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Filed Pursuant to Rule 424(b)(4)
File No. 333-80137
[LOGO]
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3,400,000 SHARES
COMMON STOCK
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This is the initial public offering of yesmail.com, inc. and we are offering
3,400,000 shares of our common stock.
We have been approved to list our common stock on the Nasdaq National Market
under the symbol "YESM."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE RISK FACTORS BEGINNING ON
PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PUBLIC UNDERWRITING
OFFERING DISCOUNTS AND PROCEEDS TO
PRICE COMMISSIONS YESMAIL.COM
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<S> <C> <C> <C>
Per Share $ 11.00 $ 0.77 $ 10.23
Total $37,400,000 $ 2,618,000 $34,782,000
</TABLE>
We have granted the underwriters the right to purchase up to 510,000 additional
shares to cover any over-allotments.
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
VOLPE BROWN WHELAN & COMPANY
The date of this prospectus is September 22, 1999
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information, financial statements and notes to financial statements appearing
elsewhere in this prospectus.
YESMAIL.COM
We believe we are a leading provider of comprehensive permission email
direct marketing solutions. We deliver direct email marketing messages to
targeted individuals, our members, who have given us or our network partners
prior permission to send them promotional email messages. Through our network,
we can direct promotional campaigns to a targeted audience of over five million
self-selected members. In the quarter ended June 30, 1999, we delivered over 8.9
million permission email messages for over 120 clients.
We work with direct marketers to reach a targeted audience to promote their
products or services. Our direct marketer clients have included eToys,
Fingerhut, Hewlett Packard, MotherNature.com, Office Max, Value America and
Verio. Once a direct marketing campaign is created, we deliver promotional email
messages to the appropriate members of our network. We use our proprietary
targeting and tracking technology and our direct marketing expertise to help our
direct marketer clients achieve response rates of up to 15% and maximize the
return on the resources they spend on advertising, commonly known as return on
investment.
Our network partners include Web sites that have developed or are
developing their own permission email lists. We provide our network partners
with resale and tracking services by selling direct marketers access to their
lists and tracking the responses of members on their lists. Our network partners
provide us with their lists for a percentage of our revenues. We enable our
network partners to generate additional revenues from their permission email
lists by utilizing our expertise and software tools to provide direct marketers
access to these lists. By working with us, our network partners avoid the costs
and challenges associated with building and maintaining their own direct
marketing sales forces and email direct marketing technologies. Our network
partners may also benefit from our proprietary technology that tracks the
responses of their list members, thereby enhancing the value of their lists to
direct marketers. Network partners also benefit from the scale and reach of our
network and the organization of all network members into categories of interest
and response rate histories. Although we have contracts with each of our network
partners, there is no permanent relationship or common ownership arrangement
with any such party. In addition to our network partners, we have nonexclusive
relationships with third party list managers who provide us with access to their
lists on a campaign by campaign basis for a fixed fee.
We believe that our members will benefit from the ability to control the
flow of email marketing messages they receive. Our proprietary consumer product,
My.YesMail, is designed to give members the tools necessary to organize their
email subscriptions and permission lists, filter undesired promotional messages
and control message frequency. We intend to create a trusted brand name which
facilitates positive interactions between direct marketers and members.
INTERNET MARKETING
The growth of the Internet has spurred traditional businesses and
e-commerce companies to devote larger portions of their marketing budgets to the
Internet. The Internet is particularly well suited as a direct marketing medium
because of the ability to target consumers, receive immediate response, direct
consumers to a precise point of sale and provide a measurable return on
investment. However, to date, Internet direct marketing has been primarily
confined to mass-mailing of unsolicited email messages, known as 'spam,' which
has met with negative consumer reaction and low response rates. In addition, the
placement of advertisements on Web sites, commonly known as banner advertising,
has proven to be less effective as a direct marketing
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medium than as a vehicle for establishing brand identity, with response rates
averaging 0.7% according to Forrester Research.
Permission email direct marketing response rates, according to Jupiter
Communications, are three to ten times higher than traditional direct mail or
banner advertising. In addition, the cost to deliver permission email messages
can be 75% to 90% lower than direct mail, according to the Gartner Group. We
believe that the combination of substantially higher response rates and lower
costs will result in an increasing portion of the $160 billion spent in the
United States on direct marketing shifting to permission email. The Direct
Marketing Association projects that spending on Internet direct marketing will
increase from $600 million in 1998 to $5.3 billion in 2003.
We believe that permission email direct marketing represents an opportunity
to more fully realize the Internet's viability as an effective direct marketing
medium due to its substantially higher response rates and lower delivery costs,
and that we are well positioned to take advantage of this opportunity.
Our objective is to be the leading provider of permission email direct
marketing. We intend to achieve this objective by:
- Providing effective email direct marketing programs to enable direct
marketers to maximize their return on investment.
- Increasing our targeted reach through a permission based network that
currently exceeds five million self-selected members.
- Expanding our sales, marketing and client services to grow our business
while providing a high level of customer support.
- Leveraging our proprietary technology and current and planned products
for direct marketers, network partners and members, including eTrack,
eTarget, ePredict, eCampaign, eManage and My.YesMail.
- Building a leading brand that establishes YesMail as the trusted leader
in quality permission email programs.
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Superhighway Consulting, Inc. was incorporated in Illinois in April 1995,
and we were incorporated in Delaware in October 1998. We merged with
Superhighway in March 1999. Our principal executive offices are located at 565
Lakeview Parkway, Suite 135, Vernon Hills, Illinois 60061. Our telephone number
at that location is (847) 918-9292. We also maintain a Web site which is located
at www.yesmail.com. Information contained in our Web site does not constitute a
part of this prospectus. WebPromote is our registered trademark. This prospectus
also contains other trademarks of ours including, yesmail, eCampaign, eConnect,
eManage, ePredict, eTarget, eTrack, yesmail.com, My.Yesmail and YesMail Network.
All other trademarks or trade names used in this prospectus are the property of
their respective owners.
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Unless otherwise noted, the information in this prospectus assumes:
- the effectiveness of a three-for-eight reverse split of the outstanding
shares of capital stock prior to the closing of this offering;
- the conversion of each outstanding share of preferred stock into one
share of common stock, which will occur upon the closing of this
offering; and
- no exercise of the underwriters' over-allotment option.
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THE OFFERING
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Common stock offered by yesmail.com................... 3,400,000 shares
Common stock to be outstanding after the offering..... 20,324,094 shares
Use of proceeds....................................... For general corporate purposes, including
working capital
Nasdaq National Market symbol......................... YESM
</TABLE>
The number of shares of common stock to be outstanding after the offering
above is based on the number of shares of common stock outstanding as of June
30, 1999 and does not include shares of common stock reserved for issuance under
our stock option and stock purchase plans, of which 1,660,570 shares were
issuable upon exercise of outstanding options as of September 15, 1999.
SUMMARY CONSOLIDATED FINANCIAL DATA
See Note 3 of Notes to Consolidated Financial Statements for a description
of the method that we used to compute our net loss per share and an explanation
of the determination of the number of shares used in computing per share data.
The as adjusted financial data below reflects the sale of the shares of common
stock that we are offering in this prospectus at the public offering price of
$11.00 per share and after deducting the underwriting discounts and commissions
and our estimated offering expenses.
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SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
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1996 1997 1998 1998 1999
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(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 935 $2,468 $ 4,583 $2,046 $ 3,642
Gross profit............................................. 642 1,378 1,880 904 1,165
Loss from operations..................................... (85) (405) (1,401) (433) (5,354)
Net loss................................................. $ (80) $ (414) $(1,706) $ (460) $(5,475)
====== ====== ======= ====== =======
Basic and diluted net loss per share..................... $(0.01) $(0.05) $ (0.22) $(0.06) $ (0.60)
====== ====== ======= ====== =======
Weighted-average shares outstanding
used in computing basic and diluted net loss per
share.................................................. 7,723 7,649 7,636 7,776 9,178
====== ====== ======= ====== =======
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<CAPTION>
JUNE 30, 1999
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $3,508 $37,190
Working capital........................................... 476 34,158
Total assets.............................................. 6,676 40,358
Capital lease obligations less current portion............ 330 330
Stockholders' equity...................................... 1,853 35,535
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to purchase shares of our common stock.
WE RECENTLY REDIRECTED OUR STRATEGIC FOCUS SO OUR RECENT OPERATING RESULTS ARE
NOT COMPARABLE TO OUR RESULTS FOR PRIOR PERIODS.
We were founded in 1995 as a supplier of a broad range of Internet
marketing services and in late 1998 redirected our strategic focus to permission
email. Through June 30, 1999, permission email marketing services represented
less than half of our revenue. Accordingly, our operating results since the end
of 1998 are not comparable to our results for prior periods. We cannot be
certain that our business strategy will be successful or that we will adequately
address these risks.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES.
We incurred net losses of $2.2 million from our inception through December
31, 1998 and $5.5 million for the six months ended June 30, 1999. As of June 30,
1999, we had an accumulated deficit of $7.7 million. We expect to continue to
incur net losses for the foreseeable future and negative cash flow from
operations through at least the year 2000.
We expect to significantly increase our operating expenses as a result of
expanding our sales and marketing, product development and administrative
operations and developing new strategic relationships to promote our future
growth. As a result, we will need to generate significant revenues to meet these
increased expenses and to achieve profitability. If we do achieve profitability,
we cannot be certain that we can sustain or increase profitability in the
future.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND REMAIN UNCERTAIN,
WHICH COULD NEGATIVELY AFFECT THE VALUE OF YOUR INVESTMENT.
Our operating results are difficult to predict. Our future quarterly
operating results may fluctuate significantly and may not meet the expectations
of securities analysts or investors. If this occurs, the price of our common
stock would likely decline, perhaps substantially. Factors that may cause
fluctuations of our operating results include the following:
- the level of market acceptance of our products and services;
- delays we may encounter in introducing new products and services;
- competitive developments;
- demand for advertising on the Internet; and
- changes in pricing policies and resulting margins.
We expect that an increasing portion of our future revenues will be derived
from permission email marketing products and services. The volume and timing of
orders are difficult to predict because the market for our products is in its
infancy and the sales cycle may vary substantially from customer to customer.
Currently, our customer contracts are only for a limited period of time,
typically lasting only days or weeks, which makes revenues in any quarter
substantially dependent upon contracts entered into in that quarter. Our
customers can terminate their contracts with us on short notice without penalty.
Moreover, our sales are expected to fluctuate due to seasonal or cyclical
marketing campaigns. We expect that revenue growth in the first and third
quarters of each year may be lower than revenue growth in the second and fourth
quarters of that and the preceding year. We believe this trend may occur as a
result of our customers' annual budgetary, purchasing and sales cycles. In
addition, our sales cycle has varied from
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customer to customer and several customers have taken many months to evaluate
our products before making their purchase decisions. To the extent significant
revenues occur earlier than expected, our operating results for later quarters
may not compare favorably with operating results from earlier quarters.
OUR SUCCESS DEPENDS UPON BROAD MARKET ACCEPTANCE OF PERMISSION EMAIL MARKETING
SERVICES AND WE ARE UNCERTAIN IF OR WHEN SUCH MARKET ACCEPTANCE WILL OCCUR.
We do not know if our products and services will be successful. The growth
of the Internet remains fairly recent and advertising on the Internet even more
so. The Internet may not be accepted as a viable long-term commercial
marketplace and medium of commerce for a number of reasons, including
potentially inadequate development of necessary Internet infrastructure,
government regulation or delayed development of enabling technologies and
performance improvements. The market for permission email marketing services is
in its infancy, and we are not certain whether our target customers will widely
adopt and deploy this technology. Even if they do so, they may not choose our
products for technical, cost, support or other reasons. Adoption of permission
email marketing services, particularly by those entities that have historically
relied upon traditional means of direct marketing, such as telemarketing and
direct mail, requires the broad acceptance of a new and substantially different
approach to direct marketing. We believe that the promotion of the concept of
permission email marketing will require us to engage in an intensive marketing
and sales effort to educate prospective customers regarding the uses and
benefits of our products and services. Enterprises that have already invested
substantial resources in other advertising methods may be reluctant or slow to
adopt our new approach.
Our future growth also depends on the commercial success of our YesMail
Network and the products that comprise our network. These products include
eTrack, eCampaign and eTarget, and the products we plan to introduce by the end
of the third quarter of 1999, such as ePredict and eManage. If our customers do
not widely adopt and purchase our products, our business will suffer.
Furthermore, the Internet advertising and permission email services market is
characterized by rapid technological change, frequent new product introductions,
changes in customer requirements and evolving industry standards. If we are
unable to develop and introduce products or enhancements in a timely manner, we
may not be able to successfully compete and our products may become obsolete.
SEVERAL KEY MEMBERS OF OUR MANAGEMENT TEAM HAVE ONLY RECENTLY JOINED US AND IF
THEY ARE UNABLE TO EFFECTIVELY INTEGRATE THEMSELVES INTO OUR BUSINESS OR WORK
TOGETHER AS A MANAGEMENT TEAM, OUR BUSINESS WILL SUFFER.
Several key members of our management team have joined us since January 1,
1999, including David M. Tolmie, our Chief Executive Officer and President,
David B. Menzel, our Chief Financial Officer and Vice President, Finance and
Administration, Peder Jungck, our Chief Technology Officer, Michael R.
Mooradian, our Vice President, Sales and Anthony Priore, our Vice President,
Marketing. If these key employees cannot effectively integrate themselves into
our business or work together as a management team to enable us to carry out our
permission email strategy, our business will suffer.
COMPETITION IN THE MARKET FOR INTERNET ADVERTISING AND DIRECT MARKETING IS
INTENSE AND COULD ADVERSELY AFFECT OUR BUSINESS.
The market for Internet advertising and direct marketing is intensely
competitive, rapidly changing and highly fragmented. We expect that competition
will increase significantly in the near-term because of the attention the
Internet has received as a means of advertising and direct marketing and because
there are no significant barriers to entry. Our primary long-term competitors
may not have entered the market yet because our market is new. Competition could
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result in price reductions, changes in the way services are priced, reduced
gross margin and loss of market share, any of which could cause our business to
suffer.
Many of our current and potential competitors have greater name
recognition, longer operating histories, larger customer bases and significantly
greater financial, technical, marketing, public relations, sales, distribution
and other resources than we do. Some of our potential competitors are among the
largest and most well-capitalized companies in the world. In addition, some of
our competitors may include Web site owners who own permission email lists. We
expect to face competition from these and other competitors, including Internet
portals, traditional list brokers, banner advertising managers, independent list
managers, incentive-based subscriber lists and customer management and retention
service companies. For a more detailed discussion of our competition, please see
"Business -- Competition."
OUR FAILURE TO DEVELOP AND MAINTAIN OUR SALES, MARKETING AND SUPPORT
ORGANIZATION AND RELATIONSHIPS WITH OUR NETWORK PARTNERS AND THIRD PARTY LIST
MANAGERS WOULD LIMIT OUR GROWTH.
If we fail to substantially develop our direct and indirect sales and
marketing operations and our relationships with our network partners, our growth
will be limited. Our products and services require a sales effort targeted at
several people within our prospective customers. We have recently expanded our
direct sales force and plan to hire additional sales personnel. We might not be
able to hire, train or retain the kind and number of sales and marketing
personnel we are targeting because competition for qualified sales and marketing
personnel is intense. In addition, we will increasingly rely on advertising
agencies and direct marketers to resell our products and services. If we do not
effectively manage or grow our sales and marketing channel, our business could
suffer.
We must continue to maintain and expand relationships with network partners
who provide us with access to permission email lists. We began to enter into
agreements with our network partners in the first quarter of 1999. These
contracts are generally for an initial term of 1 to 3 years, with an automatic
annual renewal. Pursuant to these contracts, we provide our network partners
with resale and tracking services by selling direct marketers access to their
lists, and our network partners receive a percentage of our revenue. We cannot
be assured that the growth of our business as a result of our entering into
these agreements will be sufficient to meet our expectations for sales growth
and profitability. In addition to our network partners, we have reseller
arrangements with third party list managers, under which we pay a fixed fee for
the nonexclusive use of their list for a specific campaign. These third party
list managers are not contractually obligated to provide us with access to their
lists. A majority of the email addresses that we have access to through our
proprietary list, our network partners and our list managers is currently
comprised of addresses from list managers. If we fail to maintain or grow our
relationships with our network partners and third party list managers, our
business could suffer.
IF WE ARE UNABLE TO MANAGE OUR EXPECTED GROWTH, OUR BUSINESS WILL SUFFER.
Our ability to successfully offer our products and services and implement
our business plan in the rapidly evolving market for permission email marketing
services requires an effective planning and management process. We continue to
increase the scope of our operations and have grown our headcount substantially.
These factors have placed, and our anticipated future operations will continue
to place, a significant strain on our management systems and resources. We
expect that we will need to continue to improve our operational and financial
and managerial controls and reporting systems and procedures, and will need to
continue to expand, train and manage our work force.
