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FILED PURSUANT TO RULE 424(b)3
REGISTRATION NO. 333-94807
NETMOVES CORPORATION
399 THORNALL STREET
EDISON, NEW JERSEY 08837
January 18, 2000
Dear Stockholder:
I am pleased to forward to you this proxy statement/prospectus for a special
meeting of the stockholders of NetMoves Corporation ("NetMoves") to be held on
February 8, 2000, at the Sheraton Woodbridge Place Hotel, 515 Route One South,
Iselin, New Jersey 08830, (732) 634-3600, at 11 a.m., local time.
At the special meeting, you will be asked to approve and adopt an Agreement
and Plan of Merger by and among Mail.com, Inc. ("Mail.com"), Mast Acquisition
Corp., which is a wholly-owned subsidiary of Mail.com, and NetMoves. The merger
agreement provides for the merger of Mast Acquisition Corp. with and into
NetMoves. When the merger is complete, NetMoves will be a wholly-owned
subsidiary of Mail.com.
In the merger, each share of your NetMoves common stock will be converted
into the right to receive 0.385336 shares of Mail.com Class A common stock.
Mail.com expects to issue approximately 6,381,000 shares of its Class A common
stock pursuant to the merger which includes shares issuable to holders of
NetMoves warrants that Mail.com will require to be exercised in connection with
the merger. Mail.com's Class A common stock is traded on The Nasdaq National
Market under the trading symbol "MAIL," and closed at $17.50 per share on
January 14, 2000. The merger is described more fully in this proxy
statement/prospectus.
The merger cannot be consummated unless the holders of a majority of the
shares of NetMoves common stock entitled to vote approve and adopt the merger
agreement. Only stockholders who hold shares of NetMoves common stock at the
close of business on January 18, 2000 will be entitled to vote at the special
meeting.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO YOU AND IN
YOUR BEST INTERESTS, AND HAS UNANIMOUSLY RECOMMENDED THAT YOU APPROVE AND ADOPT
THE MERGER AGREEMENT.
This proxy statement/prospectus provides detailed information about Mail.com
and the merger. Please give all of this information your careful attention. IN
PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED
"RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROXY STATEMENT/PROSPECTUS.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. To
vote your shares, you may use the enclosed proxy card or attend the special
meeting in person. To approve and adopt the merger agreement, you MUST vote
"FOR" the proposal by following the instructions stated on the enclosed proxy
card. If you do not vote at all, your non-vote will, in effect, count as a vote
against the merger agreement. We urge you to vote FOR this proposal. The
approval of this proposal is a necessary step in the merger of NetMoves with a
wholly-owned subsidiary of Mail.com.
Sincerely,
/s/ THOMAS F. MURAWSKI
Thomas F. Murawski
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER OR THE ISSUANCE OF MAIL.COM
CLASS A COMMON STOCK, OR DETERMINED THAT THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED JANUARY 18, 2000, AND WAS FIRST
MAILED TO NETMOVES STOCKHOLDERS ON OR ABOUT JANUARY 18, 2000.
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NETMOVES CORPORATION
399 THORNALL STREET
EDISON, NEW JERSEY 08837
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 8, 2000
------------------------
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
NetMoves Corporation, a Delaware corporation ("NetMoves"), will be held on
February 8, 2000, at the Sheraton Woodbridge Place Hotel, 515 Route One South,
Iselin, New Jersey 08830, (732) 634-3600, at 11 a.m. local time for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of December 11, 1999, attached as
Appendix A to the accompanying proxy statement/ prospectus, and to
approve the merger of Mast Acquisition Corp., a wholly-owned subsidiary
of Mail.com, Inc., with and into NetMoves, as a result of which NetMoves
will become a wholly-owned subsidiary of Mail.com. In the merger, each
outstanding share of NetMoves common stock will be converted into the
right to receive 0.385336 shares of Mail.com Class A common stock.
2. To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
Only NetMoves stockholders of record at the close of business on
January 18, 2000 are entitled to notice of and to vote at the special meeting or
any adjournment or postponement thereof. Approval and adoption of the merger
agreement will require the affirmative vote of at least a majority of the
outstanding shares of NetMoves common stock.
It is very important that your shares be represented at the special meeting.
Whether or not you plan to attend the special meeting, please take the time to
vote by completing the enclosed proxy card and mailing it to us. Failure to
secure a quorum on the date set for the special meeting would require an
adjournment that would cause us to incur considerable additional expense. IF YOU
SIGN, DATE AND MAIL YOUR PROXY CARD WITHOUT INDICATING HOW YOU WANT TO VOTE,
YOUR PROXY WILL BE COUNTED IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
PLEASE DO NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
Please sign, date and return the accompanying proxy in the enclosed
addressed envelope, which requires no postage if mailed in the United States.
You may revoke your proxy at any time before the vote is taken at the special
meeting in the manner described in the proxy statement/prospectus. You may vote
in person at the special meeting even if you have returned a proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ THOMAS F. MURAWSKI
Thomas F. Murawski
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD OF DIRECTORS
JANUARY 18, 2000
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TABLE OF CONTENTS
<TABLE>
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... iv
SUMMARY..................................................... 1
RISK FACTORS................................................ 16
Risks Related to the Merger............................... 16
Risks Related to the Business of the Combined Company..... 17
THE SPECIAL MEETING......................................... 35
Date, Time and Place...................................... 35
Matters to be Considered at the Special Meeting........... 35
Record Date............................................... 35
Voting and Revocation of Proxies.......................... 35
Vote Required............................................. 35
Quorum; Abstentions and Broker Non-Votes.................. 36
Solicitation of Proxies and Expenses...................... 36
Board Recommendation...................................... 36
THE MERGER.................................................. 37
Background of the Merger.................................. 37
Reasons for the Merger.................................... 40
Opinion of NetMoves' Financial Advisor.................... 44
Interests of NetMoves' Officers and Directors in the
Merger.................................................. 49
Applicable Waiting Periods and Regulatory Approvals....... 50
Material Federal Income Tax Considerations................ 50
Anticipated Accounting Treatment.......................... 52
No Appraisal Rights....................................... 52
Delisting and Deregistration of NetMoves Common Stock
Following the Merger.................................... 53
Listing of Mail.com Class A Common Stock to be Issued
Pursuant to the Merger.................................. 53
Restrictions on Resales of Mail.com Class A Common
Stock................................................... 53
THE MERGER AGREEMENT........................................ 54
The Merger................................................ 54
The Effective Time........................................ 54
Directors and Officers of NetMoves After the Merger....... 54
Conversion of Shares in the Merger........................ 54
NetMoves' Stock Options................................... 54
NetMoves' Warrants........................................ 55
The Exchange Agent........................................ 55
Procedures for Exchanging Stock Certificates.............. 55
Distributions with Respect to Unexchanged Shares.......... 55
No Fractional Shares...................................... 56
Representations and Warranties............................ 56
NetMoves' Conduct of Business Before Completion of the
Merger.................................................. 57
Mail.com's Conduct of Business Before Completion of the
Merger.................................................. 58
No Solicitation........................................... 58
Director and Officer Indemnification...................... 59
NetMoves' Board Seat...................................... 60
Conditions to Completion of the Merger.................... 60
Termination of the Merger Agreement....................... 61
Payment of Termination Fee................................ 62
</TABLE>
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<TABLE>
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Extension, Waiver and Amendment of the Merger Agreement... 63
VOTING AGREEMENTS........................................... 64
EMPLOYMENT AGREEMENTS....................................... 65
DESCRIPTION OF MAIL.COM CAPITAL STOCK....................... 66
Common Stock.............................................. 66
Preferred Stock........................................... 67
Warrants/Options.......................................... 67
Registration Rights....................................... 67
Anti-Takeover Effects of Certain Provisions of Delaware
Law and Mail.com's Amended and Restated Certificate of
Incorporation and Bylaws................................ 69
Indemnification of Directors and Executive Officers and
Limitation of Liability................................. 70
Transfer Agent and Registrar.............................. 71
COMPARISON OF RIGHTS OF HOLDERS OF NETMOVES COMMON STOCK AND
MAIL.COM CLASS A COMMON STOCK............................. 72
Classes of Common Stock of NetMoves and Mail.com; Voting
Rights.................................................. 72
Classified Board of Directors............................. 72
Number of Directors....................................... 72
Removal of Directors...................................... 72
Filling Vacancies on the Board of Directors............... 73
Ability to Call Special Meetings.......................... 73
Amendment of Certificate of Incorporation................. 73
Amendment of Bylaws....................................... 73
Indemnification of Directors and Officers................. 73
BUSINESS OF MAIL.COM........................................ 74
MAIL.COM'S MANAGEMENT....................................... 94
CERTAIN MAIL.COM TRANSACTIONS............................... 104
Founder Transactions...................................... 104
Preferred Financings...................................... 104
Class A Preferred Financing............................... 104
Class A Preferred Stock Issuance Obligation Settlement.... 104
Class C Preferred Financing............................... 105
Class C Preferred Stock Issuance Obligation Settlement.... 105
Class E Preferred Financing............................... 106
Class E Preferred Stock Issuance Obligation Settlement.... 106
Agreements with Stockholders.............................. 107
Agreements with CNET, Snap and NBC Multimedia............. 108
Employment Related Agreements............................. 109
PRINCIPAL STOCKHOLDERS OF MAIL.COM.......................... 110
MAIL.COM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 113
BUSINESS OF NETMOVES........................................ 125
NETMOVES' MANAGEMENT........................................ 135
CERTAIN NETMOVES TRANSACTIONS............................... 139
PRINCIPAL STOCKHOLDERS OF NETMOVES.......................... 140
</TABLE>
ii
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<TABLE>
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NETMOVES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 141
EXPERTS..................................................... 149
LEGAL MATTERS............................................... 149
WHERE YOU CAN FIND MORE INFORMATION......................... 150
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A--Agreement and Plan of Merger....................
APPENDIX B--Form of Company Voting Agreement................
APPENDIX C--Opinion of Lehman Brothers......................
</TABLE>
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL HAPPEN IN THE PROPOSED TRANSACTION?
A: A wholly-owned subsidiary of Mail.com, Inc. ("Mail.com") will merge with and
into NetMoves Corporation ("NetMoves"), and NetMoves will become a
wholly-owned subsidiary of Mail.com.
Q: WHY ARE THE COMPANIES PROPOSING THE MERGER?
A: You should review the factors that the boards of directors of NetMoves and
Mail.com considered when deciding whether to approve the merger agreement and
the merger. Please read the more detailed description of the reasons for the
merger beginning on page 40.
Q: WHAT WILL I BE ENTITLED TO RECEIVE IN THE MERGER?
A: If the merger is completed, you will be entitled to receive 0.385336 shares
of Mail.com Class A common stock for each share of NetMoves common stock you
own. For example, if you own 100 shares of NetMoves common stock, you will be
entitled to receive 38 shares of Mail.com Class A common stock pursuant to
the merger, plus cash for the fractional share that would otherwise be
issuable.
Mail.com will not issue fractional shares of its Class A common stock.
Instead of fractional shares, you will be entitled to receive cash based on
the average closing price of Mail.com Class A common stock for the ten most
recent days that Mail.com Class A common stock has traded prior to the
completion of the merger, as reported on The Nasdaq National Market.
The number of shares of Mail.com Class A common stock to be issued for each
share of NetMoves common stock is fixed and will not be adjusted based upon
changes in the value of Mail.com Class A common stock. As a result, the
value of the Mail.com Class A common stock you will be entitled to receive
pursuant to the merger will not be determined at the time you vote on the
merger agreement and will go up or down as the market price of Mail.com
Class A common stock goes up or down. Neither party will be permitted to
terminate the merger agreement based solely on changes in the value of
Mail.com Class A common stock prior to the closing of this transaction.
On January 14, 2000, the last full day for which information was available
prior to the printing of this proxy statement/prospectus, the closing sales
price for Mail.com Class A common stock on The Nasdaq National Market was
$17.50.
Q: WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO
NETMOVES STOCKHOLDERS?
A: It is a condition to completion of the merger that Mail.com and NetMoves
receive legal opinions from outside counsel to the effect that the merger
constitutes a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. If the merger qualifies as a
tax-free reorganization, NetMoves' stockholders will not recognize any gain
or loss for United States federal income tax purposes when they exchange
their shares of NetMoves common stock for shares of Mail.com Class A common
stock. However, NetMoves' stockholders may recognize gain or loss if they
receive cash instead of a fractional share of Mail.com Class A common stock.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We are working to complete the merger by March 2000. Because the merger is
subject to governmental and other regulatory approvals, however, we cannot
predict the exact timing.
iv
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Q: WHAT DO I NEED TO DO NOW?
A: After you carefully read this proxy statement/prospectus, please complete,
sign, date and mail your proxy card in the enclosed return envelope as soon
as possible so that your shares can be represented at the special meeting of
stockholders. You may also vote by attending the special meeting.
Q: WHAT HAPPENS IF I DON'T INDICATE HOW TO VOTE MY PROXY?
A: If you mail your properly signed proxy but do not include instructions on how
your shares are to be voted, your shares will be voted FOR approval and
adoption of the merger agreement.
Q: WHAT HAPPENS IF I DON'T RETURN A PROXY CARD?
A: Not returning your proxy card will have the same effect as voting against
approval and adoption of the merger agreement.
Q: CAN I CHANGE MY VOTE AFTER MAILING MY PROXY?
A: Yes. You may change your vote at any time before your proxy is voted at the
special meeting. You may do this in one of three ways. You may file a notice
of revocation with the Chief Financial Officer of NetMoves at NetMoves'
principal executive offices at 399 Thornall Street, Edison, New Jersey 08837.
Second, you can complete and submit a new proxy card. Third, you can attend
the special meeting and vote in person. Attending the special meeting, in and
of itself, without voting in person, however, will not result in the
revocation of a proxy.
Q: IF MY BROKER HOLDS MY SHARES IN STREET NAME, WILL MY BROKER VOTE MY SHARES
FOR ME?
A: No. Your broker will not be able to vote your shares without instructions
from you. If you do not provide your broker with voting instructions, your
shares will be considered present at the special meeting for purposes of
determining a quorum but will not be considered to have been voted on the
merger agreement. If you have instructed a broker to vote your shares, you
must follow directions received from your broker to change those
instructions.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After we complete the merger, Mail.com will send you written instructions
explaining how to exchange your certificates representing shares of NetMoves
common stock outstanding as of the effective time of the merger for the
appropriate number of shares of Mail.com Class A common stock.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MERGER?
A: Yes. We have set out under the heading "Risk Factors" beginning on page 16 of
this proxy statement/ prospectus a number of risks that you should consider.
Q: WHOM SHOULD I CALL IF I HAVE ANY ADDITIONAL QUESTIONS?
A: Please call or email NetMoves' Investor Contact, Peter Macaluso, at
(732) 906-2000, extension 2225 or [email protected].
v
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SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT
TO YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE PROXY STATEMENT/ PROSPECTUS,
INCLUDING THE APPENDICES, AND THE OTHER DOCUMENTS REFERRED TO HEREIN FOR A MORE
COMPLETE UNDERSTANDING OF THE MERGER. SEE "WHERE YOU CAN FIND MORE INFORMATION"
ON PAGE 150 OF THIS PROXY STATEMENT/ PROSPECTUS. EACH ITEM IN THIS SUMMARY
INCLUDES A REFERENCE DIRECTING YOU TO A MORE COMPLETE DESCRIPTION OF THAT ITEM.
THE COMPANIES
MAIL.COM, INC.
11 Broadway, 6(th) Floor
New York, New York 10006
(212) 425-4200
Mail.com is a global provider of email services and offers its email
services to both the consumer and business markets. Basic consumer email
services are free to Mail.com members. A consumer can become a Mail.com member
by signing up for email service at any of its partners' Web sites or Mail.com's
own Web sites. Mail.com generates the majority of its revenues from its consumer
email services, primarily from advertising related sales, including direct
marketing and e-commerce promotion. Mail.com also generates revenues in the
consumer market from subscription services, such as a service that allows
members to purchase increased storage capacity for their emails. In November
1999, Mail.com generated approximately 217 million page views and delivered
approximately 672 million advertisements in its consumer email services.
Mail.com also offers a range of email services to businesses. Mail.com connects
existing email systems to the Internet, monitors Internet emails for viruses or
specific content and hosts and manages email systems. Mail.com currently
generates revenues in the business market primarily from email service fees
related to its email system connection services and email monitoring services.
As of December 31, 1999, Mail.com provided email services for approximately
2,090 businesses.
NETMOVES CORPORATION
399 Thornall Street
Edison, New Jersey 08837
(732) 906-2000
NetMoves designs, develops and markets a variety of Internet document
delivery services, including email-to-fax, fax-to-email, fax-to-fax, enhanced
fax and broadcast fax services. Through volume-based arrangements with several
telephony-based common carriers and by delivering fax transmissions over the
Internet, NetMoves transmits customers' documents and images worldwide at rates
that are below the international rates charged by long distance voice carriers
for traditional fax transmissions. NetMoves has developed proprietary software
which automatically delivers each outgoing transmission through the route that
provides the lowest cost and the highest transmission quality available on the
NetMoves network. NetMoves has deployed 28 Internet-capable computer facilities
in 20 countries, including the United States. NetMoves is able to generate cost
savings for its customers by using its Internet backbone to bypass long distance
common carriers for transmissions originating and terminating in countries where
such computer facilities have been established. In addition to these cost
savings, many NetMoves' customers use its services for ease of use and
productivity improvements. NetMoves believes that the combination of its
telephony-based network and its growing Internet-based network will enable it to
emerge as a leading supplier of comprehensive, convenient, low-cost global
messaging services.
THE MERGER (SEE PAGE 37)
If all of the conditions to the merger are satisfied or waived, a
wholly-owned subsidiary of Mail.com will merge with and into NetMoves. As a
result, NetMoves will become a wholly-owned subsidiary of
1
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Mail.com. Stockholders of NetMoves will be entitled to become stockholders of
Mail.com following the merger and each share of NetMoves common stock will be
converted into the right to receive 0.385336 shares of Mail.com Class A common
stock. We urge you to read the merger agreement, which is attached as
Appendix A to this proxy statement/prospectus, carefully and in its entirety.
STOCKHOLDER APPROVAL (SEE PAGE 35)
Completion of the merger is conditioned, among other things, on the approval
and adoption of the merger agreement by the holders of a majority of the
outstanding shares of NetMoves common stock. You are entitled to cast one vote
per share of NetMoves common stock owned by you at the close of business on
January 18, 2000. The stockholders of Mail.com are not required to approve and
adopt the merger agreement or otherwise approve the merger.
VOTING AGREEMENTS (SEE PAGE 64)
The directors and certain officers of NetMoves have entered into voting
agreements with Mail.com. These directors and officers beneficially hold
approximately 2.0% of NetMoves' outstanding common stock and options exercisable
for approximately 10.8% of NetMoves' outstanding common stock. The voting
agreements require these directors and officers to vote their respective shares
of NetMoves common stock in favor of approval and adoption of the merger
agreement and against any competing proposals.
VOTING SHARES HELD BY YOUR BROKER IN STREET NAME (SEE PAGE 35)
Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker. If you do not
provide your broker with voting instructions, your shares will not be voted at
the special meeting of NetMoves' stockholders and it will have the same effect
as voting against approval and adoption of the merger agreement.
COMPLETION OF THE MERGER (SEE PAGE 60)
NetMoves and Mail.com will complete the merger when all of the conditions to
completion of the merger are satisfied or waived. The merger will become
effective when NetMoves and Mail.com file a certificate of merger with the
Secretary of State of the State of Delaware (or such later time as may be
specified in the certificate).
NetMoves and Mail.com are working toward completing the merger as quickly as
possible and, assuming approval and adoption of the merger agreement and the
satisfaction or waiver of all other conditions of the merger, expect to complete
the merger promptly after the special meeting.
EXCHANGING YOUR STOCK CERTIFICATES (SEE PAGE 55)
When the merger is completed, Mail.com's exchange agent will mail to the
stockholders of NetMoves a letter of transmittal and instructions for use in
surrendering NetMoves stock certificates in exchange for Mail.com stock
certificates. When a NetMoves stockholder delivers a NetMoves stock certificate
to the exchange agent along with an executed letter of transmittal and any other
required documents, the NetMoves stock certificate will be canceled and the
NetMoves stockholder will receive Mail.com stock certificates representing the
number of full shares of Mail.com Class A common stock to which the stockholder
is entitled under the merger agreement. A NetMoves stockholder will receive
payment in cash, without interest, in lieu of any fractional shares of Mail.com
Class A common stock which would have been otherwise issuable to the stockholder
in the merger.
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NETMOVES' REASONS FOR THE MERGER; RECOMMENDATION OF NETMOVES BOARD (SEE
PAGE 41)
The board of directors of NetMoves, by unanimous vote, (i) determined that
the merger is the best transaction reasonably available to NetMoves, and that
the merger is fair to, and in the best interests of, NetMoves and its
stockholders, (ii) declared the advisability of, approved and adopted the merger
agreement and approved the merger and the other transactions contemplated by the
merger agreement and (iii) recommended approval and adoption of the merger
agreement and approval of the merger by the NetMoves stockholders.
OPINION OF NETMOVES' FINANCIAL ADVISORS, LEHMAN BROTHERS (SEE PAGE 44)
Lehman Brothers has delivered its opinion to the board of directors of
NetMoves that, as of December 11, 1999, the exchange ratio is fair, from a
financial point of view, to the stockholders of NetMoves. For purposes of Lehman
Brothers' opinion, the term "exchange ratio" refers to the ratio at which
NetMoves common stock is converted into the right to receive Mail.com Class A
common stock, in accordance with the merger agreement. For information on the
assumptions made, matters considered and limits of the reviews by Lehman
Brothers, stockholders are urged to read in its entirety the opinion of Lehman
Brothers, a copy of which is attached hereto as Appendix C.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE 49)
In considering the recommendation of NetMoves board of directors that you
vote to approve and adopt the merger agreement, you should note that certain
officers and directors of NetMoves have interests in the merger that are
different from, or in addition to, your interests. These interests relate to
potential accelerated vesting of stock options, indemnification rights and, for
officers, employment benefits. As a result, directors and officers may be more
likely to vote in favor of approval and adoption of the merger agreement than
NetMoves stockholders generally.
CONDITIONS TO THE MERGER (SEE PAGE 60)
Mail.com and NetMoves will complete the merger only if the conditions set
forth in the merger agreement are either satisfied or waived. These conditions
include:
- NetMoves stockholders approve and adopt the merger agreement;
- Mail.com's registration statement is declared effective and no stop order
suspending its effectiveness has been issued and no proceeding for
suspension has been initiated or threatened by the Commission;
- the waiting periods under the federal antitrust laws expire;
- the parties each receive a written opinion from their respective tax
counsel regarding the merger;
- Mail.com's Class A common stock is authorized for listing on The Nasdaq
National Market;
- the representations and warranties of the respective parties made in the
merger agreement remain accurate;
- the parties perform their respective covenants and obligations in the
merger agreement;
- NetMoves obtains all consents, waivers and approvals in connection with
the merger;
- Mail.com receives satisfactory evidence of the resignation of all the
directors of NetMoves; and
- Mail.com receives affiliate letters from those persons set forth in the
merger agreement.
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TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 61)
The boards of directors of both companies may mutually agree to terminate
the merger agreement at any time without completing the merger. Either company
may also terminate the merger agreement if:
- the merger is not completed by June 15, 2000;
- a governmental authority or legal action permanently prohibits the merger;
- the NetMoves stockholders do not approve and adopt the merger agreement;
or
- the other company breaches any representation, warranty or covenant, or
any of the representations or warranties become inaccurate, in either case
such that the other company is unable to satisfy certain conditions to the
completion of the merger, and the breach or inaccuracy is not cured.
In addition, Mail.com may terminate the merger agreement if any of the following
triggering events occur:
- NetMoves' board of directors withdraws or amends in a manner which is
adverse to Mail.com its recommendation to approve and adopt the merger
agreement;
- NetMoves' board of directors fails to affirm its recommendation to approve
and adopt the merger agreement within ten business days after Mail.com
requests in writing that such recommendation be affirmed after the public
announcement of a third-party acquisition proposal; or
- a tender or exchange offer for NetMoves common stock is commenced and
NetMoves fails to send to its stockholders within ten business days
thereafter a statement that NetMoves recommends rejection of the tender or
exchange offer.
TERMINATION FEES AND EXPENSES (SEE PAGE 62)
If Mail.com terminates the merger agreement because any of the above
triggering events has occurred, NetMoves will be required to pay to Mail.com a
termination fee of $7.0 million. NetMoves may also be required to pay the
$7.0 million termination fee if NetMoves' stockholders fail to approve and adopt
the merger agreement and NetMoves enters into an acquisition transaction with
another party within eighteen months of termination. NetMoves will also be
obligated to pay the termination fee if Mail.com terminates the agreement
because NetMoves materially breaches its covenant to promptly convene a meeting
of its stockholders to vote on the merger and to recommend the merger or
materially and willfully breaches its covenant not to solicit other proposals
for the acquisition of NetMoves.
If Mail.com terminates the merger agreement because NetMoves breaches a
representation, warranty or covenant in the merger agreement, or any of the
representations or warranties of NetMoves become inaccurate, in either case such
that NetMoves is unable to satisfy certain conditions to the completion of the
merger, and the breach or inaccuracy is not cured, NetMoves may be required to
pay Mail.com all of the expenses incurred by Mail.com in connection with the
merger.
NO SOLICITATION (SEE PAGE 58)
NetMoves has generally agreed not to initiate or engage in discussions with
another party regarding a business combination with that party while the merger
is pending. However, NetMoves may furnish information regarding NetMoves to, and
enter into negotiations or discussions with, another party in response to such
party's acquisition proposal if NetMoves' board of directors concludes it is a
superior offer as compared to the present merger and failure to take such action
would cause the board to breach its fiduciary obligations.
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<PAGE>
GOVERNMENTAL AND REGULATORY MATTERS (SEE PAGE 50)
To complete the merger, we must obtain approvals from or make filings with
various federal and state regulatory agencies, including the Federal Trade
Commission and the Antitrust Division of the Department of Justice under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. We must also
obtain approvals from the Federal Communications Commission and obtain approvals
from or file notifications with the public utilities commissions of the various
states in which NetMoves now operates.
ANTICIPATED ACCOUNTING TREATMENT (SEE PAGE 52)
Mail.com intends to treat the merger as a purchase for accounting and
financial reporting purposes which means that Mail.com will treat NetMoves as a
separate entity for periods prior to the closing and, thereafter, as a
wholly-owned subsidiary of Mail.com.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 50)
It is a condition to completion of the merger that Mail.com and NetMoves
receive legal opinions from outside counsel to the effect that the merger
constitutes a tax-free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code. If the merger qualifies as a tax-free reorganization,
NetMoves' stockholders will not recognize any gain or loss for United States
federal income tax purposes when they exchange their shares of NetMoves common
stock for shares of Mail.com Class A common stock. However, NetMoves'
stockholders may recognize gain or loss if they receive cash instead of a
fractional share of Mail.com Class A common stock.
NO APPRAISAL RIGHTS (SEE PAGE 52)
Under Delaware law, you do not have any right to an appraisal of the value
of your NetMoves common stock in connection with the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Each of Mail.com and NetMoves has made forward-looking statements in this
proxy statement/ prospectus that are subject to risks and uncertainties.
Forward-looking statements include expectations concerning matters that are not
historical facts. Words such as "believes," "expects," "anticipates" or similar
expressions indicate forward-looking statements. For more information regarding
factors that could cause actual results to differ from these expectations, you
should refer to "Risk Factors" beginning on page 16.
5
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
MAIL.COM
Mail.com's Class A common stock began trading publicly on The Nasdaq
National Market on June 18, 1999 and is traded under the symbol "MAIL." The
following table sets forth the range of high and low sales prices reported on
The Nasdaq National Market for Mail.com Class A common stock for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999
Second Quarter (from June 18, 1999)....................... $21.375 $ 7.750
Third Quarter............................................. 26.750 12.000
Fourth Quarter............................................ 29.000 13.000
2000
First Quarter (through January 14, 2000).................. $19.375 $15.000
</TABLE>
NETMOVES
NetMoves common stock began trading publicly on The Nasdaq National Market
on October 11, 1996 under the symbol "FAXX" and is currently traded under the
symbol "NTMV." The following table sets forth the range of high and low sales
prices reported on The Nasdaq National Market for NetMoves common stock for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1996
Fourth Quarter (from October 11, 1996)..................... $ 8.500 $5.000
1997
First Quarter.............................................. $ 7.500 $4.000
Second Quarter............................................. 5.250 1.250
Third Quarter.............................................. 1.750 1.000
Fourth Quarter............................................. 3.000 1.000
1998
First Quarter.............................................. $ 4.000 $2.375
Second Quarter............................................. 5.063 2.563
Third Quarter.............................................. 8.313 2.375
Fourth Quarter............................................. 11.000 3.000
1999
First Quarter.............................................. $12.000 $5.625
Second Quarter............................................. 12.000 4.563
Third Quarter.............................................. 7.500 3.938
Fourth Quarter............................................. 7.688 2.750
2000
First Quarter (through January 14, 2000)................... $ 7.000 $5.250
</TABLE>
RECENT CLOSING PRICES
The following table sets forth the closing sales prices per share of
Mail.com Class A common stock and NetMoves common stock on The Nasdaq National
Market on (1) December 10, 1999, the last full trading date prior to the public
announcement of the merger, and (2) January 14, 2000, the latest practicable
trading day before the printing of this proxy statement/prospectus. The
equivalent NetMoves
6
<PAGE>
per share price as of any given date, including the dates indicated, is
determined by multiplying the price of one share of Mail.com Class A common
stock as of such date by 0.385336, the exchange ratio set forth in the merger
agreement, and represents what the market value of one share of NetMoves common
stock would have been if the merger had been consummated on or prior to such
day.
<TABLE>
<CAPTION>
MAIL.COM EQUIVALENT
CLASS A NETMOVES NETMOVES
COMMON STOCK COMMON STOCK PER SHARE PRICE
------------ ------------ ---------------
<S> <C> <C> <C>
December 10, 1999..................... $25.625 $5.500 $9.874
January 14, 2000...................... $17.500 $6.312 $6.743
</TABLE>
Because the market price of Mail.com Class A common stock is subject to
fluctuation, the market value of the shares of Mail.com Class A common stock
that holders of NetMoves common stock will be entitled to receive pursuant to
the merger may increase or decrease prior to and following the merger. The
exchange ratio is fixed and will not be adjusted to compensate NetMoves'
stockholders for decreases in the market price of Mail.com Class A common stock
which could occur prior to the merger becoming effective. WE URGE STOCKHOLDERS
TO OBTAIN CURRENT MARKET QUOTATIONS FOR MAIL.COM CLASS A COMMON STOCK AND
NETMOVES COMMON STOCK. WE CANNOT ASSURE YOU AS TO THE FUTURE PRICES OR MARKETS
FOR MAIL.COM CLASS A COMMON STOCK OR NETMOVES COMMON STOCK.
7
<PAGE>
MAIL.COM
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of Mail.com
should be read in conjunction with Mail.com's consolidated financial statements
and related notes thereto and "Mail.com Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this proxy
statement/prospectus. Mail.com's financial statements as of December 31, 1994
and 1995 and for the period from August 1, 1994 through December 31, 1995
reflect only immaterial transactions. These activities have been included in the
1996 financial statements to facilitate presentation. The consolidated statement
of operations data for each of the years in the three-year period ended
December 31, 1998, and the consolidated balance sheet data at December 31, 1997
and 1998, are derived from the consolidated financial statements of Mail.com
which have been audited by KPMG LLP, independent accountants, and are included
elsewhere in this proxy statement/prospectus. The consolidated statement of
operations data for the nine months ended September 30, 1998 and 1999, and the
consolidated balance sheet data at September 30, 1999 are derived from the
unaudited consolidated financial statements of Mail.com included elsewhere in
this proxy statement/prospectus. In the opinion of Mail.com's management, these
unaudited consolidated financial statements have been prepared on substantially
the same basis as the audited financial statements and, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the financial data for such periods. Historical results are not necessarily
indicative of the results to be expected in the future.
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 19 $ 173 $ 1,495 $ 492 $ 6,593
Operating expenses
Cost of revenues.................................... 187 1,082 2,891 1,745 7,720
Sales and marketing................................. 65 930 6,680 2,140 17,083
General and administrative.......................... 222 862 3,482 1,730 7,207
Product development................................. 94 296 1,573 986 4,643
Amortization of goodwill and intangible assets...... -- -- -- -- 725
Write-off of acquired in-process technology......... -- -- -- -- 900
---------- ---------- ---------- ---------- ----------
Total operating expenses.......................... 568 3,170 14,626 6,601 38,278
---------- ---------- ---------- ---------- ----------
Loss from operations.............................. (549) (2,997) (13,131) (6,109) (31,685)
---------- ---------- ---------- ---------- ----------
Other income (expense)
Gain on sale of investment.......................... -- -- 438 438 --
Interest income..................................... 7 36 277 141 1,098
Interest expense.................................... (2) (35) (109) (57) (355)
---------- ---------- ---------- ---------- ----------
Total other income (expense), net................. 5 1 606 522 743
---------- ---------- ---------- ---------- ----------
Net loss.............................................. (544) (2,996) (12,525) (5,587) (30,942)
Cumulative dividends on settlement of contingent
obligations to preferred stockholders............... -- -- -- -- 14,556
---------- ---------- ---------- ---------- ----------
Net loss attributable to common stockholders.......... $ (544) $ (2,996) $ (12,525) $ (5,587) $ (45,498)
========== ========== ========== ========== ==========
Basic and diluted net loss per common share........... $ (0.04) $ (0.21) $ (0.86) $ (0.39) $ (1.69)
========== ========== ========== ========== ==========
Weighted-average basic and diluted shares
outstanding......................................... 13,725,278 14,097,500 14,607,915 14,229,114 26,891,270
========== ========== ========== ========== ==========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $128 $ 910 $ 8,414 $ 53,469
Working capital (deficiency)................................ 38 (190) 5,076 34,773
Total assets................................................ 666 2,646 20,344 133,767
Domain asset purchase obligations, less current portion..... -- 150 217 184
Deferred revenue, current and long-term portion............. 6 329 1,905 1,867
Capital lease obligations, less current portion............. 146 569 1,437 9,094
Redeemable convertible preferred stock...................... -- -- 13,048 --
Total stockholders' equity (deficit)........................ 370 567 (333) 101,150
</TABLE>
9
<PAGE>
NETMOVES
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with NetMoves' financial statements and related notes thereto and
"NetMoves Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this proxy statement/prospectus.
The statement of operations data for each of the years in the three-year period
ended December 31, 1998, and the balance sheet data at December 31, 1998 and
1997, are derived from the financial statements of NetMoves, which have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are included
elsewhere in this proxy statement/prospectus. The selected financial data for
the nine months ended September 30, 1998 and 1999 and as of September 30, 1999
have been derived from NetMoves' unaudited financial statements included
elsewhere in this proxy statement/prospectus. In the opinion of NetMoves'
management, these statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results.
Historical results are not necessarily indicative of the results to be expected
in the future.
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 15,036 $ 17,418 $ 21,117 $ 15,507 $ 17,135
Cost of service......................... 8,898 10,414 11,129 8,121 8,983
--------- --------- ---------- ---------- ----------
Gross margin............................ 6,138 7,004 9,988 7,386 8,152
Operating expenses:
Network operations and support........ 1,985 2,287 3,608 2,571 3,575
Research and development.............. 1,772 1,909 1,995 1,582 1,526
Sales and marketing................... 6,065 5,268 6,640 4,708 5,971
General and administrative............ 2,495 3,132 3,285 2,369 3,391
Depreciation and amortization......... 1,437 1,702 1,492 1,081 1,526
Other................................. -- -- 1,025 1,025 --
--------- --------- ---------- ---------- ----------
Total operating expenses............ 13,754 14,298 18,045 13,336 15,989
--------- --------- ---------- ---------- ----------
Operating loss.......................... (7,616) (7,294) (8,057) (5,950) (7,837)
Interest (expense) income, net.......... 46 79 (134) (78) (97)
Other income, net....................... 94 96 106 77 89
--------- --------- ---------- ---------- ----------
Loss before income taxes................ (7,476) (7,119) (8,085) (5,951) (7,845)
Provision for income taxes.............. -- -- -- -- --
--------- --------- ---------- ---------- ----------
Net loss................................ $ (7,476) $ (7,119) $ (8,085) $ (5,951) $ (7,845)
========= ========= ========== ========== ==========
Net loss per common and equivalent
share................................. $ (2.74) $ (0.72) $ (0.68) $ (0.52) $ (0.52)
========= ========= ========== ========== ==========
Weighted average common and equivalent
shares outstanding.................... 2,724,651 9,880,681 11,842,956 11,377,178 15,206,767
========= ========= ========== ========== ==========
Pro forma net loss per common and
equivalent share...................... $ (0.86) $ (0.72) $ (0.68) $ (0.52) $ (0.52)
========= ========= ========== ========== ==========
Shares used in computing pro forma net
loss per common and equivalent
share................................. 8,712,054 9,880,681 11,842,956 11,377,178 15,206,767
========= ========= ========== ========== ==========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------
1996 1997 1998 1999
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 7,923 $ 3,680 $ 5,260 $ 8,966
Working capital...................................... 7,080 1,333 3,724 6,874
Total assets......................................... 14,448 10,496 14,488 21,088
Capital lease obligations, less current portion...... 399 85 -- 145
Notes payable, less current portion.................. 279 1,083 1,540 1,429
Total stockholders' equity........................... 9,659 4,664 8,050 13,589
</TABLE>
11
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL DATA
In the table below, we provide you selected unaudited pro forma condensed
combined financial data (a) on an actual basis; (b) in the case of the unaudited
condensed combined statement of operations data for the year ended December 31,
1998 and the nine months ended September 30, 1999, on a pro forma basis, to give
effect to (i) Mail.com's acquisition of The Allegro Group, Inc., ("Allegro") on
August 20, 1999 as if such acquisition had been completed on January 1, 1998;
and (ii) both Mail.com's acquisition of Allegro and its proposed acquisition of
NetMoves as if the acquisitions had been completed on January 1, 1998. Since the
acquisition of Allegro occurred on August 20, 1999, the unaudited pro forma
condensed combined statement of operations data for the nine months ended
September 30, 1999 reflects the approximately seven and one-half months of
activity prior to the consummation of the acquisition. This acquisition was
accounted for as a purchase business combination.
The unaudited pro forma condensed combined balance sheet as of
September 30, 1999 gives effect to the proposed acquisition of NetMoves as if
the acquisition had occurred on that date. The unaudited pro forma condensed
combined balance sheet as of September 30, 1999, as adjusted for the proposed
offering, also gives effect to Mail.com's proposed offering, and the application
of the net proceeds of, $100,000,000 aggregate principal amount (excluding any
overallotments) of subordinated convertible notes at an assumed price of 100%.
The merger is not conditioned on completion of the offering, and the offering
may not close or may close on terms that vary from those currently contemplated.
See "Risk Factors--Risks Related to the Business of the Combined Company--The
combined company faces various risks and uncertainties in connection with
Mail.com's proposed offering of convertible subordinated notes."
The allocation of the purchase price of NetMoves is preliminary and may be
subject to change depending upon the final outcome of valuations and appraisals.
This selected unaudited combined financial data should be read in conjunction
with the unaudited pro forma condensed combined financial statements of Mail.com
and the separate historical consolidated financial statements and related notes
thereto of Mail.com and NetMoves included elsewhere in this proxy
statement/prospectus. See "Where You Can Find More Information" on page 150. You
should not rely on the selected unaudited pro forma condensed combined financial
information as an indication of the results of operations or financial position
that would have been achieved if the transaction with NetMoves or Allegro had
taken place earlier or of the results of operations or financial position of
Mail.com after the completion of these transactions.
If Mail.com is unable to write-off any of the in-process technology and,
accordingly, the dollar amount of the purchase price allocated to in-process
technology was determined to be zero, the effect would result in (i) an
$18.0 million increase in both goodwill and other intangible assets and
stockholder's equity presented in the unaudited pro forma condensed combined
balance sheet as of September 30, 1999; and (ii) a $6.0 million or $(0.27) per
share and $4.5 million or $(0.13) per share increase in the net loss
attributable to common stockholders and net loss per common share presented in
the unaudited pro forma condensed consolidated combined statement of operations
for the year ended December 31, 1998 and the nine months ended September 30,
1999, respectively. As a result, the annual amortization of goodwill and other
intangible assets would increase from $44.1 million per year to $50.1 million
per year based upon an expected estimated period of benefit of three years.
12
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
($ IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR ALLEGRO AND
ACTUAL PRO FORMA FOR ALLEGRO NETMOVES
-------------------------------------- ---------------------------- ----------------------------
NINE MONTHS ENDED NINE MONTHS NINE MONTHS
YEAR ENDED SEPTEMBER 30, YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, ----------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1998 1999 1998 1999 1998 1999
------------ ---------- ---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ 1,495 $ 492 $ 6,593 $ 5,821 $ 9,559 $ 26,938 $ 26,694
Operating expenses:
Cost of revenues......... 2,891 1,745 7,720 5,209 9,324 20,226 22,244
Sales and marketing...... 6,680 2,140 17,083 7,572 17,771 14,212 23,742
General and
administrative......... 3,482 1,730 7,207 4,925 7,563 9,307 11,959
Product development...... 1,573 986 4,643 1,708 5,242 3,818 6,927
Amortization of goodwill
and intangible
assets................. -- -- 725 6,692 5,019 50,785 38,089
Write-off of acquired
in-process
technology............. -- -- 900 -- 900 -- 900
Patent litigation
settlement............. -- -- -- -- -- 1,025 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 14,626 6,601 38,278 26,106 45,819 99,373 103,861
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations....... (13,131) (6,109) (31,685) (20,285) (36,260) (72,435) (77,167)
Other income (expense):
Gain on sale of
investment............. 438 438 -- 438 -- 438 --
Other income............. 277 141 1,098 287 1,112 516 1,201
Interest expense......... (109) (57) (355) (147) (382) (404) (479)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income
(expense), net..... 606 522 743 578 730 550 722
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................... (12,525) (5,587) (30,942) (19,707) (35,530) (71,885) (76,445)
Cumulative dividends on
settlement of contingent
obligations to preferred
stockholders............. -- -- 14,556 -- 14,556 -- 14,556
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss attributable to
common stockholders...... $ (12,525) $ (5,587) $ (45,498) $ (19,707) $ (50,086) $ (71,885) $ (91,001)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted net loss
per common share......... $ (0.86) $ (0.39) $ (1.69) $ (1.25) $ (1.79) $ (3.26) $ (2.65)
========== ========== ========== ========== ========== ========== ==========
Weighted average basic and
diluted shares
outstanding.............. 14,607,915 14,229,114 26,891,270 15,710,888 27,994,243 22,054,792 34,338,147
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------------------
PRO FORMA
FOR NETMOVES
AS ADJUSTED
PRO FORMA FOR
FOR PROPOSED
ACTUAL NETMOVES OFFERING
------ --------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 53,469 $ 62,435 $158,735
Working capital............................................. 34,773 41,646 137,946
Total assets................................................ 133,767 287,133 387,133
Convertible subordinated notes.............................. -- -- 100,000
Domain asset purchase obligations, less current portion..... 184 184 184
Deferred revenue, current and long-term portion............. 1,867 1,867 1,867
Capital lease obligations, less current portion............. 9,094 9,239 9,239
Total stockholders' equity.................................. 101,150 247,017 247,017
</TABLE>
13
<PAGE>
UNAUDITED COMPARATIVE PER COMMON SHARE DATA
The following tables reflect (a) the historical net loss per share and book
value per share of Class A common stock of Mail.com and the historical net loss
per share and book value per share of common stock of NetMoves in comparison to
the unaudited pro forma net loss and book value per share after giving effect to
the proposed merger, and (b) the equivalent historical net loss and book value
per share attributable to 0.385336 shares of Mail.com Class A common stock that
will be received for each share of NetMoves common stock pursuant to the merger.
The information presented in the following tables should be read in conjunction
with the unaudited pro forma condensed combined financial statements and the
historical consolidated financial statements and related notes thereto of
Mail.com, and the historical financial statements and related notes thereto of
NetMoves which are included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
<S> <C> <C>
HISTORICAL MAIL.COM
Net loss per common share (basic and diluted).............. $(0.86) $(1.69)
Book value per common share(1)............................. (0.02) 2.28
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
<S> <C> <C>
HISTORICAL NETMOVES
Net loss per common share (basic and diluted).............. (0.68) $(0.52)
Book value per common share(1)............................. $ 0.58 $ 0.83
</TABLE>
<TABLE>
<CAPTION>
MAIL.COM AND NETMOVES YEAR ENDED NINE MONTHS ENDED
PRO FORMA COMBINED PER SHARE DATA DECEMBER 31, 1998 SEPTEMBER 30, 1999
- --------------------------------- ------------------ -------------------
<S> <C> <C>
Net loss per Mail.com share (basic and diluted)............ $(3.26) $(2.65)
Net loss per equivalent NetMoves share (basic and
diluted)(3).............................................. (1.26) (1.02)
Book value per Mail.com share(2)........................... 7.19
Book value per equivalent NetMoves share(2)(3)............. 2.77
</TABLE>
- ------------------------
(1) The historical book value per share amounts are computed by dividing
Mail.com's and NetMoves' stockholders' equity (deficit), respectively, by
their actual common shares outstanding as of December 31, 1998 and
September 30, 1999.
(2) The pro forma combined book value per share amounts are computed by dividing
pro forma stockholders' equity by the pro forma number of common shares of
Mail.com outstanding as of September 30, 1999, assuming the merger had
occurred as of that date.
(3) The equivalent pro forma combined book value per NetMoves share amounts are
calculated by multiplying the pro forma combined book value per Mail.com
share by the exchange ratio of 0.385336 shares of Mail.com common stock for
each share of NetMoves common stock.
The following table sets forth the closing sales prices per share of
Mail.com Class A common stock on The Nasdaq National Market and the closing
sales prices per share of NetMoves common stock on The Nasdaq National Market on
(1) December 10, 1999, the last full trading date prior to the public
announcement of the merger, and (2) January 14, 2000, the latest practicable
trading day before the printing of this proxy statement/prospectus. The
equivalent NetMoves per share price as of any given date, including the dates
indicated, is determined by multiplying the price of one share of Mail.com
Class A common stock as of such date by 0.385336, the exchange ratio set forth
in the merger agreement, and
14
<PAGE>
represents what the market value of one share of NetMoves common stock would
have been if the merger had been consummated on or prior to such day.
<TABLE>
<CAPTION>
MAIL.COM CLASS A NETMOVES
EQUIVALENT NETMOVES PER SHARE PRICE COMMON STOCK COMMON STOCK
- --------------------------------------------- ----------------- ------------
<S> <C> <C> <C>
December 10, 1999.................. $9.874 $25.625 $5.500
January 14, 2000................... $6.743 $17.500 $6.312
</TABLE>
No assurance can be given as to the market prices of Mail.com Class A common
stock or NetMoves common stock at any time before the closing of the merger or
as to the market price of Mail.com Class A common stock at any time thereafter.
The exchange ratio is fixed and will not be adjusted to reflect increases or
decreases in the market price of Mail.com Class A common stock that could occur
before the merger becomes effective. If the market price of Mail.com Class A
common stock decreases or increases prior to the effective time of the merger,
the market value of the Mail.com Class A common stock to be received pursuant to
the merger in exchange for NetMoves common stock will correspondingly decrease
or increase. STOCKHOLDERS OF NETMOVES ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS OF NETMOVES COMMON STOCK AND MAIL.COM CLASS A COMMON STOCK.
15
<PAGE>
RISK FACTORS
BY VOTING IN FAVOR OF THE MERGER AGREEMENT, NETMOVES' STOCKHOLDERS WILL BE
CHOOSING TO INVEST IN MAIL.COM CLASS A COMMON STOCK. AN INVESTMENT IN MAIL.COM
CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING WHETHER TO VOTE FOR THE MERGER
AGREEMENT.
RISKS RELATED TO THE MERGER
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT NETMOVES' STOCK PRICE AND
OPERATING RESULTS.
If the merger is not completed for any reason, NetMoves may be subject to a
number of material risks, including the following:
- the price of NetMoves common stock may decline to the extent that the
current market price of NetMoves common stock reflects a market assumption
that the merger will be completed;
- costs related to the merger, such as legal and accounting fees, must be
paid even if the merger is not completed; and
- in certain circumstances, NetMoves may be required to pay Mail.com a
termination fee of $7.0 million and/or reimburse Mail.com for expenses.
If the merger is terminated and NetMoves' board of directors determines to
seek another merger or business combination, there can be no assurance that
NetMoves will be able to find a partner willing to pay an equivalent or more
attractive price than the price to be paid in the merger. In addition, while the
merger agreement is in effect, NetMoves is prohibited from soliciting,
initiating or encouraging or inducing any acquisition proposal other than the
merger, or from entering into certain extraordinary transactions, such as a
merger, sale of assets or other business combination, with any party other than
Mail.com. As a result of this prohibition, NetMoves may lose an opportunity for
a transaction with another potential partner at a favorable price.
REGARDLESS OF INCREASES IN MARKET VALUE OF NETMOVES COMMON STOCK OR DECREASES IN
MARKET VALUE OF MAIL.COM CLASS A COMMON STOCK, NETMOVES STOCKHOLDERS WILL BE
ENTITLED TO RECEIVE 0.385336 SHARES OF MAIL.COM CLASS A COMMON STOCK FOR EACH OF
THEIR SHARES OF NETMOVES COMMON STOCK.
In the merger, each share of NetMoves common stock will be converted into
the right to receive 0.385336 shares of Mail.com Class A common stock. There
will be no adjustment for changes in the market price of either NetMoves common
stock or Mail.com Class A common stock. In addition, neither NetMoves nor
Mail.com may terminate the merger agreement or "walk away" from the merger and
NetMoves may not resolicit the vote of its stockholders solely because of
changes in the market price of Mail.com Class A common stock or NetMoves common
stock. Accordingly, the specific dollar value of Mail.com Class A common stock
that you will be entitled to receive upon the merger's completion will depend on
the market value of Mail.com Class A common stock when the merger is completed
and may decrease from the date you submit your proxy. This value may decrease
compared to the market value of NetMoves common stock based on decreases in the
value of Mail.com Class A common stock, increases in the value of NetMoves
common stock or both. The price of Mail.com Class A common stock and NetMoves
common stock each are by nature subject to the general price fluctuations in the
market for publicly traded equity securities and have experienced significant
volatility. We urge you to obtain recent market quotations for Mail.com Class A
common stock and NetMoves common stock. We cannot predict or give any assurances
as to the market price of Mail.com Class A common stock or NetMoves common stock
at any time before or after the completion of the merger.
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FAILURE TO EFFECTIVELY INTEGRATE MAIL.COM AND NETMOVES COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE BUSINESS OF THE COMBINED COMPANY.
Mail.com and NetMoves entered into the merger agreement with the expectation
that the merger will result in significant benefits to NetMoves, Mail.com and
the companies' stockholders. Achieving the anticipated benefits of the merger
will depend in part on the integration of the two businesses in an efficient
manner, and there can be no assurance that this will occur. For example,
Mail.com may not be able to retain key executives and employees of NetMoves
after the merger. Also, the integration of Mail.com and NetMoves will require
substantial attention from management. Diversion of management's attention from
ongoing operations and any difficulties encountered in the transition and
integration process could have a material adverse effect on the revenues,
expenses and operating results of the combined company. There can be no
assurance that Mail.com will realize any of the anticipated benefits of the
merger.
MAIL.COM'S ESTIMATED ACCOUNTING FOR THE NETMOVES ACQUISITION IS SUBJECT TO
CHANGE.
In recent years, the Commission has challenged companies' estimated
write-offs of in-process technology and estimated amounts allocated to goodwill
or intangibles and related amortization periods. Mail.com's pro forma financial
statements included in this proxy statement/prospectus reflect an estimated
write-off of $18.0 million of in-process technology in connection with the
purchase of NetMoves. The amount of the actual write-off, however, may differ
from Mail.com's pro forma estimate after Mail.com completes a more extensive
evaluation of acquired in-process technology and it receives comments from the
Commission in connection with any SEC review thereof. If the actual amount of
the write-off is less than its pro forma estimate, Mail.com's net loss for 2000
will decrease and expenses associated with the amortization of goodwill and
other intangible assets related to the purchase of NetMoves will increase. If
Mail.com is unable to write-off any of the in-process technology, then the
dollar amount of the purchase price allocated to in-process technology would be
zero. This would result in an $18.0 million increase in goodwill and other
intangible assets, and in stockholder's equity, presented in the unaudited pro
forma condensed combined balance sheet as of September 30, 1999. As a result,
the annual amortization of goodwill and other intangible assets would increase
from $44.1 million per year to $50.1 million per year based upon an expected
estimated period of benefit of three years. In addition, the unaudited pro forma
condensed consolidated combined financial statements would also change. See
"Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page
F-35. If the actual amount of the write-off is greater than its pro forma
estimate, Mail.com's net loss for 2000 will increase and expenses associated
with the amortization of goodwill and other intangible assets related to the
purchase of NetMoves will decrease. Similarly, if the annual amount of goodwill
or intangibles that is required to be amortized is otherwise required to be
reduced from its pro forma estimate, Mail.com's net loss for future annual
periods will decrease and, conversely, if such annual amount is otherwise
required to be increased from its pro forma estimate, Mail.com's net loss for
future annual periods will increase.
RISKS RELATED TO THE BUSINESS OF THE COMBINED COMPANY
BECAUSE MAIL.COM HAS ONLY A LIMITED OPERATING HISTORY, AND IS INVOLVED IN A NEW
AND UNPROVEN INDUSTRY, IT IS DIFFICULT TO EVALUATE THE BUSINESS OF THE COMBINED
COMPANY.
Mail.com has a limited operating history upon which you can evaluate the
business of the combined company and its prospects. Mail.com has offered a
commercial email service since November 1996 under the name iName. It changed
its company name to Mail.com, Inc. in January 1999. The success of the combined
company will depend first upon the development of a viable market for email
advertising and fee-based email services and outsourcing, and then upon its
ability to compete successfully in those markets. For the reasons discussed in
more detail below, there are substantial obstacles to the combined company
achieving and sustaining profitability.
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MAIL.COM HAS INCURRED LOSSES SINCE INCEPTION AND EXPECTS TO INCUR SUBSTANTIAL
LOSSES IN THE FUTURE, AND THE COMBINED COMPANY MAY NEVER ACHIEVE PROFITABILITY.
Mail.com has generated only limited revenues to date. It has not achieved
profitability in any period, and the combined company may not be able to achieve
or sustain profitability. Mail.com incurred a net loss attributable to common
stockholders of $12.5 million for the year ended December 31, 1998 and
$45.5 million for the nine months ended September 30, 1999. Mail.com had an
accumulated deficit of $47.0 million as of September 30, 1999. Mail.com expects
the combined company to continue to incur substantial net losses and negative
operating cash flow for the foreseeable future. Mail.com has begun and will
continue to significantly increase the operating expenses of the combined
company in anticipation of future growth. Mail.com intends to expand the
combined company's sales and marketing operations, upgrade and enhance its
technology, continue its international expansion, and improve and expand its
management information and other internal systems. Mail.com intends that the
combined company make strategic acquisitions and investments, which may result
in significant amortization of goodwill and other expenses. The combined company
will make these expenditures in anticipation of higher revenues, but there will
be a delay in realizing higher revenues even if it is successful. If the
combined company does not succeed in substantially increasing its revenues, its
losses will continue indefinitely and will increase.
THE COMBINED COMPANY FACES VARIOUS RISKS AND UNCERTAINTIES IN CONNECTION WITH
MAIL.COM'S PROPOSED OFFERING OF CONVERTIBLE SUBORDINATED NOTES.
On January 6, 2000, Mail.com announced its proposed Rule 144A offering of
$100.0 million (excluding any overallotments) of convertible subordinated notes.
If the proposed offering is completed, the actual total amount of notes issued
may be less than or greater than $100.0 million. The notes would be convertible,
at the option of the holder, into shares of Mail.com's Class A common stock.
Proceeds from the notes would be used to develop Mail.com's domain name
properties and partially fund related acquisitions, finance international
expansion, expand business outsourcing, sales and marketing activities, and fund
other general corporate purposes. Holders of the notes would have resale
registration rights with respect to the notes and the shares of Mail.com Class A
common stock issuable upon conversion.
THE OFFERING OF NOTES MAY NOT CLOSE OR MAY CLOSE ON TERMS THAT VARY FROM
THOSE CURRENTLY CONTEMPLATED. At the time of printing of this proxy
statement/prospectus, Mail.com's proposed offering had not yet priced, and
Mail.com had not entered into a purchase agreement with respect to the notes
with any placement agent. The merger is not conditioned on completion of the
notes offering. If the offering is not completed for any reason, the combined
company may be subject to a number of risks, including the risk that the
combined company may be unable to raise necessary capital in the future.
THE NOTES WOULD SIGNIFICANTLY INCREASE MAIL.COM'S LEVERAGE. The sale of the
notes on the terms currently contemplated would significantly increase
Mail.com's debt as a percentage of capitalization from approximately 11% to
approximately 31% (or 35% if the overallotment option is exercised) as of
September 30, 1999, on a pro forma as adjusted basis after giving effect to the
merger. Along with the notes, Mail.com may incur additional indebtedness in the
future. Mail.com's level of indebtedness, among other things, could:
- Make it difficult for it to make payments on the notes;
- Make it difficult for it to obtain any necessary financing in the future
for working capital, capital expenditures, debt service requirements or
other purposes;
- Limit its flexibility in planning for, or reacting to changes in, its
business; and
- Make it more vulnerable in the event of a downturn in its business.
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TO GENERATE INCREASED REVENUES FROM ITS CONSUMER SERVICES, MAIL.COM WILL HAVE TO
SUBSTANTIALLY INCREASE THE NUMBER OF ITS MEMBERS, WHICH WILL BE DIFFICULT TO
ACCOMPLISH.
To achieve its objective of generating advertising related revenues and
subscription revenues through its consumer email services, Mail.com will have to
retain its existing members and acquire a large number of new members. Mail.com
relies upon strategic alliances with third party Web sites to attract the
majority of its current members.
Mail.com believes that its success will partially depend on its ability to
maintain its current alliances and to enter into new ones with Web sites and
Internet Service Providers or "ISPs" on acceptable terms. Mail.com believes,
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 Mail.com has identified as potential sources for
significant quantities of new members already offer their visitors an email
service similar to Mail.com's. Mail.com cannot assure you that it will be able
to enter into successful alliances with third party Web sites or ISPs on
acceptable terms or at all.
MAIL.COM'S CONTRACTS WITH ITS WEB SITE AND ISP PARTNERS REQUIRE IT TO INCUR
SUBSTANTIAL EXPENSES.
In nearly all cases, Mail.com's Web site and ISP partners do not pay
Mail.com to provide its services. Mail.com bears the costs of providing its
services. Mail.com generates revenues by selling advertising space to
advertisers who want to target its members and by selling subscription services
to these members. Mail.com pays the partner a share of the revenues it
generates. In addition, a number of Mail.com's contracts require it to pay
significant fees or to make minimum payments to the partner without regard to
the revenues Mail.com realizes. If Mail.com is unable to generate sufficient
revenues at its partner sites, these fees and minimum payments can cause the
partner's effective share of Mail.com's revenues to approach or exceed 100%.
MAIL.COM HAS ISSUED WARRANTS TO PURCHASE 1,000,000 SHARES OF ITS CLASS A COMMON
STOCK TO AT&T CORP. AS PART OF A PROPOSED STRATEGIC RELATIONSHIP WITH IT, BUT
MAIL.COM CANNOT ASSURE YOU THAT IT WILL ENTER INTO THE STRATEGIC RELATIONSHIP.
Under a letter agreement with AT&T Corp. dated May 26, 1999, Mail.com issued
warrants to purchase 1,000,000 shares of its Class A common stock at an exercise
price of $11.00 per share. AT&T may exercise the warrants at any time on or
before December 31, 2000 even if Mail.com does not enter into a strategic
relationship with AT&T. Mail.com will incur non-cash accounting charges of
approximately $4.3 million in the aggregate as a result of the issuance of these
warrants. See "Mail.com Management's Discussion and Analysis of Financial
Condition and Results of Operations." Under the letter agreement, AT&T and
Mail.com have agreed to negotiate in good faith to establish a strategic
relationship. On July 26, 1999, Mail.com entered into an interim agreement to
provide its email services as part of a package of AT&T or third party branded
communications services that AT&T may offer to some of its small business
customers. Mail.com does not expect to generate significant revenues under the
July 26 interim agreement. Since August 31, 1999, AT&T or Mail.com may terminate
the May 26 letter agreement without further liability at any time prior to the
execution and delivery of a definitive agreement establishing the strategic
relationship. Mail.com cannot assure you that it will be able to enter into a
definitive agreement to implement the proposed strategic relationship. AT&T will
be entitled to retain their warrants even if Mail.com does not enter into a
definitive agreement.
THE FAILURE TO RENEW MAIL.COM'S PARTNER CONTRACTS, WHICH HAVE LIMITED TERMS, CAN
RESULT IN THE LOSS OF MEMBERS AND IMPAIR MAIL.COM'S CREDIBILITY.
Mail.com's 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 Mail.com's service, a desire to switch to one of
its outsourcing competitors, or a decision to provide email service themselves.
Partners can
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also choose not to renew Mail.com's contract because they have entered into a
merger or other strategic relationship with another company that can provide
email service. This last factor is becoming increasingly common in light of the
consolidation taking place among Web sites, ISPs and other Internet-related
businesses. For example, NBC Multimedia announced on May 10, 1999, that it
reached an agreement with XOOM to create a new Internet services company. Under
the terms of the agreement, XOOM combined with Snap in the fourth quarter of
1999, which is jointly owned by CNET and NBC Multimedia. XOOM currently offers a
free email service at its XOOM.com Web site. Mail.com cannot assure you that
these partners will not seek to terminate their contractual relationships with
it. The loss of a partner can be very disruptive for Mail.com for a number of
reasons:
MAIL.COM MAY LOSE A SUBSTANTIAL NUMBER OF MEMBERS. When members register
for Mail.com's 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 November 30, 1999, Mail.com estimates that approximately 25% of
its established emailboxes have email addresses at partner-owned domain names.
Upon expiration, most partners can require Mail.com to relinquish existing
members with addresses at partner-owned domain names. Even those members who
have selected addresses using Mail.com 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 Mail.com's revenues. Moreover, as of
December 31, 1999, Mail.com estimates that approximately 18% of its emailboxes
established are at the eMail.com domain. If CNET and Snap exercise their rights
to terminate their agreement, which includes the right to terminate for
convenience after May 13, 2001, Mail.com would be obligated to transfer the
email.com domain name and related member information to them. If CNET and Snap
terminate for convenience, they would be obligated to pay Mail.com 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
Mail.com the shares that it issued to them for the establishment of emailboxes
or pay Mail.com the then fair market value of these shares. If CNET and Snap
terminate for other reasons, the amount of compensation they must pay to
Mail.com 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 Mail.com's agreement with them.
LOSING RELATIONSHIPS WITH PROMINENT PARTNERS CAN IMPAIR MAIL.COM'S
CREDIBILITY WITH ADVERTISERS AND OTHER PARTNERS. Mail.com believes that
partnerships with Web sites that have prominent brand names help give it
credibility with other partners and with advertisers. The loss of Mail.com's
better-known Web site partners could damage Mail.com's reputation and adversely
affect the advertising, direct marketing, e-commerce and subscription rates it
charges.
SEVERAL OF MAIL.COM'S MOST SIGNIFICANT PARTNER CONTRACTS HAVE EXPIRED WHICH
COULD RESULT IN REDUCED ADVERTISING AND SUBSCRIPTION REVENUES.
Any loss of members or decline in the number of page views arising out of
the expiration or termination of partner contracts could reduce Mail.com's
advertising and subscription revenues.
Two of Mail.com's most important Web site partnerships have been with Lycos
and AltaVista, which collectively have accounted for approximately 19% of the
emailboxes established through September 30, 1999, and for approximately 16% of
the total page views delivered in September 1999. Mail.com's agreement with
Lycos expired on October 8, 1998, shortly after Lycos acquired Who Where, a
competitor that provides personal homepage and Webmail services. Mail.com's
contract with AltaVista expired on September 30, 1999. While Mail.com owns the
right to serve the majority of the affected members after the expiration of
these contracts, it cannot be sure that these members will continue to use its
service as actively as they have in the past, if at all. Because these contracts
have expired, Mail.com cannot sign up new members at either of these Web sites.
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BECAUSE MAIL.COM IS DEPENDENT ON A SMALL NUMBER OF PARTNER SITES FOR A
SUBSTANTIAL PERCENTAGE OF ITS ANTICIPATED NEW MEMBERS, A DISRUPTION IN ITS
RELATIONSHIP WITH ANY OF THESE PARTNERS OR A DECREASE IN TRAFFIC AT ANY OF THESE
SITES COULD REDUCE ITS ADVERTISING RELATED REVENUES AND SUBSCRIPTION REVENUES.
Most of Mail.com's 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 36.5% of Mail.com's new emailboxes
established in November 1999:
<TABLE>
<CAPTION>
DATE THAT
PERCENTAGE OF MAIL.COM'S
NEW EMAILBOXES IN CONTRACT WITH THE
PARTNER NOVEMBER 1999 PARTNER EXPIRES
- ------- ----------------- -----------------
<S> <C> <C>
iWon......................................... 12.8% June 2000
Snap......................................... 10.8 *
Prodigy...................................... 7.5 February 2001
CNET......................................... 5.4 *
</TABLE>
- ------------------------
* CNET and Snap may terminate their contracts for convenience after May 13,
2001.
Mail.com's contract with Prodigy is automatically renewable for successive
one-year terms unless either party elects to terminate at least sixty days
before the start of a new term. If any of the Web sites operated by these
parties were to experience lower than anticipated traffic, or if Mail.com's
relationships with any of these parties were disrupted for any reason, its
revenues could decrease and the growth of its 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.
MAIL.COM HAS ONLY LIMITED INFORMATION ABOUT ITS MEMBERS AND THEIR USAGE, WHICH
MAY LIMIT MAIL.COM'S POTENTIAL REVENUES.
Mail.com's ability to generate revenue from advertising related sales is
directly related to its members' activity levels and the quality of its
demographic data. To be successful, Mail.com will have to increase members'
usage of its service. Mail.com is subject to several constraints that will limit
its ability to maximize the value of its member base:
MAIL.COM BELIEVES THAT MOST OF ITS MEMBERS DO NOT USE THEIR EMAILBOXES
REGULARLY, AND MANY DO NOT USE THEM AT ALL. Mail.com does not have the computer
systems necessary to regularly monitor emailbox usage by its members. Mail.com
has information for selected Web sites for the month of November 1999 which
excludes ISP members, email.com members, members who automatically forward their
email from their emailbox provided by Mail.com to another emailbox and members
that subscribe for its upgrade "POP3" access. In November 1999, no more than 30%
of emailboxes in the sample were accessed by Mail.com's members. Moreover, up to
20% of those email boxes that were accessed were first established during that
period. Mail.com expects its proportion of active members to decrease as its
total number of established emailboxes increases. On an ongoing basis, Mail.com
believes that a significant number of members will cease using its service each
month. Mail.com cannot assure you that it will be able to add enough new members
to compensate for this anticipated loss of usage.
MAIL.COM HAS ONLY A LIMITED ABILITY TO GENERATE ADVERTISING REVENUES FROM
FORWARDING AND POP3 ACCOUNTS, WHICH REPRESENT A SIGNIFICANT PERCENTAGE OF ITS
EMAILBOXES. Members who choose Mail.com's forwarding service or subscribe to
its POP3 service do not need to come to its partners' or its Web sites to access
their email. Therefore, Mail.com does not deliver Web-based advertisements to
these members. Forwarding and POP3 accounts represented approximately 36% of
Mail.com's total emailboxes as of November 30, 1999, and 16% of the emailboxes
that were established during November 1999. If a disproportionate percentage
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of members choose either of these options, it will adversely affect Mail.com's
ability to generate advertising related revenues.
MAIL.COM'S DATABASE CONTAINS INACCURACIES THAT COULD REDUCE THE VALUE OF ITS
INFORMATION. Although Mail.com attempts to collect basic demographic
information about members at the time they establish their accounts, it does not
verify the accuracy of this information. Moreover, even if the information is
correct when Mail.com receives it, members may move, change jobs or die without
its knowledge. As a result, Mail.com's database contains inaccuracies that could
make Mail.com's information less appealing to advertisers.
MAIL.COM DOES NOT KNOW HOW MANY MEMBERS HAVE ESTABLISHED MULTIPLE
EMAILBOXES. Because Mail.com does not charge for its basic service, individuals
can easily establish multiple emailboxes. This makes it impossible for Mail.com
to determine the number of separate individuals registering for its service,
which may reduce the advertising rates it can command.
WEBMAIL, USE OF THE INTERNET AS A MEDIUM FOR FAX TRANSMISSIONS, EMAIL
ADVERTISING AND EMAIL OUTSOURCING MAY NOT PROVE TO BE VIABLE BUSINESSES.
The combined company operates in an industry that is only beginning to
develop. Its success will require the widespread acceptance by consumers of
Webmail and of fax transmissions over the Internet. The combined company is 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, AND POTENTIAL
CUSTOMERS MAY NOT ACCEPT THE INTERNET AS THE PREFERRED MEDIUM FOR TRANSMISSION
OF DOCUMENTS. As Web-based messaging and document delivery services, Webmail
and fax transmission over the Internet are 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 or potential customer acceptance of faxing over
the Internet. Moreover, Webmail and fax transmission over the Internet 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
or to fax documents over the Internet. Consumers may also react negatively to
the relatively new concept of an advertising supported email service. Mail.com's
business will suffer if public perception of its 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 the combined company's markets, and an article or review
unfavorable to Webmail or Internet faxing services or to the service of Mail.com
or NetMoves 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 MAIL.COM'S ABILITY TO MARKET
PREMIUM WEBMAIL SERVICES SUCCESSFULLY. Consumers have generally been very
reluctant to pay for services provided over the Internet. In August 1999,
Mail.com discontinued charging its members for virtually all of its premium
domain names. Moreover, if Mail.com's competitors choose to provide POP3 access,
greater storage capacity or other services without charge or as part of a
bundled offering, it may be forced to do the same.
THERE ARE SIGNIFICANT OBSTACLES TO THE DEVELOPMENT OF A SIZABLE MARKET FOR
EMAIL OUTSOURCING. Outsourcing is one of the principal methods by which the
combined company will attempt to reach the size Mail.com believes 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 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.
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Mail.com has begun to provide a range of email services, and NetMoves its
Internet fax transmission services, to businesses and organizations. Mail.com
currently generates revenues in the business market primarily from email service
fees related to Mail.com's email system connection services and email
monitoring. There can be no assurance that the combined company will be able to
expand its business customer base, attract additional customers in other
segments or acquire a sufficient base of customers for whom it would provide
hosting services. In addition, the sales cycle for hosting services is lengthy
and could delay the generation of revenues in the business email services
market. Furthermore, the combined company may not be able to generate
significant additional revenues by providing email services and Internet fax
transmission 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 the combined company will
charge. Mail.com cannot assure you that the fees the combined company intends 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, Mail.com will still need large numbers of advertisers to purchase
space on its Webmail service. Mail.com currently does not sell advertisements in
connection with its business email services.
BECAUSE MAIL.COM, AND ITS COMPETITORS, HAVE ONLY RECENTLY BEGUN TO OFFER
EMAIL ADVERTISING, ITS POTENTIAL ADVERTISING CUSTOMERS HAVE LITTLE OR NO
EXPERIENCE WITH THIS MEDIUM. Mail.com does 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 Mail.com's 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. Mail.com's
advertising customers may refuse to accept Mail.com's own measurements or
third-party measurements of advertisement delivery, which would adversely affect
Mail.com's ability to generate advertising related revenues.
FILTERING SOFTWARE COULD PREVENT MAIL.COM 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 Mail.com's ability to generate advertising revenues.
THERE ARE SIGNIFICANT OBSTACLES TO MAIL.COM'S ABILITY TO INCREASE ADVERTISING
REVENUES.
Mail.com's success will largely depend on its ability to substantially
increase its advertising related revenues, which Mail.com currently generates
only in connection with its consumer services. Several factors will make it very
difficult for Mail.com to achieve this objective:
A LIMITED NUMBER OF ADVERTISERS ACCOUNT FOR A HIGH PERCENTAGE OF MAIL.COM'S
REVENUES, ITS CONTRACTS WITH ITS ADVERTISERS TYPICALLY HAVE TERMS OF ONLY ONE OR
TWO MONTHS, AND MAIL.COM MAY BE UNABLE TO RENEW THESE CONTRACTS. Mail.com is
dependent on a limited number of advertisers to derive a substantial portion of
its revenues. For the nine-month periods ended September 30, 1999 and 1998,
approximately 7% and 12%, respectively, of Mail.com's total revenues were
attributable to N2K/Music Boulevard, which recently merged with CDnow, Inc. and
is not presently one of its advertisers. For the nine-month periods ended
September 30, 1999 and 1998, revenues from Mail.com's five largest advertisers
accounted for an aggregate of 36% and 35%, respectively, of its revenues.
Mail.com's future success will depend upon its ability to
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retain these advertisers, to generate significant revenues from new advertisers
and to reduce its reliance on any single advertiser. Mail.com's existing
contracts with advertisers generally have terms of only one or two months and it
may be unable to renew them. The loss of one of Mail.com's major advertisers or
its inability to attract new advertisers would cause Mail.com's revenues to
decline.
MAIL.COM 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 IT HAS IN
THE PAST. To date, Mail.com has generated a significant portion of its
advertising revenues on a "cost per thousand" basis. These agreements require
the advertiser to pay Mail.com a fixed fee for every 1,000 advertisements that
Mail.com delivers to its members. Mail.com believes that this type of agreement
is the most effective for it, but Mail.com 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.
MAIL.COM FACES 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
Mail.com a fee for each occasion on which a member "clicks" on the
advertisement. Cost per conversion contracts provide that Mail.com receives 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
Mail.com for each advertisement that it delivers to its members. Moreover, cost
per conversion contracts present additional risks for Mail.com because it has no
control over the advertiser's ability to convert a "click" into a sale or other
action. Mail.com also must rely on the advertiser to report to it the number of
conversions. These reports may not be accurate, and they may not be timely, both
of which can adversely affect Mail.com's revenues. Notwithstanding these risks,
Mail.com may have to sell more of its advertising on a cost per click or cost
per conversion basis in the future.
THE COMBINED COMPANY MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF
FLUCTUATIONS IN ITS QUARTERLY OPERATING RESULTS, WHICH WOULD CAUSE ITS STOCK
PRICE TO DECLINE.
Although Mail.com intends to steadily increase the combined company's
spending and investment to support its planned growth, its revenues (and some of
its costs) will be much less predictable. This is likely to result in
significant fluctuations in the combined company's quarterly results, and to
limit the value of quarter-to-quarter comparisons. Because of Mail.com's limited
operating history and the emerging nature of the combined company's industry,
Mail.com anticipates that securities analysts will have difficulty in accurately
forecasting the combined company's results. It is likely that the combined
company operating results in some quarters will be below market expectations. In
this event, the price of Mail.com's Class A common stock is likely to decline.
The following are among the factors that could cause significant
fluctuations in the combined company's operating results:
- incurrence of a non-cash accounting charge of the remaining unamortized
portion of the approximately $4.3 million originally capitalized from the
issuance of warrants to AT&T if Mail.com does not enter into a definitive
agreement with AT&T Mail.com would incur this charge in the fiscal quarter
in which both parties have ceased negotiations;
- incurrence of other cash and non-cash accounting charges resulting from
acquisitions, including charges resulting from acquisitions of Allegro,
TCOM and, if consummated, NetMoves;
- 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;
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- introduction of new or enhanced services by the combined company or its
competitors;
- changes in the combined company's pricing policies or that of its
competitors;
- seasonality in the demand for advertising, or changes in Mail.com's 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 MAIL.COM'S AND NETMOVES' COMPETITORS HAVE SUBSTANTIALLY GREATER
RESOURCES, LONGER OPERATING HISTORIES, LARGER CUSTOMER BASES AND BROADER PRODUCT
OFFERINGS.
The businesses of Mail.com and NetMoves are, and each company believes will
continue to be, intensely competitive.
Mail.com's 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. Mail.com also competes 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, Mail.com expects to compete with MCI Mail, USA.NET and Critical
Path. In addition, Mail.com competes for advertisers with DoubleClick,
24/7 Media, and other Internet advertising networks. Mail.com also competes for
advertisers with other Internet publishers as well as traditional media such as
television, radio, print and outdoor advertising.
Some of Mail.com's 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 Mail.com. 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 market for fax transmission services is intensely competitive and the
industry is characterized by low barriers to entry. 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 the
combined company expands its service offerings, Mail.com expects to encounter
increased competition in the development and delivery of these services.
Further, some of the combined company's competitors may offer services at or
below cost or for free for which Mail.com now charges its members. If the
combined company's competitors choose to offer premium or other services at or
below cost or for free, the combined company may be forced to do the same for
its comparable services. If this occurs, the combined company's ability to
generate revenues from its subscription services would be materially impaired.
Some of the combined company's competitors may offer advertisement-free email on
a subscription basis or for free, which could adversely affect the combined
company's ability to attract and retain members unless it does the same. In
addition, new technologies and the expansion of existing technologies may
increase competitive pressures on the combined company's. The combined company
may not be able to compete successfully against its competitors.
MAIL.COM'S RAPID EXPANSION IS STRAINING ITS EXISTING RESOURCES, AND IF THE
COMBINED COMPANY IS NOT ABLE TO MANAGE ITS GROWTH EFFECTIVELY, ITS BUSINESS AND
OPERATING RESULTS WILL SUFFER.
Mail.com has begun aggressively expanding its operations in anticipation of
an increasing number of strategic alliances and a corresponding increase in the
number of members as well as development of its business customer base. The
number of Mail.com employees increased from 29 on December 31, 1997 to
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276 on December 31, 1999, including the 21 former employees of Allegro whom
Mail.com hired in connection with its acquisition of Allegro. Mail.com has
entered into agreements with additional partners and has upgraded its email
services. In addition, Mail.com has developed the technology and infrastructure
to begin offering a range of services in the business email services market.
This expansion has placed on Mail.com, and Mail.com expects it to continue to
place on the combined company, a significant strain on managerial, operational
and financial resources. If the combined company cannot manage its growth
effectively, its business and operating results will suffer.
IF MAIL.COM IS NOT ABLE TO IMPROVE ITS BILLING, MANAGEMENT INFORMATION AND OTHER
SYSTEMS, ITS REVENUES FROM SUBSCRIPTION SERVICES WILL DECLINE AND ITS MARKETING
EFFORTS WILL BE LESS EFFECTIVE.
Mail.com needs to improve or replace its existing operational, customer
service and financial systems, procedures and controls.
THE LACK OF NECESSARY SYSTEMS TO REGULARLY MONITOR MAIL.COM'S MEMBERS'
ACTIVITY LEVELS MAY REDUCE THE EFFECTIVENESS OF ITS MARKETING EFFORTS. It is
difficult for Mail.com to regularly generate statistics such as the number of
emailboxes that its members access, and the pages they view, on a daily, weekly
and monthly basis. Data of this nature is of significant value to potential
advertisers, and Mail.com's inability to provide this information reduces the
effectiveness of its marketing efforts.
MAIL.COM'S OLD SUBSCRIPTION BILLING SYSTEM WAS INADEQUATE. Until March
1999, Mail.com did not request credit card information from new premium service
members at the time they registered, but sought instead to obtain billing
information upon expiration of a 30-day free trial period. This proved to be
unsuccessful, and consequently approximately 94% of Mail.com's premium members
received subscription services for which they did not pay. Mail.com's new
billing system, implemented in March 1999, has been designed to require a member
to supply credit card information at the time of registration for subscription
services.
IT IS DIFFICULT TO RETAIN KEY PERSONNEL AND ATTRACT ADDITIONAL QUALIFIED
EMPLOYEES IN THE COMBINED COMPANY'S BUSINESS AND THE LOSS OF KEY PERSONNEL AND
THE BURDEN OF ATTRACTING ADDITIONAL QUALIFIED EMPLOYEES MAY IMPEDE THE OPERATION
AND GROWTH OF THE COMBINED COMPANY'S BUSINESS AND CAUSE ITS REVENUES TO DECLINE.
The future success of the combined company depends to a significant extent
on the continued service of its key technical, sales and senior management
personnel, but they have no contractual obligation to remain with the combined
company. In particular, the success of the combined company depends on the
continued service of Gerald Gorman, Mail.com's Chairman and Chief Executive
Officer, Gary Millin, Mail.com's President, Lon Otremba, Mail.com's Chief
Operating Officer, Debra McClister, Mail.com's Executive Vice President and
Chief Financial Officer, Charles Walden, Mail.com's Executive Vice President,
Technology, Aaron Fessler, President of Allegro, and Thomas F. Murawski, who is
expected to become Chief Executive Officer of Mail.com's Messaging Division
after completion of the merger. The loss of the services of Messrs. Gorman,
Millin, Otremba, Walden, Fessler, or Murawski or of Ms. McClister, or several
other key employees, would impede the operation and growth of the business of
the combined company.
To manage its existing business and handle any future growth, the combined
company will have to attract, retain and motivate additional highly skilled
employees. In particular, the combined company will need to hire and retain
qualified salespeople if it is to meet its sales goals. The combined company
will also need to hire and retain additional experienced and skilled technical
personnel in order to meet the increasing technical demands of its expanding
business. Competition for employees in Internet-related businesses is intense.
Mail.com has in the past experienced, and expects that the combined company will
continue to experience, difficulty in hiring and retaining employees with
appropriate qualifications. If the
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combined company is unable to do so, its management may not be able to
effectively manage its business, exploit opportunities and respond to
competitive challenges.
THE BUSINESS OF THE COMBINED COMPANY WILL BE HEAVILY DEPENDENT ON TECHNOLOGY,
INCLUDING TECHNOLOGY THAT HAS NOT YET BEEN PROVEN RELIABLE AT HIGH TRAFFIC
LEVELS AND TECHNOLOGY THAT THE COMBINED COMPANY WILL NOT CONTROL.
The performance of the computer systems of the combined company will be
critical to the quality of service it is able to provide to its members and to
its business customers. If the services of the combined company are unavailable
or fail to perform to their satisfaction, they may cease using its service.
Reduced use of the email services of the combined company will decrease its
revenues by decreasing the advertising space that it has available to sell. If
the Internet faxing services of the combined company are unavailable or fail to
perform, the combined company is likely to lose customers and the associated
fees from their Internet faxing. In addition, Mail.com's agreements with several
of its partners establish minimum performance standards. If Mail.com fails to
meet these standards, its partners could terminate their relationships with
Mail.com and assert claims for monetary damages.
THE COMBINED COMPANY NEEDS TO UPGRADE ITS COMPUTER SYSTEMS TO ACCOMMODATE
INCREASES IN EMAIL TRAFFIC AND FAX TRANSMISSIONS, BUT IT MAY NOT BE ABLE TO DO
SO WHILE MAINTAINING ITS CURRENT LEVEL OF SERVICE, OR AT ALL.
The combined company must continue to expand and adapt its computer systems
as the number of members and business customers and the amount of information
they wish to transmit increases and as their requirements change, and as the
combined company develops its business email and Internet fax transmission
services. Because Mail.com has only been providing its services for a limited
time, and because its computer systems have not been tested at greater
capacities, it cannot guarantee the ability of its computer systems to connect
and manage a substantially larger number of members or meet the needs of
business customers at high transmission speeds. If the combined company cannot
provide the necessary service while maintaining expected performance, its
business will suffer and its ability to generate revenues through its services
will be impaired.
The expansion and adaptation of the combined company's computer systems will
require substantial financial, operational and managerial resources. The
combined company may not be able to project the timing of increases in email
traffic or other customer requirements accurately. In addition, the very process
of upgrading the combined company's computer systems is likely to cause service
disruptions. This is because the combined company will have to take various
elements of the network out of service in order to install some upgrades.
MAIL.COM'S COMPUTER SYSTEMS MAY FAIL AND INTERRUPT ITS SERVICE.
Mail.com's members have in the past experienced interruptions in their email
service. Mail.com believes that these interruptions will continue to occur from
time to time. These interruptions are due to hardware failures, unsolicited bulk
emails that overload Mail.com's system and other computer system failures. In
particular, Mail.com has experienced outages and delays in email delivery and
access to its email service related to disk failures, the implementation of
changes to its computer system and insufficient storage capacity. These failures
have resulted and may continue to result in significant disruptions to
Mail.com's service. Although Mail.com plans 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 Mail.com's
network increases the risk of service interruptions. Some aspects of Mail.com's
computer systems are not redundant. These include Mail.com's member database
system and its email storage system, which stores emails and other data for its
members. In addition, substantially all of Mail.com's computer and
communications systems are currently located in its primary data centers in
Manhattan and Dayton, Ohio. Mail.com currently does not have alternate sites
from which it could
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conduct operations in the event of a disaster. Mail.com's computer and
communications hardware is vulnerable to damage or interruption from fire,
flood, earthquake, power loss, telecommunications failure and similar events.
Mail.com's services would be suspended for a significant period of time if
either of its primary data centers was severely damaged or destroyed. Mail.com
might also lose stored emails and other member files, causing significant member
dissatisfaction and possibly giving rise to claims for monetary damages.
THE SERVICES OF THE COMBINED COMPANY WILL BECOME LESS DESIRABLE OR OBSOLETE IF
IT IS UNABLE TO KEEP UP WITH THE RAPID CHANGES CHARACTERISTIC OF ITS BUSINESS.
The success of the combined company will depend on its ability to enhance
its existing services and to introduce new services in order to adapt to rapidly
changing technologies, industry standards and customer demands. To compete
successfully, the combined company will have to accurately anticipate changes in
consumer and business demand and add new features to its services very rapidly.
The combined company will also have to regularly upgrade its software to ensure
that it remains compatible with the wide and changing variety of Web browsers
and other software used by its members and business customers. For example,
Mail.com's system currently cannot properly receive files sent using some third
party email programs. The combined company may not be able to integrate the
necessary technology into its computer systems on a timely basis or without
degrading the performance of its services. Mail.com cannot be sure that, once
integrated, new technology will function as expected. Delays in introducing
effective new services could cause existing and potential members or business
customers to forego use of the services of the combined company and to use
instead those of its competitors.
THE BUSINESS OF THE COMBINED COMPANY WILL SUFFER IF IT IS UNABLE TO PROVIDE
ADEQUATE SECURITY FOR ITS SERVICES, OR IF ITS SERVICES ARE IMPAIRED BY SECURITY
MEASURES IMPOSED BY THIRD PARTIES.
Security is a critical issue for any online service, and will present a
number of challenges for the combined company.
IF THE COMBINED COMPANY IS UNABLE TO MAINTAIN THE SECURITY OF ITS SERVICE,
ITS REPUTATION AND ITS ABILITY TO ATTRACT AND RETAIN MEMBERS MAY SUFFER, AND IT
MAY BE EXPOSED TO LIABILITY. Third parties may attempt to breach the security
of the combined company or that of its members or any business customers whose
email networks it may maintain or for whom it provides messaging services. If
they are successful, they could obtain the combined company's members'
confidential information, including its 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. The
combined company's members or any business customers may assert claims for money
damages for any breach in its security and any breach could harm the combined
company's reputation.
THE COMBINED COMPANY'S COMPUTERS WILL BE VULNERABLE TO COMPUTER VIRUSES,
PHYSICAL OR ELECTRONIC BREAK-INS AND SIMILAR INCURSIONS, WHICH COULD LEAD TO
INTERRUPTIONS, DELAYS OR LOSS OF DATA. Mail.com expects that the combined
company will 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. The combined company's failure to prevent security breaches may
expose the combined company to liability and may adversely affect its ability to
attract and retain members and develop its business market.
SECURITY MEASURES TAKEN BY OTHERS MAY INTERFERE WITH THE EFFICIENT OPERATION
OF THE COMBINED COMPANY'S SERVICES, WHICH MAY HARM ITS REPUTATION, ADVERSELY
IMPACT ITS ABILITY TO ATTRACT AND RETAIN MEMBERS AND BUSINESS CUSTOMERS AND
IMPEDE THE DELIVERY OF ADVERTISEMENTS FROM WHICH MAIL.COM GENERATES
REVENUES. "Firewalls" and similar network security software employed by many
ISPs, employers and schools can interfere with the operation of Mail.com's
Webmail service, including denying its members access to their email accounts.
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Similarly, in their efforts to filter out unsolicited bulk emails, ISPs and
other organizations may block email from all or some of Mail.com's members.
MAIL.COM'S DEPENDENCE ON LICENSED TECHNOLOGY EXPOSES IT TO THE RISK THAT IT MAY
NOT BE ABLE TO INTEGRATE ITS TECHNOLOGY, WHICH MAY RESULT IN LESS DEVELOPMENT OF
ITS OWN TECHNOLOGY AND MAY INCREASE ITS COSTS.
Mail.com licenses a significant amount of technology from third parties,
including technology related to its Web servers, email monitoring services,
billing processes, database and planned Internet fax services. Mail.com
anticipates that it will need to license additional technology to remain
competitive. Mail.com may not be able to license these technologies on
commercially reasonable terms or at all. Third-party licenses expose Mail.com to
increased risks, including risks relating to the integration of new technology,
the diversion of resources from the development of its own proprietary
technology, and a greater need to generate revenues sufficient to offset
associated license costs.
IF THE INTERNET AND OTHER THIRD-PARTY NETWORKS ON WHICH THE COMBINED COMPANY
WILL DEPEND TO DELIVER ITS SERVICES BECOME INEFFECTIVE AS A MEANS OF
TRANSMITTING DATA, THE BENEFITS OF ITS SERVICE MAY BE SEVERELY UNDERMINED.
The business of the combined company will depend 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 the combined company's
services. Therefore, the combined company's success depends on improvements
being made to the entire Internet infrastructure to alleviate overloading and
congestion. The combined company will also depend on telecommunications network
suppliers such as MFS, BBN Planet, UUNET and MCI Worldcom to transmit and
receive email messages and fax transmissions on behalf of its members and
business customers. As many of these companies are potential competitors of the
combined company, there can be no assurance that these companies will continue
to handle the traffic of the combined company.
Mail.com is also affected by service outages at its partners' Web sites. If
service at a partner's site is unavailable for a period of time, Mail.com 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 MAIL.COM DEPENDS ON FOR THE ACTUAL DELIVERY OF THE
ADVERTISEMENTS IT SELLS EXPERIENCES TECHNICAL DIFFICULTIES OR OTHERWISE FAILS TO
PERFORM, ITS REVENUES FROM ADVERTISING MAY BE ADVERSELY AFFECTED.
Mail.com contracts with DoubleClick, Inc. to deliver the advertisements that
it sells and that appear on its Web pages and on the Web pages of its partners.
If DoubleClick experiences technical difficulties or otherwise fails to perform,
its revenues from advertising may be adversely affected. Furthermore,
DoubleClick may not have the same priorities for technology development as
Mail.com does and this may limit its ability to improve its delivery of
advertising for its specific needs.
THE COMPUTER SYSTEMS OF THE COMBINED COMPANY, AND THE SYSTEMS OF OTHERS THAT THE
COMBINED COMPANY WILL DEPEND ON, MAY NOT OPERATE PROPERLY BECAUSE OF THE YEAR
2000 PROBLEM.
The combined company may still have exposure to the Year 2000 problem, both
with its own systems and with systems it does not control. The Year 2000 problem
could adversely affect the business and financial results of the combined
company. Many currently installed computer systems and software products have
been coded to accept or recognize only two digit entries to define the
applicable year. These systems may erroneously recognize the year 2000 as the
year 1900. This could result in major failures or malfunctions.
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This risk is particularly significant for the business of the combined
company. In addition to relying on the combined company's internal computer
equipment and software, it will depend upon the continued viability of many
external systems, most importantly the Internet, in order to make its services
available to its members and business customers. The combined company will use
the Internet to deliver all of its email services to its members and to transmit
and receive their email, and will increasingly route fax transmissions over the
Internet. Because no single entity or organization manages or controls the
Internet, there is no way to determine how many of the devices or systems that
contribute to the efficient transmission of data over the Internet may be prone
to the Year 2000 risk. If the performance or the availability of the Internet as
a data communications medium is compromised because of the Year 2000 problem,
the ability of the combined company to deliver its services and to generate
revenues would be adversely affected even if its own internal systems are fully
operational.
In addition, many of Mail.com's members are dependent upon the availability
of its partners' Web sites in order to gain access to its services. Mail.com
cannot be sure that Year 2000 problems will not materialize at these sites.
Moreover, Mail.com's members rely on a wide variety of hardware and software, as
well as numerous ISPs, in order to reach the Internet and its Web-based
services. If Mail.com's members were unable to access its services because of
Year 2000 problems associated with their own computers or their ISPs, Mail.com's
ability to deliver its services and to generate revenues would be adversely
affected.
Any significant Year 2000 problems in Mail.com's internal systems will harm
the operations of the combined company and increase its losses. Please see
"Mail.com Management's Discussion and Analysis of Financial Condition and
Results of Operations."
GERALD GORMAN CONTROLS MAIL.COM AND WILL BE ABLE TO PREVENT A CHANGE OF CONTROL.
Gerald Gorman, Mail.com's Chairman and Chief Executive Officer, beneficially
owned as of December 31, 1999 Class A and Class B common stock representing
approximately 75.26% of the voting power of Mail.com's 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 Mail.com's 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 Mail.com's stockholders who
formerly held its preferred stock to designate a total of three members of its
board of directors.
Mail.com's certificate of incorporation contains provisions that could deter
or make more expensive a takeover of Mail.com. These provisions include the
ability to issue "blank check" preferred stock without stockholder approval.
IT IS MAIL.COM'S INTENTION THAT THE COMBINED COMPANY ACQUIRE OR MAKE STRATEGIC
INVESTMENTS IN OTHER BUSINESSES AND ACQUIRE OR LICENSE TECHNOLOGY AND OTHER
ASSETS, AND THE COMBINED COMPANY MAY HAVE DIFFICULTY INTEGRATING THESE
BUSINESSES OR GENERATING AN ACCEPTABLE RETURN FROM ACQUISITIONS.
Mail.com recently acquired The Allegro Group, Inc., a provider of email and
email related services, such as virus blocking and content screening, to
businesses. Mail.com also made an investment in 3Cube, Inc., a company
specializing in Internet fax technology. Following the merger, it is Mail.com's
intent that the combined company continue its efforts to acquire or make
strategic investments in businesses and acquire or license technology and other
assets, and any of these acquisitions may be material to the combined company.
Mail.com cannot assure you that acquisition or licensing opportunities
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will continue to be available to the combined company on terms acceptable to it
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 the ongoing business of the combined company;
- inability to successfully incorporate acquired technology into the
combined company's service offerings and maintain uniform standards,
controls, procedures, and policies; and
- lack of the necessary experience to enter new markets.
The combined company may not successfully overcome problems encountered in
connection with potential acquisitions. In addition, an acquisition could
materially impair the combined company's operating results by diluting its
stockholders' equity, causing it to incur additional debt, or requiring it to
amortize acquisition expenses and acquired assets.
MAIL.COM'S GOAL OF BUILDING BRAND IDENTITY IS LIKELY TO BE DIFFICULT AND
EXPENSIVE.
Mail.com believes that a quality brand identity will be essential if the
combined company is to increase membership, traffic on its sites and revenues,
and develop its business services market. Mail.com does not have experience with
some of the types of marketing that it is currently using. If the combined
company's marketing efforts cost more than anticipated or if it cannot increase
its brand awareness, its losses will increase and its ability to succeed will be
seriously impeded.
THE COMBINED COMPANY'S EXPANSION INTO INTERNATIONAL MARKETS IS SUBJECT TO
SIGNIFICANT RISKS AND ITS LOSSES MAY INCREASE AND ITS OPERATING RESULTS MAY
SUFFER IF ITS REVENUES FROM INTERNATIONAL OPERATIONS DO NOT EXCEED THE COSTS OF
THOSE OPERATIONS.
Mail.com intends that the combined company continue to expand into
international markets and that it expend significant financial and managerial
resources to do so. In 1998, NetMoves derived approximately 27.9% of its total
revenues from customers outside of the United States, and for the first nine
months of 1999 it derived approximately 28.7% of its total revenue from
customers outside of the United States. Mail.com has limited experience in
international operations, and the combined company may not be able to compete
effectively in international markets. If the combined company's revenues from
international operations do not exceed the expense of establishing and
maintaining these operations, its losses will increase and its operating results
will suffer. The combined company faces significant risks inherent in conducting
business internationally, such as:
- uncertain demand in foreign markets for Webmail advertising, transmission
of faxes over the Internet, direct marketing and e-commerce;
- the inability to maintain strategic partnerships developed by NetMoves or
the failure of such partners to successfully develop and sustain a market
for the business of the combined company;
- potentially high cost of localizing services;
- difficulties and costs of staffing and managing international operations;
- differing technology standards;
- difficulties in collecting accounts receivable and longer collection
periods;
- economic instability and fluctuations in currency exchange rates and
imposition of currency exchange controls;
- potentially adverse tax consequences; and
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- political instability, unexpected changes in regulatory requirements and
reduced protection for intellectual property rights in some countries.
IF THE COMBINED COMPANY IS UNABLE TO RAISE NECESSARY CAPITAL IN THE FUTURE, IT
MAY BE UNABLE TO FUND NECESSARY EXPENDITURES.
Mail.com anticipates that the combined company will need to raise additional
capital in the future. However, it may not be able to raise on terms favorable
to it, or at all, amounts necessary to fund its planned expansion, develop new
or enhanced services, respond to competitive pressures, promote its brand name
or acquire complementary businesses, technologies or services. Some of
Mail.com's stockholders have registration rights that could interfere with the
ability of the combined company to raise needed capital.
If the combined company raises additional funds by issuing equity
securities, stockholders may experience dilution of their ownership interest.
Moreover, the combined company could issue preferred stock that has rights
senior to those of the Class A common stock. If the combined company raises
funds by issuing debt, its lenders may place limitations on its operations,
including its ability to pay dividends.
THE MESSAGING DIVISION OF THE COMBINED COMPANY IS SUBJECT TO EXTENSIVE
GOVERNMENT REGULATION, AND THE REGULATION OF EMAIL AND INTERNET USE IS EVOLVING
AND MAY ADVERSELY IMPACT THE BUSINESS OF THE COMBINED COMPANY.
The Internet fax transmission business anticipated to be carried on by the
combined company is subject to regulation by the FCC and other federal, state
and international communications regulatory agencies. NetMoves is licensed by
the FCC as an authorized telecommunications company and is classified as a
"non-dominant interexchange carrier." The FCC has the power to impose more
stringent regulatory requirements on NetMoves and to change its regulatory
classification. There can be no assurance that the FCC will not change NetMoves'
regulatory classification or otherwise subject the combined company to more
burdensome regulatory requirements.
The nodes and FaxLauncher service of NetMoves to be acquired in the merger
use encryption technology in connection with the routing of customer documents
through the Internet. The export of this encryption technology is regulated by
the United States government. While NetMoves is currently allowed to export this
encryption technology to most countries, any change in these regulations could
limit the ability of the combined company to distribute these services outside
of the United States or electronically which could have a material adverse
effect on the business, financial condition and results of operations on the
combined company.
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 the
business of the combined company.
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. The combined company could face liability for
defamation, copyright, patent or trademark infringement and other claims based
on the content of the email transmitted over Mail.com's system. Mail.com does
not and cannot screen all the content generated and received by its 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. The combined company may be subject to
legal proceedings and damage claims if it is found to have violated laws
relating to email content.
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THE INTELLECTUAL PROPERTY RIGHTS OF THE COMBINED COMPANY ARE CRITICAL TO ITS
SUCCESS, BUT MAY BE DIFFICULT TO PROTECT.
Mail.com and NetMoves each regard their respective copyrights, service
marks, trademarks, trade secrets, domain names and similar intellectual property
as critical to their success. The combined company will rely on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, members, strategic partners and others to protect
its proprietary rights. Despite the combined company's precautions, unauthorized
third parties may improperly obtain and use information that it regards as
proprietary. Third parties may submit false registration data attempting to
transfer key domain names to their control. The combined company's 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 Mail.com's rights
to use some of its domain names, and it expects 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. Neither Mail.com
nor NetMoves knows if its current or future patent applications will be issued
with the scope of the claims sought, if at all. Current United States law does
not adequately protect Mail.com's 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. The
combined company's means of protecting its proprietary rights in the United
States or abroad may not be adequate and competitors may independently develop
similar technology.
Third parties may infringe or misappropriate the combined company's
copyrights, trademarks and similar proprietary rights. In addition, other
parties may assert infringement claims against the combined company. The
combined company cannot be certain that its services do not infringe on 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 the combined company's services. Mail.com and NetMoves each have been,
and the combined company may continue to be subject to legal proceedings and
claims from time to time in the ordinary course of its business, including
claims related to the use of domain names and claims of alleged infringement of
the trademarks and other intellectual property rights of third parties.
Intellectual property litigation is expensive and time-consuming and could
divert management's attention away from running the business of the combined
company.
A SUBSTANTIAL AMOUNT OF MAIL.COM'S COMMON STOCK MAY COME ONTO THE MARKET IN THE
FUTURE, WHICH COULD DEPRESS ITS STOCK PRICE.
Sales of a substantial number of shares of Mail.com's common stock in the
public market could cause the market price of its Class A common stock to
decline. As of December 31, 1999, Mail.com had an aggregate of 45,218,466 shares
of Class A and Class B common stock and 9,725,461 options and 1,218,899 warrants
to purchase an aggregate of 10,944,360 shares of Class A common stock
outstanding. 32,763,844 shares of Class A and Class B common stock are freely
tradable, in some cases subject to the volume and manner of sale limitations
contained in Rule 144. Approximately 12,454,622 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. Mail.com is likely to issue large amounts of additional
Class A common stock (including, if its proposed Rule 144A offering of
convertible notes is completed, upon conversion of those notes), which may also
be sold and which could adversely affect the price of Mail.com's stock.
The holders of up to 16,198,618 shares of Class A common stock, excluding
any of these shares that have been sold publicly pursuant to Rule 144, have the
right, subject to various conditions, to require Mail.com to file registration
statements covering their shares, or to include their shares in registration
statements that Mail.com may file for itself or for other stockholders. In
addition, if Mail.com's proposed offering of convertible notes is completed,
holders of the notes would have resale registration rights with respect to the
notes and the shares of Mail.com Class A common stock issuable upon conversion.
By
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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.
MAIL.COM'S STOCK PRICE HAS BEEN VOLATILE AND IT EXPECTS THAT IT WILL CONTINUE TO
BE VOLATILE.
Mail.com's stock price has been volatile since its initial public offering
and Mail.com expects that it will continue to be volatile. As discussed above,
Mail.com's 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
Mail.com's stock price, a securities class action may be brought against
Mail.com. Class-action litigation could result in substantial costs and divert
the combined company's management's attention and resources.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS.
This proxy statement/prospectus contains forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to Mail.com's and NetMoves' financial condition, results of
operations and business and the expected impact of the merger on Mail.com's
financial performance. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions indicate
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties discussed in this section.
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THE SPECIAL MEETING
We are furnishing this proxy statement/prospectus to you in connection with
the solicitation of proxies by NetMoves' board of directors for use at the
special meeting of stockholders of NetMoves to be held on February 8, 2000, and
any adjournment or postponement of the meeting.
This proxy statement/prospectus was first mailed to stockholders of NetMoves
on or about January 18, 2000. This proxy statement/prospectus is also being
furnished to NetMoves stockholders as a prospectus in connection with the
issuance by Mail.com of shares of its Class A common stock as contemplated by
the merger agreement.
DATE, TIME AND PLACE
The special meeting will be held on February 8, 2000, at 11:00 a.m., local
time, at the Sheraton Woodbridge Place Hotel, 515 Route One South, Iselin, New
Jersey 08830, (732) 634-3600.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting and at any adjournment or postponement thereof, you
will be asked:
- to consider and vote upon the adoption and approval of the merger
agreement; and
- to transact such other business as may properly come before the special
meeting.
RECORD DATE
Only stockholders of record of NetMoves common stock at the close of
business on January 18, 2000 are entitled to notice of and to vote at the
special meeting. As of the close of business on that record date, there were
16,519,304 shares of NetMoves common stock outstanding and entitled to vote,
held of record by approximately 200 stockholders. Each NetMoves stockholder is
entitled to one vote for each share of NetMoves common stock held as of the
record date.
VOTING AND REVOCATION OF PROXIES
The board of directors of NetMoves requests that stockholders complete, date
and sign the accompanying proxy and promptly return it in the accompanying
postage-paid envelope or otherwise mail it to NetMoves. Brokers holding shares
in "street name" may vote the shares only if the beneficial stockholder provides
instructions on how to vote. Brokers will provide beneficial owners instructions
on how to direct the brokers to vote the shares. All properly executed proxies
that NetMoves receives prior to the vote at the special meeting, and that are
not revoked, will be voted in accordance with the instructions indicated on the
proxies. If no direction is indicated, the proxies will be voted FOR the
approval and adoption of the merger agreement and approval of the merger.
NetMoves' board of directors does not currently intend to bring any other
business before the special meeting and, so far as NetMoves' board of directors
knows, no other matters are to be brought before the special meeting. If any
other matters are properly brought before the special meeting, the persons named
in the proxies will have discretion to vote on such matters in accordance with
their best judgment.
Stockholders may revoke their proxies at any time prior to the special
meeting by filing with the Chief Financial Officer of NetMoves at its principal
executive offices at 399 Thornall Street, Edison, New Jersey 08837, a notice of
revocation or another signed proxy with a later date. You may also revoke your
proxy by attending the special meeting and voting in person. Attending the
special meeting, in and of itself, without voting, however, will not revoke any
proxy.
VOTE REQUIRED
The holders of a majority of the outstanding shares of NetMoves common stock
must vote in favor of approval and adoption of the merger agreement. As of
December 11, 1999, the directors and executive officers of NetMoves beneficially
held approximately 2.0% of NetMoves' outstanding common stock and
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options exercisable for approximately 10.8% of NetMoves' outstanding common
stock. The voting agreements in the form attached as Appendix B to this proxy
statement/prospectus require these directors and officers to vote their
respective shares of NetMoves common stock in favor of approval and adoption of
the merger agreement and against any competing proposals. See "The
Merger--Interests of NetMoves' Officers and Directors in the Merger."
Mail.com stockholders are not required to approve the merger agreement and
will not vote on the merger.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the special meeting
is a majority of the shares of NetMoves common stock issued and outstanding on
the record date. Abstentions and broker non-votes will be included in
determining the number of shares present and voting at the meeting for the
purpose of determining the presence of a quorum. However, abstentions and broker
non-votes will have the same effect as votes against the merger agreement. In
addition, the failure of a NetMoves' stockholder to return a proxy or vote in
person will have the effect of a vote against the merger agreement and the
merger. Brokers holding shares for beneficial owners cannot vote on the actions
proposed in this proxy statement/ prospectus without the beneficial owners'
specific instructions. Accordingly, NetMoves' stockholders are urged to return
the enclosed proxy card marked to indicate their vote.
SOLICITATION OF PROXIES AND EXPENSES
NetMoves has retained the services of Innisfree M&A Incorporated to assist
in the solicitation of proxies from its stockholders. The fees to be paid to
Innisfree M&A Incorporated for its services by NetMoves are expected to be
approximately $10,000, plus expenses. NetMoves will bear its own expenses in
connection with the solicitation of proxies for its special meeting of
stockholders, except that Mail.com and NetMoves will share equally all fees and
expenses, other than attorneys' and accountants fees and expenses, incurred in
relation to the printing and filing with the Commission of this proxy statement/
prospectus and the registration statement on Form S-4 and any amendments or
supplements thereto.
Copies of these materials will be furnished to brokerage houses, fiduciaries
and custodians holding shares in their names that are beneficially owned by
others so that they may forward this solicitation material to such beneficial
owners. In addition, NetMoves may reimburse such persons for their costs in
forwarding these materials to such beneficial owners. The original solicitation
by mail may be supplemented by solicitation by telephone, telegram or other
means by directors, officers or employees of NetMoves. No additional
compensation will be paid to these individuals for any such services. Except as
described above, NetMoves does not presently intend to solicit proxies other
than by mail.
BOARD RECOMMENDATION
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO YOU AND IN
YOUR BEST INTERESTS, AND HAS UNANIMOUSLY RECOMMENDED THAT YOU APPROVE AND ADOPT
THE MERGER AGREEMENT. In considering the recommendation of the board of
directors, you should be aware that certain NetMoves' directors and officers
have interests in the merger that are different from, or in addition to, your
interests. See "The Merger--Interests of NetMoves' Officers and Directors in the
Merger."
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF NETMOVES. Accordingly, you are urged to read and
carefully consider the information presented in this proxy statement/prospectus,
and to complete, date, sign and promptly return the enclosed proxy in the
enclosed postage-paid envelope.
DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARDS. A transmittal
form with instructions for the surrender of NetMoves common stock certificates
will be mailed to you promptly after completion of the merger. For more
information regarding the procedures for exchanging NetMoves stock certificates
for Mail.com stock certificates, see "The Merger Agreement--Procedures for
Exchanging Stock Certificates" on page 55 of this proxy statement/prospectus.
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THE MERGER
THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES ASPECTS OF THE
PROPOSED MERGER THAT WE CONSIDER IMPORTANT. WHILE WE BELIEVE THAT THE
DESCRIPTION COVERS THE MATERIAL TERMS OF THE MERGER AND THE RELATED
TRANSACTIONS, THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO NETMOVES' STOCKHOLDERS. STOCKHOLDERS SHOULD READ THE MERGER
AGREEMENT AND THE OTHER DOCUMENTS WE REFER TO CAREFULLY AND IN THEIR ENTIRETY
FOR A MORE COMPLETE UNDERSTANDING OF THE MERGER.
BACKGROUND OF THE MERGER
The electronic messaging industry is highly competitive. In their efforts to
enhance their market position and grow their businesses in an increasingly
competitive environment, Mail.com and NetMoves have continually evaluated
strategic relationships of various forms with various third parties. Since its
initial public offering in June 1999, Mail.com has used business combinations as
a significant part of its business strategy and has actively pursued potential
business combinations, corporate acquisition opportunities, strategic alliances
and other strategic transactions, with the aim of obtaining and developing
access to complementary products and technologies.
Over time, representatives of NetMoves and Mail.com became familiar with
each others' products through informal contacts at industry trade shows and
through interaction with various industry participants. In the summer of 1999,
senior executives of the two companies expressed interest in exploring the
possibility of a commercial relationship between NetMoves and Mail.com,
primarily in the context of a corporate partnering arrangement. Executives of
the companies were interested in seeing how the business functionalities could
integrate, and held a number of meetings and telephone calls in July 1999. These
communications helped to provide Mail.com and NetMoves with a basic familiarity
with broad industry trends as well as each other's business and management and a
preliminary understanding of the potential merits of a combination.
In late September 1999, NetMoves received a tentative proposal regarding a
possible business combination. NetMoves indicated that the proposed price was
inadequate but that NetMoves would be willing to discuss the possibility of a
transaction offering greater value to NetMoves stockholders. NetMoves received
no response to its response. NetMoves' management, based upon discussions with
NetMoves' board, did not pursue this offer any further.
Thereafter, NetMoves' management, in periodic consultation with the NetMoves
board, began to explore various possible strategic alternatives to improve
long-term stockholder value and to satisfy NetMoves' future growth plans. These
strategic alternatives generally included, among others, various partnering
transactions and joint ventures, licensing arrangements, a business combination
involving NetMoves and the sale of NetMoves.
On October 1, 1999, NetMoves entered into an engagement letter with Lehman
Brothers to serve as its financial advisor and to assist NetMoves in reviewing
strategic alternatives. On October 26, 1999, NetMoves' board, through a
unanimous written consent, approved the terms of the engagement with Lehman
Brothers. Also on October 26, 1999, NetMoves issued a press release announcing
its third quarter earnings, its engagement of Lehman Brothers, and its intention
to explore strategic alternatives.
During October and November 1999, NetMoves' management, in consultation with
Lehman Brothers, identified and reviewed a list of candidates that might be
expected to have an interest in a strategic transaction with NetMoves. From time
to time throughout October and November 1999, representatives of NetMoves'
senior management and Lehman Brothers, on behalf of NetMoves, initiated
exploratory contacts and informal discussions and meetings with a number of
parties and received inquiries and indications of possible interest concerning
possible strategic transactions from a number of other parties. As a result of
this process, several parties expressed an interest in exploring a possible
business combination with NetMoves.
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In mid-November 1999, representatives of Lehman Brothers had a number of
telephone conversations with representatives of Mail.com to discuss, on a
preliminary basis, possible strategic relationships between NetMoves and
Mail.com. In connection with such preliminary discussions, Lehman Brothers
provided Mail.com with certain public information relating to NetMoves.
On November 19, 1999, representatives of each of NetMoves and Lehman
Brothers met with representatives of Mail.com to further discuss possible
strategic relationships between NetMoves and Mail.com, and NetMoves'
representatives presented an overview of NetMoves and its products.
On November 22, 1999, a representative of Lehman Brothers telephoned a
representative of Mail.com to discuss Mail.com's proposed business combination
between Mail.com and NetMoves.
On November 23, 1999, Mail.com indicated to NetMoves that it was willing to
explore a stock-for-stock acquisition of NetMoves in which NetMoves stockholders
would receive Mail.com stock with a value of $9 per NetMoves share, subject to
satisfactory completion of due diligence and negotiation of a mutually
acceptable definitive merger agreement. At the same time, Mail.com indicated to
NetMoves that it was unwilling to pursue further discussions or devote the
effort required to explore a possible acquisition of NetMoves unless NetMoves
agreed to an exclusive negotiation period with Mail.com and certain other
provisions.
On November 24, 1999, senior executives of NetMoves, Lehman Brothers and
Brobeck Phleger & Harrison LLP, NetMoves' legal counsel ("Brobeck"), briefed the
members of the NetMoves board on the status of discussions with Mail.com and
other potential acquirers and merger partners and reviewed the terms of the
confidentiality and exclusivity agreement proposed by Mail.com.
On November 24, 1999, NetMoves entered into a Confidentiality Agreement with
Mail.com. As part of the Confidentiality Agreement, NetMoves agreed to negotiate
on an exclusive basis with Mail.com for a limited time period, through
December 13, 1999, and to reimburse certain out-of-pocket expenses of Mail.com
(up to a $200,000 cap) in the event that NetMoves decided not to pursue a
transaction with Mail.com and NetMoves within six months thereafter consummated
a business combination transaction with a third party at a higher price.
Following the execution of the Confidentiality Agreement, NetMoves provided
Mail.com with additional financial and operating information relating to
NetMoves.
On November 29, 1999, Winthrop, Stimson, Putnam & Roberts, Mail.com's legal
counsel ("Winthrop Stimson"), circulated a draft merger agreement to NetMoves
and Brobeck. In its initial draft, Mail.com requested a termination fee equal to
5% of the proposed transaction value, an option to acquire stock representing
19.9% of the outstanding common stock of NetMoves, voting agreements from
NetMoves directors and officers in favor of the proposed transaction and against
competing proposals, a strict "no-shop" provision and a limited "fiduciary out".
On November 29 and 30, 1999, representatives of Mail.com met with
representatives of NetMoves at the offices of Lehman Brothers and NetMoves to
review additional financial, legal, product and operating information relating
to NetMoves. In addition, certain members of NetMoves' management conducted a
presentation regarding various aspects of NetMoves. For the next two weeks,
numerous calls occurred among representatives of NetMoves, Mail.com, Donaldson,
Lufkin & Jenrette ("DLJ"), financial advisor to Mail.com, and Lehman Brothers to
discuss due diligence and the possible terms of a transaction.
Also on November 30, 1999, representatives of NetMoves, Lehman Brothers and
Brobeck commenced negotiations with Mail.com, its legal counsel, Winthrop
Stimson, and DLJ, with respect to the terms of the initial draft of the merger
agreement and other related agreements.
On December 3, representatives of Mail.com, Lehman Brothers and DLJ met at
NetMoves' offices to discuss NetMoves' business and financial performance and
position and to respond to a list of questions previously submitted by Mail.com
to NetMoves.
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Between December 8, 1999 and December 10, 1999, a representative of Mail.com
visited certain NetMoves offices nationwide to conduct additional due diligence.
On December 8, 1999, representatives of Mail.com and DLJ met with
representatives of NetMoves and Lehman Brothers for a presentation regarding
various aspects of Mail.com's business.
On Wednesday, December 8, 1999, representatives of Brobeck conducted
extensive negotiations with representatives of Winthrop Stimson and Mail.com's
Delaware legal counsel, Richards, Layton & Finger, P.A. ("Richards Layton"),
regarding the proposed no-shop, termination fee and related provisions of the
draft merger agreement. Brobeck indicated NetMoves was unwilling to consider the
stock option requested by Mail.com and objected to a number of provisions of the
draft merger agreement. The initial negotiations did not result in agreement and
produced little, if any, movement in the parties' positions.
On Thursday, December 9, 1999, Brobeck and NetMoves' Delaware legal counsel,
Morris Nichols Arsht & Tunnel, conducted extended negotiations with Winthrop
Stimson and Richards Layton concerning Mail.com's stock option, the amount,
triggers and timing of payment of the proposed termination fee, the details of
the no-shop and fiduciary out, and certain details of the proposed voting
agreements. After a break in the negotiations, Mail.com proposed certain
modifications to these provisions.
On Friday, December 10, 1999, NetMoves' board held a special meeting and
analyzed and reviewed the strategic, financial and legal considerations
concerning the proposed merger, the advisability of the merger and the fairness
of the exchange ratio proposed by Mail.com, and the terms and conditions of the
most recent draft of the merger agreement. During the meeting, Brobeck briefed
the NetMoves board on its legal and fiduciary duties and summarized the terms of
the most recent draft of the merger agreement and the remaining open issues,
including the definition of a "Material Adverse Effect," timing of payment of
the termination fee, conditions to closing and employment terms for the
management of NetMoves. Brobeck also summarized the history of negotiations
relating to, and reviewed the details and effect of, the proposed no-shop
restrictions, the fiduciary out, the termination fee, and the termination
provisions in the proposed merger agreement, including the ability of Mail.com
to terminate and trigger payment of the termination fee and the lack of any
provision allowing NetMoves to terminate the merger agreement to accept a
"Superior Offer" (as defined in the merger agreement). Lehman Brothers then
provided NetMoves' board with an overview of contacts and discussions held with
nearly two dozen other parties in connection with Lehman Brothers' review of
NetMoves' strategic alternatives. In addition, Lehman Brothers reviewed the
financial terms of the transaction and the terms of comparable transactions.
Following discussion, the NetMoves board determined to adjourn without action
and to resume deliberations in the morning. In the interim, the NetMoves board
directed Brobeck to hold further negotiations with Mail.com concerning the
no-shop, termination fee and related provisions.
Thereafter, Brobeck contacted Mail.com and Winthrop Stimson and indicated
that the NetMoves board had taken no action with respect to the proposed merger
and had concerns with a number of the details of the proposed merger agreement.
In response, Mail.com and Winthrop Stimson contacted Brobeck to propose certain
further modifications, including an extension of the time for payment of the
termination fee in certain circumstances, and extension of the time for NetMoves
to exercise its "fiduciary out", and to fix the dollar amount of the proposed
termination fee at $7 million.
On Saturday morning, December 11, 1999, the NetMoves board resumed its
deliberations regarding the proposed merger. At the meeting, Brobeck briefed the
NetMoves board on Mail.com's latest proposals concerning the proposed no-shop,
termination fee and related provisions. In addition, Lehman Brothers delivered
its oral opinion (subsequently confirmed in writing) that, as of December 11,
1999, the proposed exchange ratio was fair to the stockholders of NetMoves, from
a financial point of view. In addition, Brobeck informed the NetMoves board of
the recent material changes negotiated in the merger agreement overnight.
Following the review of the final terms of the merger agreement, the NetMoves
board determined that the merger agreement and the merger contemplated thereby
are advisable, are fair to and in the best interests of NetMoves and NetMoves'
stockholders, and approved the merger, authorized the
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execution and delivery of the merger agreement, and recommended that NetMoves'
stockholders approve and adopt the merger agreement and the merger.
On December 11, 1999, NetMoves was informed by Mail.com that Mail.com's
board of directors had approved the merger. After the meeting of the NetMoves
board on December 11, 1999, NetMoves and Mail.com executed and delivered the
merger agreement and certain related agreements.
REASONS FOR THE MERGER
MAIL.COM'S REASONS FOR THE MERGER
Mail.com's board of directors has determined that the terms of the merger
are fair to, and in the bests interests of, Mail.com and its stockholders.
Accordingly, Mail.com's board of directors has approved the merger agreement and
the consummation of the merger. In reaching its decision, Mail.com's board of
directors identified several potential benefits to the merger, including the
following:
- INCREASING MAIL.COM'S PRESENCE IN THE BUSINESS SERVICES MARKET. As of the
time of deliberation, Mail.com offered its email services to approximately
1,400 business customers. The merger provides Mail.com with an opportunity
to accelerate its penetration into the business services market. Upon the
completion of the merger, Mail.com will add more than 7,000 business
customers to its current business customer base.
- GAINING ACCESS TO AN ESTABLISHED SALES FORCE. Upon completion of the
merger, Mail.com will have access to NetMoves' experienced sales force in
the United States and its established international reseller network.
Through these channels, Mail.com will be able to offer its business email
services, in addition to the suite of facsimile transmission services
currently offered by NetMoves, and reduces the need for Mail.com to build
its own sales force internally and develop reseller relationships abroad.
- EXPANDING MAIL.COM'S OFFERING OF INTERNET-BASED MESSAGING
SOLUTIONS. NetMoves currently offers a full range of facsimile
transmission services to business customers, including Internet fax
services which enable Internet-connected customers to transmit or receive
faxes directly from their computer desktops. These services significantly
enhance Mail.com's product offering of Internet-based messaging solutions
to both the business services market and the consumer market.
Mail.com's board of directors also identified and considered a variety of
potential negative factors in its deliberations concerning the merger,
including, but not limited to:
- the risk to Mail.com's stockholders that the value to be received by
NetMoves' stockholders in the merger could increase significantly due to
the fixed exchange ratio;
- the risk that the potential benefits sought in the merger might not be
fully realized; and
- the possibility that the merger might not be consummated.
Other factors considered by Mail.com's board of directors in its
deliberations included:
- historical market prices, trading multiples, recent trading activity and
trading ranges of NetMoves common stock and Mail.com Class A common stock;
- Mail.com's management's view of the financial condition, results of
operations, businesses and prospects of the combined company after giving
effect to the merger; and
- the terms and conditions of the merger agreement and the company voting
agreements and the percentage of NetMoves common stock represented by the
stockholders who signed the voting agreements.
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After due consideration, Mail.com's board of directors believed that the
overall risks associated with the proposed merger were outweighed by the
potential benefits of the merger. Mail.com's board of directors does not intend
the foregoing discussion of information and factors to be exhaustive but
believes the discussion to include the material factors that it considered. In
view of the complexity and wide variety of information and factors, both
positive and negative, that it considered, Mail.com's board of directors did not
find it practical to quantify or otherwise assign relative or specific weights
to the factors considered. However, after taking into consideration all of the
factors set forth above, Mail.com's board of directors concluded that the merger
agreement and merger were fair to, and in the best interests of, Mail.com and
its stockholders and that Mail.com should proceed with the merger.
NETMOVES' REASONS FOR THE MERGER
In authorizing the merger agreement, approving the merger and recommending
that all holders of common stock of NetMoves approve and adopt the merger
agreement and approve the merger, the NetMoves board considered the following
material factors:
- the fact that the merger gives NetMoves' stockholders the opportunity to
realize a significant premium over recent market prices for NetMoves
common stock and the further opportunity to participate in the future
growth and profits of the combined company as stockholders of Mail.com;
- the historical market prices, trading multiples, recent trading activity
and trading ranges of NetMoves common stock and Mail.com Class A common
stock;
- the fact that the merger consideration represents a premium of
approximately 80% over the $5.50 closing price of NetMoves common stock on
The Nasdaq National Market on December 10, 1999, the last full trading day
preceding the public announcement of the execution of the merger
agreement, and a premium of approximately 168% over the closing price of
NetMoves common stock on the day four weeks prior to December 10, 1999;
- the premiums paid in comparable transactions;
- the current market value of Mail.com Class A common stock and various
factors that may affect that value in the future, including (i) the
history of rapid growth of revenues of Mail.com, (ii) its strong brand
name, (iii) the strength of its management, (iv) the anticipated ability
of Mail.com to utilize its strengths to develop its managed mail division,
(v) the NetMoves board's judgment that NetMoves and Mail.com have highly
complementary businesses and (vi) the NetMoves board's judgment that, as a
combined company, Mail.com and NetMoves will have the ability to bring
together technologies, managerial resources and customer bases to expand
the managed mail division of Mail.com and to create a company better
positioned to meet competitive challenges and expand into new markets than
either company as a stand-alone company;
- the NetMoves board's assessment of NetMoves' business, financial
condition, current business strategy and future business prospects;
- the presentations and view expressed by management of NetMoves regarding
among other things: (i) the financial condition, results of operations,
cash flows, business and prospects of NetMoves, including the prospects
of, and uncertainties facing, NetMoves if it remains independent;
(ii) NetMoves' prospects as a stand-alone company and the outlook for its
current strategies; (iii) the prospects for achieving maximum long-term
value on a stand-alone basis; (iv) the strategic alternatives available to
NetMoves; (v) the fact that no other party had submitted to NetMoves a
proposal as attractive as the merger as to price; (vi) the judgment of
NetMoves' management, based on the process undertaken to pursue strategic
alternatives, that it was unlikely that any other party would make a
proposal more favorable to NetMoves and its stockholders than the merger;
and (vii) the recommendation of the merger by the management of NetMoves;
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- the history and progress of NetMoves' discussions with other parties,
including the history of contacts with other potential acquirers and
strategic partners, the absence of higher offers, and the view of the
NetMoves board that further discussions with other potential acquirers and
strategic partners were unlikely to result in a transaction that would be
more favorable to NetMoves and its stockholders;
- the extensive arms-length negotiations between NetMoves and Mail.com and
the belief of the NetMoves board that $9 per share was the highest price
per share that could be negotiated with Mail.com and the best transaction
reasonably available to NetMoves and its stockholders;
- the presentations of Lehman Brothers at the briefing of the NetMoves board
on November 24, 1999 and the meetings of the NetMoves board on
December 10 and December 11, 1999, and Lehman Brothers' opinion to the
effect that, as of December 11, 1999 and based upon and subject to certain
matters stated in such opinion, the proposed exchange ratio was fair, from
a financial point of view, to the stockholders of NetMoves (as more fully
set forth in the full text of Lehman Brothers' written opinion dated
December 11, 1999 attached hereto as Appendix C);
- the fact that Lehman Brothers had incentives under its fee arrangements
with NetMoves to explore all alternatives which might maximize stockholder
value and had made a widespread solicitation of indications of interest in
a possible business combination, strategic partnership or similar
transaction with NetMoves;
- the intensive negotiations between Mail.com and NetMoves concerning
no-shop, termination fee and related provisions and the concessions by
Mail.com during the course of those negotiations;
- the fact that, pursuant to the merger agreement, NetMoves and its
representatives may, in certain circumstances, furnish information to, or
negotiate with, third parties making acquisition offers (but not
authorize, approve or recommend any acquisition proposal or enter into any
agreement for an acquisition transaction with any third party);
- the fact that, pursuant to the merger agreement, NetMoves board has the
right to change its recommendation in favor of the merger agreement if,
prior to the vote by NetMoves stockholders on the merger, NetMoves
receives a Superior Offer and the NetMoves board has determined, in its
good faith judgment, after consultation with legal counsel, that failure
to change the recommendation would cause the NetMoves board to breach its
fiduciary duties under applicable law;
- the terms and conditions of the merger agreement, including the
prohibition on the solicitation of other proposals by NetMoves, the
obligations of NetMoves to pay a termination fee of $7 million to Mail.com
and to reimburse Mail.com for certain expenses in certain circumstances;
- comparable terms of other recent merger agreements involving other
companies with comparable market capitalizations;
- the circumstances in which the $7 million termination fee and the expense
reimbursement become payable by NetMoves to Mail.com and the timing of
payment;
- the judgment of the NetMoves board that the amount of the termination fee
and expense reimbursement would not preclude a competing bidder from
making a Superior Offer;
- the conditions to the parties' obligations to complete the merger,
including, as it relates thereto, the definition of Material Adverse
Effect and the exclusion of industry-wide changes, changes attributable to
the announcement or pendency of the merger and other matters from the
definition of a Material Adverse Effect;
- the terms of the voting agreements and the fact that the voting agreements
applied to less than 10% of the outstanding voting power of NetMoves;
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- the executive retention arrangements negotiated by Mail.com with key
executives of NetMoves and the expected contribution of these executives
to the success of the combined company and the value of the Mail.com stock
received by NetMoves stockholders in the merger;
- the consents and approvals required to consummate the merger and the
favorable prospects for receiving all such consents and approvals; and
- the other provisions of the merger agreement.
The NetMoves board also identified and considered a number of risks,
uncertainties and restrictions in its deliberations concerning the merger,
including, but not limited to the following:
- the fact that the exchange ratio is fixed and will not change with
increases or decreases in the market price of either company's stock
before the closing of the merger, and the possibility that the exchange
ratio will yield stock with a dollar value of more or less than $9 per
NetMoves share at the time of the closing of the merger;
- the risk that the potential benefits sought in the merger may not be fully
realized, if at all;
- the possibility that the merger may not be consummated and the effect of
the public announcement of the merger on NetMoves' sales, customer
relations and operating results and NetMoves' ability to attract and
retain key management, marketing and technical personnel;
- the risk that despite the efforts of the combined company, key technical,
marketing and management personnel might not choose to remain employed by
the combined company;
- the risk of market confusion and hesitation and potential delay or
reduction in product orders;
- the fact that a majority of the voting power of Mail.com is controlled by
a single stockholder who will have the power to approve corporate and
stockholder action that may affect the future value of the Mail.com stock
held by NetMoves stockholders after the merger;
- the fact that Mail.com's controlling stockholder will have the ability to
cause Mail.com to engage--or block--transactions that may offer a
substantial premium to Mail.com stockholders in the future and thereby
prevent NetMoves stockholders from receiving a further control premium for
their Mail.com shares;
- the fact that pursuant to the merger agreement, NetMoves is required to
obtain Mail.com's consent before it can take a variety of actions before
the closing of the merger;
- NetMoves' limited ability to terminate the merger agreement, including the
fact that NetMoves does not have the right to terminate the merger
agreement and enter into a transaction with another party, if NetMoves
receives a Superior Offer; and
- various other risks associated with the businesses of NetMoves, Mail.com
and the combined company and the merger described under "Risk Factors"
herein.
The NetMoves board believed that certain of these risks were unlikely to
occur or unlikely to have a material impact on the merger or the combined
company, while others could be avoided or mitigated by NetMoves or by the
combined company, and that, overall, the risks, uncertainties, restrictions and
potentially negative factors associated with the merger were outweighed by the
potential benefits of the merger.
The foregoing discussion of information and factors considered and given
weight by the NetMoves board is not intended to be exhaustive, but is believed
to include all of the material factors considered by the NetMoves board. In view
of the variety of factors considered in connection with its evaluation of the
merger, the NetMoves board did not find it practicable to, and did not, quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determinations and recommendations.
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OPINION OF NETMOVES' FINANCIAL ADVISOR
Lehman Brothers has acted as financial advisor to NetMoves in connection
with the merger. As part of its role as financial advisor to NetMoves, Lehman
Brothers rendered an opinion to the NetMoves board of directors as to the
fairness, from a financial point of view, of the exchange ratio to be received
by the NetMoves stockholders in the merger.
The full text of the Lehman Brothers opinion, dated as of December 11, 1999,
is attached as Appendix C and is incorporated herein by reference. NetMoves
stockholders may read the opinion for a discussion of assumptions made, factors
considered and limitations on the review undertaken by Lehman Brothers in
rendering its opinion. This summary of the Lehman Brothers opinion is qualified
by reference to the full text of the opinion.
No limitations were imposed by NetMoves on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. Lehman Brothers was not requested to and did not make any
recommendation to the NetMoves board as to the form or amount of consideration
to be received by NetMoves stockholders in connection with the merger, which was
determined through arm's-length negotiations between NetMoves and Mail.com. In
arriving at its opinion, Lehman Brothers did not ascribe a specific range of
value to NetMoves, but made its determination as to the fairness, from a
financial point of view, to the NetMoves stockholders of the exchange ratio to
be received by such stockholders, on the basis of the financial and comparative
analyses described below. The Lehman Brothers opinion was for the use and
benefit of the NetMoves board and was rendered in connection with the NetMoves'
board's consideration of the merger. The Lehman Brothers opinion is not intended
to be, and does not constitute, a recommendation to any NetMoves stockholder as
to how such stockholder should vote with respect to the merger. Lehman Brothers
was not requested to opine as to, and its opinion does not in any manner
address, NetMoves' underlying business decision to proceed with or effect the
merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
- the merger agreement and the specific terms of the merger;
- publicly available information concerning NetMoves and Mail.com that it
believed to be relevant to its analysis, including NetMoves' Forms 10-K
for the year ended December 31, 1998 and Form 10-Q for the quarter ended
September 30, 1999, Mail.com's Prospectus dated June 17, 1999 and
Form 10-Q for the quarter ended September 30, 1999 and other relevant
public documents;
- financial and operating information with respect to the business,
operations, contracts and prospects of NetMoves furnished to it by
NetMoves;
- financial and operating information with respect to the business,
operations and prospects of Mail.com furnished to it by Mail.com;
- a trading history of NetMoves common stock from December 10, 1998 to
December 10, 1999 and a comparison of that trading history with those of
other companies that Lehman Brothers deemed relevant;
- a trading history of Mail.com's Class A common stock from June 17, 1999 to
December 10, 1999 and a comparison of that trading history with those of
other companies that Lehman Brothers deemed relevant;
- a comparison of the historical financial results and present financial
condition of NetMoves with those of other companies that Lehman Brothers
deemed relevant;
- a comparison of the historical financial results and present financial
condition of Mail.com with those of other companies that Lehman Brothers
deemed relevant;
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- a comparison of the financial terms of the merger with the financial terms
of certain other recent transactions that Lehman Brothers deemed relevant;
- publicly available estimates of the future financial performance of
NetMoves prepared by third-party research analysts;
- publicly available estimates of the future financial performance of
Mail.com prepared by third-party research analysts; and
- the results of Lehman Brothers' efforts to solicit indications of interest
and proposals from third parties with respect to an acquisition or other
business combination or strategic transaction involving NetMoves.
In addition, Lehman Brothers had discussions with the managements of
NetMoves and Mail.com concerning their respective businesses, customers,
contracts, operations, assets, financial conditions and prospects, including
with respect to operating synergies, revenue enhancements and other strategic
benefits expected to result from a combination of the businesses of NetMoves and
Mail.com, and has undertaken such other studies, analyses and investigations as
it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial information used by it without
assuming any responsibility for independent verification of such information and
further relied upon the assurances of the managements of NetMoves and Mail.com
that they were not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of NetMoves, prepared by the management of NetMoves, Lehman Brothers has assumed
that such projections have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of NetMoves
as to the future financial performance of NetMoves and that NetMoves will
perform substantially in accordance with such projections, and Lehman Brothers
relied upon such projections in arriving at its opinion. With respect to the
financial projections of Mail.com for the year 2000, upon advice of Mail.com,
Lehman Brothers has assumed that such projections have been reasonably prepared
on a basis reflecting the best currently available estimates and judgments of
the management of Mail.com as to the future financial performance of Mail.com
and that Mail.com will perform substantially in accordance with such
projections. For years subsequent to 2000, Lehman Brothers was not provided with
any financial projections prepared by the management of Mail.com, and
accordingly, in performing its analysis, based upon advice of Mail.com and with
the consent of NetMoves, Lehman Brothers has assumed that the publicly available
estimates of third party research analysts are a reasonable basis upon which to
evaluate the future financial performance of Mail.com and that Mail.com will
perform substantially in accordance with such estimates. In arriving at its
opinion, Lehman Brothers did not conduct a physical inspection of the properties
and facilities of NetMoves or Mail.com, and Lehman Brothers did not make or
obtain any evaluations or appraisals of the assets and liabilities of NetMoves
and Mail.com.
Upon the advice of NetMoves and its legal and accounting advisors, Lehman
Brothers assumed that the merger will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and
therefore as a tax-free transaction to the U.S. stockholders of NetMoves. The
Lehman Brothers opinion necessarily was based upon market, economic and other
conditions as they existed on, and could be evaluated as of the date of its
opinion.
In connection with its written opinion dated December 11, 1999, Lehman
Brothers performed a variety of financial and comparative analyses as summarized
below. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant method of financial and comparative
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Furthermore, in arriving at its opinion, Lehman
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Brothers did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Lehman Brothers believes
that its analyses must be considered as a whole and that considering any
portions of such analyses and factors without considering all analyses and
factors could create a misleading or incomplete view of the process underlying
its opinion. In its analysis, Lehman Brothers made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of NetMoves and Mail.com.
Any estimates contained in these analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be more or
less favorable than as set forth therein. In addition, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which businesses actually may be sold. Certain of the analyses include
information presented in tabular format. In order to understand the financial
analyses used by Lehman Brothers fully, the tables must be read together with
the text of each summary. The tables alone do not constitute a complete
description of the financial analyses.
TRANSACTION TERMS. NetMoves stockholders are to receive 0.385336 of a share
of newly issued shares of Mail.com Class A common stock for each share of
NetMoves common stock.
COMPARABLE TRANSACTION ANALYSIS. Using publicly available information,
Lehman Brothers compared selected financial data for NetMoves to similar data
for selected transactions in the software and the Internet messaging industry.
These comparable transactions included: Critical Path, Inc.'s proposed
acquisition of ISOCOR; Sterling Software, Inc.'s acquisition of Information
Advantage Software; Sun Microsystems, Inc.'s acquisition of Forte
Software Inc.; Mail.com's acquisition of The Allegro Group; and S1 Corporation's
(formerly known as Security First Technologies) acquisition of Edify Corp.
Lehman Brothers reviewed the prices paid in the comparable transactions in terms
of the multiple of the Transaction Enterprise Value, defined as the total
consideration paid including total debt assumed less cash and cash equivalents
transferred to the acquirer, to the last twelve months revenue (the "LTM Revenue
Multiple"), and the last quarter annualized revenue (the "LQA Revenue
Multiple"). Lehman Brothers noted that:
(a) the LTM Revenue Multiple associated with the merger was 7.71x as
compared to 6.24x for the median of the comparable transactions; and
(b) the LQA Revenue Multiple associated with the merger was 7.41x as
compared to 6.39x for the median of the comparable transactions.
<TABLE>
<CAPTION>
COMPARABLE
MERGER TRANSACTIONS
-------- ------------
<S> <C> <C>
LTM Revenue Multiple..................................... 7.71x 6.24x
LQA Revenue Multiple..................................... 7.41x 6.39x
</TABLE>
Because the reasons for and the circumstances surrounding each of the
comparable transactions were specific to such transactions, and because of the
inherent differences among the businesses, operations and prospects of NetMoves
and the selected acquired companies analyzed, Lehman Brothers believed that it
was inappropriate to, and therefore did not, rely solely on the quantitative
results of the comparable transactions analysis and, accordingly, also made
qualitative judgments concerning differences between the terms and
characteristics of the merger and the comparable transactions that would affect
the transaction values of NetMoves and such acquired companies.
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Lehman
Brothers compared selected financial data of NetMoves and Mail.com with similar
data of selected companies engaged in businesses considered by Lehman Brothers
to be comparable to that of NetMoves and Mail.com. Lehman Brothers included in
its selected comparable companies for NetMoves, eFax.com, Inc., eGlobe, Inc.,
JFAX.COM, Inc., and Premiere Technologies, Inc. (the "NetMoves Comparable
Companies") and for Mail.com, CommTouch Software, Ltd., Critical Path, Inc., and
Tumbleweed Communications Corp. (the
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"Mail.com Comparable Companies"). For each of NetMoves, Mail.com, NetMoves
Comparable Companies and the Mail.com Comparable Companies, Lehman Brothers
calculated the Firm Value, defined as the market value of the respective
company's common equity plus total debt less cash and cash equivalents, as a
multiple of the estimated calendar year 2000 revenues (the "2000 Revenue
Multiple") based on estimates of third party research analysts. Lehman Brothers
noted that as of December 10, 1999, the 2000 Revenue Multiple, based on the
transaction terms in the merger, was 5.24x as compared to 3.96x for the median
of the NetMoves Comparable Companies and was 39.12x for Mail.com as compared to
67.65x for the median of the Mail.com Comparable Companies. In addition, Lehman
Brothers calculated the Firm Value as a multiple of the estimated calendar year
2001 revenues ("the 2001 Revenue Multiple") for Mail.com and the Mail.com
Comparable Companies. Lehman Brothers noted that the 2001 Revenue Multiple for
Mail.com was 16.51x as compared to 34.15x for the median of the Mail.com
Comparable Companies.
<TABLE>
<CAPTION>
NETMOVES MAIL.COM
COMPARABLE COMPARABLE
MERGER COMPANIES MAIL.COM COMPANIES
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
2000 Revenue Multiple................. 5.24x 3.96x 39.12x 67.65x
2001 Revenue Multiple................. 2.75x NA 16.51x 34.15x
</TABLE>
Because of the inherent differences between the businesses, operations and
prospects of NetMoves and Mail.com and the business, operations and prospects of
the companies included in the NetMoves Comparable Companies and the Mail
Comparable Companies, as the case may be, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the comparable company analysis, and accordingly also made qualitative
judgments concerning differences between the financial and operating
characteristics and prospects of NetMoves and Mail.com and the companies
included in the NetMoves Comparable Companies and in the Mail.com Comparable
Companies, as the case may be, that would affect the public market valuations of
such companies.
TRANSACTION PREMIUM ANALYSIS. Lehman Brothers reviewed the premium paid in
the merger based on several different share prices for NetMoves at various
points in time. Lehman Brothers calculated the premium per share offered by
Mail.com in the merger compared to NetMoves' (i) average price for the month
prior to December 10, 1999 (the "One Month Average Premium"); (ii) average price
for the week prior to December 10, 1999 (the "One Week Average Premium");
(iii) share price on December 9, 1999 (the "One Day Premium"); (iv) 52-week high
(the "52-Week High Premium); and (v) 52-week low (the "52-Week Low Premium).
Lehman Brothers noted that:
(a) the One Month Average Premium associated with the merger was 168%;
(b) the One Week Average Premium associated with the merger was 88%;
(c) the One Day Premium associated with the merger was 80%;
(d) the 52-Week High Premium was -9%; and
(e) the 52-Week Low Premium was 229%.
Lehman Brothers also computed premiums paid in selected transactions in the
technology sector valued between $100-$500 million ("Comparable Transaction
Premiums") and noted that the median of the Comparable Transaction Premiums one
month prior to the announcement was 67%, the median of the
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Comparable Transaction Premiums one week prior to announcement was 47% and the
median of the Comparable Transactions Premiums one day prior to announcement was
29%.
<TABLE>
<CAPTION>
COMPARABLE
MERGER TRANSACTION PREMIUMS
-------- --------------------
<S> <C> <C>
One Month Premium................................. 168% 67%
One Week Premium.................................. 88% 47%
One Day Premium................................... 80% 29%
</TABLE>
Because the reasons for and the circumstances surrounding each of the
comparable transactions were specific to such transactions, and because of the
inherent differences among the businesses, operations and prospects of NetMoves
and the selected acquired companies analyzed, Lehman Brothers believed that it
was inappropriate to, and therefore did not, rely solely on the quantitative
results of the transaction premium analysis and, accordingly, also made
qualitative judgments concerning differences between the terms and
characteristics of the merger and the comparable transactions that would affect
the transaction premiums for NetMoves and such acquired companies.
DISCOUNTED CASH FLOW ANALYSIS. Lehman Brothers performed a discounted cash
flow ("DCF") analysis for NetMoves using projections provided by the management
of NetMoves for the year 2000 and publicly available estimates of the future
financial performance of NetMoves prepared by third-party research analysts,
with certain adjustments discussed with the management of NetMoves, for the
years 2001 to 2005. The DCF was calculated assuming discount rates ranging from
20% to 24% for NetMoves, and was comprised of the sum of the net present value
of the free cash flow for the period January 1, 2000 to December 31, 2005 and a
terminal value for 2005 based on a range of multiples of 9.0x to 11.0x 2005
projected EBITDA for NetMoves. Using this method, Lehman Brothers derived
estimated per share valuations for NetMoves common stock ranging from $6.74 to
$9.94.
EXCHANGE RATIO ANALYSIS. Lehman Brothers compared the average ratio of the
closing price of NetMoves common stock to the closing price of Mail.com common
stock for the 30 trading days prior to December 10, 1999 (the "30 Day Average
Exchange Ratio") and the 126 trading days (the period since the Mail.com initial
public offering) prior to December 10, 1999 (the "126 Day Average Exchange
Ratio"). Lehman Brothers noted that the 30 Day Average Exchange Ratio was
0.210626 and the 126 Day Average Exchange Ratio was 0.325111.
<TABLE>
<CAPTION>
MERGER 30 DAY AVERAGE 126 DAY AVERAGE
-------- -------------- ---------------
<S> <C> <C> <C>
Exchange Ratio......................... 0.385336 0.210626 0.325111
</TABLE>
ENGAGEMENT OF LEHMAN BROTHERS. Lehman Brothers is an internationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Lehman Brothers has performed various financial advisory and capital raising
services for NetMoves in the past, including acting as NetMoves' underwriter for
its initial public offering. Lehman Brothers received customary fees for such
services.
The engagement of Lehman Brothers in connection with the merger was
formalized by an engagement letter dated October 1, 1999 between NetMoves and
Lehman Brothers pursuant to which NetMoves has agreed to pay Lehman Brothers a
retainer of $100,000, a fee of $500,000 for rendering its opinion and a fee of
1.00% of the aggregate value of the consideration received by NetMoves
stockholders, which fee is contingent upon consummation of the merger, against
which the retainer of $100,000 and $500,000 opinion fee would be credited.
NetMoves also has agreed to reimburse Lehman Brothers for reasonable expenses
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incurred by Lehman Brothers and to indemnify Lehman Brothers and certain related
persons for certain liabilities that may arise out of its engagement and the
rendering of this opinion.
In the ordinary course of its business, Lehman Brothers actively trades in
the securities of NetMoves and Mail.com for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
INTERESTS OF NETMOVES' OFFICERS AND DIRECTORS IN THE MERGER
When considering the recommendation of the NetMoves' board of directors,
NetMoves stockholders should be aware that certain officers and directors of
NetMoves have interests in the merger that are different from, or are in
addition to, your interests. The NetMoves' board of directors was aware of these
potential conflicts and considered them in reaching its decision to approve the
merger agreement and recommend that NetMoves' stockholders vote for the approval
and adoption of the merger agreement.
ASSUMPTION AND ACCELERATION OF STOCK OPTIONS
Pursuant to the merger agreement, Mail.com will assume each outstanding
stock option under the NetMoves 1990 Stock Option Plan and 1996 Stock
Option/Stock Issuance Plan. At the effective time, options held by directors and
officers that have vested shall become options to purchase an appropriate number
of shares of Mail.com Class A common stock. At the effective time, options held
by directors and officers that have not vested shall vest over the same period
of time as in effect prior to the merger, and each such option shall become an
option to purchase an appropriate number of shares of Mail.com Class A common
stock.
Under the pre-existing terms of option agreements entered into with officers
and directors of NetMoves, and under the stock option plans, upon the
consummation of the merger, the plan administrator could exercise discretionary
rights to provide for the automatic acceleration of the vesting of any
outstanding options, the termination of any outstanding repurchase rights or the
termination of any cancellation rights issued pursuant to such plans. This would
allow each officer or director to exercise the unvested portion of such options
immediately prior to the effective time of the merger. In the merger agreement,
NetMoves has agreed to prohibit the administrator of the stock option plans from
electing to exercise the discretionary rights.
Mail.com has agreed to enter into employment agreements with certain
officers and key employees of NetMoves. Under the terms, certain unvested
options may be accelerated upon certain termination events. See "Employment
Agreements."
EMPLOYMENT OFFERS
On December 11, 1999, Mail.com offered the following officers and key
employees of NetMoves employment with Mail.com:
<TABLE>
<S> <C>
Thomas Murawski (Chief Executive Officer of Mail.com Messaging Division)
Charles Gigas
William Fallon
George Frylinck
James Kaufeld
Peter Macaluso
Thomas Mullaney
</TABLE>
For a more detailed description of the employment offers, see "Employment
Agreements."
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OTHER BENEFITS
In addition to the rollover of existing options contemplated by the merger
agreement, Thomas Murawski, NetMoves' President, Chief Executive Officer and
Chairman of the board of directors, will receive options from Mail.com 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 the lesser of $23.35650 per share and the market price
of Mail.com Class A common stock as of the close of business on the date the
merger is consummated.
INDEMNIFICATION ARRANGEMENTS
Under the merger agreement, from and after the effective time of the merger,
Mail.com is obligated to cause NetMoves to fulfill and honor in all respects the
obligations of NetMoves pursuant to any indemnification agreements between
NetMoves and its directors and officers in effect immediately prior to the
effective time of the merger and any indemnification provisions under NetMoves'
certificate of incorporation or bylaws in effect on the date the merger
agreement was signed.
Mail.com has agreed that for a period of six years after the merger, the
certificate of incorporation and bylaws of NetMoves will contain provisions with
respect to exculpation and indemnification that are at least as favorable to the
current NetMoves officers and directors as those contained in NetMoves'
certificate of incorporation and bylaws in effect on the date the merger
agreement was signed. Mail.com has also agreed to cause NetMoves to maintain
director and officer liability insurance on the same terms as NetMoves' current
policies on the current directors and officers of NetMoves for three years
following the effective time of the merger, provided that the annual premium
does not exceed 150% of the current annual premium therefor.
APPLICABLE WAITING PERIODS AND REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules promulgated thereunder, the merger may not be consummated until
notifications have been given and certain information has been furnished to the
Federal Trade Commission (FTC) and the Antitrust Division of the United States
Department of Justice (DOJ) and specified waiting period requirements have been
satisfied. Gerald Gorman, our principal stockholder, and NetMoves filed
notification and report forms with the FTC and the DOJ on January 4, 2000.
Completion of the merger will also be subject to receipt of required
approvals of the Federal Communications Commission (FCC) and the public
utilities commissions of various states. NetMoves is licensed by the FCC as an
authorized telecommunications company and is classified as a "non-dominant
interexchange carrier." The FCC has extended blanket authority to all domestic
telecommunications carriers to provide long distance services within the United
States, but still requires prior approval of transfers of control of such
carriers. The FCC also requires approval of transfers of control of
authorizations for international long distance service, but has adopted a
streamlined process for reviewing such transfers for resellers of international
service. Although a number of states do not require prior approval for mergers
of non-facilities-based resellers where the merger is transparent to end-user
customers, approval by several state public utility commissions may still be
required. In a number of states, moreover, the merged companies may also be
obligated to obtain certificates of operating authority from the applicable
public utility commission. The closing condition set forth in the merger
agreement that requires receipt of approvals discussed in this paragraph may be
waived by Mail.com, in its sole discretion.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material United States federal income
tax considerations relevant to an exchange by a NetMoves stockholder of shares
of NetMoves common stock for shares of Mail.com Class A common stock pursuant to
the merger, and, insofar as it relates to matters of law and
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legal conclusions, represents the opinion of Winthrop Stimson, counsel to
Mail.com, and Brobeck, counsel to NetMoves. This discussion is based on
currently existing provisions of the Internal Revenue Code, existing and
proposed regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any change, which could be
retroactive, could result in tax consequences to a NetMoves stockholder that are
different from those described below.
NetMoves' stockholders should be aware that this discussion does not address
all United States federal income tax considerations that may be relevant to a
particular NetMoves stockholder in light of his or her particular circumstances,
including a stockholder that:
- is a dealer in securities,
- is subject to the alternative minimum tax provisions of the Internal
Revenue Code,
- is a non-resident alien individual or a foreign entity for United States
federal income tax purposes,
- does not hold shares of NetMoves common stock as capital assets, or
- acquired shares of NetMoves common stock in connection with a stock option
or stock purchase plan or otherwise as compensation.
In addition, this discussion does not address:
- the tax consequences of the merger under any foreign, state or local tax
laws, or
- the tax consequences of the assumption by Mail.com of NetMoves stock
options or the tax consequences of the receipt of rights to acquire
Mail.com Class A common stock.
NETMOVES' STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
TAX CONSEQUENCES TO THEM, IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, OF THE
MERGER, INCLUDING APPLICABLE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES.
It is a condition to completion of the merger that Mail.com receive an
opinion from Winthrop Stimson and NetMoves receive an opinion from Brobeck, in
each case to the effect that the merger will constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code. The opinions will be
subject to assumptions and qualifications, including the truth and accuracy of
certain representations made by Mail.com and NetMoves. The parties are not
requesting, and will not request, a ruling from the Internal Revenue Service as
to the tax consequences of the merger. NetMoves' stockholders should be aware
that the opinions do not bind the Internal Revenue Service or any court.
Accordingly, there can be no assurances that the Internal Revenue Service will
not take a position contrary to the conclusions expressed in the opinions or
that a court will not sustain the Internal Revenue Service's position.
The following discussion assumes that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. Subject to the limitations and qualifications referred to in this
discussion, the merger generally will result in the following United States
federal income tax consequences to a NetMoves stockholder:
- A NetMoves stockholder will not recognize any gain or loss on receipt of
shares of Mail.com Class A common stock in exchange for shares of NetMoves
common stock pursuant to the merger (except to the extent the stockholder
receives cash instead of a fractional share of Mail.com Class A common
stock).
- The aggregate tax basis of a NetMoves stockholder in the shares of
Mail.com Class A common stock received pursuant to the merger (reduced by
any tax basis allocable to a fractional share of Mail.com Class A common
stock that the stockholder is deemed to have received and disposed of)
will equal the stockholder's aggregate tax basis in the shares of NetMoves
common stock surrendered in the merger.
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- The holding period of a NetMoves stockholder in the shares of Mail.com
Class A common stock received pursuant to the merger will include the
period during which the stockholder held the shares of NetMoves common
stock surrendered in the merger, provided the surrendered shares of
NetMoves common stock are held as capital assets at the time of the
merger.
- A NetMoves stockholder that receives cash in lieu of a fractional share of
Mail.com Class A common stock will be treated first as having received the
fractional share of Mail.com Class A common stock in the merger and then
as having exchanged the fractional share for cash. The stockholder will
recognize gain or loss in an amount equal to the difference between the
amount of cash received and the portion of the tax basis in the Mail.com
Class A common stock allocable to the fractional share.
ANTICIPATED ACCOUNTING TREATMENT
NetMoves and Mail.com intend to account for the merger under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. After the merger, the results of operations of NetMoves will be
included in the consolidated financial statements of Mail.com. Mail.com intends
to allocate a portion of the purchase price to the market value of the assets
acquired and the liabilities assumed as of the closing date. The excess of the
purchase price over the fair market value of the acquired assets and assumed
liabilities of NetMoves has been preliminarily allocated to acquired in-process
technology and goodwill and other intangible assets. Goodwill and other
intangible assets will be amortized over a period of 3 years, the estimated
expected period of benefit. This allocation is preliminary and may be subject to
change upon the evaluation of the fair value of the acquired assets and
liabilities of NetMoves at the date of acquisition, final outcome of valuations
and appraisals as well as the potential identification of certain intangible
assets.
Approximately $18 million of the purchase price of NetMoves is expected to
be allocated to in-process technology. Because such in-process technology is not
expected to reach the stage of technological feasibility by the acquisition date
and has no alternative future use, this amount will be immediately written-off
by Mail.com as a charge to stockholders' equity. The preliminary fair value of
purchased existing and in-process technology was determined by management using
a risk-adjusted income valuation approach. See "Risk Factors--Risks Related to
the Merger--Mail.com's estimated accounting for the NetMoves acquisition is
subject to change."
NO APPRAISAL RIGHTS
Delaware law provides appraisal rights to stockholders of Delaware
corporations in certain situations. However, those appraisal rights are not
available to stockholders of a corporation such as NetMoves:
- the securities of which are listed on a national securities exchange or
are designated as a national market security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.; and
- the stockholders of which are not required to accept in exchange for their
stock anything other than (A) stock in another corporation listed on a
national securities exchange or an interdealer quotation system by the
NASD and (B) cash in lieu of fractional shares.
Due to the following factors, stockholders of NetMoves will not have
appraisal rights with respect to the merger:
- NetMoves common stock is traded on The Nasdaq National Market;
- NetMoves stockholders are being offered stock of Mail.com, which is also
traded on The Nasdaq National Market; and
- NetMoves stockholders are being offered cash in lieu of fractional shares.
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DELISTING AND DEREGISTRATION OF NETMOVES COMMON STOCK FOLLOWING THE MERGER
If the merger is consummated, NetMoves common stock will be delisted from
The Nasdaq National Market and will be deregistered under the Securities
Exchange Act of 1934.
LISTING OF MAIL.COM CLASS A COMMON STOCK TO BE ISSUED PURSUANT TO THE MERGER
It is a condition to the consummation of the merger that the shares of
Mail.com Class A common stock to be issued pursuant to the merger and the shares
of Mail.com Class A common stock to be reserved for issuance in connection with
the assumption of NetMoves stock options and warrants be authorized for listing
on The Nasdaq National Market.
RESTRICTIONS ON RESALES OF MAIL.COM CLASS A COMMON STOCK
The shares of Mail.com Class A common stock to be issued in connection with
the merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of Mail.com Class A
common stock issued to or held by any person who is deemed to be an affiliate of
NetMoves at the time of the special meeting or of Mail.com after the merger.
Persons who may be deemed to be affiliates include individuals or entities that
control, are controlled by or are under common control of either NetMoves or
Mail.com and may include some of the officers, directors or principal
stockholders of NetMoves or Mail.com.
Affiliates may not sell their shares of Mail.com Class A common stock
acquired in connection with the merger except under:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- another applicable exemption under the Securities Act.
As a condition to the completion of the merger, NetMoves must cause each of
its affiliates to enter into agreements not to make any public sale of any
Mail.com Class A common stock received pursuant to the merger, except in
compliance with the Securities Act and the rules and regulations thereunder.
Mail.com's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of
Mail.com Class A common stock to be received by affiliates pursuant to the
merger.
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THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS. WE URGE YOU TO READ THE MERGER AGREEMENT IN ITS ENTIRETY
FOR A MORE COMPLETE DESCRIPTION OF THE MERGER. IN THE EVENT OF ANY DISCREPANCY
BETWEEN THE TERMS OF THE MERGER AGREEMENT OR OTHER AGREEMENTS AND THE FOLLOWING
SUMMARY, THE APPLICABLE AGREEMENT WILL CONTROL.
THE MERGER
Following the approval and adoption of the merger agreement by the
stockholders of NetMoves and the satisfaction or waiver of the other conditions
to the merger, a wholly-owned subsidiary of Mail.com will merge with and into
NetMoves, and NetMoves will continue as the surviving corporation and as a
wholly-owned subsidiary of Mail.com.
THE EFFECTIVE TIME
As soon as practicable on or after the closing date of the merger, the
parties will cause the merger to become effective by filing a certificate of
merger with the Secretary of State of the State of Delaware. The parties
anticipate that this will occur promptly after the stockholder meeting on
February 8, 2000, assuming the receipt of necessary governmental and regulatory
approvals.
DIRECTORS AND OFFICERS OF NETMOVES AFTER THE MERGER
At the effective time, the directors of Mail.com's merger subsidiary will
become the new directors of NetMoves, and the officers of Mail.com's merger
subsidiary will become the new officers of NetMoves.
CONVERSION OF SHARES IN THE MERGER
At the effective time, each share of NetMoves common stock will be
automatically converted into the right to receive 0.385336 shares of Mail.com
Class A common stock, except that shares of NetMoves common stock held
immediately prior to the effective time by NetMoves, Mail.com or any
wholly-owned subsidiary of NetMoves or Mail.com will be canceled. In addition,
the exchange ratio will be further adjusted to reflect:
- the effect of any stock split, reverse stock split, stock dividend,
extraordinary cash dividend, reorganization, recapitalization,
reclassification, combination, exchange of shares or other like change in
either Mail.com Class A common stock or NetMoves common stock that may
occur on or after the date of the merger agreement, and
- any increase in the number of shares resulting from an inaccuracy in the
number of shares NetMoves represented as outstanding in the merger
agreement up to a maximum of 50,000 shares.
NETMOVES' STOCK OPTIONS
At the effective time, each outstanding option to purchase shares of
NetMoves common stock under NetMoves' 1996 Stock Option/Stock Issuance Plans
will be assumed by Mail.com regardless of whether they have vested. Each
NetMoves stock option that is assumed by Mail.com will continue to have, and be
subject to, the same terms and conditions that were applicable to the option
immediately prior to the effective time, except that:
- each NetMoves stock option will be exercisable for shares of Mail.com
Class A common stock, and the number of whole shares of Mail.com Class A
common stock issuable upon exercise of any given option will be determined
by multiplying 0.385336 by the number of shares of NetMoves common
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stock that were issuable upon exercise of the applicable option, rounded
down to the nearest whole number; and
- the per share exercise price of any given option will be determined by
dividing the exercise price of the option immediately prior to the
effective time by 0.385336, rounded up to the nearest whole cent.
Mail.com has agreed to file a registration statement on Form S-8 for the
shares of Mail.com Class A common stock that are eligible to be registered on
Form S-8 issuable with respect to the assumed NetMoves stock options within
30 days after the effective time.
NETMOVES' WARRANTS
At the effective time, each outstanding warrant to purchase shares of
NetMoves common stock will be assumed by Mail.com (except as discussed below).
Each warrant that is assumed by Mail.com will continue to have, and be subject
to, the same terms and conditions that were applicable to the warrant
immediately prior to the effective time, subject to the analogous exceptions
described in the two bullet points under "NetMoves' Stock Options" above.
Under the merger agreement, Mail.com may elect to cause some of NetMoves'
outstanding warrants, exercisable for 38,778 shares of NetMoves common stock, to
be automatically converted in accordance with their original terms on a cashless
basis.
THE EXCHANGE AGENT
Promptly after the effective time, Mail.com is required to make available to
the exchange agent the shares of Mail.com Class A common stock to be exchanged
for shares of NetMoves common stock, and cash to pay for fractional shares and
any dividends or distributions to which holders of NetMoves common stock may be
entitled to receive under the merger agreement.
PROCEDURES FOR EXCHANGING STOCK CERTIFICATES
Promptly after the effective time, Mail.com will cause the exchange agent to
mail to the holders of record of NetMoves stock certificates (1) a letter of
transmittal and (2) instructions on how to surrender NetMoves stock certificates
in exchange for certificates representing shares of Mail.com Class A common
stock and cash for fractional shares for any dividends or other distributions
that they may be entitled to receive under the merger agreement. HOLDERS OF
NETMOVES COMMON STOCK SHOULD NOT SURRENDER THEIR NETMOVES STOCK CERTIFICATES
UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
Upon surrendering their NetMoves stock certificates to the exchange agent
for cancellation, together with a properly completed letter of transmittal and
any other documents required by the exchange agent, the holders of NetMoves
stock certificates will be entitled to receive a certificate representing that
number of whole shares of Mail.com Class A common stock which that holder has
the right to receive, cash for fractional shares of Mail.com Class A common
stock and any dividends or other distributions to which the holder is entitled.
Until surrendered to the exchange agent, outstanding NetMoves stock certificates
will be deemed from and after the effective time to evidence only the right to
receive (1) the number of full shares of Mail.com Class A common stock into
which the shares of NetMoves common stock have converted into the right to
receive and (2) an amount in cash for any fractional shares.
DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES
Until you surrender your NetMoves stock certificate in exchange for a
Mail.com stock certificate, you will not receive any dividends or other
distributions declared or made after the date of the merger agreement with
respect to Mail.com stock with a record date after the effective time. However,
once you surrender your NetMoves stock certificate to the exchange agent, you
will receive (1) a Mail.com stock
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certificate, (2) cash as payment for fractional shares and (3) the amount of any
dividends or other distributions with a record date after the effective time
theretofore paid with respect to the shares referred to in clause (1).
NO FRACTIONAL SHARES
No fractional shares of Mail.com Class A common stock will be issued because
of the merger. Instead, each NetMoves stockholder who would be entitled to a
fractional share of Mail.com Class A common stock will receive cash. The amount
of cash to be received by such NetMoves stockholder will be determined by
multiplying the fraction of such share that such stockholder would have
otherwise received by the average closing sale price of one share of Mail.com
Class A common stock over the ten trading days immediately prior to the
effective time as reported by Nasdaq.
REPRESENTATIONS AND WARRANTIES
Mail.com and NetMoves each made customary representations and warranties in
the merger agreement regarding aspects of their respective businesses, financial
condition, structure and other facts pertinent to the merger.
The representations given by NetMoves include, among others:
- capitalization;
- compliance of NetMoves' SEC filings with federal securities laws;
- financial statements;
- changes in NetMoves' business since September 30, 1999 (including the
absence of a material adverse change on NetMoves);
- litigation potentially having a material adverse effect on the business of
NetMoves or its ability to complete the merger;
- employee benefit plans and labor matters;
- title to properties;
- taxes, tax returns and audits;
- environmental matters;
- intellectual property used;
- NetMoves' agreements, contracts and commitments;
- insurance policies held;
- change of control payments;
- the identity of affiliates of NetMoves; and
- fairness opinion received from its financial advisors.
The representations given by Mail.com as they relate to Mail.com and its
subsidiaries include, among others:
- capitalization;
- compliance of Mail.com's SEC filings with federal securities laws;
- financial statements;
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- changes in business since September 30, 1999 (including the absence of a
material adverse change on Mail.com);
- taxes;
- intellectual property used;
- litigation potentially having a material adverse effect on the business of
Mail.com or its ability to complete the merger; and
- title to properties.
The representations and warranties in the merger agreement are complex and
not easily summarized. You are urged to carefully read the articles of the
merger agreement entitled "Representations and Warranties of Company" and
"Representations and Warranties of Parent and Merger Sub."
NETMOVES' CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
NetMoves agreed that until the earlier of the effective time and the
termination of the merger agreement or unless Mail.com consents in writing,
NetMoves will operate its business in the usual, regular and ordinary course
consistent with past practice, pay its debts and taxes when due, and use
commercially reasonable efforts to:
- preserve substantially intact its present business organization;
- keep available the services of its present officers and employees; and
- preserve its relationships with:
- customers,
- suppliers,
- distributors,
- licensors,
- licensees, and
- others having significant business dealings with NetMoves.
NetMoves also agreed that until the earlier of the effective time or the
termination of the merger agreement or unless Mail.com consents in writing,
NetMoves would conduct its business in compliance with specific restrictions
relating to the following:
- changes to stock repurchase rights, stock options or restricted stock;
- severance and termination pay;
- the transfer and license of intellectual property;
- the declaration or payment of dividends or other distributions;
- the purchase and redemption of NetMoves stock;
- the issuance of securities;
- modification of NetMoves' certificate of incorporation and bylaws;
- the acquisition of any business or entity or entering into of joint
ventures or strategic alliances;
- the disposition of assets;
- the incurrence of indebtedness;
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- employees and employee benefits;
- settlement of litigation and other claims;
- the entrance into, termination or modification of contracts;
- accounting policies and procedures;
- treatment of the merger as a reorganization under Section 368(a) of the
Internal Revenue Code;
- tax elections and liabilities;
- formation, establishment or acquisition of subsidiaries;
- acceleration of options, termination of repurchase rights or termination
of cancellation rights by the administrator of NetMoves' stock option
plans; or
- agreements to do any of the actions listed above.
MAIL.COM'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
Mail.com agreed that until the earlier of the effective time and termination
of the merger agreement or unless NetMoves consents in writing, Mail.com will
not declare, set aside or pay dividends on or make any other distributions on
its common stock without reserving a pro rata amount for distribution to
stockholders of NetMoves based on the exchange ratio.
The agreements related to the conduct of NetMoves' and Mail.com's respective
businesses in the merger agreement are complex and not easily summarized. You
are urged to carefully read the article of the merger agreement entitled
"Conduct Prior to the Effective Time."
NO SOLICITATION
Until the earlier of the effective time and the termination of the merger
agreement, NetMoves has agreed, subject to limited exceptions, that neither it
nor any of its officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by it will,
directly or indirectly:
- solicit, initiate, encourage or induce the making, submission or
announcement of any other acquisition proposal;
- participate in any discussions or negotiations regarding any proposal that
may reasonably be expected to lead to an acquisition proposal;
- furnish to any person any information with respect to any other
acquisition proposal;
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
other acquisition proposal;
- engage in discussions with any person with respect to any acquisition
proposal;
- subject to limited exceptions in the event of a superior offer, authorize,
approve or recommend any other acquisition proposal; or
- enter into any letter of intent or similar document or any contract,
agreement or commitment providing for any acquisition transaction or
accepting any acquisition proposal.
However, on or before the approval and adoption of the merger agreement by
NetMoves stockholders, the merger agreement allows NetMoves to furnish
information regarding NetMoves to, and to enter
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into negotiations or discussions with, any person or group in response to a
superior offer submitted by such person or group, if:
- neither NetMoves nor any of its officers, directors, affiliates or
employees nor any investment banker, attorney or other advisor or
representative retained by NetMoves has violated any of the restrictions
set forth above;
- NetMoves' board of directors concludes in good faith, after consultation
with its outside legal counsel, that failure to take such action would
cause the board of directors of NetMoves to breach its fiduciary
obligations to NetMoves and NetMoves' stockholders;
- prior to furnishing any such information to, or entering into discussions
or negotiations with, the person or group, NetMoves:
- gives Mail.com written notice of the identity of such person or group,
of the terms and conditions of the offer and of NetMoves' intention to
furnish information to, or enter into discussions or negotiations with,
such person or group; and
- receives from such person or group an executed confidentiality
agreement containing customary limitations on the use and disclosure of
all nonpublic information; and
- contemporaneously with furnishing any information to the person or group,
NetMoves furnishes the same information to Mail.com.
The merger agreement defines a "superior offer" as an unsolicited, bona fide
written offer made by a third party to consummate (1) an acquisition of more
than 85% of the voting power of NetMoves, (2) a merger, business combination or
similar transaction pursuant to which stockholders of NetMoves immediately
preceding such transactions hold less than 15% of the equity interest in the
surviving entity or (3) a sale or other disposition of all or substantially all
of NetMoves' assets, on terms that NetMoves' board of directors determines, in
its reasonable judgment (after consultation with an investment bank of
nationally recognized reputation) to be more favorable to NetMoves' stockholders
from a financial point of view than the terms of the merger involving Mail.com
and the consideration of which reasonably likely exceeds the value of the
consideration proposed to be issued by Mail.com.
However, an offer will only be a superior offer if any financing required to
consummate the transaction contemplated by such offer is committed or is
otherwise reasonably likely in the judgment of NetMoves' board of directors to
be obtained by such third party on a timely basis.
NetMoves has agreed to promptly inform Mail.com of any request received by
NetMoves for information which NetMoves reasonably believes could lead to an
acquisition proposal, or any inquiry received by NetMoves which NetMoves
reasonably believes could lead to an acquisition proposal, the terms and
conditions of such request, the identity of the person or group making any such
acquisition proposal or inquiry, and to keep Mail.com informed of the status and
details, including material amendments or proposed amendments of any such
acquisition proposal or inquiry.
DIRECTOR AND OFFICER INDEMNIFICATION
From and after the effective time of the merger, Mail.com is required to
cause NetMoves to fulfill and honor in all respects the obligations of NetMoves
pursuant to any indemnification agreements between NetMoves and its directors
and officers in effect immediately prior to the effective time of the merger and
any indemnification provisions under NetMoves' certificate of incorporation or
bylaws in effect on the date of the merger agreement.
After the merger, the certificate of incorporation and bylaws of NetMoves
will contain provisions which may not be amended, modified or repealed for six
years thereafter in a manner that would adversely affect the rights of
directors, officers, employees or agents of NetMoves unless such modification is
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required by law with respect to exculpation and indemnification that are at
least as favorable to the current NetMoves officers and directors as those
contained in NetMoves' certificate of incorporation and bylaws in effect on the
date of the merger agreement. Mail.com is required to cause NetMoves after the
merger to maintain director and officer liability insurance on the same terms as
NetMoves' current policies on the current directors and officers of NetMoves for
three years following the merger, provided that the annual premium does not
exceed 150% of the current annual premium therefor.
NETMOVES' BOARD SEAT
Mail.com agreed that its board of directors will take all actions necessary
such that one member of NetMoves' board of directors designated by NetMoves and
reasonably acceptable to Mail.com shall be appointed to Mail.com's board of
directors with a term expiring at the next annual meeting of Mail.com's
stockholders and Mail.com will include such person in the slate of nominees
recommended by Mail.com's board of directors to the stockholders of Mail.com at
such annual meeting. NetMoves has designated Thomas Murawski for such
appointment.
CONDITIONS TO COMPLETION OF THE MERGER
The obligations of Mail.com, Mast Acquisition Corp. and NetMoves to complete
the merger and the other transactions contemplated by the merger agreement are
subject to the satisfaction or waiver of each of the following conditions before
completion of the merger:
- the merger agreement and the merger must be adopted and approved by the
holders of a majority of outstanding shares of NetMoves common stock
entitled to vote;
- Mail.com's registration statement must be declared effective, no stop
order suspending its effectiveness shall have been issued and no
proceedings for suspension of its effectiveness shall have been initiated
or threatened by the Commission;
- no law, regulation, injunction or other order shall be enacted or issued
which remains in effect and has the effect of making the merger illegal or
otherwise prohibiting completion of the merger substantially on the terms
contemplated by the merger agreement;
- all applicable waiting periods under applicable antitrust laws must have
expired or been terminated;
- Mail.com and NetMoves must each receive from their respective tax counsel
an opinion to the effect that the merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code and such opinions must not have been withdrawn. However, if
counsel to either Mail.com or NetMoves does not render this opinion, this
condition will be satisfied if counsel to the other party renders the
opinion to such party; and
- the shares of Mail.com Class A common stock to be issued pursuant to the
merger must be authorized for listing on The Nasdaq National Market,
subject to notice of issuance.
NetMoves' obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- Mail.com's representations and warranties must be true and correct as of
the date of the merger agreement and as of the closing date as if made at
and as of the closing date, except, as of the closing date, as does not
constitute a material adverse effect on Mail.com and Mast Acquisition
Corp.; and
- Mail.com must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by Mail.com at or before completion of the merger, except
to the extent that any failure to perform or comply (other than a
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willful failure to perform or comply or failure to perform or comply with
an agreement or covenant reasonably within the control of Mail.com and
Mast Acquisition Corp.) does not, or will not, constitute a material
adverse effect with respect to Mail.com.
Mail.com's and Mast Acquisition Corp.'s obligations to complete the merger
and the other transactions contemplated by the merger agreement are subject to
the satisfaction or waiver of each of the following additional conditions before
completion of the merger:
- NetMoves' representations and warranties must be true and correct as of
the date of the merger agreement and at and as of the closing date as if
made at and as of the closing date, except, as of the closing date, as
does not constitute a material adverse effect on NetMoves;
- NetMoves must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by NetMoves at or before completion of the merger except
to the extent that any failure to perform or comply (other than a willful
failure to perform or comply or failure to perform or comply with an
agreement or covenant reasonably within the control of NetMoves) does not,
or will not, constitute a material adverse effect on NetMoves;
- NetMoves will have obtained all consents, waivers and approvals required
in connection with the consummation of the merger, other than consents,
waivers and approvals the absence of which, either alone or in the
aggregate, could not reasonably be expected to have a material adverse
effect on NetMoves;
- NetMoves shall have delivered to Mail.com evidence satisfactory to
Mail.com of the resignation of all directors of NetMoves, effective as of
the effective time; and
- Each of the persons named in NetMoves' disclosure schedule as a potential
affiliate of NetMoves shall have delivered to Mail.com a written agreement
substantially in the form attached to the merger agreement.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to completion of
the merger, whether before or after the approval and adoption of the merger
agreement by NetMoves' stockholders:
- by mutual written consent of Mail.com and NetMoves authorized by their
respective boards of directors;
- by Mail.com or NetMoves, if the merger is not completed before June 15,
2000, except that this right to terminate is not available to any party
whose action or failure to act has been a principal cause of or resulted
in the failure of the merger to occur on or before June 15, 2000, and such
action or failure to act constitutes a breach of the merger agreement;
- by Mail.com or NetMoves, if there is any order, decree or ruling or other
action of a court or governmental authority having the effect of
permanently restraining, enjoining or prohibiting the completion of the
merger, which action is final and nonappealable;
- by Mail.com or NetMoves, if the requisite vote for approval by the
stockholders of NetMoves is not obtained at the NetMoves special meeting;
- by NetMoves, upon a material breach of any representation, warranty,
covenant or agreement on the part of Mail.com in the merger agreement, or
if any of Mail.com's representations or warranties are or become
materially untrue so that the corresponding condition to completion of the
merger would not be met. However, if the breach or inaccuracy is curable
by Mail.com prior to the closing date of the merger, and Mail.com
continues to exercise commercially reasonable efforts to cure such breach,
NetMoves may not terminate the merger agreement for 30 days after delivery
of
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written notice from NetMoves to Mail.com of the breach. If the breach is
cured during those 30 days, or if NetMoves shall otherwise be in material
breach of the merger agreement, NetMoves may not exercise this termination
right;
- by Mail.com, upon a breach of any representation, warranty, covenant or
agreement on the part of NetMoves set forth in the merger agreement, or if
any of NetMoves' representations or warranties are or become materially
untrue so that the corresponding condition to completion of the merger
would not be met. However, if the breach or inaccuracy is curable by
NetMoves prior to the closing date of the merger, and NetMoves continues
to exercise commercially reasonable efforts to cure such breach, Mail.com
may not terminate the merger agreement for 30 days after delivery of
written notice from Mail.com to NetMoves of the breach. If the breach is
cured during those 30 days, or if Mail.com shall otherwise be in material
breach of the merger agreement, Mail.com may not exercise this termination
right;
- by Mail.com upon NetMoves' material and willful breach of the covenant to
promptly call a stockholder meeting to vote on the merger and to have the
board of directors of NetMoves recommend the approval and adoption of the
merger agreement and the approval of the merger, or upon NetMoves'
material and willful breach of the non-solicitation provisions of the
merger agreement; or
- by Mail.com if a triggering event shall have occurred.