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WE RUN THE RISK OF SYSTEM FAILURE THAT COULD ADVERSELY AFFECT OUR BUSINESS.
The continuing and uninterrupted performance of our network is critical to
our success. Direct marketers may become dissatisfied by any system failure that
interrupts our ability to provide our services to them, including failures
affecting the ability to deliver marketing messages quickly and accurately to
the targeted audience. Sustained or repeated system failures would reduce
significantly the attractiveness of our solutions to our customers. Our business
would suffer by any damage or failure that interrupts or delays our operations.
Our operations depend on our ability to protect our computer systems
against damage from a variety of sources, including telecommunications failures,
malicious human acts and natural disasters. Substantially all of our operations
and computer systems are located at a single facility leased by us in Vernon
Hills, Illinois. The occurrence of any of the above factors affecting our
ability to maintain uninterrupted system performance would harm our business.
Despite network security measures, our servers are vulnerable to computer
viruses and disruptions from unauthorized tampering with our computer systems.
We do not carry business interruption insurance to compensate for losses that
may occur as a result of any of these events. Despite precautions, unanticipated
problems affecting our systems could cause interruptions in the delivery of our
solutions in the future. Our data storage centers incorporate redundant systems,
consisting of additional servers, but the primary system does not switch over to
the backup system automatically.
In addition, if our products and services or our customers are affected by
problems associated with inaccurate calculations with respect to the Year 2000,
or if we experience reduced sales as potential customers divert resources to
effect their own Year 2000 compliance, our business will suffer. For a further
discussion of Year 2000 issues, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS
WILL SUFFER.
Our ability to successfully compete is substantially dependent upon our
internally developed technology, which we protect through a combination of
copyright, trade secret and trademark law. We have no issued patents or patent
applications pending. However, we may not be able to adequately protect our
proprietary rights which may harm our business. Unauthorized parties may attempt
to copy or otherwise obtain and use our products or technology. Policing
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. For a more detailed description of the
protection of our intellectual property, please see "Business -- Intellectual
Property Rights."
OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECT TO INFRINGEMENT CLAIMS WHICH COULD
HARM OUR BUSINESS.
There is a substantial risk of litigation regarding intellectual property
rights in our industry. A successful claim of product infringement against us
and our failure or inability to license the infringed or similar technology
could harm our business. From time to time, third parties have asserted and may
assert exclusive patent, copyright, trademark and other intellectual property
rights to technologies and related standards that are important to us. We expect
that our products may be increasingly subject to third-party infringement claims
as the number of our competitors grows. We cannot be certain that third parties
will not make future claims of infringement against us with respect to our
products and technology. Any claims, with or without merit, could:
- be time-consuming to defend;
- result in costly litigation;
- divert management's attention and resources;
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- cause delays in delivering products and services;
- require the payment of monetary damages which may be tripled if the
infringement is found to be willful;
- result in an injunction which would prohibit us from offering a
particular product or service; or
- require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on
acceptable terms, if at all. For additional information, please see
"Business -- Intellectual Property Rights."
OUR BUSINESS WOULD SUFFER IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE
ACQUISITIONS OF OTHER COMPANIES OR SUBSCRIBER LISTS.
From time to time, we expect to evaluate opportunities to grow through
acquisitions of or investments in complementary companies, products or
technologies. If we acquire a company, we could have difficulty in assimilating
that company's personnel, operations, products or technology. In addition, the
key personnel of the acquired company may decide not to work for us. If we make
acquisitions of products or technology, we could have difficulty in assimilating
the acquired technology or products into our operations. These difficulties
could disrupt our ongoing business, distract our management and employees and
increase our expenses. Moreover, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other
intangible assets. Furthermore, we may have to incur debt or issue equity
securities to pay for any future acquisitions, the issuance of which could be
dilutive to us or our existing stockholders. If we are unable to successfully
address any of these risks, our business could be harmed.
THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD LIKELY HAVE AN
ADVERSE EFFECT ON OUR BUSINESS.
We need to hire a significant number of additional sales, support,
marketing and product development personnel to expand our business. If we fail
to attract qualified personnel or retain current employees, our revenues may not
increase and could decline. Competition for these individuals is intense, and we
may not be able to attract, assimilate or retain additional highly qualified
personnel in the future. Our future success also depends upon the continued
service of our executive officers and other key sales, marketing and support
personnel. In addition, our products and technologies are complex and we are
substantially dependent upon the continued service of our existing engineering
personnel. Not all of our officers or key employees are bound by an employment
agreement. Our relationships with these officers and key employees are at will.
Moreover, we do not have "key person" life insurance policies covering any of
our employees.
THE FAILURE OF THIRD PARTIES TO ADEQUATELY PROVIDE REQUIRED SERVICES AND
SOFTWARE COULD HARM OUR BUSINESS.
Our business is dependent on third parties for:
- providing access to the Internet;
- supporting our operations;
- computer programming;
- product development; and
- subscriber list management.
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In the event our arrangements with these parties are terminated or these
third parties do not adequately provide required services according to our
schedule, cost and capability expectations, our business could suffer.
In addition, we license technology that is incorporated into our products
from third parties. Any interruption in the supply or support of any licensed
software could disrupt our operations and delay our sales, unless and until we
can replace the functionality provided by this licensed software. Because our
products incorporate software developed and maintained by third parties, we
depend on these third parties to deliver and support reliable products, enhance
their current products, develop new products on a timely and cost-effective
basis and respond to emerging industry standards and other technological
changes.
PRIVACY CONCERNS WITH RESPECT TO OUR PRODUCTS AND SERVICES COULD NEGATIVELY
AFFECT OUR BUSINESS.
Our technology collects and utilizes data derived from user activity in the
YesMail Network. Our network enables the use of personal profiles, in addition
to other mechanisms, to deliver targeted marketing materials, to help compile
demographic information and to limit the frequency with which an advertisement
is shown to the user. The effectiveness of our technology and the success of our
business could be limited by any reduction or limitation in the use of personal
profiles. These personal profiles contain bits of information keyed to a
specific server, file pathway or directory location that are stored in the
user's hard drive. Personal profiles are placed on the user's hard drive without
the user's knowledge or consent, but can be removed by the user at any time
through the modification of the user's browser settings. In addition, currently
available applications can be configured to prevent personal profiles from being
stored on their hard drive. Some commentators, privacy advocates and
governmental bodies have suggested limiting or eliminating the use of personal
profiles. In the event this occurs, our business would likely suffer.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES OF DOING BUSINESS ON THE INTERNET
COULD NEGATIVELY IMPACT OUR BUSINESS.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. These regulations could affect the cost
of communicating on the Internet and negatively affect the demand for our direct
marketing solutions or otherwise harm our business. Recently, the United States
Congress enacted Internet legislation regarding children's privacy, copyright
and taxation. A number of other laws and regulations may be adopted covering
issues such as user privacy, pricing, acceptable content, taxation and quality
of products and services. This legislation could hinder growth in the use of the
Internet generally and decrease the acceptance of the Internet as a
communications, commercial and direct marketing medium. In addition, the growing
use of the Internet has burdened the existing telecommunications infrastructure
and has caused interruptions in telephone service. Telephone carriers have
petitioned the government to regulate and impose fees on Internet service
providers and online service providers in a manner similar to long distance
carriers. The European Union recently adopted a directive addressing data
privacy that may result in limits on the collection and use of user information.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws including those governing intellectual property,
privacy, libel and taxation apply to the Internet and Internet advertising. In
addition, the growth and development of the market for Internet commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business over the Internet. Our business could suffer with the adoption or
modification of laws or regulations relating to the
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Internet, or the application of existing laws to the Internet. For additional
discussion of potential governmental intervention, please see
"Business -- Government Regulation."
WE MAY FACE CLAIMS FOR ACTIVITIES OF OUR CUSTOMERS WHICH COULD HARM OUR
BUSINESS.
Our customers' promotion of their products and services may not comply with
federal, state and local laws. A wide variety of laws and regulations govern the
content of advertisements and regulate the sale of products and services. There
is also uncertainty as to the application of these laws to the emerging world of
advertising on the Internet. We cannot predict whether our role in facilitating
these marketing activities would expose us to liability under these laws. We may
face civil or criminal liability for unlawful advertising or other activities of
our customers. If we are exposed to this kind of liability, we could be required
to pay substantial fines or penalties, redesign our business methods,
discontinue some of our services or otherwise expend resources to avoid
liability. Any costs incurred as a result of that liability or asserted
liability could harm our business.
THIS OFFERING IS THE INITIAL PUBLIC OFFERING OF OUR STOCK AND WE CANNOT ASSURE
YOU THAT OUR STOCK PRICE WILL NOT DECLINE AFTER THE OFFERING.
You may not be able to resell your shares at or above the initial public
offering price due to a number of factors, including:
- actual or anticipated quarterly variations in our operating results;
- changes in expectations of future financial performance or changes in
estimates of securities analysts;
- announcements of technological innovations by us or our competitors;
- departures of key personnel;
- future sales of our common stock;
- announcement of significant claims or legal proceedings; and
- conditions affecting the Internet industry.
The trading price of our common stock may be volatile. The market for
technology and Internet-related companies has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These fluctuations may negatively affect the trading price of our
common stock, regardless of our actual operating performance.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES WILL HAVE SIGNIFICANT CONTROL OF
US AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTEREST OF ALL STOCKHOLDERS.
We anticipate that our executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
37.9% of our outstanding common stock following the completion of this offering.
These stockholders, if acting together, would be able to significantly influence
all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD PREVENT US FROM BEING ACQUIRED.
Provisions of our Certificate of Incorporation, our Bylaws, and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders. For additional information on these
anti-takeover provisions, please see "Description of Capital Stock."
12
<PAGE> 12
FUTURE SALES OF COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
After this offering, a substantial percentage of our common stock will be
eligible for resale. If our stockholders sell substantial amounts of our common
stock, including common stock issued upon the exercise of outstanding options,
in the public market following this offering, the market price of our common
stock could fall dramatically. Such sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and price
that we deem appropriate.
The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities law and by certain
"lock-up" agreements that our stockholders have entered into with the
underwriters. For additional information on these restrictions and on future
sales of our common stock, please see "Shares Eligible for Future Sale" and
"Underwriting."
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS AND INDUSTRY DATA
We have made forward looking statements in this prospectus that are subject
to risks and uncertainties. Forward looking statements include information
concerning our possible or assumed results of operations. In addition, when we
use such words as "believes," "expects," "plans," "future," "intends,"
"anticipates" or similar expressions, we are making forward looking statements.
You should note that an investment in our securities involves risks and
uncertainties that could affect future financial results. You should not place
undue reliance on these forward looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of factors,
including those set forth in "Risk Factors" and elsewhere in this prospectus.
This prospectus contains statistical data regarding Internet usage and the
advertising and marketing industry that we obtained from industry publications,
including reports generated by the Direct Marketing Association, Forrester
Research, the Gartner Group and Jupiter Communications. These industry
publications generally indicate that they have obtained their information from
sources believed to be reliable, but do not guarantee the accuracy and
completeness of their information. While we believe that these publications are
reliable, we have not independently verified their data.
13
<PAGE> 13
USE OF PROCEEDS
Our net proceeds from the sale of the 3,400,000 shares of common stock we
are offering in this prospectus at the public offering price of $11.00 per
share, are estimated to be $33,682,000, or $38,899,300 if the underwriters'
over-allotment option is exercised in full and after deducting the underwriting
discounts and commissions and estimated offering expenses. Our principal
purposes for engaging in this offering are to:
- increase our equity capital;
- create a public market for our common stock; and
- facilitate future access by us to public equity markets.
We expect to use the net proceeds from this offering for general corporate
purposes, including working capital. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in short-term, interest-bearing,
investment-grade securities. Otherwise, we have no current specific plan for the
proceeds from this offering.
DIVIDEND POLICY
We have never declared or paid cash dividends to our stockholders. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and we do not anticipate declaring or paying
cash dividends for the foreseeable future.
14
<PAGE> 14
CAPITALIZATION
The actual column in the following table sets forth our actual
capitalization as of June 30, 1999. The pro forma column in the following table
reflects the conversion of each outstanding share of preferred stock into one
share of common stock, which will occur upon the closing of this offering.
The pro forma as adjusted column in the following table gives effect to the
receipt of the net proceeds from the sale of the shares of common stock that we
are offering in this prospectus at the initial public offering price of $11.00
per share and after deducting underwriting discounts and estimated offering
expenses. Please see "Use of Proceeds."
The following table does not include shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 1,660,570
shares were issuable upon exercise of outstanding options as of September 15,
1999. See "Management -- Compensation Plans" and Note 11 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, less current portion...... $ 330 $ 330 $ 330
Stockholders' equity:
Series A convertible preferred stock, $0.0001 par
value, 15,000,000 shares authorized, 5,154,548
shares issued and outstanding actual; 15,000,000
shares authorized, no shares issued and
outstanding pro forma; 5,000,000 shares
authorized, no shares issued and outstanding pro
forma as adjusted............................... 1 -- --
Common stock, $0.0001 par value, 22,500,000 shares
authorized, 11,769,546 shares issued and
outstanding actual; 22,500,000 shares
authorized, 16,924,094 shares issued and
outstanding pro forma; 60,000,000 shares
authorized, 20,324,094 shares issued and
outstanding pro forma as adjusted............... 1 2 2
Notes receivable from stockholders................... (3,831) (3,831) (3,831)
Additional paid-in capital........................... 13,782 13,782 47,464
------- ------- -------
Deferred compensation................................ (411) (411) (411)
Accumulated deficit.................................. (7,689) (7,689) (7,689)
Total stockholders' equity........................... 1,853 1,853 35,535
------- ------- -------
Total capitalization................................. $ 2,183 $ 2,183 $35,865
======= ======= =======
</TABLE>
15
<PAGE> 15
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $1.4 million
or approximately $0.08 per share of common stock. "Net tangible book value" per
share represents the amount of our total tangible assets reduced by the amount
of our total liabilities and divided by the total number of shares of common
stock outstanding. After giving effect to the sale of the 3,400,000 shares of
common stock that we are offering in this prospectus at the initial public
offering price of $11.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable, our pro forma
net tangible book value as of June 30, 1999 would have been $35.1 million or
approximately $1.72 per share of common stock. This represents an immediate
increase in net tangible book value of $1.64 per share to existing stockholders
and an immediate dilution in net tangible book value of $9.28 per share to new
investors in this offering. The following table illustrates this dilution on a
per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $11.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $0.08
Increase per share attributable to new investors.......... 1.64
-----
Net tangible book value per share after the offering........ 1.72
------
Dilution in net tangible book value per share to new
investors................................................. $ 9.28
======
</TABLE>
The following table summarizes on a pro forma basis, as of June 30, 1999,
the differences between the existing stockholders and new investors with respect
to number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------ PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 16,924,094 83.3% $12,832,573 25.5% $ 0.76
New investors................ 3,400,000 16.7 37,400,000 74.5 $11.00
---------- ---- ----------- ---- ------
Total................... 20,324,094 100% $50,232,573 100%
========== ==== =========== ====
</TABLE>
The foregoing discussion and tables are based upon the number of shares
actually outstanding as of June 30, 1999 and exclude shares of common stock
reserved for issuance under our stock option and stock purchase plans, of which
1,660,570 shares of common stock were issuable upon exercise of outstanding
options as of September 15, 1999. Please see "Capitalization,"
"Management -- Compensation Plans" and "Description of Capital Stock."
16
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the period from
April 7, 1995 through December 31, 1995 and the selected consolidated balance
sheet data as of December 31, 1995 have been derived from our unaudited
financial statements. The selected consolidated statement of operations data set
forth below for the periods from January 1, 1996 to December 31, 1998 and the
selected consolidated balance sheet data as of December 31, 1998 have been
derived from our audited financial statements included elsewhere in this
prospectus. The selected consolidated results of operations data for the three
months ended June 30, 1998 and 1999 and the selected consolidated balance sheet
data as of June 30, 1998 and 1999 are derived from unaudited consolidated
financial statements included elsewhere in this prospectus that have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of our consolidated
operating results for such periods and its financial condition as of such date.