A "triggering event" occurs if:
- NetMoves' board of directors or any committee withdraws or amends or
modifies in a manner adverse to Mail.com its recommendation in favor of
the approval and adoption of the merger agreement or the approval of the
merger;
- NetMoves fails to include in this proxy statement/prospectus the
recommendation of NetMoves' board of directors in favor of the approval
and adoption of the merger agreement and the approval of the merger;
- NetMoves' board of directors fails to reaffirm its recommendation in favor
of the approval and adoption of the merger agreement and the approval of
the merger within 10 business days after Mail.com requests in writing that
such recommendation be reaffirmed at any time following the announcement
of another acquisition proposal; or
- a tender or exchange offer relating to the securities of NetMoves is
commenced by a person unaffiliated with Mail.com and NetMoves does not
send to its stockholders, within 10 business days after such tender or
exchange offer is first published, sent or given, a statement disclosing
that NetMoves recommends rejection of such tender or exchange offer.
PAYMENT OF TERMINATION FEE
NetMoves must pay a termination fee of $7.0 million to Mail.com if:
- NetMoves materially and willfully breaches the covenant to promptly call a
stockholder meeting to vote on the merger and to have the board of
directors of NetMoves recommend the approval and adoption of the merger
agreement and the approval of the merger, or NetMoves materially and
willfully breaches the non-solicitation provisions of the merger
agreement,
- Mail.com terminates the merger agreement because of the occurrence of a
triggering event, or
- (1) the merger agreement is terminated by Mail.com or NetMoves because
the merger is not consummated by June 15, 2000 or because NetMoves'
stockholders do not approve and adopt the merger agreement and
approve the merger,
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(2) NetMoves consummates an acquisition transaction with another party or
enters into the agreement providing for the consummation of an
acquisition proposal, and
(3) (a) NetMoves consummates an acquisition transaction or enters into
the agreement providing for the consummation of an acquisition
transaction within 18 months following the termination of the merger
agreement,
(b) prior to termination of the merger agreement because the merger
is not consummated by June 15, 2000, an acquisition proposal
shall have been made known to NetMoves or to NetMoves'
stockholders generally or any person shall have publicly
announced an intention (whether or not conditional and whether or
not such acquisition proposal shall have been rejected or shall
have been withdrawn or terminated prior to NetMoves' special
meeting or any termination of the merger agreement) to make an
acquisition proposal or
(c) in the case of termination because NetMoves stockholders do not
approve and adopt the merger agreement and approve the merger,
prior to or during NetMoves' special meeting (or any subsequent
meeting of NetMoves' stockholders at which it is proposed that
the merger be approved), an acquisition proposal shall have been
made directly to NetMoves' stockholders generally or any person
shall have publicly announced an intention (whether or not
conditional and whether or not such acquisition proposal shall
have been rejected or shall have been withdrawn or terminated
prior to NetMoves' special meeting or any termination of the
merger agreement) to make an acquisition proposal.
NetMoves must pay to Mail.com an amount equal to all out-of-pocket expenses
and fees incurred by Mail.com arising out of, or in connection with or related
to, the transactions contemplated by the merger agreement, including, without
limitation, all fees and expenses of agents, counsel, commercial banks,
investment banking firms, accountants, experts and consultants to Mail.com and
its affiliates if the merger agreement is terminated by Mail.com because
NetMoves materially breaches any representation, warranty, covenant or agreement
in the merger agreement, or if any representation or warranty of NetMoves shall
have become materially untrue, in either case such that the conditions of
Mail.com and Mast Acquisition Corp. with respect to the accuracy of the
representations and warranties of NetMoves and NetMoves' performance of or
compliance with its covenants would not be satisfied as of the time of such
breach or as of the time such representation or warranty shall have become
untrue and is not curable or is not cured within 30 days of Mail.com's delivery
of written notice of the breach to NetMoves.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
Mail.com and NetMoves may amend the merger agreement (whether before or
after adoption of the merger agreement by the stockholders of NetMoves) before
completion of the merger by mutual written consent, provided that the merger
agreement may not be amended after any such approval in a manner that by law
requires further approval of such stockholders without such further approval.
Either Mail.com or NetMoves may extend the other's time for the performance
of any of the obligations or other acts under the merger agreement, waive any
inaccuracies in the other's representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the merger
agreement.
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VOTING AGREEMENTS
As a condition to Mail.com's entering into the merger agreement, Mail.com
and each director and certain officers of NetMoves have entered into voting
agreements. By entering into the voting agreements these NetMoves stockholders
have irrevocably appointed Mail.com as their lawful attorney and proxy. These
proxies give Mail.com the limited right to vote the shares of NetMoves common
stock beneficially owned by these NetMoves stockholders, including shares of
NetMoves common stock acquired after the date of the voting agreements, in favor
of the approval and adoption of the merger agreement, in favor of the approval
of the merger and in favor of each other matter that could reasonably be
expected to facilitate the merger and against any competing acquisition
proposal. These NetMoves stockholders may vote their shares of NetMoves common
stock on all other matters.
As of the record date, these individuals collectively beneficially owned
323,108 shares of NetMoves common stock which represented approximately 2.0% of
the outstanding NetMoves common stock, and options exercisable for approximately
10.8% of the outstanding NetMoves common stock. All of the shares of NetMoves
common stock held by directors and certain officers of NetMoves are subject to
voting agreements. None of the NetMoves stockholders who are parties to the
voting agreements were paid additional consideration in connection with them.
However, certain of these stockholders agreed to enter into employment
agreements with Mail.com as described below under "Employment Agreements."
Under these voting agreements, and except as otherwise waived by Mail.com,
each stockholder agreed not to sell the NetMoves common stock, options or other
securities convertible into NetMoves common stock owned, controlled or acquired,
either directly or indirectly, by that person until the earlier of the
termination of the merger agreement and the effective time, unless the
transferee signs a counterpart of the voting agreement and agrees to be bound by
the terms and provisions of the voting agreement. Each of these stockholders
also agreed that, until the earlier of the termination of the merger agreement
and the effective time, he shall not deposit (or permit the deposit of) any
NetMoves common stock, options or other securities convertible into NetMoves
common stock in a voting trust or grant any proxy or enter into any voting
agreement or similar agreement in contravention of his obligations under the
voting agreement with respect to any of the NetMoves common stock, options or
other securities convertible into NetMoves common stock.
Also under these voting agreements, each of these stockholders agreed that,
until the earlier of the termination of the merger agreement and the effective
time, he will not, and will not permit any of his officers, directors,
affiliates or employees or any investment banker, attorney or other advisor or
representative retained by it to, directly or indirectly:
- solicit, initiate, encourage or induce the making, submission or
announcement of any acquisition proposal,
- participate in any discussions or negotiations regarding, or furnish to
any person any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or
may reasonably be expected to lead to, any acquisition proposal,
- engage in discussions with any person with respect to any acquisition
proposal,
- authorize, approve or recommend any acquisition proposal or
- enter into any letter of intent or similar document or any contract,
agreement or commitment providing for any acquisition transaction or
accepting any acquisition proposal.
Each stockholder agreed as promptly as practicable to advise Mail.com orally
and in writing of any request received by him for information which he
reasonably believes could lead to an acquisition proposal or of any acquisition
proposal, or any inquiry received by him with respect to or which he reasonably
believes could lead to any acquisition proposal, the terms and conditions of
such request, acquisition proposal or inquiry, and the identity of the person or
group making any such request, acquisition proposal or inquiry.
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These voting agreements will terminate upon the earlier to occur of the
termination of the merger agreement and the effective time.
EMPLOYMENT AGREEMENTS
In connection with the merger, Mail.com will enter into employment
agreements with certain executives and key employees of NetMoves. These
agreements are expected to contain terms similar to those summarized below.
- Options to purchase NetMoves common stock will be converted into options
to purchase Mail.com Class A common stock based on the exchange ratio in
the merger.
- The shares underlying options that are vested immediately prior to the
completion of the merger and the shares issued prior to such time upon the
exercise of vested options will be subject to certain restrictions on
transfer.
- Options to purchase NetMoves common stock that are not vested immediately
prior to the completion of the merger will vest monthly and the shares
issued upon the exercise of such options will not be subject to any
restrictions on transfer.
- Upon the occurrence of an Acceleration Event (as defined below):
- within twenty-four months after completion of the merger, unvested
options that are scheduled to vest and become exercisable during the
twenty-four month period following the Acceleration Event will vest
immediately and become immediately exercisable;
- at any time after completion of the merger, any newly granted options
that are unvested at such time will be forfeited; or
- within either six or twelve months after the completion of the merger,
as the case may be, an employee will receive a severance payment equal
to such employee's monthly salary multiplied by six or twelve, as the
case may be for such employee, less the number of months such employee
has been employed by Mail.com or its subsidiaries after the closing
date through the date of such Acceleration Event.
In the case of Thomas Murawski, Mail.com has agreed to issue, at the
completion of the merger, options to purchase Mail.com Class A common stock
based on the exchange ratio in the merger and equivalent to 600,000 options to
purchase NetMoves common stock with an exercise price equal to the lower of
$23.356250 per share and the market price of Mail.com Class A common stock as of
the close of business on the date the merger is consummated. These options will
vest quarterly over a twenty-four month period. The employment agreement with
Mr. Murawski will contain provisions similar to those described above except
that upon the occurrence of an Acceleration Event within eighteen months after
the completion of the merger, Mr. Murawski will receive a severance payment
equal to his monthly salary multiplied by eighteen less the number of months he
has been employed by Mail.com or its subsidiaries after the closing date through
the date of such Acceleration Event.
In addition, the employment agreements with each employee will contain
provisions relating to intellectual property, non-use and non-disclosure of
confidential information and non-competition covering NetMoves, Mail.com and its
subsidiaries similar to those contained in the employment agreements of
Mail.com's current executives.
"Acceleration Event" is defined as the termination of an employee's
employment with Mail.com and its subsidiaries for any of the following
reasons:(i) an employee's involuntary dismissal or discharge for reasons other
than cause, disability or misconduct or (ii) an employee's voluntary resignation
following a reduction in employee's compensation, a significant reduction in
employee's duties (solely in the case of Mr. Murawski), or a relocation of
employee's place of employment by more than fifty miles without employee's
consent.
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DESCRIPTION OF MAIL.COM CAPITAL STOCK
The following descriptions of Mail.com's capital stock and the relevant
provisions of its amended and restated certificate of incorporation and its
bylaws are summaries and are qualified by reference to its amended and restated
certificate of incorporation and its bylaws.
Mail.com is authorized to issue up to 120,000,000 shares of Class A common
stock, par value $.01 per share, 10,000,000 shares of Class B common stock, par
value $.01 per share, and 60,000,000 shares of preferred stock, par value $.01
per share.
COMMON STOCK
As of December 31, 1999, Mail.com had 35,218,466 shares of Class A common
stock outstanding held of record by approximately 259 stockholders and
10,000,000 shares of Class B common stock outstanding held entirely by Gerald
Gorman, its Chairman and Chief Executive Officer.
All of the issued and outstanding shares of Mail.com's Class A common stock
are fully paid and nonassessable. Except as described below, the issued and
outstanding shares of Mail.com's Class A common stock and Class B common stock
generally have identical rights. In addition, under Mail.com's amended and
restated certificate of incorporation, holders of Class A common stock have no
preemptive or other subscription rights to purchase shares of its stock, nor are
they entitled to the benefits of any redemption or sinking fund provisions.
VOTING RIGHTS
The holders of Mail.com's Class A common stock are entitled to one vote per
share on all matters to be voted on by stockholders generally, including the
election of directors. The holder of Mail.com's Class B common stock is entitled
to ten votes per share on all matters to be voted on by stockholders generally,
including the election of directors. In addition to any class vote that may be
required under law or its amended and restated certificate of incorporation, all
classes of capital stock entitled to vote generally on any matter shall vote
together as a single class. There are no cumulative voting rights. Accordingly,
holders of a majority of the total votes entitled to vote in an election of
directors will be able to elect all of the directors standing for election.
Please see "Risk Factors--Risks Related to the Business of the Combined
Company--Gerald Gorman controls Mail.com and will be able to prevent a change of
control."
LIQUIDATION PREFERENCES
If Mail.com is liquidated, dissolved or wound up, the holders of Mail.com's
Class A common stock and Class B common stock will be entitled to receive
distributions only after satisfaction of all liabilities and the prior rights of
any outstanding class of preferred stock. If Mail.com is liquidated, dissolved
or wound up, its assets legally available after satisfaction of all of its
liabilities shall be distributed to the holders of Mail.com's Class A common
stock and Class B common stock pro rata based on the respective numbers of
shares of Class A common stock held by these holders or issuable to them upon
conversion of Class B common stock.
CONVERSION RIGHTS/MANDATORY CONVERSION
Holders of Mail.com's Class A common stock have no conversion rights.
Holders of Mail.com's Class B common stock may convert each share into one share
of Class A common stock. In addition, each share of Mail.com's Class B common
stock will automatically convert into one share of Mail.com's Class A common
stock upon a sale or other transfer by Gerald Gorman to any person or entity
other than entities controlled by Mr. Gorman.
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DIVIDENDS
The holders of both classes of Mail.com's common stock are entitled to
receive equal non-cumulative dividends when and as declared from time to time by
the board of directors, subject to any preferential dividend rights of any
outstanding preferred stock.
PREFERRED STOCK
Under Mail.com's amended and restated certificate of incorporation, the
board of directors is authorized, without further stockholder approval, to issue
up to 60,000,000 shares of preferred stock in one or more classes or series. The
board also has the authority to fix or alter the designations, preferences,
rights and any qualifications, limitations or restrictions of the shares of each
such class or series, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences. Preferred stock could
thus be issued quickly with terms that could delay or prevent a change in
control of Mail.com or make removal of management more difficult. Additionally,
the issuance of preferred stock may decrease the market price of Mail.com
Class A common stock and may adversely affect the voting and other rights of the
holders of Mail.com's Class A common stock. Currently, Mail.com does not have
any preferred stock outstanding and has no plans to create or issue any shares
of any new class or series of preferred stock.
WARRANTS/OPTIONS
Under an engagement letter dated March 2, 1998 between PaineWebber
Incorporated and Mail.com and entered into in connection with the private
placement of Mail.com's Class C preferred stock, it issued to PaineWebber
Incorporated warrants to purchase 143,484 shares of Mail.com's Class A common
stock and it issued to a former employee of PaineWebber Incorporated warrants to
purchase 35,872 shares of its Class A common stock. These warrants are
exercisable at an exercise price of $3.50 per share and expire July 31, 2003.
The warrants are entitled to anti-dilution adjustment in the event of stock
splits, stock dividends, stock distributions or combinations.
Under the Mail.com letter agreement with AT&T dated May 26, 1999, Mail.com
issued warrants to purchase 1,000,000 shares of Mail.com's Class A common stock
at an exercise price of $11.00 per share. AT&T may exercise the warrants at any
time on or before December 31, 2000. If under Mail.com's proposed strategic
relationship AT&T provides more than 30,000 active emailboxes with our managed
messaging service on or before December 31, 2000, AT&T may pay the exercise
price of the warrants by exchanging warrants in lieu of cash. For this purpose,
the value of the warrants used to pay the exercise price will be the difference
between the exercise price and the market value of Mail.com's Class A common
stock at the time of exercise. AT&T may not sell or otherwise transfer to a
third party the warrants or the shares issuable upon exercise of the warrants
until the earlier of May 26, 2004 or the date upon which it has provided more
than 30,000 active emailboxes if this date is on or before December 31, 2000.
Please see "Risk Factors--Risks Related to the Business of the Combined
Company--Mail.com has issued warrants to purchase 1,000,000 shares of its
Class A common stock to AT&T Corp. as part of a proposed strategic relationship
with it, but Mail.com cannot assure you that it will enter into the strategic
relationship."
REGISTRATION RIGHTS
PREFERRED STOCKHOLDERS
The stockholders who formerly held shares of Mail.com's Class A preferred
stock, other than Lycos, and the stockholders who formerly held shares of
Mail.com's Class C and Class E preferred stock are entitled to various
registration rights with respect to their shares of Class A common stock issued
upon conversion of each class of preferred stock.
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- DEMAND REGISTRATION RIGHTS. The holders of a majority of Mail.com's shares
issued upon conversion of its Class A preferred stock and the holders of a
majority of the shares issued upon conversion of Mail.com's Class C
preferred stock, voting as separate classes, have the right to demand that
Mail.com register their shares of Class A common stock under the
Securities Act. The stockholders who formerly held shares of Mail.com's
Class A preferred stock may exercise their demand registration rights up
to three times, and the stockholders who formerly held shares of
Mail.com's Class C preferred stock may exercise their demand registration
right once. In addition, the holders of 20% or more of the shares issued
upon conversion of Mail.com Class E preferred stock may demand that it
register their shares of Class A common stock under the Securities Act. If
30% or more of the shares registered in any Class C or Class E demand
registration are shares requested to be registered by Lycos, then the
former holders of each of Mail.com's Class C and Class E preferred stock
have the right to a second demand registration.
- PIGGYBACK REGISTRATION RIGHTS. The stockholders who formerly held shares
of Mail.com's Class A, Class C and Class E preferred stock can request to
have their shares registered under the Securities Act any time Mail.com
files a registration statement to register any of its securities for its
own account or for the account of any of its stockholders. The number of
times such rights may be exercised is unlimited, but the number of shares
that can be registered at any one time is subject to limitations that any
underwriters may impose.
- S-3 DEMAND REGISTRATION RIGHTS. The holders of at least a majority of the
shares issued upon conversion of each of Mail.com's Class A preferred
stock and Class C preferred stock have the right to have their shares of
Class A common stock registered under the Securities Act on Form S-3 once
Mail.com becomes eligible. The holders of at least 25% of the shares
issued upon conversion of Mail.com's Class E preferred stock also have the
right to demand a Form S-3 registration once Mail.com becomes eligible.
The number of times these Form S-3 registration rights may be exercised is
unlimited, but Mail.com is required to file only one Form S-3 in any
twelve-month period.
In the case of the stockholders who formerly held shares of Mail.com's Class A
preferred stock, their registration rights will terminate on June 23, 2004, five
years from the closing of Mail.com's initial public offering. In the case of the
stockholders who formerly held shares of Mail.com's Class C and Class E
preferred stock, their registration rights will terminate on December 23, 2001,
30 months from the closing of Mail.com's initial public offering.
LYCOS
Lycos has the right to have its shares of Mail.com's Class A common stock
registered any time Mail.com files a registration statement for any of its
securities for its own account or the account of any of its stockholders. The
number of times Lycos may exercise its right is unlimited, but the number of
shares that can be registered at any one time is subject to limitations that any
underwriters may impose.
CNET AND NBC MULTIMEDIA
Mail.com granted registration rights to CNET and NBC Multimedia with respect
to the shares of Mail.com's Class A common stock issued upon exercise of their
warrants. The holder or holders of a majority of the shares of Class A common
stock issued upon exercise of their warrants may require Mail.com to effect one
registration under the Securities Act. If 30% or more of the shares to be
registered in that demand registration are shares requested to be registered by
Lycos, then the holders have the right to a second demand registration.
The holder or holders of a majority of shares of Mail.com's Class A common
stock issued upon exercise of the CNET and NBC Multimedia warrants have the
right to have their shares of Class A
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common stock registered under the Securities Act any time Mail.com files a
registration statement to register any of its securities for its own account or
for the account of any of its stockholders.
The holder or holders of a majority of shares of Mail.com's Class A common
stock issued upon exercise of the CNET and NBC Multimedia warrants have the
right to have their shares of Class A common stock registered on Form S-3 once
Mail.com becomes eligible. The number of times this registration right may be
exercised is unlimited, but Mail.com is required to file only one Form S-3 in
any twelve-month period.
These registration rights will terminate 30 months from the closing of
Mail.com's initial public offering, which occurred on June 23, 1999.
AT&T CORP.
Mail.com has agreed to grant AT&T registration rights for the shares of its
Class A common stock issuable upon exercise of their warrants. The registration
rights will be available only if AT&T provides Mail.com with more than 30,000
active emailboxes with its managed messaging service on or before December 31,
2000. The registration rights are substantially similar to the rights that it
granted to NBC Multimedia and CNET. Mail.com has also allowed them to designate
one observer at meetings of Mail.com's board of directors.
3CUBE, INC.
In connection with Mail.com's investment in 3Cube, Inc. it granted 3Cube
registration rights. 3Cube has the right to have its shares of Mail.com's
Class A common stock registered under the Securities Act any time Mail.com files
a registration statement to register any of its securities for its own account
or for the account of any of its stockholders. The number of times these
piggyback rights may be exercised is unlimited, but the number of shares that
can be registered at any one time is subject to limitations that any
underwriters may impose.
PROPOSED OFFERING OF CONVERTIBLE SUBORDINATED NOTES
If Mail.com's proposed Rule 144A offering of convertible subordinated notes
is completed, holders of the notes will have resale registration rights with
respect to the notes and the shares of Mail.com Class A common stock issuable
upon conversion. See "Risk Factors--Risks Related to the Business of the
Combined Company--The combined company faces various risks and uncertainties in
connection with Mail.com's proposed offering of convertible subordinated notes."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND MAIL.COM'S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Mail.com is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware. Generally, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the time of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of a corporation's
voting stock. This statute could prohibit or delay the accomplishment of mergers
or other takeovers or changes in control with respect to Mail.com and,
accordingly, may discourage attempts to acquire Mail.com.
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In addition, provisions of the amended and restated certificate and bylaws,
which provisions are summarized in the following paragraphs, may be deemed to
have an anti-takeover effect. These provisions may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider to be in its
best interests, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
BOARD OF DIRECTORS VACANCIES. Mail.com's bylaws authorize the board of
directors to fill vacant directorships or increase the size of the board of
directors. This may prevent a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
resulting vacancies created by such removal with its own nominees.
SPECIAL MEETINGS OF STOCKHOLDERS. Mail.com's bylaws provide that special
meetings of stockholders of Mail.com may be called at any time by the Chairman
or either Co-Chairman of the board, as the case may be, the Vice Chairman of the
board, if any, the President, if any, or the board of directors. Written notice
of the meeting must be given not less than 10 nor more than 60 days before the
date of the meeting.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
Mail.com's common stock and preferred stock are available for future issuance
without stockholder approval, subject to the limitations imposed by The Nasdaq
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved common stock and preferred stock could
render more difficult or discourage an attempt to obtain control of Mail.com by
means of a proxy contest, tender offer, merger or otherwise.
The General Corporation Law of the State of Delaware provides generally
that, in addition to the approval of the board of directors, the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation, unless a corporation's
certificate of incorporation requires a greater percentage.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Mail.com's amended and restated certificate of incorporation includes a
provision that eliminates the personal liability of its directors and executive
officers for monetary damages for breach of fiduciary duty as a director or
executive officer, except:
- for any breach of the director's or executive officer's duty of loyalty to
Mail.com or its stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for unlawful dividends and stock purchases under section 174 of the
General Corporation Law of the State of Delaware; or
- for any transaction from which the director derived an improper personal
benefit.
Mail.com's bylaws provide that:
- Mail.com must indemnify its directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
- Mail.com may indemnify its other employees and agents to the same extent
that it indemnifies its officers and directors, unless otherwise required
by law, its amended and restated certificate of incorporation, its bylaws
or agreements; and
- Mail.com must advance expenses, as incurred, to its directors and
executive officers in connection with any legal proceeding to the fullest
extent permitted by Delaware law, subject to limited exceptions.
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Mail.com has entered into indemnity agreements with each of our directors
and executive officers to give them additional contractual assurances regarding
the scope of the indemnification described above and to provide additional
procedural protections. In addition, it has obtained directors' and officers'
insurance providing indemnification for its directors, officers and key
employees for various liabilities. Mail.com believes that these indemnification
provisions and agreements are necessary to attract and retain qualified
directors and officers.
The limitation of liability and indemnification provisions in Mail.com's
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. These
provisions may also have the effect of reducing the likelihood of stockholder
derivative litigation against directors and officers, even though a derivative
action, if successful, might otherwise benefit Mail.com and its stockholders.
Furthermore, a stockholder's investment may be adversely affected to the extent
Mail.com pays the costs of settlement and damage awards against directors and
officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
Mail.com's directors, officers or employees for which indemnification is sought,
nor is Mail.com aware of any threatened litigation that may result in claims for
indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Mail.com's Class A common stock is
American Stock Transfer and Trust Company.
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COMPARISON OF RIGHTS OF HOLDERS OF
NETMOVES COMMON STOCK AND MAIL.COM CLASS A COMMON STOCK
This section of the proxy statement/prospectus describes certain differences
between the rights of NetMoves stockholders and Mail.com stockholders. While we
believe that the description covers the material differences between the two
companies, this summary may not contain all of the information that is important
to you. You should carefully read this entire document and the other documents
we refer to for a more complete understanding of the differences between being a
stockholder of NetMoves and being a stockholder of Mail.com.
The rights of the stockholders of NetMoves are governed by NetMoves' Sixth
Amended and Restated Certificate of Incorporation, and its Bylaws, as amended.
After completion of the merger, NetMoves stockholders will become stockholders
of Mail.com and their rights will be governed by Mail.com's Amended and Restated
Certificate of Incorporation and its Bylaws. Both companies are incorporated
under the laws of the State of Delaware and, accordingly, NetMoves stockholders'
rights will continue to be governed by the General Corporation Law of the State
of Delaware after completion of the merger.
CLASSES OF COMMON STOCK OF NETMOVES AND MAIL.COM; VOTING RIGHTS
NetMoves has authorized one class of common stock and one class of preferred
stock. Currently, only shares of NetMoves common stock are issued and
outstanding. Mail.com has authorized two classes of common stock and
undesignated preferred stock. Currently, shares of Mail.com Class A and Class B
common stock are issued and outstanding, and no preferred stock is issued or
outstanding. Each holder of NetMoves common stock is entitled to one vote per
share. Each holder of Mail.com Class A common stock is entitled to one vote per
share, and each holder of Mail.com Class B common stock is entitled to ten votes
per share. Please see "Risk Factors--Risks Related to the Business of the
Combined Company--Gerald Gorman controls Mail.com and will be able to prevent a
change of control."
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. NetMoves' board of
directors is divided into three classes, as nearly equal in size as possible,
with one class being elected annually for a three-year term. NetMoves' directors
are elected for a term of three years and until their successors are elected and
qualified. Mail.com does not have a classified board. Mail.com's directors are
all elected at its annual meeting of stockholders.
NUMBER OF DIRECTORS
NetMoves' board of directors may consist of no fewer than four nor more than
nine directors and currently consists of four directors. Within these limits,
the number of directors on NetMoves' board of directors is determined by
resolution of the board itself or by NetMoves stockholders at the annual
meeting.
Mail.com's board of directors consists of seven directors. The size of the
board of directors may be altered by the affirmative vote of a majority of the
board itself.
REMOVAL OF DIRECTORS
The directors or the entire board of directors of NetMoves may be removed at
any time, with cause, by the holders of a majority of the shares entitled to
vote at an election of directors. The directors or the entire board of directors
of Mail.com may be removed at any time, with or without cause, by the holders of
a majority of the shares entitled to vote at an election of directors.
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FILLING VACANCIES ON THE BOARD OF DIRECTORS
Any vacancies and newly created directorships in NetMoves' board of
directors resulting from any increase in the authorized number of directors may
be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors chosen shall hold
office until the next annual election of their class and until their successors
are elected and qualified. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. If, at the time of
filling a vacancy or any newly created directorship, the directors then in
office constitute less than a majority of the whole board, then any
stockholder(s) holding at least ten percent of the outstanding shares may
petition the Delaware Court of Chancery to order that an election to fill the
vacancy or the newly created directorship be held, or to replace the directors
chosen by the directors then in office.
Any vacancy on Mail.com's board of directors occurring for any reason,
including newly created directorships, may be filled by a majority of the
remaining members of the board of directors (even though less than a quorum) or
by the sole remaining director, or by the stockholders at the next annual
meeting or at a special meeting.
ABILITY TO CALL SPECIAL MEETINGS
Special meetings of NetMoves stockholders may be called by the president and
shall be called by the president or secretary at the request in writing of a
majority of the board of directors, or at the request in writing of stockholders
owning a majority of the entire capital stock. Written notice shall be given no
fewer than 10 nor more than 60 days prior to the meeting.
Special meetings of Mail.com stockholders may be called at any time by the
Chairman or either Co-Chairman of the board, as the case may be, the Vice
Chairman of the board, if any, the President, if any, or the board of directors.
Written notice of the meeting must be given not less than 10 nor more than
60 days before the date of the meeting.
AMENDMENT OF BYLAWS
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal bylaws. In addition, a corporation may, in its certificate of
incorporation, confer this power upon the board of directors. The stockholders
always have the power to adopt, amend or repeal bylaws, even though the board of
directors may also be afforded this power.
The NetMoves bylaws may be altered, amended, or repealed, or new bylaws may
be adopted, by the stockholders or by the board of directors. The Mail.com
bylaws may be amended or repealed by a majority vote of the directors or of the
stockholders at any meeting upon proper notice.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of the State of Delaware generally permits a
corporation to indemnify officers, directors, employees and agents for actions
taken in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the corporation, and with respect to any
criminal action that they had no reasonable cause to believe was unlawful.
The certificates of incorporation and bylaws of both NetMoves and Mail.com
provide for indemnification of directors and officers from and against any and
all of the expenses, liabilities or other matters encountered in defending any
action, suit or proceeding, to the fullest extent permitted by the General
Corporation Law of the State of Delaware. Mail.com extends indemnification
protection beyond directors and officers, covering all employees, and even
provides for the purchase and maintenance of insurance and/or the execution of
individual agreements of indemnification.
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BUSINESS OF MAIL.COM
Mail.com is a global provider of email services. Mail.com offers its email
services to both the consumer and business markets. Mail.com's basic consumer
email services are free to its members. Mail.com generates the majority of its
revenues from its consumer email services, primarily from advertising related
sales, including direct marketing and e-commerce promotion. Mail.com also
generates revenues in the consumer market from subscription services, such as a
service that allows members to purchase increased storage capacity for their
emails. In November 1999, Mail.com generated approximately 217 million
page views and delivered approximately 672 million advertisements in its
consumer email services. Mail.com has begun to offer a range of email services
to businesses. Mail.com connects existing email systems to the Internet,
monitors Internet emails for viruses or specific content and hosts and manages
email systems. Mail.com currently generates revenues in the business market
primarily from email service fees related to its email system connection
services and email monitoring services. As of December 31, 1999, Mail.com
provided email services for approximately 2,090 businesses.
INDUSTRY BACKGROUND
Use of the Internet and Internet-related applications is growing rapidly.
The International Data Corporation (IDC) projects that the number of Web users
will increase from 142 million worldwide at the end of 1998 to 502 million by
the end of 2003.
GROWTH OF EMAIL
Email is becoming an increasingly important means of communication, with
both the number of email users and usage levels per individual projected to
increase significantly. Email has the highest usage of any service on the
Internet. In an October 1998 Jupiter Communications/NFO Interactive survey,
approximately 93% of respondents reported using email regularly. According to
the Jupiter/NFO survey, there are over three times as many online users who
regularly use email as there are viewing or creating a personal homepage,
visiting a sports, music or games related site, or participating in online chat.
At the end of 1998, there were approximately 325 million emailboxes worldwide,
an increase of 64% from a year before according to a study by ELECTRONIC MAIL &
MESSAGING SYSTEMS. Forrester Research projects that daily global Internet email
traffic will increase from 100 million messages per day in 1994 to 1.5 billion
messages per day in 2002.
Mail.com believes the growth in email usage reflects several advantages over
traditional methods of communication. An email is easier to send than printed
correspondence and typically arrives in minutes. Email is easily distributed and
forwarded to many recipients or distributed to mailing lists. The electronic
format of email offers electronic filing, searching and editing capabilities not
generally available for faxes, voicemail and other forms of communications.
Email also allows for computer file attachments, permitting the recipient to
open and use files if they have the appropriate application software. In
addition, email can be integrated with other applications such as automated
scheduling, document sharing and messaging applications such as email-to-fax and
email-to-pager.
Mail.com believes that Webmail accounts are a rapidly growing category of
emailboxes. According to ELECTRONIC MAIL & MESSAGING SYSTEMS, the number of
Webmail accounts increased from 2.4 million at the end of 1996 to 82.7 million
at the end of 1998. Webmail allows users to access their email through any
computer or other device that has a Web browser and access to the Internet. The
feature email users request most is universal access to their email services,
according to a survey conducted by Jupiter Communications/NFO Interactive.
EMERGENCE OF THIRD PARTY EMAIL SERVICE PROVIDERS
The email industry is highly fragmented with large numbers of ISPs,
businesses and schools maintaining their own systems. Mail.com believes that as
the complexity and usage of email increases there will be
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an increasing desire on the part of Web sites, ISPs, small businesses and
educational institutions to outsource their email to third parties. IDC
estimates that the number of outsourced business emailboxes in the United States
will grow from approximately 12.0 million business emailboxes in 1999 to
40.0 million business emailboxes in 2003. Mail.com believes its economies of
scale, flexible technology platform and email focus enable it to offer these
market segments an attractive outsourcing alternative, both domestically and
internationally.
Prior to 1996, nearly all email services were provided directly by users'
employers, schools or ISPs. The emergence of Webmail has given third party
providers the ability to provide email services to any user with access to the
Web. This permits the development of large third-party email providers that
often have economy of scale advantages over traditional email providers,
including:
- the ability to spread costs of developing specialized email products and
services over large numbers of users;
- the ability to service many customer locations from one or more large
centralized data centers;
- sufficient global traffic to warrant 24 hour customer support and system
maintenance staff;
- volume purchasing of hardware, software, telecommunications and other
services;
- sufficient user base to attract general interest advertisers as well as
specialized advertisers seeking users in specific demographic targets; and
- sufficient user base to develop direct marketing and e-commerce
opportunities.
ADVERTISING, DIRECT MARKETING AND E-COMMERCE ON THE INTERNET
The Web is emerging as an attractive new medium for advertisers, offering
the ability to target advertising more effectively than many traditional media.
Jupiter Communications projects that the amount of advertising dollars spent on
the Internet is expected to increase from approximately $1.9 billion in 1998 to
$7.7 billion by 2002, a compound annual growth rate of 42%. By advertising on
the Web, advertisers have the ability to target their messages to specific
groups of consumers. The Web also allows advertisers to measure the number of
times that a particular advertisement has been presented and the responses to
the advertisement.
Mail.com also believes that the Web improves advertisers' direct marketing
efforts, which have been traditionally conducted through direct mail and
telemarketing. The interactive nature of the Web gives advertisers the potential
to establish dialogues and one-to-one relationships with potential consumers.
Advertisers can then make highly targeted product offers to consumers at the
point of sale over the Web at lower costs.
Mail.com believes that the growth in Web users and usage and the increasing
potential for e-commerce will continue to create growth in Web advertising and
direct marketing. The Web is becoming a vehicle for e-commerce, since online
purchases of goods and services can be less expensive and more convenient than
traditional transactions. Mail.com believes that as the volume of e-commerce
transactions expands, retailers will offer a greater variety of products and
services over the Web. Forrester Research has estimated that online sales for
retail goods other than automobiles totaled $8.0 billion in 1998 and projects
that these sales will increase to $96.6 billion in 2002.
RECENT DEVELOPMENTS
Since its initial public offering, Mail.com has announced several strategic
partnerships and acquisitions to enhance the email services it offers to its
members, to extend its distribution network, to expand its member base and
partner network and to offer email services to business customers.
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- Mail.com began offering its Web-based email services at Web sites owned by
Dell Computer and Juno Online Services and has entered into agreements to
provide similar services to EarthLink, Bell Atlantic and OneMain.com.
- Mail.com began pursuing strategic partnerships to develop some of its
domain name properties, including Asia.com and India.com, into independent
Web sites.
- In July 1999, Mail.com made an investment in 3Cube, Inc., formerly known
as B.A.K. Jina International, Inc., a company specializing in Internet fax
technology, and intends to begin offering a service that will allow
members to send faxes from their emailboxes in the first quarter of 2000.
- In August 1999, Mail.com acquired The Allegro Group, Inc., a provider of
email and email related services to business customers and other
organizations. Through this acquisition, Mail.com acquired over 1,000
business customers in a wide range of industries, including legal,
healthcare, automotive, education and financial markets. On December 30,
1999, Mail.com acquired Lansoft, Inc., a provider of email management,
e-commerce and Web hosting services to businesses, and added approximately
690 business customers.
- In October 1999, Mail.com launched the MAIL.COM MARKETPLACE which allows
its members to shop online when they visit Mail.com's Web site to read and
write email.
- In October 1999, Mail.com acquired TCOM, a software technology consulting
firm. Mail.com intends to retain TCOM's software developers to help
develop its business email services. Mail.com is not continuing the
business operations of TCOM but rather making the acquisition in order to
obtain technology and development resources.
- On December 11, 1999, Mail.com entered into the merger agreement to
acquire NetMoves, as described elsewhere in this proxy
statement/prospectus.
- On December 15, 1999, Mail.com added an integrated organizer and calendar
feature to its consumer email service which lets members at some of its
Web sites manage their day-to-day activities, including appointments,
birthdays, anniversaries and to do lists, directly from their email
accounts.
BUSINESS STRATEGY
As a global provider of email services, Mail.com seeks to grow its member
base and increase usage of its services in both the consumer and business
markets. Its strategies include:
- INCREASING ITS EMAIL SERVICE REVENUES IN THE BUSINESS MARKET. Mail.com has
begun to offer a range of email services to businesses. Mail.com connects
existing email systems to the Internet, monitors Internet emails for
viruses or specific content and hosts and manages email systems. With the
acquisition of The Allegro Group, Inc. in August 1999, Mail.com acquired
over 1,000 business customers and with the acquisition of Lansoft in
December 1999, it acquired approximately 690 business customers. Mail.com
intends to expand its business customer base and to attract additional
customers, such as schools and organizations. Mail.com also intends to
continue acquiring businesses, like NetMoves, that already offer messaging
services to an established customer base.
- BUILDING ITS CONSUMER MEMBER BASE. Mail.com intends to add new members by
expanding its partner network to include additional ISPs and Web sites.
Mail.com plans to continue its marketing, promotional and communications
programs in an attempt to increase its brand recognition, and to attract
new partners and members.
- INCREASING CONSUMER MEMBER USAGE. Mail.com believes that adding features
to its services will increase member usage and generate more page views
and revenue opportunities. Mail.com recently introduced integrated
personal organizers and calendars with "to do" lists and event
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reminders at some of its Web sites in December 1999. Mail.com will begin
promoting this in January 2000. Mail.com also intends to begin offering a
service that will allow members to send faxes from their emailboxes in the
first quarter of 2000. Mail.com plans to continue to expand its portfolio
of domain names from which members can select their email addresses.
Mail.com is designing its technology to be the foundation for additional
messaging services. Mail.com's long-term objective is to become a member's
communications portal on the Web by combining email, fax, voicemail,
calendars, address books and related tools into one fully-integrated
service.
- INCREASING ITS ADVERTISING RELATED REVENUE OPPORTUNITIES, INCLUDING DIRECT
MARKETING AND E-COMMERCE PROMOTION. As its number of active members grows,
Mail.com seeks to increase its advertising revenues by using the
demographic data it collects to offer advertisers access to larger and
increasingly segmented pools of members who fit their desired criteria.
Mail.com plans to offer advertisers a broader array of advertising formats
and tools. Examples include custom mailings to members who have requested
special advertiser offers and instant member polls regarding their planned
purchases, brand preferences, price sensitivity and other areas of
interest to Mail.com's sponsors. Mail.com has also developed e-commerce
relationships. In October 1999, it launched the MAIL.COM MARKETPLACE, a
service which allows its members to shop online when they visit some of
Mail.com's and its partners' Web sites to read and write email.
- EXPANDING SUBSCRIPTION AND OTHER REVENUE OPPORTUNITIES. Mail.com plans to
offer additional premium services in the consumer market. Mail.com has
designed its new subscription system to permit it to add additional
services on a regular basis. Mail.com requires fees from some Web sites
seeking its email services and intends to continue this practice in the
future where appropriate.
- ENTERING ADDITIONAL MARKET SEGMENTS. Mail.com is exploring possible
business opportunities and strategic partnerships, both domestically and
internationally, to develop some of its domain name properties, including
Asia.com, India.com, doctor.com and lawyer.com, into independent Web
sites. Mail.com plans to expand its international member base by adding
additional international partners and by providing new features such as
email language translation. Mail.com plans to add foreign language sites
in addition to the German, Italian, Spanish, French, Dutch and Japanese
sites it offers today. Mail.com will also continue to seek to acquire
strategic businesses and technology that will help it serve these markets.
MAIL.COM'S CONSUMER SERVICES
Mail.com offers its consumer members traditional email services and Webmail
services. The majority of its members use its Webmail services. Webmail differs
from traditional email in several respects. Traditional email services are
typically provided by ISPs, employers and schools as part of a larger offering,
usually including Internet access. Traditional email users generally download
their email from their ISP or other source to their own computer. The user then
reads his or her email using a program provided by the ISP or a commercial
program such as Eudora, Microsoft Outlook or Netscape Messenger.
Members of Mail.com sign up for its free Webmail services at one of its
partners' or its own Web sites. After a brief sign-up procedure, which includes
providing selected demographic data, a member selects an email address and
establishes a password. Mail.com's members are not required to install or set up
any email software on their computers. In order to access and read their email,
its members can visit the site at which they established service using any
computer or other device with Web access and a Web browser, such as Microsoft
Internet Explorer or Netscape Navigator. In addition, members store their email,
address books, folders and other data on Mail.com's computers, rather than on
the individual computer they used for a particular visit. With Mail.com's basic
service, members perform all their email tasks while online and connected to the
Web.
Mail.com offers a service which gives members access to their existing ISP
email accounts from any computer or other device with a Web browser and access
to the Internet. Customers of ISPs that offer its
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service can access their ISP email by going to their ISP's Web site and signing
in using their existing ISP email address and password.
Mail.com has developed a broad array of services to provide Internet
messaging capabilities. All of its services share a common foundation of
technology, features and applications. The primary services are described below.
BASIC FREE SERVICES
<TABLE>
<S> <C>
Universal access.............. Universal access to all email sending and receiving
capabilities, including reply, forward, attachments, address
book, and storage folders, from any computer or other device
with a Web browser and access to the Internet. This permits
members to read and send email when they are away from home,
school or work. Universal access also allows for permanent
email addresses. Mail.com's members keep their email
addresses even if they change ISPs, leave school or switch
jobs.
Email forwarding.............. Set an account to forward email to any emailbox anywhere in
the world.
External mail collection...... Consolidate mail from up to five emailboxes into one Webmail
account. This feature permits a member with multiple
emailboxes to manage their email without having to check all
their emailboxes on a regular basis. Mail collection will
not work with any third party account that is protected by a
"firewall" or similar software that prevents Mail.com from
accessing the account. Many ISPs, schools and businesses use
software of this nature.
Multiple accounts............. Create separate email accounts for different family members
or colleagues even if they have only one Internet account.
Storage capacity.............. Includes up to four megabytes of storage on its system.
Privacy....................... Messages are stored centrally on Mail.com's system and are
accessed only after a password is verified. With traditional
email, messages are downloaded onto a user's computer, where
they could potentially be viewed by others who have access
to the computer.
Spam blocking................. Using proprietary software, Mail.com attempts to block
unsolicited bulk email (spam) from members' accounts.
Wide choice of email
addresses................... At most of Mail.com's and its partners' Web sites, members
can select a personalized email address from a list of
unique domain names owned either by Mail.com or by one of
its partners.
Web-based organizer and
calendar.................... Universal access to manage calendar, address book and
electronic reminders of appointments, birthdays and
anniversaries. Features weather and movie information based
on member's geographic location. This feature is available
at some of Mail.com's Web sites.
PREMIUM PAY SERVICES
</TABLE>
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<TABLE>
<S> <C>
MailPro....................... Increased storage capacity above the current limit of four
megabytes of data. Increased ability to send and receive
larger file attachments above the current limit of 500
kilobytes of data. Priority customer service.
("POP3") access Post Office
Protocol.................... The ability to download email to a computer, including a
laptop or other portable device. The member can then read
their email while offline, such as when traveling or
commuting, using an email program such as Microsoft Outlook,
Eudora or Netscape Messenger. This also permits members to
save telephone and ISP charges.
OTHER SERVICES SCHEDULED TO
LAUNCH IN 2000
MailFax (pay service)......... Send faxes through one universally accessible Web site.
Phone access to email
(pay service)............... Send and access email messages using a telephone through
text to speech and speech to text technology.
Web-based conference calls
(pay service)............... Set up and manage conference calls using Mail.com's Web
interface.
Instant messaging
(free service).............. Real time "chat" feature.
</TABLE>
PORTFOLIO OF DOMAIN NAMES
Mail.com has a portfolio of approximately 1,200 domain names in a variety of
categories including professions, business, entertainment, places and sports.
Mail.com offers a portion of these domain names to its members as choices for
email addresses. Most of its domain names are offered for free to its members.
In an effort to increase member sign ups and retention, Mail.com eliminated
subscription fees for most of its premium email addresses. On certain sites,
members are offered a single choice and on other sites members are offered
choices of domain names, up to a maximum of 300 domain names at a site. Often
the default domain name offered on a partner's site is owned by the partner,
along with a few other domain names, and the rest are controlled by Mail.com.
Mail.com does not offer the same selection of domain names at all of its sites.
Mail.com either owns the domain names in its portfolio or has the right to use
them to offer email services. Mail.com pays a royalty to the sellers or owners
of approximately 10 domain names. Also, Mail.com is required to pay to a third
party 30% of the proceeds from the sale of any of approximately 150 domain
names.
Mail.com may also offer its domain names in the future as personalized
addresses for member homepages. Many of these domain names also present
potential business opportunities as independent Web sites. For example, Mail.com
has licensed the domain names London.com, Britain.com and England.com as Web
site addresses for Web sites being developed by the London Tourist Board.
Pursuant to an agreement with Southam, Inc., the parent of The Daily Telegraph,
a large English daily newspaper, Mail.com offers email services to their
newspaper readers using the domain name London.com. Mail.com is also exploring
possible strategic partnerships to develop other geographic domain names, such
as Asia.com and India.com, into independent Web sites. Mail.com intends to
acquire more domain names to appeal to additional segments of users.
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Below is a sample of Mail.com's domain names by category.
<TABLE>
<CAPTION>
MAIL PLACES PROFESSION AFFINITY
- ---- ------ ---------- --------
<S> <C> <C> <C>
Mail.com USA.com Doctor.com SPORTS
Email.com Asia.com Lawyer.com Fan.com
Webmail.com Europe.com Engineer.com Footballmail.com
Post.com India.com Accountant.com Hockeymail.com
Faxmail.com London.com Consultant.com MUSIC
Schoolmail.com Paris.com Financier.com Bluesfan.com
Workmail.com Rome.com Journalist.com Jazzfan.com
</TABLE>
DISTRIBUTION NETWORK
Mail.com has built its consumer member base by signing up members in
partnership with third party Web sites and ISPs as well as by signing up members
directly through its own Web sites. Mail.com generally shares a portion of its
revenues with its partners in exchange for their making its service available to
their users.
WEBMAIL FOR MAIL.COM'S WEB SITE PARTNERS
One of Mail.com's strategies since inception has been to offer its email
service in partnership with third party Web sites. These partner sites attract a
large number of visitors and provide a cost-effective way for Mail.com to
rapidly add new members to its service. Mail.com believes that when it launched
its email service for InfoSpace in 1996, it became the first party to outsource
email for a Web site. Since then Mail.com has built its partner network and as
of December 31, 1999 it offered its email service through 38 Web sites in
diverse categories such as technology, media, sports, entertainment and
business.
Mail.com enables its partners to offer Webmail without having to incur the
expense of developing and maintaining the necessary technology and
infrastructure. Mail.com provides the technology development, manages the
hardware infrastructure, and provides customer support. Since its technology
allows for flexibility in the design of Web pages, Mail.com can allow its
partners to customize the look and feel of the user interface to provide a
better integration between the partner's Web site and its email service.
By offering Mail.com's Webmail service to their visitors, Web site partners
seek to increase the traffic at their site because they expect that visitors
will return to the site to check their email. By attaching customized tag lines
to outgoing emails that identify the partner's Web site, Mail.com believes its
service can enhance a partner's branding efforts. Mail.com believes that its
selection of personalized domain names can also help increase user loyalty if
users choose an email address that relates to the Web site's content. In
addition, the demographic data that Mail.com requests at sign up can help a
partner learn about its user base and give the partner access to information
that might otherwise be difficult to obtain.
WEBMAIL FOR ISPS
During the second half of 1998, Mail.com used its expertise in outsourcing
email for Web sites to develop a proprietary Webmail service for the ISP
marketplace. As of December 31, 1999, Mail.com provided this service for
Prodigy, Cable & Wireless, GTE, Juno Online Services and 31 regional ISPs and
had entered into contracts to provide similar services for EarthLink,
OneMain.com and four regional ISPs.
According to ELECTRONIC MAIL & MESSAGING SYSTEMS, there were approximately
42 million emailboxes provided by ISPs worldwide at the end of 1998. Mail.com
believes that its Webmail service significantly enhances ISP email services by
providing their email users with universal email access.
ISP partners can offer their users Webmail without the cost of developing or
maintaining technology, infrastructure or customer support. As with Mail.com's
Web site partners, ISPs seek to increase user
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loyalty and to generate additional revenues. Additionally, ISPs may benefit from
lower network costs. With Web access to their ISP email accounts, users can more
easily access their ISP email during the workday. This may help ISPs lower
network costs by shifting some user demand away from peak evening times, when
users are at home, resulting in a more even distribution of usage throughout the
day.
As of December 31, 1999, Mail.com's Web site and ISP partners and the Web
site addresses through which members could access its services were as follows:
<TABLE>
<CAPTION>
PARTNER ADDRESS DESCRIPTION
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
BUSINESS
Dell Computer www.dellnet.com Computer sales
Lexis-Nexis www.lexis.com/xchange Legal content
Martindale-Hubbell www.martindale.com Legal content
SmartResume www.smartresume.net Career services
Standard & Poor's www.personalwealth.com Financial information
TECHNOLOGY PUBLISHERS
CMP Media www.techweb.com Technology
CNET www.cnet.com, www.news.com, Technology content and
www.download.com services
IDG www.idg.net International technology
content
MEDIA
Barbour/Langley www.cops.com COPS television show
NBC www.nbc.com National and affiliate TV
Paramount Entertainment www.startrek.com Online home of Star Trek
WorldNow www.worldnow.com Media conglomerate
Rolling Stone email.rollingstone.com Music industry content
E-COMMERCE
Alloy Online www.alloy.com Teen shopping catalog
Call Sciences www.istc.org International student travel
Club VDO www.vdo.net/clubvdo Streaming video
INTERNATIONAL
G.r.R. Home Net to be launched Japanese portal
Futebol www.futeboltotal.com Brazilian soccer
Basis Technologies www.nichibei.net Japanese Webmail
Southam/Daily Telegraph www.ukmax.com British newspaper
INTERNET
InfoSpace.com www.infospace.com Directory services
iWon.com www.iWon.com CBS-backed portal
RemarQ www.remarq.com Newsgroup service
Snap www.snap.com Portal
Home Work Central www.homeworkcentral.com Education Content
</TABLE>
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<TABLE>
<CAPTION>
PARTNER ADDRESS DESCRIPTION
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
New York.com to be launched Portal
INTERNET SERVICE PROVIDERS
Cable & Wireless www.webmail.com Internet service provider
EarthLink to be launched Internet service provider
GTE www.gte.net Internet service provider
Juno Online Services www.juno.com Internet service provider
OneMain.com to be launched Internet service provider
Prodigy maillink.prodigy.net Internet service provider
SPORTS
CBS SportsLine www.sportsline.com Sports content
Denver Broncos www.denverbroncos.com Team site
FANSonly.com www.fansonly.com, College sports content
www.calbears.com,
www.goducks.com
MaxCSN www.maxcsn.com Sports portal
NHL www.nhl.com Professional hockey
</TABLE>
PARTNER ECONOMICS
While each Web site and ISP partner contract is different, contracts
typically run one to two years in length. In addition to assuming all costs
associated with providing the email service, Mail.com typically pays out a
percentage (generally ranging from 20 to 50%) of any advertising and
subscription revenues attributable to its Webmail service at the partner's site.
Under some of its revenue sharing arrangements, Mail.com's partners are entitled
to receive guaranteed minimum amounts, most often based upon the number of
member registrations processed during the applicable pay period. In addition,
several contracts with specific promotional commitments from its partners
require Mail.com to pay upfront or scheduled fees. More recently, Mail.com has
entered into contracts where it collects a fee for providing its service.
Mail.com currently has one such contract.
Mail.com generally manages and sells the advertising on the Web sites. Under
some of its contracts, Mail.com's partners assume responsibility for managing
advertising sales and pay it a percentage of the advertising revenues. A number
of its partners do not permit Mail.com to place advertisements in its email
service at their site unless it also places those advertisements throughout its
network, which prevents Mail.com from specifically targeting members who use
those particular sites.
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Members are generally given a choice of domain names when registering for
Mail.com's service at a partner site. Typically, the default domain name offered
on a partner's site is owned by the partner and the other selections are owned
by Mail.com. As of November 30, 1999, Mail.com estimates that approximately 25%
of its total emailboxes established, including emailboxes established by members
that have signed up at its own Web sites, have email addresses at partner-owned
domains. As of December 31, 1999, Mail.com estimates that approximately 18% of
its total emailboxes established are at the email.com domain. See "Risk
Factors--Risks Related to the Business of the Combined Company--The failure to
renew Mail.com's partner contracts, which have limited terms, can result in the
loss of members and impair Mail.com's credibility."
Upon expiration, a small number of contracts obligate Mail.com to relinquish
existing members with addresses at partner-owned domains, but most require it to
continue providing service to those members until the partner elects to
designate an alternative provider or provide service itself. By contrast,
Mail.com generally retains the member accounts with addresses at domains owned
by it. Thus, Mail.com can continue its efforts to generate revenues from these
retained accounts even if its partners choose not to extend or renew their
contracts with Mail.com. After their contract ends, many of Mail.com's partners
will have the option to maintain a way for members who registered for its
service to continue signing in at their site. See "Risk Factors--Risks Related
to the Business of the Combined Company--Mail.com's contracts with its Web site
and ISP partners require it to incur substantial expenses," "--The failure to
renew Mail.com's partner contracts, which have limited terms, can result in the
loss of members and impair Mail.com's credibility" and "--Several of Mail.com's
most significant partner contracts have expired which could result in reduced
advertising and subscription revenues."
MAIL.COM BRANDED EMAIL
In addition to offering Webmail services through its partners, members can
sign up directly at Mail.com's own Web sites. Since November 1996, members have
accessed www.iName.com to sign up for service. iName is short for "Internet
Name" and was the name of Mail.com's company until January 1999, when it changed
its name to Mail.com, Inc. Mail.com launched its service at www.mail.com in May
1999. In addition, Mail.com offers email service through other Web sites owned
by it, including www.USA.com and www.webmail.com. In the fourth quarter of 1999,
approximately 46% of new sign ups were at Web sites owned by Mail.com.
MAIL.COM'S BUSINESS SERVICES
Mail.com offers a range of email services to businesses. As of December 31,
1999, Mail.com provided these services for approximately 2,090 business
customers. Approximately 350 of these business customers are not now required to
pay for service fees and may elect to discontinue receiving our services prior
to the time they would be required to begin paying our fees. Mail.com currently
generates the majority of its revenues in the business services market by
providing to its business customers the ability to connect their existing email
systems to the Internet and by providing email monitoring services, such as
virus scanning and blocking and content screening, and administrative tools to
complement their existing email systems. In addition, Mail.com has recently
begun to provide some business customers with a full suite of email services,
including the hosting of a customer's emailboxes on its computers and universal
access to their emailboxes. The following chart describes Mail.com's current
offering of business email services:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- ------- --------------------------------------------------------
<S> <C>
Email monitoring or "gateway" services Customers may choose various features and services to
complement their existing email systems. These "gateway"
services include the ability to scan and block emails
and attachments that originate from within or outside a
customer's system for viruses, unsolicited bulk email,
and specific content and to hold for delivery during
non-peak periods or block email messages containing
images, videos and other attachments.
</TABLE>
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<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- ------- --------------------------------------------------------
<S> <C>
Email system connection services Customers can connect their existing internal email
system such as Microsoft Exchange, Lotus Notes and
Novell GroupWise to the Internet over a dial-up or
dedicated connection.
Hosted email services Mail.com hosts the customer's emailboxes on its own
computers that are located and maintained in its data
centers. Customers can have emailboxes at a single
domain name or multiple domain names allowing email
addresses to reflect the customer's name or the name of
a specific department within the customer's
organization.
Customers may elect to have Web-based access to their
emailboxes, allowing them to access and read their email
from any computer or other device with Web access and a
Web browser.
Each emailbox has a standard storage capacity that can
be increased in pre-defined increments specified by the
customer's email administrator.
Integration services Customers may purchase various services including remote
help desk support, on-site system design and
implementation and pre-paid telephone support to support
their email systems.
Administration tools Each customer's email administrator has the ability to
monitor all aspects of the email service, including the
addition or removal of emailboxes and the application of
particular services to each individual user. This
feature is available to customers of Mail.com's hosted
email and "gateway" services.
Customer Service Mail.com's basic service includes technical support
which is available to the customer's email administrator
and online support which is available to the email
administrator and the individual end users. Mail.com's
premium service allows individual end users to contact
its customer service center for personal support. This
feature is available to customers of Mail.com's hosted
email and "gateway" services.
</TABLE>
Mail.com plans to market its services directly to businesses and other
organizations in the future by allowing smaller businesses to subscribe to its
email services by submitting a credit card number directly at its Web sites.
Mail.com also plans to sell to larger businesses through resellers and a
telemarketing effort and its direct sales force.
REVENUES
Mail.com generates revenues from advertising related sales, subscription
services, business service fees and other revenue sources. Other sources
include, for example, revenue from the sale or lease of domain names. The
following table presents Mail.com's approximate revenues across these
categories. Mail.com began generating revenues from email services in the
business market in August 1999, when it acquired The Allegro Group, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------- ---------------------------------
1996 1997 1998 1998 1999
------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising
related............ $ -- -- $ -- -- $1,117,000 75% $225,000 46% $5,301,000 80%
Subscription
services........... 2,000 10% 61,000 35% 285,000 19 187,000 38 434,000 7
Business services.... -- -- -- -- -- -- -- -- 569,000 9
Other................ 17,000 90 112,000 65 93,000 6 80,000 16 289,000 4
------- --- -------- --- ---------- --- -------- --- ---------- ---
Total Revenues....... $19,000 100% $173,000 100% $1,495,000 100% $492,000 100% $6,593,000 100%
</TABLE>
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ADVERTISING RELATED SALES
The majority of Mail.com's revenues are currently generated from advertising
related sales. There are three basic ways in which Mail.com accomplishes
this: advertising impression based sales, permission marketing services and
e-commerce.
Mail.com believes that its Webmail service has several benefits as an
advertising vehicle including:
- Low cost content that is meaningful to its members--The content of its Web
pages consists primarily of emails written by members or their friends,
family and colleagues. Therefore, unlike online publishers, Mail.com does
not incur the cost of hiring writers or paying for content that is typical
of online publishers. Because most of its content is written specifically
for its members by their friends, family and colleagues, it is important
to them and it is likely that they will read it.
- Demographic collection capability--When members sign up for email
accounts, Mail.com requires, but does not verify, demographic data such
as:
<TABLE>
<S> <C> <C>
Zip code or postal code Date of birth Street address
Gender Occupation
</TABLE>
Additionally, Mail.com requests other data such as income range and phone
number.
- Effective targeting--Since members must log in and thus identify
themselves in order to use the service, Mail.com can direct advertising to
individual members on every page they view after signing in. This enables
Mail.com to target advertising to individual members based on the
demographic data it has collected. As Mail.com's member base grows, it can
more finely target using more demographic variables and still have target
groups that are large enough to be valuable to its advertisers.
- Network sales--Since Mail.com's advertising opportunities are generated by
members across many partner Web sites as well as its own Web sites, it can
sell this space as an advertising network. Mail.com's advertising network
includes several recognizable brand name sites that advertisers recognize
and trust. Its advertisers can purchase targeted advertising directed to
members across its advertising network by making a single purchase of
advertising space from Mail.com.
ADVERTISING IMPRESSION BASED SALES
Mail.com can deliver advertisements to its members when they access its
email service to read and write messages and perform other email functions.
Every page viewed during an email session has the capability to carry one or
more advertisements. These may be in the form of a banner, typically across the
top of each page, or smaller rectangular buttons and portals, typically located
in the left margin of the Web pages. Mail.com currently does not deliver
Web-based advertisements to its email forwarding and POP3 service members.
Mail.com sells to advertisers, direct marketers and their agencies through its
own sales force. Advertisers pay Mail.com based upon a variety of delivery
measurements. They pay either a fixed amount for every 1,000 advertisements that
Mail.com delivers to its members, or an amount for each time one of its members
clicks on their advertisement or responds to an offer.
PERMISSION MARKETING SERVICES
Mail.com can also deliver advertisements to its members through its Special
Delivery (formerly known as Bargain Hunter) 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 emailbox about
special opportunities, information and offers from companies in those
categories. Current categories include:
<TABLE>
<S> <C> <C> <C> <C>
technology software sports finance family/kids
hardware entertainment shopping auto home
</TABLE>
Mail.com intends to expand the current category of choices in the first
quarter of 2000.
Mail.com sends messages and special offers on behalf of its advertisers, who
pay for one-time access to its mailing list to members who have granted it
permission to do so. Mail.com's mailing list is an "opt-in"
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list in that members must affirmatively check a box to indicate interest.
Mail.com believes email "opt-in" lists generally command higher advertising
rates than "opt-out" lists.
E-COMMERCE
Mail.com also generates advertising related revenues by facilitating
transactions for third party e-commerce sites. For example, Mail.com is
currently promoting video tape sales for BigStar and book sales for Barnes &
Noble. To date, most of Mail.com's e-commerce partners have paid upfront fees to
secure exclusive promotional rights within their product categories on the
Mail.com network. They also may pay acquisition fees on a per customer basis or
commissions on the sale of products or services. The agreements Mail.com has
entered into so far typically run from six months to three years in length.
In October 1999, Mail.com launched the MAIL.COM MARKETPLACE, which allows
members to shop online when they visit Mail.com's and its partners' Web sites to
read and write email. With MAIL.COM MARKETPLACE, its members can purchase
various products offered by participating online stores. Mail.com generates
revenues in the MAIL.COM MARKETPLACE from commissions for purchases made by its
members in the MAIL.COM MARKETPLACE, upfront placement fees and customer
acquisition fees. Mail.com believes that e-commerce is a natural supplement to
its service.
Since Mail.com commenced delivering advertisements in 1998, approximately
283 companies have advertised on its network. Selected advertisers included:
<TABLE>
<S> <C> <C> <C> <C>
American Express Ford MCI Petsmart Sony
BancOne General Motors Net2Phone Sears Visa
Citibank IBM OnHealth Showtime Vtech
Sports
Discover LL Bean OfficeMax Authority
</TABLE>
SUBSCRIPTION SERVICES
While the majority of its members sign up for free service, Mail.com also
generates revenues from upgraded email services. Until March 10, 1999, Mail.com
charged $23.95, $37.95, $59.95, and $79.95 for one-year, two-year, five-year and
lifetime subscriptions to its POP3 service. Commencing March 10, 1999, Mail.com
changed its rates to $3.95 per month or $39.95 for a one-year subscription to
its POP3 service. Mail.com started offering MailPro on March 10, 1999. Mail.com
charges $2.95 per month or $29.95 for a one-year subscription to its MailPro
service. Until August 1999, Mail.com charged its members for the use of an email
address at a premium domain name. In an effort to attract and retain members,
most of Mail.com's premium email addresses are now available for free to
members. Mail.com has offered members who paid for a premium domain name the
option of receiving a free one-year subscription to MailPro or a refund.
As of November 30, 1999, approximately 55,000 members have provided credit
card information and purchased one or more subscription services. Mail.com
expects this number to grow as it offers more subscription or other pay services
to a larger membership base. Once Mail.com has collected a member's credit card
information and billing address, subsequent purchases of subscription and other
services should be greatly simplified.
BUSINESS SERVICE REVENUES
Mail.com currently generates revenues in the business market primarily from
email service fees related to its email system connection services and email
monitoring services. Mail.com receives revenues from its business customers
through one-time setup fees, monthly charges and annual fees. Mail.com's email
monitoring services are charged to customers on a monthly basis per emailbox.
Businesses are billed per emailbox for each email monitoring service they
select, including virus scanning services or the ability to control the
attachment and content that goes in or out of the customer's email system.
Mail.com bills customers who use its email system connection services a monthly
access fee and, in some cases, a per message fee.
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Customers who purchase Mail.com's hosted email services are charged initial
setup fees as well as monthly charges per emailbox. Customers are billed a flat
rate per month for each emailbox, which includes universal access,
administration tools and customer support for a customer's email administrator.
In addition, customers may purchase additional increments of storage capacity on
its computers. These customers are billed on a monthly basis per increment of
additional storage capacity. Customers may also choose to purchase telephone and
email support for their individual email users. This service is also billed on a
monthly basis per emailbox.
Mail.com is positioning itself to take advantage of other email service
revenue opportunities. Mail.com believes that other organizations, particularly
small businesses and schools, will increasingly seek to outsource their email
requirements. Mail.com believes that it will have the scale to provide better
service at a lower cost than these entities could provide themselves. Mail.com
does, however, expect that it will be more difficult to enter into outsourcing
agreements with schools and small businesses than it has been with Web sites.
This is because schools and small businesses may already have established
internal networks on which they are dependent and may have higher security
concerns.
OTHER REVENUE SOURCES
To date, Mail.com's other revenue sources have represented a small portion
of total revenues. It has generated other revenue primarily from the sale or
lease of domain names.
MARKETING
Mail.com markets to members, partners, advertisers and businesses. Its
primary marketing objectives are to:
- drive new signups;
- promote higher usage;
- build its brand;
- recruit new partners;
- support advertising sales; and
- grow its customer base in the business market.
To sign up new members, Mail.com primarily advertises on other Web sites. It
either purchases this advertising or receives it as part of an agreement with
its partner Web sites. At its partner Web sites, Mail.com uses a combination of
buttons, links, sign-up portals and banners to promote its email service.
Mail.com uses welcome emails and regular communications with its members to
promote new features, special offers and contests and intends to provide a
mechanism for customer feedback.
Mail.com believes that is category-defining Mail.com brand name provides it
with competitive advantages in efficiently marketing its Internet messaging
services. To build its brand among consumers, potential Web site and ISP
partners and business customers, Mail.com uses a combination of newspaper,
radio, outdoor and television advertising. Another important brand-building
vehicle, "Powered by Mail.com," is displayed on the Webmail interface across its
partner Web sites.
Mail.com uses business-to-business print and online advertising to help
attract new Web site and ISP partners and retain existing relationships.
Mail.com also markets directly to ISPs and businesses using both online and
traditional methods of direct marketing, such as telemarketing and mailings, to
support its sales efforts.
Mail.com engages in trade advertising and participates in trade shows to
attract new advertisers. In addition, it uses targeted sales materials and
direct marketing efforts to promote its network to potential advertisers.
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CUSTOMER SUPPORT
Mail.com's members are very valuable to it and to its partners. Its goal is
to provide quality customer support through its online support areas on its Web
sites and through a dedicated customer support team. During the fourth quarter
of 1999, the average response time for all non-billing inquiries was less than
six hours. Mail.com believes this positions it as a leader in Internet consumer
customer support. Only approximately 43% of Web sites surveyed in a third
quarter 1999 Jupiter Communications report were able to respond to customer
queries within 48 hours with a personalized, signed message.
ONLINE SUPPORT
Mail.com has created and frequently updates an online searchable knowledge
base with over 400 Web pages that allows members to find the answers to many of
their questions about its services. Members can find answers by viewing its
frequently asked questions or by using its full text search function. Mail.com
has also developed a facility to enable members to help themselves with requests
for forgotten passwords. Mail.com believes that approximately 80% of its members
who seek its help are able to find answers using its online support area and
without having to contact its customer service department.
CUSTOMER SUPPORT TEAM
Mail.com's customer service department is available by email or telephone
24 hours a day, seven days a week and is staffed by experienced technical
support engineers and customer service representatives. Mail.com currently does
not offer a toll free number for its members. Its business customers can contact
its customer support team via a toll free number 24 hours a day, seven days a
week. Both phone and email interactions with customers are randomly monitored to
ensure consistent quality and accuracy. The majority of customers who contact
Mail.com's customer service department use the customer service request form on
its Web site or send an email. When members submit a request electronically,
they receive a confirmation email with a tracking number. Mail.com's customized
email-tracking system allows it to access a full history of each customer
service request, prioritize issues based on customer status, classify issues
based on the topic and route issues to customer service representatives
depending upon the particular type of issue.
TECHNOLOGY
Mail.com's Webmail technology has evolved rapidly since it commenced
commercial operations. Its hardware network has grown from one computer at the
end of June 1996 to approximately 500 computers at the end of December 1999.
These computers run an extensive library of proprietary software it has
developed to provide member and partner services. Currently, Mail.com is focused
on building an integrated hardware and software network that is reliable and can
be expanded to support tens of millions of members. Mail.com cannot be sure that
its technology will operate adequately at these levels.
HARDWARE NETWORK
Mail.com's hardware network is designed to provide high availability and
performance and to accommodate rapid growth of its member base and development
of our business customer base. The six primary elements of its hardware
infrastructure are:
- Mail transfer machines: Redundant banks of computers receive, transfer and
send email.
- Web page servers: Redundant banks of computers generate customized Webmail
pages.
- Database machines: Emailbox account data is stored in disk storage arrays.
The data is managed using database software.
- Email storage: Email messages are stored separately from account data in
disk storage arrays.
- Bill presentment servers: Redundant computers run the secure on-line
billing system.
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- Data network: Mail.com's computer network uses high speed routers and
switches and is connected to the Internet through high capacity links from
BBN Planet, MCI WorldComm, AT&T, Sprint, and UUNET.
For its core infrastructure, Mail.com uses industrial grade hardware from
leading manufacturers. Generally, its hardware infrastructure is built using
redundant components. However, some components, including the database and email
storage machines, are not currently redundant. A failure of any of these
components could disrupt Mail.com's service until a replacement component is
received and installed. Mail.com has experienced service outages resulting from
failures in these systems. It plans to install additional computer hardware to
reduce the impact of any future computer system failures. Mail.com's member
account data is saved to tape and stored off site on a daily basis. Member
emails are stored on redundant hard drives within its email storage machines in
case a hard drive should fail. However, Mail.com cannot be sure that it will be
able to restore member data in the event of a hardware failure or that a
restoration can be completed on a timely basis. See "Risk Factors--Risks Related
to the Business of the Combined Company--Mail.com's computer systems may fail
and interrupt its service."
SOFTWARE
No commercial software is available to meet the demands of Mail.com's large
member base and diverse partner network adequately. As a result, it has
developed a substantial amount of software internally and will attempt to
develop additional software. Where available, Mail.com uses software from
off-the-shelf software suppliers such as Oracle. Examples of Mail.com's software
related developments include:
- Webmail technology which offers improved response times to members and
gives it the ability to deploy new features in less time.
- A customizable Webmail interface that integrates with the technology and
branding of its partners' Web sites. This allows members a more seamless
experience in signing in and navigating.
- A design for secure email. It has applied for a related patent.
- A technology license from 3Cube, Inc., that will allow it to offer
Web-based and email to fax services across its network of Web site and ISP
partners.
- A technology license from Content Technologies, Inc. that allows it to
scan and block emails and attachments that originate from within or
outside a customer's system for viruses, unsolicited bulk email and
specific content and to hold for delivery during non-peak periods or block
email messages containing images, videos and other attachments.
DATA CENTER
Mail.com's computers are located in commercial data centers in Manhattan and
Dayton, Ohio. Its data centers provide 24-hour security, fire protection,
computer-grade air handling and backup power sources. It has also started
establishing a data center at one of its own offices in Jersey City, New Jersey.
When completed, this data center will provide additional capacity and will serve
as a testing facility and as a backup site in the event of an emergency at
Mail.com's primary data centers.
OPERATIONS
Mail.com's operations group monitors its sites 24 hours a day, seven days a
week. Systems operators use automated monitoring tools to continuously test site
performance and repeatedly perform manual checks of major functions.
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UNSOLICITED BULK EMAIL (SPAM)
Unsolicited bulk email, or spam as it is often called, is a significant
problem for any provider of email services. To address this chronic problem,
Mail.com has developed proprietary software and has implemented internal
procedures for detecting and terminating accounts engaged in this activity.
Mail.com has full time staff dedicated to the detection and reduction of spam.
SECURITY
While no computer system is impenetrable, Mail.com's system is designed to
guard against intruders who might seek to either damage or slow its service, or
gain access to members' accounts or information. Mail.com has also implemented
automated monitors that are designed to provide an early warning if attempts are
made to breach its systems.
COMPETITION
Mail.com competes for members, partners, advertisers and business customers.
Members typically receive an emailbox from their employer, school or an ISP
such as AOL, Excite@Home or Microsoft's MSN network. In addition, they can
subscribe to email services at most of the major Web sites. The leading sites
offering email services include Microsoft's MSN network, which claims to have
over 40 million Web-based emailboxes at its Hotmail site, Yahoo!, Excite,
Disney's GO Network, which includes InfoSeek, and the Lycos Network.
Alternatively, members can sign up for email services through Web sites that
have partnered with Mail.com's outsourcing competitors. For example, Netscape
offers email at its Web site outsourced from USA.NET. Microsoft and Netscape
have modified their browsers to promote their email offerings to users, and
Compaq and other major PC manufacturers now include keyboard buttons linking
users directly to their email offerings. Users that do not have Web access can
also receive free email services from Juno Online Services. Mail.com's success
in attracting members over these competitors is highly dependent on its
partners' level of visitor traffic and their commitment to promoting its email
service.
Mail.com competes for Web site and ISP partners with USA.NET, Bigfoot,
CommTouch, Critical Path and Lycos' WhoWhere subsidiary. In offering its
services to business customers, schools and other organizations, Mail.com
competes with MCI Mail, USA.NET and Critical Path and major ISPs such as Netcom.
In addition, companies such as Software.com, Microsoft, Netscape, Lotus, Oracle
and Sun Microsystems are currently offering email software products that would
permit potential partners to provide their own email services, as opposed to
through an outsourcer. Success in attracting new partners and outsourcing
customers is dependent on scale, ability to rapidly deploy services, partner
portfolio and pricing structure. Some potential partners and outsourcing
customers may elect not to outsource for other strategic reasons such as a need
for direct control over the user experience or a desire to integrate their email
service with other service offerings.
Mail.com competes for Internet advertising revenues with large Web
publishers and Web portals, such as America Online, Excite@Home, Lycos, Yahoo!,
Disney's GO Network and Microsoft. Further, Mail.com competes with a variety of
Internet advertising networks, including DoubleClick and 24/7 Media. Mail.com
also encounters competition from a number of other sources, including
advertising agencies and other companies that facilitate Internet advertising.
Mail.com also competes with traditional advertising media, such as print, radio,
television and outdoor advertising for a share of advertisers' total advertising
budgets.
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 Mail.com expands its service offerings, it expects to
encounter increased competition in the development and delivery of these
services. Many of Mail.com's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than it does.
Some of Mail.com's competitors have the ability to bundle a variety of Web-based
services such as Internet
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access, browser software, homepage design and Web site hosting, in addition to
email services. The ability of these competitors to offer a suite of services
may give them an advantage over Mail.com. Smaller companies may enter into
strategic or commercial relationships with larger, more established and well
financed companies. For example, Hotmail was acquired by Microsoft, and WhoWhere
was recently acquired by Lycos. Further, some of its competitors may offer
services similar to those of Mail.com at a lower price or for free. In addition,
new technologies and the expansion of existing technologies may increase
competitive pressures on Mail.com. Mail.com cannot be sure that it will be able
to compete successfully against its current or future competitors or that
competition will not have a material adverse effect on its business, results of
operations and financial condition. See "Risk Factors--Risks Related to the
Business of the Combined Company--Several of Mail.com's and NetMoves'
competitors have substantially greater resources, longer operating histories,
larger customer bases and broader product offerings."
INTELLECTUAL PROPERTY
Mail.com's intellectual property is among its most valued assets. Mail.com
protects its intellectual property, technology and trade secrets primarily
through copyrights, trademarks, trade secret laws, restrictions on disclosure
and other methods. Parties with whom Mail.com discusses, or to whom it shows,
proprietary aspects of its technology, including employees and consultants, are
required to sign confidentiality and non-disclosure agreements. If Mail.com
fails to protect its intellectual property effectively, its business, operating
results and financial condition may suffer. In addition, litigation may be
necessary in the future to enforce Mail.com's intellectual property rights, to
protect its trade secrets or to determine the validity and scope of the
proprietary rights of others.
Mail.com has developed proprietary technology to offer its email services
and to allow it to deliver specific advertisements targeted to members based
upon demographic data that it has collected. Mail.com restricts access to and
distribution of its technology. Mail.com does not presently license its
technology to third parties.
Notwithstanding these protections, there is a risk that a third party could
copy or otherwise obtain and use Mail.com's technology or trade secrets without
authorization. In addition, others may independently develop substantially
equivalent technology. The precautions Mail.com takes may not prevent
misappropriation or infringement of its technology.
Mail.com jointly owns its member database with its respective partners. This
database includes contact and demographic information submitted by its members
when they sign up for email service. Any third parties receiving member contact
and demographic information are required to sign confidentiality, non-disclosure
and use restriction agreements, committing them to adhere to Mail.com's privacy
policy and prohibiting them from using the contact and demographic information
in any way except as Mail.com expressly specifies. In the absence of these
agreements, current law provides inadequate protection. As a result, Mail.com
will have difficulty protecting its rights if any of the information contained
in its member database is pirated or obtained by an unauthorized party.
In July 1999, Mail.com submitted an application to the U.S. Patent and
Trademark Office for a patent for a secure email system. Mail.com conducts an
ongoing review of all of its proprietary technology to determine whether other
aspects of its technology should be patented. Mail.com has a registered
trademark for iName, its predecessor company name. In October 1999, Mail.com
filed a trademark application with the U.S. Patent and Trademark Office for its
Mail.com logo.
Mail.com owns or has the rights to over 1,200 Internet domain names,
approximately 600 of which it currently uses to provide email addresses to its
members. All of Mail.com's domain names are registered with Network
Solutions, Inc. under a registration agreement which is renewed annually for a
fee of $35.00 per domain name. Mail.com tries to review all domain names to
ensure that they are not subject to claims of ownership and other legal
challenges by holders of any trademarks. Mail.com's rights to its domain names
have been challenged by third parties in the past and it expects they will be
challenged in the future. Mail.com will seek to protect by all appropriate means
its rights to its domain names.
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Mail.com incorporates licensed, third-party technology in some of its
services. In these license agreements, the licensors have generally agreed to
defend, indemnify and hold Mail.com harmless with respect to any claim by a
third party that the licensed software infringes any patent or other proprietary
right. The outcome of any litigation between these licensors and a third party
or between Mail.com and a third party may lead to its having to pay royalties
for which it is not indemnified or for which such indemnification is
insufficient, or it may not be able to obtain additional licenses on
commercially reasonable terms, if at all. In the future, Mail.com may seek to
license additional technology to incorporate in its services. The loss of or
inability to obtain or maintain any necessary technology licenses could result
in delays in introduction of new services or curtailment of existing services,
which could have a material adverse effect on Mail.com's business, results of
operations and financial condition.
To the extent that Mail.com licenses any of its content from third parties,
its exposure to copyright infringement actions may increase because it must rely
upon these third parties for information as to the origin and ownership of the
licensed content. Mail.com generally obtains representations as to the origins
and ownership of any licensed content and indemnification to cover breaches of
any representations. However, such representations may be inaccurate or any
indemnification may be insufficient to provide adequate compensation for any
breach of these representations.
Mail.com cannot assure you that infringement or other claims will not be
asserted or prosecuted against it in the future or that any future assertions or
prosecutions will not materially adversely affect its business, results of
operations and financial condition. It is also possible that claims could be
asserted against Mail.com because of the content of emails sent over its system.
Any of these claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel or require
Mail.com to develop non-infringing technology or enter into royalty or licensing
agreements. Any royalty or licensing agreements, if required, may not be
available on terms acceptable to Mail.com, if at all. In the event of a
successful claim of infringement against Mail.com and its failure or inability
to develop non-infringing technology or license the infringed or similar
technology on a timely basis, its business, results of operations and financial
condition could be materially adversely affected.
MAIL.COM EMPLOYEES
As of December 31, 1999, there were 276 people dedicated full-time to
Mail.com's business. Of these personnel, 131 persons worked in technology,
product development and Web production; 57 persons worked in sales, marketing
and business development; 22 persons worked in customer support; 60 persons
worked in operations and administration; and 6 persons were executives. Mail.com
has never had a work stoppage and no personnel are represented under collective
bargaining agreements. Mail.com considers its employee relations to be good.
Mail.com believes that its future success will depend in part on its
continued ability to attract, integrate, retain and motivate highly qualified
sales, technical, and managerial personnel, and upon the continued service of
its senior management and key sales and technical personnel. To help Mail.com
retain its personnel, all of its full-time employees have received stock option
grants. To increase its geographic reach and ability to attract talented
employees, Mail.com has opened a technology office in Morristown, New Jersey and
a sales office in San Francisco, California. None of Mail.com's personnel are
bound by employment agreements that prevent them from terminating their
relationship at any time for any reason.
Competition for qualified personnel is intense, and Mail.com may not be
successful in attracting, integrating, retaining and motivating a sufficient
number of qualified personnel to conduct its business in the future. See "Risk
Factors--Risks Related to the Business of the Combined Company--Mail.com's rapid
expansion is straining its existing resources, and if the combined company is
not able to manage its growth effectively, its business and operating results
will suffer."
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FACILITIES
Mail.com's headquarters are located in leased space in Manhattan consisting
of approximately 36,000 square feet. Mail.com has approximately 18 months
remaining on its original five-year lease which ends June 30, 2001. Mail.com
believes there is enough vacant space available in its building and the
neighboring area for it to expand its operations as necessary. Mail.com's
landlord is entitled to relocate it to a similar space for any reason upon
60 days written notice. Mail.com's landlord may cancel its lease upon 90 days
written notice if there are plans to demolish the building.
Mail.com has a technology development team located in approximately 5,800
square feet of leased space in Morristown, New Jersey. Mail.com has a three-year
lease on approximately 2,400 of the 5,800 square feet that ends on
September 14, 2001, and it has the right to terminate this lease at any time
after the first year with three months notice. Mail.com has a two-year lease on
the remaining 3,400 square feet which ends on August 14, 2001. Mail.com has no
early cancellation rights on this additional space. Mail.com also has a
technology development team located in approximately 3,900 square feet of space
in Morris Plains, New Jersey. This lease expires on March 31, 2002.
Mail.com has subleased 13,000 square feet of space in Jersey City, New
Jersey. Approximately 2,000 square feet of this space has been built into a data
center which Mail.com expects will become active later this year. This sublease
expires on December 30, 2005.
Mail.com's West coast advertising sales team occupies approximately 10,000
square feet of leased space in San Francisco, CA. Mail.com has subleased this
space and its sublease expires on May 31, 2003.
One of Mail.com's data centers is housed in approximately 1,200 square feet
of space leased from a commercial data center in Manhattan. Under its current
terms, the lease covering this space terminates on June 14, 2001. Mail.com has
leased an additional 1,925 square feet in this facility, for a total of 3,125
square feet. The data center provides 24-hour security, fire protection,
computer-grade air handling and backup power facilities.
Mail.com has committed to lease approximately 4,500 square feet of space at
a data center operated by AT&T. The term of this commitment is for calendar year
2000.
Mail.com has leased 9,600 square feet of space in Dayton, Ohio. Under its
current terms, the lease expires on May 31, 2002.
LEGAL PROCEEDINGS
From time to time Mail.com has been, and expects to continue to be, subject
to legal proceedings and claims in the ordinary course of business. These
include claims of alleged infringement of third-party patents, trademarks,
copyrights, domain names and other similar proprietary rights. These claims,
even if not meritorious, could require Mail.com to expend significant financial
and managerial resources. Mail.com believes that there are no claims or actions
pending or threatened against it that will have a material adverse effect on its
business, results of operations or financial condition.
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MAIL.COM'S MANAGEMENT
The following table identifies the executive officers and directors of
Mail.com as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Gerald Gorman............................. 44 Chairman and Chief Executive Officer
Gary Millin............................... 30 President, Director
Lon Otremba............................... 42 Chief Operating Officer, Director
Charles Walden............................ 46 Executive Vice President, Technology,
Director
Debra McClister........................... 45 Executive Vice President, Chief Financial
Officer
David Ambrosia............................ 43 Executive Vice President, General Counsel
William Donaldson......................... 68 Director
Stephen Ketchum........................... 38 Director
Jack Kuehler.............................. 66 Director
</TABLE>
The following table identifies other key employees of Mail.com:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Aaron Fessler............................. 27 President, The Allegro Group, Inc.
Jason Gorevic............................. 28 Senior Vice President and General Manager,
Business and ISP Services
Michael Agesen............................ 36 Vice President, Business Development
Eri Golembo............................... 51 Vice President, Consumer Marketing
Courtney Nichols.......................... 29 Vice President, Advertising Sales
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
GERALD GORMAN--CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Mr. Gorman has served as Chairman of Mail.com since founding the company in
December 1995 and as its Chief Executive Officer since February 1997. Prior to
founding Mail.com, Mr. Gorman spent 12 years in the Investment Banking Division
of Donaldson, Lufkin & Jenrette Securities Corporation where he founded and
managed the Satellite Financing Group. Mr. Gorman also held positions at General
Electric Capital Corporation from 1983 to 1985 and at Utah International from
1982 to 1983. Mr. Gorman received his Bachelor of Mechanical Engineering degree
from Melbourne University and his M.B.A. from Columbia University.
GARY MILLIN--PRESIDENT, DIRECTOR
Mr. Millin has served as President of Mail.com and as a member of its board
of directors since founding the company in December 1995. Prior to founding
Mail.com, Mr. Millin spent three years at the venture capital firm Consumer
Venture Partners (CVP) from 1991 to 1994. Mr. Millin received his B.S. in
Economics from the Wharton School and his M.B.A. from Harvard Business School,
where he was a Baker Scholar.
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LON OTREMBA--CHIEF OPERATING OFFICER, DIRECTOR
Mr. Otremba has served as Chief Operating Officer of Mail.com and as a
member of its board of directors since October 1997. Prior to joining Mail.com,
Mr. Otremba served as Executive Vice President, Network Sales at CNET from July
1994 to August 1997. Prior to joining CNET, Mr. Otremba served as Associate
Publisher of PC Magazine from 1991 to 1993. He also held positions at CMP Media
from 1987 to 1990, Lebhar-Friedman from 1982 to 1987 and Procter & Gamble from
1980 to 1981. Mr. Otremba received his B.A. in Economics from Michigan State
University.
CHARLES WALDEN--EXECUTIVE VICE PRESIDENT, TECHNOLOGY, DIRECTOR
Mr. Walden has served as Executive Vice President of Technology of Mail.com
and as a member of its board of directors since February 1998. Before joining
Mail.com, Mr. Walden worked for Dialogic Corporation from 1985 to 1997 in
several capacities, including Director of Software Development, Vice President
of Engineering and, during his last two years, as Chief Technical Officer.