The historical results are not necessarily indicative of results to be expected
for any future period. The data has been derived from financial statements that
have been prepared in accordance with generally accepted accounting principles
and should be read in conjunction with the Consolidated Financial Statements and
the Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 7, SIX MONTHS ENDED
1995) THROUGH YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------------- -----------------
1995 1996 1997 1998 1998 1999
------------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 13 $ 935 $ 2,468 $ 4,583 $ 2,046 $ 3,642
Cost of revenues.............................. -- 293 1,090 2,703 1,142 2,477
------- ------- ------- ------- ------- -------
Gross profit.................................. 13 642 1,378 1,880 904 1,165
Operating expenses:
Sales and marketing expenses................ -- 292 960 1,751 677 3,101
General and administrative expenses......... 26 237 466 929 384 1,996
Research and development costs.............. -- 198 357 601 276 1,423
------- ------- ------- ------- ------- -------
Total operating expenses................ 26 727 1,783 3,281 1,337 6,520
------- ------- ------- ------- ------- -------
Loss from operations.......................... (13) (85) (405) (1,401) (433) (5,355)
Interest expense.............................. -- (4) (18) (45) (18) (106)
Other income (expense)........................ -- -- -- (250) -- 20
Minority interest............................. -- 9 9 (10) (9) (34)
------- ------- ------- ------- ------- -------
Net loss...................................... $ (13) $ (80) $ (414) $(1,706) $ (460) $(5,475)
======= ======= ======= ======= ======= =======
Basic and diluted net loss per share(1)....... $ 0.00 $ (0.01) $ (0.05) $ (0.22) $ (0.06) $ (0.60)
======= ======= ======= ======= ======= =======
Shares used in computing basic and diluted net
loss per share(1)........................... 4,630 7,723 7,649 7,636 7,776 9,178
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------- -----------------
1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 10 $ 9 $ 2 $ 26 $ 9 $ 3,508
Working capital (deficit).......................... 4 (52) (448) (2,262) (907) 476
Total assets....................................... 27 200 284 643 337 6,676
Capital lease obligations, less current portion.... -- 12 18 153 19 330
Stockholders' equity (deficit)..................... (13) (38) (347) (2,053) (811) 1,853
</TABLE>
- ---------------
(1) Computed by dividing loss attributable to common stockholders by shares used
in basic and diluted net loss per share. See Note 3 of Notes to Consolidated
Financial Statements for an explanation of the determination of the number
of shares used in computing basic and diluted net loss per share.
17
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties. These
forward-looking statements include, among others, those statements including the
words, "expects," "anticipates," "intends," "believes" and similar language. Our
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to
the risks discussed in the section titled "Risk Factors" in this prospectus.
OVERVIEW
We were organized as a Delaware corporation in October 1998 and had no
operations prior to March 25, 1999. Superhighway Consulting, Inc. was founded in
1995 and was merged with us on March 29, 1999, in a stock for stock transaction,
with the former Superhighway shareholders receiving 7,500,000 shares of our
common stock, or 80% of our outstanding shares. The parties determined that in
exchange for assisting us in raising capital and hiring a new management team,
our founding stockholders should be entitled to 20% of the combined company. In
connection with this merger, we entered into a founders' agreement with our
stockholders, which, among other things, gave the former shareholders of
Superhighway Consulting the right to retain the first $16 million of our value
upon our subsequent sale or merger or our founding stockholders' interest in the
first $16 million of our value upon our initial public offering. In the case of
our initial public offering, the payment to the former Superhighway Consulting
shareholders shall be made with a transfer of shares from our founding
stockholders. For additional information on this option among our stockholders,
please see "Related Party Transactions -- Option Among Stockholders," "Principal
Stockholders" and Note 1 to Notes to Consolidated Financial Statements. In June
1999, we purchased the 30% minority interest in our Starting Point, L.L.C.,
subsidiary for approximately $300,000 in cash and notes and an option to acquire
18,750 shares of our common stock at an exercise price of $1.79 per share. This
transaction was effected so that we would have full ownership of Starting
Point's web site and permission email list. We had distributed the 30% interest
in Starting Point in September 1996 for $16,000. For additional information on
the acquisition, please see Note 11 to Notes to Consolidated Financial
Statements.
We provide permission email direct marketing services. In 1995, as
Superhighway, we were originally focused on providing a wide array of Internet
marketing services. From 1995 through 1997, the majority of our revenue was
derived from directory submission Internet services and business advertising on
the Internet.
After identifying the opportunity for permission email direct marketing, we
began to refocus our strategy towards permission email in 1998. To implement our
permission email strategy, we engaged a new executive management team in late
1998 and early 1999. As a result of our new focus, we have built a network and
developed reseller relationships which collectively provide us with reach to
over 5 million self-selected individuals, who have given express permission to
receive promotional messages via email on specific categories of interest. Our
current strategy is to focus our resources on our permission email business by
continuing to build our network of subscribers and our customer base. Our change
in business focus has resulted in permission email growing from approximately 9%
of revenue in the first quarter of 1998 to approximately 40% of revenue in the
first quarter of 1999 and approximately 72% of revenue in the second
18
<PAGE> 18
quarter of 1999. The following table sets forth the amount of revenue received
from permission email, advertising and marketing services for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
1996 TOTAL 1997 TOTAL 1998 TOTAL 1998 TOTAL 1999 TOTAL
---- -------- ------ -------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Permission email................ $ -- 0% $ 95 4% $ 968 21% $ 176 9% $2,175 60%
Advertising services............ 480 51 1,111 45 1,706 37 739 36 1,096 30
Marketing services.............. 455 49 1,262 51 1,909 42 1,131 55 371 10
---- ---- ------ ---- ------ ---- ------ ---- ------ ----
$935 100 $2,468 100 $4,583 100 $2,046 100 $3,642 100
</TABLE>
Since 1998, permission email has represented an increasing portion of our
revenue as we have implemented our strategy of changing our business focus
towards permission email. We expect this trend to continue and expect that
revenue from advertising and marketing services will decline as a percentage of
revenue in future periods.
We derive revenue by providing Internet marketing services including
charging fees for sending permission email, placing advertising on Web sites and
providing services to Web site owners. Revenue is recognized when emails are
sent to subscribers, when advertisements are placed on Web sites and when
services are performed. Our customers are primarily companies developing
Internet marketing strategies and their interactive advertising agencies.
We deliver email messages to members of our YesMail Network, consisting of
our own permission email list and those of our network partners, and permission
email lists from third party list managers. We pay our network partners or third
party list managers either a percentage of revenue derived from the delivery of
email messages to members on the lists they provide or a fixed fee.
Substantially all of our direct marketing customers purchase our permission
email services under short-term contracts. Customers can therefore terminate
these contracts on short notice without penalty. Our revenues would suffer if we
are unable to secure new contracts from existing direct marketing customers or
obtain new direct marketing customers. We expect to continue to derive a
substantial majority of our revenues from short-term contracts.
Gross margins from permission email are lower than gross margins from the
other Internet marketing services we provide due to the higher costs associated
with acquiring and managing permission email lists. As a result of our change in
focus to permission email, our gross margin declined significantly in the first
quarter of 1999 compared to 1998. For the next several quarters, we expect our
gross margins to continue to decline as permission email becomes a higher
percentage of total revenue.
We have incurred significant losses since inception and as of June 30,
1999, we had an accumulated deficit of $7.7 million. We expect to increase
spending on sales and marketing as we expand our sales force, increase our
subscriber base and promote awareness of our brand. We also expect substantially
higher general and administrative and research and development expenses as we
expand our infrastructure to support our expected growth and as we continue to
develop new products and enhancements to our existing products. As a result of
these increases, we expect to incur significant losses for the foreseeable
future.
In view of the rapidly evolving nature of our business, our limited
operating history and our recent focus on permission email, we believe that
period-to-period comparisons of our revenue and operating results, including our
gross margin and operating expenses as a percentage of total revenues, are not
meaningful and should not be relied upon as an indication of future performance.
We do not believe that our historical growth rates are indicative of future
results.
19
<PAGE> 19
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Revenues. Our revenues consist of fees from providing Internet marketing
services, including the delivery of permission email direct marketing messages
to members in our network, as well as banner advertising and other Internet
marketing services. Total revenues were $2.0 million and $3.6 million for the
six months ended June 30, 1998 and 1999, respectively. Permission email revenues
were $176,000 and $2.2 million for the six months ended June 30, 1998 and 1999,
respectively, representing 9% and 60% of total revenue in the respective
periods. The increase in revenues was primarily due to the increased number of
permission email messages we sent in addition to an increase in the number of
direct marketer clients to whom we provided permission email services.
Cost of Revenues. Cost of revenues consists of expenses related to
providing Internet marketing services and includes payments made to our network
partners and third party list managers, fees for the placement of advertisements
on third party Web sites on behalf of others and personnel costs associated with
our Internet marketing services. Cost of revenues were $1.1 million and $2.5
million for the six months ended June 30, 1998 and 1999, respectively. The
increase in cost of revenues was primarily due to the increase in sales volume.
Gross margins decreased from 44% for the six months ended June 30, 1998 to 32%
for the six months ended June 30, 1999. This decrease was primarily the result
of increased revenues associated with our permission email strategy because
payments we make to network partners are greater as a percentage of revenues
than other costs of revenues. We expect our cost of revenues to increase in both
absolute dollars and as a percentage of revenue as we continue to focus on
permission email.
Sales and Marketing. Sales and marketing expenses consist of personnel and
related costs for our direct sales force and marketing staff and marketing
programs, including trade shows, advertising and public relations. Sales and
marketing expenses were $677,000 and $3.1 million for the six months ended June
30, 1998 and 1999, respectively. The increase was primarily due to increases in
the number of direct sales personnel and increased marketing expenditures
targeted at building our permission email strategy. We expect sales and
marketing expenses will increase substantially in absolute dollars over the next
year as we hire additional sales and marketing personnel and initiate additional
marketing programs.
General and Administrative. General and administrative expenses consist
primarily of personnel and related costs for general corporate functions,
including finance, accounting, human resources, facilities and legal. General
and administrative expenses were $384,000 and $2.0 million for the six months
ended June 30, 1998 and 1999, respectively. The increase was due primarily to an
increase in the number of general and administrative personnel and increased
legal and accounting costs associated with our growth. We expect general and
administrative expenses to increase in absolute dollars in future periods as we
hire additional personnel and incur additional costs related to the growth of
our business and our operations as a public company.
Research and Development. Research and development expenses consist
primarily of personnel and related costs for our development and technical
support efforts. To date, all research and development costs have been expensed
as incurred. Research and development expenses were $276,000 and $1.4 million
for the six months ended June 30, 1998 and 1999, respectively. The increase was
primarily due to increased research and development personnel and consulting
costs associated with the development of our Web site and our products which
enable the execution of our permission email strategy. We believe significant
investment in research and development is essential to our future success and
expect that research and development expenses will increase in absolute dollars
in future periods.
Interest Expense. Interest expense consists of interest paid on capital
lease and debt obligations. Interest expense was $18,000 and $106,000 for the
six months ended June 30, 1998
20
<PAGE> 20
and 1999, respectively. The increase was the result of increased borrowings,
primarily from a $1.0 million bridge loan issued in January 1999.
Minority Interest. Minority interest consists of the third party ownership
interest through June 9, 1999, in our 70% owned subsidiary, Starting Point, LLC.
In June 1999, we purchased the 30% ownership interest of Starting Point, LLC
from the minority interest shareholder.
Income Taxes. No provision for federal and state income taxes was recorded
as we incurred net operating losses from inception through June 30, 1999. As of
December 31, 1998, we had approximately $1.4 million of federal and state net
operating loss carryforwards which expire in varying amounts beginning in 2010.
As a result of various equity transactions during 1999, we believe that we may
have undergone an "ownership change" as defined in section 382 of the Internal
Revenue Code. Accordingly, the utilization of a portion of the net operating
loss carryforwards may be limited. Due to the uncertainty regarding the ultimate
utilization of the net operating loss carryforwards, we have not recorded any
benefit for losses and a valuation allowance has been recorded for the entire
amount of the net deferred tax asset. In addition, sales of our stock, including
shares sold in this offering, may further restrict our ability to utilize our
net operating loss carryforwards.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenues. Total revenues were $935,000, $2.5 million and $4.6 million for
the years ended December 31, 1996, 1997 and 1998, respectively. Permission email
revenues were $0, $95,000 and $968,000 for the respective periods. The increase
in revenues in 1998 compared to 1997 was primarily due to increases in the
number of advertising clients and the increased number of permission email
messages we sent. The increase in revenues in 1997 compared to 1996 was
primarily attributable to increases in the number of direct marketing customers
partially offset by decreases in the number of Web development projects.
Cost of Revenues. Cost of revenues were $293,000, $1.1 million, and $2.7
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
increase in 1998 compared to 1997 primarily resulted from increased sales
volumes, including payments to our network partners and third party list
managers. The increase in cost of revenues in 1997 compared to 1996 was
primarily due to the increase in personnel costs.
Sales and Marketing. Sales and marketing expenses were $292,000, $960,000
and $1.8 million in 1996, 1997 and 1998, respectively. These increases were
primarily due to increases in the number of direct sales personnel and increased
marketing expenditures targeted at building our permission email strategy.
General and Administrative. General and administrative expenses were
$237,000, $466,000 and $929,000 in 1996, 1997 and 1998, respectively. These
increases were due primarily to an increase in the number of general and
administrative personnel and increased legal and accounting costs.
Research and Development. Research and development expenses were $199,000,
$357,000 and $601,000 in 1996, 1997 and 1998, respectively. The increase in
research and development expenses from 1997 to 1998 was primarily due to
increased personnel and consulting costs associated with the development of our
Web site and the building of our permission email strategy. The increase in
research and development expenses from 1996 to 1997 was primarily due to
increased personnel and consulting costs associated with our banner advertising
services.
Interest Expense. Interest expense was approximately $4,000, $18,000 and
$45,000 in 1996, 1997 and 1998, respectively. These increases were the result of
increased borrowings to fund our working capital needs.
21
<PAGE> 21
Other Expense. Other expense of $250,000 for the year ended December 31,
1998 consists of the accrual of the costs related to a claim by a former
employee. In May 1999, this claim was settled for approximately $250,000.
Income Taxes. No provision for federal and state income taxes was recorded
as we incurred net operating losses from inception through December 31, 1998. As
of December 31, 1998, we had approximately $1.4 million of federal and state net
operating loss carryforwards which expire in varying amounts beginning in 2010.
As a result of various equity transactions during 1999, we believe that we may
have undergone an "ownership change" as defined in section 382 of the Internal
Revenue Code. Accordingly, the utilization of a portion of the net operating
loss carryforwards may be limited. Due to the uncertainty regarding the ultimate
utilization of the net operating loss carryforwards, we have not recorded any
benefit for losses and a valuation allowance has been recorded for the entire
amount of the net deferred tax asset. In addition, sales of our stock, including
shares sold in this offering, may further restrict our ability to utilize our
net operating loss carryforwards.
22
<PAGE> 22
QUARTERLY OPERATING RESULTS
The following table presents our historical unaudited quarterly results of
operations for our most recent six quarters. This data is unaudited and derived
from our audited annual Consolidated Financial Statements and Notes thereto
appearing elsewhere in this prospectus. In the opinion of management, such
quarterly financial information has been prepared on the same basis as our
annual financial statements and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial results
set forth therein. Such statement of operations data should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto
in this prospectus. Our results of operations have fluctuated and are likely to
continue to fluctuate significantly from quarter to quarter. Results of
operations for any previous periods are not necessarily comparable to future
periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 873 $ 1,173 $ 1,126 $ 1,411 $ 1,389 $ 2,253
Cost of revenues............................ 376 766 782 779 657 1,820
------- ------- ------- ------- ------- -------
Gross profit................................ 497 407 344 632 732 433
Operating expenses:
Sales and marketing expenses.............. 387 291 342 732 902 2,199
General and administrative expenses....... 143 240 195 351 669 1,327
Research and development costs............ 150 126 122 202 234 1,189
------- ------- ------- ------- ------- -------
Total operating expenses.................... 680 657 659 1,285 1,805 4,715
------- ------- ------- ------- ------- -------
Loss from operations........................ (183) (250) (315) (653) (1,073) (4,282)
Interest expense............................ (8) (10) (8) (19) (55) (51)
Other income (expense)...................... -- -- -- (250) -- 20
------- ------- ------- ------- ------- -------
Net loss before minority interest........... (191) (260) (323) (922) (1,128) (4,313)
Minority interest........................... (2) (7) (11) 10 (23) (11)
------- ------- ------- ------- ------- -------
Net loss.................................... $ (193) $ (267) $ (334) $ (912) $(1,151) $(4,324)
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUES:
Revenues.................................... 100% 100% 100% 100% 100% 100%
Cost of revenues............................ 43 65 70 55 47 81
------- ------- ------- ------- ------- -------
Gross profit................................ 57 35 30 45 53 19
Operating expenses:
Sales and marketing expenses.............. 44 25 30 52 65 98
General and administrative expenses....... 17 20 17 25 48 59
Research and development costs............ 17 11 11 14 17 53
------- ------- ------- ------- ------- -------
Total operating expenses.................... 78 56 58 91 130 210
------- ------- ------- ------- ------- -------
Loss from operations........................ (21) (21) (28) (46) (77) (191)
Interest expense............................ (1) (1) (1) (1) (4) (2)
Other income (expense)...................... -- -- -- (18) -- 1
------- ------- ------- ------- ------- -------
Net loss before minority interest........... (22) (22) (29) (65) (81) (192)
Minority interest........................... -- (1) (1) 1 (2) (1)
------- ------- ------- ------- ------- -------
Net loss.................................... (22)% (23)% (30)% (64)% (83)% (193)%
======= ======= ======= ======= ======= =======
</TABLE>
23
<PAGE> 23
Our operating results are expected to fluctuate significantly in the future
as a result of a variety of factors, many of which are outside of our control.