Mr. Walden received his B.A. in Computer Science from the University of Texas at
Austin.
DEBRA MCCLISTER--EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Ms. McClister has served as Executive Vice President and Chief Financial
Officer of Mail.com since July 1998. Prior to joining Mail.com, Ms. McClister
held a variety of executive positions at Philips Media, and most recently served
as Chief Operating Officer of Philips Media Software from 1996 to 1997. She was
the Senior Vice President and Chief Financial Officer for Philips Media, North
America from 1995 to 1996, Corporate Vice President and Controller for Philips
Electronics, North America from 1988 to 1995 and she held various positions at
Philips Electronics from 1984 to 1988. Ms. McClister also worked in financial
management for Hitachi America from 1981 to 1984. Ms. McClister received her
B.S. in Commerce from Rider University and is a Certified Public Accountant.
DAVID AMBROSIA--EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
Mr. Ambrosia joined Mail.com as Executive Vice President and General Counsel
in May 1999. Prior to joining Mail.com, Mr. Ambrosia was engaged in the private
practice of law in the field of corporate law with an emphasis on securities
offerings and mergers and acquisitions. From January 1990 through June 1999, he
was a partner at Winthrop, Stimson, Putnam & Roberts. From September 1982 until
December 1989, he was an associate at Winthrop, Stimson, Putnam & Roberts.
Mr. Ambrosia received his B.S. from the School of Industrial and Labor Relations
at Cornell University, his M.B.A. from the Johnson Graduate School of Management
at Cornell University and his J.D. from the Cornell Law School.
WILLIAM DONALDSON--DIRECTOR
Mr. Donaldson has been a member of the board of directors of Mail.com since
April 1998. He presently serves as Senior Advisor to Donaldson, Lufkin &
Jenrette, Inc. He is Chairman for the Carnegie Endowment for International Peace
and is a director of Aetna, Inc., the Phillip Morris Companies and Bright
Horizons Family Solutions. From 1991 to 1995, he served as Chairman and Chief
Executive Officer of the New York Stock Exchange. In 1981, he founded the
private investment firm, Donaldson Enterprises, and served as its Chairman until
1990. In 1975, Mr. Donaldson was named founding Dean and Professor of Management
at the Yale Management School. In 1973, he was appointed U.S. Undersecretary of
State and subsequently served as Counsel to Vice President Nelson Rockefeller.
In 1959, he co-founded Donaldson, Lufkin & Jenrette where he served as its Chief
Financial Officer until 1973. He received his B.A. from Yale University and his
M.B.A. with distinction from the Harvard Business School.
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STEPHEN KETCHUM--DIRECTOR
Mr. Ketchum has been a member of the board of directors of Mail.com since
May 1997. Mr. Ketchum is a Senior Vice President of Donaldson, Lufkin, &
Jenrette Securities Corporation's Satellite Financing Group. Prior to joining
Donaldson, Lufkin & Jenrette Securities Corporation in 1990, Mr. Ketchum was
employed at Dean Witter Reynolds. Mr. Ketchum serves on the board of
Manufacturer's Services Limited, a contract manufacturing company based in
Boston. Mr. Ketchum received his B.A. in Finance and Marketing from New England
College and his M.B.A. from the Harvard Business School.
JACK KUEHLER--DIRECTOR
Mr. Kuehler has been a member of the board of directors of Mail.com since
April 1998. Mr. Kuehler retired in August 1993 as Vice Chairman and a director
of International Business Machines Corporation, having held various positions
since joining IBM in 1958. Prior to his appointment as Vice Chairman of IBM in
January 1993, Mr. Kuehler served as President from 1989 to 1993 and as Executive
Vice President from 1987 to 1988. Mr. Kuehler is a director of Aetna, Inc., In
Focus Systems, Inc., Olin Corporation and The Parsons Corporation. He is a
member of the National Academy of Engineering, a fellow of the Institute of
Electrical and Electronics Engineers, Inc. and a fellow of the American Academy
of Arts and Sciences.
KEY EMPLOYEES
AARON FESSLER--PRESIDENT, THE ALLEGRO GROUP, INC.
Mr. Fessler has served as President of Mail.com's Allegro subsidiary since
August 1999, when Mail.com acquired The Allegro Group, Inc. Mr. Fessler founded
Allegro in 1995 and served as its President and Chief Executive Officer prior to
the acquisition. Prior to founding Allegro, Mr. Fessler served as a network
operations manager at the HSLDA, a law firm based in Washington, D.C., where he
was responsible for software engineering and database prototype development.
JASON GOREVIC--SENIOR VICE PRESIDENT AND GENERAL MANAGER, BUSINESS AND ISP
SERVICES.
Mr. Gorevic joined Mail.com in April 1998 and has served as its Senior Vice
President and General Manager of its Business and ISP Services division since
July 1999. From April 1998 to July 1999, he served as Vice President of
Operations of Mail.com. Prior to joining Mail.com, Mr. Gorevic was the Director
of Service Strategy for Oxford Health Plans from 1993 to 1998. Mr. Gorevic
received his B.A. in International Relations from the University of
Pennsylvania.
MICHAEL AGESEN--VICE PRESIDENT, BUSINESS DEVELOPMENT.
Mr. Agesen, Vice President of Business Development of Mail.com, has been
with the company since November 1998. Prior to joining Mail.com, Mr. Agesen was
Vice President of Affiliate Development at Snap from March 1997 to November
1998. Mr. Agesen was Vice President of Licensing and Business Development at
CNET from December 1995 until March 1997. From 1992 to 1995, Mr. Agesen was
Product Marketing Manager for AT&T WorldNet and AT&T Consumer Interactive
Services. Mr. Agesen received his B.A. from the University of Virginia.
ERI GOLEMBO--VICE PRESIDENT, CONSUMER MARKETING.
Mr. Golembo, Vice President of Consumer Marketing, began as a consultant to
Mail.com in May 1999 and joined Mail.com as a full-time employee in September
1999. From 1995 to 1999, Mr. Golembo owned a consulting firm specializing in
helping advertising agencies with Internet-related opportunities. Also during
1997 and 1998, Mr. Golembo served as Senior Vice President, Interactive, for
Gillespie Advertising. Additionally, he served as President of Imager, Inc., a
children's software publishing company from 1992 to
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1995, was a partner at CMP Communication, a high tech advertising agency, from
1988 to 1992 and founded and served as Vice President of Marketing at Prodigy
Computer Centers from 1977 to 1988. Mr. Golembo received a B.Sc. in Engineering
from the University of Witwatersrand, Johannesburg and an M.B.A. from the
University of Tel Aviv.
COURTNEY NICHOLS--VICE PRESIDENT, ADVERTISING SALES.
Ms. Nichols, Vice President of Advertising Sales of Mail.com, has been with
the company since February 1998. Prior to joining Mail.com, Ms. Nichols was a
Sales Manager for CNET from January 1997 to January 1998. From 1995 to 1997, she
served as Director of Sales at Interactive Imaginations, now 24/7 Media. From
1993 to 1995, she served as a liaison to General Motors' board of directors and
worked in GM's Treasurer's Office. Ms. Nichols received her B.A. from Davidson
College.
DIRECTOR TERMS
Members of the board of directors, other than the members of the initial
board of directors, shall be elected at the annual meeting of stockholders and
shall hold office until their successor is elected and qualified or until their
earlier resignation or removal.
BOARD COMMITTEES
The compensation committee is currently composed of two outside
directors:William Donaldson and Stephen Ketchum. Under agreements with
stockholders who formerly held shares of its Class A and Class C preferred
stock, Mail.com is required to elect at least two non-management directors to
the compensation committee.
The members of the audit committee of the board of directors are Stephen
Ketchum, William Donaldson and Gary Millin. The audit committee will review, act
on and report to the board of directors with respect to various auditing and
accounting matters, including the recommendation of Mail.com's auditors, the
scope of the annual audits, fees to be paid to the auditors, the performance of
Mail.com's independent auditors and the accounting practices of Mail.com.
DIRECTOR COMPENSATION
Other than reimbursing directors for customary and reasonable expenses of
attending board of directors or committee meetings, Mail.com does not currently
compensate directors who are part of the management team. In 1997 and 1998, two
outside, non-management directors were granted options as compensation for their
serving as board members. In 1997, Mr. Donaldson and Mr. Kuehler were each
granted options to purchase 100,000 shares of Class A common stock at an
exercise price of $1.00, vesting monthly for one year, from May 1997 through May
1998. In May 1998, these two directors were each granted options to purchase
25,000 shares of Class A common stock at an exercise price of $3.50, vesting
monthly for one year, from May 1998 to May 1999. On March 1, 1999, four outside,
non-management directors were granted options for their service. Mr. Kuehler and
Mr. Donaldson were each granted options to purchase 20,000 shares of Class A
common stock at an exercise price of $5.00 per share, vesting on a monthly basis
for one year from May 1999 through May 2000. Mr. Ketchum and John Whitman, a
former director, were each granted options to purchase 10,000 shares of Class A
common stock at $5.00 per share, vesting on a monthly basis for one year from
March 1999 through March 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mail.com's compensation committee is comprised of two non-management
directors. All decisions relating to the compensation of Mail.com's executive
officers are made by the compensation committee and Gerald Gorman.
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EMPLOYMENT, SEVERANCE AND OTHER ARRANGEMENTS
Mail.com's current employment agreement with Gerald Gorman is dated
April 1, 1999. The agreement provides that Mr. Gorman is to receive a base
salary of $200,000 per year. Mr. Gorman's base salary and bonus amount are
adjustable on an annual basis at the sole discretion of the compensation
committee. Additionally, the agreement provides that after Mr. Gorman leaves the
employ of Mail.com, he will not work for a competitor during the two year period
following his employment or disclose any of its confidential information.
Mail.com's current employment agreement with Gary Millin is dated April 1,
1999. Under this agreement, Mr. Millin receives an annual base salary of
$130,000. Mr. Millin's base salary and bonus amount are adjustable in the sole
discretion of the Chief Executive Officer of Mail.com and the compensation
committee. Additionally, the agreement provides that after Mr. Millin leaves the
employ of Mail.com, he will not work for a competitor during the two year period
following his employment or disclose any of its confidential information.
Mail.com's current employment agreement with Lon Otremba is dated April 1,
1999. The agreement provides that Mr. Otremba will receive an annual base salary
of $200,000 and a bonus of up to 30% of his base salary. Under his initial
employment agreement with Mail.com, dated September 24, 1997, Mr. Otremba was
granted an initial option of acquiring 473,200 shares of its Class A common
stock, which vest quarterly over the first three years of his employment and are
exercisable at the price of $2.00 per share. The initial agreement with Mail.com
also provided for the grant of additional contingent options, which were linked
to advertising revenues that Mail.com recognized through 1998, granting
Mr. Otremba options to purchase up to 402,975 shares of its Class A common stock
at $2.00 per share. These additional options vest quarterly over three years
from the date of grant. Finally, the current agreement provides that after
Mr. Otremba leaves the employ of Mail.com, he will not work for a competitor
during the two year period following his employment or disclose any of
Mail.com's confidential information.
Mail.com's current employment agreement with Debra McClister is dated
April 1, 1999. The agreement provides that Ms. McClister will receive an annual
base salary of $180,000 which will be reviewed each year, and an annual bonus
between 15%-45% of base annual salary. Under Ms. McClister's initial employment
agreement with Mail.com, dated June 29, 1998, she was granted an option to
purchase 200,000 shares of its Class A common stock at an exercise price of
$3.50 upon the commencement of her employment. In accordance with the initial
agreement, Mail.com granted Ms. McClister an additional option to purchase
40,000 shares at an exercise price of $3.50 per share on September 14, 1998 for
achievement of a specified objective. Under the initial agreement,
Ms. McClister waived her salary until October 19, 1998 in return for receiving
options to purchase 90,000 shares of Mail.com Class A common stock, which were
granted at an exercise price of $3.50 per share and vest quarterly over
4 years. The current agreement also provides that in the event that Mail.com is
sold to a third party, Ms. McClister's options will be converted into options to
acquire the third party's stock, with an equivalent value and the same remaining
vesting period as her Mail.com options. In the event that Ms. McClister's
position at Mail.com is eliminated, replaced or taken over by the third party in
connection with an acquisition, merger or transfer of a majority interest,
Mail.com will attempt to offer Ms. McClister a comparable senior management
position with the same compensation, commuting and travel requirements. In the
event that such a position is not offered to Ms. McClister, she will be entitled
to a severance package comprised of (a) six months base salary, (b) annual bonus
pro rated for the portion of the year worked and (c) immediate vesting of 50% of
her remaining unvested options. Additionally, her current employment agreement
provides that after Ms. McClister leaves the employ of Mail.com, she will not
work for a competitor during the two year period following her employment or
disclose any confidential information.
Mail.com's employment agreement with David Ambrosia is dated May 19, 1999.
The agreement provides that Mr. Ambrosia will receive an annual base salary of
$180,000 which will be reviewed each year, and an annual bonus between 15%-30%
of base annual salary. Mr. Ambrosia was granted options to
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purchase 250,000 shares of Mail.com Class A common stock at an exercise price
equal to $7.00 per share which vest quarterly over three years. If an
acquisition, merger, consolidation or transfer of control occurs, Mr. Ambrosia
is entitled to severance and other arrangements, including rights similar to
those contained in Ms. McClister's agreement. Additionally, Mr. Ambrosia's
employment agreement provides that after he leaves the employ of Mail.com, he
will not work for a competitor during the two year period following his
employment or disclose any confidential information.
Mail.com's employment agreement with Charles Walden is dated February 4,
1999. The agreement provides that Mr. Walden will receive an annual base salary
of $160,000. In addition to his base salary, Mr. Walden is eligible for
incentive compensation, which together with his salary, are to be determined and
reviewed by the Chief Executive Officer and the compensation committee. In lieu
of cash salary and bonus in 1998, Mr. Walden received an option grant on
January 1, 1998 of 285,000 shares and a second option grant on February 16, 1998
of 395,200 shares, each granted at the fair market value of the common stock at
the date of grant. Mr. Walden's current employment agreement with Mail.com
provides that after he leaves its employ, he will not work for a competitor
during the two year period following his employment or disclose any confidential
information.
EXECUTIVE COMPENSATION
The following table presents certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to Mail.com in
all capacities during the fiscal year ended December 31, 1999, by the Chief
Executive Officer of Mail.com and each of the four other most highly compensated
executive officers whose salary and bonus exceeded $100,000 in 1999
(collectively, the "Named Executive Officers"). No executive who would otherwise
have been included in this table on the basis of salary and bonus earned for
1999 has resigned or otherwise terminated employment during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY OPTIONS(1)
- --------------------------- -------- ------------
<S> <C> <C>
Gerald Gorman ....................................... $200,000 0
Chairman and Chief Executive Officer
Gary Millin ......................................... 132,000 0
President
Lon Otremba ......................................... 200,000 0
Chief Operating Officer
Charles Walden ...................................... 142,769(2) 0
Executive Vice President, Technology
Debra McClister ..................................... 180,000 2,000
Executive Vice President and Chief Financial
Officer
</TABLE>
- ------------------------
(1) Does not include annual bonus compensation earned for the year ended
December 31, 1999 since amount has not been determined or approved by the
Compensation Committee of the board of directors.
(2) Salary did not commence until February 4, 1999.
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<PAGE>
OPTION GRANTS IN FISCAL YEAR
The following table provides certain information regarding stock options
granted to the Named Executive Officers during the year ended December 31, 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERMS(1)
---------------------------------------------------------------- ------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE MARKET
OPTIONS FISCAL YEAR PRICE PER PRICE PER EXPIRATION
NAME GRANTED(#) (%) SHARE SHARE DATE 0% 5% 10%
- ---- ----------- ------------- --------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Gorman................. 19,920 0.6% $5.00 $5.00 3/1/09 $ -- $62,549 $70,318
Gary Millin................... 20,267 0.6 5.00 5.00 3/1/09 -- 63,638 71,543
Lon Otremba................... 15,932 0.5 5.00 5.00 3/1/09 -- 50,026 56,240
Charles Walden................ -- -- -- -- -- -- -- --
Debra McClister............... 10,573 0.3 5.00 5.00 3/1/09 -- 33,199 37,323
2,000 0.1 5.00 5.00 3/18/09 -- 6,280 7,060
</TABLE>
- ------------------------------
Unless otherwise noted all options vest quarterly over four years.
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted based upon the
fair market value on the date of grant. These assumptions are not intended
to forecast future appreciation of Mail.com's stock price. The amounts
reflected in the table may not necessarily be achieved.
FISCAL YEAR-END OPTION VALUES
The following table indicates for each of the Named Executive Officers the
number and year-end value of exercisable and unexercisable options for the year
ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald Gorman................................. 482,885 63,335 $8,833,769 $1,138,706
Gary Millin................................... 495,970 72,297 8,910,713 1,273,959
Lon Otremba................................... 593,551 359,836 9,908,721 6,010,915
Charles Walden................................ 494,585 185,615 7,805,499 2,995,051
Debra McClister............................... 128,782 213,791 1,952,628 3,252,751
</TABLE>
- ------------------------
(1) All amounts reflected were determined using a December 31, 1999 price of
$18.75 per share.
EMPLOYEE BENEFIT PLANS
The board of directors of Mail.com adopted the Mail.com 1996 Stock Option
Plan on March 16, 1996, the Mail.com 1997 Stock Option Plan on May 1, 1997, the
Mail.com 1998 Stock Option Plan on October 5, 1998, and the Mail.com 1999 Stock
Option Plan on April 21, 1999, and each has been subsequently
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<PAGE>
approved by the stockholders of Mail.com. The principal provisions of the plans
are summarized below. This summary is qualified in its entirety by reference to
the provisions of each of the plans.
PURPOSE
The purpose of the plans is to grant incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and non-qualified stock
options as a means to provide an incentive to selected directors, officers,
employees and consultants to acquire a proprietary interest in Mail.com, to
continue in their positions with Mail.com and to increase their efforts on its
behalf.
ADMINISTRATION
The plans are administered by the board or a committee appointed by the
board. Under the plans, the plan administrator has the authority to, among other
things: (a) select the eligible persons to whom options will be granted,
(b) determine the size, type and the terms of each option granted, (c) adopt,
amend and rescind rules and regulations for the administration of the plans, and
(d) decide all questions and settle all controversies and disputes of general
applicability that may arise in connection with the plans.
SHARES AVAILABLE FOR ISSUANCE
A maximum of 1,000,000, 3,500,000 and 1,500,000 shares of Mail.com Class A
common stock is available for issuance under the 1996 plan, the 1997 plan and
the 1998 plan, respectively. 2,500,000 shares of Class A common stock are
available for issuance under the 1999 plan. Outstanding options under the
previous plans were incorporated into the 1999 plan at the time of the initial
public offering, and no further option grants have been or will be made under
the previous plans. The incorporated options will continue to be governed by
their existing terms, unless the plan administrator elects to extend one or more
features of the 1999 plan to those options.
The maximum number of shares underlying options granted to any individual
within a calendar year under the 1999 plan is 1,000,000. In the event of any
changes in the number or kind of outstanding shares of stock by reason of
merger, consolidation, recapitalization, reclassification, split, reverse split,
combination of shares or otherwise, the plan administrator may make equitable
adjustments to the price and other terms of any option previously granted or
which may be granted under the plans.
OPTIONS
Each option granted under the plans will be evidenced by an agreement that
states the terms and conditions of the grant. The exercise price of an option
granted under any of the plans shall not be less than 100% of the fair market
value of the stock at the time of grant (110% in the case of an incentive stock
option granted to any person who possesses more than 10% of the total combined
voting power of all classes of Mail.com's capital stock). Each option granted
under the plans will be exercisable at the times and in the amounts determined
by the plan administrator at the time of grant. In addition, the plan
administrator, in its discretion, may accelerate the exercisability of any
option outstanding under any of the plans. The exercise price of an option is
payable in cash unless otherwise approved by the plan administrator.
Options granted under the plans are not transferable except by will or the
laws of descent and distribution and are only exercisable by the grantee during
the grantee's lifetime. Each option shall terminate at the time determined by
the plan administrator provided that the term may not exceed ten years from the
date of grant (five years in the case of an incentive stock option granted to a
ten percent stockholder). However, the plan administrator may, subject to the
limitations of the plans, modify, extend or renew outstanding options granted
under the plans, or accept the surrender of outstanding unexercised options and
authorize the grant of substitute options.
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<PAGE>
AMENDMENTS AND TERMINATION
The plans will terminate on the earliest of (a) March 15, 2006 for the 1996
plan, April 23, 2007 for the 1997 plan, October 4, 2008 for the 1998 plan and
May 1, 2009 for the 1999 plan, (b) the date when all shares of stock reserved
for issuance under each plan have been acquired through the exercise of options
granted under each plan or (c) any earlier date as may be determined by
Mail.com's board of directors. Subject to limitations, Mail.com's board of
directors may amend each plan, correct any defect, supply any omission or
reconcile any inconsistency in the plans. None of these modifications shall
alter or adversely impair any rights or obligations under any option previously
granted under the plans, except with the consent of the grantee.
THE MAIL.COM, INC., ALLEGRO GROUP STOCK OPTION PLAN
In connection with Mail.com's acquisition of Allegro in August 1999, its
board of directors adopted the Mail.com, Inc., Allegro Group Stock Option Plan.
The purpose of the plan is to grant non-qualified stock options to selected
directors, officers and employees of Allegro. The plan is substantially similar
in form to the stock option plans described above. Options for all 625,000
shares of Mail.com Class A common stock available for issuance under the plan
were granted immediately after Mail.com acquired Allegro. These options have an
exercise price of $16.00 per share and vest quarterly over four years subject to
continued employment.
THE MAIL.COM, INC, TCOM STOCK OPTION PLAN
In connection with Mail.com's acquisition of TCOM, Inc. in October 1999, its
board of directors adopted the Mail.com, Inc. TCOM Stock Option Plan. The
purpose of the plan is to grant non-qualified stock options to selected
employees of TCOM. The plan is substantially similar in form to the stock option
plans described above. Options for all 459,330 shares of Mail.com Class A common
stock available for issuance under the plan were granted immediately after
Mail.com acquired TCOM. These options have an exercise price of $13.16 per share
and vest quarterly over four years subject to continued employment.
THE MAIL.COM, INC. IFAN STOCK OPTION PLAN
In connection with Mail.com's acquisition of iFan, Inc. in December 1999,
its board of directors adopted the Mail.com, Inc. iFan Stock Option Plan. The
purpose of the plan is to grant non-qualified stock options to selected
employees of iFan, Inc. The plan is substantially similar in form to the stock
option plans described above. Options for all 16,967 shares of Mail.com Class A
common stock available for issuance under the plan were granted immediately
after Mail.com acquired iFan, Inc. These options have an exercise price of
$20.07 per share and vest quarterly over four years subject to continued
employment.
THE MAIL.COM, INC., LANSOFT STOCK OPTION PLAN
In connection with Mail.com's acquisition of Lansoft U.S.A., Inc. in
December 1999, its board of directors adopted the Mail.com, Inc. Lansoft Stock
Option Plan. The purpose of the plan is to grant non-qualified stock options to
selected employees of Lansoft. The plan is substantially similar in form to the
stock option plans described above. Options for all 100,000 shares of Mail.com
Class A common stock available for issuance under the plan were granted
immediately after Mail.com acquired Lansoft. These options have an exercise
price of $17.06 per share and vest quarterly over four years subject to
continued employment.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is generally a summary of the principal United
States federal income tax consequences under current federal income tax laws
relating to grants or awards to employees under the
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<PAGE>
plans. This summary is not intended to be exhaustive and, among other things,
does not describe state, local or foreign income tax or other tax consequences.
A grantee will not recognize any taxable income upon the grant of a
non-qualified option and Mail.com will not be entitled to a tax deduction with
respect to the grant. Generally, upon exercise of a non-qualified option, the
excess of the fair market value of stock on the date of exercise over the
exercise price will be taxable as ordinary income to the grantee. If Mail.com
complies with applicable withholding requirements, it will be entitled to a tax
deduction in the same amount and at the same time as the grantee recognizes
ordinary income subject to any deduction limitation under Section 162(m) of the
Internal Revenue Code. The subsequent disposition of shares acquired upon the
exercise of a nonqualified stock option will ordinarily result in capital gain
or loss.
Subject to the discussion below, a grantee will not recognize taxable income
at the time of grant or exercise of an incentive stock option and Mail.com will
not be entitled to a tax deduction with respect to the grant or exercise.
However, the exercise of an incentive stock option may result in an alternative
minimum tax liability for the grantee.
Generally, if a grantee has held shares acquired upon the exercise of an
incentive stock option for at least one year after the date of exercise and for
at least two years after the date of grant of the incentive stock option, upon
disposition of the shares by the grantee, the difference, if any, between the
sales price of the shares and the exercise price will be treated as long-term
capital gain or loss to the grantee. Generally, upon a sale or other disposition
of shares acquired upon the exercise of an incentive stock option within one
year after the date of exercise or within two years after the date of grant of
the incentive stock option (a "disqualifying disposition"), any excess of the
fair market value of the shares at the time of exercise of the option over the
exercise price of the option will constitute ordinary income to the grantee. Any
excess of the amount realized by the holder on the disqualifying disposition
over the fair market value of the shares on the date of exercise will generally
be capital gain. Subject to any deduction limitation under Section 162(m) of the
Internal Revenue Code, Mail.com will be entitled to a deduction equal to the
amount of the ordinary income recognized by the holder.
If a non-qualified or incentive stock option is exercised through the use of
shares previously owned by the holder, this exercise generally will not be
considered a taxable disposition of the previously owned shares and thus no gain
or loss will be recognized with respect to these shares upon exercise. However,
if the option is an incentive stock option, and the previously owned shares were
acquired on the exercise of an incentive stock option and the holding period
requirement for those shares is not satisfied at the time they are used to
exercise the option, this use will constitute a disqualifying disposition of the
previously owned shares resulting in the recognition of ordinary income in the
amount described above.
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<PAGE>
CERTAIN MAIL.COM TRANSACTIONS
FOUNDER TRANSACTIONS
In March 1996, Mail.com sold a total of 10,000,000 shares of Class B common
stock at $0.10 per share for $1,000,000 to Gerald Gorman, its Chairman and Chief
Executive Officer. Concurrently, Mail.com sold an aggregate of 2,422,500 shares
of Class A common stock at $0.005 per share for $12,113. Among the purchasers
were Gerald Gorman, its Chief Executive Officer (1,092,500 shares for $5,463),
Gary Millin, its President (1,160,000 shares for $5,800) and Anthony Millin, the
brother of Gary Millin (100,000 shares for $500). Mail.com also sold an
aggregate of 100,000 shares of Class A preferred stock at $0.005 per share for
$500 to various individuals including Gary Millin (80,000 shares for $400).
Mail.com issued to Michael Gorman, the brother of Gerald Gorman, in
consideration of employment services rendered to it, options to purchase 30,000
shares of Class A common stock in 1996 at an exercise price of $.50 per share,
options to purchase 48,750 shares of Class A common stock in 1997 at an exercise
price of $1.00 per share, options to purchase 30,000 shares of Class A common
stock in 1997 at an exercise price of $2.00 per share and options to purchase
11,250 shares of Class A common stock in 1998 at an exercise price of $3.50 per
share. All of these options were granted with an exercise price equal to the
fair market value of Mail.com's Class A common stock on the date of grant.
PREFERRED FINANCINGS
Mail.com used the funds raised in each of the preferred stock financings
described below:
- to expand its business operations, including acquiring additional hardware
to satisfy increased demand;
- to hire additional personnel;
- to provide additional services; and
- for other general corporate purposes related to the expansion of its
business.
All of the outstanding shares of Class A, Class C and Class E preferred
stock automatically converted into Class A common stock upon the consummation of
Mail.com's initial public offering on a one-for-one basis before giving effect
to the settlements described below.
CLASS A PREFERRED FINANCING
On May 27, 1997 and December 17, 1997, Mail.com issued an aggregate of
3,460,000 shares of Class A preferred stock at $1.00 per share for an aggregate
amount of $3,290,000 in cash and $170,000 in the form of equity securities and
services by outside vendors. Among the purchasers were Gerald Gorman, Mail.com's
Chairman and Chief Executive Officer (400,000 shares for cash and equity
securities of InfoSpace.com valued at $400,000 in total), and William Donaldson
(100,000 shares for $100,000), Stephen Ketchum (225,000 shares for $225,000) and
Jack Kuehler (100,000 shares for $100,000), each of whom is a director of
Mail.com.
CLASS A PREFERRED STOCK ISSUANCE OBLIGATION SETTLEMENT
Prior to being amended, the Class A preferred stock purchase agreement dated
May 27, 1997, the purchase and sale agreement dated December 17, 1997 and the
purchase and sale agreement dated January 5, 1998 obligated Mail.com to issue
additional shares of Class A preferred stock to the purchasers if they were not
provided with an opportunity to dispose of shares of Class A preferred stock at
specified minimum prices.
Mail.com amended these agreements to provide that if it consummated an
initial public offering on or before July 31, 1999, then it would issue an
aggregate of 968,800 shares of Class A common stock to be
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<PAGE>
divided on a pro rata basis among the purchasers. This amendment settled in full
Mail.com's contingent obligations to issue additional shares described above.
As a result of the Class A preferred stock contingent issuance obligation
settlement, Mail.com issued 968,800 shares to the former holders of Class A
preferred stock upon the closing of its initial public offering on June 23,
1999, including the following persons who received the amounts indicated: Gerald
Gorman, Mail.com's Chairman and Chief Executive Officer (112,000 shares), and
William Donaldson (28,000 shares), Stephen Ketchum (63,000 shares) and Jack
Kuehler (28,000 shares), each of whom is a director of Mail.com.
CLASS C PREFERRED FINANCING
On July 31, 1998 and August 31, 1998, Mail.com issued an aggregate of
3,776,558 units, with each unit consisting of one share of Class C preferred
stock and detachable warrants to purchase .35 shares of Class C preferred stock
at an exercise price equal to the Class C conversion price as defined in
Mail.com's amended and restated certificate of incorporation, for a price per
unit of $3.50. The aggregate amount of this financing was $13,218,000. Among the
purchasers were John Whitman, formerly one of Mail.com's directors (7,200
shares, 2,520 warrants for $25,200), and The Whitman Children Irrevocable Trust
(7,200 shares, 2,520 warrants for $25,200). Also, CitiGrowth Fund II Offshore,
L.P. and CG Asian-American Fund, L.P., limited partnerships indirectly
controlled by entities in which Mr. Whitman holds a minority interest, purchased
1,099,200 shares and 384,720 warrants in the aggregate for a total purchase
price of $3,847,200. Mr. Whitman also has the power to vote or dispose of an
additional 311,700 shares and 109,095 warrants purchased in this financing for
$1,090,950.
CLASS C PREFERRED STOCK ISSUANCE OBLIGATION SETTLEMENT
Prior to being amended, Mail.com's amended and restated certificate of
incorporation provided for a reduction in the conversion price of the Class C
preferred stock if the holders of Class C preferred stock were not provided with
an opportunity to dispose of the Class C shares at specified minimum prices.
Mail.com amended its amended and restated certificate of incorporation to
provide that, if it consummated an initial public offering on or before
July 31, 1999, the holders of Class C preferred shares would receive a one time
reduction in the Class C conversion price from $3.50 per share to $2.80. This
amendment settled in full Mail.com's contingent obligation to issue additional
shares described above and permitted the Class C holders to receive an
additional 944,139 shares of Class A common stock upon conversion of their
preferred shares, which occurred automatically upon the closing of Mail.com's
initial public offering on June 23, 1999. Also, upon the closing of Mail.com's
initial public offering, the warrants to purchase 1,321,778 shares of Class C
preferred stock were cancelled and returned to Mail.com.
As a result of the Class C preferred stock contingent issuance obligation
settlement, Mr. Whitman and the persons or entities listed below received upon
the closing of Mail.com's initial public offering on June 23, 1999 an aggregate
issuance of 356,400 shares of Class A common stock in the amounts listed. As
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<PAGE>
indicated below, Mr. Whitman has the power to vote or dispose of these shares or
holds an interest in the entities that control the owners of these shares.
<TABLE>
<CAPTION>
SHARES OF
CLASS A
COMMON STOCK
------------
<S> <C>
John Whitman(1)............................................. 79,800
The Whitman Children Irrevocable Trust(2)................... 1,800
CitiGrowth Fund II Offshore, L.P.(3)........................ 137,400
CG Asian-American Fund, L.P.(3)............................. 137,400
-------
Total................................................... 356,400
</TABLE>
- ------------------------
(1) Includes 78,000 shares owned by other persons and over which Mr. Whitman has
the power to vote or to direct the disposition.
(2) The Whitman Children Irrevocable Trust is a trust for the benefit of
Mr. Whitman's children and Mr. Whitman has the power to vote or dispose of
these shares.
(3) Mr. Whitman holds a minority interest in the entities that control these
limited partnerships.
CLASS E PREFERRED FINANCING
On March 10, 1999, Mail.com issued an aggregate of 3,200,000 shares of
Class E preferred stock at $5.00 per share. The aggregate amount of this
financing was $16,000,000. Among the purchasers were John Whitman, one of
Mail.com's directors (3,000 shares for $15,000), and The Whitman Children
Irrevocable Trust (1,000 shares for $5,000), Gerald Gorman, Mail.com's Chairman
and Chief Executive Officer (35,000 shares for $175,000), Lon Otremba,
Mail.com's Chief Operating Officer and one of its directors (50,000 shares for
$250,000), Stephen Ketchum, one of Mail.com's directors (10,000 shares for
$50,000), and Debra McClister, Mail.com's Chief Financial Officer (40,000 shares
for $200,000). Also, CitiGrowth Fund II Offshore, L.P. and CG Asian-American
Fund, L.P., limited partnerships indirectly controlled by entities in which
Mr. Whitman holds a minority interest, purchased 76,880 shares in the aggregate
for $384,400. Mr. Whitman also has the power to vote or dispose of an additional
33,820 shares purchased in this financing for $169,100.
CLASS E PREFERRED STOCK ISSUANCE OBLIGATION SETTLEMENT
Immediately before consummation of Mail.com's initial public offering, the
Class E preferred stock conversion price was reduced based upon the amount of
additional shares of Class A common stock issuable as a result of the
settlements of Mail.com's contingent obligations to issue additional shares of
Class A and Class C preferred stock described above. An additional 166,424
shares of Class A common stock were issued upon conversion of the Class E
preferred stock as a result of this adjustment to the Class E preferred stock
conversion price. This adjustment in the conversion price constituted full
settlement of Mail.com's contingent obligations to issue additional shares to
the purchasers of its Class E preferred stock.
As a result of the Class E preferred stock contingent issuance obligation
settlement, the officers and directors of Mail.com and the other persons and
entities listed below received upon the closing of Mail.com's initial public
offering on June 23, 1999 an issuance of shares of Class A common stock in the
amounts listed. As indicated below, Mr. Whitman has the power to vote or dispose
of the shares, or has an
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<PAGE>
interest in the entities that control the owners of the shares, held by the
persons listed below other than Messrs. Gorman, Otremba and Ketchum and
Ms. McClister.
<TABLE>
<CAPTION>
SHARES OF
CLASS A
COMMON STOCK
------------
<S> <C>
Gerald Gorman............................................... 1,820
Lon Otremba................................................. 2,601
Debra McClister............................................. 2,080
Stephen Ketchum............................................. 520
John Whitman(1)............................................. 1,915
The Whitman Children Irrevocable Trust(2)................... 52
CitiGrowth Fund II Offshore, L.P.(3)........................ 1,999
CG Asian-American Fund, L.P.(3)............................. 1,999
------
Total................................................... 12,986
</TABLE>
- ------------------------
(1) Includes 1,759 shares owned by other persons and over which Mr. Whitman has
the power to vote or to direct the disposition.
(2) The Whitman Children Irrevocable Trust is a trust for the benefit of
Mr. Whitman's children and Mr. Whitman has the power to vote or dispose of
these shares.
(3) Mr. Whitman holds a minority interest in the entities that control these
limited partnerships.
AGREEMENTS WITH STOCKHOLDERS
Holders of Mail.com's Class A common stock who were formerly holders of its
Class A, Class C and Class E preferred stock and purchased their preferred stock
in the offerings described above are parties to stock purchase and investor
agreements with Mail.com and other stockholders. These agreements entitle them
to a number of rights, including the following:
- REGISTRATION RIGHTS. Mail.com has granted registration rights to holders
of its Class A common stock who were formerly holders of its Class A,
Class C and Class E preferred stock. See "Description of Mail.com Capital
Stock--Registration Rights."
- RIGHT TO NOMINATE THREE MEMBERS OF THE BOARD OF DIRECTORS. Subject to
minimum ownership levels and other conditions, holders of Mail.com's
Class A common stock who previously held its Class A, Class C and Class E
preferred stock purchased in the financings described above, voting as
separate groups, have the right to nominate one director each to
Mail.com's board of directors. In the event that these groups fail to
maintain minimum ownership levels, they will have the right to have an
observer attend all board of directors meetings in a nonvoting capacity.
Mail.com has also granted U.S. Information Technology Financing, L.P. and
the Encompass Group, Inc., holders of Class E preferred stock, the right
to jointly appoint one observer to attend all board of directors meetings
in a nonvoting capacity.
- CONTROLLING STOCKHOLDER AGREEMENT NOT TO SELL HIS SHARES OF CLASS B COMMON
STOCK. Gerald Gorman, Mail.com's controlling stockholder, has agreed not
to sell his shares of Class B common stock until the holders of Mail.com's
Class A common stock who formerly held Class A, Class C and Class E
preferred stock have had an opportunity to sell their shares of Class A
common stock at specified prices.
- RIGHT TO PARTICIPATE IN PROPOSED SALE OF STOCK BY CONTROLLING
STOCKHOLDER. Subject to exceptions, Mr. Gerald Gorman, Mail.com's
controlling stockholder, has granted the holders of Mail.com's Class A
common stock who formerly held Class A, Class C and Class E preferred
stock purchased in the financings described above the right to sell their
shares of Class A common stock along with
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<PAGE>
Mr. Gorman's shares, in any transaction in which Mr. Gorman proposes to
transfer his shares of Mail.com's stock to a third party at the same price
and upon the same terms and conditions as Mr. Gorman.
- RIGHT OF CONTROLLING STOCKHOLDER TO COMPEL SOME OF MAIL.COM'S CLASS A
COMMON STOCKHOLDERS TO SELL THEIR SHARES OF MAIL.COM'S STOCK. Mr. Gorman,
Mail.com's controlling stockholder, has the right to require the holders
of Mail.com's Class A common stock who formerly held Class A, Class C and
Class E preferred stock purchased in the financings described above to
sell their shares of Class A common stock to a third party to whom
Mr. Gorman proposes to sell his common stock at the same price as and in
the same proportion as Mr. Gorman is selling his common stock.
- RIGHTS TO INFORMATION. Mail.com may be required to provide to selected
holders of Class A common stock who formerly held shares of its Class A,
Class C or Class E preferred stock purchased in the financings described
above, audited annual financial statements and unaudited quarterly
financial statements.
AGREEMENTS WITH CNET, SNAP AND NBC MULTIMEDIA
The following summary of the material terms of Mail.com's agreements with
CNET, Snap and NBC Multimedia is qualified by reference to the actual
agreements, which Mail.com has filed as exhibits to the registration statement
of which this proxy statement/prospectus is a part.
In May of 1998, Mail.com entered into an agreement with CNET under which
Mail.com agreed to offer its email service at the CNET Web site through the
domain "email.com". Mail.com's agreement originally obligated it to issue shares
of its Class A common stock to CNET for each new emailbox established through
the CNET site, up to a maximum of four million "email.com" emailboxes. Mail.com
issued a total of 691,540 shares for emailboxes created at the CNET site through
September 30, 1999. Upon the closing of Mail.com's initial public offering,
however, Mail.com issued an aggregate of 2,368,907 shares to CNET and Snap, in
full settlement of its original contingent obligation to issue additional shares
to these partners based upon the number of emailboxes established. CNET and Snap
agreed that the 2,368,907 shares issued to them in settlement be held in escrow
and issued to each of them based on the number of emailboxes established at each
site. Of the 691,540 shares issued to CNET, 339,283 were issued out of the
escrowed shares, and of the shares issued to Snap (described below), 428,909
were issued out of the escrowed shares. There are currently 1,600,715 shares
that remain in escrow to be issued to CNET and Snap. Once four million email.com
emailboxes have been established (including those established at the Snap and
NBC Multimedia sites), Mail.com will be required to pay CNET a portion of its
profits attributable to each new emailbox established through the CNET site. If
CNET exercises its rights to terminate Mail.com's agreement, which includes the
right to terminate for its own convenience at any time after May 13, 2001,
Mail.com would be obligated to transfer the email.com domain and related member
information to CNET. If CNET terminates for convenience, they would be obligated
to pay Mail.com the greater of $5 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 Mail.com the shares that Mail.com issued to it for the
establishment of emailboxes or pay Mail.com the then fair market value of those
shares. If CNET terminates for other reasons, the amount of compensation it must
pay Mail.com varies depending on the reason for termination.
In February 1999, Mail.com entered into a similar agreement with NBC
Multimedia under which Mail.com agreed to offer its email service at their Web
sites through the email.com domain. Upon launch of Mail.com's email service in
May 1999, Mail.com became obligated to make non-refundable installment payments
totaling $200,000. In addition, Mail.com's agreement obligates it to issue
shares of its Class A common stock to NBC Multimedia. Mail.com guaranteed them a
minimum of 210,000 shares, and Mail.com was originally obligated to issue shares
for each new emailbox established through their sites, up to a maximum of
four million email.com emailboxes (including those established through the CNET
and
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Snap sites). Upon the closing of its initial public offering, Mail.com issued
210,000 shares in full settlement of its contingent original obligation to issue
additional shares based upon the number of emailboxes established at the NBC
Multimedia site. In addition, once four million email.com emailboxes have been
established (including those established through the CNET and Snap sites),
Mail.com will be required to pay NBC Multimedia a portion of its profits
attributable to each new emailbox established through their sites. If NBC
Multimedia exercises its rights to terminate Mail.com's agreement, which
includes the right to terminate for its own convenience at any time after
May 12, 2001, Mail.com would be obligated to transfer the applicable member
information to them. In return, NBC Multimedia would be obligated to compensate
Mail.com in an amount based upon their reason for termination.
NBC Multimedia and CNET commenced a joint venture to operate Snap. On
June 18, 1998, Snap became an independent party to the CNET agreement described
above and is subject to substantially the same terms and conditions. Under the
agreement, Mail.com has issued a total of 997,745 shares of Class A common stock
to Snap for emailboxes established at its site. Of such shares, 428,909 were
issued to Snap out of the 2,368,907 shares issued in the aggregate into escrow
to Snap and CNET in full settlement of Mail.com's original contingent obligation
to issue additional shares to these partners (see description of issuances to
CNET above). CNET was issued 339,283 shares out of the escrowed shares. There
are currently 1,600,715 shares that remain in escrow to be issued to CNET and
Snap.
Under Mail.com's agreement with CNET and Snap, which subsequently assigned
its rights to NBC Multimedia, Mail.com was obligated to grant warrants to
purchase its Class A common stock upon the achievement of a specified number of
emailboxes. In March 1999, Mail.com satisfied its obligations by issuing
warrants to CNET and NBC Multimedia for purchase of 990,000 and 510,000 shares,
respectively, of its Class A common stock. CNET and NBC Multimedia exercised
their warrants and deposited funds for the payment of the exercise price into
escrow prior to Mail.com's initial public offering. Upon consummation of
Mail.com's initial public offering, the shares subject to the warrants were
issued to CNET and NBC Multimedia at a price of $5.00 per share and funds
sufficient to pay the exercise price were released to Mail.com.
Under an investor's rights agreement dated March 1, 1999 by and among
Mail.com, CNET and NBC Multimedia, Mail.com has granted to CNET and NBC
Multimedia registration rights. See "Description of Capital Stock--Registration
Rights". Also under an agreement between CNET and Mail.com, Mail.com granted
CNET the right to nominate a director to its Board of Directors. CNET has since
waived its right to nominate a director.
On May 1, 1999, Mail.com entered into an agreement to settle in full the
contingent obligation to issue shares of Class A common stock to CNET, Snap and
NBC Multimedia for emailboxes established. Under this settlement, Mail.com
issued upon the closing of its initial public offering on June 23, 1999,
2,368,907 shares of its Class A common stock in the aggregate to CNET and Snap
and 210,000 shares of its Class A common stock to NBC Multimedia. CNET and Snap
have not yet agreed upon the allocation of the remaining shares. Mail.com is
still obligated to share profits with these partners as described above.
EMPLOYMENT RELATED AGREEMENTS
For information regarding the grant of stock options to executive officers
and directors, see "Mail.com's Management--Director Compensation," "--Executive
Compensation," "--Employee Benefit Plans" and "Principal Stockholders of
Mail.com."
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PRINCIPAL STOCKHOLDERS OF MAIL.COM
The following table provides information with respect to the beneficial
ownership of Mail.com's common stock as of December 31, 1999 and as adjusted to
reflect the issuance of the shares of common stock pursuant to the merger, for:
- each person who Mail.com knows beneficially owns more than 5% of its
Class A common stock;
- each of Mail.com's directors, including its Chairman and Chief Executive
Officer;
- Mail.com's four most highly compensated executive officers, other than its
Chief Executive Officer, who were serving as executive officers at the end
of 1999; and
- all of Mail.com's executive officers and directors, who were serving as
executive officers and directors at the end of 1999, as a group.
For purposes of this table, a person, entity or group is deemed to have
"beneficial ownership" of any shares of Class A common stock, including shares
subject to options, warrants or conversion rights, which the person, entity or
group has the right to acquire within 60 days after the date of this proxy
statement/ prospectus. Unless otherwise noted below, the persons and entities
named in the table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws where
applicable.
For purposes of calculating the percentage of outstanding shares or voting
power held by each person named below, any shares which that person has the
right to acquire within 60 days after the date of this proxy
statement/prospectus are deemed to be outstanding, but shares which may
similarly be acquired by other persons are deemed not to be outstanding.
The total number of shares of Class A common stock for purposes of
calculating the percentages of Class A common stock beneficially owned includes
10,000,000 shares of Class A common stock into which the 10,000,000 shares of
Class B common stock are convertible.
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The total number of votes for purposes of calculating the percentage of
total voting power includes the voting power of 10,000,000 shares of Class B
common stock owned by Gerald Gorman. Each share of Class B common stock entitles
Mr. Gorman to ten votes.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OF CLASS A CLASS A COMMON PERCENTAGE OF
COMMON STOCK BENEFICIALLY STOCK BENEFICIALLY TOTAL VOTING
OWNED OWNED POWER
---------------------------- ------------------- -------------------
BEFORE AFTER BEFORE AFTER BEFORE AFTER
NAME OF BENEFICIAL OWNER MERGER MERGER MERGER MERGER MERGER MERGER
- ------------------------ ----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gerald Gorman........................ 12,124,205(1) 12,124,205(1) 26.5% 23.4% 75.3% 72.0%
Gary Millin.......................... 1,735,970 1,735,970 3.8 3.4 1.3 1.2
Lon Otremba.......................... 796,152 796,152 1.7 1.5 * *
Charles Walden....................... 570,585 570,585 1.2 1.1 * *
Stephen Ketchum...................... 306,853 306,853 * * * *
William Donaldson.................... 268,000 268,000 * * * *
Jack Kuehler......................... 268,000 268,000 * * * *
Debra McClister...................... 170,862 170,862 * * * *
All directors and executive officers
as a group (9 persons)............. 18,193,961 18,193,961 38.0 33.8 78.5 75.2
CNET................................. 3,282,246(2) 3,282,246(2) 7.3 6.4 2.4 2.3
150 Chestnut Street
San Francisco, CA 94111
NBC Multimedia....................... 3,321,795(3) 3,321,795(3) 7.3 6.5 2.5 2.4
30 Rockefeller Plaza
New York, NY 10112
</TABLE>
- ------------------------
* Represents beneficial ownership or voting power of less than 1%.
(1) Includes 10,000,000 shares of Class A common stock issuable upon conversion,
on a one for one basis, of Class B common stock.
(2) Includes 1,600,715 shares in the aggregate issued into escrow for Snap and
CNET in full settlement of Mail.com's original contingent obligation to
issue additional shares to these partners. CNET and Snap agreed that the
shares issued into escrow in settlement shall be allocated to each of them
according to the number of emailboxes established at email.com through their
respective Web sites. Because of CNET's contingent interest in the 1,600,715
shares, CNET could be deemed to share the power to direct the voting or
disposition of and therefore to beneficially own these shares.
(3) Includes 1,001,080 shares of Class A common stock owned by Snap. Also
includes the 1,600,715 shares issued to CNET and Snap in settlement that
remain in escrow. The number of shares Snap has received to date, and will
receive going forward, out of the shares issued in settlement is based upon
the number of emailboxes established at email.com through its site. Because
of NBC Multimedia's ownership interest in Snap, NBC Multimedia could be
deemed to share the power to direct the voting or disposition of and
therefore to beneficially own the shares owned by Snap and the 1,600,715
shares. NBC Multimedia disclaims beneficial ownership of all shares owned by
Snap. NBC Multimedia is a wholly owned subsidiary of National Broadcasting
Company, Inc., which is an indirect wholly owned subsidiary of General
Electric Company. National Broadcasting Company, Inc. and General Electric
Company and other subsidiaries of General Electric Company may be deemed to
be beneficial owners of the shares deemed beneficially owned by NBC
Multimedia.
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The following table sets forth the number of shares of Class A common stock
included in the table above that are issuable upon the exercise of options
exercisable within 60 days of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OF BENEFICIAL OWNER CLASS A COMMON STOCK
- ------------------------ ---------------------
<S> <C>
Gerald Gorman............................................ 482,885
Gary Millin.............................................. 495,970
Lon Otremba.............................................. 593,551
Charles Walden........................................... 570,585
Stephen Ketchum.......................................... 9,167
William Donaldson........................................ 140,000
Jack Kuehler............................................. 140,000
Debra McClister.......................................... 128,782
</TABLE>
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MAIL.COM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS OF
MAIL.COM AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
OVERVIEW
Mail.com is a global provider of email services. Mail.com offers its email
services to both the consumer and business markets. Its basic consumer email
services are free to members. Mail.com generates the majority of its revenues
from its consumer email services, primarily from advertising related sales,
including direct marketing and e-commerce promotion. Mail.com also generates
revenues in the consumer market from subscription services, such as a service
that allows members to purchase increased storage capacity for their emails. In
November 1999, Mail.com delivered approximately 217 million page views and
approximately 672 million advertisements in its consumer email services.
Mail.com currently generates revenues in the business market primarily from
email service fees related to its email system connection services and email
monitoring services. As of December 31, 1999, Mail.com provided email services
for approximately 2,090 businesses.
Prior to 1998, Mail.com generated most of its revenues from subscription
services and trading of domain names. Mail.com collects subscriptions by
charging members' credit cards in advance, usually after a 30-day trial period.
Until this year, Mail.com offered one-year, two-year, five-year and lifetime
subscription periods. During March 1999, Mail.com increased its subscription
rates and began offering only monthly and annual subscriptions. Mail.com records
subscriptions as deferred revenues and recognize the revenues ratably over the
term of the subscription. Mail.com uses an eight-year amortization period for
lifetime subscriptions. Mail.com recognizes revenues from the sale of domain
names at the time of sale. Mail.com offers a 30-day trial period for certain
subscription services. Mail.com does not recognize any revenue during such
period. Mail.com provides pro rated refunds and chargebacks to subscription
members who elect to discontinue their service. The actual amount of refunds and
chargebacks approximated Mail.com's expectations for all periods presented. In
August 1999, in an effort to increase member sign ups and retention, Mail.com
eliminated subscription fees for most of its premium email addresses.
During 1998, Mail.com's member base became large enough to provide a
platform for advertising related sales. During the first nine months of 1999,
Mail.com generated approximately 80% of its revenues from advertising related
sales, 9% from business services and 7% from its subscription services. Mail.com
expects that advertising sales will continue to represent a majority of its
revenues before giving effect to the NetMoves acquisition. However, with its
expansion into the business market, Mail.com expects that business service
revenues will represent an increasing percentage of its revenues. Mail.com also
generated a small portion of its revenues from the sale of domain name assets
and from email service outsourcing fees paid by Web sites.
Mail.com prices 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 the entire Mail.com network. Mail.com attempts to sell all of
its available advertising space, or inventory, through a combination of
advertisements that it sells on either a "cost per thousand" or "CPM" basis, or
a "cost per action" basis. Advertising sales billed on a CPM basis require that
the advertiser pay Mail.com an agreed amount for each 1,000 advertisements
delivered. In a CPM-based advertising contract, Mail.com recognizes revenues
from advertising sales ratably as it delivers individual advertisements or
impressions. In a cost per action contract, Mail.com recognizes revenues as
members "click" or otherwise respond to the advertisement. In the case of
contracts requiring actual sales of advertised items, Mail.com may experience
delays in recognizing revenues pending receipt of data from the advertiser.
On some occasions, Mail.com has also received upfront "placement" fees from
advertising related sales to direct marketing and e-commerce promotion. These
arrangements give the customer the exclusive
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right to use Mail.com's network to promote goods or services within their
category. These exclusive arrangements generally last one year. Mail.com records
placement fees as deferred revenues and recognizes the revenues ratably over the
term of the agreement.
Mail.com has also engaged in barter transactions. Under these arrangements,
Mail.com delivers advertisements promoting a third party's goods and services in
exchange for their agreement to run advertisements promoting its Webmail
service. The number of advertisements that each party agrees to deliver, and
hence the effective CPM, may not be equal. Mail.com recognizes barter revenues
ratably as the third party's advertisements are delivered to its members.
Mail.com records cost of revenues ratably as its advertisements are delivered by
the third party. Although its revenues and related costs of revenues will be
equal at the conclusion of the barter transaction, the amounts may not be equal
in any particular quarter. Mail.com records barter revenues and expenses at the
fair market value of either the services it provides or of those it receives,
whichever is more readily determinable under the circumstances. Barter revenues
were approximately 11% of revenues for the year ended December 31, 1998 and
approximately 5% of total revenues for the nine months ended September 30, 1999
as compared to 17% for the first nine months of 1998. Commencing in 2000,
Mail.com anticipates that barter revenues will remain below 5%, although the
actual percentage may fluctuate in any given quarter.
Mail.com also provides businesses with Internet email services. This
includes Internet email system connection services, email hosting services and
email monitoring services, including virus scanning, attachment control, spam
control, legal disclaimers and real-time web-based reporting. Revenue from
business email is recognized as the services are performed. Business revenues
for the nine months ended September 30, 1999 was $569,000 as compared to none in
the prior year period.
In most of Mail.com's contracts with its partners, it provides the Webmail
service at no cost to the partner. In addition to assuming the costs to provide
service, Mail.com also pays out a percentage (generally up to 50%) of any
advertising and subscription revenues attributable to its Webmail service at the
partner's site. While most of Mail.com's partners share in advertising and
subscription revenues on a quarterly basis during the contract term, some of its
partners are compensated or have the option to be compensated based on the
number of member registrations. These contracts require Mail.com to pay an
amount in cash for each member registration or confirmed member registration at
the partner's site. In addition, under some of Mail.com's contracts it pays its
partners guaranteed minimum amounts and/or upfront or scheduled payments,
usually in the form of sponsorship or license fees. Because Mail.com expects to
retain at contract termination most of the members that establish emailboxes, it
accounts for both revenue sharing and per member costs as customer acquisition
costs. Mail.com records these costs as sales and marketing expenses as it incurs
them.
Historically, some of Mail.com's contracts have required it to issue shares
of its Class A common stock on a contingent basis. The amount of stock Mail.com
was required to issue was usually based upon the number of member registrations
during the preceding quarter or upon the achievement of performance targets.
Mail.com recorded the non-cash expense as of the date it issued the stock or as
of the date the targets were achieved, at the then fair market value of its
stock. These expenses aggregated approximately $3.0 million and $5.6 million for
the year ended December 31, 1998 and for the nine months ended September 30,
1999, respectively. Upon the closing of its initial public offering, Mail.com
issued an aggregate of 2,368,907 shares of its Class A common stock to CNET and
Snap and 210,000 shares of Class A common stock to NBC Multimedia to settle in
full its contingent obligation to issue shares to these parties.
Under an agreement with CNN, Mail.com issued shares of its Class A common
stock upon execution of the contract. Mail.com agreed to issue the shares in
anticipation of CNN's fulfillment of promotional obligations under the contract.
Mail.com capitalized as a partner advance the market value of the stock it
issued and then amortizes that amount over the length of the contract. Mail.com
recorded approximately $173,000 and $406,000 of amortization expense for this
agreement in 1998 and for the nine months ended September 30, 1999,
respectively. This amortization is included in sales and marketing expenses.
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Under Mail.com's agreement with GeoCities entered into in September 1998,
GeoCities received 1,000,000 shares of its Class A common stock upon the
commencement of the contract in consideration of the advertising, subscription
and customer acquisition opportunities. In addition to its obligation to share
revenue generated from the partnership with GeoCities, Mail.com was 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 Mail.com paid to it under the original
agreement and Mail.com will not be required to pay the remaining $1.0 million.
In addition, GeoCities returned to Mail.com the 1,000,000 shares of Class A
common stock issued to them. Mail.com has also agreed to deliver advertisements
over its network on behalf of GeoCities for the sixteen month period commencing
May 1999. The total payments by GeoCities for this advertising will be $125,000
per month or $2.0 million in the aggregate over the sixteen month period. In the
second quarter of 1999, Mail.com reversed the issuance of shares and expensed
the non-refundable fee paid to GeoCities.
In 1998, Mail.com entered into a partner agreement with CNET which was
amended shortly thereafter to include Snap, a newly formed entity. Under the
agreement, Mail.com was obligated to issue warrants for a total of 1,500,000
shares of its Class A common stock upon achievement of a member registration
target. The warrants were divided between CNET and Snap and Snap subsequently
assigned its portion to NBC Multimedia. CNET and NBC Multimedia exercised their
warrants prior to Mail.com's initial public offering, and upon the closing of
the initial public offering on June 23, 1999, $7.5 million was transferred from
an escrow account to Mail.com's account and it issued the shares of Class A
common stock to CNET and NBC Multimedia.
Under a letter agreement dated May 26, 1999, AT&T Corp. and Mail.com have
agreed to negotiate in good faith to complete definitive agreements to establish
a strategic relationship. On July 26, 1999, Mail.com entered into an interim
agreement to provide its 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 do not expect to generate significant revenues under the
July 26 interim agreement. The parties have not entered into a definitive
agreement to establish the proposed strategic relationship and no assurance can
be given that a definitive agreement will be achieved. AT&T or Mail.com may
terminate the May 26 letter agreement without further liability at any time
prior to execution and delivery of a definitive agreement. Under the letter
agreement, Mail.com issued warrants to purchase 1,000,000 shares of its Class A
common stock at $11.00 per share. AT&T may exercise the warrants at any time on
or before December 31, 2000 regardless of whether Mail.com enters into a
definitive agreement for the strategic relationship. If under a definitive
agreement relating to the proposed strategic relationship AT&T provides more
than 30,000 active emailboxes with Mail.com's outsourcing services on or before
December 31, 2000, AT&T may pay the exercise price of the warrants by exchanging
warrants in lieu of cash. AT&T may not sell or otherwise transfer to a third
party the warrants or the shares issuable upon the exercise of the warrants
until the earlier of May 26, 2004 or the date that it provides more than 30,000
active emailboxes if this date is on or before December 31, 2000.
Mail.com will incur non-cash accounting charges of approximately
$4.3 million in the aggregate as a result of the issuance of these warrants to
AT&T. Mail.com has amortized $445,000 for the nine month period ended
September 30, 1999 and will continue to amortize these charges over the term of
the interim agreement entered into with AT&T. If Mail.com does not enter into a
definitive agreement, the remaining non-cash charges will be expensed in the
fiscal quarter in which both parties have ceased negotiations for the proposed
strategic relationship. For a discussion of risks associated with Mail.com's
proposed strategic relationship with AT&T, including risks related to the
interim agreement and the warrant issuance, please see "Risk Factors--Risks
Related to the Business of the Combined Company-- Mail.com has issued warrants
to purchase 1,000,000 shares of its Class A common stock to AT&T Corp. as part
of a proposed strategic relationship with it, but Mail.com cannot assure you
that it will enter into the strategic relationship."
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On July 14, 1999, Mail.com purchased an equity interest in 3Cube, Inc. Under
the agreement, Mail.com paid $1.0 million in cash and issued 80,083 shares of
its Class A common stock in exchange for 307,444 shares of 3Cube, Inc.
convertible preferred stock which represents an equity interest of less than 20%
in 3Cube. Mail.com recorded this transaction under the cost method. This
agreement also included a technology licensing arrangement, whereby 3Cube has
agreed to integrate its Internet facsimile technology into Mail.com's email
service across its partner network.
On August 20, 1999, Mail.com acquired The Allegro Group, Inc. Pursuant to
the terms of the merger agreement, Allegro became a wholly owned subsidiary of
Mail.com. In connection with this acquisition, Mail.com paid approximately
$3.2 million in cash and issued 1,102,973 shares of its Class A common stock to
the stockholders of Allegro valued at $17.1 million. Mail.com also paid one-time
signing bonuses of $800,000 to employees of Allegro who were not stockholders of
Allegro. Mail.com is also obligated to pay additional amounts based upon
Allegro's achievement of specified revenue targets in 2000. This contingent
payment would consist of up to $3.2 million payable in cash, additional bonus
payments of up to $800,000 and up to $16.0 million payable in shares of Mail.com
Class A common stock based on the market value of the stock at the time of
payment, up to a maximum of 2,000,000 shares. This contingent payment would be
made in 2001. Mail.com also granted options to Allegro employees to purchase
approximately 625,000 shares of Mail.com Class A common stock at an exercise
price of $16.00 per share. These options vest quarterly over four years subject
to continued employment. This acquisition has been accounted for as a purchase
business combination.
The valuation of the write-off of acquired in-process technology in the
amount of $900,000 in connection with the acquisition of Allegro is based on an
independent appraisal which determined that the new versions of MailZone
technology acquired from Allegro had not been developed into the platform
required by us at the date of acquisition. As a result, Mail.com will be
required to expend significant capital expenditures to successfully integrate
and develop the new versions of the MailZone technology, for which there is
considerable risk that such technology will not be successfully developed. If
such technology is not successfully developed, there will be no alternative use
for the technology. The MailZone technology is an enabling technology for email
communications and includes message management, license, traffic and reporting
features. Mail.com's 1999 consolidated statements of operations reflect a
one-time write-off of the amount of the purchase price of Allegro allocated to
acquired in-process technology of $900,000.
On October 18, 1999, Mail.com acquired TCOM, Inc., a software technology
development firm, specializing in the design of software for the
telecommunications and computer telephony industries. The addition of TCOM will
expand Mail.com's ability to deliver Internet services that meet the demands of
its business customers.
Mail.com is not continuing the business operations of TCOM but rather made
the acquisition in order to obtain technology and development resources.
Mail.com paid $2.0 million in cash and issued 439,832 shares of its Class A
common stock valued at approximately $6.1 million.
Mail.com may be obligated to pay additional consideration to the sellers of
TCOM based upon the achievement of certain objectives over an 18-month period.
The additional consideration would consist of up to $1.0 million payable in cash
and up to $2.75 million payable in shares of Mail.com Class A common stock based
on the market value at the time of payment although the market value will be
deemed to be not less than $4.00 per share.
On December 30, 1999, Mail.com acquired Lansoft U.S.A., Inc., a provider of
email management,
e-commerce and Web hosting services to businesses, and added approximately 690
business customers. The acquisition has been accounted for as a business
combination. Mail.com issued 152,006 shares of Mail.com Class A common stock
valued at approximately $2.7 million. In addition, the board of directors
approved the Lansoft Stock Option Plan, providing for the issuance of 100,000
non-qualified stock options at an exercise price of $17.06 per share to select
employees of Lansoft. All such options were issued immediately after the
consummation of the Lansoft acquisition.
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Although Mail.com has experienced substantial growth in revenues in recent
periods, Mail.com has incurred substantial operating losses since inception and
will incur substantial losses for the foreseeable future. As of December 31,
1998 and September 30, 1999, Mail.com had an accumulated deficit of
approximately $16.1 million and $47.0 million, respectively. Mail.com intends to
invest heavily in sales and marketing and continued development and enhancements
to its computer systems and service offerings. Mail.com's 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."
Mail.com has recorded amortization of deferred compensation of approximately
$71,000 and $274,000 for the year ended December 31, 1998 and for the nine
months ended September 30, 1999, respectively, in connection with the grant of
stock options to its employees. This deferral represents the difference between
the deemed fair value of Mail.com's 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 applicable vesting
period of the applicable options which typically range from three to four years.
Amortization of deferred stock compensation is charged to sales and marketing
expense on the statement of operations. Mail.com will amortize the remaining
deferred compensation of approximately $751,000 over the remaining vesting
periods through December 2001.
Mail.com has recorded amortization of deferred compensation of approximately
$76,000 in the nine months ended September 30, 1999, in connection with the
grant of 110,150 stock options to some employees. This deferral represents the
difference between the deemed fair value of its common stock for accounting
purposes, in this case $7.00 to $11.00 per share, and the $5.00 per share
exercise price of the options at the date of grant. Mail.com will amortize the
deferred compensation over the four-year vesting period of the applicable
options.
In light of the evolving nature of its business and its limited operating
history, Mail.com believes that period-to-period comparisons of its revenues and
operating results are not meaningful and should not be relied upon as
indications of future performance. Mail.com believes that advertising sales in
traditional media, such as television and radio, generally are lower in the
first calendar quarter. Mail.com's revenues are also affected by seasonal
patterns in advertising, which would become more noticeable if revenue growth
does not continue at its recent rate. Mail.com does not believe that its
historical growth rates are indicative of future results.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES
Revenues increased approximately $6.1 million, from approximately $492,000
for the nine months ended September 30, 1998 to approximately $6.6 million for
the nine months ended September 30, 1999. The increase was due primarily to
Mail.com's commencing advertising sales in the second half of 1998. These sales
became possible because of the growth in its number of emailboxes. Mail.com's
members established approximately 2.0 million emailboxes during the third
quarter of 1999 and approximately 3.6 million emailboxes for the first nine
months of 1999. The cumulative total of emailboxes established approximates
8.2 million as of September 30, 1999. See "Risk Factors--Risks Related to the
Business of the Combined Company--Mail.com has only limited information about
its members and their usage, which may reduce Mail.com's potential revenues."
Advertising revenues increased approximately $5.1 million, from $225,000 for
the nine months ended September 30, 1998 to $5.3 million for the nine months
ended September 30, 1999. For the nine months ended September 30, 1999,
approximately 10% of Mail.com's revenue came from one advertiser. Revenues from
Mail.com's five largest advertisers accounted for approximately 36% of its
revenues for the nine months ended September 30, 1999. Barter revenues increased
$277,000, from $84,000 for the nine months ended September 30, 1998 to $361,000
for the nine months ended September 30, 1999.
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Business revenues were $569,000 for the nine months ended September 30, 1999
as compared to none for the nine months ended September 30, 1998. Mail.com's
revenues from subscriptions increased $247,000, from approximately $187,000 for
the nine months ended September 30, 1998 to approximately $434,000 for the nine
months ended September 30, 1999. Other revenue, primarily the sale of domain
names, increased $209,000, from approximately $80,000 for the nine months ended
September 30, 1998 to approximately $289,000 for the nine months ended
September 30, 1999.
In the nine months ended September 30, 1999, revenues from members acquired
through the Lycos and AltaVista Web sites accounted for approximately 11.4% of
Mail.com's revenue. Mail.com's agreement with Lycos expired on October 8, 1998,
and its agreement with AltaVista expired on September 30, 1999. As of February
1999, Mail.com stopped registering new members through the Lycos Web site, and
it stopped registering new members at the AltaVista Web site as of October 6,
1999. However, Mail.com retains the members who have previously signed up at the
Lycos site under Mail.com's domain names. Mail.com also retains all the members
registered at the AltaVista Web site. While these contracts have expired,
Mail.com expects that it will continue to serve the majority of the affected
members. See "Risk Factors--Risks Related to the Business of the Combined
Company--Several of Mail.com's most significant partner contracts have expired,
which could result in reduced advertising and subscription revenues."
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues increased $6.0 million, from approximately $1.7 million for
the nine months ended September 30, 1998 to approximately $7.7 million for the
nine months ended September 30, 1999. Cost of revenues consists primarily of
costs incurred in the delivery and support of Mail.com's email service,
including depreciation of equipment used in its computer systems, the cost of
telecommunications service, and personnel costs associated with its systems,
databases and graphics. Cost of revenues also includes costs associated with
licensing third party network software. In addition, Mail.com reports the cost
of barter trades, amortization of domain assets, and the cost of domain names
that have been sold in cost of revenues. During the first nine months of 1999,
Mail.com purchased significant amounts of capital equipment for its computer
systems to accommodate the current growth and in anticipation of the future
growth in the number of emailboxes. As a result, depreciation expense increased
significantly during this period. During the nine months ended September 30,
1998 and 1999, barter expense was $83,000 and $303,000, respectively. Also,
Mail.com substantially increased headcount during 1999. Mail.com anticipates
continuing to purchase significant amounts of hardware and software and to
continue to hire technical personnel.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased $15.0 million, from approximately
$2.1 million for the nine months ended September 30, 1998 to approximately
$17.1 million for the nine months ended September 30, 1999. The increase was due
primarily 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 is customer acquisition costs. The costs related to
customer acquisitions paid in cash were $694,000 for the nine months ended
September 30, 1998, and $1.6 million for the nine months ended September 30,
1999. The costs related to customer acquisitions through the issuance of
Mail.com Class A common stock were approximately $5.6 million for the nine
months ended September 30, 1999 and $653,000 for the nine months ended
September 30, 1998. There were no customer acquisition costs for the three
months ended September 30, 1999 through the issuance of stock due to amendments
to the CNET, Snap and NBC agreements signed during the second quarter of 1999,
which eliminated the monthly issuance of shares, but required Mail.com to issue
the remaining shares under the contract simultaneously with its initial public
offering. The associated value of these shares ($18.1 million) is being
amortized over the subsequent two year period. Mail.com recorded approximately
$2.7 million of amortization expense in
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connection with the issuance of these shares for the nine months ended
September 30, 1999. Mail.com also recorded approximately $62,000 in amortization
of partner advances of shares to CNN and warrants to AT&T for the nine months
ended September 30, 1998 and $851,000 for the nine months ended September 30,
1999. The next largest cost is advertising expenses, which reflect the launch of
Mail.com's advertising campaign to build its brand. The remainder of the costs
in this category relate to salaries and commissions for sales, marketing, and
business development personnel. Mail.com increased its sales and marketing
efforts throughout the first nine months of 1999 and expect sales and marketing
expenses to increase as it continues to invest in sales and marketing personnel,
expand its partner network and build its brand name.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $5.5 million, from
approximately $1.7 million for the nine months ended September 30, 1998 to
approximately $7.2 million for the nine months ended September 30, 1999. The
third quarter of 1999 included increased personnel and related costs, including
recruiting fees, primarily due to the increase in the number of employees,
increasing customer service coverage to 24 hours per day, 7 days per week, and
increased facilities costs. General and administrative expenses consist
primarily of compensation and other employee costs not included in other line
items, as well as overhead expenses, customer support and bad debt expense.
Mail.com expects these expenses to continue to grow as necessary to support the
growth of its business and to operate as a public company.
PRODUCT DEVELOPMENT
Product development costs increased $3.6 million, from approximately
$986,000 for the nine months ended September 30, 1998 to approximately
$4.6 million for the nine months ended September 30, 1999. The increase in
expenses was primarily due to increased staffing and consulting costs to add new
features, design new services and redesign existing services. During the nine
months ended September 30, 1999, a portion of the consulting expenses was paid
through the issuance of 55,000 shares of Mail.com Class A common stock. Product
development costs consist primarily of salaries and consulting services. To
date, Mail.com has expensed all of its product development costs as incurred.
Mail.com needs to continue to invest in product development to attain its goals,
and as a result it expects product development expenses to increase
significantly.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS AND WRITE-OFF OF
ACQUIRED IN-PROCESS TECHNOLOGY
Amortization of goodwill and other intangible assets and the write-off of
acquired in-process technology resulted from the acquisition of Allegro.
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-year period.
Purchased in-process technology was $900,000 for the nine months ended
September 30, 1999. Amortization of goodwill for the nine months ended
September 30, 1999 was $725,000 as compared to none for the prior year period.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income from Mail.com's cash
investments, gain on the sale of investments and interest expense related to its
capital lease obligations. Interest income increased $1.0 million, from
approximately $141,000 for the nine months ended September 30, 1998 to
approximately $1.1 million for the nine months ended September 30, 1999. The
increase was due to higher cash balances after Mail.com completed a private
placement of preferred stock in March 1999 and its initial public offering in
June 1999. In 1998, Mail.com realized a gain of approximately $0.4 million when
it sold shares of Lycos common stock. Mail.com received the Lycos stock as
consideration in March 1998 when Lycos exercised an option to acquire Mail.com
Class A preferred stock. Mail.com had granted Lycos the option when it entered
into a partner contract with them in October 1997. Interest expense increased
$298,000
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from approximately $57,000 for the nine months ended September 30, 1998 to
approximately $355,000 for the nine months ended September 30, 1999. The
increase was due to interest recorded on Mail.com's capital lease obligations,
as Mail.com continues to finance its computer equipment purchases.
PREFERRED STOCK DIVIDEND
On the closing of its initial public offering, Mail.com settled in full all
of its contingent obligations to issue additional shares of stock to its former
preferred stockholders by issuing 968,800, 944,139, and 166,424 shares of its
Class A common stock to stockholders who formerly held Class A, C and E
preferred shares, respectively. Simultaneously, all outstanding shares of
Mail.com preferred stock were converted on a one-for-one basis to shares of
Mail.com Class A common stock. See "Certain Mail.com Transactions."
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Mail.com's financial statements as of December 31, 1994 and 1995 and for the
period from August 1, 1994 through December 31, 1995 reflect only immaterial
transactions. These activities have been included in the 1996 financial
statements to facilitate presentation.
REVENUES
Revenues increased $1.3 million, from approximately $173,000 in 1997 to
approximately $1.5 million in 1998. The increase was primarily due to
advertising sales which Mail.com initiated in July 1998. These sales became
possible because of the growth in its number of emailboxes. Mail.com experienced
an increase of approximately 3.0 million emailboxes during 1998 to an aggregate
of approximately 4.0 million. See "Risk Factors--Risks Related to the Business
of the Combined Company--Mail.com has only limited information about its members
and their usage, which may reduce Mail.com's potential revenues." Revenues for
1998 included approximately $1.1 million of advertising revenue. Of this
revenue, approximately $461,000 was attributable to one customer, N2K/Music
Boulevard, which recently merged with CDnow, Inc. This amount included barter
revenues of approximately $162,000, representing all of Mail.com's barter
revenues for the year. Mail.com's revenues from subscriptions increased
$224,000, from approximately $61,000 in 1997 to approximately $285,000 in 1998.
Other revenue, primarily the sale of domain names, decreased $19,000, from
approximately $112,000 in 1997 to approximately $93,000 in 1998.
Mail.com launched its commercial email service in 1996 and had only $19,000
in revenues in this period. These consisted of $2,000 from subscription services
and $17,000 from the sale of domain names.
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues increased $1.8 million, from approximately $1.1 million in
1997 to approximately $2.9 million in 1998. Depreciation expense increased
significantly during the second half of the year due to increased capital
expenditures. At the same time, Mail.com substantially increased headcount in
the relevant groups in the second half of the year. Barter expense was $0 and
$233,000 in 1997 and 1998, respectively.
Cost of revenues increased $913,000, from approximately $187,000 in 1996 to
approximately $1.1 million in 1997. The increase was due primarily to increased
depreciation expense, personnel costs and amortization of domain names. There
were no barter expenses in 1996 or 1997.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased $5.8 million, from approximately
$930,000 in 1997 to approximately $6.7 million in 1998. Mail.com increased its
sales and marketing efforts in the latter part of 1997 and continued to increase
these efforts through 1998. The costs related to customer acquisitions paid
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in cash increased $1.1 million, from approximately $631,000 in 1997 to
approximately $1.7 million in 1998. The costs related to customer acquisitions
through the issuance of Mail.com Class A common stock were approximately
$3.0 million in 1998. Mail.com did not issue shares related to customer
acquisitions before 1998. Mail.com also recorded $173,000 in amortization of
partner advances in 1998. There were no partner advances before 1998.
In 1997, sales and marketing expenses increased $865,000, from approximately
$65,000 in 1996 when Mail.com started conducting business to approximately
$930,000. During 1997, Mail.com entered into several partner relationships and
began incurring customer acquisition costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $2.6 million, from
approximately $862,000 in 1997 to approximately $3.5 million in 1998. The
increase was primarily due to increases in the number of personnel and personnel
related costs, increasing customer service coverage to 24 hours per day, 7 days
per week and expansion of facilities.
General and administrative expenses increased $640,000, from approximately
$222,000 in 1996 to approximately $862,000 in 1997 as Mail.com's business
started to grow. The increase was due primarily to increases in personnel,
recruiting and consulting expenses.
PRODUCT DEVELOPMENT
Product development costs increased $1.3 million, from approximately
$296,000 in 1997 to approximately $1.6 million in 1998. The increase was due to
increased staffing, the costs of adding new features to services provided by
Mail.com, designing new services and redesigning existing services.
Product development costs increased $202,000, from approximately $94,000 in
1996 to approximately $296,000 in 1997. This increase was also due to increased
staffing and consulting expenses and depreciation.
OTHER INCOME (EXPENSE), NET
Interest income increased $241,000, from approximately $36,000 in 1997 to
approximately $277,000 in 1998. The increase was due to higher cash balances
after Mail.com completed private placements of preferred stock in May and
December of 1997 and January, July and August of 1998. In 1998, Mail.com
realized a gain of approximately $0.4 million when it sold shares of Lycos
common stock. Mail.com received the Lycos stock as consideration in March 1998
when Lycos exercised an option to acquire Mail.com Class A preferred stock.
Mail.com had granted Lycos the option when it entered into a partner contract
with them in October 1997. Interest expense of approximately $109,000 in 1998
consists of interest recorded on Mail.com's capital lease obligations.
Interest income increased $29,000, from $7,000 in 1996 to $36,000 in 1997.
The increase was due primarily to higher cash balances after Mail.com completed
private placements of preferred stock in May and December of 1997. Interest
expense on capital leases increased $33,000, from $2,000 in 1996 to $35,000 in
1997, as Mail.com continued to finance its computer equipment purchases.
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QUARTERLY RESULTS OF OPERATIONS DATA
The following table presents unaudited quarterly statements of operations
for each of the four quarters in 1998 and for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999. Mail.com has prepared this data on
substantially the same basis as the audited financial statements appearing
elsewhere in this proxy statement/prospectus. Mail.com believes this data
includes all necessary adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. You should read the quarterly
data together with the financial statements and the notes to those statements
appearing elsewhere in this proxy statement/prospectus. The results of
operations for any quarter are not necessarily indicative of the results of
operations for any future period. Mail.com expects that its quarterly revenues
may fluctuate significantly. See "Risk Factors--Risks Related to the Business of
the Combined Company--The combined company may fail to meet market expectations
because of fluctuations in its quarterly operating results, which would cause
its stock price to decline." Mail.com believes that advertising sales in
traditional media, such as television and radio, generally are lower in the
first calendar quarter. Mail.com's revenues are also affected by seasonal
patterns in advertising, which will become more noticeable if revenue growth
does not continue at its recent rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
---------- --------- -------------- ------------- ---------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 80 $ 139 $ 273 $ 1,003 $ 1,186 $ 2,057 $ 3,350
------- ------- ------- ------- ------- ------- --------
Operating expenses:
Cost of revenues.............. 352 592 801 1,146 1,478 2,043 4,199
Sales and marketing........... 273 520 1,347 4,540 3,590 3,906 9,587
General and administrative.... 275 490 965 1,752 1,365 2,634 3,208
Product development........... 218 278 490 587 1,177 1,545 1,921
Amortization of goodwill...... -- -- -- -- -- -- 725
Write-off of acquired
in-process technology....... -- -- -- -- -- -- 900
------- ------- ------- ------- ------- ------- --------
Total operating expenses.... 1,118 1,880 3,603 8,025 7,610 10,128 20,540
------- ------- ------- ------- ------- ------- --------
Loss from operations.......... (1,038) (1,741) (3,330) (7,022) (6,424) (8,071) (17,190)
Other income (expense):
Gain on sale of investment.... -- 438 -- -- -- -- --
Other income.................. 7 27 107 136 115 188 795
Interest expense.............. (13) (20) (24) (52) (99) (79) (177)
------- ------- ------- ------- ------- ------- --------
Total other income
(expense), net............ (6) 445 83 84 16 109 618
------- ------- ------- ------- ------- ------- --------
Net loss...................... $(1,044) $(1,296) $(3,247) $(6,938) $(6,408) $(7,962) $(16,572)
======= ======= ======= ======= ======= ======= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Mail.com has obtained financing through private
placements of equity securities, equipment leases, and more recently through its
initial public offering. In March 1999, Mail.com received net proceeds of
$15.2 million from the sale of Class E convertible preferred stock. In June
1999, Mail.com received net proceeds of approximately $51.1 million from its
initial public offering, concurrent share issuances to CNET and NBC Multimedia
for the exercise of their warrants to purchase Mail.com Class A common stock and
from the exercise of some employee stock options. In July 1999, Mail.com
received an additional $6.7 million when the underwriters exercised their
over-allotment option.
Net cash used in operating activities was approximately $439,000,
$1.8 million, and $4.8 million for the years ended December 31, 1996, 1997, and
1998, respectively, and $2.7 million and $8.2 million for the nine month periods
ended September 30, 1998 and 1999, respectively. Cash used in operating
activities was
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impacted by the net loss from operations, offset in part by increases in
accounts payable and accrued expenses as well as non-cash charges related to
partner agreements and vendor services, and depreciation and amortization of
fixed assets.
Net cash used in investing activities was approximately $134,000, $489,000
and $3.9 million for the years ended December 31, 1996, 1997, and 1998,
respectively, and $2.2 million and $18.8 million for the nine month periods
ended September 30, 1998 and 1999, respectively. Net cash used in investing
activities consisted primarily of purchases of computer equipment and for the
purchase of Allegro, offset in part by the proceeds received from the sale and
leaseback of computer equipment. Mail.com expects that net cash used in
investing activities will increase as it acquires significant new hardware and
software in the future.
Net cash provided by financing activities was approximately $702,000,
$3.0 million and $16.2 million during 1996, 1997 and 1998, respectively, and
$16.3 million and $72.1 million for the nine months ended September 30, 1998 and
1999, respectively. During the nine months ended September 30, 1999,
$57.9 million was received from Mail.com's initial public offering which
includes $6.7 million from the exercise of the underwriters over-allotment
option, 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.
On July 14, 1999, Mail.com purchased an equity interest of less than 20% in
3Cube, Inc., formerly B.A.K. Jina International, Inc. Under the agreement,
Mail.com paid $1.0 million in cash and issued 80,083 shares of its Class A
common stock for 307,444 shares of 3Cube, Inc.
As of September 30, 1999 Mail.com had $53.5 million of cash and cash
equivalents. Mail.com's principal commitments consist of obligations under
capital leases, domain asset purchase obligations and commitments for capital
expenditures. If Mail.com's proposed offering of convertible subordinated notes
is completed, the subordinated notes would also represent a significant
commitment. Mail.com believes that the net proceeds from the proposed offering
of convertible subordinated notes together with its existing cash and cash
equivalents and cash generated from operations will be sufficient to meet its
working capital and capital expenditure requirements for at least the next
12 months. Mail.com's operating and investing activities may require it to
obtain additional equity or debt financing. In addition, Mail.com continues to
evaluate potential acquisitions of other businesses, products, and technologies
on an ongoing basis. In order to complete these potential acquisitions, Mail.com
may need additional equity or debt financing in the future. Sales of additional
equity securities could result in additional dilution to its stockholders.
At September 30, 1999, Mail.com had established a $1.0 million letter of
credit with a bank to secure obligations under an office space lease. The letter
of credit 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 letter of credit by notifying Mail.com not less than
30 days but not more than 60 days prior to an expiry date. Mail.com is required
to maintain a $1.0 million balance on deposit with the bank in an interest
bearing account, which is included in restricted investments in the consolidated
balance sheet. Through September 30, 1999, there were no drawings under the
letter of credit.
YEAR 2000 COMPLIANCE
Mail.com estimates that its total cost to become Year 2000 compliant will
not exceed $200,000. Mail.com's Year 2000 budget constituted less than 2% of its
overall information technology budget of 1999. Its Year 2000 compliance efforts
have not had a material impact on other information technology projects.
Mail.com does not expect the financial or resource requirements necessary to
achieve compliance to have a material impact on its financial condition or
results of operations. However, necessary upgrades and replacements may not be
completed on schedule or within estimated costs or may not successfully address
Mail.com's Year 2000 compliance issues. Mail.com has not engaged any third
parties to verify the results of its assessments or its cost estimates.
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Potential Year 2000 problems may vary in significance, ranging from minor
software bugs to network failures. Mail.com's services would not be available
under its worst case scenario, potentially resulting in loss of revenues and a
decrease in the number of new members. Although Mail.com does not anticipate the
occurrence of this worst case scenario, its contingency plan includes procedures
to follow if it occurs. See "Risk Factors--Risks Related to the Business of the
Combined Company--The computer systems of the combined company, and the systems
of others that the combined company will depend on, may not operate properly
because of the Year 2000 problem."
If Mail.com's present efforts to address the Year 2000 compliance issues are
not successful, or if partners, manufacturers, suppliers and other third parties
do not successfully address these issues, its business, operating results and
financial position could be materially and adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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. Mail.com adopted SOP 98-1 in 1999 and
its effects are not significant.
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.
Mail.com has determined that it does not have any separately reportable
segments.
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. Mail.com does not expect
this statement to affect it, as Mail.com does not have any derivative
instruments or hedging activities.
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BUSINESS OF NETMOVES
GENERAL
NetMoves designs, develops and markets a variety of business-to-business
facsimile transmission services, including computer-to-fax, fax-to-fax, enhanced
fax and broadcast fax services. NetMoves has developed proprietary software
which enables its customers to specify on a call-by-call basis whether a
facsimile transmission will be delivered through NetMoves' real-time, "virtual
real-time (Internet fax)" or broadcast services. This software, coupled with
NetMoves' fax-only network of three interconnected switching nodes in the United
States and Internet-capable facsimile nodes located in nineteen countries
automatically delivers each outgoing transmission through the route that
provides the lowest cost and the highest transmission quality available on the
NetMoves network. Pre-negotiated volume-based arrangements with several
telephony common carriers, the major carrier being MCI WorldCom, and the cost
savings available for transmission through the Internet enable NetMoves to
transmit its customers' documents and images to fax machines worldwide at rates
that are below the international rates charged by long distance voice carriers.
While NetMoves generates cost savings for customers transmitting faxes to
international destinations, many NetMoves customers use its services for ease of
use and productivity improvements rather than cost savings.
NetMoves has deployed Internet-capable facsimile nodes in nineteen key
international telecommunications markets to enable it to migrate a portion of
its customer traffic off of its telephony-based network and to route it over the
Internet. This global Internet backbone, which seamlessly integrates with
NetMoves' telephony-based network, enables it to bypass long distance common
carriers for transmissions originating and terminating in countries where such
nodes have been deployed, thereby further reducing its customers' international
transmission costs. NetMoves believes that the combination of its telephony-
based network and its growing Internet-based network will enable it to emerge as
a leading supplier of comprehensive, convenient, low-cost global faxing
services.
INDUSTRY BACKGROUND
THE MARKET FOR FACSIMILE SERVICES
Technological advances over the past decade have improved the speed and
quality of facsimile transmissions and reduced the cost of fax machines to
consumers, resulting in a large and increasing worldwide installed base of fax
machines. In addition, there recently has been a rapid increase in the installed
base of fax-capable personal computers. The proliferation of fax machines and
fax capable computers, and improvements in the transmission quality of domestic
and international telephone networks, have resulted in facsimile transmission
being the preferred means of immediate business-to-business document delivery.
TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION
A facsimile message typically is transmitted by means of a telephone call
from one fax machine to another over the voice telephony network. Once a
connection has been established between the two machines, the scanned image from
the originating fax machine is electronically transmitted to the destination fax
machine. Facsimile transmissions historically have been, and substantially all
of such transmissions continue to be, implemented on a real-time continuous
connection basis using the voice telephony network as a transmission medium.
An international facsimile transmission from the United States typically is
routed as follows: (i) the sending fax machine accesses the local exchange
carrier (an "LEC"), which then routes the fax to the customer's long distance
carrier; (ii) the long distance carrier then routes the fax via its voice
telephony network to the telephone company of the destination country; and
(iii) the foreign telephone company then routes the fax to a local telephone
number to which the destination fax machine is attached. In this
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example, the long distance company will bill the customer to cover the LEC
access fee, the fee for use of its voice telephony network and the fee for the
connection between the long distance carrier's network and the foreign telephone
company, which includes the fee for delivery to the destination fax machine. The
majority of the cost for international transmissions from the United States to
destinations outside of North America is attributable to the inter-country
connection fee.
DOCUMENT DELIVERY OVER THE INTERNET
Substantially all inter-country facsimile traffic worldwide is transmitted
through voice telephony networks at rates which are largely dictated by the
inter-country connection fees. Unlike traditional public and private
telecommunications networks, which are individually managed, the Internet is a
collection of connected computer systems and networks that link millions of
public and private computers to form what is essentially the largest computer
network in the world and enables businesses, educational institutions,
government agencies and individuals to transmit data internationally without
incurring inter-country voice telephony connection fees.
Although the Internet has been used for a number of years as a medium for
the international delivery of documents from computer to computer, substantially
all facsimile traffic worldwide continues to originate and terminate on fax
machines. The ability to effectively capture the savings enabled by Internet
document delivery in the international facsimile market therefore requires the
deployment, on a global basis, of a network of Internet-capable facsimile nodes
to bridge the gap between the Internet and the fax machine.
THE NETMOVES SOLUTION
NetMoves has deployed an international network of Internet-capable facsimile
nodes in twenty countries which are designed to provide a reliable means to
deliver facsimile transmissions to fax machines worldwide at substantially
reduced costs. This global Internet backbone, which seamlessly integrates with
NetMoves' telephony-based network, enables it to bypass inter-country connection
fees for transmissions originating and terminating through such nodes.
NetMoves, through its integrated Internet and telephony network, provides a
comprehensive range of services for the global transmission of documents and
images, including computer-to-fax, fax-to-fax, enhanced fax and broadcast fax
services. In addition, to position itself in the emerging desktop-to-fax market,
NetMoves has developed several proprietary software products which enable the
transmission of documents or images created in any Windows, Macintosh or e-mail
application to be routed directly from an Internet-connected computer desktop
through the NetMoves network to fax machines worldwide.
The NetMoves solution provides substantial ease of use to the customer.
Customers may begin transmitting faxes at substantially reduced costs without
any upfront investment or complex system installation. NetMoves is quickly and
easily installed by the customer and does not require any changes in customer
business practices. Customers connect to the NetMoves network from a fax machine
by simply installing a faxSAV Connector, a small proprietary device that easily
plugs between the customer's fax machine and the wall jack, or by simply
installing NetMoves' proprietary desktop software on an Internet-connected
personal computer. NetMoves' proprietary routing algorithms then automatically
deliver each facsimile transmission, through either its telephony network or
Internet backbone in order to optimize the lowest cost and the highest
transmission quality available on the NetMoves network. Additionally, the
NetMoves solution is both modular and scalable to meet customer business needs
in that it can be easily deployed across multiple fax machines or personal
computers within an organization on an unlimited basis.
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THE NETMOVES NETWORK
OVERVIEW
TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION
In the United States, traditional international facsimile transmission
begins when the originating fax machine places a call over the local telephone
network. Because the number dialed has an international prefix, the Local
Exchange Carrier ("LEC") switches the call to the sender's long distance carrier
(typically, AT&T Corp., MCI WorldCom or Sprint Corp. The long distance carrier
("LDC") delivers the call to the corresponding long distance company (the "PTT")
in the country of destination, which in turn completes the call by providing a
connection through the local telephone network to the receiving fax machine.
Thus a real-time connection is established over the traditional telephony
networks, and the originating fax machine sends a data stream, comprising a
scanned image, to the receiving fax machine.
FACSIMILE TRANSMISSION VIA NETMOVES' NETWORK
NetMoves' services, which are targeted at businesses and professionals, are
designed to reduce the cost of sending international faxes, and to make the
process of sending faxes easier and less time-consuming. The NetMoves network
offers its customers the benefits of increased savings and convenience by
bypassing parts or all of the traditional network described above. For example,
an international fax-to-fax message delivered through NetMoves' Internet-based
network utilizes the Internet as a delivery medium, bypassing the long distance
carriers and thereby avoiding expensive inter-country connection fees. In
addition, a customer using the faxSAV for Internet suite of services accesses
the NetMoves network through its ISP rather than through the local telephone
network. NetMoves' proprietary software then either routes the call over its
telephony network or bypasses the long distance carriers and the associated
inter-country connection fees by routing the call through its Internet-based
network.
THE NETMOVES NETWORK
The NetMoves network is designed to minimize the cost of sending faxes
internationally by selecting the optimal route and carrier for each facsimile
transmission. Currently, NetMoves provides its customers with the ability to
reach fax machines worldwide via its telephony-based network. NetMoves'
telephony-based services are competitively priced and, on faxes to most
international destinations, NetMoves customers are expected to realize
substantial savings as compared to the rates charged by traditional long
distance carriers.
In addition to its telephony-based network, NetMoves has deployed an
Internet-based network which connects key telecommunications markets worldwide.
NetMoves' Internet-based network complements its telephony-based network and
provides it with the opportunity to further lower the retail price of its
customers' international facsimile transmissions while increasing its market
share. As NetMoves continues to deploy its Internet nodes internationally, it
will be able to route an increasing portion of its customers' traffic over the
Internet.
NetMoves believes that the combination of its telephony-based network and
its Internet-based network is critical to achieving its objective of emerging as
the leading provider of comprehensive low-cost global faxing solutions.
Therefore, NetMoves intends to maintain both a telephony-based and an Internet-
based network but with an increasing level of customer traffic being routed
through the Internet.
NETWORK INFRASTRUCTURE
At the core of the NetMoves network are three main switching nodes,
installed in New York, New Jersey and Washington, D.C. These switching nodes use
NetMoves' proprietary messaging software to provide the full range of its
service offerings, including real-time delivery, "virtual real-time (Internet
fax)" delivery, least cost fax routing, e-mail to fax conversion, Internet
access, broadcast delivery, customer
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registration and customer query capabilities. Each switching node employs
switch-to-host architecture and fully redundant hardware and software, and is
interconnected to the others through a private intranet utilizing T1 links. A
backup connection is also provided through separate T1 links to the Internet via
firewalls. The switching nodes are installed in secure locations and are
supported by uninterruptible power supplies with emergency power generators as
further backup. The main switching nodes are connected through the Internet to
the Internet facsimile nodes installed by NetMoves overseas, extending access to
its service in the markets where such nodes are located. Internet nodes provide
"virtual real-time" fax delivery, least-cost fax routing via the best node,
e-mail to fax conversion and broadcast delivery capabilities. NetMoves has
designed a network-wide redundancy into its nodes, such that if any particular
node fails for any reason to complete a transmission, an alternative route
through the NetMoves network will automatically be selected. In addition, in the
event of an Internet failure, the Internet nodes have a spanning (multiple
simultaneous calling) dial backup capability to connect via telephony lines to
the nearest node. This node-based and network wide redundancy is designed to
allow NetMoves to reliably provide service to its customers without
interruption. Additionally, RSA encryption is provided in each Internet node
such that each file delivered through NetMoves' Internet nodes is encrypted,
addressing security concerns of its customers. All nodes are designed for
unattended operation, provide a full range of system monitoring and control
capability and can be upgraded and maintained remotely.
SERVICES
INTERNET SUITE OF SERVICES
NetMoves Internet suite of services, introduced in stages beginning in the
first half of 1996, enables Internet-connected customers to send faxes directly
from their computer desktops, either from their e-mail package or from a Windows
or Macintosh software application, through the Internet to fax machines
worldwide via the NetMoves network. NetMoves' Web site includes a detailed
explanation of these services, installation instructions and service
registration forms. Customers are charged on a per-page basis for the Internet
suite of services and either billed monthly or in advance of usage based upon
certain credit criteria. The Internet suite of services includes the following
discrete services:
- faxLauncher enables customers to fax documents created in any Windows or
Macintosh application directly from an Internet-connected computer desktop
to fax machines worldwide. faxLauncher also supports documents scanned
through sheet-fed scanners manufactured by Visioneer, Inc., Hewlett-
Packard Co. or Compaq Computer Corporation. A new version of this
software, faxLauncher Pro, provides users with additional features
including on-line fax status checking, off-line queuing, account code
support and storage of sent faxes. faxLauncher software is provided to
customers in diskette form or it may be downloaded from NetMoves' Web
site.
- faxMailer using NetMoves' patented e-mail security technology, enables
customers to transmit messages from e-mail packages over the Internet to
the NetMoves network for delivery to fax machines worldwide. faxMailer
provides the desktop e-mail customer with the ability to reach the fax
machine of anyone not yet connected to the Internet without the necessity
of creating hard copy and manually sending a fax. Customers may register
for the faxMailer service through NetMoves' Web site.
- In the fourth quarter of 1999, NetMoves introduced a new version of its
faxMailer service that enables customers to include file attachments with
an email message. At the receiving fax machine, the email message and the
documents included as file attachments are delivered as readable fax
documents. The new service is activated by the customer through
registration of email addresses with NetMoves but does not require the
installation of any additional software or hardware at the customer
location. Customers pay an upfront fee for the service and are billed
monthly on a per page basis.
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- faxScan enables customers to send documents scanned in any TWAIN-compliant
scanner over the Internet to the NetMoves network for delivery to fax
machines worldwide. The combination of a scanner and faxScan software puts
a virtual fax machine at the desktop for the customer. faxScan software is
provided to customers in diskette form.
- Serverlink enables any fax software or applications developer the
flexibility of linking to the NetMoves Network in order to facilitate the
seamless distribution of fax documents worldwide. Use of Serverlink
results in least cost-routing and expanded availability of fax software or
applications to multiple users. Serverlink is provided to potential
partners and customers electronically.
- faxCourier which was introduced in the first quarter of 1998 enables
customers to route faxes straight to their email address. A local or
toll-free fax number in the NetMoves Network is allocated to the user. All
faxes sent to these numbers are automatically converted to a standard TIFF
file format and forwarded as attachments to email to the customer's email
address. Users can view or print their faxes using standard, freely
available TIFF viewing software.
FAXSAV
faxSAV, NetMoves' first fax-to-fax service, is a real-time fax transmission
service that is delivered through its telephony-based network. The faxSAV
service is accessed by customers through the installation of a faxSAV Connector,
a small proprietary device which is plugged between the fax machine and the
telephone jack. The faxSAV Connector, which is programmable directly from
NetMoves headquarters based on the customer's specified needs, automatically
identifies each outgoing call which the customer has pre-selected for delivery
by NetMoves and routes the call to the NetMoves network. The faxSAV Connector is
provided by NetMoves free of charge with no installation cost to the customer.
NetMoves believes that, depending on the volume and destinations of the
customer's traffic, the faxSAV service provides significant savings to customers
on fax usage costs in comparison to the international rates charged by the major
long distance carriers. faxSAV customers are charged on a per-minute basis for
the transmission time to the destination fax machine, and are billed monthly.
NetMoves also offers customized pricing plans based on the customer's volume of
traffic to individual countries.
FAXSAV ASSURED
faxSAV Assured is a "virtual real-time" enhanced delivery option available
to all faxSAV customers through the faxSAV Connector which may be selected for
all of the customer's traffic or on a call by call basis. faxSAV Assured shifts
the responsibility for repetitive completion attempts to the NetMoves network,
thereby reducing indirect costs and increasing the reliability, timeliness and
predictability of difficult facsimile deliveries. The standard faxSAV Assured
service immediately begins to attempt delivery, and makes multiple attempts for
a period of one hour. If the fax has not been successfully completed within that
time, the customer is sent a "Non-Delivery" notice. NetMoves also offers
customized faxSAV Assured services to meet customer-specific delivery schedules.
FAXSAV EZ-LIST
faxSAV EZ-List is an easy to use fax broadcast service which, from a fax
machine, utilizes the capabilities of the faxSAV Connector to capture the fax
message and the customer's list identification number in a single transmission.
During 1997, NetMoves introduced its Broadcast List Manager software product
which enables customers to manage and submit broadcast lists from their
desktops. faxSAV EZ-List enables customers to send the same fax message to
multiple recipients by transmitting a single fax message to the NetMoves network
and identifying a specific list of fax addresses previously stored in NetMoves'
customer database. faxSAV EZ-List customers are charged on a per-minute basis
for the transmission time to each destination fax machine, and are billed
monthly. NetMoves also offers customized pricing plans based on the customer's
volume of traffic to individual countries.
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FAXSAV PLUS
In the third quarter of 1996, NetMoves introduced faxSAV PLUS, a new
"virtual real-time" Internet fax service which is designed to provide reliable
delivery of facsimile transmissions at substantially reduced costs. This service
is designated as Internet fax because NetMoves utilizes a combination of its
traditional telephony-based network and its growing Internet-based network to
deliver faxSAV PLUS transmissions to fax machines worldwide. NetMoves is
currently implementing the faxSAV PLUS service with a two-tiered pricing
structure. Pricing for delivery to the key telecommunications markets that
either have Internet nodes installed or are currently targeted for Internet node
deployment is based on the economics of delivery through a planned Internet
backbone. Pricing for delivery to other destinations worldwide continues to be
based on the economics of delivery through NetMoves' telephony-based network,
which prices may or may not be reduced in the event that NetMoves deploys
Internet-capable facsimile nodes in such markets. faxSAV PLUS customers are
charged on a per-minute basis for the transmission time to the destination fax
machine, and are billed monthly.
FAXSAV CUSTOM CORPORATE SOLUTIONS
faxSAV Custom Corporate Solutions are specialized services developed by
NetMoves to meet customer needs for specific volume fax applications. NetMoves
will custom tailor a software, networking and telecommunications solution
designed to provide the customer with additional savings in time and money.
CUSTOMER SUPPORT SERVICES
NetMoves believes that customer support is important in differentiating its
facsimile delivery services from other delivery approaches. The customer support
services provided by NetMoves include installation assistance on an as-requested
basis, facilitation of international fax completion and monitoring the
performance of faxSAV Connectors. NetMoves currently provides customer support
and network/faxSAV Connector monitoring functions twenty-four hours a day, seven
days a week. NetMoves' support personnel respond to telephone inquiries and
e-mail inquiries. NetMoves also provides information about its services and new
desktop software upgrades on its Web site.
To provide immediate response to customer inquiries, NetMoves has developed
a wide area network that provides a real-time fax tracking system and allows
network operations and customer service personnel to redirect, reschedule or
repair fax transmissions that are experiencing completion difficulty. The system
accesses fax traffic information via an Oracle database that is updated from
NetMoves' three switching nodes in the United States and provides an on-line
connectivity to NetMoves' master customer database.
SALES AND MARKETING
DOMESTIC SALES AND MARKETING
NetMoves offers its services in the United States through multiple sales
channels which include a direct field sales force, an agent and dealer
distribution network, and promotional activities at trade shows and on the
NetMoves Web site. Through the first quarter of 1997, NetMoves had employed a
direct mail and direct response program supported by multiple third party
telemarketing firms. However, thereafter it changed its focus by expanding its
direct sales approach to reach larger prospective customers.
During 1995, NetMoves established a direct field sales force to address the
specialized faxing needs of major accounts and to manage and support its agent
channel. Its agent and dealer distribution network consists of organizations
which sell office equipment, office supplies and telephony services, as well as
independent marketing companies. These agents offer NetMoves services as a
companion offering to their other products lines. NetMoves has also entered into
agreements for the bundling of the Internet suite of
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services with the products of computer hardware, software and Internet services
companies although revenues from these agreements have been insignificant.
NetMoves has used computer and Internet trade shows as forums to introduce
the faxSAV for Internet suite of services to prospective customers and partners.
Its promotions have included the distribution of free software to access its
services and free faxing during a trial period and it currently offers 5 free
pages of faxes to each new subscriber that registers through its Web home page.
NetMoves has promoted its faxLauncher software on the Web since February 1996.
INTERNATIONAL ALLIANCES
In connection with the installation of Internet-capable facsimile nodes in
certain foreign countries, NetMoves has formed strategic sales and marketing
alliances with local Internet service providers, telecommunications companies
and resellers. NetMoves anticipates that these organizations will use their
knowledge of the local market, language, customs and regulations, as well as
their existing distribution, customer support and billing infrastructures, to
establish, grow and properly service an international NetMoves customer base. In
return, NetMoves is offering these organizations either exclusive or
non-exclusive rights to market its services in their territories and offering to
provide such services at a discount to its retail prices.
In addition to the strategic alliances, NetMoves has developed a network of
commission-based agents to sell the faxSAV for Internet suite of services in
foreign markets. To date, this network consists of over 200 agents representing
NetMoves in over 70 foreign markets. NetMoves has also implemented a reseller
program for those agents who have the infrastructure to generate invoices and
perform collections. Under this program, participating agents are provided
detailed billing information on their accounts from which they can create and
distribute invoices in the local language and currency, and locally service
customer billing inquiries.
CUSTOMERS
NetMoves sells its services primarily to businesses throughout the world.
Customers can install NetMoves' services at individual fax machine or desktop
locations, across departments or throughout organizations by simply plugging the
faxSAV Connector, a small proprietary device, between their fax machine and the
telephone jack or by simply installing NetMoves' desktop software on an Internet
connected personal computer. Through 1995, all of NetMoves' customers were
located in the United States. In 1996, with the introduction of the faxSAV for
Internet suite of services, NetMoves began to expand its customer base to
include foreign desktop customers. In the first quarter of 1997, it began
offering fax-to-fax services through its international marketing alliances in
certain countries where an Internet node was installed. In 1997, revenues from
these international customers amounted to $2.3 million or 13.2% of total
revenues, and in 1998, revenues from these international customers amounted to
$5.9 million or 27.9% of total revenues.
COMPETITION
The market for facsimile transmission services is intensely competitive and
there are limited barriers to entry. NetMoves expects that competition will
intensify in the future. NetMoves believes that its ability to compete
successfully will depend upon a number of factors, including market presence;
the capacity, reliability and security of its network infrastructure; the
pricing policies of its competitors and suppliers; the timing of introductions
of new services and service enhancements by it and its competitors; and industry
and general economic trends. A key element of NetMoves' strategy is to expand
its market presence by leveraging its price leadership strategy both
domestically and internationally. NetMoves intends to maintain and improve the
capacity, reliability and security of its network infrastructure through
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continued research and development activities and will continue to place
significant emphasis on the ongoing development of new services and applications
of its existing services.
NetMoves' current and prospective competitors generally fall into the
following groups: (i) telecommunication companies, such as AT&T, MCI WorldCom,
Sprint, the regional Bell operating companies and telecommunications resellers,
(ii) Internet service providers, such as UUnet and NETCOM On-Line Communications
Services, Inc.; (iii) on-line services providers, such as Microsoft and America
Online and (iv) direct fax delivery competitors, including Premiere Document
Distribution (formerly Xpedite Systems, Inc.) and IDT Corporation. Many of these
competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to NetMoves. As a result, they may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services than
can NetMoves. Further, the foundation of NetMoves' telephony network
infrastructure consists of the right to use the telecommunications lines of
several of the above-mentioned long distance carriers, including MCI WorldCom.
There can be no assurance that these companies will not discontinue or otherwise
alter their relationships with NetMoves in a manner that would have a material
adverse effect upon its business, financial condition and results of operations.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their services to address the needs of NetMoves' current and
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. In addition to direct competitors, many of NetMoves' larger potential
customers may seek to internally fulfill their fax communication needs through
the deployment of their own computerized fax communications systems or network
infrastructures for intra-company faxing.
INTELLECTUAL PROPERTY
NetMoves' success is dependent upon its proprietary technology. NetMoves
relies primarily on a combination of contract, copyright and trademark law,
trade secrets, confidentiality agreements and contractual provisions to protect
its proprietary rights. It has been granted patents related to its faxSAV
Connector and for its "e-mail Stamps" security technology incorporated into its
faxMailer service. There can be no assurance that the present or future patents
will provide sufficient protection to NetMoves' present or future technologies,
products and processes. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information or
obtain access to the NetMoves' know-how. Despite Netmoves' efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of its
services or to obtain and use information that it regards as proprietary. In
addition, the laws of some foreign countries do not protect NetMoves'
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the steps taken by NetMoves to protect its proprietary
rights will be adequate or that its competitors will not independently develop
technologies that are substantially equivalent or superior to its technologies.
Effective September 22, 1998, NetMoves settled all outstanding litigation
with AudioFAX IP, L.L.P. ("AudioFAX") to avoid the expense and disruption of
protracted litigation. In 1997, NetMoves had filed a lawsuit against AudioFAX
seeking declaratory relief that its services did not infringe on any valid
claims in certain AudioFAX's patents relating to store-and-forward technology or
that certain claims of the AudioFAX patents were not valid. Immediately after
the filing of NetMoves' complaint, AudioFAX filed a lawsuit against NetMoves
alleging patent infringement. The terms of the settlement agreement required
NetMoves to issue 275,000 shares of common stock to AudioFAX and to register
such shares for resale in exchange for a fully paid-up license to the patents in
the dispute. Although under certain circumstances NetMoves would have been
required to issue additional shares or pay a certain amount of cash to AudioFAX,
these requirements are no longer applicable. NetMoves has recorded a charge of
$1,025,000 in
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1998 representing all costs associated with the settlement. No costs have been
capitalized, as NetMoves could not determine the future economic benefit, if
any, to it of the patent licenses acquired.
There can be no assurance that other third parties will not assert
infringement claims against NetMoves in the future. Patents have been granted
recently on fundamental technologies in the communications and desktop software
areas, and patents may be issued which relate to fundamental technologies
incorporated in NetMoves' services. As patent applications in the United States
are not publicly disclosed until the patent is issued, applications may have
been filed which, if issued as patents, could relate to NetMoves' services.
NetMoves could incur substantial costs and diversion of management resources
with respect to the defense of any claims that it has infringed upon the
proprietary right of others, which costs and diversion could have a material
adverse effect on its business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which could
effectively block NetMoves' ability to license and sell its services in the
United States or abroad. Any such judgment could have a material adverse effect
on its business, financial condition and results of operations. In the event a
claim relating to proprietary technology or information is asserted against
NetMoves, it may seek licenses to such intellectual property. There can be no
assurance, however, that licenses could be obtained on terms acceptable to
NetMoves, or at all. The failure to obtain any necessary licenses or other
rights could have a material adverse effect on its business, financial condition
and results of operations.
GOVERNMENT REGULATION
NetMoves is subject to regulation by various state public service and public
utility commissions and by various international regulatory authorities.
NetMoves is licensed by the FCC as an authorized telecommunications company and
is 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 NetMoves and to change its regulatory
classification. There can be no assurance that the FCC will not change its
regulatory classification or otherwise subject NetMoves 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, NetMoves will face increased competition for its international
fax services which may have a material adverse effect on its business, financial
condition or results in operations.
In connection with the deployment of Internet-capable nodes in countries
throughout the world, NetMoves is required to satisfy a variety of foreign
regulatory requirements. It intends 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 NetMoves 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 it 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.
NetMoves' nodes and its 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. NetMoves has 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
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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
NetMoves' ability to distribute its services outside of the United States or
electronically. While NetMoves takes precautions against unlawful exportation of
its software, the global nature of the Internet makes it virtually impossible to
effectively control the distribution of its 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 NetMoves' services, or new legislation or regulation could have a
material adverse effect on its business, financial condition and results of
operations.
NETMOVES EMPLOYEES
As of December 31, 1999, NetMoves had 150 full-time employees, including 17
in research and development, 54 in network operations and support, 62 in sales
and marketing and 17 in finance and administration. Its employees are not
covered by any collective bargaining agreements. NetMoves believes that its
relations with its employees are good.
FACILITIES
NetMoves' corporate headquarters are located in Edison, New Jersey in
facilities consisting of approximately 18,900 square feet of office space
occupied under two leases expiring in May 2002 and August 2004. Its three U.S.
Network facilities are co-located in telehousing facilities under short term
leases. In addition, NetMoves leases offices for its sales staff in the Chicago,
Dallas, Ft. Lauderdale, Los Angeles, New York and San Francisco metropolitan
areas. While it believes that these facilities are adequate for its present
needs, it is continually reviewing its needs and may add facilities in the
future. NetMoves believes that any required additional space would be available
on commercially reasonable terms. Finally, in connection with its deployment of
Internet-capable facsimile nodes, NetMoves has entered into, and will continue
to enter into, short-term leases in telehousing facilities worldwide.
LEGAL PROCEEDINGS
Effective September 22, 1998, NetMoves settled all outstanding litigation
with AudioFAX IP, L.L.P. ("AudioFAX") to avoid the expense and disruption of
protracted litigation. In 1997, NetMoves had filed a lawsuit against AudioFAX
seeking declaratory relief that its services did not infringe on any valid
claims in certain AudioFAX's patents relating to store-and-forward technology or
that certain claims of the AudioFAX patents are not valid. Immediately after the
filing of its complaint, AudioFAX filed a lawsuit against NetMoves alleging
patent infringement. The terms of the settlement agreement required NetMoves to
issue 275,000 shares of common stock to AudioFAX and to register such shares for
resale in exchange for a fully paid-up license to the patents in the dispute.
Although under certain circumstances NetMoves would have been required to issue
additional shares or pay a certain amount of cash to AudioFAX, these
requirements are no longer applicable. NetMoves has recorded a charge of
$1,025,000 in 1998 representing all costs associated with the settlement. No
costs have been capitalized, as NetMoves could not determine the future economic
benefit, if any, to it of the patent licenses acquired.
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NETMOVES' MANAGEMENT
The following table identifies the executive officers and directors of
NetMoves on December 31 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Thomas F. Murawski........................ 54 Chief Executive Officer, President and
Chairman of the Board of Directors
William Fallon............................ 38 Vice President, Marketing
George Frylinck........................... 52 Vice President, International Marketing
and Business Development
Charles J. Gigas.......................... 54 Vice President, Operations
James C. Kaufeld.......................... 49 Vice President, Engineering
Peter S. Macaluso......................... 53 Vice President and Chief Financial Officer
Thomas C. Mullaney........................ 54 Vice President, Sales
Peter A. Howley........................... 59 Director
Robert Labant............................. 53 Director
Richard H. Miller......................... 50 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
THOMAS F. MURAWSKI--CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD
OF DIRECTORS
Mr. Murawski joined NetMoves in November 1991, after serving as Executive
Vice President of Western Union Corporation, a global telecommunications and
financial services company, where he was President of its Network Services
Group. Prior to joining Western Union Corporation, Mr. Murawski served
twenty-three years with ITT Corporation, a diversified manufacturing and
services company. He has held operating responsibilities in the areas of
subsidiary and product line management, engineering, sales and marketing for
both voice and data-oriented businesses. Mr. Murawski's last position with ITT
Corporation was President and General Manager of ITT World Communications Inc.,
an international telecommunications services company.
WILLIAM FALLON--VICE PRESIDENT, MARKETING
Mr. Fallon joined NetMoves in March 1998. From July 1996 until he joined
NetMoves, he was Director of Business Development and then Vice President of
Operations for Audible, Inc., a start-up Internet commerce company. Prior to
joining Audible, Inc., from 1986 to July 1996, Mr. Fallon held a variety of
senior marketing and product management positions at AT&T Corporation, primarily
in the development of its messaging and online/Internet businesses. His two most
recent positions at AT&T were as Director of its HomePlace Messaging Services
Group, a network-based unified messaging service, and Director of PersonaLink
Services, an advanced electronic messaging service.
GEORGE FRYLINCK--VICE PRESIDENT, INTERNATIONAL MARKETING AND BUSINESS
DEVELOPMENT
Mr. Frylinck joined NetMoves in November 1992. From November 1990 until
Mr. Frylinck joined NetMoves, he acted as an independent consultant to various
telecommunications industry clients. From 1988 to November 1990, he was Senior
Vice President of Marketing, Sales and International Operations, at World
Communications Inc., a communications services company that was a subsidiary of
the Swiss-based TeleColumbus Incorporated. Prior to his experience at World
Communications Inc., Mr. Frylinck was the Vice President responsible for
establishing and directing marketing and sales functions for International
Private Line Services at Western Union Corporation and served at ITT
Corporation, where he held such key management positions as Director of Product
Management, International Leased Lines with ITT Corporation.
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CHARLES J. GIGAS--VICE PRESIDENT, OPERATIONS
Mr. Gigas joined NetMoves in September 1998. From 1987 until September 1998
he was president and chief executive officer of ConverSys, Inc., a consulting
company founded by Mr. Gigas, that specialized in technology, process and
organizational consulting in systems and network management. He previously held
a number of positions during a ten year career at AT&T Bell Laboratories.
JAMES C. KAUFELD--VICE PRESIDENT, ENGINEERING
Mr. Kaufeld joined NetMoves in April 1993 and has over twenty years
experience in the design, development and management of telecommunications
systems. From January 1989 to April 1993, Mr. Kaufeld was General manager and
Regional Vice President of IEX, a telecommunications consulting firm, with
responsibility for sales and product management for the carrier market. Prior to
January 1989, Mr. Kaufeld worked at AT&T Bell Laboratories, where he held a
variety of management positions and assignments ranging from research into
multi-processor operating systems, to the design and development of interactive
systems for real-time control of AT&T's long distance network.
PETER S. MACALUSO--VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Mr. Macaluso has been employed by NetMoves since February 1991. From August
1989 to February 1991, he was Vice President of Operations for Century Cellular
Corp., a cellular subsidiary of Cellular Communications Inc., a cable television
services and cellular phone company. He was employed by Metro Mobile CTS Inc.,
an independent cellular telephone company, from May 1985 to December 1988, where
his position was Chief Financial Officer. Mr. Macaluso is a certified public
accountant and, prior to his employment at Metro Mobile CTS Inc., he was
employed by Coopers & Lybrand, an international accounting and management
consulting firm. His last position with Coopers & Lybrand was as an Audit
Manager.
THOMAS C. MULLANEY--VICE PRESIDENT, SALES
Mr. Mullaney joined NetMoves in June 1994 after serving from February 1994
to June 1994 as the Chief Operating Officer of Athena Design, Inc., a start-up
software company. From January 1991 through February 1994, Mr. Mullaney was
self-employed as a marketing consultant to telecommunications companies. Prior
to working as a consultant, Mr. Mullaney served eighteen years at MCI, a
diversified telecommunications services company. He served MCI as Regional Vice
President of Sales and Operations, Vice President of National Sales and Customer
Service, Division Vice President Sales and Marketing, as well as Vice President
of Carrier and Special Account Sales.
PETER A. HOWLEY--DIRECTOR
Mr. Howley has been a director of NetMoves since January 1992. Mr. Howley is
the Chief Executive Officer of IPWireless, Inc., a startup company formed in
April 1999 in the data, internet and voice telecommunications industry.
Mr. Howley has been a private investor since May 1994. From August 1985 until
May 1994, Mr. Howley served as President, Chief Executive Officer, and Chairman
of the board of directors of Centex Telemanagement, Inc., a telecommunications
management services company. Mr. Howley currently serves as a director of
Worldport Communications, Inc., and Exodus Communications, Inc.
ROBERT LABANT--DIRECTOR
Mr. Labant has been a director of NetMoves since June 1996. Since July 1996,
Mr. Labant has served as President and Chief Operating Officer of Candle
Software Services Corporation, a systems management software company. From
February 1995 until July 1996, Mr. Labant worked as a self-employed independent
consultant to software companies. For twenty-eight years, until February 1995,
Mr. Labant served in
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<PAGE>
various capacities at International Business Machines Corp. ("IBM").
Mr. Labant's last position at IBM was as Senior Vice President and General
Manager of North American Operations, and previously he served as Vice President
and General Manager of the AS 400 Product Manufacturing and Development
Division. Mr. Labant also serves on the board of directors of Arkwright
Insurance, a mutual insurance company, and on the Board of Overseers of the Amos
Tuck School of Business at Dartmouth College.
RICHARD H. MILLER--DIRECTOR
Mr. Miller has been a director of NetMoves since February 1, 1999.
Mr. Miller is currently the Chief Executive Officer of Telematica, Inc., a
consulting firm specializing in commercial and technical strategies for the data
communications and networked applications industry that he founded in 1981 and
re-established in March 1994. From 1991 until March 1994, Mr. Miller served as
Executive Vice President at General Magic, Inc., a provider of
computer-Internet-telephony integration solutions for the mobile user community.
Prior to joining General Magic, Inc., Mr. Miller served as Chief Executive
Officer of Rapport Communication, Inc., a consulting firm specializing in
technology strategies in the areas of e-mail, groupware, directory services and
electronic commerce.
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation paid by
NetMoves during 1999, 1998 and 1997 to its Chief Executive Officer and the four
other most highly compensated executive officers of NetMoves whose total
compensation during 1999 exceeded $100,000 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
FISCAL AWARDS SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS(1)
- --------------------------- -------- -------- -------- ----------------------
<S> <C> <C> <C> <C>
Thomas F. Murawski .......................... 1999 $223,776 $150,000 50,000
President and Chief Executive Officer 1998 224,046 56,800 100,000
1997 199,142 40,000 125,000
Charles J. Gigas ............................ 1999 $154,920 $ 25,000 20,000
Vice President, Operations 1998 47,030 -- 110,000
1997 -- --
James C. Kaufeld ............................ 1999 $168,440 $ 25,000 25,000
Vice President, Engineering 1998 158,470 19,880 35,000
1997 148,512 10,000 25,000
Peter S. Macaluso ........................... 1999 $144,400 $ 30,000 35,000
Vice President and Chief Financial Officer 1998 134,410 19,880 35,000
1997 119,424 18,500 25,000
Thomas C. Mullaney .......................... 1999 $158,440 $ 10,000 10,000
Vice President, Sales 1998 148,470 25,000 25,000
1997 148,512 -- --
</TABLE>
- ------------------------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted as the aggregate amount of such perquisites and other
personal benefits constituted the lesser of $50,000 or 10% of the total
annual salary and bonus of the Named Executive Officer for such year.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding stock options
granted to the Named Executive Officers during the year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICES APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(1) SHARE DATE 5% 10%
- ---- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Murawski............. 50,000 7.9% $4.31 12/06/09 $196,855 $441,106
Charles J. Gigas............... 20,000 3.2% 4.31 12/06/09 78,742 176,442
James C. Kaufeld............... 25,000 4.0% 4.31 12/06/09 98,427 220,553
Peter S. Macaluso.............. 35,000 5.6% 4.31 12/06/09 137,798 308,774
Thomas C. Mullaney............. 10,000 1.6% 4.31 12/06/09 39,371 88,221
</TABLE>
- ------------------------
(1) Based on a aggregate of 629,000 options granted to employees in fiscal 1999,
including options granted to the Named Executive Officers.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options at the end of the ten-year option term. The assumed 5%
and 10% rates of stock appreciation are mandated by rules of the Securities
and Exchange Commission and do not represent NetMoves' estimate of the
future market price of the common stock from the date of grant to the
current date.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table indicates for each of the Named Executive Officers the
number and value of exercisable and unexercisable options as of December 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END (#) FISCAL YEAR-END(1)
ACQUIRED VALUE ----------------------------- ------------------------------
NAME ON EXERCISE REALIZED EXERCISEABLE UNEXERCISEABLE EXCERCISEABLE UNEXERCISEABLE
- ---- ----------- -------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Murawski...... -- -- 464,263 233,848 $2,866,858 $921,138
Charles J. Gigas........ -- -- 27,500 102,500 113,437 394,112
James C. Kaufeld........ -- -- 98,552 66,558 566,888 254,007
Peter S. Macaluso....... -- -- 100,999 78,002 598,594 288,684
Thomas C. Mullaney...... 7,500 $56,400 140,768 37,010 906,691 160,164
</TABLE>
- ------------------------
(1) Amounts calculated by subtracting the exercise price of the options from the
market value of the underlying common stock using the closing selling price
on the Nasdaq National Market of $7.00 per share of common stock on
December 31, 1999.
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<PAGE>
CERTAIN NETMOVES TRANSACTIONS
STOCK OPTIONS
In 1999, NetMoves granted executive officers and directors a total of
198,888 stock options with exercise prices ranging from $4.31 per share to $5.38
per share.
EMPLOYMENT SEVERANCE AGREEMENTS
NetMoves does not presently have any employment contracts in effect with the
Chief Executive Officer or any of the other Named Executive Officers.
The Compensation Committee, as Plan Administrator of NetMoves' 1996 Stock
Option/Stock Issuance Plan, will have the authority to provide for the
accelerated vesting of the shares of common stock subject to outstanding options
held by the Chief Executive Officer and any other executive officer or the
shares of common stock subject to direct issuances held by such individual(s),
in connection with certain changes in control of NetMoves or the subsequent
termination of such officer's employment following the change in control event.
Each of NetMoves' directors and officers, with the exception of Mr. Labant,
is party to an agreement with NetMoves providing for the acceleration of the
vesting of options to purchase common stock held by such director and officer in
the event of the Involuntary Removal or Dismissal (as defined in such
agreements) of such director or officer in connection with an Acquisition (as
defined in such agreements) of NetMoves. Such agreements may have the effect of
delaying or preventing a change in control of NetMoves, and therefore, could
adversely affect the price of NetMoves' common stock. NetMoves has also agreed
to pay Mr. Murawski $12,500 per month, plus all benefits, for up to three months
after the termination of his employment without cause.
Each of NetMoves' officers is party to an agreement with NetMoves providing
for certain payments in the event of an Involuntary Termination (as defined in
such agreements) in connection with a Change in Control (as defined in such
agreements). Mr. Murawski's agreement provides for the payment of an amount
equal to eighteen months base salary. Mr. Macaluso's agreement provides for the
payment of an amount equal to twelve months base salary. The remaining officers
have agreements providing for the payment of an amount equal to six months base
salary.
These arrangements have been modified pursuant to the merger agreement.
Please see "The Merger--Interests of NetMoves' Officers and Directors in the
Merger."
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<PAGE>
PRINCIPAL STOCKHOLDERS OF NETMOVES
The following table provides information with respect to the beneficial
ownership of NetMoves' common stock as of December 31, 1999 for:
(i) each person (or group of affiliated persons) who NetMoves knows
beneficially owns more than 5% of the outstanding shares of NetMoves common
stock;
(ii) each NetMoves director;
(iii) the executive officers named in the Summary Compensation Table of
the Management section of this proxy statement/prospectus; and
(iv) all of NetMoves' current directors and executive officers as a
group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OUTSTANDING (1) OWNED(1) SHARES
- ---------------------------------------- ------------------- -------------
<S> <C> <C>
Brookhaven Capital Management Co. Ltd. ..................... 4,638,810 26.4%
3000 Sand Hill Road, Bldg. 3,
Suite 105
Menlo Park, California 94025
Thomas F. Murawski (2)...................................... 538,370 3.1%
Peter A. Howley (3)......................................... 255,130 1.5%
Robert Labant (4)........................................... 45,444 *
Richard H. Miller (5)....................................... 15,445 *
Charles J. Gigas (6)........................................ 31,167 *
James C. Kaufeld (7)........................................ 103,716 *
Peter S. Macaluso (8)....................................... 109,604 *
Thomas C. Mullaney (9)...................................... 156,379 *
All current directors and executive officers as a group
(10 persons) (10)......................................... 1,405,292 8.0%
</TABLE>
- ------------------------
* Less than one percent.
(1) Gives effect to the shares of common stock issuable within 60 days of
December 31, 1999 upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that date. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting and investment power with respect
to shares.
(2) Includes 482,815 shares of common stock issuable upon the exercise of stock
options and 1,000 shares of common stock held by Mr. Murawski's son.
Mr. Murawski disclaims beneficial ownership of the shares held by his son.
(3) Includes 47,777 shares of common stock issuable upon the exercise of stock
options.
(4) Includes 14,444 shares of common stock issuable upon the exercise of stock
options.
(5) Includes 4,445 shares of common stock issuable upon the exercise of stock
options.
(6) Consists of 31,167 shares of common stock issuable upon the exercise of
stock options.
(7) Includes 101,516 shares of common stock issuable upon the exercise of stock
options.
(8) Includes 104,604 shares of common stock issuable upon the exercise of stock
options.
(9) Includes 145,379 shares of common stock issuable upon the exercise of stock
options.
(10) See Notes (2) through (9).
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<PAGE>
NETMOVES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS OF
NETMOVES AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
OVERVIEW
NetMoves designs, develops and markets a variety of business-to-business
Internet messaging solutions, including computer-to-fax, fax-to-fax,
fax-to-email, enhanced fax and broadcast fax services. It has developed
proprietary software which enables its customers to specify whether a fax
transmission will be delivered through NetMoves' real-time, "virtual real-time
(Internet Fax)" or broadcast services. This software, coupled with NetMoves'
fax-only network of three interconnected switching nodes in the United States
and Internet-capable fax nodes located in nineteen countries as of
September 30, 1999, automatically delivers each outgoing transmission through
the route that provides the lowest cost and the highest transmission quality
available on the NetMoves network. Pre-negotiated volume-based arrangements with
several telephony common carriers, the major carrier being MCI WorldCom, and the
cost savings available for transmission through the Internet enable NetMoves to
transmit its customers' documents and images to fax machines worldwide at rates
that are below the international rates charged by long distance voice carriers.
While NetMoves generates cost savings for customers transmitting faxes to
international destinations, many NetMoves customers use its services for ease of
use and productivity improvements, rather than cost savings.
NetMoves has deployed Internet-capable fax nodes in nineteen key
international telecommunications markets to enable it to migrate a portion of
its customer traffic off of its telephony-based network and to route it over the
Internet. This global Internet backbone, which seamlessly integrates with
NetMoves' telephony-based network, enables NetMoves to bypass long distance
common carriers for transmissions originating and terminating in countries where
such nodes have been deployed, thereby further reducing its customers'
international transmission costs. NetMoves believes that the combination of its
telephony-based network and its growing Internet-based network will enable it to
emerge as a leading supplier of comprehensive, convenient, low-cost global
faxing services.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
The following table represents unaudited financial information expressed as
a percentage of total revenues for the periods indicated. NetMoves believes that
this information has been presented on a basis consistent with its audited
financial statements and includes all adjustments, consisting only of normal
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recurring adjustments that management considers necessary for a fair
representation for the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
PERCENTAGE OF REVENUES:
Revenues................................................... 100.0% 100.0%
Cost of service............................................ 52.4 52.4
----- -----
Gross margin............................................... 47.6 47.6
----- -----
Operating expenses
Network operations and support........................... 20.9 16.6
Research and development................................. 8.9 10.2
Sales and marketing...................................... 34.8 30.4
General and administrative............................... 19.8 15.3
Depreciation and amortization............................ 8.9 7.0
Patent litigation settlement............................. 0.0 6.6
----- -----
Total operating expenses............................... 93.3 86.1
----- -----
Operating loss............................................. (45.7) (38.5)
----- -----
Interest expense, net...................................... (0.6) (0.5)
Other income............................................... 0.5 0.5
----- -----
Loss before income taxes................................... (45.8) (38.5)
Provision for income taxes................................. -- --
----- -----
Net loss................................................... (45.8)% (38.5)%
----- =====
</TABLE>
REVENUES
Revenues, which consist primarily of customer usage charges, grew 10.5% to
$17.1 million in the nine months ended September 30, 1999 from $15.5 million in
the nine months ended September 30, 1998 as a result of a 34% increase in total
Internet fax revenues which account for 83% of total revenues offset by a 39%
decrease in telephony fax revenues which only comprise 17% of total revenues.
All of NetMoves' current sales and marketing programs are related to the sale of
Internet fax services and more specifically to computer-originated Internet fax
services which amounted to $6.4 million for the nine months ended September 30,
1999, representing a 62% increase over the same service revenues for the nine
months ended September 30, 1998. Internet fax revenues for the U.S. business
segment increased $2.7 million or 41% to $9.2 million in the first three
quarters of 1999 and the international business segment increased $0.8 million
or 21% to $4.9 million in the 1999 period in comparison to the same period in
1998.
COST OF SERVICE
Cost of service consists of local access charges, leased network backbone
circuit costs and long distance domestic and international termination charges.
These are primarily variable costs based on actual fax volume. Cost of service
increased as a result of the increase in fax volume for the period but as a
percentage of revenues, remained the same for both periods at 52.4%.
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<PAGE>
OPERATING EXPENSES
NETWORK OPERATIONS AND SUPPORT
Network operations and support costs consist primarily of the expenses of
operating and expanding the network infrastructure, monitoring network traffic
and quality of service and providing customer support in service installations,
fax deliveries and message reporting and billing. Network operations and support
costs increased to $3.6 million for the nine month period ended September 30,
1999 in comparison to $2.6 million in the nine months ended September 30, 1998
as a result of hiring additional personnel to support NetMoves' expanding
customer base on a 7-day per week, 24-hour per day basis. As a percentage of
revenues, these expenses increased to 20.9% in the 1999 period from 16.6% of
revenues in the 1998 period.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and
consulting fees paid to software engineers and development personnel largely for
the continuing development efforts for enhancements to NetMoves' Internet fax
services. Research and development expenses decreased to $1.5 million for the
nine month period ended September 30, 1999 in comparison to $1.6 million in the
nine months ended September 30, 1998. As a result of the decreased expense and
higher revenues in 1999, research and development expenses decreased to 8.9% of
revenues in the nine months ended September 30, 1999 from 10.2% of revenues in
the nine months ended September 30, 1998.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and commissions
for sales and marketing staffs, promotional material preparation and mailing
costs, and agent and dealer commissions. Sales and marketing expenses increased
to $6.0 million for the nine months ended September 30, 1999 in comparison to
$4.7 million in the nine months ended September 30, 1998. As a percentage of
revenues, these costs increased to 34.8% from 30.4% for the 1999 and 1998
periods, respectively. The higher costs in 1999 as compared to the same period
in 1998 relate to additional expenses to support NetMoves' previously announced
strategy to accelerate growth of computer-originated Internet faxing.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of expenses associated with
NetMoves' management, accounting, finance, billing and administrative functions.
General and administrative expenses amounted to $3.4 million in the nine months
ended September 30, 1999 as compared to $2.4 million in the nine months ended
September 30, 1998. As a percentage of revenues, these expenses increased to
19.8% in the nine months ended September 30, 1999 from 15.3% in the nine months
ended September 30, 1998. The increase in general and administrative expenses
result from personnel increases and additional accounts receivable allowances to
support the increased customer base and revenues.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization amounted to $1.5 million or 8.9% of revenues
in the nine months ended September 30, 1999 and $1.0 million or 7.0% of revenues
in the nine months ended September 30, 1998. The increase in depreciation and
amortization expense relates to an increase in the depreciable base of fixed
assets and amortization charges related to the UNIFI acquisition in 1999.
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<PAGE>
PATENT LITIGATION SETTLEMENT
During the quarter ended September 30, 1998, NetMoves agreed to the
settlement of all outstanding patent litigation with AudioFAX. The charge in the
1998 quarter represents the cost of the license fee paid by NetMoves for the
license of certain AudioFAX patents.
PROVISION FOR INCOME TAXES
NetMoves had losses for income tax purposes for the nine months ended
September 30, 1999 and 1998. Accordingly, there was no provision or credit for
income taxes for those periods. Any income tax benefits at NetMoves' expected
effective tax rate for these losses have been offset by a valuation allowance
for deferred tax assets.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The following table sets forth certain operating data expressed as a
percentage of total revenues for the periods indicated (subtotals not adjusted
for rounding):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
PERCENTAGES OF REVENUES:
Revenues........................................... 100.0% 100.0% 100.0%
Cost of service.................................... 52.7 59.8 59.2
----- ----- -----
Gross margin....................................... 47.3 40.2 40.8
Operating expenses:
Network operations and support................... 17.0 13.1 13.2
Research and development......................... 9.4 11.0 11.8
Sales and marketing.............................. 31.4 30.2 40.3
General and administrative....................... 15.6 18.0 16.6
Depreciation and amortization.................... 7.1 9.8 9.6
Other............................................ 4.9 -- --
----- ----- -----
Total operating expenses........................... 85.4 82.1 91.5
Operating loss..................................... (38.1) (41.9) (50.7)
Interest income (expense), net..................... (0.6) 0.5 0.3
Other income, net.................................. 0.5 0.5 0.6
----- ----- -----
Loss before income taxes........................... (38.2) (40.9) (49.8)
Provision for income taxes......................... -- -- --
----- ----- -----
Net loss........................................... (38.2)% (40.9)% (49.8)%
----- ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues, which consist primarily of customer usage charges, grew 21.3% to
$21.1 million in the year ended December 31, 1998 from $17.4 million in the year
ended December 31, 1997 primarily as a result of the continued expansion of
NetMoves' customer base, particularly in international markets. The increased
revenues resulted largely from NetMoves' Internet desktop-to-fax and faxSAV
EZ-List broadcast services. Fax volumes in total, representing faxes delivered
to domestic and international destinations, grew 58.0% to 62.4 million minutes
in 1998 as compared with 39.5 million minutes in 1997, while faxes routed
through the internet grew 127.4% to 50.7 million minutes in 1998 from
22.3 million minutes in 1997.
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<PAGE>
COST OF SERVICE
Cost of service consists of local access charges, leased network backbone
circuit costs and long distance and international termination charges. These are
primarily variable costs based on actual fax volumes. Cost of service increased
in 1998 as a result of the increase in fax volume for the year but decreased as
a percentage of revenues to 52.7% in 1998 from 59.8% in 1997. The decreased
percentage is a result of transmitting an increased level of customer faxes over
NetMoves' Internet fax network and lower costs for international fax charges.
OPERATING EXPENSES
NETWORK OPERATIONS AND SUPPORT
Network operations and support costs consist primarily of the expenses of
operating and expanding the network infrastructure, monitoring network traffic
and quality of service and providing customer support in service installations,
fax deliveries and message reporting and billing. Network operations and support
costs increased to $3.6 million in the year ended December 31, 1998 from
$2.3 million in the year ended December 31, 1997 as a result of hiring
additional personnel to implement the Internet fax node deployment plan and to
support NetMoves' expanding customer base on a 7-day per week, 24-hour basis. As
a percentage of revenues, these costs increased to 17.0% from 13.1% in 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and
consulting fees paid to software engineers and development personnel. Research
and development expenses increased to $2.0 million for the year ended
December 31, 1998 compared with $1.9 million for the year ended December 31,
1997 due to the continuing development efforts for enhancements to NetMoves'
Internet desktop-to-fax services both in client software and network
enhancements, and continuing development of its faxSAV EZ-List broadcast
service. As a percentage of revenues, these expenses decreased to 9.4% in 1998
from 11.0% in 1997 as a result of increased revenues in 1998.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and commissions
for sales and marketing staffs, promotion material preparation and mailing
costs, third-party telemarketing charges and agent and dealer commissions. Sales
and marketing expenses increased to $6.6 million and 31.4% of revenues for the
year ended December 31, 1998 compared with $5.3 million and 30.2% for the year
ended December 31, 1997. The higher costs in 1998 relate to additional expenses
to support the growth in international revenues, the expansion of NetMoves'
direct sales staff in the U.S. and increased spending for U.S. marketing
programs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of expenses associated with
NetMoves' management, accounting, finance, billing and administrative functions.
General and administrative expenses increased to $3.3 million in the year ended
December 31, 1998 from $3.1 million in the year ended December 31, 1997. The
increases in total expenses result from personnel increases to support the
increased customer base and expenses incurred for management information systems
improvements. As a percentage of revenues, these expenses decreased to 15.6% in
1998 from 18.0% in 1997 as a result of increased revenues in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased to $1.5 million and 7.1% of revenues
in the year ended December 31, 1998 in comparison to $1.7 million and 9.8% of
revenues in the year ended December 31,
145
<PAGE>
1997, primarily reflecting reduced charges for faxSAV Connectors installed on
fax machines at customer premises, resulting from NetMoves' shift in its
business to desktop originated services.
OTHER
NetMoves incurred other expenses in 1998 of $1.0 million or 4.9% of revenues
for settlement of the AudioFAX litigation. No such expenses were incurred in
1997.
PROVISION FOR INCOME TAXES
NetMoves had losses for income tax purposes for the years ended
December 31, 1998 and 1997. Accordingly, there was no provision or credit for
income taxes. Any income tax benefits at NetMoves' expected effective tax rate
for these losses has been offset by a valuation allowance for deferred tax
assets.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Revenues, which consist primarily of customer usage charges, grew 15.8% to
$17.4 million in the year ended December 31, 1997 from $15.0 million in the year
ended December 31, 1996 primarily as a result of increased revenues from
(i) NetMoves' faxSAV for Internet suite of services first introduced in 1996,
(ii) NetMoves' faxSAV EZ-List broadcast service and (iii) an international
fax-to-fax customer base developed in 1997. Fax volumes in total, representing
faxes delivered to domestic and international destinations, grew 40.0% to
39.5 million minutes in 1997 as compared to 28.3 million minutes in 1996, while
faxes to international destinations grew 33.0% to 22.0 million minutes in 1997
from 16.5 million minutes in 1996.
COST OF SERVICE
Cost of service consists of local access charges, leased network backbone
circuit costs and long distance and international termination charges. These are
primarily variable costs based on actual fax volumes. Cost of service increased
in 1997 as a result of the increase in fax volume for the year and also
increased as a percentage of revenues to 59.8% in 1997 from 59.2% in 1996. The
increased percentage is a result of a higher cost of service for the revenues
generated from NetMoves' lower priced Internet services. These revenues were
generated without the complete benefit of the lower cost Internet network
deployment that is still in process. As of December 31, 1997, NetMoves had
completed the installation of Internet nodes in eighteen of the planned thirty
countries.
OPERATING EXPENSES
NETWORK OPERATIONS AND SUPPORT
Network operations and support costs consist primarily of the expenses of
operating and expanding the network infrastructure, monitoring network traffic
and quality of service and providing customer support in service installations,
fax deliveries and message reporting and billing. Network operations and support
costs increased to $2.3 million in the year ended December 31, 1997 from
$2.0 million in the year ended December 31, 1996 as a result of hiring
additional personnel to implement the Internet fax node deployment plan and to
support NetMoves' expanding customer base. As a percentage of revenues, these
costs remained relatively unchanged amounting to 13.1% in 1997 and 13.2% in
1996.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and
consulting fees paid to software engineers and development personnel. Research
and development expenses increased to $1.9 million for the year ended
December 31, 1997 in comparison to $1.8 million for the year ended December 31,
1996
146
<PAGE>
due to the continuing development efforts for enhancements to NetMoves' Internet
desktop-to-fax services both in client software and network enhancements, and
enhancements to its faxSAV EZ-List broadcast service. As a percentage of
revenues, these expenses decreased to 11.0% in 1997 from 11.8% in 1996 as a
result of increased revenues in 1997.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and commissions
for sales and marketing staffs, promotion material preparation and mailing
costs, third-party telemarketing charges and agent and dealer commissions. Sales
and marketing expenses decreased to $5.3 million and 30.2% of revenues for the
year ended December 31,1997 in comparison to $6.1 million and 40.3% for the year
ended December 31, 1996. These costs decreased as a result of reduced spending
for third party telemarketing programs in 1997 in connection with NetMoves'
change in focus to a direct selling staff and as a result of higher expenses
incurred in 1996 for trade shows and an advertising and promotion campaign for
the introduction of the Internet suite of services.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of expenses associated with
NetMoves' management, accounting, finance, billing and administrative functions.
General and administrative expenses increased to $3.1 million and 18.0% of
revenues in the year ended December 31, 1997 from $2.5 million and 16.6% of
revenues for the year ended December 31, 1996. The increases in total expenses
and in the percentage of revenues result from personnel increases to support the
increased customer base, expenses incurred for management information systems
improvements and from expenses incurred in 1997 related to the public ownership
of NetMoves' common stock.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $1.7 million and 9.8% of revenues
in the year ended December 31, 1997 in comparison to $1.4 million and 9.6% of
revenues in the year ended December 31, 1996, primarily reflecting depreciation
of the company's increased investment in international Internet nodes as part of
NetMoves' strategy to deploy a global Internet network and in faxSAV Connectors
installed at customer premises to allow access to the NetMoves network.
PROVISION FOR INCOME TAXES
NetMoves had losses for income tax purposes for the years ended
December 31, 1997 and 1996. Accordingly, there was no provision or credit for
income taxes. Any income tax benefits at NetMoves' expected effective tax rate
for these losses has been offset by a valuation allowance for deferred tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
NetMoves' principal sources of liquidity at September 30, 1999 included cash
and cash equivalents of $9.0 million and $0.3 million available under equipment
lines of credit. NetMoves believes that its current cash and cash equivalents
and available equipment financing facility will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure requirements
through at least December 2000.
In May 1999, NetMoves completed a $14.3 million private placement of
2,499,000 new unregistered shares of its common stock to a group of investors.
During the nine months ended September 30, 1999, it entered into a total of
$1.5 million of equipment lines of credit with draw-downs payable over 36 to
42 months at interest rates of 14% to 16%.
147
<PAGE>
Cash used in operating activities amounted to $5.9 million in the nine
months ended September 30, 1999, as compared to $4.3 million in the first nine
months of 1998. Cash used for the purchase of equipment, mainly used to improve
and expand the NetMoves network, amounted to $1.7 million in the first nine
months of both 1999 and 1998. Cash used to purchase intangible assets, including
the U.S. fax customer base of UNIFI Communications in 1999, amounted to
$2.0 million and $0.3 million in the first nine months of 1999 and 1998
respectively. NetMoves has committed to minimum monthly usage levels with its
primary telecommunications carrier amounting to, exclusive of usage discounts,
$0.5 million per month through August 2002.
To the extent that funds expected to be generated from its operations are
insufficient to meet current or planned operating requirements, NetMoves will
seek to obtain additional funds through bank facilities, equity or debt
financing, collaborative or other arrangements with corporate partners and from
other sources. Additional funding may not be available when needed or on terms
acceptable to NetMoves, which could have a material adverse effect on its
business, financial condition and results of operations. If adequate funds are
not available, NetMoves may be required to delay or to eliminate certain
expenditures or to license to third parties the rights to commercialize
technologies that it would otherwise seek to develop itself. In addition, in the
event that NetMoves obtains any additional funding, such financings may have a
dilutive effect on the holders of its securities.
YEAR 2000 COMPLIANCE
OVERVIEW
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements
or risk system failure or miscalculations causing disruptions of normal business
activities.
STATE OF READINESS
NetMoves conducted a study of the Year 2000 readiness of its information
technology systems prior to December 31, 1999, including its computing and
networking systems, and its non-information technology systems. Its study
consisted of:
- INVENTORY AND ASSESSMENT--conducting an inventory and review of NetMoves
software, third-party software and hardware, and telecommunications and
Internet service providers; contacting third-party vendors and licensors
of material hardware, software and services that are both directly and
indirectly related to the delivery of NetMoves for Internet suite of
services and the NetMoves Connector; contacting third-party vendors and
licensors of material hardware, software and services that are both
directly and indirectly related to the delivery of NetMoves for Internet
suite of services and the NetMoves Connector.
- REVIEW--conducting a review of NetMoves' application and product software
code to determine Year 2000 compliance; assessment of repair or
replacement requirements.
- CORRECTION AND TESTING--implementing code modifications and complete
system re-testing where necessary; modification, upgrade, repair or
replacement of all non-compliant systems.
NetMoves completed a test of its information technology systems to verify
the results of its study and remedied certain minor discrepancies that were
discovered. It has been informed by many of its vendors of material hardware and
software components of its information technology systems that the products that
it uses are currently Year 2000 compliant. The computing systems that provide
application layer services (i.e., NetMoves customer services) within the
NetMoves network are based upon some variant of the Unix operating system, which
adequately represents dates beyond the year 2000. Many of the computing systems
148
<PAGE>
that support the internal operations of NetMoves' business have the similar
capacity to represent dates beyond the year 2000. In addition, for all of its
internal accounting applications, NetMoves has purchased new accounting system
software that the manufacturer specifies as Year 2000 compliant. NetMoves has
also required vendors of its other material hardware and software components of
its information technology systems to provide assurances of their Year 2000
compliance. NetMoves will also seek assurances of Year 2000 compliance from
providers of its material non-information technology systems.
As of January 14, 2000 NetMoves has not experienced any disruption from its
computing and networking systems related to the Year 2000.
COSTS
To date, NetMoves has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. Most of its expenses
have related to the operating costs associated with time spent by employees in
the evaluation process and Year 2000 compliance matters generally. NetMoves'
costs to purchase and implement new accounting system software that the
manufacturer specifies as Year 2000 compliant are approximately $0.2 million.
EXPERTS
The financial statements of Mail.com, Inc. as of December 31, 1997 and 1998
and for each of the years in the three year period ended December 31, 1998
included in this proxy statement/prospectus have been so included in reliance on
the report of KPMG LLP, independent accountants, appearing elsewhere herein,
upon authority of said firm as experts in auditing and accounting.
The financial statements of The Allegro Group, Inc. as of December 31, 1997
and 1998 and for each of the years in the two year period ended December 31,
1998 included in this proxy statement/prospectus have been so included in
reliance on the report of KPMG LLP, independent accountants, appearing elsewhere
herein, upon authority of said firm as experts in auditing and accounting.
The financial statements of NetMoves Corporation (a.k.a. FaxSav Inc.) as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in this proxy statement/prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the shares of Class A common stock offered hereby and
certain tax matters with respect to the merger will be passed upon for Mail.com
by Winthrop, Stimson, Putnam & Roberts, New York, New York. Certain tax matters
with respect to the merger will be passed upon for NetMoves by Brobeck,
Phleger & Harrison LLP, San Francisco, California.
149
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Mail.com and NetMoves file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information filed by
either company at the Commission's public reference rooms at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at any of the Commission's other public
reference rooms in New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. Mail.com's and NetMoves' filings with the Commission are also available
to the public from commercial document-retrieval services and at the Web site
maintained by the Commission at http://www.sec.gov.
Mail.com filed a registration statement to register the shares of Mail.com
Class A common stock to be issued to NetMoves stockholders pursuant to the
merger. This proxy statement/prospectus is a part of that registration statement
and constitutes a prospectus of Mail.com in addition to being a proxy statement
of NetMoves for use at its special meeting of stockholders.
Mail.com has supplied all information contained in this proxy
statement/prospectus relating to Mail.com, and NetMoves has supplied all
information contained in this proxy statement/prospectus relating to NetMoves.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE MERGER AGREEMENT AND THE MERGER. NEITHER
MAIL.COM NOR NETMOVES HAS AUTHORIZED ANYONE TO PROVIDE INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED JANUARY 18, 2000. STOCKHOLDERS SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS
OF ANY OTHER DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT/PROSPECTUS TO
STOCKHOLDERS NOR THE ISSUANCE OF MAIL.COM CLASS A COMMON STOCK PURSUANT TO THE
MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
150
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
MAIL.COM, INC.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999 (unaudited)........................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998, and for the nine months
ended September 30, 1998 (unaudited) and September 30,
1999 (unaudited).......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998, and
for the nine months ended September 30, 1999
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998, and for the nine months
ended September 30, 1998 (unaudited) and September 30,
1999 (unaudited).......................................... F-8
Notes to Consolidated Financial Statements.................. F-10
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ F-35
Pro Forma Condensed Combined Balance Sheet as of September
30, 1999 (unaudited)...................................... F-39
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998 (unaudited).................. F-40
Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1999 (unaudited).......... F-41
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................... F-42
THE ALLEGRO GROUP, INC.
Independent Auditors' Report................................ F-44
Balance Sheets as of December 31, 1997 and 1998............. F-45
Statements of Operations for the years ended December 31,
1997 and 1998, and for the six months ended June 30, 1998
and 1999 (unaudited)...................................... F-46
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997 and 1998, and for the six months
ended June 30, 1999 (unaudited)........................... F-47
Statements of Cash Flows for the years ended December 31,
1997 and 1998............................................. F-48
Notes to Financial Statements............................... F-49
FAXSAV INCORPORATED (CURRENTLY NETMOVES CORPORATION)
Report of Independent Accountants........................... F-55
Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999 (unaudited)............................ F-56
Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended
September 30, 1998 (unaudited) and September 30, 1999
(unaudited)............................................... F-57
Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended
September 30, 1998 (unaudited) and September 30, 1999
(unaudited)............................................... F-58
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1999 (unaudited)...................... F-59
Notes to Financial Statements............................... F-60
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mail.com, Inc.:
We have audited the accompanying balance sheets of Mail.com, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mail.com, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
March 19, 1999
F-2
<PAGE>
MAIL.COM, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 910 $ 8,414 $ 53,469
Accounts receivable, net of allowance for doubtful
accounts of $92 and $197 as of December 31, 1998 and as
of
September 30, 1999, respectively........................ -- 702 2,400
Prepaid expenses and other current assets................. 37 223 1,290
Receivable from sale leaseback............................ -- 631 --
------- -------- --------
Total current assets.................................. 947 9,970 57,159
------- -------- --------
Property and equipment, net................................. 928 4,341 26,035
Domain assets, net.......................................... 651 1,010 4,145
Partner advances............................................ -- 4,715 19,842
Investments in affiliated companies......................... 100 250 5,854
Goodwill and other intangible assets, net................... -- -- 19,352
Restricted investment....................................... -- -- 1,000
Other....................................................... 20 58 380
------- -------- --------
Total assets.......................................... $ 2,646 $ 20,344 $133,767
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 67 $ 1,753 $ 8,028
Accrued expenses.......................................... 461 1,669 6,322
Current portion of capital lease obligations.............. 240 479 3,866
Current portion of domain asset purchase obligations...... 63 169 268
Due to officer............................................ 200 -- --
Deferred revenue.......................................... 106 824 914
Other current liabilities................................. -- -- 2,988
------- -------- --------
Total current liabilities............................. 1,137 4,894 22,386
------- -------- --------
Capital lease obligations, less current portion............. 569 1,437 9,094
Domain asset purchase obligation, less current portion...... 150 217 184
Deferred revenue............................................ 223 1,081 953
Redeemable convertible preferred stock, $0.01 par value;
Class C--12,000,000 shares authorized; 3,776,558 and 0
shares issued and outstanding at December 31, 1998 and
September 30, 1999, respectively, with an aggregate
liquidation preference of $13,047,650 and $0 as of
December 31, 1998 and September 30, 1999, respectively.... -- 13,048 --
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value; 60,000,000
shares authorized:
Class A--12,000,000 shares authorized; 4,185,000,
6,185,000 and 0 shares issued and outstanding at
December 31, 1997 and 1998, and at September 30, 1999,
respectively, with an aggregate liquidation preference
of $2,932,580, $7,647,580 and $0 at December 31, 1997
and 1998, and at September 30, 1999, respectively....... 42 62 --
Common stock, $0.01 par value; 130,000,000 shares
authorized:
Class A--120,000,000 shares authorized; 4,097,500,
5,931,405 and 34,363,172 shares issued and outstanding
at December 31, 1997 and 1998, and September 30, 1999,
respectively............................................ 41 59 344
Class B--10,000,000 shares authorized, issued and
outstanding at December 31, 1997 and 1998 and
September 30, 1999; with an aggregate liquidation
preference of $1,000,000................................ 100 100 100
Additional paid-in capital.................................. 4,652 16,537 146,387
Subscriptions receivable.................................... (728) (1) --
Deferred compensation....................................... -- (1,025) (1,316)
Accumulated deficit......................................... (3,540) (16,065) (47,007)
Other comprehensive income.................................. -- -- 2,642
------- -------- --------
Total stockholders' equity (deficit).................... 567 (333) 101,150
------- -------- --------
Commitments and contingencies
Total liabilities and stockholders' equity (deficit).... $ 2,646 $ 20,344 $133,767
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
MAIL.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 19 $ 173 $ 1,495 $ 492 $ 6,593
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of revenues............ 187 1,082 2,891 1,745 7,720
Sales and marketing......... 65 930 6,680 2,140 17,083
General and
administrative............ 222 862 3,482 1,730 7,207
Product development......... 94 296 1,573 986 4,643
Amortization of intangible
assets.................... -- -- -- -- 725
Write-off of acquired in-
process technology........ -- -- -- -- 900
----------- ----------- ----------- ----------- -----------
Total operating
expenses................ 568 3,170 14,626 6,601 38,278
----------- ----------- ----------- ----------- -----------
Loss from operations...... (549) (2,997) (13,131) (6,109) (31,685)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Gain on sale of
investment................ -- -- 438 438 --
Interest income............. 7 36 277 141 1,098
Interest expense............ (2) (35) (109) (57) (355)
----------- ----------- ----------- ----------- -----------
Total other income
(expense), net.......... 5 1 606 522 743
----------- ----------- ----------- ----------- -----------
Net loss...................... (544) (2,996) (12,525) (5,587) (30,942)
Cumulative dividends on
settlement of contingent
obligations to preferred
shareholders................ -- -- -- -- 14,556
----------- ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders......... $ (544) $ (2,996) $ (12,525) $ (5,587) $ (45,498)
=========== =========== =========== =========== ===========
Basic and diluted net loss per
common share................ $ (0.04) $ (0.21) $ (0.86) $ (0.39) $ (1.69)
=========== =========== =========== =========== ===========
Weighted-average basic and
diluted shares
outstanding................. 13,725,278 14,097,500 14,607,915 14,229,114 26,891,270
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
MAIL.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............................. -- $ -- -- $ -- -- $ --
Issuance of Class A common stock to founders............. -- -- 2,422,500 24 -- --
Issuance of Class B common stock to founder.............. -- -- -- 10,000,000 100
Issuance of Class A preferred stock to founders.......... 100,000 1 -- -- -- --
Domain assets purchased in exchange for Class A preferred
stock.................................................. 225,000 2 -- -- -- --
Domain assets purchased in exchange for Class A common
stock.................................................. -- -- 1,675,000 17 -- --
Issuance of Class A preferred stock for cash............. 400,000 4 -- -- -- --
Net loss................................................. -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ----
Balance at December 31, 1996............................. 725,000 7 4,097,500 41 10,000,000 100
Payment of founder's Class B common stock subscription
receivable............................................. -- -- -- -- -- --
Issuance of Class A preferred stock in exchange for
asset.................................................. 100,000 1 -- -- -- --
Issuance of Class A preferred stock, net of $55 issuance
costs.................................................. 3,290,000 33 -- -- -- --
Issuance of Class A preferred stock in exchange for
services............................................... 70,000 1 -- -- -- --
Issuance of options and warrants in connection with
partner and consultant agreements...................... -- -- -- -- -- --
Net loss................................................. -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ----
Balance at December 31, 1997............................. 4,185,000 42 4,097,500 41 10,000,000 100
Issuance of Class A common stock to vendor............... -- -- 2,745 -- -- --
Issuance of Class A common stock in connection with
partner agreements..................................... -- -- 1,831,160 18 -- --
Proceeds from stock subscriptions receivable............. -- -- -- -- -- --
Issuance of Class A preferred stock as a result of
options exercised, net of $227 issuance costs.......... 2,000,000 20 -- -- -- --
Issuance of warrants for Class A common stock............ -- -- -- -- -- --
Issuance of warrants in connection with Class C
redeemable convertible preferred stock................. -- -- -- -- -- --
Offering costs in connection with Class C redeemable
convertible preferred stock............................ -- -- -- -- -- --
Issuance of stock options to officer..................... -- -- -- -- -- --
Amortization of deferred compensation.................... -- -- -- -- -- --
Issuance of stock options to partner..................... -- -- -- -- -- --
Net loss................................................. -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ----
Balance at December 31, 1998............................. 6,185,000 62 5,931,405 59 10,000,000 100
<CAPTION>
ADDITIONAL OTHER
PAID-IN SUBSCRIPTIONS DEFERRED ACCUMULATED COMPREHENSIVE
CAPITAL RECEIVABLE COMPENSATION DEFICIT INCOME
---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............................. $ -- $ -- -- $ -- $ --
Issuance of Class A common stock to founders............. (12) (12) -- -- --
Issuance of Class B common stock to founder.............. 900 (450) -- -- --
Issuance of Class A preferred stock to founders.......... (1) -- -- --
Domain assets purchased in exchange for Class A preferred
stock.................................................. 20 -- -- -- --
Domain assets purchased in exchange for Class A common
stock.................................................. 160 -- -- -- --
Issuance of Class A preferred stock for cash............. 161 -- -- -- --
Net loss................................................. -- -- -- (544) --
-------- ----- ------- -------- ------
Balance at December 31, 1996............................. 1,229 (463) -- (544) --
Payment of founder's Class B common stock subscription
receivable............................................. -- 450 -- -- --
Issuance of Class A preferred stock in exchange for
asset.................................................. 99 -- -- -- --
Issuance of Class A preferred stock, net of $55 issuance
costs.................................................. 3,203 (715) -- -- --
Issuance of Class A preferred stock in exchange for
services............................................... 69 -- -- -- --
Issuance of options and warrants in connection with
partner and consultant agreements...................... 52 -- -- -- --
Net loss................................................. -- -- -- (2,996) --
-------- ----- ------- -------- ------
Balance at December 31, 1997............................. 4,652 (728) -- (3,540) --
Issuance of Class A common stock to vendor............... 5 -- -- -- --
Issuance of Class A common stock in connection with
partner agreements..................................... 7,213 -- -- -- --
Proceeds from stock subscriptions receivable............. -- 727 -- -- --
Issuance of Class A preferred stock as a result of
options exercised, net of $227 issuance costs.......... 3,753 -- -- -- --
Issuance of warrants for Class A common stock............ 130 -- -- -- --
Issuance of warrants in connection with Class C
redeemable convertible preferred stock................. 170 -- -- -- --
Offering costs in connection with Class C redeemable
convertible preferred stock............................ (853) -- -- -- --
Issuance of stock options to officer..................... 1,096 -- (1,096) -- --
Amortization of deferred compensation.................... -- -- 71 -- --
Issuance of stock options to partner..................... 371 -- -- -- --
Net loss................................................. -- -- -- (12,525) --
-------- ----- ------- -------- ------
Balance at December 31, 1998............................. 16,537 (1) (1,025) (16,065) --
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance at December 31, 1995............................. $ --
Issuance of Class A common stock to founders............. --
Issuance of Class B common stock to founder.............. 550
Issuance of Class A preferred stock to founders.......... --
Domain assets purchased in exchange for Class A preferred
stock.................................................. 22
Domain assets purchased in exchange for Class A common
stock.................................................. 177
Issuance of Class A preferred stock for cash............. 165
Net loss................................................. (544)
--------
Balance at December 31, 1996............................. 370
Payment of founder's Class B common stock subscription
receivable............................................. 450
Issuance of Class A preferred stock in exchange for
asset.................................................. 100
Issuance of Class A preferred stock, net of $55 issuance
costs.................................................. 2,521
Issuance of Class A preferred stock in exchange for
services............................................... 70
Issuance of options and warrants in connection with
partner and consultant agreements...................... 52
Net loss................................................. (2,996)
--------
Balance at December 31, 1997............................. 567
Issuance of Class A common stock to vendor............... 5
Issuance of Class A common stock in connection with
partner agreements..................................... 7,231
Proceeds from stock subscriptions receivable............. 727
Issuance of Class A preferred stock as a result of
options exercised, net of $227 issuance costs.......... 3,773
Issuance of warrants for Class A common stock............ 130
Issuance of warrants in connection with Class C
redeemable convertible preferred stock................. 170
Offering costs in connection with Class C redeemable
convertible preferred stock............................ (853)
Issuance of stock options to officer..................... --
Amortization of deferred compensation.................... 71
Issuance of stock options to partner..................... 371
Net loss................................................. (12,525)
--------
Balance at December 31, 1998............................. (333)
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
MAIL.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS E CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------------- --------------------- --------------------- ----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998............ 6,185,000 62 -- -- 5,931,405 59 10,000,000
Issuance of Class E preferred stock net
of issuance costs of $835
(unaudited)........................... -- -- 3,200,000 32 -- -- --
Domain assets Purchased (unaudited)..... -- -- -- -- 355,000 4 --
Issuance of Class A common stock in
connection with partner agreements
(unaudited)........................... -- -- -- -- 485,616 5 --
Issuance of stock options to consultant
in lieu of services (unaudited)....... -- -- -- -- -- -- --
Issuance of Class A common stock to
vendor/consultant in lieu of services
(unaudited)........................... -- -- -- -- 65,801 2 --
Issuance of warrants to vendor and
partner (unaudited)................... -- -- -- -- -- -- --
Proceeds from stock subscription
receivable (unaudited)................ -- -- -- -- -- -- --
Issuance of stock options to employees
below fair value (unaudited).......... -- -- -- -- -- -- --
Amortization of deferred compensation
(unaudited)........................... -- -- -- -- -- -- --
Return of common stock from GeoCities
(unaudited)........................... -- -- -- -- (1,000,000) (10) --
Exercise of employee stock options
(unaudited)........................... -- -- -- -- 144,966 1 --
Purchase of employee stock options at
fair value............................ -- -- -- -- -- -- --
Issuance of Class A common stock in IPO,
net of $4,791 issuance costs
(unaudited)........................... -- -- -- -- 6,850,000 69 --
Exercise of warrants by CNET/Snap
(unaudited)........................... -- -- -- -- 1,500,000 15 --
Issuance of Class A common stock to
CNET/Snap/NBC Multimedia in connection
with settlement of contingent
obligation (unaudited)................ -- -- -- -- 2,578,907 25 --
<CAPTION>
CLASS B
MMON STOCK
---------- PAID-IN SUBSCRIPTIONS DEFERRED ACCUMULATED COMPREHENSIVE
AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT INCOME
-------- ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998............ 100 16,537 (1) (1,025) (16,065) --
Issuance of Class E preferred stock net
of issuance costs of $835
(unaudited)........................... -- 15,133 -- -- -- --
Domain assets Purchased (unaudited)..... -- 2,552 -- -- -- --
Issuance of Class A common stock in
connection with partner agreements
(unaudited)........................... -- 2,517 -- -- -- --
Issuance of stock options to consultant
in lieu of services (unaudited)....... -- 91 -- -- -- --
Issuance of Class A common stock to
vendor/consultant in lieu of services
(unaudited)........................... -- 403 -- -- -- --
Issuance of warrants to vendor and
partner (unaudited)................... -- 4,278 -- -- -- --
Proceeds from stock subscription
receivable (unaudited)................ -- -- 1 -- -- --
Issuance of stock options to employees
below fair value (unaudited).......... -- 641 -- (641) -- --
Amortization of deferred compensation
(unaudited)........................... -- -- -- 350 -- --
Return of common stock from GeoCities
(unaudited)........................... -- (3,490) -- -- -- --
Exercise of employee stock options
(unaudited)........................... -- 267 -- -- -- --
Purchase of employee stock options at
fair value............................ -- 211 -- -- -- --
Issuance of Class A common stock in IPO,
net of $4,791 issuance costs
(unaudited)........................... -- 43,090 -- -- -- --
Exercise of warrants by CNET/Snap
(unaudited)........................... -- 7,485 -- -- -- --
Issuance of Class A common stock to
CNET/Snap/NBC Multimedia in connection
with settlement of contingent
obligation (unaudited)................ -- 18,027 -- -- -- --
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance at December 31, 1998............ (333)
Issuance of Class E preferred stock net
of issuance costs of $835
(unaudited)........................... 15,165
Domain assets Purchased (unaudited)..... 2,556
Issuance of Class A common stock in
connection with partner agreements
(unaudited)........................... 2,522
Issuance of stock options to consultant
in lieu of services (unaudited)....... 91
Issuance of Class A common stock to
vendor/consultant in lieu of services
(unaudited)........................... 405
Issuance of warrants to vendor and
partner (unaudited)................... 4,278
Proceeds from stock subscription
receivable (unaudited)................ 1
Issuance of stock options to employees
below fair value (unaudited).......... --
Amortization of deferred compensation
(unaudited)........................... 350
Return of common stock from GeoCities
(unaudited)........................... (3,500)
Exercise of employee stock options
(unaudited)........................... 268
Purchase of employee stock options at
fair value............................ 211
Issuance of Class A common stock in IPO,
net of $4,791 issuance costs
(unaudited)........................... 43,159
Exercise of warrants by CNET/Snap
(unaudited)........................... 7,500
Issuance of Class A common stock to
CNET/Snap/NBC Multimedia in connection
with settlement of contingent
obligation (unaudited)................ 18,052
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
MAIL.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS E CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------------- --------------------- --------------------- ----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Conversion of preferred stock
(unaudited)........................... (6,185,000) (62) (3,200,000) (32) 9,385,000 94 --
Conversion of redeemable Class C
preferred stock (unaudited)........... -- -- -- -- 3,776,558 38 --
Issuance of common stock in connection
with settlement of contingent
obligation to preferred stockholders
(unaudited)........................... -- -- -- -- 2,079,363 20 --
Exercise of underwriters over-allotment
option, net of issuance costs of $530
(unaudited)........................... -- -- -- -- 1,027,500 10 --
Issuance of Class A common stock to
3Cube, Inc, (unaudited)............... -- -- -- -- 80,083 1 --
Issuance of Class A common stock to
Allegro (unaudited)................... -- -- -- -- 1,102,973 11 --
Unrealized appreciation (unaudited)..... -- -- -- -- -- -- --
Net loss (unaudited).................... -- -- -- -- -- -- --
Total comprehensive loss
(unaudited)......................... -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ---- ----------
Balance at September 30, 1999
(unaudited)........................... -- $ -- -- $ -- 34,363,172 $344 10,000,000
========== ==== ========== ==== ========== ==== ==========
<CAPTION>
CLASS B
MMON STOCK
---------- PAID-IN SUBSCRIPTIONS DEFERRED ACCUMULATED COMPREHENSIVE
AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT INCOME
-------- ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Conversion of preferred stock
(unaudited)........................... -- -- -- -- -- $ --
Conversion of redeemable Class C
preferred stock (unaudited)........... -- 13,010 -- -- -- --
Issuance of common stock in connection
with settlement of contingent
obligation to preferred stockholders
(unaudited)........................... -- (20) -- -- -- --
Exercise of underwriters over-allotment
option, net of issuance costs of $530
(unaudited)........................... -- 6,652 -- -- -- --
Issuance of Class A common stock to
3Cube, Inc, (unaudited)............... -- 1,959 -- -- -- --
Issuance of Class A common stock to
Allegro (unaudited)................... -- 17,044 -- -- -- --
Unrealized appreciation (unaudited)..... -- -- -- -- -- 2,642
Net loss (unaudited).................... -- -- -- -- (30,942) --
Total comprehensive loss
(unaudited)......................... -- -- -- -- -- --
---- -------- ----- ------- -------- ------
Balance at September 30, 1999
(unaudited)........................... $100 $146,387 $ -- $(1,316) $(47,007) $2,642
==== ======== ===== ======= ======== ======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Conversion of preferred stock
(unaudited)........................... --
Conversion of redeemable Class C
preferred stock (unaudited)........... 13,048
Issuance of common stock in connection
with settlement of contingent
obligation to preferred stockholders
(unaudited)........................... --
Exercise of underwriters over-allotment
option, net of issuance costs of $530
(unaudited)........................... 6,662
Issuance of Class A common stock to
3Cube, Inc, (unaudited)............... 1,960
Issuance of Class A common stock to
Allegro (unaudited)................... 17,055
Unrealized appreciation (unaudited)..... 2,642
Net loss (unaudited).................... (30,942)
Total comprehensive loss
(unaudited)......................... (28,300)
--------
Balance at September 30, 1999
(unaudited)........................... $101,150
========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
MAIL.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(544) $(2,996) $(12,525) $(5,587) $(30,942)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Non-cash charges related to partner agreements.......... -- -- 3,017 633 6,227
Non-cash compensation................................... -- 122 521 -- --
Depreciation and amortization........................... 16 162 903 709 2,962
Goodwill amortization................................... -- -- -- -- 725
Amortization of warrants................................ -- -- -- -- 499
Amortization of domain assets........................... 25 126 201 145 563
Amortization of deferred compensation................... -- -- 71 -- 350
Write-off of property and equipment..................... -- 84 -- -- --
Write-off of GeoCities contract......................... -- -- -- -- 500
Provision for doubtful accounts......................... -- -- 92 -- 156
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable..................................... -- -- (794) (357) (1,854)
Prepaid expenses and other current assets............... (35) (11) (186) 32 (1,067)
Partner advances........................................ -- -- (500) -- --
Other assets............................................ 2 (9) (36) (75) (322)
Accounts payable........................................ -- 67 1,686 958 6,275
Accrued expenses........................................ 91 371 1,208 156 4,653
Deferred revenue........................................ 6 323 1,576 724 38
Other liabilities....................................... -- -- -- -- 2,988
----- ------- -------- ------- --------
Net cash used in operating activities................. (439) (1,761) (4,766) (2,662) (8,249)
----- ------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of domain assets.............................. (60) (334) (385) (338) (943)
Loan-related party...................................... (51) -- -- -- --
Repayment of loan-related party......................... 20 31 -- -- --
Proceeds from sale leaseback............................ 38 710 643 513 3,917
Purchase of restricted investment....................... -- -- -- -- (1,000)
Investment.............................................. -- -- -- -- (1,000)
Purchases of property and equipment..................... (81) (896) (4,188) (2,416) (16,562)
Cash paid for acquisition, net of cash acquired......... -- -- -- -- (3,175)
----- ------- -------- ------- --------
Net cash used in investing activities................. (134) (489) (3,930) (2,241) (18,763)
----- ------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A, C and E preferred
stock................................................. 165 2,520 16,682 16,797 15,165
Net proceeds from issuance of Class A and B common
stock................................................. 550 450 12 -- --
Net Proceeds from issuance of Class A common stock
related to initial public offering and over
allotment............................................. -- -- -- -- 49,876
Proceeds from issuance of Class A common stock in
connection with the exercise of warrants and
options............................................... -- -- -- -- 7,890
Payments under capital lease obligations................ (13) (139) (284) (259) (735)
Due to officer.......................................... -- 200 (200) (200) --
Payments under domain asset purchase obligations........ -- -- (10) (10) (129)
----- ------- -------- ------- --------
Net cash provided by financing activities............. 702 3,031 16,200 16,328 72,067
----- ------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 129 781 7,504 11,425 45,055
Cash and cash equivalents at beginning of the period...... -- 129 910 910 8,414
----- ------- -------- ------- --------
Cash and cash equivalents at the end of the period........ $ 129 $ 910 $ 8,414 $12,335 $ 53,469
===== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
MAIL.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosure of non-cash information:
During the years ended December 31, 1996, 1997 and 1998, and during the nine
month periods ended September 30, 1998 and 1999, the Company paid
approximately $2,000, $35,000, $85,000, $57,000 and $355,000 respectively, for
interest.
Non-cash investing activities:
During the year ended December 31, 1996, the Company purchased domain
assets in exchange for the issuance of Class A preferred and common stock.
The transaction resulted in a non-cash investing activity of $200,000.
During the year ended December 31, 1996, the Company issued 100,000
shares of Class A preferred stock in exchange for stock. The transaction
resulted in a non-cash investing activity of $100,000.
During the year ending December 31, 1998, and the nine month periods
ending September 30, 1998 and 1999, the Company issued 1,831,160, 126,874
and 3,130,324, respectively, shares of its common stock in connection with
some of its Mail.com partner agreements and vendor services. These
transactions resulted in a non-cash investing activity of
approximately $7,196,000, $590,000 and 21,000,000 for the year ending
December 31, 1998 and the nine month periods September 30, 1998 and 1999,
respectively.
During the nine months ended September 30, 1999, the Company purchased
domain assets with 355,000 shares of Class A common stock. This action
resulted in a non-cash investing activity of $2,556,000.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital lease obligations resulted in non-cash financing activities
aggregating $211,000, $750,000, $1,392,000, $1,500,000 and $11,500,000 for
the years ended December 31, 1996, 1997, and 1998, and for the nine month
periods ended September 30, 1998 and 1999, respectively.
The Company is obligated under various agreements to purchase domain
assets. These obligations resulted in non-cash financing activities
aggregating $227,000, $169,000, $0 and $195,000 for the years ended
December 31, 1997 and 1998, and for the nine month periods ended
September 30, 1998 and 1999, respectively.
During the nine months ended September 30, 1999, the Company purchased
an equity interest in an internet company by issuing 80,083 shares of
Class A Common Stock. This transaction resulted in a non-cash financing
activity of $1,960,000.
F-9
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) SUMMARY OF OPERATIONS. Mail.com, Inc. (the "Company" or "Mail.com"),
formerly known as iName, Inc., is a provider of free and pay email services and
functions to Web users. The Company provides Web users with its email messaging
services primarily through its own Web sites and its network of third-party Web
site partners ("Mail.com Partners"). The Company generates revenues primarily
from advertising related sales, including direct marketing and e-commerce
promotions and from premium services offered on a subscription basis. The
Company has assembled a portfolio of approximately 1,200 domain names.
The Company also provides businesses with Internet email message management
services. This includes Internet email network integration services, email
hosting services and email message management services, including virus
scanning, attachment control, spam control, legal disclaimers and real time
Web-based reporting.
In addition to providing email services, Mail.com provides domain name
trading services through its Best Domains Web site. Best Domains is a trading
site for domain names on the Internet.