These factors may include:
- seasonality of direct marketing expenditures which are typically higher
in the second and fourth quarters and lower in the first and third
quarters;
- the level of market acceptance of our products and services;
- delays we may encounter in introducing new products and services;
- competitive developments;
- demand for advertising on the Internet;
- changes in pricing policies and resulting margins;
- changes in the growth rate of Internet usage;
- the growth rate of our network affiliates;
- changes in the mix of products and services sold;
- changes in the mix of sales channels through which products and services
are sold;
- costs related to acquisitions of technology or businesses; and
- economic conditions generally as well as those specific to the Internet
and related industries.
As a strategic response to a changing competitive environment, we may from
time to time make pricing, service, marketing or acquisition decisions that
could harm our business.
In addition, we expect that our revenue will be subject to seasonal
fluctuations because direct marketers typically run fewer campaigns during the
first and third calendar quarters of each year. In addition, expenditures by
marketers tend to be cyclical, reflecting overall economic conditions as well as
budgeting and buying patterns.
LIQUIDITY AND CAPITAL RESOURCES
From inception to January 1999, we have primarily funded our growth through
short-term borrowings and capital leases. In January 1999, we completed a $1.0
million bridge financing, which was convertible into series A preferred stock at
the lender's option. In March 1999, we received $600,000 in advances from three
of our stockholders. In May 1999, we completed a financing and issued
approximately 5.2 million shares of series A preferred stock, including shares
issuable upon conversion of the bridge loan and shares issued in exchange for
the cancellation of the $600,000 in advances from our stockholders, for gross
proceeds of $9.0 million. As of June 30, 1999, we had $3.5 million in cash and
cash equivalents and had borrowed $320,000 under credit lines.
Net cash used in operating activities was $21,000 and $65,000 for the years
ended December 31, 1996 and 1997, respectively, primarily the result of net
losses of $80,000 and $414,000, which were partially offset by increases in
accounts payable and accrued expenses. Net cash provided by operating activities
was $935 for the year ended December 31, 1998, the result of a net loss of $1.7
million, which was offset by increases in accounts payable and accrued expenses.
Net cash used in operating activities was $4.4 million for the six months ended
June 30, 1999 primarily the result of the net loss of $5.5 million and the
increase in accounts receivable and prepaid expenses. The increase in account
receivable was partially due to the Company's extension of normal credit terms
in the ordinary course of business, and generally requiring fewer customers to
pay for services in advance. This net loss and the increases in accounts
receivable and prepaid expenses were partially offset by increases in accounts
payable and accrued expenses.
Net cash used in investing activities was $45,000, $70,000 and $102,000 for
the years ended December 31, 1996, 1997 and 1998 respectively and $982,000 for
the six months ended June 30,
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<PAGE> 24
1999. Cash used in investing activities was primarily related to purchases of
property and equipment.
Net cash provided by financing activities was, $65,000, $127,000 and
$126,000 for the years ended December 31, 1996, 1997 and 1998, respectively, and
$8.9 million for the six months ended June 30, 1999. Cash provided by financing
activities in 1997 and 1998 resulted from borrowings of short-term debt, and was
partially offset by payments of capital leases. Cash provided from financing
activities for the six months ended June 30, 1999 resulted from the proceeds
received upon issuance of preferred stock.
We do not have any material commitments for capital expenditures. We
currently plan to incur approximately $2.0 million in capital expenditures
during 1999.
We believe that the net proceeds from this offering, together with our cash
resources and available credit facilities, will be sufficient to meet our
anticipated cash needs for working capital, repayment of debt and capital
expenditures for at least the next twelve months. After that time, we may need
additional capital. However, we may need to raise additional funds sooner to
fund our planned expansion, to develop new or enhanced products or services, to
respond to competitive pressures or to make acquisitions. We cannot be certain
that additional financing will be available to us on favorable terms. If
adequate funds are not available on acceptable terms, we may not be able to
continue or expand our business.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruption of operations for any
company using such computer programs or hardware, including, among other things,
a temporary inability to process transactions, send or receive email messages,
send invoices or engage in normal business activities. As a result, many
companies' computer systems may need to be upgraded or replaced in order to
avoid "Year 2000" issues.
We are a comparatively new enterprise, and, accordingly, the majority of
software and hardware we use to manage our business has all been purchased or
developed by us within the last 24 months. While this does not uniformly protect
us against Year 2000 exposure, we believe our exposure is limited because the
information technology, or IT, we use to mange our business is not based upon
legacy hardware and software systems. Generally, hardware and software design
within the current decade and the past several years in particular has given
greater consideration to Year 2000 issues. All of the software code we have
internally developed to manage our network and infrastructure, is written with
four digits to define the applicable year.
We are in the process of testing our internal IT and non-IT systems. The
testing we have completed has primarily been performed internally and, to date,
we have not retained any outside service or consultants to test or review our
systems for Year 2000 compliance. Based on the testing we have performed, we
believe that our software is Year 2000 compliant. We are testing our systems for
Year 2000 compliance and will continue to test these systems as development of
these systems progress.
In addition, we rely on software and hardware developed by third parties
both for our network and internal information systems and third party network
infrastructure providers to gain access to the Internet. To date, we have not
done any testing of third-party software or hardware to determine Year 2000
compliance. We have, however, reviewed certifications from our key suppliers of
hardware and networking equipment for our data centers that this hardware and
networking equipment are Year 2000 compliant. Additionally, we have reviewed
certifications from the providers of key software applications for our internal
operations that their software is
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<PAGE> 25
Year 2000 compliant. Based upon an initial evaluation of our broader list of
software and hardware providers, we believe that all of these providers are in
the process of reviewing and implementing their own Year 2000 compliance
programs. We intend to work with these providers to address the Year 2000 issue
and continue to seek assurances from them that their products are Year 2000
compliant.
As of June 30, 1999, we had incurred approximately $30,000 in expenses
related to the Year 2000 problem, and we anticipate that future costs associated
with our Year 2000 remediation efforts will not exceed $150,000. However, if we,
third party providers of hardware and software or our third party network
providers fail to remedy any Year 2000 issues, the result could be lost
revenues, increased operating costs, the loss of customers and other business
interruptions, any of which could harm our business. Moreover, the failure to
adequately address Year 2000 compliance issues in our products and systems could
result in claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time consuming to defend.
We have engaged in an ongoing Year 2000 assessment, but have not yet
developed any contingency plans. The results of our testing and the responses
received from third party vendors and service providers will be taken into
account in determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 of Notes to Consolidated Financial Statements for recently
adopted and recently issued accounting standards.
26
<PAGE> 26
BUSINESS
INDUSTRY BACKGROUND
EMERGENCE OF THE INTERNET AND E-COMMERCE
The Internet has emerged as an important tool for commerce and
communications. Jupiter Communications estimates that at the end of 1998 there
were over 77 million online users in the United States and that by the end of
2002 this number will increase to over 131 million. Email is one of the most
popular Internet applications and has broadened from a simple personal messaging
device to a powerful and cost-effective business tool. Jupiter Communications
projects that approximately 90 billion email messages were sent in the United
States in 1998.
The growing use of the Internet has led businesses to develop e-commerce
strategies to drive traffic to their Web sites, attract customers and facilitate
transactions. The Internet provides businesses with the ability to reach a
global audience, realize economies of scale, reduce overhead and operate with
minimal infrastructure, while providing consumers with increased buying power,
broad selections of goods and services and convenience. Forrester Research
projects that purchases of goods and services in the United States over the
Internet will increase from $51 billion in 1998 to $919 billion in 2002.
BRAND ADVERTISING VERSUS DIRECT MARKETING
Within the advertising industry, there are two widely-recognized types of
advertising, brand advertising and direct marketing. Brand advertising is
intended to generate brand awareness and create a specific image for a
particular brand. Direct marketing is intended to generate a specific consumer
response or action, generally the trial of a product or service. The direct
marketer attempts to maximize the number of desired responses per marketing
dollar invested, thereby achieving a high return on investment. According to the
Direct Marketing Association, or the DMA, of the projected $285 billion spent on
total advertising in the United States in 1998, 57% was invested in direct
marketing compared to 43% spent on brand advertising.
BRAND ADVERTISING ON THE INTERNET
The Internet is evolving into an important medium for advertisers due to
its interactive nature, global reach, rapidly growing audience and the
significant increases in e-commerce. Current methods of Internet advertising,
principally banner advertising, provide advertisers with the ability to reach
broad audiences and help advertisers establish brand awareness. Jupiter
Communications estimates that spending on Internet advertising will grow from
$1.9 billion in 1998 to $7.7 billion in 2002. However, response rates, or
click-throughs, to banner advertisements averaged approximately 0.7% as reported
by Forrester Research in March 1999, which indicates to us that this form of
Internet marketing is generally ineffective for purposes of direct marketing,
which requires a high rate of consumer response and trial.
DIRECT MARKETING ON THE INTERNET
Direct marketing has traditionally been conducted through a variety of
media, including direct mail. The Internet is particularly well suited as a
direct marketing medium because of its ability to target consumers, receive
immediate response, direct consumers to a precise point of sale and provide
measurable response information and return on investment per marketing dollar.
The Internet has the potential to enable direct marketers to increase consumer
response rates and decrease costs-per-transaction by targeting and delivering
direct marketing campaigns to particular consumers based on their profile,
self-selected interests and online behavioral characteristics. Jupiter
Communications reports that response rates for direct email campaigns targeted
to permission-based audiences are three to ten times greater than the response
rates of traditional direct mail methods and 5 to 7.5 times greater than the
response rates to banner
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<PAGE> 27
advertising. The following chart illustrates the average response rates for
banner advertisements, traditional direct mail and permission email:
LOGO
Sending promotional messages electronically can be 75% to 90% less
expensive than traditional direct mail through the U.S. Post Office, according
to the Gartner Group. By providing a more cost-effective method to reach target
customers, email direct marketing can improve the direct marketer's return on
investment.
Because direct marketers can achieve higher response rates and lower costs
through direct email marketing, a significant portion of the amount spent on
direct response marketing is expected to shift to the Internet. In 1998, the DMA
projected that over $160 billion was spent on direct response marketing in the
United States and that by 2003, $5.3 billion will be spent on Internet direct
marketing in the United States.
To date, Internet direct marketing practices have primarily focused on mass
mailing of promotional email messages. Although this method has been a low cost
direct marketing vehicle, the unsolicited and untargeted nature of the mailings,
commonly known as "spam," has resulted in negative consumer reaction, the recent
introduction of regulatory legislation and very low response rates.
OPPORTUNITIES FOR PERMISSION EMAIL DIRECT MARKETING
The limitations of traditional direct mail and the negative issues
associated with mass unsolicited emailing or "spam" has created a need for a
cost-effective solution that enables Internet marketers to use the Internet as
an efficient and effective means of direct marketing. This need is beginning to
be satisfied by an email direct marketing method that involves transmitting
email messages that are targeted to consumers who have expressed a prior
interest in receiving email messages on specific topics. This approach is being
referred to as permission email direct marketing. Permission email direct
marketing:
- provides direct marketers with a targeted means of reaching a highly
responsive audience at a lower cost and higher response rate than
traditional direct mail or banner advertising;
- permits reliable and real-time tracking of the effectiveness of campaigns
and return on investment feedback for direct marketers; and
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<PAGE> 28
- enables the consumer to control the marketing messages they receive by
sending promotional email messages only after receiving the consumer's
permission.
THE YESMAIL SOLUTION
We provide a comprehensive solution for permission email direct marketing
through our YesMail Network. Through our network of direct marketers, network
partners and third party list managers, and members, we can direct a campaign to
a targeted audience currently consisting of over 5 million self-selected
individuals. We link each of the three constituencies within our network with
proprietary technology to target, track and manage direct marketing campaigns
over the Internet.
Benefits to Direct Marketers. We provide direct marketers with access to a
broad reach of Internet users who have given their permission to receive
promotional information in specific categories of interest. We enable direct
marketers to optimize the performance of their direct marketing campaigns by
reaching targeted audiences based on specific profiles and response behaviors.
In addition, we provide direct marketers with comprehensive real-time tracking
and reporting services to monitor the effectiveness of their campaign. Our
proprietary products and services enable direct marketers to deliver the right
information to the right people at the right time, resulting in a direct
marketing campaign with a high return on investment for the direct marketer.
Benefits to Network Partners. Our network partners are primarily Web sites
that have developed or are in the process of developing permission-based email
lists. We enable our network partners to generate additional revenues from their
Web site visitors and customers by providing access to direct marketers, without
the costs and challenges associated with building and maintaining their own
direct marketing sales forces and email direct marketing technologies. Our
network partners benefit from our proprietary technology that tracks the
responses of their list members, thereby enhancing the value of their lists to
direct marketers. Network partners also benefit from the scale and reach of our
network and the organization of all network members into categories of interest
and response rate histories.
Benefits to Members. Membership in My.YesMail enables members to control
the flow of subscription information they receive via email. Our members benefit
by receiving messages from merchandisers that are targeted to their specific
interests. These messages inform our members about matters such as new product
offerings and special pricing promotions. We also provide these members with the
tools necessary to organize their email subscriptions and permission lists,
filter undesired promotional materials and control message frequency. We believe
that our ability to create a trusted brand name for permission email messages
will enable our members to have greater confidence in the messages they receive.
YESMAIL STRATEGY
Our objective is to be the leading provider of permission email direct
marketing. The key elements of our strategy are as follows:
Provide Effective Email Direct Marketing Programs. By combining proprietary
technology with our YesMail Network, we strive to enable direct marketers to
maximize the return on their investment. We intend to continue to improve our
ability to provide effective direct email campaigns to highly targeted and
responsive audiences. We provide a comprehensive permission email direct
marketing solution that enables marketers to cost-effectively target an audience
that has expressed a prior interest in receiving promotional email messages on
specific topics.
Maximize Targeted Reach Through a Permission-Based Network. We plan to
continue to expand our network of members who are permission-based, direct email
recipients because we believe that major marketers value broad reach through a
single provider. We intend to expand
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<PAGE> 29
our YesMail Network through a variety of relationships with our network partners
for whom we provide services, including permission list building, management and
reselling, and through an increase in the number of members in our own
proprietary list. We also intend to improve the depth and breadth of the
information we manage with respect to these members, principally in the area of
compiling response histories.
Expand Sales, Marketing and Client Services. We believe that effective
selling, marketing and client service are essential to expanding our business.
We plan to significantly increase the size of our direct sales force, broaden
our network partner development efforts and expand our advertising to direct
marketer clients and their advertising agencies. We intend to continue to build
on our expertise to provide permission email direct marketing services to our
direct marketer clients by leveraging our experienced direct marketing staff. We
also plan to continue to enhance our Web site as a tool for marketing, customer
service and campaign reporting.
Leverage Proprietary Technology. We intend to continue to develop, acquire
or license proprietary products and technology in such areas as message
targeting, response tracking, advanced messaging techniques, predictive buying
behavior and permission network development. We also plan to continue using
technology to deliver innovative products and services to our network partners
and to our members.
Build a Leading Brand. We believe that individuals will increasingly seek
to obtain more control over the marketing messages they receive. We plan on
leveraging our leadership position by closely associating the YesMail brand with
member-authorized messaging. We intend to implement our strategy through a
program that includes maintaining strict standards for permission and privacy,
supporting relevant industry initiatives and offering member-oriented products
for filtering and controlling their messages. We believe that by providing
individual members with products and services that help them control and manage
the messages they receive, we will build a positive relationship with our
members and a leading brand.
PRODUCTS AND SERVICES
THE YESMAIL NETWORK
The YesMail Network is a comprehensive permission email marketing program,
comprised of three constituencies: direct marketers, network partners and third
party list managers, and members. We provide proprietary products, technology,
direct marketing expertise and a direct sales force to meet the needs of these
constituencies to effectively deliver permission email marketing campaigns to a
targeted audience. In the quarter ended June 30, 1999, we sent over 8.9 million
permission email messages for over 120 direct marketers.
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Direct Marketers. Our customers include direct marketers whose objective is
to generate product sales from marketing campaigns that result in a high return
on investment. For the first six months of 1999, our largest direct marketing
customers have included the following customers which represented an aggregate
of $1.0 million, or 28% of our revenue for such period:
<TABLE>
<S> <C>
- - Allaire Corporation - Fingerhut Companies
- - Amazon.com - Flycast Communications Corporation
- - AT&T Interactive Communication - Get Smart
- - BeFree - GoTo.com
- - Brainplay - LifeMinders
- - Casinos Australasia - MotherNature.com
- - Earthweb - Office Max
- - eShare - Omaha Steaks
- - Fatbrain-Computer Literacy - Refer-It.com
</TABLE>
For the first six months of 1999, revenues from our largest customer,
Fingerhut, represented 13% of our revenues. In 1997 and 1998, no customer
accounted for more than 10% of our revenues.