The Company was incorporated in the State of Delaware on August 1, 1994
(inception), however, the business commenced operations in 1996 and launched its
first commercial email service in November 1996. The Company's financial
statements as of December 31, 1994 and 1995 and for the period from August 1,
1994 through December 31, 1995 reflect immaterial transactions. Accordingly, the
Company's results of operations for the period from August 1, 1994 through
December 31, 1995 have been combined with the Company's results of operations
for the year ended December 31, 1996 to facilitate presentation due to the
limited activity during the earlier period. During 1994 and 1995, the Company
only incurred expenses which resulted in a reported net loss of approximately
$6,000 and $3,000, respectively.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of Web-based email and email
advertising. The Company's future success will be dependent upon its ability to
create and deliver effective and competitive email services to consumers and
business customers, the acceptance of the Internet and Web-based email as a
medium for advertising, and the Company's ability to develop and provide new
services that meet members' and businesses changing requirements, including the
effective use of leading technologies, to continue to enhance its current
services, and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
(B) INITIAL PUBLIC OFFERING. On June 23, 1999, the Company closed its
Initial Public Offering ("IPO") which resulted in the issuance of 6,850,000
shares of Class A common stock at $7.00 per share. On July 12, 1999, 1,027,500
shares of Class A common stock were issued in connection with the exercise of
the underwriters' over-allotment option. In addition, upon the closing of the
IPO, 6,185,000, 3,776,558 and 3,200,000 shares of Series A, C and E convertible
preferred stock, respectively, automatically converted on a one-for-one basis
into 13,161,558 shares of Class A common stock. Net proceeds from the offering,
after underwriting fees of $3.4 million and offering costs of $1.4 million, were
approximately $49.9 million.
(C) UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION. The interim
consolidated financial statements of the Company as of September 30, 1999, and
for the nine months ended September 30, 1998 and
F-10
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1999, are unaudited. 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 rules and
regulations of the Securities and Exchange Commission relating to interim
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial position and the results of operations and cash flows have been
included in such unaudited interim consolidated financial statements. The
results of operations for the nine months ended September 30, 1998 and 1999 are
not necessarily indicative of the results to be expected for the entire year.
(D) 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.
(E) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Mail.com and its wholly-owned subsidiary. The Company's
unaudited interim consolidated financial statements as of September 30, 1999 and
for the nine month periods ended September 30, 1999 include the consolidated
accounts of its wholly-owned subsidiary, The Allegro Group, Inc ("Allegro"),
from August 20, 1999 (date of acquisition). All intercompany balances and
transactions have been eliminated in consolidation.
(F) CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
securities, with original maturities of three months or less when acquired, to
be cash equivalents. Cash equivalents at December 31, 1997 and 1998 and
September 30, 1999 were approximately $773,000, $7,727,000 and $54,590,000,
respectively.
(G) LETTER OF CREDIT AND RESTRICTED INVESTMENTS. On September 30, 1999, the
Company established a $1 million letter of credit ("LOC") with a bank to secure
obligations under an office space lease. The LOC 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 LOC 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 $1.0 million balance on deposit with the
bank in an interest bearing account, which is included in restricted investments
in the consolidated balance sheet. Through September 30, 1999 there were no
drawings under the LOC.
(H) PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets, generally ranging from three to five years.
Property and equipment under capital leases are stated at the present value of
minimum lease payments and are amortized using the straight-line method over the
shorter of the lease term or the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter.
(I) 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
F-11
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
domain name). Domain assets represent the purchase of domain names and are
amortized using the straight-line method over their economic useful lives, which
has been estimated to be five years. Domain assets are stated at cost. Domain
assets acquired in exchange for future payment obligations are stated at the net
present value of such payments using a discount rate of 8.5%. The associated
payment obligation is also recorded at the net present value of the payment
obligations (see note 2). Payment terms vary from two to seven years.
Amortization of domain assets is charged to cost of revenues. The Company's
policy is to evaluate its domain assets prior to paying its annual registration
renewal fees. Any impairment is charged to cost of revenues. Retirements, sales
and disposals of domain assets are recorded by removing the cost and accumulated
amortization with the resulting amount charged to cost of revenues.
The Company pays domain name registration fees in advance to InterNIC, a
cooperative activity between the United States government and Network
Solutions, Inc., which is the national registry for domain names in the United
States. 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.
(J) GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible
assets are stated net of accumulated amortization of $725,000 at September 30,
1999. Goodwill and other intangible assets are being amortized on a
straight-line basis over their expected period of benefit of three years (see
note 2).
(K) IMPAIRMENT OF LONG-LIVED ASSETS. Periodically, management determines
whether any property and equipment or any other assets have been impaired based
on the criteria established in SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." During 1997, the
Company made an adjustment of $84,000 to reduce the carrying value of a computer
system deemed to be impaired.
(L) INCOME TAXES. Income taxes are accounted for under the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in results of
operations in the period that the tax change occurs. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
(M) REVENUE RECOGNITION. The Company's revenues are derived principally from
the sale of banner advertisements. Other advertising revenue sources include
up-front placement fees and promotions. The Company's advertising products
currently consist of banner advertisements that appear on pages within the
Company's properties, promotional sponsorships that are typically focused on a
particular event and merchant buttons on targeted advertising inventory
encouraging users to complete a transaction. Advertising was a new source of
revenue in 1998. Previously, the main source of revenue was subscription
services. For the year ended December 31, 1998 and for the nine months ended
September 30, 1998 and 1999, revenue from advertising related sales approximated
$1,117,000, $225,000 and $5,300,000, respectively. Up-front placement fees
represent funds received from direct marketers and e-commerce companies upon
F-12
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
commencement of the contract. Such fees are recorded as deferred revenues and
amortized ratably to revenue over the term of the contract.
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, revenue is
recognized after the item is purchased based upon notification from the vendor.
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or received,
whichever is more determinable in the circumstances. Revenue from barter
transactions is recognized as income when advertisements are delivered on the
Company's Web properties. Barter expense is recognized when the Company's
advertisements are run on other companies' Web sites. 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. As of December 31, 1998
and September 30, 1999, the Company has recorded a liability of approximately
$71,000 and $13,000, respectively, for barter advertising to be delivered.
Barter revenues and expenses were approximately $162,000 and $233,000,
respectively, during 1998. Barter revenues and expenses were approximately
$84,000 and $83,000; and $361,000 and $303,000 for the nine months ended
September 30, 1998 and 1999, respectively.
The Company also provides businesses with email services. This includes
email system connection services, email hosting services and email monitoring
services, including virus scanning, attachment control, spam control, legal
disclaimers and real time Web-based reporting. Revenue from business services is
recognized as the services are performed. There were no business service
revenues for the year ended December 31, 1998. For the nine months ended
September 30, 1999, revenues from business services were $569,000.
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. The eight year amortization period for lifetime
subscriptions is based on the weighted-average expected usage period of a
lifetime member. Commencing March 10, 1999, the Company no longer offers
lifetime memberships and only offers monthly and annual subscriptions. 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. For the years ended
December 31, 1996, 1997 and 1998, and for the nine months ended September 30,
1998 and 1999, revenues from
F-13
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
email subscriptions were approximately $2,000, $61,000, $285,000, $187,000 and
$434,000, respectively. 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.
The Company has entered into certain partner agreements whereby the Company
compensates its partners based upon a percentage of net revenues generated by
the Company on its partners' email Web sites. The Company's partner payments are
included as a component of sales and marketing expenses.
Revenues from the sale of domain names are recognized at the time when the
ownership of the domain name is transferred provided that no significant Company
obligation remains and collection of the resulting receivable is probable.
Revenues from email outsourcing are recognized as the service is performed based
upon the monthly fees charged to its customers. For the years ended
December 31, 1996, 1997, and 1998, and for the nine month periods ended
September 30, 1998 and 1999, revenues from the sale of domain names and email
outsourcing fees were approximately $17,000, $112,000, $93,000, $80,000 and
$289,000, respectively.
(N) PRODUCT DEVELOPMENT COSTS. Product development costs consist principally
of salaries and related costs, which are charged to expense as incurred.
(O) SALES AND MARKETING COSTS. Marketing expense includes the costs to
acquire and retain subscribers, advertising and other general sales and
marketing costs. Sales and marketing costs include expenses related to customer
acquisitions of approximately $631,000 and $1,709,000 in cash and approximately
$0 and $3,017,000 in common stock issuances during 1997 and 1998, respectively,
and approximately $694,000 and $1,639,000 in cash and approximately $653,000 and
$5,616,000 in common stock issuances for the nine month periods ended
September 30, 1998 and 1999, respectively.
The Company expenses the costs of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $2,000, $8,000 and $300,000, and $21,000 and $5,675,000 for the
years ending December 31, 1996, 1997, and 1998 and for the nine month periods
ended September 30, 1998 and 1999, respectively.
(P) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK. Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts receivable. At
December 31, 1997 and 1998, the fair value of these instruments approximated
their financial statement carrying amount because of the short-term maturity of
these instruments. Substantially all of the Company's cash equivalents were
invested in money market accounts. The Company has not experienced any
significant credit loss to date. One advertiser accounted for 31% and 10% of the
Company's revenues and 36% and 9% of accounts receivable in 1998 and for the
nine months ended September 30, 1999, respectively. Revenues from the Company's
five largest advertisers accounted for an aggregate of 44% of the Company's
revenues in 1998, and 36% of the Company's revenues for the nine months ended
September 30, 1999. No single customer exceeded 10% of either revenue or
accounts receivable in either 1997 or 1996.
F-14
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(Q) STOCK-BASED COMPENSATION. The Company accounts for stock-based
compensation arrangements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of Accounting Principle
Board ("APB") Opinion No. 25 and provide pro forma net earnings (loss)
disclosures for employee stock option grants as if the fair value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(R) BASIC AND DILUTED NET LOSS PER SHARE. Loss per share is presented in
accordance with the provisions of SFAS No. 128, "Earnings Per Share", and the
Securities and Exchange Commission Staff Accounting Bulletin No. 98. SFAS
No. 128 replaced the presentation of primary and fully diluted earnings (loss)
per share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS
No. 128, basic EPS excludes dilution for common stock equivalents and is
computed by dividing income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock. Diluted net loss per share is
equal to basic loss per share since all common stock equivalents are
anti-dilutive for each of the periods presented.
Diluted net loss per common share for the years ended December 31, 1996,
1997 and 1998, and for the nine months ended September 30, 1998 and 1999, does
not include the effects of employee options to purchase 2,195,770, 3,901,321,
6,656,296, 5,956,261 and 9,141,213 shares of common stock, respectively,
warrants to purchase 0, 20,000, 3,021,134, 199,356 and 1,218,899 shares of
common stock, respectively, and 4,185,000, 6,185,000, 13,161,558, 9,961,558 and
0 shares of convertible preferred stock, respectively.
(S) STOCK SPLIT. Effective September 30, 1998, the Company authorized and
implemented a 2-for-1 stock split of all preferred and common stock.
Accordingly, all share and per share amounts in the accompanying financial
statements have been retroactively restated to effect the stock split.
(T) COMPREHENSIVE INCOME. In 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires the Company to report in its
financial statements, in addition to its net income (loss), comprehensive income
(loss) which includes all changes in equity during a period from non-owner
sources, including foreign currency items, minimum pension liability adjustments
and unrealized gains and losses on investments in debt and equity securities.
The Company recorded approximately $2.6 million pertaining to the net unrealized
gains on investments that are available for sale during the nine months ended
September 30, 1999.
(U) RECENT ACCOUNTING PRONOUNCEMENTS. 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 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 the first quarter of 1999, the effect of which was
insignificant.
F-15
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it does
not have any separately reportable segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137, which deferred the effective date of SFAS No. 133. Under
SFAS No. 137, SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. This statement is not expected to effect the
Company, as the Company currently does not have any derivative instruments or
hedging activities.
(2) ACQUISITION OF ALLEGRO
Mail.com acquired The Allegro Group, Inc. ("Allegro"), for approximately
$20.4 million including acquisition costs pursuant to the terms of an Agreement
and Plan of Merger dated August 20, 1999 (the "Merger Agreement"), among
Mail.com, AG Acquisition Corp., a wholly-owned subsidiary of Mail.com
("Acquisition Corp."), Allegro and the shareholders of Allegro. Pursuant to the
terms of the Merger Agreement, Allegro merged with and into Acquisition Corp.
and become a wholly owned subsidiary of Mail.com. The acquisition was accounted
for as a purchase business combination. The consideration payable by Mail.com in
connection with the acquisition of Allegro consisted of the following:
approximately $3.2 million in cash and 1,102,973 shares of Mail.com's Class A
common stock valued at approximately $17.1 million. The Company also incurred
acquisition costs of approximately $150,000. In addition, one-time signing
bonuses of $800,000, which are included in the operating expenses in the
statement of operations, were paid to employees of Allegro who were not
shareholders of Allegro pursuant to employment agreements entered into with them
upon the closing date. In connection with their employment agreements with
Mail.com, Mail.com also granted options to Allegro employees to purchase
approximately 625,000 shares of Mail.com common stock at an exercise price of
$16.00 per share, the then fair value. These options vest quarterly over four
years subject to continued employment.
Mail.com may be obligated to pay additional consideration (the "Contingent
Consideration") upon completion of its audited financial statements for the year
ended December 31, 2000 based on the achievement of certain performance
standards for such year. The Contingent Consideration would consist of up to
$3.2 million payable in cash, additional bonus payments up to $800,000, and up
to $16.0 million payable in shares of Mail.com Class A common stock based on the
market value of such stock at the time of payment (but such market value shall
be deemed to be not less than $8.00 per share).
The consideration payable by Mail.com was determined as a result of
negotiations between Mail.com and Allegro. The number of shares of Mail.com
Class A Common Stock issued to Allegro shareholders was determined based on the
exchange rate of 2,750.5561 of a share of Mail.com Class A Common Stock for each
share of Allegro common stock. Funds paid in connection with the acquisition of
Allegro were provided from Mail.com's cash on hand.
F-16
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(2) ACQUISITION OF ALLEGRO (CONTINUED)
The Company has allocated a portion of the purchase price to the net book
value of the acquired assets and liabilities of Allegro as of the date of
acquisition. The excess of the purchase price over the net book value of the
acquired assets and liabilities of Allegro has been allocated to goodwill and
other intangible assets. Goodwill and other intangible assets will be amortized
over a period of three years, the expected period of benefit.
The valuation of the write-off of acquired in-process technology in the
amount of $900,000 in connection with the acquisition of Allegro is based on an
independent appraisal which determined that the new versions of MailZone
technology acquired from Allegro had not been developed into the platform
required by the Company at the date of acquisition. As a result, the Company
will be required to expend significant capital expenditures to successfully
integrate and develop the new versions of the MailZone technology, for which
there is considerable risk that such technology will not be successfully
developed, and if such technology is not successfully developed, there will be
no alternative use for the technology. The MailZone technology is an enabling
technology for email communications and includes message management, license,
traffic and reporting. The Company's 1999 consolidated statement of operations
reflects a write-off of the amount of the purchase price allocated to acquired
in-process technology of $900,000.
(3) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases, are stated
at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software, including
amounts related to capital leases of $961,000,
$2,352,000 and $13,892,000, respectively...... $1,091,000 $5,175,000 $29,522,000
Furniture and fixtures.......................... 15,000 39,000 254,000
Leasehold improvement........................... -- 24,000 118,000
---------- ---------- -----------
1,106,000 5,238,000 29,894,000
---------- ---------- -----------
Less accumulated depreciation and amortization,
including amounts related to capital leases of
$159,000, $484,000 and $2,006,000,
respectively.................................. 178,000 897,000 3,859,000
---------- ---------- -----------
Total....................................... $ 928,000 $4,341,000 $26,035,000
========== ========== ===========
</TABLE>
Domain assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Domain names.................................... $ 755,000 $1,315,000 $ 5,013,000
Less accumulated amortization................... 104,000 305,000 868,000
---------- ---------- -----------
Domain assets, net.......................... $ 651,000 $1,010,000 $ 4,145,000
========== ========== ===========
</TABLE>
F-17
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(3) BALANCE SHEET COMPONENTS (CONTINUED)
In connection with acquisition of domain assets, the Company has entered
into various domain asset purchase agreements. In January 1999, the Company
purchased the domain name "USA.com" for 225,000 shares of Class A common stock
valued at $5.00 per share totaling $1,125,000. In the second quarter of 1999,
the Company issued 130,000 common shares valued at $11.00 per share totaling
$1,431,000 plus $1,142,000 in cash in connection with its acquisition of domain
name assets, for approximately $2.6 million in the aggregate.
Goodwill and other intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill........................................ $ -- $ -- $18,496,000
Other intangible assets......................... -- -- 1,581,000
---------- ---------- -----------
-- -- 20,077,000
Less accumulated amortization................... -- -- 725,000
---------- ---------- -----------
Total....................................... $ -- $ -- $19,352,000
========== ========== ===========
</TABLE>
Accrued expenses consist of the following, in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Payments due under partner contracts............ $ 28,000 $ 722,000 $ 1,050,000
Professional services and consulting fees....... 138,000 128,000 1,053,000
Software obligations............................ -- -- 325,000
Payroll and related costs....................... 140,000 487,000 1,705,000
Advertising..................................... -- -- 1,071,000
Sales taxes..................................... -- -- 679,000
Other........................................... 155,000 332,000 439,000
---------- ---------- -----------
Total....................................... $ 461,000 $1,669,000 $ 6,322,000
========== ========== ===========
</TABLE>
Other current liabilities as of September 30, 1999 consists of amounts due
for the Oracle system implementation.
(4) INVESTMENTS
The Company has an investment in one of its Mail.com partners, and two other
Internet companies. In July 1999, the Company acquired an equity interest in
3Cube, Inc. Under the agreement, the Company paid $1.0 million in cash and
issued 80,083 of its Class A common stock valued at approximately $2.0 million
in exchange for 307,444 shares of 3Cube, Inc. convertible preferred stock which
represents an equity interest of less than 20% of 3Cube, Inc. Investments which
are not publicly traded are accounted for on the cost basis, as the Company owns
less than 20% of each company's stock. Such investments are stated at the lower
of cost or market value. Investments which are publicly traded are treated as
F-18
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(4) INVESTMENTS (CONTINUED)
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 in
stockholder's equity.
<TABLE>
<S> <C>
Investments, at cost........................................ $3,112,000
Investments available-for-sale, at cost..................... 100,000
----------
3,212,000
Unrealized appreciation..................................... 2,642,000
----------
$5,854,000
==========
</TABLE>
(5) PARTNER AGREEMENTS
Throughout 1998 and through September 30, 1999, the Company entered into
many new Mail.com Partner agreements. Included in these agreements are some
percentage of revenue sharing agreements, miscellaneous fees and other customer
acquisition costs with Mail.com Partners. The revenue sharing agreements vary
for each party but typically are based on selected revenues, as defined, or on a
per sign-up basis. As of December 31, 1998 and September 30, 1999, the Company
owes $722,000 and $1,050,000, respectively to various Mail.com Partners under
such agreements. Such amounts are included in accrued expenses in the balance
sheet.
The Company has issued stock to some of its Mail.com Partners and
capitalizes such issuances when the measurement date for such stock grants is
fixed and there is a sufficient disincentive to breach the contract in
accordance with Emerging Issues Task Force Abstract No. 96-18, "Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Such amounts are amortized ratably
over the length of the contract commencing on the site launch date.
In August 1998, the Company entered into a two year agreement with CNN. In
consideration of the advertising, subscription and customer acquisition
opportunities, CNN received 253,532 shares of Class A common stock upon the
commencement of the contract at $3.50 per share, the fair market value of
Mail.com's common stock on the date of grant, or $887,000. The value of the
stock issuance has been recorded in the 1998 balance sheet as partner advances
and is amortized ratably to amortization expense over the contract term. The
launch of the services coincided with the contract date. The Company recorded
approximately $173,000 and $406,000 of amortization expense in 1998 and for the
nine months ended September 30, 1999, respectively, for this agreement. CNN also
has the right to receive a portion of the Company's selected revenues under the
agreement, as defined. The Company shall also pay quarterly sponsorship fees up
to a maximum of $2 million during the term of the contract of which $615,000 has
been paid through September 30, 1999.
In August 1999, the contract terms were amended. Under the amended contract,
the Company is obligated to pay (1) the greater of 50% of selected revenues for
the quarter, as defined, or $125,000; (2) quarterly license fee of $125,000; and
(3) an amount based upon the gross number of confirmed sign-ups in excess of a
certain threshold.
F-19
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(5) PARTNER AGREEMENTS (CONTINUED)
In September 1998, the Company entered into a minimum two year agreement
with GeoCities with an automatic one year renewal at the Company's option if
GeoCities had not delivered a specified number of sign-ups and two additional
one year renewals subject to approval by both parties. In consideration of the
advertising, subscription and customer acquisition opportunities, GeoCities
received 1,000,000 shares of Class A common stock upon the commencement of the
contract valued at $3.50 per share, the fair market value of Mail.com's common
stock on the date of grant, or $3,500,000. The Company was also required to pay
GeoCities $1.5 million in three installments, the first of which was paid in
December 1998. GeoCities also had the right to receive a portion of the
Company's selected revenues under the agreement, as defined. The value of the
stock issuance and cash payments have been recorded in the 1998 balance sheet as
partner advances and would have been amortized ratably to amortization expense
over the contract term commencing upon the launch of the services. Yahoo!
announced its agreement to acquire GeoCities and the acquisition closed in
May 1999.
In May 1999, the Company and GeoCities cancelled and rescinded their
agreement and agreed to abandon their joint efforts. 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 the second quarter of 1999. In addition, the Company
has agreed to deliver advertisements over its network on behalf of GeoCities and
GeoCities has agreed to pay $125,000 per month for sixteen months, representing
$2,000,000 in the aggregate.
The Company issued an additional 577,628 (Alta Vista--29,528 shares at $3.50
per share, 23,197 at $5.00 per share, totaling $220,000, CNET/Snap--494,903 at
$5.00 per share, totaling $2,474,000 and RemarQ--30,000 shares at $5.00 per
share, totaling $150,000) and 485,616 (Alta Vista--56,092 shares at $5.00-$11.00
per share, totaling $341,000 and CNET/Snap--429,524 shares ranging from
$5.00--$15 per share, totaling $2,181,000) shares of its Class A common stock at
varying prices in 1998 and for the nine months ended September 30, 1999,
respectively, in connection with certain strategic partnership agreements. When
stock issuances are either contingent upon the achievement of certain targets or
the measurement date is not fixed, the Company expenses the issuance of such
stock at the time such stock is issued or the targets are achieved at the then
fair market value of the Company's stock. Such amounts aggregated approximately
$2,844,000 and $2,522,000 for the year ended December 31, 1998 and for the nine
months ended September 30, 1999, respectively, and are included in sales and
marketing expenses in the statement of operations.
The Company's partnership agreement with Lycos expired on October 8, 1998,
shortly after Lycos acquired WhoWhere, a competitor which provides personal
homepage and Webmail services. Compaq, which owns the AltaVista Web site,
recently entered into a strategic relationship with Microsoft. The Company's
partnership agreement with Alta Vista expired on September 30, 1999. While the
Company will continue to own the right to serve the majority of the affected
members after the expiration of these contracts, it cannot be sure that these
members will continue to use its service as actively as the members have in the
past, if at all.
Prior to May 1, 1999, the Company was required to issue to CNET, Snap and
NBC Multimedia an aggregate of 1.25 shares of its Class A common stock for each
member who registers at their sites through
F-20
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(5) PARTNER AGREEMENTS (CONTINUED)
December 31, 1999, up to a maximum of two million members. The Company was also
required to issue 0.5 shares of its Class A common stock for each subsequent
registration until December 31, 2000, subject to a maximum of four million
members (including members who registered prior to December 31, 1999). The
Company had guaranteed NBC Multimedia a minimum of 210,000 shares of Class A
common stock if they launched the Company's services.
On May 1, 1999, the Company entered into an agreement to settle in full its
contingent obligation to issue shares of Class A common stock to CNET, Snap and
NBC Multimedia as described above. Under this settlement, the Company issued
2,368,907 shares of Class A common stock in the aggregate to CNET and Snap and
210,000 shares of Class A common stock to NBC Multimedia at $7.00 per share upon
the closing of the IPO in June 1999. The value of the stock issuance being
(approximately $18 million), has been recorded on the balance sheet as a partner
advance and is being amortized ratably to amortization expense through
May 2001. The Company recorded approximately $2,689,000 of amortization expense
in the nine months ended September 30, 1999.
The following are contracts that require substantial minimum payments and/or
payments in the form of stock contingent upon the occurrence of certain events.
The issuance of such shares of Class A common stock will be accounted for at its
fair market value on the date of issuance:
- CBS SportsLine has the option of receiving its revenue share or $4.00 for
each confirmed signup at its Web site through June 30, 2000. In addition,
the Company must pay sponsorship fees totaling $450,000, $100,000 of which
the Company paid upon signing the contract. The Company shall pay the
remaining $350,000 in quarterly installments of $50,000 and has paid
$100,000 through September 30, 1999.
- The Company guaranteed Time Warner a minimum revenue share of $63,000 per
quarter. The current agreement with Time Warner expired in December 1998.
A new agreement has been entered into that does not require any guaranteed
payments.
- An agreement with NBC Multimedia requires the Company to pay $200,000 in
installments following the launch of service which occurred in May 1999.
- The Company guaranteed NHL Interactive CyberEnterprises (NHL.com) a
minimum revenue share of $50,000 per year. The current agreement expires
in May 2000.
- AltaVista has the option of receiving its revenue share or $1.00 in cash
plus 0.25 shares of the Company's Class A common stock for each confirmed
member registration at their Web site through September 30, 1999.
- In July 1999, the Company entered into a one year agreement, starting from
the date of launch, with Juno Online Services, Inc. ("Juno"). In
consideration of the advertising, subscription and customer acquisition
opportunities, the Company paid Juno an upfront development fee of
$120,000 and four quarterly sponsorship fees of $270,000 each.
- In connection with the launch of email services at iWon.com, the Company
is required to pay CTC Bulldog the greater of its revenue share, $2.00 or
$4.00 for each confirmed sign up at a domain name owned by CTC Bulldog or
Mail.com, respectively, or $1.50 for every 1,000 advertisements delivered
by the Company at the iWon.com web site.
F-21
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(5) PARTNER AGREEMENTS (CONTINUED)
Certain Mail.com Partner agreements require minimum cash and/or equity
payments which aggregated $2,200,000 of which $700,000 is due in 1999 and
$1,500,000 is due in 2000. Additional amounts become payable to certain Mail.com
Partners upon achieving varying member levels.
(6) COMMITMENTS AND CONTINGENCIES
The Company sold certain assets for approximately $710,000 and $1,276,000 in
1997 and 1998, respectively, and approximately $513,000 and $3,900,000 for the
nine months ended September 30, 1998 and 1999, respectively. The assets were
leased back from the purchaser over 3-5 years. The Company recognized a $8,000
loss in 1998 in connection with the sale-leaseback. The Company had not received
approximately $633,000 from such sales as of December 31, 1998. The Company
leases facilities and certain equipment under agreements accounted for as
operating leases. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rental expense for operating
leases for the years ending December 31, 1996, 1997, and 1998 and for the nine
months ended September 30, 1998 and 1999 were approximately $21,000, $71,000,
$380,000, $218,000 and $827,000, respectively.
The Company's lease obligations are collateralized by certain assets at
December 31, 1998. Future minimum lease payments under non-cancelable operating
leases (with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------ -------------- ----------------
<S> <C> <C>
1999............................................. $ 715,000 $ 627,000
2000............................................. 659,000 625,000
2001............................................. 522,000 338,000
2002............................................. 379,000 3,000
2003............................................. 328,000 --
Later years through 2005......................... 15,000 --
---------- ----------
Total minimum lease payments..................... 2,618,000 $1,593,000
==========
Less estimated executory costs................... 68,000
----------
Net minimum lease payments....................... 2,550,000
Less amount representing interest (at a weighted-
average interest rate of 11.5%)................ 634,000
----------
Present value of net minimum capital lease
payments....................................... 1,916,000
Less current portion of obligations under capital
leases......................................... 479,000
----------
Obligations under capital leases, excluding
current portion................................ $1,437,000
==========
</TABLE>
During the nine months ended September 30, 1999, the Company entered into
various capital leases aggregating approximately $11.5 million. In addition, in
February 1999, the Company entered into an agreement with a third party vendor
to provide bulk email to the Company's members for e-commerce opportunities and
company updates. This agreement calls for a minimum payment of approximately
$2.1 million over the life of the agreement (nineteen months).
F-22
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(7) CAPITAL STOCK
AUTHORIZED SHARES
During 1997, the Company amended and restated its certificate of
incorporation. As a result, the total number of shares which the Company was
authorized to issue was 54,000,000 shares: 32,000,000 of these shares were
Class A common stock, 10,000,000 shares were Class B common stock and 12,000,000
shares were Class A preferred stock, all classes having a par value of $0.01.
On October 1, 1998, the Company amended and restated its certificate of
incorporation to increase the number of authorized shares to 104,000,000,
consisting of 60,000,000 and 10,000,000 shares of Class A and Class B common
stock, respectively; and 12,000,000, 12,000,000 and 10,000,000 shares of
Class A, C, and D preferred stock respectively; all classes with a par value of
$0.01 per share.
In March 1999, the Company amended and restated its certificate of
incorporation to increase the number of authorized shares to 190,000,000
consisting of 120,000,000 and 10,000,000 shares of Class A and Class B common
stock, respectively; and 12,000,000, 12,000,000, 10,000,000 and 10,000,000
shares of Class A, C, D and E preferred stock respectively; and 16,000,000
undesignated preferred shares (collectively "Preferred Stock"), all classes with
a par value of $0.01 per share.
COMMON STOCK
During 1996, the Company issued 2,422,500 shares of Class A common stock (at
$0.005 per share) and 10,000,000 shares of Class B common stock (at $0.10 per
share) to its founders in exchange for $1,012,000, comprised of $550,000 in cash
and $462,000 in stock subscriptions receivable of which $450,000 was paid during
1997 and $12,000 was paid in 1998. Also during 1996, the Company issued
1,675,000 shares of Class A common stock (at approximately $0.10 per share) in
connection with a domain asset purchase agreement. During 1998, and for the nine
months ended September 30, 1999, Mail.com issued 1,831,160 and 3,130,324 shares
respectively, of its Class A common stock to various Mail.com Partners (see
note 5).
In addition, in March 1999, the Company also entered into a consulting
contract with a third party for services related to system performance,
activation and maintenance of a partner email site. The Company issued 55,000
shares of Class A common stock valued at $5.00 per share in connection with this
agreement. During the nine months ended September 30, 1999, the Company recorded
approximately $275,000 of expense in connection with this consulting contract.
CONVERTIBLE PREFERRED STOCK
CLASS A PREFERRED STOCK
During 1996, the Company issued 100,000 shares of Class A preferred stock at
$0.005 per share to its founders in exchange for $500. In May 1997, the Company
completed a private placement of 3,460,000 shares of Class A Preferred Stock at
$1.00 per share for an aggregate price of $3,460,000, of which $2,575,000 was
received in cash, $715,000 in stock subscriptions receivable (all of which was
paid during the first quarter of 1998) and $170,000 was contributed in the form
of equity securities and services. The sale of securities was done in three
stages. Proceeds were held in escrow and released upon meeting certain
milestones, namely: 1) $50 of receipts in subscription revenue, and 2) $50 of
receipts in banner advertising
F-23
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(7) CAPITAL STOCK (CONTINUED)
and other revenues (excluding subscriptions). These milestones were met during
1997 and all proceeds were released from escrow prior to the end of 1997.
Each share of Class A preferred stock automatically converted into one share
of Class A common stock upon the closing of the IPO in June 1999.
At the earlier of 30 months or the sale of all or substantially all of the
assets or stock of the Company, each purchaser shall be issued additional
Class A preferred stock, without paying additional consideration, so that, after
giving effect to such issuance, the effective price of all issued shares shall
be reduced as follows: the adjusted share price shall be the greater of
1) $0.50; or 2) 10% of the highest price per share offered to the purchasers in
any public or private sale to a third party, in which the purchasers declined an
opportunity to sell their shares; or 3) 10% of the price per share in a Company
sale. However, in no event shall the adjusted share price exceed $1.00 per
share.
During March 1999, with the consent of the Class A preferred shareholders,
the Company agreed to eliminate in full the Class A contingent additional stock
issuance obligation described above in exchange for giving the existing Class A
preferred shareholders 968,800 shares of Class A common shares on an as if
converted basis, provided the Company completed an IPO before July 31, 1999.
Such IPO closed on June 23, 1999 and the applicable preferred shares converted
to Class A common shares at that time.
REDEEMABLE CLASS C PREFERRED STOCK
In July and August 1998, a private placement of 3,776,558 Class C preferred
shares with detachable warrants at a combined offering price of $3.50 per share
($3.455 per preferred C share and $0.12857 per warrant with each share having
0.35 warrants) was completed for approximately $13,218,000. Such stock is
redeemable at the option of the holders in three equal annual installments
commencing five years from the date of purchase.
Each share of Class C preferred stock automatically converted into one share
of Class A common stock upon the closing of the Company's IPO on June 23, 1999.
In the event that the Company does not provide the Class C preferred
shareholders with an offer to sell, transfer, or dispose of their shares for a
cash price equal to or greater than 3.0 times the combined offering price within
24 months of the date of purchase (such period to be extended to 30 months in
the event the Company has completed a qualified offering within 24 months from
the date of purchase) the stock price will be reduced ratably to a floor of
$2.00 per share through the issuance of additional shares.
During March 1999, with the consent of the Class C preferred shareholders,
the Company agreed to revise the Class C conversion price from $3.50 to $2.80 in
exchange for eliminating in full the Class C additional contingent stock
issuance obligation provisions described above. This revision equated to an
additional 944,139 shares of Class A common stock being issued to the Class C
preferred shareholders upon the closing of the IPO on June 23, 1999.
F-24
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(7) CAPITAL STOCK (CONTINUED)
CONVERSION
Upon the closing of the Company's initial public offering on June 23, 1999,
6,185,000 and 3,776,558 shares of Class A and C convertible preferred stock,
respectively, representing all of the outstanding shares of the convertible
preferred stock, automatically converted on a one-for-one basis into 9,961,558
shares of Class A common stock (before giving effect to the adjustments
described below). In addition, the 3.2 million Class E preferred shares
automatically converted into the same number of Class A common stock (before
giving effect to the adjustments described below). Further, the holders of
Class A, C and E preferred stock received an additional 968,800, 944,139 and
166,424, Class A common shares, respectively, upon conversion of such preferred
stock at the closing of the IPO.
WARRANTS
As part of the private placement of Class C preferred shares in July and
August 1998, 1,321,778 detachable warrants were also issued for proceeds of
$170,000 at a value of $0.12857 per warrant. The Company has the right to
repurchase the warrants, or a portion of the warrants, at a price of $0.005 per
warrant if: 1) the holders of Class C preferred Stock are offered an opportunity
to sell their stock at a price of $10.50 per share or greater within 24 months
after the closing date, or 30 months after the closing date if the Company has
completed a qualified offering; or 2) the Company has net revenues, as defined,
during the 12 month period beginning the month after the closing date, in an
amount equal to or greater than $35,000,000. If net revenues during that period
are greater than $25,000,000 but less than $35,000,000, the Company will be
entitled to repurchase a pro rata portion of the warrants. The warrants may be
exercised in the event that they are not repurchased within the 24 or 30 month
period, or immediately before a merger, consolidation, sale of all or most of
the assets of the Company, or a liquidation or dissolution of the Company. In
connection with the Class C additional contingent stock issuance obligation
settlement described above, all such warrants were cancelled upon the closing of
the IPO.
In 1997, the Company issued warrants to purchase 20,000 shares of Class A
common stock at an exercise price of $1.00 per share to a consultant. These
warrants are exercisable for a period of 10 years. The Company recorded
compensation expense of $4,000 in connection with the issuance of these warrants
using a Black Scholes pricing model.
In addition, warrants were also issued in July and August 1998 to purchase
179,356 shares of Class A common stock at an exercise price of $3.50 per share.
The Company recorded offering costs of $130,000 in connection with the issuance
of these warrants using a Black Scholes pricing model. The terms of these
warrants are substantially identical to the terms of the warrants issued with
the Class C preferred stock, except for the additional contingent stock issuance
obligation, anti-dilution provisions, registration rights and cashless exercise.
These warrants are exercisable for a period of five years.
In the three months ended March 31, 1999, the Company issued 10,183 warrants
to a consultant and a vendor at exercise prices ranging from $5.00 to $6.00 per
share exercise price. The Company recognized approximately $11,000 of expense
using a Black Scholes pricing model.
In May 1999, the Company issued 8,460 warrants to two consultants at an
exercise price of $11.00 per share. The Company recognized approximately $77,000
of expense using a Black Scholes pricing model.
F-25
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(7) CAPITAL STOCK (CONTINUED)
In June 1999, the Company issued 900 warrants to a consultant at an exercise
price of $7.00 per share. The Company recognized approximately $5,000 of expense
using a Black Scholes pricing model.
CLASS D PREFERRED STOCK
In July 1998, the Company authorized 10,000,000 of shares Class D preferred
stock (after giving effect to the October 2, 1998, 2-for 1 stock split).
However, no shares of Class D preferred stock have been issued to date.
CLASS E PREFERRED STOCK
In March 1999, the Company completed a private placement of 3.2 million
shares of Class E preferred stock at $5.00 per share for net proceeds of
approximately $15,200,000. These shares were automatically converted on a
one-for-one basis to an equivalent number of Class A common shares upon the
closing of the IPO. These shares also include the additional contingent stock
issuance obligation provision similar to the Class A and C preferred stock
issuance obligation whereby the Class E shareholders received an additional
166,424 shares of Class A common stock upon the closing of the IPO.
UNDESIGNATED PREFERRED SHARES
The Company is authorized, without further stockholder approval, to issue
authorized but unissued shares of preferred stock in one or more classes or
series. 16,000,000 authorized shares of undesignated preferred stock were
available for creation and issuance in this manner.
VOTING RIGHTS
Each share of Class A common stock shall have one vote per share. Each share
of Class B common stock shall have ten votes per share.
LIQUIDATION PREFERENCE
In the event of any liquidation or winding up of the Company, holders of the
Class A, C and E preferred stock and the Class B common stock are entitled, on a
pro rata basis, in preference to the holders of the Class A common stock, an
amount equal to the applicable purchase price per share plus any accrued but
unpaid dividends.
F-26
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(7) CAPITAL STOCK (CONTINUED)
The following summarizes the Company's preferred stock liquidation
preferences:
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
CLASS E CLASS C CLASS A CLASS B
--------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Number of shares........................... -- -- 400,000 10,000,000
Price per share............................ -- -- $ 0.41 $ 0.10
----------- ----------- ---------- ----------
Total consideration........................ -- -- $ 165,000 $1,000,000
Issuance of stock in exchange of domain
assets................................... -- -- 23,000 --
Subscription receivable.................... -- -- -- $ (450,000)
----------- ----------- ---------- ----------
Liquidation value at December 31, 1996..... -- -- $ 188,000 $ 550,000
----------- ----------- ---------- ----------
Number of shares........................... -- -- 3,290,000 --
Price per share............................ -- -- $ 1.00 --
----------- ----------- ---------- ----------
Total consideration(1)..................... -- -- $3,290,000 --
Subscription receivable.................... -- -- $ (715,000) $ 450,000
Issuance of preferred stock in exchange for
asset.................................... -- -- 100,000 --
Issuance of stock for services............. -- -- 70,000 --
----------- ----------- ---------- ----------
Liquidation value at December 31, 1997..... -- -- $2,933,000 $1,000,000
Number of shares........................... -- 3,777,000 2,000,000 --
Price per share............................ -- $ 3.45 $ 2.00 --
----------- ----------- ---------- ----------
Total consideration(2)..................... -- $13,048,000 $4,000,000 --
Subscription receivable.................... -- -- $ 715,000 --
----------- ----------- ---------- ----------
Liquidation value at December 31, 1998..... -- $13,048,000 $7,648,000 $1,000,000
----------- ----------- ---------- ----------
Numbers of shares.......................... 3,200,000 -- -- --
Price per share............................ $ 5.00 -- -- --
----------- ----------- ---------- ----------
Total consideration(1)..................... $16,000,000 -- -- --
Conversion to Class A common stock in
connection with the IPO.................. (16,000,000) (13,048,000) (7,648,000) --
----------- ----------- ---------- ----------
Liquidation value at September 30, 1999.... $ -- $ -- $ -- $1,000,000
=========== =========== ========== ==========
</TABLE>
- --------------------------
1. Excludes issuance costs of $55,000
2. Excludes issuance costs of $227,000 and $854,000, respectively
3. Excludes issuance costs of $835,000
F-27
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(8) AT&T WARRANT
Under a letter agreement dated May 26, 1999, AT&T Corp. and the Company have
agreed to negotiate in good faith to complete definitive agreements to establish
a strategic relationship. On July 26, 1999, both parties entered into an interim
agreement to provide email services to select corporate IP Services customers.
Both parties are working toward a definitive agreement that will include
additional corporate customers and a broader set of email services. Under the
strategic relationship, AT&T Corp. would offer the Company's email outsourcing
services to AT&T Corp.'s new and existing corporate customers who purchase
Internet connection services from AT&T Corp. subject to any conditions that may
be included in the definitive agreements. These services would not contain any
advertising or promotional messages. Mail.com would agree not to integrate or
customize its email outsourcing technology for these services with any third
party until December 31, 1999. Mail.com would retain the right during this
period, however, to distribute its non-customized services to corporate
customers both under its own brand name and other parties' brand names if these
other parties do not need to integrate or customize our technology. At AT&T
Corp.'s request, Mail.com would also agree to work with AT&T Corp. on a
preferred basis to develop and integrate technologies for services such as
email, voicemail, telephony, paging and voice conferencing. AT&T Corp. or the
Company may terminate the letter agreement without further liability if
definitive agreements are not entered into on or before August 31, 1999. Under
the letter agreement, the Company issued warrants to purchase 1,000,000 shares
of Class A common stock at $11.00 per share. AT&T Corp. may exercise the
warrants at any time on or before December 31, 2000 regardless of whether the
Company enters into definitive agreements for the strategic relationship. If
under the proposed strategic relationship AT&T Corp. provides more than 30,000
active emailboxes with the Company's managed messaging service on or before
December 31, 2000, AT&T Corp. may pay the exercise price of the warrants by
exchanging warrants in lieu of cash. AT&T Corp. may not sell or otherwise
transfer to a third party the warrants or the shares issuable upon exercise of
the warrants until the earlier of May 26, 2004 or the date that it provides more
than 30,000 active emailboxes if this date is on or before December 31, 2000. In
addition, AT&T Corp. has agreed that it will not sell or otherwise transfer the
warrants or the Class A common stock for 180 days after our initial public
offering.
The Company has incurred non-cash accounting charges of approximately
$4.3 million in the aggregate as a result of the issuance of these warrants. The
Company has amortized $445,000 for the nine months ended September 30, 1999 and
will continue to amortize these charges over the term of the agreement entered
into with AT&T Corp. If the Company does not enter into a definitive agreement,
the non-cash charges will be expensed in the fiscal quarter in which both
parties have ceased negotiations for the proposed strategic relationship.
(9) CNET/SNAP STOCK WARRANT
In 1998, the Company entered into a partner agreement with CNET, Inc. which
was amended shortly thereafter to include the newly formed Snap, LLC. During
March 1999, Snap assigned their rights to NBC Multimedia. As part of this
agreement, on November 6, 1998, when 250,000 users completed subscriptions for
the Email.com service, warrants for an aggregate of 1,500,000 Class A common
shares were granted at an exercise price of the lesser of $5.00 per share (the
fair market value at the date of grant) or the IPO price. These warrants expire
on the earlier of (a) December 31, 1999 or (b) the closing of a firm commitment,
underwritten initial public offering of common stock by Mail.com. The Company
recorded a non-cash charge of approximately $371,000, based upon the fair market
value of the stock warrants, using a
F-28
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(9) CNET/SNAP STOCK WARRANT (CONTINUED)
Black Scholes pricing model. Such amount is included in sales and marketing in
the 1998 statement of operations. In March 1999, CNET and NBC Multimedia
exercised their warrants in accordance with this agreement by placing the
proceeds of $7.5 million in an escrow account. Upon the closing of the IPO on
June 23, 1999, funds from the exercise of the warrants in accordance with the
agreement were disbursed to the Company and the shares of the Class A common
stock relating to the warrants were issued to CNET and NBC Multimedia.
(10) LYCOS STOCK WARRANT
In October 1997, the Company entered into a partner agreement with
Lycos, Inc. As part of this agreement, a stock warrant for 2,000,000 Class A
preferred shares was granted at an exercise price of $2.00 per share, the fair
market value at the date of grant. The Company recorded a non-cash charge of
$48,000, based upon the fair market value of the stock warrant, using a Black
Scholes pricing model. In March 1998, Lycos exercised its warrant in accordance
with this agreement whereby the Company received 100,062 shares of Lycos stock
valued at $39.98 per share on the closing date, which the Company sold in the
following week for proceeds totaling approximately $4.4 million. The Company
recognized a gain of approximately $438,000 on such sale.
(11) STOCK OPTIONS
During 1996, the Company established the 1996 Stock Option Plan. Under the
Plan, the Board of Directors may issue incentive stock options or nonqualified
stock options to purchase up to 1,000,000 common shares.
In 1997, the 1997 Stock Option Plan was approved by the Board of Directors
and Shareholders and provided for the issuance of 3,500,000 options, including
both incentive stock and nonqualified stock options.
During 1998, the Board of Directors approved the 1998 Stock Option Plan
providing for the issuance of 1,500,000 options, including both incentive stock
and nonqualified stock options. Most options are granted at fair market value,
except as noted below, and are for periods not to exceed 10 years.
On April 21, 1999, the Board of Directors approved the 1999 Stock Option
Plan providing for the issuance of 2,500,000 options, including both incentive
stock and non-qualified stock options.
During 1998, 40,000 options were issued to a key executive at an exercise
price of $3.50 per share. Such options were contingent upon the executive
achieving a specified target. Such options were issued when the executive
achieved a specific target at the then fair value of the Company's common stock
of $3.50 per share. Accordingly, no compensation expense was recorded.
During 1998, 402,975 options were issued to a key executive at an exercise
price of $2.00 per share, all of which were granted in 1998. Such options were
outside of the Company's Stock Option Plans and contingent upon the Company
achieving specified advertising revenue targets, as defined. For the year ended
December 31, 1998, the Company recorded deferred compensation expense of
approximately $1,100,000 in the aggregate in connection with these grants,
representing the difference between the deemed fair value of the Company's stock
at the date of each grant and the $2.00 per share exercise price of the related
options. This amount is presented as a reduction of stockholders' equity
(deficit) and
F-29
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(11) STOCK OPTIONS (CONTINUED)
amortized over the three year vesting period from the achievement of the
performance targets which was concurrent with each option grant. The Company has
amortized $71,000 and $274,000 of deferred compensation for the year ended
December 31, 1998 and the nine months ended September 30, 1999, respectively.
The Company will amortize the remaining deferred compensation of approximately
$751,000 as of September 30, 1999 over the remaining vesting period.
For the year ended December 31, 1997 and 1998 and for nine months ended
September 30, 1998 and 1999, the Company recorded compensation expense of
approximately $48,000, $442,000, $0 and $795,000, respectively, for stock option
and warrant issuances. Such amounts include the employee option grants and the
CNET, Lycos and AT&T warrants (see notes 8 through 11).
For the nine months ended September 30, 1999, the Company issued 110,150
stock options to certain employees at prices ranging from $5.00 to $11.00 per
share. The fair value of the Company's common stock on the dates of grant ranged
from $7.00 to $11.00 per share. Accordingly, the Company recorded deferred
compensation of approximately $641,000, representing the difference between the
deemed fair value of the Company's stock at the date of each grant and the
exercise price of the related options. The amount is presented as a reduction of
stockholders' equity (deficit) and amortized over the 4 year vesting period of
the applicable options. The Company has amortized $350,000 of total deferred
compensation for the nine months ended September 30, 1999. For the nine months
ended September 30, 1999, the Company issued approximately 2.8 million stock
options to certain employees at a weighted average exercise price of $8.85 per
share, and select employees exercised 144,966 stock options.
In August 1999, the Board of Directors approved the Allegro Group stock
option plan, providing for the issuance of 625,000 non-qualified stock options,
at an exercise price of $16.00 per share, to select officers and employees of
Allegro. All such options were issued immediately after the consummation of the
Allegro acquisition.
The Company applies APB No. 25 and related interpretations in accounting for
its stock options issued to employees. Under APB No. 25, because the exercise
price of the Company's employee stock options equals the fair value of the
underlying common stock on the date of grant, no compensation cost has been
recognized for its stock option grants to employees and directors. Had
compensation cost for the Company's stock option grants been determined based on
the fair value at the grant date for awards consistent with the method of SFAS
No. 123, the Company's net loss would have increased the pro forma amounts for
each year indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported........................... $(544,000) $(2,996,000) $(12,525,000)
========= =========== ============
Pro forma............................. $(705,000) $(3,595,000) $(14,134,000)
========= =========== ============
Net loss per common share:
As reported........................... $ (0.04) $ (0.21) $ (0.86)
========= =========== ============
Pro forma............................. $ (0.05) $ (0.25) $ (0.97)
========= =========== ============
</TABLE>
F-30
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(11) STOCK OPTIONS (CONTINUED)
The resulting effect on the pro forma net loss disclosed for the year ended
December 31, 1996, 1997 and 1998 is not likely to be representative of the
effects on the net loss on a pro forma basis in future years, because the pro
forma results include the impact of only one and two years respectively, of
grants and related vesting, while subsequent years will include additional
grants and vesting.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes method option-pricing model with the following weighted
average assumptions used for grants in 1996, 1997, 1998: dividend yield of zero
(0%) percent, risk-free interest rate ranging from 5.81% to 6.89% and expected
life of 10 years. As permitted under the provisions of SFAS No. 123 and based on
the historical lack of a public market for the Company's stock, no factor for
volatility has been reflected in the option pricing calculation.
A summary of the Company's stock option activity and weighted average
exercise prices is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------------- --------------------
1999
1996 1997 1998 --------------------
--------------------- --------------------- -------------------- (UNAUDITED)
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
period............................ -- -- 2,195,770 $ 0.27 3,901,321 $0.94 6,656,296 $1.93
--------- --------- --------- --------- --------- ----- --------- -----
Options granted..................... 2,195,770 $ 0.27 2,176,130 $ 1.85 3,086,884 $3.18 2,843,545 $8.85
Options exercised................... -- -- -- -- -- -- (144,966) $1.85
Options canceled.................... -- -- (470,579) $ 0.35 (331,909) $1.85 (213,662) $1.18
--------- --------- --------- --------- --------- ----- --------- -----
Options outstanding at end of
period............................ 2,195,770 $ 0.27 3,901,321 $ 0.94 6,656,296 $1.93 9,141,213 $4.10
========= ========= ========= =========
Options exercisable at period end... 1,429,976 2,108,028 3,230,469 4,629,081
Weighted average fair value of
options granted during the
period............................ $ 0.12 $ 0.81 $ 1.48 $ 7.99
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------ -------------------------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
0.10-$$0.20...... 920,256 7.55 $ 0.11 650,255 $0.11
0.50.$........... 906,440 7.95 $ 0.50 779,721 $0.50
1.00.$........... 896,260 8.25 $ 1.00 617,057 $1.00
2.00.$........... 1,859,827 8.95 $ 2.00 810,755 $2.00
3.50.$........... 1,795,013 9.36 $ 3.50 372,087 $3.50
5.00.$........... 278,500 9.85 $ 5.00 594 $5.00
--------- ---------
6,656,296 3,230,469
========= =========
</TABLE>
F-31
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(12) INCOME TAXES
There is no provision for federal, state or local income taxes for all
periods presented, since the Company has incurred losses since inception. At
December 31, 1998, the Company had approximately $12.7 million of federal net
operating loss carryforwards available to offset future taxable income. Such
carryforwards expire in various years through 2018. The Company has recorded a
full valuation allowance against its deferred tax assets since management
believes that, after considering all the available objective evidence, it is not
more likely than not that these assets will be realized. The tax effect of
temporary differences that give rise to significant portions of federal deferred
tax assets principally consists of the Company's net operating loss
carryforward.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), the utilization of net operating loss carryforwards may be limited
under the change in stock ownership rules of the Code. The Company has not yet
determined whether an ownership change has occurred.
The effects of temporary differences and tax loss carryforwards that give
rise to significant portions of federal deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1998 are presented below.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $1,491,000 $6,292,000
Deferred revenues.................................... 102,000 979,000
Accounts receivable principally due to allowance for
doubtful accounts.................................. -- 42,000
Non-cash compensation................................ -- 49,000
Other................................................ 39,000 62,000
---------- ----------
Gross deferred tax assets............................ 1,632,000 7,424,000
Less: valuation allowance............................ (1,626,000) (7,373,000)
---------- ----------
Net deferred tax assets.............................. 6,000 51,000
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation.................................... (6,000) (51,000)
---------- ----------
Gross deferred tax liabilities....................... $ (6,000) $ (51,000)
========== ==========
</TABLE>
F-32
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(13) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS/ BALANCE AT END
YEAR EXPENSES WRITE-OFFS OF PERIOD
------------ ---------- ----------- --------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996: Allowance
for doubtful accounts........................ $ $ $ $
======= ======== ======= ========
For the year ended December 31, 1997: Allowance
for doubtful accounts........................ $ $ $ $
======= ======== ======= ========
For the year ended December 31, 1998: Allowance
for doubtful accounts........................ $ $ 92,000 $ $ 92,000
======= ======== ======= ========
For the nine months ended September 30, 1999:
Allowance for doubtful accounts
(unaudited).................................. $92,000 $156,000 $51,000 $197,000
======= ======== ======= ========
</TABLE>
(14) SUBSEQUENT EVENTS
On October 18, 1999, the Company acquired TCOM, Inc. ("TCOM"), a software
technology development firm, specializing in the design of carrier class
applications for the telecommunications and computer telephony industries. The
acquisition will be accounted for as a purchase business combination. The
Company is not continuing the business operations of TCOM but rather made the
acquisition in order to obtain technology and development resources. The Company
paid $2.0 million in cash and issued 439,832 shares of Mail.com Class A common
stock valued at approximately $6.1 million.
Mail.com may be obligated to pay additional consideration (the "Contingent
Consideration") based upon certain employment criteria over an 18-month period.
The Contingent Consideration would consist of up to $1.0 million payable in cash
and up to $2.75 million payable in shares of Mail.com Class A common stock based
on the market value of such stock at the time of payment (but such market value
shall be deemed to be not less than $4.00 per share).
In October 1999, the Company acquired a domain name for $250,000 in cash and
53,571 shares of Mail.com's Class A common stock valued at approximately
$750,000.
In November 1999, the Company acquired iFan, Inc. ("iFan"), a web site with
various domain names. The acquisition has been accounted for as a purchase
business combination. The Company issued 72,704 shares of Mail.com Class A
Common Stock valued at approximately $1.6 million. In addition, the Board of
Directors approved the iFan, Inc. Group stock option plan, providing for the
issuance of 16,697 non-qualified stock options at an exercise price of $20.07
per share to select employees of iFan. All such options were issued immediately
after the consummation of the iFan acquisition.
Mail.com and Mast Acquisition Corp., a newly formed subsidiary of Mail.com,
have entered into a merger agreement dated as of December 11, 1999, with
NetMoves, a Delaware corporation. The merger agreement provides for the merger
of Mast Acquisition Corp. with and into NetMoves, with NetMoves becoming a
wholly-owned subsidiary of Mail.com.
F-33
<PAGE>
MAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(14) SUBSEQUENT EVENTS (CONTINUED)
The merger agreement provides for the issuance of 0.385336 shares of
Mail.com Class A common stock in exchange for each share of common stock of
NetMoves outstanding immediately prior to the consummation of the merger for a
total of 6,343,904 shares of Class A common stock. In addition, the Company is
assuming outstanding options and warrants of NetMoves which will represent the
right to purchase 996,053 shares and 57,343 shares, respectively, of the
Company's Class A common stock at average exercise prices of $6.57 and $8.64,
respectively. Based on the $25.625 per share closing price of Mail.com's
Class A common stock on the last day of trading prior to the signing of the
merger agreement, the total value of those shares is $162.6 million. Completion
of the merger is subject to the satisfaction of various conditions, including
approval of the stockholders of NetMoves at a special meeting to be held as soon
as practicable and the expiration of antitrust regulatory waiting periods.
Concurrently with the execution of the merger agreement, certain directors
and officers of NetMoves entered into separate voting agreements with Mail.com.
These directors and officers beneficially hold outstanding shares of NetMoves'
common stock representing approximately 2.0% of NetMoves' outstanding common
stock and options exercisable for NetMoves' common stock representing
approximately an additional 10.8% of NetMoves' outstanding common stock. In the
voting agreements, such directors and officers have agreed, to vote their shares
of NetMoves' common stock in favor of approval and adoption of the merger
agreement and approval of the merger and against any competing transactions that
may arise.
Also concurrently with the execution of the merger agreement, seven of the
key officers of NetMoves, including Thomas F. Murawski, the Chief Executive
Officer and Chairman of NetMoves, agreed to enter into employment agreements
with Mail.com following the merger.
In addition to the rollover of existing options contemplated by the merger
agreement, Thomas Murawski, NetMoves' President, Chief Executive Officer and
Chairman of the board of directors, will receive options from Mail.com 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 the lesser of $23.35650 per share and the market price
of Mail.com Class A common stock as of the close of business on the date the
merger is consummated.
In December 1999, the Company acquired Lansoft U.S.A., an internet messaging
company similar to Allegro. The acquisition has been accounted for as a business
combination. The Company issued 152,006 shares of Mail.com Class A common stock
valued at approximately $2.7 million. In addition, the Board of Directors
approved the Lansoft Stock Option Plan, providing for the issuance of 100,000
non-qualified stock options at an exercise price of $17.06 per share to select
employees of Lansoft. All such options were issued immediately after the
consummation of the Lansoft acquisition.
On January 6, 2000, the Company announced its proposed Rule 144A offering of
$100 million (excluding overallotments) of convertible subordinated notes. The
notes would be convertible, at the option of the holder, into shares of the
Company's Class A common stock. The NetMoves merger is not conditioned on
completion of the notes offering. As of January 18, 2000, the proposed offering
had not yet priced, and the Company had not yet entered into a purchase
agreement with respect to the notes with any placement agent.
F-34
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
ACQUISITION OF THE ALLEGRO GROUP, INC.
On August 20, 1999, Mail.com acquired The Allegro Group, Inc. ("Allegro")
pursuant to the terms of an Agreement and Plan of Merger (the "Allegro Merger
Agreement"). Pursuant to the terms of the Allegro Merger Agreement, Allegro
merged with and into Acquisition Corp. and became a wholly owned subsidiary of
Mail.com. The total purchase price for this transaction was approximately
$20.4 million, including acquisition costs. The consideration payable by
Mail.com in connection with the acquisition of Allegro consisted of the
following: approximately $3.2 million in cash and 1,102,973 shares of Mail.com
Class A common stock valued at approximately $17.1 million. Mail.com also
incurred acquisition costs of approximately $150,000 related to the merger.
The consideration payable by Mail.com was determined as a result of
negotiations between Mail.com and Allegro. The number of shares of Mail.com
Class A common stock issued to Allegro stockholders was determined based on the
exchange rate of 2,750.5561 shares of Mail.com Class A common stock for each
share of Allegro common stock.
The acquisition has been accounted for using the purchase method of
accounting. Mail.com has allocated a portion of the purchase price to the fair
market value of the acquired assets and assumed liabilities of Allegro as of the
date of acquisition. The excess of the purchase price over the fair market value
of the acquired assets and assumed liabilities of Allegro has been allocated to
goodwill and other intangible assets. Goodwill and other intangible assets are
being amortized over a period of 3 years, the expected period of benefit.
Approximately $900,000 of the purchase price was allocated to in-process
technology based upon an independent appraisal which determined that the new
versions of MailZone technology acquired from Allegro had not been developed
into the platform required by Mail.com at the date of acquisition. The fair
value of purchased existing and in-process technologies was determined by
management using a risk-adjusted income valuation approach. Because such
in-process technologies had not reached the stage of technological feasibility
at the acquisition date and had no alternative future use, this amount was
immediately written off on the date of the acquisition. As a result, Mail.com
will be required to expend significant capital expenditures to successfully
integrate and develop the new versions of the MailZone technology, for which
there is considerable risk that such technology will not be successfully
developed, and if such technology is successfully developed, there will be no
alternative use for the technology. The MailZone technology is an enabling
technology for email communications and includes message management, license,
traffic and reporting. Accordingly, Mail.com's historical statement of
operations for the nine months ended September 30, 1999 reflect a write-off of
the amount of purchase price allocated to acquired in-process technology of
$900,000.
Mail.com allocated the excess purchase price over the fair value of net
tangible assets acquired to identified intangible assets. In performing this
allocation, Mail.com considered, among other factors, the attrition rate of the
active users of the technology at the date of acquisition and the research and
development projects in-process at the date of acquisition. With regard to the
in-process research and development projects, Mail.com considered, among other
factors, the stage of development of each project at the time of acquisition,
the importance of each project to the overall development plan, and the
projected incremental cash flows from the projects when completed and any
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the impact of potential changes in future
target markets.
Mail.com will incur in excess of approximately $600,000 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
F-35
<PAGE>
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.
ACQUISITION OF NETMOVES CORPORATION
On December 11, 1999, Mail.com entered into a definitive agreement and
intends to acquire NetMoves Corporation ("NetMoves") for approximately
$163.9 million including acquisition costs pursuant to the terms of the merger
agreement described elsewhere in this offering memorandum. Pursuant to the terms
of the merger agreement, Mast Acquisition Corp., which is a wholly owned
subsidiary of Mail.com, will merge with and into NetMoves and NetMoves will
become a wholly-owned subsidiary of Mail.com. Pursuant to the merger, NetMoves
stockholders will be entitled to receive 0.385336 of a share of Mail.com
Class A common stock for each issued and outstanding share of NetMoves common
stock. Based on NetMoves' capitalization on December 11, 1999, the consideration
payable by Mail.com in connection with the acquisition of NetMoves will consist
of the following:
- 6,343,904 shares of Mail.com Class A common stock valued at approximately
$154.6 million;
- The assumption by Mail.com of options to purchase shares of NetMoves'
common stock, par value of $.01 per share, to be exchanged for options to
purchase approximately 1.0 million shares of Mail.com Class A common
stock. The options were valued at approximately $7.8 million. 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, to be exchanged for warrants to
purchase approximately 58,000 shares of Mail.com Class A Common Stock. The
warrants were valued at approximately $852,000. Such warrants have an
aggregate exercise price of approximately $496,000. Mail.com has the right
to cause some of the warrants to be converted into NetMoves common stock
prior to the merger; and
- Mail.com also anticipates acquisition costs of approximately $600,000
related to the merger.
In addition to the rollover of existing options contemplated by the merger
agreement, Thomas Murawski, NetMoves' President, Chief Executive Officer and
Chairman of the board of directors, as an employee of Mail.com will receive
options from Mail.com 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 the lesser of $23.35650 per share and the
market price of Mail.com Class A common stock as of the close of business on the
date the merger is consummated.
The consideration payable by Mail.com was determined as a result of
negotiations between Mail.com and NetMoves. The number of shares of Mail.com
Class A common stock to be issued to NetMoves stockholders was determined based
on the exchange rate of 0.385336 shares of Mail.com Class A common stock for
each share of NetMoves common stock.
The acquisition is expected to be accounted for using the purchase method of
accounting. Mail.com intends to allocate a portion of the purchase price to the
fair market value of the acquired assets and assumed liabilities of NetMoves as
of the date of the closing. For pro forma purposes, Mail.com used the
announcement date of the intended acquisition as its basis for determining its
preliminary allocation of the purchase price. The excess of the purchase price
over the fair market value of the acquired assets and assumed liabilities of
NetMoves has been preliminarily allocated to goodwill and other intangible
assets. Goodwill and other intangible assets are expected to be amortized over a
period of 3 years, the expected estimated period of benefit. The purchase price
allocation is preliminary and is subject to change depending upon the final
outcome of the valuation and appraisals of the fair market value of the acquired
assets and assumed liabilities of NetMoves at the date of acquisition, as well
as the potential identification of certain intangible assets such as customer
lists, etc.
F-36
<PAGE>
Mail.com is in process of performing an independent valuation of NetMoves
estimated acquired in-process technology, etc. Approximately $18.0 million of
the purchase price of NetMoves is expected to be allocated to in-process
technology based upon a preliminary 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 by the anticipated
acquisition date. The preliminary 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 will be 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 will reflect a
write-off of the amount of purchase price allocated to in-process technology of
$18 million. For purposes of the pro forma financial information, the estimated
amount of the in-process technology ($18 million) is the mid point of the
preliminary estimated range of acquired in-process technology of $16 to
$20 million. This range is based upon a preliminary analysis. Because such
in-process technologies is not expected to reach the stage of technological
feasibility by the anticipated acquisition date and is expected to have no
alternative future use, this amount shall be immediately written-off by Mail.com
and has been reflected in the pro forma balance sheet as a charge to
stockholders' equity.
Mail.com intends to allocate the excess purchase price over the fair value
of net tangible assets acquired to identified intangible assets. In performing
this allocation, Mail.com considered, among other factors, the attrition rate of
the active users of the technology at the date of acquisition and the research
and development projects in-process at the date of acquisition. With regard to
the in-process research and development projects, Mail.com considered, among
other factors, the stage of development of each project at the time of
acquisition, the importance of each project to the overall development plan, and
the projected incremental cash flows from the projects when completed and any
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the impact of potential changes in future
target markets.
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.
If Mail.com is unable to write-off any of the in-process technology and,
accordingly, the dollar amount of the purchase price allocated to in-process
technology was determined to be zero, the effect would result in (i) an
$18.0 million increase in both goodwill and other intangible assets and
stockholder's equity presented in the unaudited pro forma condensed combined
balance sheet as of September 30, 1999; and (ii) a $6.0 million or $(0.27) per
share and $4.5 million or $(0.13) per share increase in the net loss
attributable to common stockholders and net loss per common share presented in
the unaudited pro forma condensed consolidated combined statement of operations
for the year ended December 31, 1998 and the nine months ended September 30,
1999, respectively. As a result, the annual amortization of goodwill and other
intangible assets would increase from $44.1 million per year to $50.1 million
per year based upon an expected estimated period of benefit of three years.
F-37
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed combined Statement of
Operations (the "Pro Forma Statement of Operations") for the year ended
December 31, 1998 and nine months ended September 30, 1999 gives effect to the
Allegro and NetMoves acquisitions as if they had occurred on January 1, 1998.
The Pro Forma Statement of Operations are based on historical results of
operations of Mail.com, Allegro and NetMoves for the year ended December 31,
1998 and nine months ended September 30, 1999 (approximately seven and one-half
months for Allegro).
The Unaudited Pro Forma Condensed Combined Balance Sheet (the "Pro Forma
Balance Sheet") gives effect to the acquisition of NetMoves as if the
acquisition had occurred on September 30, 1999. The acquisition of Allegro
occurred during the third quarter of 1999 and, accordingly, the Allegro
acquisition is reflected in Mail.com's historical balance sheet as of
September 30, 1999. The Pro Forma Statement of Operations and Pro Forma Balance
Sheet and accompanying notes (the "Pro Forma Financial Information") should be
read in conjunction with and are qualified by the historical financial
statements of Mail.com, NetMoves and Allegro and notes thereto set forth or
incorporated by reference in this proxy statement/prospectus.
The Pro Forma Financial Information is intended for informational purposes
only and is not necessarily indicative of the future financial position or
future results of operations of Mail.com after the acquisition of Allegro and
NetMoves, or of the financial position or results of operations of Mail.com that
would have actually occurred had the acquisition of Allegro and NetMoves been
effected on January 1, 1998.
F-38
<PAGE>
MAIL.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NETMOVES
MAIL.COM, INC. CORPORATION ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 53,469 $ 8,966 $ -- $ 62,435
Accounts receivable, net................... 2,400 3,400 -- 5,800
Prepaid expenses and other current
assets................................... 1,290 432 -- 1,722
-------- ------- -------- --------
Total current assets..................... 57,159 12,798 -- 69,957
Property and equipment, net.................. 26,035 6,100 -- 32,135
Domain assets, net........................... 4,145 -- -- 4,145
Partner advances............................. 19,842 -- -- 19,842
Investments in affiliated companies.......... 5,854 -- -- 5,854
Goodwill and other intangible assets, net.... 19,352 2,190 132,278(b) 153,820
Restricted investment........................ 1,000 -- -- 1,000
Other assets................................. 380 -- -- 380
-------- ------- -------- --------
Total assets............................. $133,767 $21,088 $132,278 $287,133
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 8,028 $ 1,976 $ -- $ 10,004
Accrued expenses........................... 6,322 2,720 -- 9,042
Capital lease obligations.................. 3,866 63 -- 3,929
Domain asset purchase obligations.......... 268 -- -- 268
Current portion of long-term debt.......... -- 1,166 -- 1,166
Deferred revenue........................... 914 -- -- 914
Other current liabilities.................. 2,988 -- -- 2,988
-------- ------- -------- --------
Total current liabilities................ 22,386 5,925 -- 28,311
Capital lease obligations, less current
portion.................................... 9,094 145 -- 9,239
Domain asset purchase obligations, less
current portion............................ 184 -- -- 184
Long-term debt, less current portion......... -- 1,429 -- 1,429
Deferred revenue............................. 953 -- -- 953
-------- ------- -------- --------
Total liabilities........................ 32,617 7,499 -- 40,116
(13,589)(b)
(18,000)(b)
Stockholders' equity......................... 101,150 13,589 163,867(b) 247,017
-------- ------- -------- --------
Total liabilities and stockholders'
equity................................. $133,767 $21,088 $132,278 $287,133
======== ======= ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.
F-39
<PAGE>
MAIL.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THE ALLEGRO GROUP, NETMOVES
MAIL.COM, INC. INC. CORPORATION ADJUSTMENTS PRO FORMA
-------------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 1,495 $4,326 $21,117 $ -- $ 26,938
------------ ------ ------- --------- -----------
Operating expenses:
Cost of revenues........ 2,891 2,318 15,017 -- 20,226
Sales and marketing..... 6,680 892 6,640 -- 14,212
General and
administrative........ 3,482 1,443 4,382 -- 9,307
Product development..... 1,573 135 2,110 -- 3,818
Amortization of goodwill
and intangible
assets................ -- -- -- 6,692(a) 50,785
44,093(b)
Patent litigation
settlement............ -- -- 1,025 -- 1,025
------------ ------ ------- --------- -----------
Total operating
expenses............ 14,626 4,788 29,174 50,785 99,373
------------ ------ ------- --------- -----------
Loss from
operations.......... (13,131) (462) (8,057) (50,785) (72,435)
------------ ------ ------- --------- -----------
Other income:
Gain on sale of
investment............ 438 -- -- -- 438
Other income............ 277 10 229 -- 516
Interest expense........ (109) (38) (257) -- (404)
------------ ------ ------- --------- -----------
Total other income
(expense), net...... 606 (28) (28) -- 550
------------ ------ ------- --------- -----------
Net loss.................. $ (12,525) $ (490) $(8,085) $ (50,785) $ (71,885)
============ ====== ======= ========= ===========
Basic and diluted net loss
per common share........ $ (0.86) $ (3.26)(c)
============ ===========
Weighted-average basic and
diluted shares 1,102,973(c)
outstanding............. 14,607,915 6,343,904(c) 22,054,792(c)
============ ========= ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.
F-40
<PAGE>
MAIL.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
THE ALLEGRO NETMOVES
MAIL.COM, INC. GROUP, INC. (1) CORPORATION ADJUSTMENTS PRO FORMA
-------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 6,593 $2,966 $17,135 $ -- $ 26,694
----------- ------ ------- ---------- -----------
Operating expenses:
Cost of revenues............. 7,720 1,604 12,920 -- 22,244
Sales and marketing.......... 17,083 688 5,971 -- 23,742
General and administrative... 7,207 356 4,396 -- 11,959
Product development.......... 4,643 599 1,685 -- 6,927
Amortization of goodwill and
intangible assets.......... 725 -- -- 4,294(a) 38,089
33,070(b)
Write-off of acquired
in-process technology...... 900 -- -- -- 900
----------- ------ ------- ---------- -----------
Total operating expenses... 38,278 3,247 24,972 37,364 103,861
----------- ------ ------- ---------- -----------
Loss from operations....... (31,685) (281) (7,837) (37,364) (77,167)
----------- ------ ------- ---------- -----------
Other income:
Other income................. 1,098 14 89 -- 1,201
Interest expense............. (355) (27) (97) -- (479)
----------- ------ ------- ---------- -----------
Total other income
(expense), net........... 743 (13) (8) -- 722
Net loss....................... (30,942) (294) (7,845) (37,364) (76,445)
Cumulative dividends on
settlement of contingent
obligations to preferred
stockholders................. 14,556 -- -- -- 14,556
----------- ------ ------- ---------- -----------
Net loss attributable to
common stockholders...... $ (45,498) $ (294) $(7,845) $ (37,364) $ (91,001)
=========== ====== ======= ========== ===========
Basic and diluted net loss per
common share................. $ (1.69) $ (2.65)(c)
=========== ===========
Weighted-average basic and
diluted shares outstanding... 1,102,973(c)
==========
26,891,270 6,343,904(c) 34,338,147(c)
=========== ========== ===========
</TABLE>
- ------------------------
(1) Represents The Allegro Group, Inc. from January 1, 1999 to August 20, 1999
(date of acquisition).
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.
F-41
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(1) PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(a) The following represents the allocation of the purchase price over the
actual fair values of the acquired assets and assumed liabilities of Allegro
at August 20, 1999, the date of acquisition. The purchase price allocation
is as follows:
<TABLE>
<S> <C>
Assets acquired:
Cash...................................................... $ 25
Accounts receivable....................................... 516
Other assets.............................................. 84
Property and equipment.................................... 757
Goodwill and intangibles.................................. 20,077
-------
21,459
In-process technology....................................... 900
Liabilities assumed......................................... (1,989)
-------
Purchase price.............................................. $20,370
=======
</TABLE>
The pro forma adjustments reflect twelve months of amortization expense for
the year ended December 31, 1998 and approximately seven and one-half months
of amortization expense for the period from January 1, 1999 through its date
of acquisition (August 20, 1999), assuming the Allegro transaction had
occurred on January 1, 1998. The value of the goodwill and intangible assets
at January 1, 1998 would have been approximately $20.1 million. Goodwill and
other intangible assets will be amortized over the expected period of
benefit of three years.
Mail.com may be required to record additional contingent purchase payments
for the Allegro acquisition based on future performance levels. Basic and
diluted net loss per share excludes the effect of additional purchase price
of up to $19.2 million including the issuance of up to 2 million shares of
Class A common stock (based on the minimum deemed fair market value of such
shares of $8.00 per share) whose payout and issuance is contingent on
Allegro achieving certain revenue and spending levels in fiscal year 2000.
The contingent consideration would consist of up to $3.2 million payable in
cash, additional bonus payments of $800,000 and up to $16.0 million payable
in shares of Mail.com Class A common stock based on the market value of such
stock at the time of payment (but such market value shall be deemed to be
not less than $8.00 per share). The minimum level of performance required by
Allegro in fiscal 2000 that would require payout of any of the $20 million
and issuance of up to 2 million shares of Class A common stock is specified
revenue and spending levels as defined. If the entire $4.0 million is paid
($3.2 million of purchase price and additional bonus payments of $800,000)
and all of the $16 million in value of contingent Class A common shares are
issued (2 million common shares based upon the minimum assumed fair market
value per share of $8.00), $19.2 million of additional purchase price,
$800,000 of expense and approximately $6.4 million of additional annual
amortization expense will result. If all these contingent shares were
included in the basic and diluted net loss per common share calculation,
basic and diluted net loss per common share would have been ($3.29) and
($2.64) for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively.
(b) The following represents the preliminary allocation of the purchase price
over the historical net book values of the acquired assets and assumed
liabilities of NetMoves at September 30, 1999, and is for illustrative pro
forma purposes only. Actual fair values will be based on financial
information as of the
F-42
<PAGE>
acquisition date. Assuming the transaction had occurred on September 30,
1999, the preliminary allocation would have been as follows:
<TABLE>
<S> <C>
Assets acquired:
Cash...................................................... $ 8,966
Accounts receivable....................................... 3,400
Other assets.............................................. 2,622
Property and equipment.................................... 6,100
Goodwill and intangibles.................................. 132,278
--------
153,366
In-process technology....................................... 18,000
Liabilities assumed......................................... (7,499)
--------
Purchase price.............................................. $163,867
========
</TABLE>
This allocation is preliminary and may be subject to change upon evaluation
of the fair value of NetMoves' acquired assets and liabilities as of the
acquisition date as well as the potential identification of certain
intangible assets.
- The pro forma adjustments reflect twelve months of amortization expense
for the year ended December 31, 1998 and nine months of amortization
expense for the period from January 1, 1999 through September 30, 1999
assuming the transaction had occurred on January 1, 1998. The preliminary
value of the goodwill and intangible assets at January 1, 1998 would have
been approximately $132.3 million. Goodwill and other intangible assets
will be amortized over the expected estimated period of benefit of three
years;
- For purposes of the pro forma financial information, the estimated amount
of the in-process technology ($18 million) is the mid point of the
preliminary estimated range of acquired in-process technology of $16 to
$20 million. This range is based upon a preliminary analysis. Because such
in-process technologies is not expected to reach the stage of
technological feasibility by the anticipated acquisition date and is
expected to have no alternative future use, this amount shall be
immediately written-off by Mail.com and has been reflected in the pro
forma balance sheet as a charge to stockholders' equity; and
If Mail.com is unable to write-off any of the in-process technology and,
accordingly, the dollar amount of the purchase price allocated to
in-process technology was determined to be zero, the effect would result
in (i) an $18.0 million increase in both goodwill and other intangible
assets and stockholder's equity presented in the unaudited pro forma
condensed combined balance sheet as of September 30, 1999; and (ii) a
$6.0 million or $(0.27) per share and $4.5 million or $(0.13) per share
increase in the net loss attributable to common stockholders and net loss
per common share presented in the unaudited pro forma condensed
consolidated combined statement of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999,
respectively. As a result, the annual amortization of goodwill and other
intangible assets would increase from $44.1 million per year to
$50.1 million per year based upon an expected estimated period of benefit
of three years.
- The pro forma adjustment reconciles the historical balance sheet of
NetMoves at September 30, 1999 to the allocated purchase price of NetMoves
of $163.9 million assuming the transaction had occurred on September 30,
1999.
(c) The pro forma basic and diluted net loss per common share is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of common shares outstanding. The calculation of the weighted
average number of shares outstanding assumes that 1,102,973 of Mail.com's
common stock issued in connection with its acquisition of Allegro and the
6,343,904 of Mail.com's common stock expected to be issued in connection
with its planned acquisition of NetMoves were outstanding for the entire
period. Diluted net loss per share equals basic net loss per share, as
common stock equivalents are anti-dilutive for all pro forma periods
presented.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Allegro Group, Inc.:
We have audited the accompanying balance sheets of The Allegro Group, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Allegro Group, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Columbus, Ohio
October 18, 1999
F-44
<PAGE>
THE ALLEGRO GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 88,568 $ 39,096 $ 50,091
Accounts receivable, net of allowance for doubtful
accounts of $5,000, $3,000 and $12,000 in 1997, 1998,
and 1999, respectively............................... 485,295 445,159 457,277
Prepaid expenses and other current assets.............. 23,849 21,849 50,048
---------- ---------- ----------
Total current assets................................. 597,712 506,104 557,416
---------- ---------- ----------
Property and equipment, net............................ 410,394 692,224 626,668
Other.................................................. 9,109 8,624 8,624
---------- ---------- ----------
Total assets......................................... $1,017,215 $1,206,952 $1,192,708
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit............................... $ 99,993 $ 93,722 $ 98,600
Current portion of notes payable to bank............... -- 53,548 59,766
Current portion of capital lease obligations........... 22,870 76,493 142,265
Accounts payable....................................... 320,145 731,875 975,485
Other accrued expenses................................. 41,107 286,000 332,911
Accrued payroll and related costs...................... 153,483 51,000 140,817
---------- ---------- ----------
Total current liabilities............................ 637,598 1,292,638 1,749,844
---------- ---------- ----------
Notes payable to bank, less current portion............ -- 56,755 22,104
Capital lease obligations, less current portion........ 38,363 105,213 3,152
---------- ---------- ----------
Total liabilities.................................... 675,961 1,454,606 1,775,100
---------- ---------- ----------
Shareholders' equity (deficit):
Common stock, $0.01 par value; 850 shares authorized;
401 shares issued and outstanding for all periods.... 4 4 4
Additional paid-in capital............................. 536 536 536
Retained earnings (accumulated deficit)................ 340,714 (248,194) (582,932)
---------- ---------- ----------
Total shareholders' equity (deficit)................. 341,254 (247,654) (582,392)
---------- ---------- ----------
Commitments and contingencies
Total liabilities and shareholders' equity (deficit)... $1,017,215 $1,206,952 $1,192,708
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-45
<PAGE>
THE ALLEGRO GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................................... $2,900,039 $4,325,995 $2,064,234 $2,335,234
---------- ---------- ---------- ----------
Operating expenses:
Cost of revenues............................ 1,362,830 2,317,970 1,212,166 1,349,374
Sales and marketing......................... 538,722 892,097 354,285 548,935
Product development......................... 63,368 135,463 51,029 104,164
General and administrative.................. 719,312 1,442,534 546,146 591,502
---------- ---------- ---------- ----------
Total operating expenses.................. 2,684,232 4,788,064 2,163,626 2,593,975
---------- ---------- ---------- ----------
Income (loss) from operations............. 215,807 (462,069) (99,392) (258,741)
---------- ---------- ---------- ----------
Other income (expense):
Interest income............................. 12,267 10,888 8,439 9,870
Interest expense............................ (3,664) (38,286) (10,867) (25,679)
Other....................................... 1,284 (783) 3,677 5,100
---------- ---------- ---------- ----------
Total other income (expense), net......... 9,887 (28,181) 1,249 (10,709)
---------- ---------- ---------- ----------
Net income (loss)............................. $ 225,694 $ (490,250) $ (98,143) $ (269,450)
========== ========== ========== ==========
Pro Forma income taxes (unaudited)............ $ 88,007 $ (156,976) $ (78,488) $ 7,662
========== ========== ========== ==========
Pro Forma net income (loss) (unaudited)....... $ 137,687 $ (333,274) $ (19,655) $ (277,112)
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-46
<PAGE>
THE ALLEGRO GROUP, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
------------------- ADDITIONAL (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL DEFICIT) EQUITY (DEFICIT)
-------- -------- --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996........... 401 $4 $536 $ 233,028 $ 233,568
Net income............................ -- -- -- 225,694 225,694
Shareholder distributions............. -- -- -- (118,008) (118,008)
--- -- ---- --------- ---------
Balances at December 31, 1997........... 401 4 536 340,714 341,254
Net loss.............................. -- -- -- (490,250) (490,250)
Shareholder distributions............. -- -- -- (98,658) (98,658)
--- -- ---- --------- ---------
Balances at December 31, 1998........... 401 4 536 (248,194) (247,654)
Net loss (unaudited).................. -- -- -- (269,450) (269,450)
Shareholder distributions
(unaudited)......................... -- -- -- (65,288) (65,288)
--- -- ---- --------- ---------
Balances at June 30, 1999 (unaudited)... 401 $4 $536 $(582,932) $(582,392)
=== == ==== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-47
<PAGE>
THE ALLEGRO GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 225,694 $(490,250) $ (98,143) $(269,450)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 145,061 262,624 124,920 166,722
Provision for doubtful accounts.............. 33,000 41,000 15,000 31,000
Losses on disposal of property and
equipment.................................. 1,191 23,703 19,706 7,098
Changes in operating assets and liabilities:
Accounts receivable.......................... (333,536) (864) 52,365 (43,118)
Prepaid expenses and other current assets.... (22,398) 2,000 18,004 (28,199)
Other assets................................. (1,137) 485 198 --
Accounts payable............................. 215,875 411,730 279,287 243,610
Other accrued expenses....................... 35,676 244,893 8,961 46,911
Accrued payroll and related costs............ 125,006 (102,483) (51,210) 89,817
--------- --------- --------- ---------
Net cash provided by operating
activities............................... 424,432 392,838 369,088 244,391
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............ (307,864) (401,918) (309,516) (108,264)
Proceeds from sales of property and
equipment.................................... -- 2,285 -- --
--------- --------- --------- ---------
Net cash used in investing activities...... (307,864) (399,633) (309,516) (108,264)
--------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under revolving
line of credit............................... 79,993 (6,271) (24,001) 10,000
Borrowings under notes payable to bank......... -- 139,487 95,729 --
Repayments of notes payable to bank............ -- (29,184) (7,980) (33,555)
Principal payments under capital lease
obligations.................................. (17,008) (48,051) (22,951) (36,289)
Distributions paid............................. (118,008) (98,658) (76,162) (65,288)
--------- --------- --------- ---------
Net cash used in financing activities........ (55,023) (42,677) (35,365) (125,132)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. 61,545 (49,472) 24,207 10,995
Cash and cash equivalents at beginning of
period......................................... 27,023 88,568 88,568 39,096
--------- --------- --------- ---------
Cash and cash equivalents at the end of period... $ 88,568 $ 39,096 $ 112,775 $ 50,091
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................... $ 3,664 $ 38,286 $ 10,867 $ 26,679
--------- --------- --------- ---------
NON-CASH FINANCING ACTIVITIES:
Property and equipment purchased under capital
lease obligations............................ $ 62,244 $ 168,524 $ 123,267 $ --
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-48
<PAGE>
THE ALLEGRO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(a) SUMMARY OF OPERATIONS. The Allegro Group, Inc. (the "Company" or
"Allegro") was formed in 1995 as an S Corporation. The Company provides
businesses with internet email message management services. The Company services
include internet email network integration services, email hosting services and
email message management services, including virus scanning, attachment control,
spam control, legal disclaimers and real time web-based reporting.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history. The Company's future success will be
dependent upon its ability to create and deliver effective and competitive
messaging services and its ability to develop and provide new services that meet
members' changing requirements, including the effective use of leading
technologies. The Company must also continue to enhance its current services,
and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
The Company's ability to provide services is dependent on its
telecommunications network. The Company uses one telecommunications company for
its business. The Company does not anticipate any contractual changes with this
telecommunications company. However, if such changes do occur, the Company does
not believe that they would have an adverse effect of the Company's business.
(B) UNAUDITED INTERIM INFORMATION. The interim financial statements of the
Company as of June 30, 1999, and for the six months ended June 30, 1998 and
1999, are unaudited. 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 rules and
regulations of the SEC relating to interim financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the financial position and the results of
its operations and its cash flows have been included in such unaudited financial
statements. The results of operations for the six months ended June 30, 1998 and
1999 are not necessarily indicative of the results to be expected for the entire
year.
(C) USE OF ESTIMATES. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(D) CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
securities, with original maturities of three months or less when acquired, to
be cash equivalents. Cash equivalents at December 31, 1997 and 1998 and
June 30, 1999 were approximately $26,000, $27,000 and $28,000, respectively.
(E) PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets, generally ranging from three to five years.
Property and equipment under capital leases are stated at the present value of
minimum lease payments and are amortized using the straight-line method over the
shorter of the lease term or the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter.
F-49
<PAGE>
THE ALLEGRO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) IMPAIRMENT OF LONG-LIVED ASSETS. Periodically, management determines
whether any property and equipment or any other assets have been impaired based
on the criteria established in SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of."
(G) INCOME TAXES. The Company has elected under the Internal Revenue Code
to be an S Corporation. As such, the Company is not subject to federal or state
income taxes. The Company's stockholders include the taxable income or loss of
the Company in their personal income tax returns. Accordingly, no provision for
income taxes has been reflected in the financial statements of the Company.
If the Company had operated as a C Corporation since inception, the Company
would have recorded net deferred tax assets for the years ended December 31,
1997 and 1998 and for the six months ended June 30, 1999 of approximately
$6,000, $133,000, and $147,000. However, due to operating losses incurred, there
would have been a corresponding valuation allowance of $31,000 and $147,000 in
1998 and 1999, respectively.
(H) REVENUE RECOGNITION. The Company's revenues are derived principally
from internet email network integration services, email hosting services and
email message management services, including virus scanning, attachment control,
spam control, legal disclaimers and real time web-based reporting.
(I) PRODUCT DEVELOPMENT COSTS. Product development costs consist
principally of salaries and related costs, which are charged to expense as
incurred.