We initiate relationships with direct marketers principally through our
direct sales force and often work in conjunction with the direct marketers'
advertising or promotional agencies. We assign a marketing account executive to
assist our direct marketer clients in executing permission email campaigns and
use our proprietary products to provide targeting, tracking and reporting
services. Our pricing is currently based on a cost per thousand emails for each
direct marketing message delivered. In the future, our pricing practices may
include performance-based measures such as cost per response or revenue sharing.
Our permission email campaigns are developed and executed quickly, often
within one week. Permission email direct marketing response time is very rapid
compared to traditional direct marketing. Our direct marketer clients frequently
receive 75% of their responses within 48 to 72 hours of delivery. We provide our
direct marketers with relevant information required to measure the results of
their campaigns, including consumer response, consumer activity on their Web
sites, conversion to purchase and campaign return on investment. Our current
proprietary products as well as products under development for direct marketers
include:
- eTrack is a proprietary email response tracking, reporting and analysis
program which direct marketers can readily and transparently incorporate
into their Web pages to track individual responses from click through to
as many as ten levels of response, including product purchase. Response
rates and return on investment calculations are reported real time to our
direct marketer clients through secure access to our Web site. Historical
responses to all campaigns are recorded in order to build individual
response data files for each permission list member.
- eCampaign is used to design and execute multi-tier direct marketing
campaigns with targeted promotional messages based on member responses to
prior messages.
- eTarget is designed to provide selection and sampling technology to match
our direct marketer client's message with the best targeted audience from
the YesMail Network. eTarget will also schedule the delivery of email
messages, collect payment information and automatically generate notices
of messaging status.
- ePredict is being designed to utilize the database of member response
histories developed in eTrack to enable improved targeting and modeling
of predictive selling. Direct marketers will benefit from the ability to
target the most frequent responders within specific interest categories.
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Our eTrack and eCampaign products were launched in April 1999 and our
eTarget product was launched in July 1999. We expect to introduce ePredict by
the end of the third quarter of 1999.
YesMail Network. The YesMail Network provides access to over 5 million
individuals who have given their permission to receive direct marketing messages
in specific categories of interest to them. We provide direct marketers access
to these individuals through our own proprietary list, lists from our network
partners, primarily Web sites that have developed or are in the process of
developing their own permission email lists, and third party list managers. Our
relationships with our network partners include our exclusive management of our
network partners' lists for which we pay our network partners a percentage of
revenues derived from the sale of these lists. Our network also includes
re-seller arrangements under which we pay third party list managers a fixed fee
for the nonexclusive use of their list for a specific campaign. All network
partners and third party list managers must meet our YesMail consumer permission
policy requirements, which mandate that each list member has given their prior
permission to receive promotional messages and has the ongoing opportunity to
retract their permission. Our objective is to increase the mix of our network
partners from lower margin reseller relationships to higher margin contractual
managed arrangements and our proprietary member base.
Our network partners use our products and services to generate additional
revenue from their existing email lists, but only with respect to the members of
their permission email lists who have given their prior permission to receive
emails. Our ePredict product is being designed to enable our network partners to
receive further revenues for those list members who have a demonstrated history
of responsiveness.
In the first quarter of 1999, we began to enter into contracts to
exclusively build and manage permission email lists for our network partners.
These contracts are generally for an initial term of 1 to 3 years, with an
annual automatic renewal. Pursuant to these contracts, our network partners
share the revenues we receive when we send promotional email messages to persons
on their permission lists. In addition, as part of our contractual relationship,
we provide our network partners with the following services: build and manage
their permission members, convert general lists to permission email lists, track
historical responses, build databases on each permission list member, and report
and analyze network usage. As of August 14, 1999, the list of managed network
partners includes the following:
<TABLE>
<S> <C>
- - Alloy Online, Inc. - Infophil, Inc.
- - BroadcastMusic.com - Internet Marketing Group, Ltd.
- - Colleges.com, Inc. - Interactive Toaster Company, Inc.
- - Cybergold, Inc. - MapQuest.com, Inc.
- - Did-It.com, Inc. - Mpath Interactive, Inc.
- - Doog Web Site Promotions - Quantum Computer Services
- - Earthweb, Inc. - PeaPod, Inc.
- - eFax.com - PlanetOut Corporation
- - Financial Services Online, Inc. - SodaMail, LLC
- - Free Drive, Inc. - Soupserver.com
</TABLE>
In addition to our network partners, we have reseller arrangements with
third party list managers, under which we pay a fixed fee for the nonexclusive
use of their list for a specific campaign. Participation in the YesMail Network
provides our network partners and third party list managers with the reach and
visibility that are important to direct marketers. By combining their permission
email lists with those of other network partners in our YesMail Network, network
partners can benefit from increased reach, targeting and segmentation.
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YesMail Members. The individuals, or YesMail members, who receive emails
from our direct marketers also benefit from the YesMail Network because we
enable them to control the email messages they receive. We believe that by
giving these members more control over their email boxes we can establish a
beneficial relationship for all of the YesMail Network constituents. In May
1999, we introduced two applications, My.Interests and My.Profile, as part of
the My.YesMail suite of online applications, and in the third quarter of 1999,
we plan to introduce two more applications, My.Subscriptions and My.Events.
These applications will provide our YesMail members with tools, to control the
emails they receive, such as:
- My.Interests allows members to select from over 20 categories and over
250 subcategories. The My.Interests profile quickly and easily helps
members define what messages they do and do not want to receive.
- My.Profile is an application that enables our members to select and edit
the information categories and subcategories that suit their particular
interests. Members can control where information relating to each
category is sent, allowing them to receive emails related to their jobs
at their office email address and emails related to their hobbies at
home.
- My.Subscriptions is being designed to assist members in managing the
lists, newsletters and sites to which they subscribe. My.Subscriptions
software also is being designed to help members process subscription
cancellations.
- My.Events is being designed to remind members of birthdays,
anniversaries, holidays, business meetings or other events. Additionally,
after the member has set up their My.Events profile, our software is
being designed to automatically send them an email reminder of the event
and include some suggestions that might compliment their event. For
example, a birthday reminder might include a link to an online flower or
greeting card merchant.
SALES AND MARKETING
We sell our services to direct marketers principally through our direct
sales force. As of June 30, 1999, we had 20 direct sales professionals in
Chicago, Atlanta, Cincinnati, Los Angeles and San Francisco. We plan to
significantly increase the size of our sales force and open additional offices
over the next 12 months.
Our direct sales force consists of internal representatives and field sales
account executives. Our sales and marketing teams work together to target
prospective clients, focusing initially on industry sectors, individuals and
advertising agencies that are active users of Internet advertising and/or direct
marketing programs. A sales representative, in conjunction with a marketing
account executive, typically works with the key decision-makers and advertising
agencies for the prospective client. Our sales and marketing personnel receive
special training in direct marketing, interactive advertising, direct response
marketing and Internet advertising techniques.
Our marketing program is designed to build and promote our brand and to
generate qualified leads for our sales team. We do this through an integrated
business to business marketing program that includes print advertising in
marketing and Internet trade publications, permission direct email, direct mail
and banner advertising. We also promote our business through trade show
participation, speaking engagements, our weekly newsletter, WebPromote Weekly
and other public relations programs.
We have implemented a program to build our brand name with individual
consumers. Our goal is to establish our brand as the recognized and trusted
provider of permission-based information direct to consumers' email boxes. We
are building our brand and our relationships with consumers through special
products, including My.YesMail, which is distributed for free through our
yesmail.com Web site and our network affiliate partners. We reinforce our brand
name by having our name appear in the "from" line in most of the permission
direct email
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messages we send for our direct marketer clients. We plan additional consumer
marketing programs later this year.
Recently, we embarked on an anti-spam awareness campaign. We have
participated in a number of conferences and pursued a marketing strategy in
pursuit of this campaign. At the request of the Direct Marketing Association and
the Association of Interactive Media, we are developing a curriculum to provide
the members of these organizations, direct marketers, with information on
developing effective and responsible email marketing programs. In addition, we
are members of TrustE and BBBOnline, consumer privacy associations focused on
safeguarding the privacy and security of Internet consumers. Further, we devote
resources to the continuing development of My.YesMail, a set of shopping tools
designed to help our members select and control the kinds of information they
wish to receive.
TECHNOLOGY
In offering permission email delivery services, we employ advanced custom
software and hardware, combining internal expertise with industry-standard
technology to create a proprietary infrastructure.
EMAIL TECHNOLOGY
We have developed a scalable proprietary email solution that can create and
deliver personalized emails to targeted members in multiple email formats such
as plain text, HTML and AOL-specific. We can also personalize the content of the
message specifically to each member. In addition to supporting high levels of
email output, we also employ sophisticated automatic routing of email we
receive. Inbound traffic could include reports of undeliverable email and
confirmations of customer requests to be included or excluded from an
information service. Our solution allows for monitoring of all stages of an
email campaign as well as the recording of key statistics regarding the
campaign.
TRACKING
Tracking is the mechanism by which we record a history of events that a
member performs in response to our permission email campaign and subsequent
visits to the advertiser's Web site. Because the email we send can be
personalized, we are able to embed unique elements in an email message that
allows our tracking technology to identify members even before they click-
through to the advertiser. We can record each action that the member performs on
an advertiser's Web site and are able to use this information to help predict
the behavior of those members with regard to new advertising campaigns.
SNIFFING
Sniffing is the mechanism by which we gather additional data on a member
through recording freely available user information, from sources such as their
browser, during viewing sessions of an advertiser's Web site. With this
technology, we are able to gain additional information to help target members,
as well as improve the success rates of our campaigns. We use sniffing to learn
what email client is being used, for identifying email format capabilities such
as plain text or HTML and identifying a member's location. This is accomplished
by looking up the Internet address assigned when they connected to the Internet.
We may also take this information and cross-reference it with other databases,
including third-party Internet resources, and record the additional information
in our databases for future targeting.
SECURITY
Information recorded about members is not released to external parties.
Internally, the security and privacy of this information is guarded in several
ways. Our employees are on a network that is physically separate from the
network that sends the emails. Access to our databases and security
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control points is limited to select members of our information technology group.
Each action by the member to request to be included or excluded from an
information service, to change list memberships, or to request pricing or other
key data points is tracked and maintained to provide an audit trail for members,
network partners and marketers in order to protect privacy and choice. Our
Web-based products utilize industry-standard secure user authentication, and
each function that is performed re-verifies security rights each time it is
employed. We employ a proprietary user account security system to provide an
additional level of security.
DATA CENTERS AND NETWORK ACCESS
Our computer servers are grouped into three task areas: emailing, tracking
and Web serving, and corporate email and connectivity. Each area is
independently connected to the Internet through separate CheckPoint Firewall-1
servers. This architecture ensures that our corporate functions remain separate
from mission-critical applications and Web server traffic, while still providing
backup options in case of system failure.
Our data centers use Compaq Proliant servers running Windows NT and Sun
servers running the Solaris operating system. We use Microsoft SQL Server 7.0
for our transaction databases and Oracle for our financial databases. Our
products are built on three tiers of functionality: user interface, execution of
program code and access to stored database functions and data. By separating
these tiers, each element becomes reusable and scalable to support growth.
Our Internet connectivity solution allows us to deliver emails to several
of the top members at a fraction of the normal delay of traditional Internet
connections without having to ever go through the backbone of the Internet. We
accomplish this through multiple T-1 Internet connections provided by Qwest
Communications Corporation and Advanced Information Systems, Inc. We employ
sophisticated monitoring technology to tract the status of our network,
connectivity and throughput of our own network in addition to those through
which we connect.
All of our systems are backed up on a regular schedule with onsite copies
in fireproof storage. Backups are regularly rotated to offsite secure storage.
We seek to ensure the maximum uptime of our network through backup electrical
power systems, continuously updated and available backup hard drive systems,
computer parts that can be replaced without shutdown and separate physical sites
that can take over in the case of catastrophic failure.
LICENSED TECHNOLOGY
We license technology from third parties that is incorporated into our
products. Specifically, we have entered into a nonexclusive software license
agreement with Revnet Systems, Inc. relating to email delivery technology. Under
this agreement, we are obligated to pay Revnet a fee of $325,000 per year in
addition to any service fees incurred during the term of the agreement. The
service fees under this license represent fees for implementation and training
services provided by Revnet. These fees are paid monthly as incurred. As of June
30, 1999, we have not incurred any of these service fees and do not anticipate
incurring any material service fees under this license. This agreement is for an
initial term of two years which expires in March 2001.
COMPETITION
We compete in the market for Internet advertising and email direct
marketing, which is intensely competitive and rapidly changing. This market is
highly fragmented with the largest companies accounting for only a small portion
of the market in 1998. We expect that competition will increase significantly in
the near-term because of the attention the Internet has received as a means of
advertising and direct marketing and because there are no significant barriers
of entry into the market. Our primary long-term competitors may not have entered
the market yet because our market is new. Competition could result in price
reductions, changes in the way services are priced, reduced gross margin and
loss of market share, any of which could materially adversely affect our
business.
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Many of our current and potential competitors have greater name
recognition, longer operating histories, larger customer bases and significantly
greater financial, technical, marketing, public relations, sales, distribution
and other resources. Some of our potential competitors are among the largest and
most well-capitalized companies in the world. In addition, some of our
competitors may include Web site owners who choose to manage their own
permission email lists. We expect to face competition from these and other
competitors, including:
- Internet portals who offer direct email services to their email lists
such as Excite and Yahoo!;
- traditional list brokers such as American List Counsel and Venture
Communications;
- banner advertising managers such as DoubleClick, 24/7 Media and Flycast
Communications;
- independent list managers;
- incentive-based subscriber lists such as MyPoints and Netcentives; and
- customer management and retention service companies such as Digital
Impact and Post Communications.
If one or more of our current or future competitors were to achieve leading
positions in the industry or if they were to expand relationships with
significantly larger companies through mergers, acquisitions or otherwise, our
business could be seriously harmed. In addition, potential competitors may
bundle or incorporate the functionality of our products into their products in a
manner that eliminates the need for our products or discourages users from
purchasing our products.
INTELLECTUAL PROPERTY RIGHTS
Our success and ability to compete are substantially dependent upon our
technology and intellectual property. While we rely on copyright, trade secret
and trademark law to protect our technology and intellectual property, we
believe that factors such as the technological and creative skills of our
personnel, new product and service developments, frequent product and service
enhancements and reliable product and service maintenance are more essential to
establishing and maintaining an intellectual property leadership position. We
have no patents or patent applications pending. Others may develop products and
services that are similar or superior to ours.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners and generally control access to
and distribution of our products, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products, services
or technology. Policing unauthorized use of our proprietary information is
difficult, and the steps we have taken might not prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as do the laws of the United States.
Our products and services operate in part by collecting and utilizing data
derived from user activity on the YesMail Network. This information is used to
target marketing materials and to predict the performance of these materials.
This creates the potential for claims to be made against us, either directly or
through contractual indemnification provisions with customers, including
negligence, copyright or trademark infringement, personal injury, invasion of
privacy or other legal theories. In addition, others may claim rights to this
information. It is also possible that if any such information contains errors,
third parties could make claims against us for losses incurred in reliance on
such information. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.
Substantial litigation regarding intellectual property rights exists in the
technology industry. From time to time, third parties have asserted and may
assert exclusive patent, copyright, trademark
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and other intellectual property rights to technologies and related standards
that are important to us. We expect that we may increasingly be subject to
infringement claims as the number of competitors in our industry segments grows
and the functionality of products in different industry segments overlaps. In
addition, we believe that many of our competitors have filed or intend to file
patent applications covering aspects of their technology that they may claim our
intellectual property infringes. Although we have not been party to any
litigation asserting claims that allege infringement of intellectual property
rights, we cannot assure you that we will not be a party to litigation in the
future. Any third party claims, with or without merit, could be time-consuming
to defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us, if at all. A successful claim of product
infringement against us could harm our business.
GOVERNMENT REGULATION
There is a growing body of laws and regulations applicable to access to or
commerce on the Internet. Due to the increasing popularity and use of the
Internet, it is likely that a growing number of laws and regulations will be
adopted at the international, federal, state and local level with respect to the
Internet or email direct marketing services covering issues such as user
privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of products and services. Further, the growth and
development of the market for email direct marketing may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The adoption of any additional laws or
regulations may impair the growth of the Internet or email direct marketing,
which could, in turn, decrease the demand for our products and services and
increase our cost of doing business, or otherwise harm our business. Moreover,
the applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business or the
application of existing laws and regulations to the Internet could harm our
business.
Legislation has recently been enacted in several states relating to the
sending of unsolicited emails, a practice commonly referred to as "spamming."
The federal government and several states, including New York, are considering,
or have considered, similar legislation. Although the provisions of these
current and contemplated laws vary, they generally limit or prohibit both the
transmission of unsolicited emails and the use of familiar spamming techniques
such as the use of forged or fraudulent routing and header information. Some
states, including California, require that unsolicited emails include opt-out
instructions and that senders of such emails honor any opt-out requests, a
requirement that is consistent with our own permission email policies. We
believe that our permission email system will not be affected by such
legislation because we do not send unsolicited messages and because our current
practices are intended to comply with current and proposed legislation. However,
there can be no assurance that such legislation or similar legislation will not
also affect permission email marketing in a way that could force us to change
our business practices, particularly in light of the rapidly evolving state of
the law in this area. In such event, our business could suffer.
EMPLOYEES
As of June 30, 1999, we had 71 employees, including 32 in sales and
marketing, 14 in general and administrative functions, 13 in operations and 12
in research and development. We are not subject to any collective bargaining
agreements and believe that our employee relations are good. Competition for
employees in our industry is intense and our future success depends on our
ability to attract, retain and motivate highly-skilled employees.
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FACILITIES
Our principal executive offices are located in Vernon Hills, Illinois,
where we lease approximately 8,700 square feet under the terms of a lease that
expires in October 2003. We intend to open a business and sales office in the
San Francisco, California and New York areas in the third quarter of 1999. We
are currently seeking additional space in the Chicago area to meet our needs and
believe it will be available on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial conditions. We may in the future be
party to litigation arising in the course of our business, including claims that
we allegedly infringe third-party trademarks and other intellectual property
rights. These claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of June 30, 1999,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
David M. Tolmie...................... 44 Chief Executive Officer, President and Director
David B. Menzel...................... 37 Chief Financial Officer and Vice President, Finance
and Administration
Mark D. Boyce........................ 41 Vice President, Product Management and Operations
Peder J. Jungck...................... 32 Chief Technology Officer
D. Todd Love......................... 36 Vice President, Network Development
Michael R. Mooradian................. 41 Vice President, Sales
Anthony Priore....................... 41 Vice President, Marketing
John G. Vandegrift................... 32 List Partner Program Advisor and Director
Kenneth D. Wruk...................... 31 Vice President, Strategic Alliances and Chairman
of the Board of Directors
Gian M. Fulgoni(1)(2)................ 51 Director
Alexander F. Hern(1)................. 35 Director
Michael A. Santer(1)(2).............. 33 Director
Robert W. Shaw(2).................... 51 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
David M. Tolmie has served as Chief Executive Officer and President since
joining yesmail.com on January 1, 1999 and has been a member of the Board of
Directors since May 1999. From September 1997 until January 1999, Mr. Tolmie was
with Platinum Venture Partners, where he served as Chief Executive Officer in
Residence of their e-commerce and Internet services group. From December 1993
until September 1997, Mr. Tolmie was Senior Vice President of Operations at
Bally Total Fitness, Inc., a nationwide health and fitness company. From
September 1990 until December 1993, Mr. Tolmie was President of Foundation
Properties, a real estate development, sales and marketing company. From
December 1985 until September 1990, Mr. Tolmie was a Corporate Vice President at
Bally Total Fitness, Inc. From December 1983 until November 1985, Mr. Tolmie was
a consultant at McKinsey & Co., an international management consulting firm.
From August 1980 to December 1983, Mr. Tolmie was a Marketing Manager with
General Mills, Inc., a consumer products company. Mr. Tolmie holds a B.A. with
distinction in economics from the University of Virginia and an M.B.A. from
Harvard University.
David B. Menzel has served as Chief Financial Officer and Vice President,
Finance and Administration since joining us in April 1999. From August 1994
until April 1999, Mr. Menzel was the Chief Financial Officer of Campbell
Software, a computer software company. From January 1984 until July 1994, Mr.
Menzel was in the Audit and Financial Consulting division of Arthur Andersen.
Mr. Menzel holds a B.S. in accounting and a Masters in accountancy, both from
Florida State University.
Mark D. Boyce joined us in December 1998 as Vice President, Product
Management and Operations. From September 1996 until October 1998, Mr. Boyce was
head of the Internet division for the Aberdeen Group, an information services
company. From January 1993 until August 1996, Mr. Boyce was President of
Synthesis, an Internet services company. From 1987 until January 1993, Mr. Boyce
was a Vice President of Marketing for Anixter, Inc., an international
distributor of networking products. Mr. Boyce holds a B.A. in economics from
Colgate University and an M.B.A. from Dartmouth College.
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Peder J. Jungck has served as Chief Technology Officer since joining us in
February 1999. From March 1997 until February 1999, Mr. Jungck was Chief
Information Officer of Remington Associates, Ltd., an Internet consulting firm.
From June 1994 until March 1997, Mr. Jungck was Vice President of Production and
Engineering at TerraGlyph Interactive Studios, L.P., a multimedia entertainment
company. Mr. Jungck holds a B.A. in mathematics and computer science from Beloit
College.
D. Todd Love joined us in August 1999 as Vice President, Network
Development. From November 1998 until August 1999, Mr. Love was Vice President
for American List Counsel, an interactive database marketing and management
group. From November 1987 through November 1998, Mr. Love was employed by Direct
Media, Inc., a direct marketing agency, as Group Director and Vice President
from January 1993 through November 1998. Mr. Love holds a B.A. in communications
from the University of New Hampshire.
Michael R. Mooradian has served as Vice President, Sales since joining us
in May 1999. From August 1996 until May 1999, Mr. Mooradian was Vice President
of Worldwide Sales for the Giga Information Group, an information technology
research company. From January 1996 until July 1996, Mr. Mooradian was Vice
President of Sales for Timeline, Inc., a financial reporting software company.
From July 1991 until January 1996, Mr. Mooradian was a Regional Director at
Comshare, Inc., an enterprise software company. Mr. Mooradian holds a B.S. in
business administration from DePaul University.
Anthony Priore joined us in March 1999 as Vice President, Marketing. From
May 1998 to December 1998, Mr. Priore was Executive Vice President and Managing
Director at Chicago Creative Partnership, an advertising agency. From September
1995 until May 1998, Mr. Priore was Vice President of Marketing at Peapod, Inc.,
an e-commerce grocery delivery company. From September 1991 to September 1994,
Mr. Priore was Vice President at Leo Burnett, an international advertising
agency. Mr. Priore holds a B.S. in journalism and an M.S.A., from Northwestern
University.
John G. Vandegrift has served as List Partner Program Advisor since April
1999 and as a member of our Board of Directors since July 1997. As our List
Partner Program Advisor, Mr. Vandegrift develops relationships with our network
partners. From January 1999 until March 1999, Mr. Vandegrift was the Interim
Chief Executive Officer of Frictionless Commerce, Inc., an Internet software
company. From December 1997 until December 1998, Mr. Vandegrift was Marketing
Senior Executive with Compaq Computer Corp. From May 1993 to July 1998, Mr.
Vandegrift was Executive Vice President of Marketing and Business Development
and then President of TAC Systems, a communications company. Mr. Vandegrift
holds a B.S. from Texas A&M University and a M.S. from the University of
Alabama.
Kenneth D. Wruk is one of our co-founders and has served as Chairman of the
Board of Directors since our inception in November 1995. From December 1992
until November 1995, Mr. Wruk was a lead software engineer at Safeco
Corporation, a cellular communication company. Mr. Wruk holds a B.S. in
electrical engineering and an M.B.A., from Northern Illinois University.
Gian M. Fulgoni has served as a member of our Board of Directors since
March 1999. Since November 1998, Mr. Fulgoni has been Chief Executive Officer of
Lancaster Enterprises, LLC, an investment firm. From 1986 until November 1998,
Mr. Fulgoni was Chief Executive Officer of Information Resources, Inc., a market
research company. Mr. Fulgoni continues to serve as a member of the board of
directors of Information Resources, Inc., a position that he has held since
1981. Mr. Fulgoni has also served as a member of the board of directors of
Platinum Technology, Inc., a software company, since 1990. Mr. Fulgoni holds a
B.S. with honors, in physics from Manchester University and a M.A. in marketing
from Lancaster University.
Alexander F. Hern has been a member of our Board of Directors since
February 1999. Mr. Hern is the founder and general partner of Strategic
Acquisition Ventures, Ltd., a venture
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capital firm. Mr. Hern was a co-founder of Inktomi Corporation, a publicly
traded Internet services company. From 1996 until January 1998, Mr. Hern served
as Chairman of the Board and Chief Executive Officer of Military Commercial
Technologies, Inc., a military technology company. From 1994 until 1996, Mr.
Hern served as an investor in and advisor to a broad range of technology
companies.
Michael A. Santer has been a member of our Board of Directors since
February 1999. Mr. Santer is a co-founder and has been a general partner of
Platinum Venture Partners, a venture capital firm, since its inception in
February 1992. At Platinum Venture Partners, Mr. Santer has sponsored
investments in over a dozen companies that have completed public offerings or
successful mergers, five of which were Internet-focused companies. Mr. Santer
holds a B.S. in management information systems from the University of Dayton and
a Masters of Management from the J.L. Kellogg School of Management at
Northwestern University.
Robert W. Shaw served as a member of our Board of Directors since April
1999. Since November 1998, Mr. Shaw has been a member of the board of directors
and Chief Executive Officer of USWeb/ CKS, an internet marketing services
company. From May 1992 until August 1998, Mr. Shaw was Executive Vice President
at Oracle Corporation, a software company. From 1989 until 1992, Mr. Shaw was a
partner at Booz Allen & Hamilton, a global management and consulting firm. From
1985 until 1989, Mr. Shaw was the Managing Partner of the information technology
practice at Coopers & Lybrand (currently PricewaterhouseCoopers LLP), an
international accounting firm. Mr. Shaw holds a B.A. in business administration
from the University of Texas.
We believe the foregoing information includes all of the business
experience of each of our directors and officers during the past five years.
BOARD COMPOSITION
We currently have authorized seven directors. Each director is elected at
the annual general meeting of our stockholders, by a vote of the holders of a
plurality of the voting power represented at such meeting. Each director holds
office until the annual general meeting of our stockholders and until his or her
successor has been elected. The executive officers serve at the discretion of
the Board. There are no family relationships among any of our directors or
executive officers.
BOARD COMMITTEES
Our Audit Committee reviews, acts on and reports to our Board of Directors
with respect to various auditing and accounting matters, including the selection
of our independent accountants, the scope of our annual audits, fees to be paid
to the independent accountants, the performance of our independent accountants
and our accounting practices. Messrs. Fulgoni, Hern and Santer are the members
of our Audit Committee.
Our Compensation Committee establishes salaries, incentives and other forms
of compensation for officers and other employees. This Committee also
administers our incentive compensation and benefit plans. Messrs. Fulgoni,
Santer and Shaw are the members of the Compensation Committee.
DIRECTOR COMPENSATION
Except for reimbursement of reasonable expenses incurred in connection with
serving as a director and the grant of stock options, directors are not
compensated for their service as directors. In May 1999, we granted each of
Messrs. Fulgoni and Shaw, non-employee directors of ours, an option to purchase
75,000 shares of common stock at an exercise price of $1.60 per share. These
options vest quarterly over a period of two years. At the discretion of our
Board of Directors, we may issue additional options to our directors at 100% of
the fair market value of our common stock, as reported on the Nasdaq National
Market, at the close of trading on the date of the grant.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our Compensation Committee is an officer or employee
of yesmail.com. No interlocking relationship exists between our Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company, nor has such an interlocking relationship
existed in the past.
EMPLOYMENT CONTRACTS
Mr. Tolmie is party to an employment agreement dated March 12, 1999,
effective as of January 1, 1999. Under the agreement, we agreed to pay Mr.
Tolmie an annual salary of $150,000 and a performance bonus of up to $50,000.
Mr. Tolmie also purchased 337,500 shares and 900,000 shares of our common stock
under two restricted stock purchase agreements. These shares may be repurchased
by us and may not be transferred until vested, except to family members or
trusts that agree to be bound by the restrictions in the purchase agreement. Mr.
Tolmie retains voting power with respect to these shares. The 337,500 purchased
shares shall vest, pro rata, semi-annually over four years, commencing May 18,
1999. The 900,000 purchased shares shall vest as to 337,500 shares on January 1,
2000, and 112,500 of the shares shall vest at the end of each six month period
thereafter, provided, however, all 900,000 shares shall vest seven months from
the day our stock begins trading on the Nasdaq National Market. In the event Mr.
Tolmie is terminated without cause he will be entitled to receive a severance
payment of $100,000.
Mr. Menzel is party to an employment agreement with us, dated April 2,
1999. Under the agreement, we agreed to pay Mr. Menzel an annual salary of
$140,000, a performance bonus of $50,000 and a discretionary bonus of up to
$50,000, and Mr. Menzel purchased 243,750 shares of our common stock under a
restricted stock purchase agreement. The purchased shares shall vest, pro rata,
semi-annually over four years, commencing April 26, 1999. These shares may be
repurchased by us and may not be transferred until vested, except to family
members or trusts that agree to be bound by the restrictions in the purchase
agreement. Mr. Menzel retains voting power with respect to these shares. We have
also agreed to pay Mr. Menzel a special bonus of $150,000 in three equal
installments on the six month, twelve month, and eighteenth month anniversary of
his date of hire; provided, however, Mr. Menzel may be required to repay all or
a part of this special bonus in some circumstances. In the event Mr. Menzel is
terminated without cause, he will be entitled to receive severance equal to six
months of his base salary and any unpaid amounts pursuant to the special bonus.
Mr. Boyce is party to an employment agreement, dated May 27, 1999. Under
the agreement, we agreed to pay Mr. Boyce an annual salary of $150,000 and a
performance bonus of up to $37,500, and Mr. Boyce purchased 243,750 shares of
our common stock under a restricted stock purchase agreement. The purchased
shares shall vest, pro rata, semi-annually over four years, commencing January
1, 1999. The shares may be repurchased by us and may not be transferred until
vested, except to family members or trusts that agree to be bound by the
restrictions in the purchase agreement. Mr. Boyce retains voting power with
respect to these shares. In the event that Mr. Boyce is terminated without
cause, he will be entitled to receive severance equal to six months of his base
salary.
Mr. Jungck is party to an employment agreement, dated February 15, 1999.
Under the agreement, we agreed to pay Mr. Jungck an annual salary of $140,000
and a performance bonus of up to $30,000, and Mr. Jungck purchased 243,750
shares of our common stock under a restricted stock purchase agreement. The
purchased shares shall vest, pro rata, semi-annually over four years, commencing
February 15, 1999. These shares may be repurchased by us and may not be
transferred until vested, except to family members or trusts that agree to be
bound by the restrictions in the purchase agreement. Mr. Jungck retains voting
power with respect to these
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shares. In the event that Mr. Jungck is terminated without cause, he will be
entitled to receive severance equal to six months of his base salary.
Mr. Love is a party to an employment agreement, dated August 10, 1999.
Under the agreement, we agreed to pay Mr. Love an annual salary of $175,000 and
a performance bonus of up to $100,000, and Mr. Love was granted an option to
purchase 168,750 shares of our common stock, at an exercise price of $9.87 per
share, under our stock option plan. The option shall vest, pro rata,
semi-annually over four years. In the event that Mr. Love is terminated without
cause, he will be entitled to receive severance equal to six months of his base
salary.
Mr. Mooradian is party to an employment agreement, dated April 17, 1999.
Under the agreement, we agreed to pay Mr. Mooradian an annual salary of $150,000
and a performance bonus of up to $150,000, and Mr. Mooradian was granted an
option to purchase 243,750 shares of our common stock, at an exercise price of
$1.60 per share, under our stock option plan. The option shall vest, pro rata,
semi-annually over four years. In the event that Mr. Mooradian is terminated
without cause, he will be entitled to receive severance equal to six months of
his base salary.
Mr. Priore is party to an employment agreement, dated March 3, 1999. Under
the agreement, we agreed to pay Mr. Priore an annual salary of $150,000 and a
performance bonus of $30,000, and Mr. Priore purchased 243,750 shares of our
common stock under a restricted stock purchase agreement. The purchased shares
shall vest, pro rata, semi-annually over four years, commencing March 8, 1999.
The shares may be repurchased by us and may not be transferred until vested,
except to family members or trusts that agree to be bound by the restrictions in
the purchase agreement. Mr. Priore retains voting power with respect to these
shares. In the event that Mr. Priore is terminated without cause, he will be
entitled to receive severance equal to six months of his base salary.
Mr. Vandegrift is party to an employment agreement, dated March 31, 1999.