(J) SALES AND MARKETING COSTS. The Company expenses the cost of
advertising and promoting its services as incurred. Such costs are included in
sales and marketing and totaled approximately $368,000 and $419,000 and $160,000
and $305,000 for the years ending December 31, 1997, and 1998 and for the
six-month periods ended June 30, 1998 and 1999, respectively.
(K) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK. Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts receivable. At
December 31, 1997 and 1998, and June 30, 1999, the fair value of these
instruments approximated their financial statement carrying amount because of
the short-term maturity of these instruments. The Company has not experienced
any significant credit loss to date. No single customer exceeded 10% of either
revenue or accounts receivable in 1997, 1998, or 1999.
The fair value of other financial instruments, including the current portion
of notes payable and current liabilities also approximated their financial
statement carrying amount because of the short-term maturity of these
instruments. The carrying amount of notes payable approximated fair value
calculated by discounting scheduled cash flows through maturity using current
rates.
(L) RECENT ACCOUNTING PRONOUNCEMENTS. 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 on accounting for the proceeds
for determining whether 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 the fourth quarter of
1998 and has
F-50
<PAGE>
THE ALLEGRO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately $16,000 and $47,000 of capitalized software costs as of
December 31, 1998 and June 30, 1999, respectively.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in 1998. SFAS
No. 130 requires the Company to report in its financial statements, in addition
to its net income (loss), comprehensive income (loss), which includes all
changes in equity during a period from non-owner sources including, as
applicable, foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. There were no differences between the Company's comprehensive income
(loss) and its net income (loss) as reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it does
not have any separately reportable segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137 which deferred the effective date of SFAS No. 133. SFAS
No. 137 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. This statement is not expected to effect the Company, as the
Company does not have any derivative instruments or engage in hedging
activities.
(2) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL --------------------- JUNE 30,
LIVES 1997 1998 1999
-------- -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment and software, including
amounts related to capital leases of $49,558,
$118,195 and $118,195, respectively............ 3 $486,193 $ 850,414 $ 938,365
Furniture and fixtures, including amounts related
to capital leases of $43,036, $142,603 and
$142,603, respectively......................... 5 106,122 273,715 272,195
Leasehold improvements........................... 3-5 9,985 12,339 12,339
-------- ---------- ----------
602,300 1,136,468 1,222,899
Less accumulated depreciation and amortization,
including amounts related to capital leases of
$34,880, $74,479 and $108,426, respectively.... 191,906 444,244 596,231
-------- ---------- ----------
Total............................................ $410,394 $ 692,224 $ 626,668
======== ========== ==========
</TABLE>
F-51
<PAGE>
THE ALLEGRO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(3) LINE OF CREDIT
The Company has a revolving credit facility agreement with a bank that
enables it to borrow up to $100,000 at 1.0% above prime (8.75% at December 31,
1998), subject to certain conditions and collateral restrictions as defined in
the agreement. At December 31, 1998, the Company had additional borrowing
capacity of approximately $6,000. The revolving credit facility is secured by
substantially all of the Company's assets, including accounts receivable and
property and equipment. The line of credit agreement expired in September 1999
and was repaid in October 1999.
(4) NOTES PAYABLE
A summary of notes payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Note payable to bank, bearing interest at prime plus 0.75%
(8.5% at December 31, 1998); principal and interest
payable in monthly installments of $2,007 through August
2000; secured by property and equipment $ 38,515 $ 26,468
Note payable to bank, bearing interest at prime plus 0.75%
(8.5% at December 31, 1998); principal and interest
payable in monthly installments of $2,660 through March
2001; secured by property and equipment 71,788 55,402
-------- --------
Total notes payable......................................... 110,303 81,870
Less current portion........................................ (53,548) (59,766)
-------- --------
Notes payable, less current portion......................... $ 56,755 $ 22,104
======== ========
</TABLE>
Aggregate maturities under these obligations as of December 31, 1998 and
June 30, 1999 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
1999........ $ 53,548 2000 $59,766
2000........ 48,843 2001 22,104
2001........ 7,912 2002
-------- ---- -------
$110,303 $81,870
======== ==== =======
</TABLE>
(5) LEASES
The Company has one operating lease having an initial or remaining
non-cancelable lease term in excess of one year for its principal office
facility and has various capital leases for property and equipment. Rental
expense for operating leases for the years ending December 31, 1997, and 1998
and for the six
F-52
<PAGE>
THE ALLEGRO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(5) LEASES (CONTINUED)
months ended June 30, 1998 and 1999 was approximately $50,000, $107,000, $34,000
and $74,000, respectively.
The Company's capital lease obligations are collateralized by certain assets
at December 31, 1998. Future minimum lease payments under non-cancelable
operating leases (with initial or remaining lease terms in excess of one year)
and future minimum capital lease payments as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------ -------------- ----------------
<S> <C> <C>
1999............................................. $105,686 $149,000
2000............................................. 89,208 153,000
2001............................................. 11,558 157,000
2002............................................. -- 66,000
-------- --------
Total minimum lease payments................... 206,452 $525,000
======== ========
Less estimated amount representing interest (at a
weighted-average interest rate of 9.5%)........ 24,746
--------
Present value of minimum capital lease
payments....................................... 181,706
Less current portion of capital lease
obligations.................................... 76,493
--------
Capital lease obligations, less current
portion........................................ $105,213
========
</TABLE>
(6) CAPITAL STOCK
The Company has authorized 450 shares of voting and 400 shares of non-voting
common stock. As of December 31, 1998, the Company has issued and outstanding
401 shares of voting common stock to the three principal shareholders of the
Company. The Company makes periodic distributions to its shareholders. However,
no distributions are required to be made under the terms of the Company's
Shareholder Agreement.
(7) 401(K) SAVINGS/RETIREMENT PLAN
Effective December 1, 1997, the Company adopted a 401(k) plan that covers
all employees. The Company may make a matching contribution to each participant
up to 3% of participant's compensation. Matching contributions vest to each
participant at the rate of 20% per year after the first full year of service.
Company matching contributions for the years ended December 31, 1997 and 1998
and for the six months ended June 30, 1998 and 1999 were approximately $1,000,
$12,000, $6,000, and $8,000, respectively.
(8) LEGAL PROCEEDINGS
The Company is involved in certain legal actions which have arisen in the
ordinary course of business. The Company has accrued its best estimate of
potential amounts to be paid related to these matters and
F-53
<PAGE>
THE ALLEGRO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(8) LEGAL PROCEEDINGS (CONTINUED)
has included approximately $19,000, $248,000, and $282,000 in other accrued
expenses as of December 31, 1997 and 1998 and June 30, 1999, respectively.
In the opinion of management the ultimate disposition of these matters will
not have a material adverse effect on the Company's financial position, results
of operations, or liquidity.
(9) SUBSEQUENT EVENTS
During August and September 1999, the Company executed two lease agreements
to finance the purchase of equipment. The August agreement requires the Company
to pay approximately $115,000 over a 2 year period and the September agreement
requires the Company to pay approximately $41,000 over a 3 year period.
On August 20, 1999, Mail.com, Inc. ("Mail.com") acquired the Company
pursuant to the terms of an Agreement and Plan of Merger dated August 20, 1999
(the "Merger Agreement"), among Mail.com, AG Acquisition Corp., a wholly-owned
subsidiary of Mail.com ("Acquisition Corp."), the Company and the shareholders
of the Company. Pursuant to the terms of the Merger Agreement, the Company
merged with and into Acquisition Corp. and became a wholly-owned subsidiary of
Mail.com. Mail.com paid aggregate consideration in connection with the
transaction of approximately $3.2 million in cash and 1,102,973 shares of its
Class A common stock. In addition to the purchase price, one-time bonus payments
totaling $800,000 were paid to employees of the Company who are not shareholders
of the Company. Mail.com also may pay additional consideration (the "Contingent
Consideration") upon completion of its audited financial statements for the year
ended December 31, 2000 based on the achievement of certain performance
standards for such year. The Contingent Consideration would consist of up to
$4.0 million payable in cash and up to $16.0 million payable in shares of
Mail.com Class A common stock based on the market value of such stock at the
time of payment (but such market value shall be deemed to be not less than $8.00
per share.)
F-54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of FaxSav Incorporated:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of FaxSav Incorporated (formerly
Digitran Corporation) (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
February 3, 1999
F-55
<PAGE>
FAXSAV INCORPORATED
BALANCE SHEETS
AS OF
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 3,680,185 $ 5,260,450 $ 8,966,171
Accounts receivable, less allowances of $330,724,
$220,076 and $238,648 as of December 31, 1997
and 1998 and September 30, 1999, respectively... 2,280,119 3,198,688 3,400,259
Prepaid expenses and other current assets......... 35,844 162,218 431,864
------------ ------------ ------------
Total current assets........................ 5,996,148 8,621,356 12,798,294
Property and equipment, net......................... 4,175,264 5,487,221 6,100,299
Other assets, net................................... 324,173 379,148 2,189,668
------------ ------------ ------------
Total assets................................ $ 10,495,585 $ 14,487,725 $ 21,088,261
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 658,703 $ 1,153,688 $ 1,975,503
Accrued expenses and other liabilities............ 3,219,846 2,654,658 2,720,158
Current portion of notes payable.................. 469,217 992,960 62,973
Obligation under capital lease.................... 315,370 95,804 1,165,804
------------ ------------ ------------
Total current liabilities................... 4,663,136 4,897,110 5,924,438
Notes payable....................................... 1,083,190 1,540,481 1,428,996
Obligation under capital lease...................... 85,551 145,461
------------ ------------ ------------
Total liabilities................................... 5,831,877 6,437,591 7,498,895
------------ ------------ ------------
Commitments and contingencies (Notes 7 and 12)
Stockholders' equity:
Common stock, $0.01 par value; 40,000,000 shares
authorized; 10,806,466, 13,904,203 and
16,462,820 shares issued and outstanding as of
December 31, 1997 and 1998 and September 30,
1999, respectively.............................. 108,065 139,042 164,628
Additional paid-in capital.......................... 36,730,388 48,171,015 61,529,556
Accumulated deficit................................. (32,174,745) (40,259,923) (48,104,818)
------------ ------------ ------------
Total stockholders' equity.................. 4,663,708 8,050,134 13,589,366
------------ ------------ ------------
Total liabilities and stockholders'
equity.................................. $ 10,495,585 $ 14,487,725 $ 21,088,261
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE>
FAXSAV INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue............................. $15,035,711 $17,418,333 $21,116,726 $15,507,389 $17,135,143
Cost of service..................... 8,898,308 10,413,797 11,128,752 8,121,692 8,982,980
----------- ----------- ----------- ----------- -----------
Gross margin.................... 6,137,403 7,004,536 9,987,974 7,385,697 8,152,163
----------- ----------- ----------- ----------- -----------
Operating expenses:
Network operations and support.... 1,984,607 2,286,594 3,608,129 2,570,767 3,575,149
Research and development.......... 1,771,822 1,909,137 1,995,039 1,582,447 1,526,404
Sales and marketing............... 6,065,045 5,268,099 6,639,575 4,708,289 5,971,037
General and administrative........ 2,495,624 3,132,438 3,285,126 2,368,961 3,390,856
Depreciation and amortization..... 1,436,673 1,702,054 1,492,493 1,080,669 1,525,842
Patent litigation settlement...... 1,025,000 1,025,000
----------- ----------- ----------- ----------- -----------
Total operating expenses........ 13,753,771 14,298,322 18,045,362 13,336,133 15,989,288
----------- ----------- ----------- ----------- -----------
Operating loss.................. (7,616,368) (7,293,786) (8,057,388) (5,950,436) (7,837,125)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income................... 188,680 240,987 123,838
Interest expense.................. (142,269) (162,218) (257,264) (78,008) (96,978)
Other............................. 93,568 96,115 105,636 77,829 89,208
----------- ----------- ----------- ----------- -----------
139,979 174,884 (27,790) (179) (7,770)
----------- ----------- ----------- ----------- -----------
Net loss........................ $(7,476,389) $(7,118,902) $(8,085,178) $(5,950,615) $(7,844,895)
=========== =========== =========== =========== ===========
Historical basic and diluted net
loss per common share............. $ (2.74) $ (0.72) $ (0.68) $ (0.52) $ (0.52)
=========== =========== =========== =========== ===========
Shares used in computing historical
net loss per common share......... 2,724,651 9,880,681 11,842,956 11,377,178 15,206,767
=========== =========== =========== =========== ===========
Unaudited pro forma data (Note 2):
Pro forma basic and diluted net
loss per common share........... $ (0.86) (0.72) $ (0.68) $ (0.52) $ (0.52)
=========== =========== =========== =========== ===========
Shares used in computing pro forma
net loss per common share....... 8,712,054 9,880,681 11,842,956 11,377,178 15,206,767
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-57
<PAGE>
FAXSAV INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(7,476,389) $(7,118,902) $(8,085,178) $(5,950,615) $(7,844,895)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization expense.............. 1,436,673 1,702,054 1,492,493 1,080,669 1,525,842
Patent litigation settlement....................... 1,000,000 1,000,000
Provision for doubtful accounts.................... 219,400 230,520 269,470 118,282 794,650
Gain on sale of property and equipment............. (18,791) (26,860)
Changes in assets and liabilities:
Accounts receivable.............................. 123,497 (495,484) (1,188,039) (956,160) (996,221)
Prepaid expenses and other current assets........ (184,111) 215,573 (126,374) 90,140 (247,369)
Other assets..................................... (80,199) (182,462) 186,975
Accounts payable................................. (40,961) 395,257 494,985 401,402 821,815
Accrued expenses and other liabilities........... 1,086,523 (193,941) (565,188) (109,196) 65,500
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities............ (4,915,567) (5,466,176) (6,547,716) (4,325,478) (5,880,678)
Cash flows used in investing activities:
Proceeds/(purchase) of marketable securities........... (1,002,513) 1,002,513
Purchase of property and equipment..................... (2,328,829) (2,856,952) (2,761,566) (1,480,570) (1,706,027)
Purchase of intangibles................................ (314,223) (284,167) (2,050,633)
Proceeds from sales of property and equipment.......... 112,770 56,250
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities............ (3,331,342) (1,741,669) (3,019,539) (1,764,737) (3,756,660)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Principal payments made under capital lease
obligation........................................... (219,201) (280,517) (305,117) (249,436) (102,427)
Borrowings under line of credit........................ 956,334 1,299,797 1,522,845 688,697 999,485
Repayments of notes payable............................ (1,525,352) (178,372) (541,812) (319,617) (938,114)
Proceeds from issuance of preferred stock, net......... 7,933,434
Proceeds from issuance of common stock and exercise of
stock options and warrants, net...................... 10,636,307 2,124,017 10,471,604 7,023,627 13,384,115
Treasury stock acquired--preferred................. (2,163,878)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities........ 15,617,644 2,964,925 11,147,520 7,143,271 13,343,059
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash.......................... 7,370,735 (4,242,920) 1,580,265 1,053,056 3,705,721
Cash and cash equivalents at beginning of period......... 552,370 7,923,105 3,680,185 3,680,185 5,260,450
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............... $ 7,923,105 $ 3,680,185 $ 5,260,450 $4,733,241 $ 8,966,171
=========== =========== =========== =========== ===========
Supplemental disclosure:
Cash paid for interest................................. $ 68,421 $ 45,918 $ 117,556 $ 92,770 $ 60,974
=========== =========== =========== =========== ===========
Noncash investing and financing activities:
Equipment acquired under capital lease................. $ 421,805 $ 0 $ 0 $ 0 $ 215,057
=========== =========== =========== =========== ===========
Issuance of common stock pursuant to patent litigation
settlement........................................... $ 0 $ 0 $ 1,000,000 $1,000,000 $ 0
=========== =========== =========== =========== ===========
Issuance of common stock under option pursuant to
severance agreement.................................. $ 42,091 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-58
<PAGE>
FAXSAV INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE COMMON STOCK
PREFERRED STOCK PAID-IN
---------------------- --------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS DEFICIT
----------- -------- ---------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996......... 58,769,921 $ 58,770 327,353 $ 3,274 $18,204,438 $(17,579,454)
Issuance of Series F preferred
stock............................ 19,999,988 20,000 7,979,998
Treasury stock acquired--Series D
preferred stock.................. (8,655,510) (2,155,222)
Conversion of preferred stock into
common stock..................... (70,127,830) (78,783) 7,791,981 77,920 (7,793)
Issuance of common stock in
connection with Initial public
offering......................... 1,600,000 16,000 11,888,000
Expense in connection with stock
issuances........................ (1,343,035)
Exercise of warrants............... 13,431 13 131 8,765
Exercise of stock options.......... 51,156 512 41,579
Net loss........................... (7,476,389)
----------- -------- ---------- -------- ----------- -------- ------------
Balance at December 31, 1996....... 0 0 9,770,621 97,706 34,616,730 (25,055,843)
----------- -------- ---------- -------- ----------- -------- ------------
Issuance of common stock in
connection with private
placement........................ 1,000,000 10,000 2,165,000
Exercise of stock options.......... 35,746 358 27,277
Exercise of warrants............... 99 1 539
Expenses in connection with stock
issuance......................... (79,158)
Net loss........................... (7,118,902)
----------- -------- ---------- -------- ----------- -------- ------------
Balance at December 31, 1997....... 0 0 10,806,466 108,065 36,730,388 (32,174,745)
----------- -------- ---------- -------- ----------- -------- ------------
Issuance of common stock in
connection with private
placements....................... 2,645,161 26,452 10,153,251 $320,297
Exercise of stock options.......... 143,560 1,435 279,774
Receivable from sale of stock...... (203,598)
Stock issuance..................... 34,016 340 101,708
Stock issuance in connection with
settlement of litigation......... 275,000 2,750 997,250
Expenses in connection with stock
issuance......................... (208,055)
Net loss........................... (8,085,178)
----------- -------- ---------- -------- ----------- -------- ------------
Balance at December 31, 1998....... 0 0 13,904,203 139,042 47,850,718 320,297 (40,259,923)
Issuance of common stock in
connection with private placement
(unaudited)...................... 2,499,000 24,990 14,344,239
Exercise of stock options
(unaudited)...................... 35,026 350 39,756
Exercise of warrants (unaudited)... 19,258 193 (193)
Stock issuance (unaudited)......... 5,333 53 15,946
Expenses in connection with private
placement (unaudited)............ (1,041,207)
Net loss (unaudited)............... -- (7,844,895)
----------- -------- ---------- -------- ----------- -------- ------------
Balance at September 30, 1999
(unaudited)...................... 0 $ 0 16,462,820 $164,628 $61,209,259 $320,297 $(48,104,818)
=========== ======== ========== ======== =========== ======== ============
<CAPTION>
TREASURY
STOCK TOTAL
-------- -----------
<S> <C> <C>
Balance at January 1, 1996......... $ 687,028
Issuance of Series F preferred
stock............................ 7,999,998
Treasury stock acquired--Series D
preferred stock.................. $(8,656) (2,163,878)
Conversion of preferred stock into
common stock..................... 8,656
Issuance of common stock in
connection with Initial public
offering......................... 11,904,000
Expense in connection with stock
issuances........................ (1,343,035)
Exercise of warrants............... 8,778
Exercise of stock options.......... 42,091
Net loss........................... (7,476,389)
------- -----------
Balance at December 31, 1996....... 0 9,658,593
------- -----------
Issuance of common stock in
connection with private
placement........................ 2,175,000
Exercise of stock options.......... 27,635
Exercise of warrants............... 540
Expenses in connection with stock
issuance......................... (79,158)
Net loss........................... (7,118,902)
------- -----------
Balance at December 31, 1997....... 0 4,663,708
------- -----------
Issuance of common stock in
connection with private
placements....................... 10,500,000
Exercise of stock options.......... 281,209
Receivable from sale of stock...... (203,598)
Stock issuance..................... 102,048
Stock issuance in connection with
settlement of litigation......... 1,000,000
Expenses in connection with stock
issuance......................... (208,055)
Net loss........................... (8,085,178)
------- -----------
Balance at December 31, 1998....... 0 8,050,134
Issuance of common stock in
connection with private placement
(unaudited)...................... 14,369,229
Exercise of stock options
(unaudited)...................... 40,106
Exercise of warrants (unaudited)... 0
Stock issuance (unaudited)......... 15,999
Expenses in connection with private
placement (unaudited)............ (1,041,207)
Net loss (unaudited)............... (7,844,895)
------- -----------
Balance at September 30, 1999
(unaudited)...................... $ 0 $13,589,366
======= ===========
</TABLE>
The Company has 1,000,000 authorized shares of preferred stock at $0.01 par
value. No preferred stock is currently issued or outstanding.
The accompanying notes are an integral part of the financial statements.
F-59
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS:
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
FaxSav Incorporated, formerly known as Digitran Corporation (the "Company"),
was formed in November 1989 to engage in the sale of network services customized
for the transmission of data, facsimile and graphical information. In
February 1996, the Company changed its name to FaxSav Incorporated.
The Company designs, develops, and markets a variety of business-to-business
facsimile transmission services, including desktop to fax, enhanced fax and
broadcast fax services. Through the use of its integrated Internet-based and
telephony-based network and its proprietary software, the Company enables its
customers to send documents and images to fax machines worldwide. The Company
initially offered services (the "legacy fax services") through its
telephony-based network with termination by long distance carriers. In early
1996, the Company began to deploy a global Internet-based network of nodes that
enable it to bypass the long distance carriers' networks when sending faxes to
or from international areas serviced by these nodes. Prior to 1997, most of the
Company's revenues have been derived from delivering facsimile transmissions to
locations outside the United States from customers located throughout the United
States. In 1997, the Company expanded its customer base in international markets
through the development of a wholesale business in desktop to fax services and a
fax-to-fax business in certain markets in the Asia Pacific region.
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Although the services provided to its customers are the same in
the U.S. and international markets, management views the two as separate
businesses and measures the results for both to the gross margin level. The
ubiquitous nature of the
F-60
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS: (CONTINUED)
Company's network and its centralized operations in the U.S. prohibit the
allocation of expenses beyond that level. Accordingly, 1998 and 1997 segment
Gross Margin and Assets for the Company were as follows:
<TABLE>
<CAPTION>
1997 1998
----------------------------------------- -----------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gross Margin
Internet Fax
Revenues.............................. $ 6,116,576 $2,306,249 $ 8,422,825 $ 9,069,808 $5,884,596 $14,954,404
Cost of Service....................... 3,459,849 1,335,140 4,794,989 4,379,264 3,292,542 7,671,806
----------- ---------- ----------- ----------- ---------- -----------
Gross Margin............................ 2,656,727 971,109 3,627,836 4,690,544 2,592,054 7,282,598
Telephony Fax
Revenues.............................. 8,995,508 8,995,508 6,162,322 6,162,322
Cost of Service....................... 5,618,808 5,618,808 3,456,946 3,456,946
----------- ----------- ----------- -----------
Gross Margin............................ 3,376,700 3,376,700 2,705,376 2,705,376
Total
Revenues.............................. 15,112,084 2,306,249 17,418,333 15,232,130 5,884,596 21,116,726
Cost of Service....................... 9,078,657 1,335,140 10,413,797 7,836,210 3,292,542 11,128,752
----------- ---------- ----------- ----------- ---------- -----------
Gross Margin............................ $ 6,033,427 $ 971,109 $ 7,004,536 $ 7,395,920 $2,592,054 $ 9,987,974
=========== ========== =========== =========== ========== ===========
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
(UNAUDITED)
-----------------------------------------
U.S. INTERNATIONAL TOTAL
----------- ------------- -----------
<S> <C> <C> <C>
Gross Margin
Internet Fax
Revenues.............................. $ 9,233,306 $4,914,619 $14,147,925
Cost of Service....................... 4,516,549 2,980,103 7,496,652
----------- ---------- -----------
Gross Margin............................ 4,716,757 1,934,516 6,651,273
Telephony Fax
Revenues.............................. 2,987,218 2,987,218
Cost of Service....................... 1,486,328 1,486,328
----------- -----------
Gross Margin............................ 1,500,890 1,500,890
Total
Revenues.............................. 12,220,524 4,914,619 17,135,143
Cost of Service....................... 6,002,877 2,980,103 8,982,980
----------- ---------- -----------
Gross Margin............................ $ 6,217,647 $1,934,516 $ 8,152,163
=========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1998
----------------------------------------- -----------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents............... $ 3,680,185 $ 3,680,185 $ 5,260,450 $ 5,260,450
Accounts Receivable, net................ 1,756,353 $ 523,766 2,280,119 2,037,549 $1,161,139 3,198,688
Property & Equipment, net............... 3,175,848 999,416 4,175,264 4,623,455 863,766 5,487,221
----------- ---------- ----------- ----------- ---------- -----------
Sub-total............................... $ 8,612,386 $1,523,182 10,135,568 $11,921,454 $2,024,905 13,946,359
=========== ========== =========== =========== ========== ===========
Other unallocated amounts............... 360,017 541,366
=========== ===========
Total Assets............................ $10,495,585 $14,487,725
=========== ===========
<CAPTION>
SEPTEMBER 30, 1999
(UNAUDITED)
-----------------------------------------
U.S. INTERNATIONAL TOTAL
----------- ------------- -----------
<S> <C> <C> <C>
Assets
Cash and Cash Equivalents............... $ 8,966,171 $ 8,966,171
Accounts Receivable, net................ 2,399,474 $1,000,785 3,400,259
Property & Equipment, net............... 5,436,549 663,750 6,100,299
=========== ========== -----------
Sub-total............................... $16,802,194 $1,664,535 18,466,729
=========== ==========
Other unallocated amounts............... 2,621,532
===========
Total Assets............................ $21,088,261
===========
</TABLE>
The Company is subject to risks common to rapidly growing technology-based
companies, including limited operating history, dependence on key personnel,
raising capital, rapid technological change, dependence on network
infrastructure, competition from substitute products and larger companies, and
the successful development and marketing of commercial products and services.
The Company currently believes its cash and cash equivalents will be
sufficient to meet its presently anticipated cash needs through at least the end
of 2000 (unaudited). Even if the Company's cash requirements vary materially
from those now planned as a result of unforeseen changes, management believes
that its current sources of liquidity are sufficient for it to continue
operations through the end of 2000 (unaudited). In this regard, the Company is
prepared to limit its network expansion and reduce or eliminate research and
development activities, and sales and marketing expenditures, if necessary.
Fax boards used in the Company's telecommunications network are supplied by
one vendor on a non-exclusive basis. Other components of the Company's operating
network are supplied by a limited number of vendors, also on a non-exclusive
basis. Management believes that other suppliers could be identified to provide
this equipment at a competitive price if this supplier was unable to provide
equipment.
F-61
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS: (CONTINUED)
Operation of the Company's network is dependent upon long distance
telecommunications companies transmitting information for the Company. The
Company has typically utilized only a limited number of these providers to
generate volume discounts. The Company's business strategy is also dependent
upon providing this service at the lowest possible cost which is greatly
affected by the cost of long distance transmission service. Management believes
that its long-distance transmissions could be made at competitive rates with any
number of companies providing long distance service.
In October 1996, the Company completed an initial public offering of 1.6
million shares of its common stock. The aggregate gross proceeds of the offering
were approximately $12 million.
In connection with the offering, the Company filed an amendment to its Fifth
Amended and Restated Certificate of Incorporation to effect a one-for-nine
reverse stock split at a par value of $0.01 and to change the authorized number
of common shares to 40,000,000. All share and per share amounts in the financial
statements have been retroactively restated to reflect the reverse stock split.
The Company also filed immediately prior to the closing of the offering its
Sixth Amended and Restated Certificate of Incorporation which changed the
authorized amount of preferred stock. All outstanding shares of preferred stock
were converted at the consent of the holders into an aggregate of 7,791,981
shares of common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Revenue Recognition and Cost of Service:
The Company recognizes revenue as services are provided to customers
and records the related cost of service as incurred. Cost of service
consists of local access charges, leased network backbone circuit costs
and long distance domestic and international termination charges.
B. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates made by management and included in the
financial statements are the allowance for bad debts, the valuation
allowance for deferred tax assets, and the accrual for legal defense.
C. Reverse Stock Split and Conversion of Preferred Stock:
In October 1996, in connection with an initial public offering of the
Company's common stock, the Company effectuated a reverse stock split for
common shares of one-for-nine shares. The effect of this reverse stock
split on all share and per share amounts has been retroactively restated
in the financial statements.
The Company also converted all of its outstanding preferred stock at
the election of the holders into 7,791,981 shares of common stock in
connection with the offering.
F-62
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
D. Earnings Per Share:
In February 1998, the SEC issued Staff Accounting Bulletin No. 98
("SAB 98"), which revised the views of the staff contained in previous
staff accounting bulletins, to be consistent with the provisions of SFAS
128. All prior periods have been restated in accordance with SAB 98.
Stock options outstanding of approximately 2,065,000, 1,523,000 and
1,256,000 for the years ended December 31, 1998, 1997, and 1996,
respectively, have been excluded from the calculation of diluted earnings
per share, since their effect would be antidilutive.
Net loss per common and equivalent share for the nine months ended
September 30, 1999 and 1998 is based on the weighted average number of
shares outstanding during the periods presented (unaudited). Stock
options outstanding of approximately 2,219,231 and 1,917,000 as of
September 30, 1999 and 1998, respectively, have been excluded from the
calculation of diluted earnings per share since their effect would be
antidilutive (unaudited).
In addition, approximately 169,000 warrants outstanding for the year
ended December 31, 1998, and 100,000 warrants for the two years ended
December 31, 1997 have been excluded from diluted earnings per share,
since their effect would be antidilutive.
E. Pro Forma Earnings Per Share:
Pro forma basic and diluted net loss per common shares is based on
the weighted average number of shares outstanding during the periods
presented, including the effect of pro forma conversion for all periods
of all outstanding preferred stock into 7,791,981 shares of common stock
in October 1996 in connection with the initial public offering of the
Company. Pro forma basic and diluted net loss per share has been
presented as additional information to enhance the comparability of
results for all periods presented assuming conversion of the preferred
stock into common shares of the Company.
F. Cash Equivalents:
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
G. Property and Equipment:
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation of furniture and equipment,
except enhanced fax equipment, is calculated using the straight-line
method over their estimated useful lives of five years. Enhanced fax
equipment is included in equipment and is depreciated over its estimated
life of 30 months. Leasehold improvements are amortized using the
straight-line method over the lesser of the lease term or the estimated
useful life of the related asset. Repairs and maintenance costs are
expensed as incurred; major renewals and betterments are capitalized.
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or
loss on the disposition is reflected in current operations. Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
If the sum of the expected future undiscounted cash flows is less than
the carrying amount of the asset, a loss is recognized for the difference
between the estimated fair value and carrying value of the assets.
F-63
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
H. Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
This statement requires an asset and liability approach for deferred
taxes that recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns.
I. Concentration of Credit Risk:
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentration of Credit Risk" requires
disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash and
cash equivalents and accounts receivable. From time to time, the Company
had concentrations of cash in several banks in the form of demand
deposits and money market accounts. The Company believes that
concentrations of credit risk with respect to trade accounts receivable
are limited due to the large number of entities comprising the Company's
customer base.
J. Financial Instruments:
The estimated fair value of the Company's financial instruments,
which include cash, cash equivalents, accounts receivable, and amounts
outstanding under line of credit, approximates their carrying value.
The fair value of cash and cash equivalents and accounts receivable
approximates their carrying value because their maturity is generally
less than one year in duration. The fair value of amounts outstanding
under the line of credit was determined using valuation techniques that
considered cash flow discounted at current rates.
K. Legal Defense:
The Company accrues the estimated future cost of defending itself
against lawsuits or other claims when management has determined, in
consultation with its legal counsel, that these matters are probable of
assertion against the Company.
L. Reclassification:
Certain items in 1997 have been reclassified to conform to the 1998
presentation.
M. Unaudited Financial Information:
The interim financial statements of the Company as of September 30,
1999, and for the nine months ended September 30, 1998 and 1999, are
unaudited. 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
rules and regulations of the Securities and Exchange Commission relating
to interim financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
for the fair presentation of the financial position and the results of
operations and cash flows have been included in such unaudited financial
statements. The results of operations for the nine months ended
September 30, 1998 and 1999 are not necessarily indicative of the results
to be expected for the entire year.
F-64
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ 1999
1997 1998 (UNAUDITED)
---------- ----------- -------------
<S> <C> <C> <C>
Equipment.............................. $7,844,450 $10,232,895 $11,932,201
Computer software...................... 364,385 625,413 804,523
Furniture and fixtures................. 113,386 132,609 135,470
Leasehold improvements................. 160,008 168,265 200,073
---------- ----------- -----------
8,482,229 11,159,182 13,072,267
Less, accumulated depreciation and
amortization..................... 4,306,965 5,671,961 6,971,968
---------- ----------- -----------
$4,175,264 $ 5,487,221 $ 6,100,299
========== =========== ===========
</TABLE>
Included in the equipment balance is certain equipment under capital leases
of approximately $966,058 at December 31, 1998 and 1997. Accumulated
amortization of equipment under capital leases approximated $588,079 and
$394,867 as of December 31, 1998 and 1997, respectively. Depreciation and
amortization expense for owned property and equipment for the years ended
December 31, 1998, 1997, and 1996, amounted to $1,420,208, $1,674,554 and
$1,388,753, respectively.
4. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- 1999
1997 1998 (UNAUDITED)
---------- ---------- -------------
<S> <C> <C> <C>
Accrued carrier charges.................. $1,926,925 $1,834,894 $1,781,321
Accrued salaries, bonuses and
commissions............................ 195,688 224,933 187,958
Excise and state taxes payable........... 269,245 132,219 209,330
Accrual for legal defense................ 251,917
Insurance premiums payable............... 79,449
Other.................................... 496,622 462,612 541,549
---------- ---------- ----------
$3,219,846 $2,654,658 $2,720,158
========== ========== ==========
</TABLE>
F-65
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
5. NOTES PAYABLE:
Long-term debt includes the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- 1999
1997 1998 (UNAUDITED)
---------- ---------- -------------
<S> <C> <C> <C>
1996 notes payable to bank--$750,000..... $ 278,871 $ 126,760 $ 12,676
1997 notes payable to bank--$800,000..... 799,908 559,935 319,963
1997 notes payable--$500,000............. 473,628 418,009 307,538
1998 notes payable to bank--$500,000..... 449,942 299,962
1998 notes payable--$1,000,000........... 978,795 808,155
1999 notes payable--$1,000,000........... 846,506
---------- ---------- ----------
Total notes payable...................... 1,552,407 2,533,441 2,594,800
Less current portion..................... 469,217 992,960 1,165,804
---------- ---------- ----------
Non-current portion...................... $1,083,190 $1,540,481 $1,428,996
========== ========== ==========
</TABLE>
In February 1999, the company entered into a new $1,000,000 equipment line
of credit with a lender. Draw-downs are to be paid over a term of 42 months with
an effective interest rate of 16% (unaudited).
As of October 31, 1999, the Company repaid the 1996 notes payable to bank
(unaudited).
During 1997, the Company entered into two new loan agreements. The first
agreement was an equipment line of credit with the Bank, in the form of a
promissory note, in the amount of $800,000. In 1998 this agreement was amended
to increase available borrowings by an additional $500,000. The new line is also
evidenced by the Company's promissory notes which are payable over 30 months.
Interest on advances, if any, are at the Bank's prime rate plus an applicable
margin, as defined in the credit agreement, which resulted in a borrowing rate
of 9.5% for 1997 and 8.9% in 1998. Among the covenants stated in the agreement,
specific liquidity ratios, debt service ratios, and net worth ratios are
required to be maintained and disclosed to the Bank on a monthly basis. As of
December 31, 1998, the Company had fully utilized these lines of credit.
The second agreement in 1997 was for an equipment loan line of $500,000 with
another lender and is in the form of two secured promissory notes, both of which
the Company is required to pay over a term of forty-eight months with an
effective interest rate of 16%. In 1998 this agreement was amended to increase
available borrowings by an additional $1,000,000. The new line is also evidenced
by the Company's promissory notes which are payable over 42 months at an
effective interest rate of 16%. The new line was fully utilized by December 31,
1998. The equipment purchased with the proceeds of these loans serve as
collateral.
6. RELATED PARTY TRANSACTIONS:
During 1998 the Company loaned two officers a total of $203,598. These
recourse loans bear interest at a rate of 5% and are collateralized by
approximately 61,000 shares of the Company's common stock. The loans are due and
payable in November 2003.
F-66
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
7. COMMITMENTS:
TELECOMMUNICATIONS LINES
The Company has committed to minimum monthly usage levels with its primary
telecommunications carriers. The commitments require minimum monthly payments,
exclusive of usage discounts, of $500,000 per month thereafter through
August 2002 (unaudited). The Company also leases space under co-locate
agreements for certain of its telecommunications equipment.
LEASES
Total rent expense for office facilities for the years ended December 31,
1998, 1997 and 1996 amounted to $470,959, $302,643 and $181,594, respectively.
The Company leases certain computer equipment pursuant to operating leases
which expire through 2000. Rent expense related to these leases for the years
ended December 31, 1998, 1997 and 1996 amounted to $69,313, $120,085 and
$168,666, respectively.
The Company acquired equipment for $421,805 under capital lease obligations
during the year ended December 31, 1996. Interest paid for capital lease
obligations during the years ended December 31, 1998, 1997 and 1996 was $27,064,
$59,658 and $69,682, respectively.
The Company was obligated under these agreements to make the following
payments for office facilities and equipment:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- ---------------------
OPERATING CAPITAL OPERATING CAPITAL
LEASE LEASE LEASE LEASE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
1998............................................. 316,641 $331,716
1999............................................. 311,808 103,126 $ 368,428 $103,126
2000............................................. 295,400 274,404
2001............................................. 275,173 274,404
2002 and thereafter.............................. 102,595 102,595
---------- -------- ---------- --------
Total minimum lease payments..................... $1,301,617 434,842 $1,019,831 103,126
Less, amount representing interest............... 33,921 7,322
Less, current principal maturities of obligation
under capital lease............................ 315,370 95,804
-------- --------
Long-term lease obligation....................... $ 85,551 $ 0
======== ========
</TABLE>
During the nine month period ended September 30, 1999, the Company acquired
network equipment for $215,057 under a capital lease obligation (unaudited).
Payments on such capital lease will be made over the life of the agreement
(thirty-six months) (unaudited).
8. CAPITAL STOCK:
CONVERTIBLE PREFERRED STOCK
Prior to October 1996, the Company was authorized to issue 1,400,000 shares
of Series A Preferred Stock, 4,000,000 shares of Series B Preferred Stock,
8,700,000 shares of Series C Preferred Stock, 26,600,000 shares of Series D
Preferred Stock, 19,500,000 shares of Series E Preferred Stock and
F-67
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
8. CAPITAL STOCK: (CONTINUED)
20,000,000 shares of Series F Preferred Stock (collectively, "the Preferred
Stock"). Holders of the Preferred Stock were entitled to dividends at the rate
of $0.075 per share for Series A, $0.10 per share for Series B, $0.06 per share
for Series C, $0.01733 per share for Series D, $0.022 per share for Series E and
$0.04 per share for Series F when and if declared by the Company's Board of
Directors. Such dividends were not cumulative. Holders of the Series A, B, C, D,
E and F Preferred Stock were entitled to a liquidation preference per share of
$0.75, $1.00, $0.60, $0.1733, $0.22 and $0.40, respectively. No dividends had
been declared on the Preferred Stock.
In February 1996 and March 1996, the Company issued 19,999,988 shares of
Series F Preferred Stock for an aggregate purchase price of $7,979,998 to
certain existing as well as other new investors in the Company. In accordance
with a December 1995 Stock Option Agreement between the Company and Telstra, the
Company on March 18, 1996 repurchased 8,655,510 shares of Series D Preferred
Stock held by Telstra for $0.25 per share for a total of $2,163,878.
All shares of Series A, B, C, D, E, and F Preferred Stock were converted
into common stock of the Company in connection with the initial public offering
of its common stock in October 1996.
In May 1999 the Company completed a $13,303,032 (net of private placement
expenses) million private placement of 2,499,000 new unregistered shares of its
common stock to a group of investors (unaudited). In accordance with the Stock
Purchase Agreement for this transaction, the Company subsequently registered the
securities for public sale (unaudited).
WARRANTS
On July 8, 1993, the Company agreed to grant warrants to purchase 5,556
shares of common stock to a firm providing equipment to the Company under a
Master Lease Agreement. The exercise price was $5.40 per share and the warrants
were to expire ten years from the date of grant. On May 5, 1994, the Company
granted additional warrants, which were to expire ten years from the date of
grant, to purchase 9,889 shares of common stock at $1.80 per share to this firm
in connection with an increase in the equipment covered by the Master Lease
Agreement. On July 7, 1995, the Company granted warrants to purchase 28,889
shares of common stock to a bank in connection with the issuance of the working
capital line of credit. The exercise price was $1.98 per share and the warrants
were to expire five years from the date of grant.
The number and purchase price of the shares could have been adjusted by the
occurrence of certain events, as defined in the warrant agreements.
On December 30, 1998, the Company granted warrants to purchase 64,516 shares
of common stock to an investor in connection with a private placement of 645,161
new unregistered shares of common stock. The exercise price is $5.425 per share
and the warrants will expire three years from the date of grant.
9. STOCK OPTIONS:
The Company has a stock option plan which authorized up to 1,794,175 shares
of common stock to be issued. During 1998, the shareholders approved an
amendment to the plan increasing the authorized number of shares by 650,000 to
2,444,175. Under the stock option plan, the Company may grant incentive stock
options or nonqualified stock options. The option exercise price of stock
options may not be less than 85% of the fair value of a share of common stock on
the date of the option grant, and the options expire in ten years. The shares
issuable upon the exercise of nonqualified options generally vest over one or
two
F-68
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
9. STOCK OPTIONS: (CONTINUED)
years from the date of grant. The shares issuable upon the exercise of incentive
stock options generally vest 20% upon completion by the optionee of one year of
service and the remaining 80% over 48 equal months of service thereafter based
on continued service. Stock option transactions under the plan are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INCENTIVE EXERCISE
NONQUALIFIED STOCK AVAILABLE PRICE PER
OPTIONS OPTIONS FOR GRANT SHARE
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
January 1, 1996.................... 364,777 702,108 181,795 $0.533
Available for Grant.............. 533,066
Granted.......................... 133,334 111,778 (245,112) $ 3.44
Exercised........................ (51,156) $0.823
Canceled......................... (4,927) 4,927 $ 2.63
--------- --------- --------
December 31, 1996.................. 493,184 762,730 474,676 $ 1.09
Granted.......................... 173,329 392,280 (565,609) $ 3.38
Exercised........................ (35,746) $ 0.80
Canceled......................... (8,333) (254,602) 262,935 $ 1.63
--------- --------- --------
December 31, 1997.................. 658,180 864,662 172,002 $ 1.28
Available for Grant.............. 650,000
Granted.......................... 517,580 318,474 (836,054) $ 3.41
Exercised........................ (55,555) (88,005) $ 4.63
Canceled......................... (113,859) (36,561) 150,420 $ 4.40
--------- --------- --------
December 31, 1998.................. 1,006,346 1,058,570 136,368 $ 1.80
--------- --------- --------
Available for Grant
(unaudited).................... 500,000
Granted (unaudited).............. 263,110 (263,110) $ 5.61
Exercised (unaudited)............ (35,026) $ 1.15
Canceled (unaudited)............. (17,500) (61,269) 78,769 $ 2.96
--------- --------- --------
September 30, 1999 (unaudited)..... 1,251,956 962,275 452,027 $ 2.22
========= ========= ========
</TABLE>
At September 30, 1999, December 31, 1998, 1997 and 1996, options for
1,138,624 (unaudited), 905,483, 785,584 and 626,277 shares were vested and
exercisable.
In October 1995, The Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The standard establishes a fair
value method for accounting for or disclosing stock-based compensation plans.
The Company discloses the pro forma net loss and loss per share amounts assuming
the fair value method.
F-69
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
9. STOCK OPTIONS: (CONTINUED)
Accordingly, if the Company had elected to recognize compensation costs in
accordance with SFAS No. 123 the reported net loss and loss per share for 1998,
1997 and 1996, respectively, would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported................... $(7,476,389) $(7,118,902) $(8,085,178)
Net loss--pro forma.................... (7,583,417) (7,260,113) (8,482,567)
Loss per share--as reported............ (2.74) (0.72) (0.68)
Loss per share--pro forma.............. (2.78) (0.73) (0.72)
</TABLE>
The Company estimated the fair value, as of the date of grant, of options
outstanding in the plan using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Expected life.................................... 10 years 5 years 5 years
Risk free interest rate.......................... 4.9% 6.3% 5.3%
Expected future dividend yield................... 0% 0% 0%
Expected volatility 34.4% 85.2% 127.2%
</TABLE>
In accordance with SFAS 123, the Company has utilized peer information when
using the Black-Scholes option pricing model. As the Company develops historical
information, the Company will modify these assumptions accordingly.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE AS OF EXERCISE
RANGE OF EXERCISE PRICES 12/31/98 LIFE PRICE 12/31/98 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.23-$0.23............ 502,713 6.24 $0.23 375,265 $0.23
$0.72-$1.50............ 639,383 5.98 1.12 463,003 0.99
$2.13-$2.94............ 528,722 9.38 2.81 22,733 2.49
$3.00-$5.38............ 386,898 9.17 3.47 41,116 3.66
$6.38-$6.38............ 7,200 8.08 6.38 3,366 6.38
$0.23-$6.38............ 2,064,916 7.52 $1.80 905,483 $0.86
</TABLE>
10. PATENT LITIGATION SETTLEMENT:
Effective September 22, 1998 the Company settled all outstanding litigation
with AudioFAX IP,L.L.P. ("AudioFAX") to avoid the expense and disruption of
protracted litigation. In 1997 the Company had filed a lawsuit against AudioFAX
seeking declaratory relief that FaxSav services did not infringe on any valid
claims in certain AudioFAX's patents relating to store-and-forward technology or
that certain claims of the AudioFAX patents are not valid. Immediately after the
filing of FaxSav's complaint, AudioFAX filed a lawsuit against FaxSav alleging
patent infringement.
The terms of the settlement agreement required the Company to issue 275,000
shares of common stock to AudioFAX and to register such shares for resale in
exchange for a fully paid-up license to the patents in the dispute. Although
under certain circumstances the Company would have been required to
F-70
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
10. PATENT LITIGATION SETTLEMENT: (CONTINUED)
issue additional shares or pay a certain amount of cash to AudioFAX, these
requirements are no longer applicable.
The Company has recorded a charge of $1,025,000 in 1998 representing all
costs associated with the settlement. No costs have been capitalized, as the
Company could not determine the future economic benefit, if any, to the Company
of the patent licenses acquired.
11. INCOME TAXES:
The Company continues to incur operating losses and currently pays no income
taxes and no provision or benefit for income taxes has been recorded.
The income tax benefit at the United States federal statutory rate on the
Company's operating loss, for all periods presented, has been eliminated by an
increase in the valuation allowance for deferred tax assets and operating losses
not recognized.
At December 31, 1998, the Company had net operating loss carryforwards
available for income tax purposes of approximately $35,000,000 which start to
expire in 2005. Net operating loss carryforwards are subject to review and
possible adjustment by the Internal Revenue Service and may be limited in the
event of certain cumulative changes in the ownership interests of significant
stockholders over a three-year period in excess of 50%. The Company has
experienced changes in ownership in excess of 50% but does not believe that
these changes in ownership will significantly impact the Company's ability to
utilize its net operating loss carryforwards assuming the Company can generate
sufficient taxable income. The components of the Company's deferred tax asset
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating loss carryforwards..................... $ 12,765,029 $ 10,225,730
Temporary differences............................ 914,450 691,560
------------ ------------
13,679,479 10,917,290
------------ ------------
Less--valuation allowance........................ (13,679,479) (10,917,290)
------------ ------------
$ 0 $ 0
============ ============
</TABLE>
In evaluating the realization of these deferred tax assets, management has
considered the market in which the Company operates, the operating losses
incurred to date and the operating losses anticipated for the future, and
believes that given the significance of this evidence, a full valuation
allowance against its deferred tax assets is required as of December 31, 1998,
1997, and 1996.
12. CONTINGENCIES:
The Company is involved in various disputes, claims or legal proceedings
related to its normal course of business. In the opinion of management, all such
matters are without merit or involve amounts, if disposed of unfavorably, which
would not have a material adverse effect on the financial position or results of
operations of the Company.
F-71
<PAGE>
FAXSAV INCORPORATED
NOTES TO FINANCIAL STATEMENTS: (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
13. SUBSEQUENT EVENT (UNAUDITED):
In April 1999, the Company announced that it was changing its name to
NetMoves Corporation. This name change reflects the Company's focus on
Internet-based solutions to support the Company's expansion into Internet
Document Delivery (IDD).
In May 1999, the Company acquired the U.S. fax customer base of UNIFI
Communications for $1,531,214 million. The purchase price, net of transaction
expenses, is classified as "Other Assets", and is being amortized over
forty-eight months.
On December 11, 1999, the Company entered into a merger agreement with
Mail.com and Mast Acquisition Corp., a newly formed subsidiary of Mail.com. The
agreement provides for the merger of Mast Acquisition Corp. with and into the
Company, with the Company becoming a wholly-owned subsidiary of Mail.com.
The merger agreement provides for the issuance of .385336 shares of Mail.com
Class A common stock in exchange for each share of the Company's stock, for a
total of 6,343,904 shares of Class A common stock. The agreement also states
that Mail.com will assume the Company's outstanding options and warrants, which
represents the right to purchase 1,053,396 shares of Mail.com Class A common
stock. The completion of the merger is subject to the Company's shareholders'
approval, which will be decided at a special meeting that is to be held on
February 8, 2000.
F-72
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MAIL.COM, INC.,
MAST ACQUISITION CORP.
AND
NETMOVES CORPORATION
DATED AS OF DECEMBER 11, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE I
THE MERGER
1.1 The Merger.................................................. A-1
1.2 Effective Time; Closing..................................... A-1
1.3 Effect of the Merger........................................ A-2
1.4 Certificate of Incorporation; Bylaws........................ A-2
1.5 Directors and Officers...................................... A-2
1.6 Effect on Capital Stock..................................... A-2
1.7 Surrender of Certificates................................... A-3
1.8 No Further Ownership Rights in Company Common Stock......... A-5
1.9 Lost, Stolen or Destroyed Certificates...................... A-5
1.10 Tax Consequences............................................ A-5
1.11 Taking of Necessary Action; Further Action.................. A-5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
2.1 Organization and Qualification; Subsidiaries................ A-5
2.2 Certificate of Incorporation and Bylaws..................... A-6
2.3 Capitalization.............................................. A-6
2.4 Authority Relative to this Agreement........................ A-7
2.5 No Conflict; Required Filings and Consents.................. A-7
2.6 Compliance with Laws. ...................................... A-8
2.7 SEC Filings; Financial Statements. ......................... A-8
2.8 No Undisclosed Liabilities. ................................ A-9
2.9 Absence of Certain Changes or Events. ...................... A-9
2.10 Litigation. ................................................ A-9
2.11 Employee Benefit Plans. .................................... A-10
2.12 Labor Matters. ............................................. A-11
2.13 Registration Statement; Proxy Statement. ................... A-11
2.14 Restrictions on Business Activities. ....................... A-11
2.15 Title to Property. ......................................... A-12
2.16 Taxes. ..................................................... A-12
2.17 Environmental Matters. ..................................... A-13
2.18 Brokers. ................................................... A-14
2.19 Intellectual Property. ..................................... A-14
2.20 Agreements, Contracts and Commitments. ..................... A-16
2.21 Insurance. ................................................. A-16
2.22 Opinion of Financial Advisor. .............................. A-16
2.23 Board Approval. ............................................ A-16
2.24 Vote Required. ............................................. A-16
2.25 Section 203 of the DGCL Not Applicable. .................... A-16
2.26 Change of Control Payments. ................................ A-17
2.27 Affiliates. ................................................ A-17
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
3.1 Organization and Qualification; Subsidiaries. .............. A-17
3.2 Certificate of Incorporation and Bylaws. ................... A-17
3.3 Capitalization. ............................................ A-17
3.4 Authority Relative to this Agreement. ...................... A-18
3.5 No Conflict; Required Filings and Consents. ................ A-18
3.6 SEC Filings; Financial Statements. ......................... A-19
3.7 Registration Statement; Proxy Statement. ................... A-19
3.8 No Undisclosed Liabilities. ................................ A-20
3.9 Absence of Certain Changes or Events. ...................... A-20
3.10 Taxes. ..................................................... A-20
3.11 Brokers. ................................................... A-20
3.12 Merger Sub. ................................................ A-20
3.13 Intellectual Property. ..................................... A-20
3.14 Litigation. ................................................ A-20
3.15 Title. ..................................................... A-21
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by Company. ............................ A-21
4.2 Conduct of Business by Parent. ............................. A-23
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations. ............................ A-23
5.2 Meeting of Company Stockholders. ........................... A-24
5.3 Confidentiality; Access to Information. .................... A-25
5.4 No Solicitation. ........................................... A-26
5.5 Public Disclosure. ......................................... A-27
5.6 Reasonable Efforts; Notification. .......................... A-27
5.7 Stock Options and Warrants.................................. A-28
5.8 Form S-8. .................................................. A-29
5.9 Indemnification. ........................................... A-29
5.10 Nasdaq Listing. ............................................ A-29
5.11 Regulatory Filings; Reasonable Efforts. .................... A-29
5.12 Benefit Plans. ............................................. A-30
5.13 Treatment as a Reorganization. ............................. A-30
5.14 Board of Directors of Parent. .............................. A-30
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the
Merger. .................................................... A-30
6.2 Additional Conditions to Obligations of Company. ........... A-31
6.3 Additional Conditions to the Obligations of Parent and
Merger Sub. ................................................ A-31
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. ............................................... A-32
7.2 Notice of Termination; Effect of Termination. .............. A-33
7.3 Fees and Expenses. ......................................... A-33
7.4 Amendment. ................................................. A-34
7.5 Extension; Waiver. ......................................... A-35
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. ............ A-35
8.2 Notices. ................................................... A-35
8.3 Interpretation. ............................................ A-36
8.4 Counterparts. .............................................. A-37
8.5 Entire Agreement; Third Party Beneficiaries. ............... A-37
8.6 Severability. .............................................. A-37
8.7 Other Remedies; Specific Performance. ...................... A-37
8.8 Governing Law. ............................................. A-37
8.9 Rules of Construction. ..................................... A-37
8.10 Assignment. ................................................ A-37
8.11 Waiver of Jury Trial. ...................................... A-37
</TABLE>
A-iii
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A.................................... Form of Company Voting Agreement
Exhibit B.................................... Company Schedule
Exhibit C.................................... Parent Schedule
Exhibit D.................................... Form of Company Affiliate Letter
</TABLE>
A-iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of December 11, 1999, among Mail.com, Inc., a Delaware corporation
("Parent"), Mast Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("Merger Sub"), and NetMoves Corporation, a Delaware
corporation ("Company").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the General Corporation Law
of the State of Delaware (the "DGCL"), Parent and Company intend to enter into a
business combination transaction.
B. The (i) Boards of Directors of Company and Parent (a) have determined
that the Merger (as defined in Section 1.1) is fair to, and in the best
interests of, their respective companies and their respective stockholders and
(b) have declared the advisability of the Merger and approved, subject to
stockholder approval in the case of the Company, this Agreement and the
transactions contemplated hereby and (ii) Board of Directors of Company has
determined to recommend that the stockholders of Company approve and adopt this
Agreement and approve the Merger.
C. Concurrently with the execution of this Agreement, and as a condition to
and an inducement to Parent's willingness to enter into this Agreement, certain
directors and officers of Company are entering into Voting Agreements in
substantially the form attached hereto as Exhibit A (the "Company Voting
Agreements").
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the DGCL, Merger Sub shall be merged with and into
Company (the "Merger"), the separate corporate existence of Merger Sub shall
cease and Company shall continue as the surviving corporation. Company as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
1.2 EFFECTIVE TIME; CLOSING. Subject to the conditions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing with the
Secretary of State of the State of Delaware in accordance with the relevant
provisions of the DGCL a Certificate of Merger (the "Certificate of Merger")
(the time of such filing with the Secretary of State of the State of Delaware,
or such later time as may be agreed in writing by Company and Parent and
specified in the Certificate of Merger, being the "Effective Time") as soon as
practicable on or after the Closing Date (as herein defined). The term
"Agreement" as used herein refers to this Agreement and Plan of Merger, as the
same may be amended from time to time, and all schedules hereto (including
Company Schedule and Parent Schedule). Unless this Agreement shall have been
terminated and the Merger herein contemplated shall have been abandoned pursuant
to Section 7.1, the closing of the Merger (the "Closing") shall take place at
the offices of Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New
York, New York 10004 at a time and date to be specified by the parties, which
shall be no later than the second business day after the satisfaction or waiver
of the
A-1
<PAGE>
conditions set forth in Article VI, or at such other time, date and location as
the parties hereto agree in writing (the "Closing Date").
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of the
DGCL. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 CERTIFICATE OF INCORPORATION; BYLAWS.
(a) At the Effective Time, the Certificate of Incorporation of Company shall
be amended in the Merger to be the same as the Certificate of Incorporation of
Merger Sub, except that the name of the Surviving Corporation shall be NetMoves
Corporation, and as so amended shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by law and such
Certificate of Incorporation of the Surviving Corporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 DIRECTORS AND OFFICERS. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time.
1.6 EFFECT ON CAPITAL STOCK. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and this Agreement and
without any action on the part of Merger Sub, Company or the holders of any of
the following securities, the following shall occur:
(a) CONVERSION OF COMPANY COMMON STOCK. Each share of Common Stock, par
value $0.01 per share, of Company (the "Company Common Stock") issued and
outstanding immediately prior to the Effective Time, other than any shares of
Company Common Stock to be canceled pursuant to Section 1.6(b), will be
automatically converted (subject to Sections 1.6(e) and (f)) into the right to
receive 0.385336 shares of Class A Common Stock, par value $0.01 per share, of
Parent (the "Parent Common Stock") (the "Exchange Ratio") upon surrender of the
certificate representing such share of Company Common Stock in the manner
provided in Section 1.7 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the manner
provided in Section 1.9). If any shares of Company Common Stock outstanding
immediately prior to the Effective Time are unvested or are subject to a
repurchase option, risk of forfeiture or other condition under any applicable
restricted stock purchase agreement or other agreement with Company, then the
shares of Parent Common Stock issued in exchange for such shares of Company
Common Stock will also be unvested or subject to the same repurchase option,
risk of forfeiture or other condition, and the certificates representing such
shares of Parent Common Stock may accordingly be marked with appropriate
legends. The Company shall take all action that may be necessary to ensure that,
from and after the Effective Time, Parent is entitled to exercise any such
repurchase option or other right set forth in any such restricted stock purchase
agreement or other agreement.
(b) CANCELLATION OF PARENT-OWNED STOCK. Each share of Company Common Stock
held by Company or owned by Merger Sub, Parent or any direct or indirect
wholly-owned subsidiary of Company or of Parent immediately prior to the
Effective Time shall be canceled and extinguished without any conversion or
payment in respect thereof.
(c) STOCK OPTIONS AND WARRANTS. At the Effective Time, all options to
purchase Company Common Stock then outstanding under Company's 1996 Stock
Option/Stock Issuance Plan, including options originally granted under Company's
1990 Stock Option Plan (the "Company Option Plan"), shall be
A-2
<PAGE>
assumed by Parent in accordance with Section 5.7(a) hereof and all warrants to
purchase Company Common Stock then outstanding (other than those that Parent
elects not to assume and to deem converted pursuant to the terms thereof) shall
be assumed by Parent or converted in accordance with Section 5.7(b) hereof.
(d) CAPITAL STOCK OF MERGER SUB. Each share of Common Stock, par value
$.01 per share, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into one
validly issued, fully paid and nonassessable share of Common Stock, par value
$.01 per share, of the Surviving Corporation. Each certificate evidencing
ownership of shares of Merger Sub Common Stock shall evidence ownership of such
shares of capital stock of the Surviving Corporation.
(e) ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio shall be adjusted to
reflect appropriately the effect of any stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Common Stock), extraordinary cash dividends,
reorganization, recapitalization, reclassification, combination, exchange of
shares or other like change with respect to Parent Common Stock or Company
Common Stock occurring on or after the date hereof and prior to the Effective
Time and of any increase (not to exceed 50,000) in the number of shares of
Company Common Stock outstanding as a result of any failure of Section 2.3 to be
correct at the date hereof.
(f) FRACTIONAL SHARES. No fraction of a share of Parent Common Stock will
be issued by virtue of the Merger, but in lieu thereof each holder of shares of
Company Common Stock who would otherwise be entitled to a fraction of a share of
Parent Common Stock (after aggregating all fractional shares of Parent Common
Stock that otherwise would be received by such holder) shall, upon surrender of
such holder's Certificates(s) (as defined in Section 1.7(c)) receive from Parent
an amount of cash (rounded to the nearest whole cent), without interest, equal
to the product of (i) such fraction, multiplied by (ii) the average closing
price of one share of Parent Common Stock for the ten (10) most recent days that
Parent Common Stock has traded ending on the trading day immediately prior to
the Effective Time, as reported on the Nasdaq National Market System ("Nasdaq").
1.7 SURRENDER OF CERTIFICATES.
(a) EXCHANGE AGENT. Parent shall select a bank or trust company reasonably
acceptable to Company to act as the exchange agent (the "Exchange Agent") in the
Merger.
(b) PARENT TO PROVIDE COMMON STOCK. Promptly after the Effective Time, and
in no event more than three (3) business days thereafter, Parent shall make
available to the Exchange Agent, for exchange in accordance with this Article I,
the shares of Parent Common Stock issuable pursuant to Section 1.6 in exchange
for outstanding shares of Company Common Stock, and cash in an amount sufficient
for payment in lieu of fractional shares pursuant to Section 1.6(f) and any
dividends or distributions to which holders of shares of Company Common Stock
may be entitled pursuant to Section 1.7(d).
(c) EXCHANGE PROCEDURES. Promptly after the Effective Time, and in no
event more than three (3) business days thereafter, Parent shall cause the
Exchange Agent to mail to each holder of record (as of the Effective Time) of a
certificate or certificates (the "Certificates"), which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock whose
shares were converted into the right to receive shares of Parent Common Stock
pursuant to Section 1.6 and cash in lieu of any fractional shares pursuant to
Section 1.6(f), (i) a letter of transmittal in customary form (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall contain such other customary provisions as Parent may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Parent Common
Stock, cash in lieu of any fractional shares pursuant to Section 1.6(f) and any
dividends or other distributions pursuant to Section 1.7(d). Upon surrender of
Certificates for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed
A-3
<PAGE>
by Parent, together with such letter of transmittal, duly completed and validly
executed in accordance with the instructions thereto, the holders of such
Certificates shall be entitled to receive in exchange therefor certificates
representing the number of whole shares of Parent Common Stock into which their
shares of Company Common Stock were converted into the right to receive at the
Effective Time, payment in lieu of fractional shares which such holders have the
right to receive pursuant to Section 1.6(f) and any dividends or distributions
payable pursuant to Section 1.7(d), and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, outstanding Certificates will be
deemed from and after the Effective Time, to evidence only the right to receive
the applicable number of full shares of Parent Common Stock issuable pursuant to
Section 1.6(a) and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.6(f).
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holders of any unsurrendered Certificates with respect to the
shares of Parent Common Stock to be issued upon surrender thereof until the
holders of record of such Certificates shall surrender such Certificates.
Subject to applicable law, following surrender of any such Certificates with a
properly completed letter of transmittal, the Exchange Agent shall promptly
deliver to the record holders thereof, without interest, certificates
representing whole shares of Parent Common Stock issued in exchange therefor
along with payment in lieu of fractional shares pursuant to Section 1.6(f)
hereof and the amount of any such dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole shares
of Parent Common Stock.
(e) TRANSFERS OF OWNERSHIP. If certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of certificates
representing shares of Parent Common Stock in any name other than that of the
registered holder of the Certificates surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been paid
or is not payable.
(f) REQUIRED WITHHOLDING. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to any
holder or former holder of Company Common Stock such amounts as are required to
be deducted or withheld therefrom under the Code or under any provision of
state, local or foreign tax law or under any other applicable legal requirement.
To the extent such amounts are so deducted or withheld, such amounts shall be
treated for all purposes under this Agreement as having been paid to the person
to whom such amounts would otherwise have been paid.
(g) TERMINATION OF COMMON STOCK EXCHANGE AGENT FUNDING. Any portion of
funds (including any interest earned thereon) or Parent Common Stock held by the
Exchange Agent which have not been delivered to holders of Certificates within
six months after the Effective Time shall promptly be paid or delivered, as
appropriate, to Parent, and thereafter holders of Certificates who have not
theretofore complied with the exchange procedures outlined in and contemplated
by this Section 1.7 shall thereafter look only to Parent (subject to abandoned
property, escheat and similar laws) only as general creditors thereof for their
claim for shares of Parent Common Stock, any cash in lieu of fractional shares
of Parent Common Stock pursuant to Section 1.6(f) and any dividends or
distributions pursuant to Section 1.7(d) with respect to Parent Common Stock to
which they are entitled.
(h) NO LIABILITY. Notwithstanding anything to the contrary in this
Section 1.7, neither the Exchange Agent, Parent, the Surviving Corporation, the
Company nor any party hereto shall be liable to a holder of shares of Parent
Common Stock or Company Common Stock for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
A-4
<PAGE>
1.8 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of
Parent Common Stock issued in accordance with the terms hereof (including any
cash paid in respect thereof pursuant to Section 1.6(f)) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Company Common Stock, and there shall be no further registration of transfers on
the records of the Surviving Corporation of shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, certificates
representing the shares of Parent Common Stock which the shares of Company
Common Stock formerly represented by such Certificates were converted into the
right to receive pursuant to Section 1.6, cash for fractional shares, if any, as
may be required pursuant to Section 1.6(f) and any dividends or distributions
payable pursuant to Section 1.7(d); provided, however, that Parent may, in its
discretion and as a condition precedent to the issuance of such certificates
representing shares of Parent Common Stock, cash and other distributions,
require the owner of such lost, stolen or destroyed Certificates to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim that
may be made against Parent, the Surviving Corporation or the Exchange Agent with
respect to the Certificates alleged to have been lost, stolen or destroyed.
1.10 TAX CONSEQUENCES. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Income Tax Regulations.
1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company and Merger Sub, the officers and directors of Company
and Merger Sub will take all such lawful and necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Parent and Merger Sub, subject to such
exceptions as are specifically disclosed in writing in the disclosure letter
supplied by Company to Parent dated as of the date hereof and attached hereto as
Exhibit B, which disclosure shall provide an exception to or otherwise qualify
the representations or warranties of Company specifically referred to,
cross-referenced or clearly applicable in such disclosure (the "Company
Schedule"), as follows:
2.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has the requisite corporate
power and authority to own, lease and operate its assets and properties and to
carry on its business as it is now being or currently planned by Company to be
conducted. Company is in possession of all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates, approvals and orders
("Approvals") necessary to own, lease and operate the properties it purports to
own, operate or lease and to carry on its business as it is now being or
currently planned by Company to be conducted, except where the failure to have
such Approvals could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect (as defined in Section 8.3(b)) on
Company.
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(b) Company has no Subsidiaries (as defined in Section 8.3(c)); and does not
directly or indirectly own any capital stock of, or any equity interest of any
nature in, any other entity, except for passive investments in equity interests
of public companies as part of the cash management program of the Company.
Company has not agreed and is not obligated to make nor is bound by any written,
oral or other agreement, contract, subcontract, lease, binding understanding,
instrument, note, option, warranty, purchase order, license, sublicense,
insurance policy, benefit plan, commitment or undertaking of any nature, as of
the date hereof or as may hereafter be in effect (a "Contract") under which
Contract it may become obligated to make, any future investment in or capital
contribution to any other entity.
(c) Company is duly qualified or licensed to do business as a foreign
corporation and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its activities
makes such modification or licensing necessary, except for such failures to be
so duly qualified or licensed and in good standing that could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect on
Company.
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS. Company has previously
furnished to Parent a complete and correct copy of its Sixth Amended and
Restated Certificate of Incorporation and its Bylaws as amended to date
(together, the "Company Charter Documents"). Such Company Charter Documents are
in full force and effect. Company is not in violation of any of the provisions
of Company Charter Documents.
2.3 CAPITALIZATION.
(a) The authorized capital stock of Company consists of 40,000,000 shares of
Company Common Stock and 1,000,000 shares of Preferred Stock ("Company Preferred
Stock"), par value $0.01 per share. At the close of business on the business day
prior to the date hereof, (i) 16,463,305 shares of Company Common Stock were
issued and outstanding, all of which are validly issued, fully paid and
nonassessable; (ii) 2,602,697 shares of Company Common Stock were reserved for
issuance upon the exercise of outstanding options to purchase Company Common
Stock under the Company Option Plan and (iii) 148,815 shares of Company Common
Stock were reserved for issuance upon the exercise of outstanding warrants to
purchase Company Common Stock. As of the date hereof, no shares of Company
Preferred Stock were issued or outstanding. Section 2.3(a) of the Company
Schedule sets forth the following information with respect to each Company Stock
Option (as defined in Section 5.7) outstanding as of the date of this Agreement:
(i) the name and address of the optionee; (ii) the particular plan pursuant to
which such Company Stock Option was granted; (iii) the number of shares of
Company Common Stock subject to such Company Stock Option; (iv) the exercise
price of such Company Stock Option; (v) the date on which such Company Stock
Option was granted; (vi) the applicable vesting schedule; (vii) the date on
which such Company Stock Option expires; and (viii) whether the exercisability
of such option will be accelerated in any way by the transactions contemplated
by this Agreement, and indicates the extent of acceleration. Company has made
available to Parent accurate and complete copies of all stock option plans
pursuant to which Company has granted such Company Stock Options that are
currently outstanding and the form of all stock option agreements evidencing
such Company Stock Options. All shares of Company Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instrument pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. Except as set forth in
Section 2.3(a) of the Company Schedule, there are no commitments or agreements
of any character to which Company is bound obligating Company to accelerate the
vesting of any Company Stock Option as a result of the Merger. All outstanding
shares of Company Common Stock and all outstanding Company Stock Options have
been issued and granted in compliance with (i) all applicable securities laws
and (in all material respects) other applicable Legal Requirements (as defined
below) and (ii) all requirements set forth in applicable Contracts. For the
purposes of this Agreement, "Legal Requirements" means any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under
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the authority of any Governmental Entity (as defined below) and (ii) all
requirements set forth in applicable contracts, agreements, and instruments.
(b) Except as set forth in Section 2.3(b) of the Company Schedule, there are
no equity securities, partnership interests or similar ownership interests of
any class of any equity security of Company, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except as set forth in Section 2.3(b) of the Company Schedule or as
set forth in Section 2.3(a) hereof there are no subscriptions, options,
warrants, equity securities, partnership interests or similar ownership
interests, calls, rights (including preemptive rights), commitments or
agreements of any character to which Company is a party or by which it is bound
obligating Company to issue, deliver or sell, or cause to be issued, delivered
or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition of, any shares of capital stock, partnership interests
or similar ownership interests of Company or obligating Company to grant,
extend, accelerate the vesting of or enter into any such subscription, option,
warrant, equity security, call, right, commitment or agreement. Except as
contemplated by this Agreement and except as set forth in Section 2.3(b) of the
Company Schedule, there are no registration rights and there is, except for
Company Voting Agreements, no voting trust, proxy, rights plan, antitakeover
plan or other agreement or understanding to which Company is a party or by which
it is bound with respect to any equity security of any class of Company.
Assuming that Parent Common Stock is listed on Nasdaq at the Effective Time,
stockholders of the Company will not be entitled to dissenters' or appraisal
rights under applicable state law in connection with the Merger.
2.4 AUTHORITY RELATIVE TO THIS AGREEMENT. Company has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and, subject to adoption of this Agreement and
the Merger by the stockholders of Company, to consummate the transactions
contemplated hereby (including the Merger).
The execution and delivery of this Agreement and the consummation by Company
of the transactions contemplated hereby (including the Merger) have been duly
and validly authorized by all necessary corporate action on the part of Company
and no other corporate proceedings on the part of Company are necessary to
authorize this Agreement or to consummate the transactions so contemplated
(other than the approval and adoption of this Agreement and the approval of the
Merger by the holders of a majority of the outstanding shares of Company Common
Stock entitled to vote with respect thereto and the filing of the Certificate of
Merger pursuant to the DGCL). This Agreement has been duly and validly executed
and delivered by Company and, assuming the due authorization, execution and
delivery thereof by Parent and Merger Sub, constitutes the legal and binding
obligation of Company, enforceable against Company in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity and public policy.
2.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by the Company and the
execution and delivery of the Company Voting Agreements by the signing
stockholders do not, and the performance of this Agreement by the Company and
the performance of the Company Voting Agreements by the signing stockholders
shall not, (i) conflict with or violate the Company Charter Documents, (ii)
subject to obtaining the adoption of this Agreement and the Merger by the
stockholders of Company and compliance with the requirements set forth in
Section 2.5(b) below, conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Company or by which its properties are bound or
affected, or (iii) result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or
materially impair Company's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Company
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pursuant to, any material note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
Company is a party or by which Company or its properties are bound or affected,
except, with respect to clauses (ii) or (iii), for any such conflicts,
violations, breaches, defaults or other occurrences that would not, individually
and in the aggregate, have a Material Adverse Effect on Company.
(b) The execution and delivery of this Agreement by Company do not, and the
performance of its obligations hereunder will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
court, administrative agency, commission, governmental or regulatory authority,
domestic or foreign (a "Governmental Entity"), except (i) for applicable
requirements, if any, of the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
state securities laws ("Blue Sky Laws"), the pre-merger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the Communications Act of 1934, as amended, state
public utility laws and of foreign Governmental Entities and the rules and
regulations thereunder, the rules and regulations of Nasdaq, and the filing of
the Certificate of Merger with the Secretary of State of the State of Delaware
and appropriate documents with the relevant authorities of other states in which
Company is qualified to do business, and (ii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on Company or, after the Effective
Time, Parent, or prevent consummation of the Merger or otherwise prevent the
parties hereto from performing their obligations under this Agreement.
2.6 COMPLIANCE WITH LAWS. Company has complied with, is not in violation
of, and has not received any notices of violation with respect to, any federal,
state or local statute, law or regulation with respect to the conduct of its
business, or the ownership or operation of its business, except for failures to
comply or violations which, individually or in the aggregate, have not had and
are not reasonably likely to have a Material Adverse Effect on the Company.
2.7 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Company has made available to Parent a correct and complete copy of each
report, registration statement and definitive proxy statement filed by Company
with the Securities and Exchange Commission ("SEC") for the 24 months prior to
the date of this Agreement (the "Company SEC Reports"), which are all the forms,
reports and documents required to be filed by Company with the SEC for the 24
months prior to the date of this Agreement. As of their respective dates, the
Company SEC Reports (A) were prepared in accordance and complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable to
such Company SEC Reports, and (B) did not at the time they were filed (and if
amended or superseded by a filing prior to the date of this Agreement then on
the date of such filing and as so amended or superceded) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(b) Each set of financial statements (including, in each case, any related
notes thereto) contained in Company SEC Reports, including each Company SEC
Report filed after the date hereof until the Closing, complied as to form in all
material respects with the published rules and regulations of the SEC with
respect thereto, was prepared in accordance with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited statements, do not contain footnotes as permitted by
Form 10-Q of the Exchange Act) and each fairly presents in all material respects
the financial position of Company at the respective dates thereof and the
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal
adjustments which were not or are not expected to have a Material Adverse Effect
on Company.
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(c) Company has previously furnished to Parent a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Company with the SEC pursuant to
the Securities Act or the Exchange Act.
2.8 NO UNDISCLOSED LIABILITIES. Except as set forth in Section 2.8 of the
Company Schedule, Company has no liabilities (absolute, accrued, contingent or
otherwise) of a nature required to be disclosed on a balance sheet or in the
related notes to the financial statements prepared in accordance with GAAP which
are, individually or in the aggregate, material to the business, results of
operations or financial condition of Company, except (i) liabilities provided
for in or otherwise disclosed in Company SEC Reports filed prior to the date
hereof or (ii) liabilities incurred since September 30, 1999 in the ordinary
course of business, none of which would have a Material Adverse Effect on
Company.
2.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 2.9 of the Company Schedule, since September 30, 1999, there has not
been: (i) any Material Adverse Effect on Company, (ii) any declaration, setting
aside or payment of any dividend on, or other distribution (whether in cash,
stock or property) in respect of, any of Company's capital stock, or any
purchase, redemption or other acquisition by Company of any of Company's capital
stock or any other securities of Company or any options, warrants, calls or
rights to acquire any such shares or other securities, (iii) any split,
combination or reclassification of any of Company's capital stock, (iv) any
granting by Company of any increase in compensation or fringe benefits, except
for normal increases of cash compensation in the ordinary course of business
consistent with past practice, or any payment by Company of any bonus, except
for bonuses made in the ordinary course of business consistent with past
practice, or any granting by Company of any increase in severance or termination
pay or any entry by Company into any currently effective employment, severance,
termination or indemnification agreement or any agreement the benefits of which
are contingent or the terms of which are materially altered upon the occurrence
of a transaction involving Company of the nature contemplated hereby, (v) entry
by Company into any licensing or other agreement with regard to the acquisition
or disposition of any Intellectual Property (as defined in Section 2.19) other
than licenses in the ordinary course of business consistent with past practice
or any amendment or consent with respect to any licensing agreement filed or
required to be filed by Company with the SEC, (vi) any material change by
Company in its accounting methods, principles or practices, except as required
by concurrent changes in GAAP, or (vii) any revaluation by Company of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable or any sale of assets of
Company other than in the ordinary course of business.
2.10 LITIGATION. There are no claims, suits, actions or, to the best
knowledge of the Company, proceedings pending or threatened against Company,
before any court, governmental department, commission, agency, instrumentality
or authority, or any arbitrator that seeks to restrain or enjoin the
consummation of the transactions contemplated by this Agreement or which could
reasonably be expected, either singularly or in the aggregate with all such
claims, actions or proceedings, to have a Material Adverse Effect on Company or
have a Material Adverse Effect on the ability of the parties hereto to
consummate the Merger.
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2.11 EMPLOYEE BENEFIT PLANS.
(a) All employee compensation, incentive, fringe or benefit plans, programs,
policies, commitments or other arrangements (whether or not set forth in a
written document and including, without limitation, all "employee benefit plans"
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")) covering any active or former employee,
director or consultant of Company, or any trade or business (whether or not
incorporated) which is a member of a controlled group or which is under common
control with Company within the meaning of Section 414 of the Code (an
"Affiliate"), with respect to which Company has liability, are listed in
Section 2.11(a) of the Company Schedule (collectively, the "Plans"). Company has
provided, or will provide within five (5) business days of the date hereof, to
Parent: (i) correct and complete copies of all documents embodying each Plan
including (without limitation) all amendments thereto, all related trust
documents, and all material written agreements and contracts relating to each
such Plan; (ii) the three (3) most recent annual reports (Form Series 5500 and
all schedules and financial statements attached thereto), if any, required under
ERISA or the Code in connection with each Plan; (iii) the most recent summary
plan description together with the summary(ies) of material modifications
thereto, if any, required under ERISA with respect to each Plan; (iv) all
Internal Revenue Service (the "IRS") or Department of Labor (the "DOL")
determination, opinion, notification and advisory letters; (v) all material
correspondence to or from any governmental agency relating to any Plan;
(vi) all material communications to employees or former employees, relating to
any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events which
would result in any material liability under any Plan or proposed Plan; and
(vii) all registration statements, annual reports (Form 11-K and all attachments
thereto) and prospectuses prepared in connection with any Plan. None of the
Plans is self-insured.
(b) Each Plan has been maintained and administered in all material respects
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such Plans. No suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Plan activities) has been brought, or to the knowledge of Company is threatened,
against or with respect to any such Plan. There are no audits, inquiries or
proceedings pending or, to the knowledge of Company, threatened by the IRS or
DOL with respect to any Plans. All contributions, reserves or premium payments
required to be made or accrued as of the date hereof to the Plans have been
timely made or accrued. Any Plan intended to be qualified under Section 401(a)
of the Code and each trust intended to qualify under Section 501(a) of the Code
(i) has either obtained a favorable determination, notification, advisory and/or
opinion letter, as applicable, as to its qualified status from the IRS or still
has a remaining period of time under applicable Treasury Regulations or IRS
pronouncements in which to apply for such letter and to make any amendments
necessary to obtain a favorable determination, and (ii) incorporates or has been
amended to incorporate all provisions required to comply with the Tax Reform Act
of 1986 and subsequent legislation to the extent such amendment or incorporation
is required as of the Closing Date. Company does not have any plan or commitment
to establish any new Plan, to modify any Plan (except to the extent required by
law or to conform any such Plan to the requirements of any applicable law, in
each case as previously disclosed to Parent in writing, or as required by this
Agreement), or to enter into any new Plan. Each Plan can be amended, terminated
or otherwise discontinued after the Effective Time in accordance with its terms,
without liability to Parent, Company or any of its Affiliates (other than
ordinary administration expenses and expenses for benefits accrued but not yet
paid).
(c) Neither Company nor any of its Affiliates has at any time ever
maintained, established, sponsored, participated in, or contributed to any plan
subject to Title IV of ERISA or Section 412 of the Code and at no time has
Company contributed to or been requested to contribute to any "multiemployer
plan," as such term is defined in ERISA or to any plan described in
Section 413(c) of the Code. Neither Company, nor any officer or director of
Company is subject to any liability or penalty under Section 4975 through 4980B
of the Code or Title I of ERISA. No "prohibited transaction," within the meaning
of Section 4975 of the
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Code or Sections 406 and 407 of ERISA, and not otherwise exempt under
Section 408 of ERISA, has occurred with respect to any Plan which could subject
Company to material liabilities.
(d) Neither Company, nor any of its Affiliates has, prior to the Effective
Time and in any material respect, violated any of the health continuation
coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA") or the requirements of the Family Medical Leave Act
of 1993, as amended. None of the Plans promises or provides retiree medical or
other retiree welfare benefits to any person except as required by applicable
law, and Company has not represented, promised or contracted (whether in oral or
written form) to provide such retiree benefits to any employee, former employee,
director, consultant or other person, except to the extent required by statute.
(e) Except as disclosed on Section 2.11(e) of the Company Schedule, neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any stockholder, director or employee of Company under any Plan
or otherwise, (ii) materially increase any benefits otherwise payable under any
Plan, or (iii) result in the acceleration of the time of payment or vesting of
any such benefits.
(f) There is no International Employee Plan in existence. For purposes of
this Section "International Employee Plan" shall mean any Plan adopted or
maintained by Company, whether informally or formally, for the benefit of
current or former employees of Company outside the United States.
2.12 LABOR MATTERS. (i) There are no material controversies pending or, to
the knowledge of Company, threatened, between Company and any of its employees
which controversies have or could reasonably be expected to have a Material
Adverse Effect on Company; (ii) Company is not a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by Company nor does Company know of any activities or proceedings of
any labor union to organize any such employees; and (iii) Company has no
knowledge of any strikes, slowdowns, work stoppages or lockouts, or threats
thereof, by or with respect to any employees of Company, nor has Company
experienced any labor interruptions over the past three (3) years.
2.13 REGISTRATION STATEMENT; PROXY STATEMENT. None of the information
supplied or to be supplied by Company for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 to be filed with the SEC
by Parent in connection with the issuance of the Parent Common Stock in
connection with the Merger (the "S-4") will, at the time the S-4 becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make such statements therein, in light of the
circumstances under which they are made, not misleading; and (ii) the proxy
statement/prospectus to be filed with the SEC by Company pursuant to
Section 5.1(a) hereof (the "Proxy Statement/Prospectus") will, at the date
mailed to the stockholders of Company and at the time of the special
stockholders meeting of Company (the "Company Stockholders' Meeting") in
connection with the transactions contemplated hereby and as of the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement/Proxy statement/prospectus will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations promulgated by the SEC thereunder. Notwithstanding the
foregoing, Company makes no representation or warranty with respect to any
information supplied by Parent or Merger Sub which is contained in any of the
foregoing documents.
2.14 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement,
commitment, judgment, injunction, order or decree binding upon Company or to
which Company is a party which has or could reasonably be expected to have the
effect of prohibiting or materially impairing any business practice of Company,
any acquisition of property by Company or the conduct of business by Company as
currently conducted other
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than such effects, individually or in the aggregate, which have not had and
could not reasonably be expected to have, a Material Adverse Effect on Company.
2.15 TITLE TO PROPERTY. Company has good and valid title to all of its
material properties and assets, free and clear of all liens, pledges, claims,
charges, security interests or other encumbrances except liens for taxes not yet
due and payable and such liens or other imperfections of title, if any, as do
not materially detract from the value of or materially interfere with the
present use of the property affected thereby; and all leases pursuant to which
Company leases from others material real or personal property are valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing material default or event of default of Company or,
to Company's knowledge, any other party (or any event which with notice or lapse
of time, or both, would constitute a material default), except where the lack of
such validity and effectiveness or the existence of such default or event of
default could not reasonably be expected to have a Material Advance Effect on
Company. All the plants, structures and equipment owned by Company, and to the
knowledge of Company, all the plants, structures and equipment leased by
Company, except such as may be under construction, are in good operating
condition and repair (subject to normal wear and tear), in all material
respects.
2.16 TAXES.
(a) DEFINITION OF TAXES. For the purposes of this Agreement, "Tax" or
"Taxes" refers to any and all federal, state, local and foreign taxes,
including, without limitation, gross receipts, income, profits, sales, use,
occupation, value added, ad valorem, transfer, franchise, withholding, payroll,
recapture, employment, excise and property taxes, assessments, governmental
charges and duties together with all interest, penalties and additions imposed
with respect to any such amounts and any obligations under any agreements or
arrangements with any other person with respect to any such amounts and
including any liability of a predecessor entity for any such amounts.
(b) TAX RETURNS AND AUDITS. Except as set forth in Section 2.16(b) of the
Company Schedule:
(i) Company has timely filed all federal, state, local and foreign
returns, estimates, information statements and reports relating to Taxes
("Returns") required to be filed by Company with any Tax authority prior to
the date hereof, except such Returns which are not material to Company. All
such Returns are true, correct and complete in all material respects.
Company has paid all Taxes shown to be due on such Returns.
(ii) All Taxes that Company is required by law to withhold or collect
have been duly withheld or collected, and have been timely paid over to the
proper governmental authorities to the extent due and payable.
(iii) Company has not been delinquent in the payment of any material Tax
nor is there any material Tax deficiency outstanding, proposed or assessed
against Company, nor has Company executed any unexpired waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) No audit or other examination of any Return of Company by any Tax
authority is presently in progress, nor has Company been notified in writing
of any request for such an audit or other examination.
(v) No adjustment relating to any Returns filed by Company has been
proposed in writing, formally or informally, by any Tax authority to the
Company or any representative thereof.
(vi) Company has no liability for any material unpaid Taxes which have
not been accrued for or reserved on Company's balance sheet included in
Company's report on Form 10-Q for the quarter ended September 30, 1999,
whether asserted or unasserted, contingent or otherwise, which is material
to Company, other than any liability for unpaid Taxes that may have accrued
since September 30, 1999
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in connection with the operation of the business of Company in the ordinary
course of business, none of which is material to the business, results of
operations or financial condition of Company.
(vii) There is no contract, agreement, plan or arrangement to which
Company is a party as of the date of this Agreement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of Company that, individually or collectively, could reasonably be
expected to give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code (or any
similar provision of state or local law). There is no contract, agreement,
plan or arrangement to which Company is a party or by which it is bound that
could require the compensation of any individual for excise taxes payable
pursuant to Section 4999 of the Code (or any similar provision of state or
local law).
(viii) Company has not filed any consent agreement under Section 341(f)
of the Code (or any similar provision of state or local law) or agreed to
have Section 341(f)(2) of the Code (or any similar provision of state or
local law) apply to any disposition of a subSection (f) asset (as defined in
Section 341(f)(4) of the Code (or any similar provision of state or local
law)) owned by Company.
(ix) Company is not party to, and has no obligation under, any tax
sharing, tax indemnity, tax allocation or similar agreement or arrangement.
(x) None of Company's assets is tax exempt use property within the
meaning of Section 168(h) of the Code (or any similar provision of state or
local law).
(xi) Company has not distributed the stock of any corporation in a
transaction satisfying the requirements of Section 355 of the Code. The
stock of Company has not been distributed in a transaction satisfying the
requirements of Section 355 of the Code.
(xii) Company is not, and has not been a "United States real property
holding corporation" within the meaning of Section 897(c)(2) of the Code.
(xiii) No power of attorney has been granted by Company and is currently
in effect.