Under the agreement, we agreed to pay Mr. Vandegrift an annual salary of
$144,000 and a quarterly performance bonus of up to $36,000, and Mr. Vandegrift
purchased 112,868 shares and 69,177 shares of our common stock under two
restricted stock purchase agreements. The 112,868 purchased shares vested on
March 25, 1999. As to the 69,177 purchased shares, 4,324 shares shall vest
monthly, commencing April 30, 1999 and 11,529 shall vest at the end of each
three months if Mr. Vandegrift meets pre-defined incentive goals. These 69,177
shares may be repurchased by us and may not be transferred until vested, except
to family members or trusts that agree to be bound by the restrictions in the
purchase agreement. Mr. Vandegrift retains voting power with respect to these
shares. Mr. Vandegrift is also entitled to receive up to $1,000 per month for
nine months as reimbursement for relocation and temporary living expenses. In
the event Mr. Vandegrift is terminated without cause, he will be entitled to
receive severance equal to one month salary and two months expense
reimbursement.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation earned for services
rendered to us in all capacities for fiscal 1998, by our former Chief Executive
Officer and President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS
---------------------------- ---- ------------ -------
<S> <C> <C> <C>
Kenneth D. Wruk(1).......................................... 1998 $34,382 $46,470
Former Chief Executive Officer
and President
</TABLE>
- ---------------
(1) Mr. Wruk resigned from his position as Chief Executive Officer and President
in January 1999.
Messrs. Tolmie, Menzel, Boyce, Jungck, Love, Mooradian, Priore and
Vandegrift were hired as executive officers subsequent to December 1, 1998 and
are compensated at annual rates of $150,000, $140,000, $150,000, $140,000,
$175,000, $150,000, $150,000 and $144,000, respectively. Please see
"-- Employment Contracts."
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant options to any of our executive officers in fiscal 1998.
However, in May 1999 we issued shares of our common stock to six of our
executive officers pursuant to restricted stock purchase agreements, and we
granted Mr. Mooradian an option to purchase our common stock pursuant to our
stock option plan. Please see "Related Party Transactions" and "-- Employment
Contracts."
COMPENSATION PLANS
1999 STOCK OPTION PLAN.
Our 1999 Stock Option Plan provides for the grant of incentive stock
options to employees and nonstatutory stock options and share purchase rights to
employees, directors and consultants. A total of 4,425,000 shares of common
stock have been reserved for issuance under our 1999 Stock Option Plan, of which
options to purchase 1,660,570 shares of common stock were outstanding as of
September 15, 1999. The number of shares of common stock reserved for issuance
under this plan will be subject to an annual increase on each anniversary
beginning January 1, 2000 equal to the lesser of:
- 1,500,000 shares;
- 4% of the outstanding shares on such date; or
- an amount determined by the Board.
The 1999 Stock Option Plan is currently administered by the Board of
Directors, although the Board may designate certain committees to administer the
1999 Stock Option Plan with respect to different groups of service providers.
Options and shares purchase rights granted under the 1999 Stock Option Plan
will vest as determined by the relevant administrator, and if not assumed or
substituted by a successor corporation will accelerate and become fully vested
in the event we are acquired. The exercise price of options and share purchase
rights granted under the 1999 Stock Option Plan will be as determined by the
relevant administrator, although the exercise price of incentive stock options
must be at least equal to the fair market value of our common stock on the date
of grant. Options granted under the 1999 Stock Option Plan generally vest over a
four-year period. The Board of
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<PAGE> 44
Directors may amend, modify or terminate the 1999 Stock Option Plan at any time
as long as such amendment, modification or termination does not impair vesting
rights of plan participants. The 1999 Stock Option Plan will terminate in 2009,
unless terminated earlier by the Board of Directors.
1999 EMPLOYEE STOCK PURCHASE PLAN.
Our 1999 Employee Stock Purchase Plan, or the Purchase Plan, provides our
employees with an opportunity to purchase our common stock through accumulated
payroll deductions. This plan will become effective upon the closing of this
offering. A total of 200,000 shares of common stock have been reserved for
issuance under the Purchase Plan, none of which have been issued. The number of
shares reserved for issuance under the Purchase Plan will be subject to an
annual increase on each anniversary beginning January 1, 2000 equal to the
lesser of:
- the number of shares issued under the Purchase Plan in the prior year; or
- an amount determined by the Board.
The Purchase Plan will be administered by the Board of Directors or by a
committee appointed by the Board. The Purchase Plan permits eligible employees
to purchase common stock through payroll deductions up to a maximum of $25,000
for all purchases ending within the same calendar year and up to a maximum of
2,000 shares for the first purchase period and 1,000 shares for each purchase
period thereafter. Employees are eligible to participate if they are employed by
us for at least 20 hours per week and more than five months in any calendar
year. Unless the Board of Directors or its committee determines otherwise, each
offering period will run for six months. The first offering period will commence
on the date of this prospectus and end on or about August 15, 2000, and new
offering periods will commence February 15, 2000 and every six months
thereafter. In the event we are acquired, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
option, the offering period then in progress will be shortened by setting a new
exercise date. The price at which common stock will be purchased under the
Purchase Plan is equal to 85% of the fair market value of the common stock on
the first or last day of the applicable offering period, whichever is lower.
Employees may end their participation in the offering period at any time, and
participation automatically ends on termination of employment. Generally, the
Board of Directors may amend, modify or terminate the Purchase Plan at any time
as long as such amendment, modification or termination does not impair the
rights of plan participants. The Purchase Plan will terminate at 2009, unless
terminated earlier in accordance with its provisions.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
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<PAGE> 45
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify other officers and
employees and our agents to the fullest extent permitted by law. We believe that
indemnification under our Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. Our Bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by any such person in any action or proceeding,
including any action by or in the right of yesmail.com, arising out of such
person's services as a director or executive officer of ours, any subsidiary of
ours or any other company or enterprise to which the person provides services at
our request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
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<PAGE> 46
RELATED PARTY TRANSACTIONS
GUARANTIES BY STOCKHOLDERS
In August 1998, we borrowed $320,000 from a third party lender, which loan
was guaranteed in full by each of Messrs. Kenneth D. Wruk, Kevin Manley, Keith
Speer and John Weiss.
We also have equipment lease obligations which are guaranteed, in varying
amounts, by Messrs. Wruk, Manley, Speer and Weiss. As of June 30, 1999, these
lease obligations had an aggregate outstanding balance of approximately
$449,000.
LOAN FROM DIRECTOR
In December 1998, we borrowed $1.0 million from Alexander F. Hern under a
promissory note. In connection with this transaction, we issued Mr. Hern a
warrant to purchase shares of our common stock in the event we did not comply
with the terms of the transaction. On May 18, 1999, Mr. Hern terminated the
promissory note and the warrant in exchange for shares of our series A preferred
stock which shares are convertible into 572,727 shares of our common stock.
ACQUISITION OF SUPERHIGHWAY CONSULTING
Under an Agreement and Plan of Merger, dated March 29, 1999, Superhighway
Consulting, Inc. was merged with and into us. Upon consummation of the merger,
we issued an aggregate of 7,500,000 shares of our common stock to the former
shareholders of Superhighway Consulting, Inc. These former shareholders of
Superhighway included the following officers and directors:
<TABLE>
<CAPTION>
NAME SHARES ISSUED
---- -------------
<S> <C>
Kenneth D. Wruk............................................. 2,152,778
Kevin Manley................................................ 2,152,778
Keith Speer................................................. 1,458,333
John Weiss.................................................. 1,458,333
</TABLE>
In connection with the merger, some of our stockholders were granted
registration rights. Please see "Description of Capital Stock -- Registration
Rights."
OPTION AMONG STOCKHOLDERS
Under an agreement among our founding stockholders in March 1999, Messrs.
Tolmie, Hern, Santer, Bryan Kennedy and Riverson Leonard are obligated to
transfer shares of our common stock to former Superhighway shareholders,
including Messrs. Wruk, Manley, Speer and Weiss who are officers and directors
and Jack Goldberg, Harvey Morris and Barbra Fischer who are employees, for an
aggregate consideration of $1.00. The purpose of this option was to provide the
former shareholders of Superhighway with an additional portion of our
outstanding shares in the event of an initial public offering of our securities
or the sale of our business in the event we did not undertake an initial public
offering of our securities. This option may be exercised by written notice when
we commence offering our capital stock to the public under a registration
statement filed with the Securities and Exchange Commission. Upon the initial
public offering of our common stock, assuming the closing price per share of our
common stock on the first day our common stock is publicly traded is $11.00, the
aggregate number of shares subject to this option would be 134,189 shares, or
approximately $1.5 million in value, based on shares
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<PAGE> 47
outstanding on June 30, 1999. However, the number of shares that can be acquired
by the former Superhighway shareholders depends on:
- the percentage of common stock held by Messrs. Tolmie, Hern, Santer,
Kennedy and Leonard, excluding stock options, restricted stock and common
stock issued upon conversion of series A preferred stock;
- the percentage of common stock held by the former Superhighway
shareholders, excluding stock options, restricted stock and common stock
issued upon conversion of series A preferred stock; and
- the closing price per share of our common stock on the first day our
common stock is publicly traded.
The above percentages may be diluted through any subsequent issuance of
shares, including this offering, but the ratio of stock ownership between the
former shareholders of Superhighway and our original founders will remain
four-to-one.
The purpose of this option was to provide former Superhighway shareholders
with additional consideration in order that they enter into the merger with us.
For additional information regarding this option among stockholders, please
see "Principal Stockholders" and Note 1 to Notes to Consolidated Financial
Statements.
ADVANCES FROM RELATED PARTIES
In March 1999, we borrowed an aggregate of $600,000 from three individuals,
including $300,000 from David M. Tolmie and $200,000 from Alexander F. Hern. On
May 18, 1999, the advances were exchanged for shares of our series A preferred
stock which shares are convertible into 343,637 shares of our common stock.
RESTRICTED STOCK ISSUANCES
In May 1999, we sold an aggregate of 2,394,546 shares of our common stock
to 6 employees at a price of $1.60 per share pursuant to restricted stock
purchase agreements. The price of our common stock was determined by our Board
of Directors which placed significant weight on the price of our series A
preferred stock. In determining this price, our Board believed that a slight
discount to the series A preferred stock was warranted in light of the
liquidation and other preferences of the preferred stock. Our employees
purchased these shares in exchange for notes issued to us, which are secured by
the shares purchased. The notes also provide for full recourse against the
borrower as to 75% of the amount of the note. The notes bear interest at 5.22%
per annum and are due and payable on the earlier of the sale of the underlying
common stock, May 2008 or termination of employment. These shares of common
stock are subject to repurchase options granted to us by the holders of the
shares. For additional information regarding the repurchase options, please see
"Management -- Employment Contracts." The purchasers of these shares are listed
in the following table:
<TABLE>
<CAPTION>
NAME SHARES PURCHASED
---- ----------------
<S> <C>
David M. Tolmie............................................. 1,237,500
David B. Menzel............................................. 243,750
Mark D. Boyce............................................... 243,750
Peder J. Jungck............................................. 243,750
Anthony Priore.............................................. 243,750
John G. Vandegrift.......................................... 182,046
</TABLE>
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<PAGE> 48
SERIES A PREFERRED STOCK FINANCING
On May 18, 1999, we issued and sold shares of our series A preferred stock,
which shares are convertible into 5,154,548 shares of our common stock, to
investors at a per share price of approximately $1.75 per common equivalent
share. The price of our series A preferred stock was determined through arms
length negotiations among us and investors not affiliated with us at the time of
this financing. Upon the closing of this offering, each share of series A
preferred stock will automatically convert into one share of common stock. The
investors in the financing included the following officers, directors and
principal stockholders and their immediate family members and related entities:
<TABLE>
<CAPTION>
EQUIVALENT
COMMON STOCK
NAME PURCHASED
---- ------------
<S> <C>
Platinum Venture Partners II, L.P. (Michael A. Santer is a
general partner).......................................... 1,145,455
Alexander F. Hern........................................... 200,455
David M. Tolmie............................................. 143,182
Gian Fulgoni................................................ 143,182
Webco & Co. (an investment vehicle controlled by Michael A.
Santer)................................................... 114,546
Donald Boyce (Mark D. Boyce's father)....................... 57,375
John G. Vandegrift.......................................... 57,273
John Tolmie (David M. Tolmie's brother)..................... 57,273
Robert W. Shaw.............................................. 57,273
Paul Tolmie (David M. Tolmie's brother)..................... 28,637
Joann Tolmie (David M. Tolmie's mother)..................... 28,637
Anthony Priore.............................................. 28,637
Michael R. Mooradian........................................ 14,318
David B. Menzel............................................. 10,473
</TABLE>
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<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of June 30, 1999, by
- each person known by us to be the beneficial owner of more than 5% of the
outstanding common stock;
- our former Chief Executive Officer;
- each of our directors; and
- all of our executive officers and directors as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o yesmail.com, Inc., 565 Lakeview Parkway, Suite 135, Vernon Hills,
Illinois 60061. The table includes all shares of common stock issuable within 60
days of June 30, 1999 upon the exercise of 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 the shares.
To our knowledge, except under applicable community property laws or as
otherwise indicated, the person named in the table have sole voting and sole
investment control with respect to all shares beneficially owned. The applicable
percentage of ownership for each stockholder is based on 16,924,094 shares of
common stock outstanding as of June 30, 1999, together with applicable options
for that stockholder. Shares of common stock issuable upon exercise of options
and other rights beneficially owned are deemed outstanding for the purpose of
computing the percentage ownership of the person holding those options and other
rights, but are not deemed outstanding for computing the percentage ownership of
any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE
OWNED BENEFICIALLY OWNED
------------------- --------------------
PRIOR TO AFTER
OWNER NUMBER OFFERING OFFERING
----- ------------------- -------- --------
<S> <C> <C> <C>
Kenneth D. Wruk(1)(2)................................ 2,191,296 12.9 10.8
Kevin Manley(1)(3)................................... 2,191,296 12.9 10.8
Michael A. Santer(4)(5)(6)........................... 1,811,251 10.7 8.9
Keith Speer(1)(7).................................... 1,484,425 8.8 7.3
John Weiss(1)(8)..................................... 1,484,425 8.8 7.3
David M. Tolmie(2)(9)................................ 1,455,682 8.6 7.2
Platinum Venture Partners II, L.P.(10)............... 1,145,555 6.8 5.6
David Brewer(11)(12)................................. 1,016,592 6.0 5.0
Aragon Ventures, LLC(13)............................. 844,773 5.0 4.2
John G. Vandegrift(14)............................... 239,319 1.4 1.2
Gian Fulgoni(15)(16)................................. 152,557 * *
Alexander F. Hern(4)(17)............................. 751,705 4.4 3.7
Robert W. Shaw(18)(19)............................... 66,647 * *
All executive officers and directors as a group (12
persons)(20)....................................... 7,699,569 45.5 37.9
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Messrs. Wruk, Manley, Speer and Weiss are our founders. Includes the
following shares which the stockholder has the right to purchase from other
stockholders at the time of the public offering under a founders' agreement
dated March 29, 1999, assuming a $11.00 price per share at the close of the
first day our shares of common stock are publicly traded. See "Related
Party Transactions" and Note 1 to Notes to Consolidated Financial
Statements.
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<PAGE> 50
<TABLE>
<CAPTION>
NAME SHARES SUBJECT TO OPTION
---- -------------------------
<S> <C>
Kenneth D. Wruk...................................... 38,518
Kevin Manley......................................... 38,518
Keith Speer.......................................... 26,092
John Weiss........................................... 26,092
</TABLE>
(2) Includes 688,889 shares held by Wruk Partners, L.P., a limited partnership
in which Mr. Wruk is the general partner.
(3) Includes 618,169 shares held by Manley Partners, L.P., a limited
partnership in which Mr. Manley is the general partner.
(4) Includes the following shares which the stockholder is obligated to
transfer to other stockholders at the time of the public offering under a
founders agreement dated March 29, 1999 assuming a $11.00 price per share
at the close of the first day our shares of common stock are publicly
traded. See "Related Party Transactions" and Note 1 to Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
NAME SHARES SUBJECT TO OPTION
---- -------------------------
<S> <C>
Michael A. Santer.................................... 39,452
David M. Tolmie...................................... 5,367
Alexander F. Hern.................................... 39,452
</TABLE>
(5) Mr. Santer's address is c/o Platinum Venture Partners, 555 Twin Dolphin
Drive, Suite 400, Redwood City, California 94065.
(6) Includes 1,145,455 shares held by Platinum Venture Partners II, L.P. and
114,546 shares held by Webco & Co. Mr. Santer is a general partner of
Platinum Venture Partners II, L.P. and maintains control over Webco & Co.
and disclaims beneficial ownership of the shares held by these entities
except with respect to his pecuniary interest.
(7) Includes 346,875 shares held by Speer Partners, L.P., a limited partnership
in which Mr. Speer is the general partner. Also includes 18,750 shares held
by Bartly J. Loethen, as trustee for the Linda Blue Dynasty Trust, an
irrevocable trust created by Mr. Speer. Mr. Speer disclaims beneficial
ownership of the shares held by the Linda Blue Dynasty Trust except with
respect to his pecuniary interest.
(8) Includes 356,250 shares held by JN Weiss Partners, L.P., a limited
partnership in which Mr. Weiss is the general partner.