(xiv) Company has not taken any action and does not know of any fact,
agreement, plan or other circumstance that is reasonably likely to prevent
the Merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
2.17 ENVIRONMENTAL MATTERS.
(a) Except as disclosed in the Company SEC Reports filed prior to the date
hereof and except for such matters that, individually or in the aggregate, are
not reasonably likely to have a Material Adverse Effect: (i) Company has
complied with all applicable Environmental Laws; (ii) the properties currently
owned or operated by Company (including soils, groundwater, surface water,
buildings or other structures) are not contaminated with any Hazardous
Substances; (iii) the properties formerly owned or operated by Company were not
contaminated with Hazardous Substances during the period of ownership or
operation by Company; (iv) Company is not subject to liability for any Hazardous
Substance disposal or contamination on any third party property; (v) Company has
not been associated with any release or threat of release of any Hazardous
Substance; (vi) Company has not received any notice, demand, letter, claim or
request for information alleging that Company may be in violation of or liable
under any Environmental Law; (vii) Company is not subject to any orders,
decrees, injunctions or other arrangements with any Governmental Entity or
subject to any indemnity or other agreement with any third party relating to
liability under any Environmental Law or relating to Hazardous Substances; and
(viii) there are no circumstances or conditions involving Company that could
reasonably be expected to result in any claims, liability, investigations, costs
or restrictions on the ownership, use or transfer of any property of Company
pursuant to any Environmental Law.
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(b) As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, regulation, order, decree, permit, authorization, opinion,
common law or agency requirement relating to: (A) the protection, investigation
or restoration of the environment, health and safety, or natural resources;
(B) the handling, use, presence, disposal, release or threatened release of any
Hazardous Substance or (C) noise, odor, wetlands, pollution, contamination or
any injury or threat of injury to persons or property.
(c) As used herein, the term "Hazardous Substance" means any substance that
is: (A) listed, classified or regulated pursuant to any Environmental Law;
(B) any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon; or (C) any other substance which is the subject of
regulatory action by any Governmental Entity pursuant to any Environmental Law.
2.18 BROKERS. Except with respect to Lehman Brothers Inc., Company has not
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders fees or agent's commissions or any similar charges in connection with
this Agreement or any transaction contemplated hereby. Prior to the date hereof,
a copy of the letter by which Company engaged Lehman Brothers, Inc., complete
with all schedules and fee information, has been delivered to Parent.
2.19 INTELLECTUAL PROPERTY. For the purposes of this Agreement, the
following terms have the following definitions:
"Intellectual Property" shall mean any or all of the following and all
worldwide common law and statutory rights in, arising out of, or associated
therewith: (i) patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof ("Patents"); (ii) inventions (whether
patentable or not), invention disclosures, improvements, trade secrets,
proprietary information, know how, technology, technical data and customer
lists, and all documentation relating to any of the foregoing;
(iii) copyrights, copyrights registrations and applications therefor, and
all other rights corresponding thereto throughout the world; (iv) domain
names, uniform resource locators ("URLs") and other names and locators
associated with the Internet ("Domain Names"); (v) industrial designs and
any registrations and applications therefor; (vi) trade names, logos, common
law trademarks and service marks, trademark and service mark registrations
and applications therefor (collectively, "Trademarks"); (vii) all databases
and data collections and all rights therein; (viii) all moral and economic
rights of authors and inventors, however denominated, and (ix) any similar
or equivalent rights to any of the foregoing (as applicable).
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, Company.
"Registered Intellectual Property" means all Intellectual Property that
is the subject of an application, certificate, filing, registration or other
document issued, filed with, or recorded by any private, state, government
or other legal authority.
"Company Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, Company.
"Company Products" means all current versions of products or service
offerings of Company.
(a) No Company Intellectual Property or Company Product is subject to any
material proceeding or outstanding decree, order, judgment, contract, license,
agreement or stipulation restricting in any manner the use, transfer or
licensing thereof by Company, or which may affect the validity, use or
enforceability of such Company Intellectual Property or Company Product, which
in any such case could reasonably be expected to have a Material Adverse Effect
on Company.
(b) Each material item of Company Registered Intellectual Property is valid
and subsisting, all necessary registration, maintenance and renewal fees
currently due in connection with such Company
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Registered Intellectual Property have been made and all necessary documents,
recordations and certificates in connection with such Company Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Company Registered
Intellectual Property, except where the failure to do so could not be reasonably
likely to have a Material Adverse Effect on Company.
(c) To the knowledge of Company, except as disclosed on Section 2.19(c) of
the Company Schedule, Company owns and has good and exclusive title to, each
material item of Company Intellectual Property owned by it free and clear of any
lien or encumbrance (excluding non-exclusive licenses and related restrictions
granted in the ordinary course); and Company is the exclusive owner of all
material Trademarks used in connection with the operation or conduct of the
business of Company including the sale of any products or the provision of any
services by Company. Without limiting the foregoing, (i) Company owns
exclusively, and has good title to, all copyrighted works that are Company
Products or which Company otherwise purports to own and (ii) except as could not
reasonably be expected to have a Material Adverse Effect, to the extent that any
Patents would be infringed by any Company Products, Company is the exclusive
owner of such Patents.
(d) To the knowledge of Company, except as disclosed on Section 2.19(d) of
the Company Schedule, to the extent that any material technology, material
software or material Intellectual Property has been developed or created
independently or jointly by a third party for Company or is incorporated into
any of Company Products, Company has a written agreement with such third party
with respect thereto and Company thereby either (i) has obtained ownership of,
and is the exclusive owner of, or (ii) has obtained a perpetual, non-terminable
license (sufficient for the conduct of its business as currently conducted and
as proposed to be conducted) to all such third party's Intellectual Property in
such work, material or invention by operation of law or by valid assignment, to
the fullest extent it is legally possible to do so.
(e) Company has not transferred ownership of, or granted any exclusive
license with respect to, any Intellectual Property that is material Company
Intellectual Property, to any third party, or knowingly permitted Company's
rights in such material Company Intellectual Property to lapse or enter the
public domain.
(f) Section 2.19(f) of the Company Schedule lists all contracts, licenses
and agretements to which Company is a party and that remain in effect: (i) with
respect to Company Intellectual Property licensed or transferred to any third
party resulting in, or which may result in, annual payments of $50,000 or more
to Company; or (ii) pursuant to which a third party has licensed or transferred
any material Intellectual Property to Company resulting in, or which may result
in, annual payments of $50,000 or more by Company.
(g) The operation of the business of Company as such business currently is
conducted, including (i) Company's design, development, manufacture,
distribution, reproduction, marketing or sale of the products or services of
Company (including Company Products) and (ii) Company's use of any product,
device or process, to its knowledge and except as could not reasonably be
expected to have a Material Adverse Effect, has not and does not and will not
infringe or misappropriate the Intellectual Property of any third party or
constitute unfair competition or trade practices under the laws of any
jurisdiction.
(h) Company has not received written notice from any third party that the
operation of the business of Company or any act, product or service of Company,
infringes or misappropriates the Intellectual Property of any third party or
constitutes unfair competition or trade practices under the laws of any
jurisdiction, except as could not reasonably be expected to have a Material
Adverse Effect on Company.
(i) To the knowledge of Company, no person has infringed or is infringing or
misappropriating any material Company Intellectual Property, except as could not
reasonably be expected to have a Material Adverse Effect on Company.
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(j) Company has and enforces a policy requiring each employee and contractor
to execute a proprietary information/confidentiality agreement substantially in
the form provided to Parent prior to the date hereof and all current and former
employees and contractors of Company have executed such an agreement, except
where the failure to do so could not reasonably be expected to have a Material
Adverse Effect on Company.
(k) To Company's knowledge, the Company Products will be fully compatible in
normal operation with changes to outputs, data or other information in relation
to dates arising in the Year 2000 and beyond, without a material loss of
performance or a material loss of use, affected by hardware or third party
software (including but not limited to operating systems) or unauthorized
modifications made to Company Products. To Company's knowledge, all of Company's
Information Technology (as defined below) is Year 2000 compliant, and will not
cause an interruption in the ongoing operations of Company's business on or
after January 1, 2000 except such interruptions as could not reasonably be
expected to have a Material Adverse Effect on Company. For purposes of the
foregoing, the term "Information Technology" shall mean and include all material
software, hardware, firmware, telecommunications systems, network systems,
embedded systems and other systems, components and/or services (other than
general utility services including gas, electric, telephone and postal) that are
owned or used by Company in the conduct of their business, or purchased by
Company from third-party suppliers.
2.20 AGREEMENTS, CONTRACTS AND COMMITMENTS. Company has not breached, or
received in writing any claim or notice that it has breached, any of the terms
or conditions of any agreement, contract or commitment to which it is a party or
by which it is bound in such a manner as, individually or in the aggregate, are
reasonably likely to have a Material Adverse Effect on Company. Each agreement,
contract or commitment to which the Company is a party or by which it is bound
that has not expired by its terms is in full force and effect, except where such
failure to be in full force and effect is not reasonably likely to have a
Material Adverse Effect on Company.
2.21 INSURANCE. Company maintains insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of Company (collectively, the "Insurance Policies") which
Company reasonably believes are adequate in amount and scope. There is no
material claim by Company pending under any of the material Insurance Policies
as to which coverage has been questioned, denied or disputed by the underwriters
of such policies or bonds.
2.22 OPINION OF FINANCIAL ADVISOR. Company has been advised in writing by
its financial advisor, Lehman Brothers Inc., that in its written opinion, as of
the date of this Agreement, the Exchange Ratio is fair to the stockholders of
Company from a financial point of view.
2.23 BOARD APPROVAL. The Board of Directors of Company (including any
required committee or subgroup of the Board of Directors of the Company) has, as
of the date of this Agreement, unanimously (i) declared the advisability of the
Merger and approved, subject to stockholder approval, this Agreement and the
transactions contemplated hereby, (ii) determined that the Merger is in the best
interests of the stockholders of Company and is on terms that are fair to such
stockholders and (iii) recommended that the stockholders of Company approve and
adopt this Agreement and approve the Merger.
2.24 VOTE REQUIRED. The affirmative vote of a majority of the votes that
holders of the outstanding shares of Company Common Stock are entitled to vote
with respect to this Agreement is the only vote of the holders of any class or
series of Company's capital stock necessary to approve and adopt this Agreement
and the transactions contemplated hereby pursuant to the DGCL and the Company
Charter Documents.
2.25 SECTION 203 OF THE DGCL NOT APPLICABLE. The Board of Directors of
Company has taken all actions so that the restrictions contained in Section 203
of the DGCL applicable to a "business combination" (as defined in such Section
203), or any other state takeover statute or similar law that otherwise would be
applicable, will not apply to the execution, delivery or performance of this
Agreement or the
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Company Voting Agreements or to the consummation of the Merger or the other
transactions contemplated by this Agreement or the Company Voting Agreements.
2.26 CHANGE OF CONTROL PAYMENTS. Section 2.26 of the Company Schedule sets
forth each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees and
directors of the Company as a result of or in connection with the Merger.
2.27 AFFILIATES. Set forth in Section 2.27 of the Company Schedule is a
list of those persons who may be deemed to be, in Company's reasonable judgment,
affiliates of Company within the meaning of Rule 145 under the Securities Act.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to
Company, subject to such exceptions as are specifically disclosed in writing in
the disclosure letter supplied by Parent to Company dated as of the date hereof
and attached hereto as Exhibit C, which disclosure shall provide an exception to
or otherwise qualify the representations or warranties thereof specifically
referred to, cross-referenced or clearly applicable in such disclosure (the
"Parent Schedule"), as follows:
3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of Parent and its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing, to the extent applicable, under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being or currently planned by Parent to be conducted. Each of Parent and its
Subsidiaries is in possession of all Approvals necessary to own, lease and
operate the properties it purports to own, operate or lease and to carry on its
business as it is now being or currently planned by Parent to be conducted,
except where the failure to have such Approvals would not, individually or in
the aggregate, have a Material Adverse Effect on Parent. Except as set forth in
Section 3.1 of the Parent Schedule, each of Parent and its Subsidiaries is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not, either individually
or in the aggregate, have a Material Adverse Effect on Parent.
3.2 CERTIFICATE OF INCORPORATION AND BYLAWS. Parent has previously
furnished to Company complete and correct copies of its Amended and Restated
Certificate of Incorporation and Bylaws as amended to date (together, the
"Parent Charter Documents"). Such Parent Charter Documents and equivalent
organizational documents of each of its Subsidiaries are in full force and
effect. Parent is not in violation of any of the provisions of the Parent
Charter Documents, and no subsidiary of Parent is in violation of any of its
equivalent organizational documents.
3.3 CAPITALIZATION. As of the date hereof, the authorized capital stock of
Parent consists of (i) 120,000,000 shares of Parent Common Stock, (ii)
10,000,000 shares of Class B Common Stock, par value $0.01 per share (the "Class
B Common Stock"), and (iii) 60,000,000 shares of Preferred Stock, par value
$0.01 per share. (i) As of October 29, 1999, 34,856,571 shares of Parent Common
Stock were issued and outstanding, (ii) as of the date hereof, 10,000,000 shares
of Class B Common Stock were issued and outstanding, (iii) as of the date
hereof, no shares of Preferred Stock were issued and outstanding and (iv) except
as disclosed in the Parent SEC Filings (as defined in Section 3.6), as of
October 29, 1999 Parent had no present commitment to issue any shares of Parent
Common Stock, Class B Common Stock or Preferred Stock. As of the date hereof,
the authorized capital stock of Merger Sub consists of 100 shares of common
stock, par value $.01 per share, all of which, as of the date hereof, are issued
and outstanding. All of the outstanding shares of Parent's and Merger Sub's
respective capital stock have been duly authorized and validly issued and are
fully paid and nonassessable. All shares of Parent Common Stock subject to
issuance
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as disclosed in the Parent SEC Filings, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall, and the shares of Parent Common Stock to be issued pursuant to the Merger
will be, duly authorized, validly issued, fully paid and nonassessable. All of
the outstanding shares of capital stock (other than directors' qualifying
shares) of each of Parent's Subsidiaries is duly authorized, validly issued,
fully paid and nonassessable and all such shares (other than directors'
qualifying shares) are owned by Parent or another Subsidiary of Parent free and
clear of all security interests, liens, claims, pledges, agreements, limitations
in Parent's voting rights, charges or other encumbrances of any nature
whatsoever.
3.4 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and Merger Sub
has all necessary corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder and to consummate the
transactions contemplated hereby (including the Merger), and Parent has all
necessary corporate power and authority to execute and deliver the Company
Voting Agreements and to perform its obligations thereunder and to consummate
the transactions contemplated thereby. The execution and delivery of this
Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub
of the transactions contemplated hereby (including the Merger) have been duly
and validly authorized by all necessary corporate action on the part of Parent
and Merger Sub, and no other corporate proceedings on the part of Parent or
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby (including the Merger), except that the
approval of the stockholders of Parent may be required by Nasdaq. The execution
and delivery of the Company Voting Agreements by Parent and the consummation by
Parent of the transactions contemplated thereby have been duly and validly
authorized by all necessary corporate action on the part of Parent, and no other
corporate proceedings on the part of Parent are necessary to authorize the
Company Voting Agreements, or to consummate the transactions contemplated
thereby. This Agreement has been duly and validly executed and delivered by
Parent and Merger Sub and, assuming the due authorization, execution and
delivery thereof by Company, constitutes the legal and binding obligations of
Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance
with its terms, except as may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and by general equitable principles. The Company Voting
Agreements have been duly and validly executed and delivered by Parent and,
assuming the due authorization, execution and delivery thereof by Company,
constitute the legal and binding obligations of Parent, enforceable against
Parent in accordance with their terms, except as may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
3.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by Parent and Merger Sub
and the Company Voting Agreements by Parent do not, and the performance of this
Agreement by Parent and Merger Sub and the Company Voting Agreements by Parent
shall not, (i) conflict with or violate the Parent Charter Documents or the
equivalent organizational documents of any of Parent's Subsidiaries, (ii)
subject to compliance with the requirements set forth in Section 3.5(b) below,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Parent or any of its Subsidiaries or by which it or their
respective properties are bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or materially impair Parent's or any such
Subsidiary's rights or alter the rights or obligations of any third party under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Parent or any of its Subsidiaries pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Parent or any of
its Subsidiaries is a party or by which Parent or any of its Subsidiaries or its
or any of their respective properties are bound or affected, except, with
respect to clauses (ii) or (iii), for any such conflicts, violations, breaches,
defaults or other occurrences that would not
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in the case of clauses (ii) or (iii), individually or in the aggregate, have a
Material Adverse Effect on Parent.
(b) The execution and delivery of this Agreement by Parent and Merger Sub
and the Company Voting Agreements by Parent do not, and the performance of this
Agreement by Parent and Merger Sub and of the Company Voting Agreements by
Parent shall not, require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity except (i) for
applicable requirements, if any, of the Securities Act, the Exchange Act, Blue
Sky Laws, the pre-merger notification requirements of the HSR Act, the
Communications Act of 1934, as amended, state public utility laws and of foreign
governmental entities and the rules and regulations thereunder, the rules and
regulations of Nasdaq, and the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware and appropriate documents with the
relevant authorities of other states in which Parent is qualified to do business
and (ii) where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, (x) would not prevent
consummation of the Merger or otherwise prevent Parent or Merger Sub from
performing their respective obligations under this Agreement or (y) could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Parent.
3.6 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has made available to Company a correct and complete copy of each
report, schedule, registration statement and definitive proxy statement filed by
Parent with the SEC on or after June 17, 1999 (the "Parent SEC Reports"), which
are all the forms, reports and documents required to be filed by Parent with the
SEC since that date. As of their respective dates, the Parent SEC Reports (A)
were prepared in accordance and complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such Parent SEC
Reports, and (B) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing and as so amended or superceded) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. None of Parent's Subsidiaries is
required to file any reports or other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports, including each
Parent SEC Report filed after the date hereof until the Closing, complied as to
form in all material respects with the published rules and regulations of the
SEC with respect thereto, was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited statements, do not contain
footnotes as permitted by Form 10-Q of the Exchange Act) and each fairly
presents in all material respects the consolidated financial position of Parent
and its Subsidiaries at the respective dates thereof and the consolidated
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal
adjustments which were not or are not expected to have a Material Adverse Effect
on Parent.
3.7 REGISTRATION STATEMENT; PROXY STATEMENT. None of the information
supplied or to be supplied by Parent for inclusion or incorporation by reference
in (i) the S-4 will, at the time the S-4 becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading; and (ii) the Proxy Statement/ Prospectus will, at the date mailed to
the stockholders of Company and at the time of Company Stockholders' Meeting and
as of the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The S-4 will comply as to form in all material
respects with the provisions of the Securities Act and the rules and regulations
promulgated by the SEC
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thereunder. Notwithstanding the foregoing, Parent makes no representation or
warranty with respect to any information supplied by Company which is contained
in any of the foregoing documents.
3.8 NO UNDISCLOSED LIABILITIES. Except as set forth in Section 3.8 of the
Parent Schedules, neither Parent nor any of its Subsidiaries has any liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be
disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually or
in the aggregate, material to the business, results of operations or financial
condition of Parent, except (i) liabilities provided for or otherwise disclosed
in Parent SEC Reports filed prior to the date hereof or (ii) liabilities
incurred since September 30, 1999 in the ordinary course of business, none of
which would have a Material Adverse Effect on Parent.
3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Section
3.9 of the Parent Schedules since September 30, 1999, there has not been any
Material Adverse Effect on Parent.
3.10 TAXES. Neither Parent nor any of its Subsidiaries has taken any
action or knows of any fact, agreement, plan or other circumstance that is
reasonably likely to prevent the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code.
3.11 BROKERS. Except with respect to Donaldson, Lufkin & Jenrette
Securities Corporation, Parent and Merger Sub have not incurred, nor will they
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.12 MERGER SUB. Merger Sub was formed solely for the purpose of engaging
in the transactions contemplated hereby, has engaged in no other business
activities and has conducted its operations only as contemplated hereby.
3.13 INTELLECTUAL PROPERTY. "Parent Intellectual Property" shall mean any
Intellectual Property that is owned by, or exclusively licensed to, Parent.
Except as set forth in Section 3.13 of the Parent Schedules:
(a) (i) With respect to any Parent Intellectual Property that, were Parent
for any reason unable to use such Parent Intellectual Property it would be
reasonably likely to have a Material Adverse Effect on Parent, Parent owns or
possesses, or owns or possesses licenses or other valid rights to use, such
Parent Intellectual Property; and (ii) to the knowledge of Parent, the conduct
of the business of Parent as presently conducted does not infringe or conflict
with, nor has it been alleged to infringe or conflict with, any patents,
trademarks, trade names or copyrights or other intellectual property rights of
others, except as could not reasonably be expected to have a Material Adverse
Effect on Parent.
(b) To the knowledge of Parent, there is no claim or liability for
trademark, trade name, patent or copyright infringement relating to the conduct
by Parent of its business that, if determined adversely to Parent, would be
reasonably likely to have a Material Adverse Effect on Parent.
(c) To the knowledge of Parent, on the date hereof (i) there are no pending
re-examination, opposition, interference, cancellation or other administrative
proceedings with respect to any of the Parent Intellectual Property that, if
determined adversely to Parent, would be reasonably likely to have a Material
Adverse Effect on Parent, and (ii) no order, holding, decision or judgment has
been rendered by any court of law or authority, and no agreement, consent or
pending litigation in a court of law exists to which Parent is a party, which
would prevent Parent from using any of the Parent Intellectual Property, except
as could not reasonably be expected to have a Material Adverse Effect on Parent.
3.14 LITIGATION. Except as set forth in Section 3.14 of the Parent
Schedules, there are no claims, suits or actions or, to the knowledge of Parent,
proceedings pending or threatened against Parent, before any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator
that seek to restrain or enjoin the consummation of the transactions
contemplated by this Agreement or which could reasonably be expected, either
singularly or in the aggregate with all such claims, actions or
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proceedings, to have a Material Adverse Effect on Parent or have a material
adverse effect on the ability of the parties hereto to consummate the Merger.
3.15 TITLE. Parent has good and valid title to all of its material
properties and assets, free and clear of all liens, pledges, claims, charges,
security interests or other encumbrances except as disclosed in Parent SEC
Reports, liens for taxes not yet due and payable and such liens or other
imperfections of title, if any, as could not reasonably be expected to have a
Material Adverse Effect on Parent; and all leases pursuant to which Parent
leases from others material real or personal property are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing material default or event of default of Parent or, to
Parent's knowledge, any other party (or any event which with notice or lapse of
time, or both, would constitute a material default), except where the lack of
such validity and effectiveness or the existence of such default or event of
default could not reasonably be expected to have a Material Adverse Effect on
Parent.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS BY COMPANY. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, Company shall, except to
the extent that Parent shall otherwise consent in writing, carry on its
business, in the usual, regular and ordinary course consistent with past
practices, in substantially the same manner as heretofore conducted and in
compliance with all applicable laws and regulations (except where noncompliance
would not have a Material Adverse Effect), pay its debts and taxes when due
subject to good faith disputes over such debts or taxes, pay or perform other
material obligations when due, and use its commercially reasonable efforts
consistent with past practices and policies to (i) preserve substantially intact
its present business organization, (ii) keep available the services of its
present officers and employees and (iii) preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with which
it has significant business dealings. In addition, except as permitted by the
terms of this Agreement, without the prior written consent of Parent, during the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement pursuant to its terms or the Effective Time,
Company shall not do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or (except as
specifically provided for herein) change the period of exercisability of options
or restricted stock, or reprice options granted under any employee, consultant,
director or other stock plans or authorize cash payments in exchange for any
options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee except
pursuant to applicable law, written agreements outstanding, or policies
existing, on the date hereof and as previously or concurrently disclosed in
writing or made available to Parent, or adopt any new severance plan, or amend
or modify or alter in any manner any severance plan, agreement or arrangement
existing on the date hereof;
(c) Transfer or license to any person or otherwise extend, amend or modify
any material rights to Company Intellectual Property, or enter into grants to
transfer or license to any person future patent rights, other than in the
ordinary course of business consistent with past practices, provided that in no
event shall Company license on an exclusive basis or sell any Company
Intellectual Property;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock;
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(e) Except as set forth in Section 4.1(e) of the Company Schedule, purchase,
redeem or otherwise acquire, directly or indirectly, any shares of capital stock
of Company, except repurchases of unvested shares at cost in connection with the
termination of the employment relationship with any employee pursuant to stock
option or purchase agreements in effect on the date hereof;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber, or agree
to any of the foregoing with respect to, any shares of capital stock or any
securities convertible into or exchangeable for shares of capital stock, or
subscriptions, rights, warrants or options to acquire any shares of capital
stock or any securities convertible into or exchangeable for shares of capital
stock, or enter into other agreements or commitments of any character obligating
it to issue any such shares or convertible or exchangeable securities, other
than (i) the issuance delivery and/or sale of shares of Company Common Stock
pursuant to the exercise of stock options therefor outstanding as of the date of
this Agreement and (ii) the granting of stock options (and the issuance of
Company Common Stock upon exercise thereof), in the ordinary course of business
and consistent with past practices, in an amount not to exceed options to
purchase (and the issuance of Company Common Stock upon exercise thereof)
300,000 shares in the aggregate (provided that the vesting of these options
shall not accelerate upon the Closing);
(g) Amend Company Charter Documents;
(h) Except as disclosed in Section 4.1(h) of the Company Schedule, acquire
or agree to acquire by merging or consolidating with, or by purchasing any
equity interest in or a portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
the Company or enter into any joint ventures, strategic partnerships or
alliances or other arrangements that provide for exclusivity of territory or
otherwise restrict Company's ability to compete or to offer or sell any products
or services;
(i) Sell, lease, license, encumber or otherwise dispose of any properties or
assets, except sales of inventory in the ordinary course of business consistent
with past practice and, except for the sale, lease or disposition (other than
through licensing) of property or assets which are not material, individually or
in the aggregate, to the business of Company;
(j) Except as disclosed in Section 4.1(j) of the Company Schedule, incur any
indebtedness for borrowed money in excess of $50,000 in the aggregate or
guarantee any such indebtedness of another person, issue or sell any debt
securities or options, warrants, calls or other rights to acquire any debt
securities of Company, enter into any "keep well" or other agreement to maintain
any financial statement condition or enter into any arrangement having the
economic effect of any of the foregoing;
(k) Except as disclosed in Section 4.1(k) of the Company Schedule, adopt or
amend any employee benefit plan, policy or arrangement, any employee stock
purchase or employee stock option plan, or enter into any employment contract or
collective bargaining agreement (other than offer letters and letter agreements
entered into in the ordinary course of business consistent with past practice
with employees who are terminable "at will"), pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
or fringe benefits (including rights to severance or indemnification) of its
directors, officers, employees or consultants, except in the ordinary course of
business consistent with past practices;
(l) Except as disclosed in Schedule 4.1(1) of the Company Schedule, (i) pay,
discharge, settle or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), or litigation
(whether or not commenced prior to the date of this Agreement) other than the
payment, discharge, settlement or satisfaction, in the ordinary course of
business consistent with past practices or in accordance with their terms, or
liabilities recognized or disclosed in the most recent consolidated financial
statements (or the notes thereto) of Company included in Company SEC Reports or
incurred since the date of such financial statements, or (ii) waive the benefits
of, agree to modify in any manner, terminate, release any person from or
knowingly fail to enforce any confidentiality or similar agreement to which
Company is a party or of which Company is a beneficiary;
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(m) Except in the ordinary course of business consistent with past
practices, modify, amend or terminate any Company Contract or other material
contract or material agreement to which Company is a party or waive, delay the
exercise of, release or assign any material rights or claims thereunder;
(n) Except as required by GAAP, revalue any of its assets or make any change
in accounting methods, principles or practices;
(o) Except as set forth in Section 4.1(o) of the Company Schedule, incur or
enter into any agreement, contract or commitment requiring Company to pay in
excess of $100,000 in any 12 month period;
(p) Engage in any action that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code;
(q) Except as set forth in Section 4.1(q) of the Company Schedule, settle
any litigation;
(r) Make or rescind any Tax elections that, individually or in the
aggregate, could be reasonably likely to adversely affect in any material
respect the Tax liability or Tax attributes of Company, settle or compromise any
material income tax liability or, except as required by applicable law,
materially change any method of accounting for Tax purposes or prepare or file
any Return in a manner inconsistent with past practice;
(s) Form, establish or acquire any Subsidiary;
(t) Permit the Plan Administrator to exercise any of its discretionary
rights under the Company Option Plan or the Company's 1990 Stock Option Plan to
provide for the automatic acceleration of any outstanding options, the
termination of any outstanding repurchase rights or the termination of any
cancellation rights issued pursuant to such plans; or
(u) Agree in writing or otherwise agree, commit or resolve to take any of
the actions described in Section 4.1 (a) through (s) above.
4.2 CONDUCT OF BUSINESS BY PARENT. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms and the Effective Time, except as permitted by the terms
of this Agreement, without the prior written consent of Company, Parent shall
not declare, set aside or pay dividends on or make any other distributions
(whether in cash, stock, equity securities or property) on its common stock
without reserving a pro rata amount for distribution to the Company Stockholders
based on the Exchange Ratio.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT; OTHER FILINGS;
BOARD RECOMMENDATIONS.
(a) As promptly as practicable after the execution of this Agreement,
Company and Parent will prepare, and file with the SEC, the Proxy
Statement/Prospectus, and Parent will prepare and file with the SEC the S-4 in
which the Proxy Statement/Prospectus will be included as a prospectus. Each of
Parent and Company shall provide promptly to the other such information
concerning its business and financial statements and affairs as, in the
reasonable judgment of the providing party or its counsel, may be required or
appropriate for inclusion in the Proxy Statement/Prospectus and the S-4, or in
any amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the Proxy
Statement/Prospectus and the S-4. Each of Company and Parent will respond to any
comments of the SEC, and will use its respective commercially reasonable efforts
to have the S-4 declared effective under the Securities Act as promptly as
practicable after such filing, and Company will cause the Proxy
Statement/Prospectus to be mailed to its stockholders at the earliest
practicable time after the S-4 is declared effective by the SEC (the "SEC
Effective Date"). As promptly as
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practicable after the date of this Agreement, each of Company and Parent will
prepare and file any other filings required to be filed by it under the Exchange
Act, the Securities Act or any other Federal, foreign or Blue Sky or related
securities laws in order to consummate the Merger and the transactions
contemplated by this Agreement (the "Other Filings"). Each of Company and Parent
will notify the other promptly upon the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the S-4 or the Proxy Statement/Prospectus and will supply the
other with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the S-4, the Proxy Statement/Prospectus or the Merger. Each of
Company and Parent will cause all documents that it is responsible for filing
with the SEC under this Section 5.1(a) to comply in all material respects with
all applicable requirements of law and the rules and regulations promulgated
thereunder. Whenever any event occurs which is required to be set forth in an
amendment or supplement to the Proxy Statement/Prospectus or the S-4, Company or
Parent, as the case may be, will promptly inform the other of such occurrence
and cooperate in filing with the SEC or its staff, and/or mailing to
stockholders of Company, such amendment or supplement.
(b) Subject to Section 5.2(c) below, the Proxy Statement/Prospectus will
include the recommendation of the Board of Directors of Company in favor of
approval and adoption of this Agreement and approval of the Merger.
5.2 MEETING OF COMPANY STOCKHOLDERS.
(a) Promptly after the date hereof, Company will take all action reasonably
necessary in accordance with the DGCL and Company Charter Documents to convene
Company Stockholders' Meeting to be held as promptly as practicable for the
purpose of voting upon this Agreement and the Merger. Company will use its
commercially reasonable efforts to solicit from its stockholders proxies in
favor of the approval and adoption of this Agreement and approval of the Merger
and will take all other action necessary or advisable to secure the vote or
consent of its stockholders required by the rules of Nasdaq or the DGCL to
obtain such approvals, subject to Section 5.2(c). Notwithstanding anything to
the contrary contained in this Agreement, Company may adjourn or postpone
Company Stockholders' Meeting to the extent necessary to ensure that any
necessary supplement or amendment to the Prospectus/Proxy Statement is provided
to Company's stockholders in advance of a vote on the Merger and this Agreement
or, if as of the time for which Company Stockholders' Meeting is originally
scheduled (as set forth in the Prospectus/Proxy Statement) there are
insufficient shares of Company Common Stock represented (either in person or by
proxy) to constitute a quorum necessary to conduct the business of Company
Stockholders' Meeting. Company shall ensure that Company Stockholders' Meeting
is called, noticed, convened, held and conducted, and that all proxies solicited
by Company in connection with Company Stockholders' Meeting are solicited, in
compliance with the DGCL, Company Charter Documents, the rules of Nasdaq and all
other applicable legal requirements. Company's obligation to call, give notice
of, convene and hold Company Stockholders' Meeting in accordance with this
Section 5.2(a) shall not be limited to or otherwise affected by the
commencement, disclosure, announcement or submission to Company of any
Acquisition Proposal.
(b) Subject to Section 5.2(c), (i) the Board of Directors of Company shall
recommend that Company's stockholders vote in favor of the approval and adoption
of this Agreement and approval of the Merger at Company Stockholders' Meeting;
(ii) the Prospectus/Proxy Statement shall include a statement to the effect that
the Board of Directors of Company has recommended that Company's stockholders
vote in favor of the approval and adoption of this Agreement and approval of the
Merger at Company Stockholders' Meeting; and (iii) neither the Board of
Directors of Company nor any committee thereof shall withdraw, amend or modify,
or propose or resolve to withdraw, amend or modify in a manner adverse to
Parent, the recommendation of the Board of Directors of Company that Company's
stockholders vote in favor of the approval and adoption of this Agreement and
approval of the Merger.
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(c) Nothing in this Agreement shall prevent the Board of Directors of
Company from withholding, withdrawing, amending or modifying its recommendation
in favor of approval and adoption of this Agreement and approval of the Merger
if (i) a Superior Offer (as defined below) is made to Company and is not
withdrawn, (ii) neither Company nor any of its representatives shall have
violated any of the restrictions set forth in Section 5.4, (iii) the Board of
Directors of Company concludes in good faith, after consultation with its
outside counsel, that, in light of such Superior Offer, the failure to withhold,
withdraw, amend or modify such recommendation would cause the Board of Directors
of Company to breach its fiduciary obligations to Company and Company's
stockholders under applicable law, (iv) five business days elapse following
delivery by Company to Parent of written notice advising Parent that the Board
of Directors of Company intends to resolve to withhold, withdraw, amend or
modify its recommendation absent modification of the terms and conditions of
this Agreement and (v) assuming this Agreement was amended to reflect all
adjustments to the terms and conditions hereof proposed by Parent during such
five business day period, such Acquisition would nevertheless constitute a
Superior Offer. Nothing contained in this Section 5.2 shall limit Company's
obligation to hold and convene the Company Stockholders' Meeting (regardless of
whether the recommendation of the Board of Directors of the Company shall have
been withdrawn, amended or modified). For purposes of this Agreement, "Superior
Offer" shall mean an unsolicited, bona fide written offer (the "Proposed
Superior Offer") made by a third party to consummate any of the following
transactions: (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Company pursuant to which the stockholders of Company immediately preceding such
transaction hold less than 15% of the equity interest in the surviving or
resulting entity of such transaction; (ii) a sale or other disposition by
Company of assets (excluding inventory and used equipment sold in the ordinary
course of business) representing all or substantially all of Company's assets,
or (iii) the acquisition by any person or group (including by way of a tender
offer or an exchange offer or issuance by Company), directly or indirectly, of
beneficial ownership or a right to acquire beneficial ownership of shares
representing in excess of 85% of the voting power of the then outstanding shares
of capital stock of Company, in each case on terms that the Board of Directors
of Company determines, in its reasonable judgment (after consultation with an
investment bank of nationally recognized reputation) to be more favorable to
Company stockholders from a financial point of view than the terms of the Merger
and the consideration of which reasonably likely exceeds the value of the
consideration in the Merger (after taking into account all relevant factors,
including any conditions to the Proposed Superior Offer, the timing of the
consummation of the transaction pursuant to the Proposed Superior Offer, the
risk of nonconsummation thereof and the need for any required governmental or
other consents, filings and approvals); provided, however, that a Proposed
Superior Offer shall only be a "Superior Offer" if any financing required to
consummate the transaction contemplated by such offer is committed or is
otherwise reasonably likely in the judgment of Company's Board of Directors to
be obtained by such third party on a timely basis.
5.3 CONFIDENTIALITY; ACCESS TO INFORMATION.
(a) The parties acknowledge that Company and Parent have previously executed
a Confidentiality Agreement, dated as of November 24, 1999 (the "Confidentiality
Agreement"), which Confidentiality Agreement (except for paragraph 10 thereof,
which shall be superseded in its entirety by the provisions of this Agreement)
will continue in full force and effect in accordance with its terms.
(b) Access to Information.
(i) Company will afford Parent and its underwriters, accountants,
counsel and other representatives reasonable access during normal business
hours, upon reasonable notice, to the properties, books, records and
personnel of Company during the period prior to the Effective Time to obtain
all information concerning the business, including the status of product
development efforts, properties, results of operations and personnel of
Company, as Parent may reasonably request. No information or knowledge
obtained by Parent in any investigation pursuant to this Section 5.3 will
affect or be
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deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.
(ii) Parent will afford Company and its underwriters, accountants,
counsel and other representatives reasonable access during normal business
hours, upon reasonable notice, to the properties, books, records and
personnel of Parent during the period prior to the Effective Time to obtain
all information concerning the business, including the status of product
development efforts, properties, results of operations and personnel of
Parent, as Company may reasonably request. No information or knowledge
obtained by Company in any investigation pursuant to this Section 5.3 will
affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Merger.
5.4 NO SOLICITATION.
(a) Until the earlier of the Effective Time or termination of this Agreement
pursuant to Article VII, Company will not, and will not authorize or permit any
of its officers, directors, affiliates or employees or any investment banker,
attorney or other advisor or representative retained by it to, directly or
indirectly (i) solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal (as defined below), (ii) participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes or may reasonably be
expected to lead to, any Acquisition Proposal, (iii) engage in discussions with
any person with respect to any Acquisition Proposal, (iv) authorize, approve or
recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any contract, agreement or commitment providing for any
Acquisition Transaction (as defined below) or accepting any Acquisition
Proposal; provided, however, that this Section 5.4(a) shall not prohibit
Company, on or before the adoption of this Agreement by the stockholders of the
Company, from furnishing information regarding Company or entering into
negotiations or discussions with, any person or group in response to a Superior
Offer submitted by such person or group (and not withdrawn) if (1) neither
Company nor any of its officers, directors, affiliates or employees or any
investment banker, attorney or other advisor or representative retained by it
shall have violated any of the restrictions set forth in this Section 5.4, (2)
the Board of Directors of Company concludes in good faith, after consultation
with its outside legal counsel, that failure to take such action would cause the
Board of Directors of Company to breach its fiduciary obligations to Company and
Company's stockholders under applicable law, (3) (x) at least twenty-four (24)
hours prior to furnishing any such information to, or entering into discussions
or negotiations with, such person or group, Company gives Parent written notice
of the identity of such person or group (with whom Parent shall thereafter have
no contact either directly or indirectly through a representative with respect
to any matters relating to Company (without the consent of Company) prior to the
earlier of the termination of this Agreement or the Effective Time), of the
terms and conditions of the offer and of Company's intention to furnish
information to, or enter into discussions or negotiations with, such person or
group and (y) Company receives from such person or group an executed
confidentiality agreement containing customary limitations on the use and
disclosure of all nonpublic written and oral information furnished to such
person or group by or on behalf of Company containing terms no less favorable to
Company than those set forth in the confidentiality agreement (provided that
such confidentiality agreement shall not in any way restrict Company from
complying with its disclosure obligations under this Agreement, including with
respect to such Acquisition Proposal), and (4) contemporaneously with furnishing
any such information to such person or group, Company furnishes such information
to Parent (to the extent that such information has not been previously furnished
by Company to Parent). Company and its officers, directors, affiliates,
employees and any investment banker, attorney or other advisor or representative
retained by it will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal. Without limiting the foregoing, it is understood
that any violation of the restrictions set forth in the preceding two sentences
by
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any officer, director, employee or affiliate of Company or any investment
banker, attorney or other advisor or representative of Company shall be deemed
to be a breach of this Section 5.4 by Company.
For purposes of this Agreement, "Acquisition Proposal" shall mean any offer
or proposal (other than an offer or proposal by Parent, Merger Sub or any
affiliate thereof) relating to any Acquisition Transaction. For the purposes of
this Agreement, "Acquisition Transaction" shall mean any transaction or series
of related transactions other than the transactions contemplated by this
Agreement involving: (A) any acquisition or purchase from Company by any person
or "group" (as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of more than a 20% interest in the total outstanding
voting securities of Company or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder) beneficially
owning 20% or more of the total outstanding voting securities of Company; (B)
any merger, consolidation, business combination or similar transaction involving
Company; (C) any sale, lease, exchange, transfer, license or other disposition
of more than 20% of the assets of Company; or (D) any liquidation or dissolution
of Company.
(b) In addition to the obligations of Company set forth in paragraph (a) of
this Section 5.4, Company as promptly as practicable shall advise Parent orally
and in writing of any request received by Company for information which Company
reasonably believes could lead to an Acquisition Proposal or of any Acquisition
Proposal, or any inquiry received by Company with respect to or which Company
reasonably believes could lead to any Acquisition Proposal, the terms and
conditions of such request, Acquisition Proposal or inquiry, and the identity of
the person or group making any such request, Acquisition Proposal or inquiry.
Company will keep Parent reasonably informed in all material respects of the
status and details (including amendments or proposed amendments) of any such
request, Acquisition Proposal or inquiry.
(c) Nothing contained in this Section 5.4 shall prevent the Board of
Directors of the Company from complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal by a third party or from
making such disclosure as may be required by applicable law; provided, however,
that the Board of Directors may not withhold, withdraw, amend or modify in a
manner adverse to Parent its recommendation with respect to this Agreement, the
Merger or the other transactions contemplated hereby except in accordance with
Section 5.2.
5.5 PUBLIC DISCLOSURE. Parent and Company will consult with each other and
agree before issuing any press release or otherwise making any public statement
with respect to the Merger, this Agreement or an Acquisition Proposal and will
not issue any such press release or make any such public statement prior to such
consultation, except as may be required by law (including fiduciary duty) or
NASD requirements for companies whose securities are traded on Nasdaq.
5.6 REASONABLE EFFORTS; NOTIFICATION.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, including Sections 5.2(c) and 5.4, each of the parties agrees to use
its commercially reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, and to assist and cooperate with the other
parties in doing, all things necessary, proper or advisable to consummate and
make effective, in the most expeditious manner practicable, the Merger and the
other transactions contemplated by this Agreement, including using commercially
reasonable efforts to accomplish the following: (i) the taking of all reasonable
acts necessary to cause the conditions precedent set forth in Article VI to be
satisfied, (ii) the obtaining of all necessary actions or nonactions, waivers,
consents, approvals, orders and authorizations from Governmental Entities and
the making of all necessary registrations, declarations and filings (including
registrations, declarations and filings with Governmental Entities, if any) and
the taking of all reasonable steps as may be necessary to avoid any suit, claim,
action, investigation or proceeding by any Governmental Entity, (iii) the
obtaining of all consents, approvals or waivers from third parties required as a
result of the transactions contemplated in this Agreement, (iv) the defending of
any suits, claims, actions, investigations or proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
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transactions contemplated hereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed and (v) the execution or delivery of any additional
instruments reasonably necessary to consummate the transactions contemplated by,
and to fully carry out the purposes of, this Agreement. In connection with and
without limiting the foregoing, Company and its Board of Directors shall, if any
state takeover statute or similar statute or regulation is or becomes applicable
to the Merger, this Agreement or any of the transactions contemplated by this
Agreement, use its commercially reasonable efforts to enable the Merger and the
other transactions contemplated by this Agreement to be consummated as promptly
as practicable on the terms contemplated by this Agreement. Notwithstanding
anything herein to the contrary, nothing in this Agreement shall be deemed to
require Parent or Company or any Subsidiary or affiliate thereof to agree to any
divestiture by itself or any of its affiliates of shares of capital stock or of
any business, assets or property, or the imposition of any material limitation
on the ability of any of them to conduct their business or to own or exercise
control of such assets, properties and stock.
(b) Company shall give prompt notice to Parent upon becoming aware that any
representation or warranty made by it contained in this Agreement has become
untrue or inaccurate, or of any failure of Company to comply with or satisfy in
any material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement, in each case, such that the conditions set
forth in Section 6.3(a) or 6.3(b) would not be satisfied; provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
(c) Parent shall give prompt notice to Company upon becoming aware that any
representation or warranty made by it or Merger Sub contained in this Agreement
has become untrue or inaccurate, or of any failure of Parent or Merger Sub to
comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement, in each
case, such that the conditions set forth in Section 6.2(a) or 6.2(b) would not
be satisfied; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
5.7 STOCK OPTIONS AND WARRANTS
(a) STOCK OPTIONS. At the Effective Time, each outstanding option to
purchase shares of Company Common Stock (each, a "Company Stock Option") under
the Company Option Plan or Company's 1990 Stock Option Plan, whether or not
vested, shall be assumed by Parent. Each Company Stock Option so assumed by
Parent under this Agreement will continue to have, and be subject to, the same
terms and conditions of such options immediately prior to the Effective Time
(including, without limitation, any repurchase rights or vesting provisions and
provisions regarding the acceleration of vesting on certain transactions, other
than the transactions contemplated by this Agreement), except that (i) each
Company Stock Option will be exercisable (or will become exercisable in
accordance with its terms) for that number of whole shares of Parent Common
Stock equal to the product of the number of shares of Company Common Stock that
were issuable upon exercise of such Company Stock Option immediately prior to
the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of Parent Common Stock and (ii) the per share exercise
price for the shares of Parent Common Stock issuable upon exercise of such
assumed Company Stock Option will be equal to the quotient determined by
dividing the exercise price per share of Company Common Stock at which such
Company Stock Option was exercisable immediately prior to the Effective Time by
the Exchange Ratio, rounded up to the nearest whole cent.
(b) WARRANTS. At the Effective Time, each outstanding warrant to purchase
shares of Company Common Stock (each, a "Warrant") shall be assumed by Parent
and will continue to have, and be subject to, the same forms and conditions of
such Warrants immediately prior to the Effective Time, except that (i) such
Warrant will be exercisable (or will become exercisable in accordance with its
terms) for that
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number of shares of Parent Common Stock equal to the product of the number of
shares of Company Common Stock that were issuable upon exercise of such Warrant
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of Parent Common Stock,
(ii) the per share exercise price for the shares of Parent Common Stock issuable
upon exercise of such assumed Warrant will be equal to the quotient determined
by dividing the exercise price per share of Company Common Stock at which such
Warrant was exercisable immediately prior to the Exercise Time by the Exchange
Ratio, rounded up to the nearest whole cent and (iii) if Parent elects not to
assume the obligations under any of the warrants identified on Schedule 5.7(b)
of the Parent Schedule, then such warrant shall be deemed to be converted
pursuant the terms of such warrant.
(c) Prior to the Closing Date, Company agrees to take all necessary steps to
effectuate the foregoing provisions of this Section, including obtaining all
necessary consents and releases, if any, from the holders of Company Stock
Options and Warrants.
5.8 FORM S-8. Parent agrees to file a registration statement on Form S-8
(or any successor form) for the shares of Parent Common Stock issuable with
respect to assumed Company Stock Options that are eligible to be registered on
Form S-8 or such successor form as soon as is reasonably practicable after the
Effective Time.
5.9 INDEMNIFICATION. From and after the Effective Time, Parent will cause
the Surviving Corporation to fulfill and honor in all respects the obligations
of Company pursuant to any indemnification agreements between Company and its
directors and officers in effect immediately prior to the Effective Time (the
"Indemnified Parties") and any indemnification provisions under Company Charter
Documents as in effect on the date hereof. The Certificate of Incorporation and
Bylaws of the Surviving Corporation will contain provisions with respect to
exculpation and indemnification that are at least as favorable to the
Indemnified Parties as those contained in Company Charter Documents as in effect
on the date hereof, which provisions will not be amended, repealed or otherwise
modified for a period of six (6) years from the Effective Time in any manner
that would adversely affect the rights thereunder of individuals who,
immediately prior to the Effective Time, were directors, officers, employees or
agents of Company, unless such modification is required by law. Parent will
cause the Surviving Corporation to maintain Director and Officer liability
insurance on the same terms as the current policies with respect to the
Indemnified Parties for the three (3) years following the Effective Time;
provided that the annual premium therefor does not exceed 150% of the current
annual premium therefor.
5.10 NASDAQ LISTING. Parent agrees to use its best efforts to authorize
for listing on Nasdaq the shares of Parent Common Stock issuable, and those
required to be reserved for issuance, in connection with the Merger, subject to
official notice of issuance.
5.11 REGULATORY FILINGS; REASONABLE EFFORTS. As soon as may be reasonably
practicable, Company and Parent each shall file with the United States Federal
Trade Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as agreed to by the
parties. Company and Parent each shall promptly (a) supply the other with any
information which may be required in order to effectuate such filings and
(b) supply any additional information which reasonably may be required by the
FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate; provided,
however, that Parent shall not be required to agree to any divestiture by Parent
or Company or any of Parent's Subsidiaries or affiliates of shares of capital
stock or of any business, assets or property of Parent or its Subsidiaries or
affiliates or of Company, its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock. As soon as may be
reasonably practicable, Company and Parent will file any applications required
for the consummation of the transactions contemplated hereby with (i) the
Federal Communications Commission and (ii) any state public utility commissions
or similar state regulatory bodies regulating Company's business.
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5.12 BENEFIT PLANS. Company shall cause its 401(k) plan to terminate
effective as of the day immediately preceding the Closing Date. During the
period commencing at the Closing Date and ending on the first anniversary
thereof, Parent shall provide employees of the Surviving Corporation with
benefits under employee benefit plans (other than stock option or other plans
involving the potential issuance of securities) that are substantially similar
to the plans in which employees of Parent participate. Parent shall recognize
service with Company for the purpose of eligibility to participate under such
plans.
5.13 TREATMENT AS A REORGANIZATION. Neither Parent nor Merger Sub shall
take any action prior to or following the Merger that could reasonably be
expected to cause the Merger to fail to qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
5.14 BOARD OF DIRECTORS OF PARENT. The Board of Directors of Parent will
take all actions necessary such that one member of Company's Board of Directors
designated by Company and reasonably acceptable to Parent shall be appointed to
Parent's Board of Directors with a term expiring at the next annual meeting of
Parent's stockholders and shall include such person in the slate of nominees
recommended by Parent's Board of Directors to the stockholders of Parent at such
annual meeting.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been duly
approved and adopted, by the requisite vote under the DGCL and the Company
Charter Documents, by the stockholders of Company and, if required by Nasdaq,
shall have been duly approved by the requisite vote under Nasdaq regulations by
the stockholders of Parent.
(b) REGISTRATION STATEMENT EFFECTIVE; PROXY STATEMENT. The SEC shall have
declared the S-4 effective. No stop order suspending the effectiveness of the
S-4 or any part thereof shall have been issued and no proceeding for that
purpose, and no similar proceeding in respect of the Proxy Statement/Prospectus,
shall have been initiated or threatened in writing by the SEC.
(c) NO ORDER; HSR ACT. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger, substantially on the terms
contemplated by this Agreement. All waiting periods, if any, under the HSR Act
and any foreign law in any jurisdiction in which the Company has material
operations relating to the transactions contemplated hereby will have expired or
terminated early and all material foreign antitrust approvals required to be
obtained prior to the Merger in connection with the transactions contemplated
hereby shall have been obtained.
(d) TAX OPINIONS. Prior to the mailing of the Proxy Statement/Prospectus
(and to be reconfirmed at the Closing Date), Parent and Company shall each have
received written opinions from their respective tax counsel (Winthrop, Stimson,
Putnam & Roberts and Brobeck Phleger & Harrison LLP, respectively), in form and
substance reasonably satisfactory to them, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code and
such opinions shall not have been withdrawn; provided, however, that if the
counsel to either Parent or Company does not render such opinion, this condition
shall nonetheless be deemed to be satisfied with respect to such party if
counsel to the other party renders such opinion to such party. The parties to
this Agreement agree to make such reasonable representations as requested by
such counsel for the purpose of rendering such opinions.
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(e) NASDAQ LISTING. The shares of Parent Common Stock issuable to the
stockholders of Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on Nasdaq upon official notice of issuance.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF COMPANY. The obligation of
Company to consummate and effect the Merger shall be subject to the satisfaction
at or prior to the Closing Date of each of the following conditions, any of
which may be waived, in writing, exclusively by Company:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of
Parent and Merger Sub contained in this Agreement (i) shall have been true and
correct as of the date of this Agreement and (ii) shall be true and correct on
and as of the Closing Date with the same force and effect as if made on the
Closing Date (it being understood that, other than with respect to the
representation set forth in Section 3.9, for purposes of determining the
accuracy of such representations and warranties for purposes of this clause
(ii), all "Material Adverse Effect" qualifications and other qualifications
based on the word "material" or similar phrases contained in such
representations and warranties shall be disregarded) except, other than with
respect to the representation set forth in Section 3.9, (A) in each case, or in
the aggregate, as does not constitute a Material Adverse Effect on Parent and
Merger Sub, (B) for changes contemplated by this Agreement and (C) for those
representations and warranties which address matters only as of a particular
date (which representations shall have been true and correct (subject to the
qualifications as set forth in the preceding clause (A)) as of such particular
date). Any update of or modification to the Parent Schedule made or purported to
have been made after the date of this Agreement shall be disregarded. Company
shall have received a certificate with respect to the foregoing signed on behalf
of Parent by an authorized officer of Parent.
(b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by them on or prior to the
Closing Date, except to the extent that any failure to perform or comply (other
than a willful failure to perform or comply or failure to perform or comply with
an agreement or covenant reasonably within the control of Parent and Merger Sub)
does not, or will not, constitute a Material Adverse Effect with respect to
Parent, and Company shall have received a certificate to such effect signed on
behalf of Parent by an authorized officer of Parent.
6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of
Company contained in this Agreement (i) shall have been true and correct as of
the date of this Agreement and (ii) shall be true and correct on and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date (it being understood that, other than with respect to the representation
set forth in Section 2.9(i), for purposes of determining the accuracy of such
representations and warranties for purposes of this clause (ii), all "Material
Adverse Effect" qualifications and other qualifications based on the word
"material" or similar phrases contained in such representations and warranties
shall be disregarded) except, other than with respect to the representation set
forth in Section 2.9(i), (A) in each case, or in the aggregate, as does not
constitute a Material Adverse Effect on Company provided, however, such Material
Adverse Effect qualifier shall be inapplicable with respect to representations
and warranties contained in the first two sentences of Section 2.3, (B) for
changes contemplated by this Agreement, (C) for those representations and
warranties which address matters only as of a particular date (which
representations shall have been true and correct (subject to the qualifications
as set forth in the preceding clause (A)) as of such particular date) and (D) in
the case of Section 2.3, where the increase in the number of shares of Company
Common Stock outstanding as a result of the failure of such representation and
warranty to be correct on the date hereof does not exceed 50,000). Any update of
or modification to the Company Schedule made or
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purported to have been made after the date of this Agreement shall be
disregarded. Parent shall have received a certificate with respect to the
foregoing signed on behalf of Company by an authorized officer of Company.
(b) AGREEMENTS AND COVENANTS. Company shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing Date
except to the extent that any failure to perform or comply (other than a willful
failure to perform or comply or failure to perform or comply with an agreement
or covenant reasonably within the control of Company) does not, or will not,
constitute a Material Adverse Effect on Company, and Parent shall have received
a certificate to such effect signed on behalf of Company by the Chief Executive
Officer and the Chief Financial Officer of Company.
(c) CONSENTS. Company shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby, other than consents, waivers and approvals the absence of
which, either alone or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect on Company.
(d) DIRECTOR RESIGNATIONS. Company shall have delivered to Parent evidence
satisfactory to Parent of the resignation of all directors of Company, effective
as of the Effective Time.
(e) AFFILIATE LETTERS. Each of the persons named in Section 2.27 of the
Company Schedule shall have delivered to Parent a written agreement
substantially in the form attached as Exhibit D hereto.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approval of the
stockholders of Company or Merger Sub:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and Company;
(b) by either Company or Parent if the Merger shall not have been
consummated by June 15, 2000 for any reason; provided, however, that the right
to terminate this Agreement under this Section 7.1(b) shall not be available to
any party whose action or failure to act has been a principal cause of or
resulted in the failure of the Merger to occur on or before such date and such
action or failure to act constitutes a breach of this Agreement;
(c) by either Company or Parent if a Governmental Entity shall have issued
an order, decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree, ruling or other action is final and nonappealable;
(d) by either Company or Parent if the required approval of the stockholders
of Company contemplated by this Agreement shall not have been obtained by reason
of the failure to obtain the required vote at a meeting of Company stockholders
duly convened therefor or at any adjournment thereof;
(e) by Company, upon a material breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or if
any representation or warranty of Parent shall have become materially untrue, in
either case such that the conditions set forth in Section 6.2(a) or
Section 6.2(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided, that if
such inaccuracy in Parent's representations and warranties or breach by Parent
is curable by Parent prior to the Closing Date, then Company may not terminate
this Agreement under this Section 7.1(e) for thirty (30) days after delivery of
written notice from Company to Parent of such breach, provided Parent continues
to exercise commercially reasonable efforts to cure such breach (it being
understood that Company may not terminate this Agreement pursuant to this
Section 7.1(e) if it shall have materially breached this Agreement or if such
breach by Parent is cured during such thirty (30)-day period);
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(f) by Parent, upon a material breach of any representation, warranty,
covenant or agreement on the part of Company set forth in this Agreement, or if
any representation or warranty of Company shall have become materially untrue,
in either case such that the conditions set forth in Section 6.3(a) or
Section 6.3(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided, that if
such inaccuracy in Company's representations and warranties or breach by Company
is curable by Company prior to the Closing Date, then Parent may not terminate
this Agreement under this Section 7.1(f) for thirty (30) days after delivery of
written notice from Parent to Company of such breach, provided Company continues
to exercise commercially reasonable efforts to cure such breach (it being
understood that (i) Parent may not terminate this Agreement pursuant to this
Section 7.1(f) if it shall have materially breached this Agreement or if such
breach by Company is cured during such thirty (30)-day period and (ii) any
breach of Sections 5.2 or 5.4 hereof is not curable);
(g) by Parent, upon a material and willful breach of the provisions of
Section 5.2 or Section 5.4 of this Agreement; or
(h) by Parent if a Triggering Event (as defined below) shall have occurred.
For the purposes of this Agreement, a "Triggering Event" shall be deemed to
have occurred if: (i) the Board of Directors of Company or any committee thereof
shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to Parent its recommendation in favor of, the approval and
adoption of this Agreement and approval of the Merger; (ii) Company shall have
failed to include in the Proxy Statement/Prospectus the recommendation of the
Board of Directors of Company in favor of the approval and adoption of this
Agreement and the Merger; (iii) Board of Directors of Company fails to reaffirm
its recommendation in favor of the approval and adoption of this Agreement and
the Merger within ten (10) business days after Parent requests in writing that
such recommendation be reaffirmed at any time following the making, announcement
or submission of an Acquisition Proposal; or (iv) a tender or exchange offer
relating to securities of Company shall have been commenced by a person
unaffiliated with Parent and Company shall not have sent to its security holders
pursuant to Rule 14e-2 promulgated under the Securities Act, within ten (10)
business days after such tender or exchange offer is first published sent or
given, a statement disclosing that Company recommends rejection of such tender
or exchange offer.
7.2 NOTICE OF TERMINATION; EFFECT OF TERMINATION. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon (or, if the
termination is pursuant to Section 7.1(e) or Section 7.1(f) and the proviso
therein is applicable, thirty (30) days after) the delivery of written notice of
the terminating party to the other parties hereto. In the event of the
termination of this Agreement as provided in Section 7.1, this Agreement shall
be of no further force or effect and the Merger shall be abandoned, except
(i) as set forth in this Section 7.2, Section 7.3 and Article 8 (General
Provisions), each of which shall survive the termination of this Agreement, and
(ii) nothing herein shall relieve any party from liability for any intentional
or willful breach of this Agreement. No termination of this Agreement shall
affect the obligations of the parties contained in the Confidentiality
Agreement, all of which obligations shall survive termination of this Agreement
and the abandonment of the Merger in accordance with their terms.
7.3 FEES AND EXPENSES.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that Parent and Company shall share
equally all fees and expenses, other than attorneys' and accountants fees and
expenses, incurred in relation to the printing and filing (with the SEC) of the
Proxy Statement/Prospectus (including any preliminary materials related thereto)
and the S-4 (including financial statements and exhibits) and any amendments or
supplements thereto.
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(b) COMPANY PAYMENTS.
(i) Company shall pay to Parent $7,000,000 (the "Termination Fee") in
immediately available funds (A) within one (1) business day after demand by
Parent following termination of this Agreement if this Agreement is
terminated by Parent pursuant to Section 7.1(g) or (B) if this Agreement is
terminated by Parent pursuant to Section 7.1(h), upon the earlier of (x) 10
days after demand by Parent following termination of this Agreement and
(y) the consummation of an Acquisition Transaction with another party or the
entering into of an agreement providing for the consummation of an
Acquisition Proposal with another party.
(ii) Company shall pay to Parent in immediately available funds, within
one (1) business day after termination of this Agreement, an amount equal to
all out-of-pocket expenses and fees incurred by Parent arising out of, or in
connection with or related to, the transactions contemplated by this
Agreement, including, without limitation, all fees and expenses of agents,
counsel, commercial banks, investment banking firms, accountants, experts
and consultants to Parent and its affiliates if this Agreement is terminated
by Parent pursuant to Section 7.1(f).
(iii) Company shall pay Parent in immediately available funds, within
one (1) business day after demand by Parent following the consummation of an
Acquisition Transaction with another party or the entering into of an
agreement providing for the consummation of an Acquisition Proposal with
another party, an amount equal to the Termination Fee, if (A) this Agreement
is terminated by Parent or Company, as applicable, pursuant to
Section 7.1(b) or (d) and (B)(1) within 18 months of termination of this
Agreement, Company shall enter into an agreement for an Acquisition
Transaction or shall consummate an Acquisition Transaction; (2) prior to
termination of this Agreement pursuant to Section 7.1(b), an Acquisition
Proposal shall have been made known to Company or to Company stockholders
generally or any person shall have publicly announced an intention (whether
or not conditional and whether or not such Acquisition Proposal shall have
been rejected or shall have been withdrawn or terminated prior to the
Company Stockholders' Meeting or any termination of this Agreement) to make
an Acquisition Proposal or (3) in the case of termination pursuant to
Section 7.1(d), prior to or during the Company Stockholders' Meeting (or any
subsequent meeting of the Company stockholders at which it is proposed that
the Merger be approved), an Acquisition Proposal shall have been made
directly to the Company stockholders generally or any person shall have
publicly announced an intention (whether or not conditional and whether or
not such Acquisition Proposal shall have been rejected or shall have been
withdrawn or terminated prior to the Company Stockholders' Meeting or any
termination of this Agreement) to make an Acquisition Proposal.
(iv) Company acknowledges that the agreements contained in this Section
7.3(b) are an integral part of the transactions contemplated by this
Agreement and that, without these agreements, Parent would not enter into
this Agreement; accordingly, if Company fails to pay in a timely manner the
amounts due pursuant to this Section 7.3(b) and, in order to obtain such
payment, Parent makes a claim that results in a judgment against Company for
the amounts set forth in this Section 7.3(b), Company shall pay to Parent
its reasonable costs and expenses (including reasonable attorneys' fees and
expenses) in connection with such suit, together with interest on the
amounts set forth in this Section 7.3(b) at the prime rate of The Chase
Manhattan Bank in effect on the date such payment was required to be made.
Subject to Section 8.7, payment of the fees described in this
Section 7.3(b) shall be in lieu of damages incurred in the event of breach
of this Agreement other than a material and willful breach.
7.4 AMENDMENT. This Agreement may be amended by the parties hereto at any
time (whether before or after adoption of this Agreement by the stockholders of
Company or Merger Sub) by execution of an instrument in writing signed on behalf
of each of Parent and Company; provided, however, this Agreement may not be
amended after any such approval in a manner which by law requires further
approval of such stockholders without such further approval.
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7.5 EXTENSION; WAIVER. At any time prior to the Effective Time, any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE VIII GENERAL PROVISIONS
8.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Company, Parent and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
8.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
Mail.com, Inc.
11 Broadway, 6(th) Floor
New York, New York 10004
Attention: Gerald Gorman
Telephone No.: (212) 425-4200 (x205)
Telecopy No.: (212) 425-3487
with a copy at the same address to:
David W. Ambrosia, Esq.
Telephone No.: (212) 425-4200 (x382)
Telecopy No.: (212) 425-3487
and with a copy to:
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004-1490
Attn: Ronald A. Fleming, Jr., Esq.
Telephone No.: (212) 858-1143
Telecopy No.: (212) 858-1500
(b) if to Company, to:
NetMoves Corporation
399 Thornall Street
Edison, NJ 08837
Attention: Thomas F. Murawski
Telephone No.: (732) 906-2000 (x2223)
Telecopy No.: (732) 906-1008
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with a copy to:
Brobeck, Phleger & Harrison, LLP
370 Interlocken Blvd.
Suite 500 Broomfield, CO 80021
Attention: Richard R. Plumridge, Esq.
Telephone No.: (303) 410-2014
Telecopy No.: (303) 410-2199
and
Brobeck, Phleger & Harrison, LLP
Two Embarcadero Place, 2200 Geng Road
Palo Alto, CA 94303
Attention: Rod J. Howard, Esq.
Telephone No.: (650) 812-2596
Telecopy No.: (650) 496-2777
8.3 INTERPRETATION.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. When a
reference is made in this Agreement to Sections, such reference shall be to a
Section of this Agreement. Unless otherwise indicated the words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. When reference is
made herein to "the business of" an entity, such reference shall be deemed to
include the business of all direct and indirect Subsidiaries of such entity.
Reference to the Subsidiaries of an entity shall be deemed to include all direct
and indirect Subsidiaries of such entity.
(b) For purposes of this Agreement, the term "Material Adverse Effect" when
used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect, individually or when aggregated with other
changes, events, violations, inaccuracies, circumstances or effects, that is
materially adverse to the business, assets (including intangible assets),
revenues, financial condition or results of operations of such entity and its
Subsidiaries, if any, taken as a whole (it being understood that neither of the
following alone or in combination shall be deemed, in and of itself, to
constitute a Material Adverse Effect: (a) a change in the market price or
trading volume of Parent Common Stock or Company Common Stock, (b) changes
attributable to the public announcement or pendency of the transactions
contemplated hereby, (c) changes in general national or regional economic
conditions or (d) changes affecting the industry generally in which Company or
Parent operates).
(c) For purposes of this Agreement, the term "Person" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or
Governmental Entity.
(d) For purposes of this Agreement, the term "Subsidiary" means with respect
to Company, the Surviving Corporation, Parent or any other person, any
corporation, partnership, joint venture, limited liability company or other
legal entity of which (i) Company, the Surviving Corporation, Parent or such
other person, as the case may be, (either alone or through or together with any
other subsidiary) owns, directly or indirectly, more than 25% of the stock or
other equity interests the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
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corporation or other legal entity or (ii) which constitutes a "Significant
Subsidiary" of such entity within the meaning of Rule 12b-2 of the Exchange Act.
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Disclosure Schedule
and the Parent Disclosure Schedule (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, it being understood that the
Confidentiality Agreement shall continue in full force and effect until the
Closing and shall survive any termination of this Agreement; and (b) are not
intended to confer upon any other person any rights or remedies hereunder,
except as specifically provided in Section 5.9.
8.6 SEVERABILITY. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
8.7 OTHER REMEDIES; SPECIFIC PERFORMANCE. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF THE LAWS THAT
MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
8.9 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 ASSIGNMENT. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties, except that Merger Sub may assign, in its sole discretion,
any or all of its rights, interests and obligations hereunder to Parent or to
any direct or indirect wholly-owned subsidiary of Parent. Subject to the first
sentence of this Section 8.10, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, COMPANY AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, COMPANY OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
A-37
<PAGE>
*****
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
<TABLE>
<S> <C> <C>
MAIL.COM, INC.
By: /s/ GERALD GORMAN
-----------------------------------------
Name: Gerald Gorman
Title: Chairman and CEO
</TABLE>
<TABLE>
<S> <C> <C>
MAST ACQUISITION CORP.
By: /s/ GERALD GORMAN
-----------------------------------------
Name: Gerald Gorman
Title: Chairman and Chief Executive
Officer
</TABLE>
<TABLE>
<S> <C> <C>
NETMOVES CORPORATION
By: /s/ THOMAS F. MURAWSKI
-----------------------------------------
Name: Thomas F. Murawski
Title: Chairman, President and Chief
Executive Officer
</TABLE>
A-38
<PAGE>
APPENDIX B
FORM OF COMPANY VOTING AGREEMENT
THIS COMPANY VOTING AGREEMENT (this "Agreement") is made and entered into as
of December 11, 1999, by and between Mail.com, Inc.., a Delaware corporation
("Parent") and the undersigned stockholder ("Stockholder") of the Company.
RECITALS
A. Concurrently with the execution and delivery of this Agreement, NetMoves
Corporation, a Delaware Corporation (the "Company"), Merger Sub (as defined
below) and Parent are entering into an Agreement and Plan of Merger (the "Merger
Agreement") that provides for the merger (the "Merger") of a wholly-owned
subsidiary of Parent ("Merger Sub") with and into the Company. Pursuant to the
Merger, each share of common stock, par value $0.01 per share, of the Company
("Company Common Stock") shall be converted into the right to receive Class A
common stock, par value $0.01 per share, of Parent, upon the terms and subject
to the conditions set forth in the Merger Agreement;
B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number
of shares of Company Common Stock and shares subject to outstanding options and
warrants as is indicated on the signature page of this Agreement; and
C. In consideration of the execution of the Merger Agreement by Parent,
Stockholder (in his or her capacity as such) agrees to vote the Shares (as
defined below) and other such shares of capital stock of the Company over which
Stockholder has voting power so as to facilitate consummation of the Merger.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS.
Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement. For purposes of this
Agreement:
1.1 "Expiration Date" shall mean the earlier to occur of (i) such date
and time as the Merger Agreement shall have been validly terminated pursuant
to its terms and (ii) the Effective Time.
1.2 "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity or (iii) governmental
authority.
1.3 "Shares" shall mean: (i) all securities of the Company (including
all shares of Company Common Stock and all options, warrants and other
rights to acquire shares of Company Common Stock) owned by Stockholder as of
the date of this Agreement; and (ii) all additional securities of the
Company (including all additional shares of Company Common Stock and all
additional options, warrants and other rights to acquire shares of Company
Common Stock) of which Stockholder acquires ownership during the period from
the date of this Agreement through the Expiration Date.
1.4 "Transfer", when used as a verb, shall mean to sell, pledge, assign,
encumber, dispose of or otherwise transfer (including by merger,
testamentary disposition, interspousal disposition pursuant to a domestic
relations proceeding or otherwise by operation of law), or, when used as a
noun, shall mean a sale, pledge, assignment, encumbrance, disposition, or
other transfer (including a merger, testamentary disposition, interspousal
disposition pursuant to a domestic relations proceeding or otherwise or
other transfer by operation of law).
B-1
<PAGE>
2. RESTRICTIONS ON TRANSFER.
Stockholder agrees that, during the period from the date of this Agreement
through the Expiration Date, Stockholder shall not, either directly or
indirectly, Transfer any shares of or options to purchase Company Common Stock
or any other securities or rights convertible into or exchangeable for shares of
Company Common Stock, owned either directly or indirectly, by Stockholder or
with respect to which Stockholder has the power of disposition, whether now or
hereafter acquired, without the prior written consent of Parent; provided that
the foregoing requirements shall not prohibit any Transfer to any Person where
as a precondition to such Transfer the transferee: (i) executes a counterpart of
this Agreement and an Irrevocable Proxy in the form attached hereto as Exhibit A
(with such modifications as Parent may reasonably request); and (ii) agrees in
writing to hold such Shares (or interest in such Shares) subject to all of the
terms and provisions of this Agreement. Stockholder agrees that, during the
period from the date of this Agreement through the Expiration Date, Stockholder
shall not (a) deposit (or permit the deposit of) any Shares in a voting trust or
grant any proxy or enter into any voting agreement or similar agreement in
contravention of the obligations of Stockholder under this Agreement with
respect to any of the Shares or (b) take any action that would make any
representation or warranty of Stockholder contained herein untrue or incorrect
or have the effect of preventing or disabling Stockholder from performing
Stockholder's obligations under this Agreement.
3. AGREEMENT TO VOTE SHARES.
(a) Stockholder hereby agrees to appear, or cause the holder of record on
any applicable record date to appear for the purpose of obtaining a quorum at
any annual or special meeting of stockholders of the Company and at any
adjournment thereof at which matters relating to the Merger, the Merger
Agreement or any transaction contemplated thereby are considered. At every
meeting of the stockholders of the Company, and at every adjournment thereof,
and on every action or approval by written consent of the stockholders of the
Company, Stockholder (in his or her capacity as such) shall vote, or cause the
Shares to be voted, in favor of approval and adoption of the Merger Agreement
and the approval of the Merger and in favor of each other action contemplated by
the Merger Agreement and any action required in furtherance hereof or thereof.
(b) At every meeting of the stockholders of the Company, and at every
adjournment thereof and on every action or approval by written consent of the
stockholders of the Company, Stockholder shall vote, or cause the Shares to be
voted, against (i) any Acquisition Proposal (in his capacity as such), (ii) any
dissolution, liquidation or winding up of or by the Company or (iii) any
amendment of the Certificate of Incorporation or by-laws of the Company or other
proposal or transaction involving the Company, which amendment or other proposal
or transaction would in any manner impede, frustrate, prevent or nullify any
material provision of the Merger Agreement or the Merger or any other
transaction contemplated by the Merger Agreement or change in any manner the
voting rights of any class of the Company's capital stock. Stockholder shall not
commit or agree to take any action inconsistent with the foregoing.
4. IRREVOCABLE PROXY.
Stockholder is hereby delivering to Parent an irrevocable proxy in the form
attached hereto as Exhibit A (the "Irrevocable Proxy") with respect to each
meeting of stockholders of the Company and action by stockholders of the Company
by written consent in lieu of a meeting, such Irrevocable Proxy to cover the
total number of Shares in respect of which Stockholder is entitled to vote. Upon
the execution of this Agreement by Stockholder, Stockholder hereby revokes any
and all prior proxies given thereby with respect to the Shares and agrees not to
grant any subsequent proxies with respect to the Shares until after the
Expiration Date.
B-2
<PAGE>
5. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER.
5.1 STOCKHOLDER (i) is the beneficial owner of the shares of Company
Common Stock and the options and warrants to purchase shares of Common Stock of
the Company indicated on the signature page of this Agreement, free and clear of
any liens, claims, options, rights of first refusal, co-sale rights, charges or
other encumbrances; (ii) does not beneficially own any securities of the Company
other than the shares of Company Common Stock and options and warrants and to
purchase shares of Company Common Stock indicated on the signature page of this
Agreement; and (iii) has full power and authority to make, enter into and carry
out the terms of this Agreement and the Irrevocable Proxy.
5.2 This Agreement and the Irrevocable Proxy have been duly and validly
executed and delivered by Stockholder and constitute the valid and binding
obligations of Stockholder, enforceable against Stockholder in accordance with
their respective terms. The execution and delivery of this Agreement and the
Irrevocable Proxy by Stockholder do not, and the performance of Stockholder's
obligations hereunder will not, (a) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any right to terminate, amend, accelerate or
cancel any right or obligation under, or result in the creation of any lien or
encumbrance on any Shares pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligations to which Stockholder is a party or by which Stockholder or the
Shares are or will be bound or affected or (b) violate any order, writ,
injunction, decree, judgment, statute, rule or regulation applicable to
Stockholder or any of Stockholder's properties or assets. No consent, approval,
order or authorization of, or registration, declaration or filing with, or
notice to, any state or federal public body or authority is required by or with
respect to Stockholder in connection with the execution and delivery of this
Agreement and the Irrevocable Proxy by Stockholder or the consummation by
Stockholder of any of the transactions contemplated hereby or thereby.
6. ADDITIONAL DOCUMENTS.
Stockholder (in his or her capacity as such) hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Parent, to carry out the intent of this Agreement.
7. LEGENDING OF SHARES.
Stockholder agrees that it shall forthwith surrender all certificates
representing the Shares so that they shall bear a conspicuous legend stating
that they are subject to this Agreement (and the restrictions on transfer
provided for herein) and to an Irrevocable Proxy. Subject to the terms of
Section 2 hereof, Stockholder agrees that it shall not Transfer the Shares
without first having the aforementioned legend affixed to the certificates
representing the Shares.
8. TERMINATION.
This Agreement shall terminate and shall have no further force or effect as
of the Expiration Date.
9. NO SOLICITATION.
Stockholder agrees that, during the period from the date of this Agreement
through the Expiration Date, Stockholder will not, and will not permit any of
its officers, directors, affiliates or employees or any investment banker,
attorney or other advisor or representative retained by it to, directly or
indirectly, (i) solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal (as defined in the Merger Agreement),
(ii) participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes or may reasonably
be expected to lead to, any
B-3
<PAGE>
Acquisition Proposal, (iii) engage in discussions with any person with respect
to any Acquisition Proposal, (iv) authorize, approve or recommend any
Acquisition Proposal or (v) enter into any letter of intent or similar document
or any contract, agreement or commitment providing for any Acquisition
Transaction (as defined in the Merger Agreement) or accepting any Acquisition
Proposal. Stockholder as promptly as practicable shall advise Parent orally and
in writing of any request received by Stockholder for information which
Stockholder reasonably believes could lead to an Acquisition Proposal or of any
Acquisition Proposal, or any inquiry received by Stockholder with respect to or
which Stockholder reasonably believes could lead to any Acquisition Proposal,
the terms and conditions of such request, Acquisition Proposal or inquiry, and
the identity of the person or group making any such request, Acquisition
Proposal or inquiry.
10. CONFIDENTIALITY.
Stockholder agrees (i) to hold any information regarding this Agreement and
the Merger in strict confidence and (ii) not to divulge any such information to
any third person, except to the extent any of the same is hereafter publicly
disclosed by Parent.
11. MISCELLANEOUS.
11.1 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
11.2 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but, except as otherwise specifically provided herein,
neither this Agreement nor any of the rights, interests or obligations of the
parties hereto may be assigned by any of the parties without prior written
consent of the others. Nothing contained in this Agreement, express or implied,
is intended to confer upon any person other than the parties hereto and their
respective successors and permitted assigns any rights or remedies of any nature
whatsoever by reason of this Agreement.
11.3 AMENDMENTS AND MODIFICATION. This Agreement may be amended by the
parties hereto and the terms and conditions hereof may be waived only by an
instrument in writing signed on behalf of each of the parties hereto or, in the
case of a waiver, by an instrument signed on behalf of the party waiving
compliance.
11.4 SPECIFIC PERFORMANCE. The parties hereto acknowledge that Parent
shall be immediately and irreparably harmed and injured if for any reason any of
the provisions of this Agreement are not performed in accordance with their
specific terms or are otherwise breached by any of the other parties hereto.
Therefore, it is agreed that, in addition to any other remedies that may be
available to Parent upon any such violation, Parent shall have the right to
enforce such covenants and agreements by specific performance, injunctive relief
or by any other means available to Parent at law or in equity. If Parent brings
an action in equity to enforce the provisions of this Agreement, neither of the
other parties hereto will allege, and each hereby waives the defense, that there
is an adequate remedy at law.
11.5 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified
B-4
<PAGE>
mail (return receipt requested), postage prepaid, to the parties at the
following address (or at such other address for a party as shall be specified by
like notice):
if to Parent, to:
Mail.com, Inc.
11 Broadway, 6(th) Floor
New York, New York 10004
Attention: Gerald Gorman
Telephone No.: (212) 425-4200 (x205)
Telecopy No.: (212) 425-3487
with a copy at the same address to:
David W. Ambrosia, Esq.
Telephone No.: (212) 425-4200 (x382)
Telecopy No.: (212) 425-3487
and with a copy to:
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004-1490
Attn: Ronald A. Fleming, Jr., Esq.
Telephone No.: (212) 858-1143
Telecopy No.: (212) 858-1500
if to Stockholder, to the address for notice set forth on the signature page
hereof.
11.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF THE LAWS THAT
MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
11.7 ENTIRE AGREEMENT. This Agreement and the Irrevocable Proxy, together
with the Company Affiliate Letter, in the forms attached as Exhibit D to the
Merger Agreement, contain the entire understanding of the parties in respect of
the subject matter hereof, and supersede all prior negotiations and
understandings between the parties with respect to such subject matter.
11.8 DESCRIPTIVE HEADINGS. The section headings are for convenience only
and shall not affect the construction or interpretation of this Agreement.
11.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but all of which, taken together, will
constitute one and the same instrument.
11.10 STOCKHOLDER CAPACITY Notwithstanding anything herein to the
contrary, no person executing this Agreement who is, or becomes during the term
hereof, a director of the Company makes any agreement or understanding herein in
his or her capacity as such director, and the agreements set forth herein shall
in no way restrict any director in the exercise of his or her fiduciary duties
as a director of the Company. Each Stockholder has executed this Agreement
solely in his or her capacity as the record or beneficial holder of such
Stockholder's Shares or as the trustee of a trust whose beneficiaries are the
beneficial owners of such Stockholder's Shares.
B-5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized officers as of the date first above written.
<TABLE>
<S> <C> <C>
MAIL.COM, INC.
By:
-----------------------------------------
Name:
Title:
</TABLE>
<TABLE>
<S> <C> <C>
STOCKHOLDER
By:
-----------------------------------------
Name:
Title:
</TABLE>
<TABLE>
<S> <C> <C>
STOCKHOLDER
By:
-----------------------------------------
Name:
Title:
-----------------------------------------
-----------------------------------------
Print Address
-----------------------------------------
Telephone
-----------------------------------------
Facsimile No.
Shares benmeficially owned:
shares of Company Common Stock
shares of Company Common Stock
issuable upon exercise of outstanding
options or warrants
</TABLE>
B-6
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of NetMoves Corporation, a Delaware corporation
(the "Company"), hereby irrevocably appoints the members of the Board of
Directors of Mail.com, Inc., a Delaware corporation ("Parent"), and each of
them, or any other designee of Parent, as the sole and exclusive
attorneys-in-fact and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Company issued or issuable in respect thereof on or
after the date hereof (collectively, the "Shares") in accordance with the terms
of this Irrevocable Proxy. The Shares beneficially owned by the undersigned
Stockholder of the Company as of the date of this Irrevocable Proxy are listed
on the signature page of this Irrevocable Proxy. Upon the undersigned's
execution of this Irrevocable Proxy, any and all prior proxies given by the
undersigned with respect to any Shares are hereby revoked and the undersigned
agrees not to grant any subsequent proxies with respect to the Shares until
after the Expiration Date (as defined below).
This proxy is irrevocable, is coupled with an interest and is granted
pursuant to that certain Company Voting Agreement of even date by and between
Parent and the undersigned stockholder (the "Voting Agreement"), and is granted
in consideration of and as a condition to Parent entering into that certain
Agreement and Plan of Merger (the "Merger Agreement"), among Parent, Mast
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent ("Merger Sub"), and the Company. The Merger Agreement provides for the
merger of Merger Sub with and into the Company in accordance with its terms (the
"Merger"). As used herein, the term "Expiration Date" shall mean the earlier to
occur of (i) such date and time as the Merger Agreement shall have been validly
terminated pursuant to the terms thereof and (ii) such date and time as the
Merger shall become effective in accordance with the terms and provisions of the
Merger Agreement.
The attorneys-in-fact and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney-in-fact and Irrevocable Proxy to
demand that the Secretary of the Company call a special meeting of stockholders
of the Company for the purpose of considering any action related to the Merger
Agreement and to vote the Shares, and to exercise all voting, consent and
similar rights of the undersigned with respect to the Shares (including, without
limitation, the power to execute and deliver written consents) at every annual,
special or adjourned meeting of stockholders of the Company and in every written
consent in lieu of such meeting (a) in favor of the approval and adoption of the
Merger Agreement and the approval of the Merger and in favor of each other
action contemplated by the Merger Agreement and any action required in
furtherance hereof or thereof and (b) against (i) any Acquisition Proposal (as
defined in the Merger Agreement), (ii) any dissolution, liquidation or winding
up of or by the Company, (iii) any amendment of the Certificate of Incorporation
or by-laws of the Company or other proposal or transaction involving the
Company, which amendment or other proposal or transaction would in any manner
impede, frustrate, prevent or nullify any material provision of the Merger
Agreement, the Merger or any other transaction contemplated by the Merger
Agreement or change in any manner the voting rights of any class of the
Company's capital stock.
B-7
<PAGE>
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
Dated: December 11, 1999
<TABLE>
<S> <C> <C>
By: -----------------------------------------
Name:
Title:
Shares beneficially owned:
shares of the Company Common Stock
shares of the Company Common Stock
issuable upon exercise of outstanding options
or warrants.
</TABLE>
B-8
<PAGE>
APPENDIX C
December 11, 1999
Board of Directors
NetMoves Corporation
399 Thornall Street
Edison, New Jersey 08837
Members of the Board:
We understand that Mail.com, Inc. ("Mail.com") and NetMoves Corporation
("NetMoves" or the "Company") are proposing to enter into an Agreement and Plan
of Merger, dated as of December 10, 1999 (the "Agreement"), which provides,
among other things, for the merger (the "Merger") of NetMoves into Mail.com.
Upon effectiveness of the Merger, each issued and outstanding share of the
common stock of NetMoves will be converted into 0.385336 shares (the "Exchange
Ratio") of newly issued shares of common stock of Mail.com (the "Proposed
Transaction"). The terms and conditions of the Proposed Transaction are set
forth in more detail in the Agreement.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Exchange Ratio to be offered to such shareholders
in the Proposed Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning NetMoves (formerly known as FaxSav Incorporated) and
Mail.com that we believe to be relevant to our analysis, including NetMoves'
Form 10-K for the year ended December 31, 1998 and Form 10-Q for the quarter
ended September 30, 1999 and Mail.com's Prospectus dated June 17, 1999 and Form
10-Q for the quarter ended September 30, 1999, (3) financial and operating
information with respect to the business, operations and prospects of the
Company furnished to us by the Company, (4) financial and operating information
with respect to the business, operations and prospects of Mail.com furnished to
us by Mail.com, (5) a trading history of the Company's common stock from
December 10, 1998 to the present and a comparison of that trading history with
those of other companies that we deemed relevant, (6) a trading history of
Mail.com's common stock from June 17, 1999 to the present and a comparison of
that trading history with those of other companies that we deemed relevant, (7)
a comparison of the historical financial results and present financial condition
of the Company with those of other companies that we deemed relevant, (8) a
comparison of the historical financial results and present financial condition
of Mail.com with those of other companies that we deemed relevant, (9) a
comparison of the financial terms of the Proposed Transaction with the financial
terms of certain other recent transactions that we deemed relevant, (10) reports
prepared by third party research analysts with respect to the future financial
performance of the Company and Mail.com and (11) the results of our efforts to
solicit indications of interest and proposals from third parties with respect to
an acquisition of the Company. In addition, we have had discussions with the
management of the Company and Mail.com concerning their respective businesses,
operations, assets, financial condition and prospects and have undertaken such
other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of management of the Company that they are
not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company, upon advice of the Company we have assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
C-1
<PAGE>
estimates and judgments of the management of the Company as to the future
financial performance of the Company and that the Company will perform
substantially in accordance with such projections. With respect to the financial
projections of Mail.com for the year 2000, upon advice of Mail.com, we have
assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of Mail.com as to the future financial performance of Mail.com and
that Mail.com will perform substantially in accordance with such projections.
For years subsequent to 2000, we were not provided with any financial
projections prepared by the management of Mail.com, and accordingly, in
performing our analysis, based upon advice of Mail.com and with the consent of
the Company, we have assumed that the publicly available estimates of third
party research analysts are a reasonable basis upon which to evaluate the future
financial performance of Mail.com and that Mail.com will perform substantially
in accordance with such estimates. In arriving at our opinion, we have not
conducted a physical inspection of the properties and facilities of the Company
and have not made or obtained any evaluations or appraisals of the assets or
liabilities of the Company. Upon advice of the Company and its legal and
accounting advisors, we have assumed that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended, and therefore as a tax-free transaction to the U.S.
stockholders of the Company. Our opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter. Based upon and subject to the foregoing, we are of the
opinion as of the date hereof that, from a financial point of view, the Exchange
Ratio to be offered to the stockholders of the Company in the Proposed
Transaction is fair to such the stockholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have performed various investment banking
services for the Company in the past including acting as underwriter for the
Company's initial public offering in 1996 and have received customary fees for
such services. In the ordinary course of our business, we actively trade in the
equity securities of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
/s/ LEHMAN BROTHERS
C-2