(9) Includes 1,237,500 shares subject to yesmail.com's right of repurchase
during a vesting period of four years and accelerated vesting in some
circumstances. Also includes 18,750 shares held by David M. Tolmie Dynasty
Trust, an irrevocable trust created by Mr. Tolmie for the benefit of his
minor children. Mr. Tolmie disclaims beneficial ownership of the shares
held by the David M. Tolmie Dynasty Trust except with respect to his
pecuniary interest.
(10) Platinum Ventures Partners II, L.P.'s address is 555 Twin Dolphin Drive,
Suite 400, Redwood City, California 94065.
(11) Mr. Brewer's address is c/o Aragon Ventures, LLC, 301 University Avenue,
Suite 440, Palo Alto, California 94301.
(12) Includes 844,773 shares held by Aragon Ventures, LLC. Mr. Brewer is a
general partner of Aragon Ventures, LLC and disclaims beneficial ownership
of the shares held by this entity except with respect to his pecuniary
interest.
(13) Aragon Ventures, LLC's address is 301 University Avenue, Suite 440, Palo
Alto, California 94301.
(14) Includes 182,046 shares subject to yesmail.com's right of repurchase during
a vesting period of four years and accelerated vesting in some
circumstances.
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<PAGE> 51
(15) Mr. Fulgoni's address is c/o Lancaster Enterprises, 65 E. Bellevue,
Chicago, Illinois 60611.
(16) Includes 9,375 shares subject to options which are exercisable within 60
days of June 30, 1999.
(17) Mr. Hern's address is 4350 W. Cypress, Suite 440, Tampa, Florida 33607.
(18) Mr. Shaw's address is c/o US Web Corporation, #2 Harrison Street, Top
Floor, San Francisco, California 94105.
(19) Includes 9,375 shares subject to options which are exercisable within 60
days of June 30, 1999.
(20) Includes 2,394,546 shares subject to yesmail.com's right of repurchase
during a vesting period of four years and accelerated vesting in some
circumstances. Also includes 18,750 shares subject to options which are
exercisable within 60 days of June 30, 1999.
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<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
60,000,000 shares of common stock, $0.0001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.0001 par value. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our Certificate of Incorporation and Bylaws, which
are included as exhibits to the Registration Statement of which this Prospectus
forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of June 30, 1999, there were 16,924,094 shares of common stock
outstanding which were held of record by 88 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of yesmail.com, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The holders of
common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the Board of Directors
determines the specific rights of the holders of such preferred stock. However,
the effects might include, among other things, restricting dividends on the
common stock, diluting the voting power of the common stock, impairing the
liquidation rights of the common stock and delaying or preventing a change in
control without further action by the stockholders. Immediately prior to the
closing no shares of preferred stock will be outstanding, and we have no present
plans to issue any shares of preferred stock.
WARRANTS
In August 1999, we issued a warrant to purchase up to 7,601 shares of
common stock at an exercise price of $2.67 per share to Great American Leasing
Company in connection with the establishment of a lease line of credit. The
warrant has a term of five years. In June 1999, we engaged Heidrick & Struggles
to conduct an executive search. In connection with this search, we agreed to
issue Heidrick & Struggles a warrant to purchase 17,968 shares of common stock
at an exercise price of $9.87 per share upon completion of the search. The
search was completed in September 1999.
REGISTRATION RIGHTS
As of June 30, 1999, the holders of 14,529,548 shares of our common stock
or their transferees are entitled to have us register their shares under the
Securities Act. These rights are
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<PAGE> 53
provided under the terms of agreements between us and the holders of these
securities. Subject to limitations in agreements, if we register any of our
common stock either for our own account or for the account of other security
holders, these holders are entitled to include their shares of common stock in
that registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. We will be responsible for paying all
registration expenses, and the holders selling their shares will be responsible
for paying all selling expenses.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Provisions of Delaware law and our Certificate of Incorporation and Bylaws
summarized below could make more difficult our acquisition by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control to first negotiate with us. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure us outweighs the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
STOCKHOLDER MEETINGS.
Under our Restated Certificate of Incorporation and Restated Bylaws, the
Board of Directors, the Chairman of the Board and the President may call special
meetings of stockholders but the stockholders may not call a special meeting.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS.
Our Restated Bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the Board of
Directors or a committee thereof.
DELAWARE ANTI-TAKEOVER LAW.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with some exceptions) the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction 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 prior to the determination of interested stockholder status, did own) 15%
or more of a corporation's voting stock. The existence of this provision would
be expected to have an anti-takeover effect with respect to transactions not
approved in advance by the Board of Directors, including discouraging attempts
that might result in a premium over the market price for the shares of common
stock held by stockholders.
UNDESIGNATED PREFERRED STOCK.
The authorization of undesignated preferred stock makes it possible for the
Board of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
yesmail.com. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management.
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<PAGE> 54
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is LaSalle National
Bank.
NASDAQ NATIONAL MARKET LISTING
We have been approved to list our common stock on The Nasdaq National
Market under the symbol "YESM."
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<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market
following this offering, the market price of our common stock could fall
dramatically. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate.
The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities law and by "lock-up"
agreements that our stockholders have entered into with the underwriters. For a
description of these "lock-up" agreements, please see "Underwriting."
Upon completion of this offering, we will have outstanding 20,324,094
shares of common stock (based upon shares outstanding as of June 30, 1999),
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after June 30, 1999. Taking into account the lock-up
agreements and assuming Deutsche Bank Securities Inc. does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
- beginning on the date of this prospectus, only the shares sold in the
offering will be immediately available for sale in the public market;
- beginning 180 days after the date of this prospectus, approximately
2,394,546 shares will be eligible for sale pursuant to Rules 144 and 701
of the Securities Act;
- an additional 9,375,000 shares will become eligible for sale pursuant to
Rule 144 beginning in March 2000;
- an additional 5,154,548 shares will become eligible for sale pursuant to
Rule 144 beginning in May 2000.
Any common stock that has been purchased or may be purchased in this
offering by our "affiliates," as defined in Rule 144 of the Securities Act, will
be subject to the volume and other selling limitations under Rule 144 of the
Securities Act. All of the shares eligible for sale at the 180th day after the
date of this prospectus or afterward will be subject initially to volume and
other limitations under Rule 144 of the Securities Act.
On or prior to the 180th day following the date of this prospectus, we
intend to register for resale an additional 4,625,000 shares of common stock
reserved for issuance under our employee stock plans based upon the number of
shares reserved for issuance as of June 30, 1999. In addition, the holders of
approximately 14,529,548 shares of common stock have the right to require us to
register their shares for sale to the public. If these holders cause a large
number of shares to be registered and sold in the public market, our stock price
could fall materially.
56
<PAGE> 56
UNDERWRITING
Under the underwriting agreement dated the date of this prospectus, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Thomas Weisel Partners LLC and Volpe Brown Whelan & Company, LLC have
severally agreed to purchase from yesmail.com the following respective numbers
of shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Deutsche Bank Securities Inc................................ 1,290,000
Thomas Weisel Partners LLC.................................. 709,500
Volpe Brown Whelan & Company, LLC........................... 580,500
BancBoston Robertson Stephens Inc........................... 60,000
CIBC World Markets Corp..................................... 60,000
Hambrecht & Quist LLC....................................... 60,000
Lehman Brothers Inc......................................... 60,000
PaineWebber Incorporated.................................... 60,000
SG Cowen Securities Corporation............................. 60,000
SoundView Technology Group, Inc............................. 60,000
William Blair & Company, L.L.C.............................. 40,000
Dain Rauscher Wessels....................................... 40,000
a division of Dain Rauscher Incorporated
Gabelli & Company, Inc...................................... 40,000
Legg Mason Wood Walker, Incorporated........................ 40,000
Needham & Company, Inc...................................... 40,000
Pennsylvania Merchant Group................................. 40,000
The Robinson-Humphrey Company, LLC.......................... 40,000
Suntrust Equitable Securities Corporation................... 40,000
C.E. Unterberg, Towbin...................................... 40,000
Wedbush Morgan Securities Inc............................... 40,000
---------
Total............................................. 3,400,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to conditions. The underwriters are obligated to purchase all of the shares of
common stock offered hereby, other than those covered by the over-allotment
option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to dealers at a price that represents a concession not in excess of $0.45 per
share under the public offering price. The underwriters may allow, and these
dealers may re-allow, a concession not in excess of $0.10 per share to other
dealers. After the initial public offering, the offering price and other selling
terms may be changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 510,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock that we are offering in this
prospectus. To the extent that the underwriters exercise the option, each of the
underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table
57
<PAGE> 57
bears to 3,400,000. We will be obligated, under the option, to sell these shares
to the underwriters to the extent the option is exercised. If any additional
shares of common stock are purchased, the underwriters will offer additional
shares on the same terms as those on which the 3,400,000 shares are being
offered.
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act.
Each of our officers and directors and most of our stockholders has agreed
not to offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction that is designed to, or could be expected to, result in the
disposition of any portion of, any common stock for a period of 180 days after
the effective date of the registration statement of which this prospectus is a
part without the prior written consent of Deutsche Bank Securities Inc. This
consent may be given at any time without public notice. We have entered into a
similar agreement. When determining whether to consent to the release of shares
from these lock-up agreements, Deutsche Bank Securities Inc. will consider the
reason for requesting the release, the number of shares for which the release is
being requested and the market conditions prevailing at the time.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thus creating a
short position in the common stock for their own account. Additionally, to cover
these over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of the common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
Six individuals affiliated with Deutsche Bank Securities Inc. are the
beneficial owners of 62,482 shares of our common stock; Volpe Brown Whelan &
Company, LLC and one individual affiliated with Volpe Brown Whelan & Company,
LLC are the beneficial owners of 28,637 shares of our common stock; and one
individual affiliated with The Robinson-Humphrey Company, LLC is the beneficial
owner of 14,318 shares of our common stock. Under the rules of the National
Association of Securities Dealers, Inc., their interest in these shares is
presumed to be underwriting compensation. Accordingly these shares cannot be
sold, transferred, assigned, pledged or hypothecated by any person for a period
of two years after the effective date of this offering, except to officers or
partners of the underwriters.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 60
filed public offerings of equity securities, of which 33 have been completed,
and has acted as a syndicate member in an additional 32 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 300,000 shares for our vendors, employees, family
members of employees and other third parties. The number of shares of common
stock available for sale to the general public will be
58
<PAGE> 58
reduced to the extent these reserved shares are purchased. Any reserved shares
that are not purchased will be offered by the underwriters to the general public
on the same basis as the other shares offered by this prospectus.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,100,000.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock was
determined by negotiation among yesmail.com and the representatives of the
underwriters. Among the factors considered in determining the public offering
price were:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and stages of development of other companies
that yesmail.com and the representatives of the underwriters believe to
be comparable to yesmail.com; and
- estimates of yesmail.com's business potential.
LEGAL MATTERS
The validity of our common stock we are offering in this prospectus will be
passed upon by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Pillsbury Madison & Sutro LLP, San Francisco, California, is
acting as counsel for the underwriters in connection with legal matters relating
to the shares of common stock offered hereby. Jeffrey D. Saper, a member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, is Secretary of the
Company. As of the date of this prospectus, members of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, own 114,545 shares of our common stock, and an
investment partnership associated with Wilson Sonsini Goodrich & Rosati,
Professional Corporation owns 57,273 shares of our common stock.
EXPERTS
Arthur Andersen LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for each of the years in
the three-year period ended December 31, 1998 as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Arthur Andersen LLP's report, given upon
the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock we are offering in this prospectus. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information set forth in the registration statement and the exhibits filed as a
part thereof, some parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to us and the
common stock we are offering in this prospectus, reference is made to the
registration statement and to the exhibits filed as a part of that registration
statement. The registration statement, including the exhibits and schedules to
that registration statement, may be inspected without charge at the principal
office of the SEC at
59
<PAGE> 59
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the Regional
Offices of the SEC at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. Our SEC filings are also available to the public from the SEC's Web
site at www.sec.gov. In addition, such material will be available for inspection
at the offices of The Nasdaq Stock Market, Inc., at 1735 K Street, N.W.,
Washington D.C. 20006. Copies of such material may be obtained by mail from the
Public Reference Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
60
<PAGE> 60
YESMAIL.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998, and for the six
months ended June 30, 1998 and 1999 (unaudited)........ F-3
Consolidated Balance Sheets as of December 31, 1997 and
1998, and as of June 30, 1999 (unaudited).............. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1997 and 1998,
and for the six months ended June 30, 1999
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998, and for the six
months ended June 30, 1998 and 1999 (unaudited)........ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
yesmail.com, inc.:
We have audited the accompanying consolidated balance sheets of
yesmail.com, inc. (a Delaware corporation) as of December 31, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of yesmail.com,
inc. as of December 31, 1997 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of yesmail.com, inc. included in this Form
S-1 and issued our report thereon dated June 4, 1999. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The Rule 12-09 Valuation Reserve schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic financial statements. This schedule has been subject to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
June 4, 1999
(except with respect to the matters discussed
in Note 11, as to which the date is
September 21, 1999)
F-2
<PAGE> 62
YESMAIL.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 934,856 $2,468,022 $ 4,583,354 $2,046,489 $ 3,642,424
Cost of revenues............. 292,776 1,089,585 2,702,872 1,142,194 2,477,369
---------- ---------- ----------- ---------- -----------
Gross profit....... 642,080 1,378,437 1,880,482 904,295 1,165,055
---------- ---------- ----------- ---------- -----------
Operating expenses:
Sales and marketing
expenses................ 291,999 959,813 1,751,208 677,471 3,100,856
General and administrative
expenses................ 236,761 466,208 929,209 383,672 1,995,470
Research and development
costs................... 198,548 357,068 600,848 276,443 1,423,169
---------- ---------- ----------- ---------- -----------
Total operating
expenses......... 727,308 1,783,089 3,281,265 1,337,586 6,519,495
---------- ---------- ----------- ---------- -----------
Operating loss............... (85,228) (404,652) (1,400,783) (433,291) (5,354,440)
Other expense:
Interest expense........... (3,590) (18,098) (45,075) (17,834) (105,600)
Other...................... -- -- (250,000) -- 19,594
---------- ---------- ----------- ---------- -----------
Total other
expense.......... (3,590) (18,098) (295,075) (17,834) (86,006)
---------- ---------- ----------- ---------- -----------
Net loss before
minority
interest......... (88,818) (422,750) (1,695,858) (451,125) (5,440,446)
Minority interest............ 8,821 8,716 (10,547) (9,061) (34,356)
---------- ---------- ----------- ---------- -----------
Net loss........... $ (79,997) $ (414,034) $(1,706,405) $ (460,186) $(5,474,802)
========== ========== =========== ========== ===========
Net loss per share:
Basic and diluted.......... $ (0.01) $ (0.05) $ (0.22) $ (0.06) $ (0.60)
Weighted average shares --
basic and diluted....... 7,723,237 7,649,480 7,636,098 7,775,977 9,178,455
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-3
<PAGE> 63
YESMAIL.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
--------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash............................................... $ 1,841 $ 26,212 $ 3,508,104
Accounts receivable, net of allowance of $26,000,
$56,000 and $166,000............................ 176,259 242,757 863,591
Deposits and prepaid expenses...................... 3,786 19,348 597,946
--------- ----------- -----------
Total current assets....................... 181,886 288,317 4,969,641
--------- ----------- -----------
Property and equipment, net.......................... 101,640 353,871 1,241,099
--------- ----------- -----------
Intangible and other assets.......................... 750 750 465,672
--------- ----------- -----------
Total assets............................... $ 284,276 $ 642,938 $ 6,676,412
========= =========== ===========
Current liabilities:
Accounts payable................................... $ 185,353 $ 1,391,509 $ 1,758,943
Short-term debt.................................... 149,241 342,870 364,448
Note payable....................................... -- -- 150,000
Due to related parties............................. 76,721 56,788 --
Obligations under capital leases, current
portion......................................... 17,647 87,165 181,991
Accrued payroll and payroll related expenses....... 74,043 213,291 462,313
Deferred revenue................................... 119,021 114,301 295,013
Accrued legal settlement........................... -- 250,000 --
Accrued marketing.................................. -- -- 880,889
Other current liabilities.......................... 8,216 94,602 399,950
--------- ----------- -----------
Total current liabilities.................. 630,242 2,550,526 4,493,547
--------- ----------- -----------
Obligations under capital leases, less current
portion............................................ 18,079 152,743 330,242
--------- ----------- -----------
Minority interest.................................... (17,537) (6,990) --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.0001 par
value; 15,000,000 shares authorized; 5,154,548
shares issued and outstanding................... -- -- 515
Common stock, $.0001 par value; 22,500,000 shares
authorized; 8,333,333, 8,333,333 and 11,769,546
shares issued................................... 833 833 1,177
Common stock in treasury, 497,685, 833,333, and no
shares at cost.................................. (602) (1,030) --
Notes receivable from stockholders................. -- -- (3,831,274)
Additional paid-in capital......................... 160,649 160,649 13,782,200
Deferred compensation.............................. -- -- (411,400)
Accumulated deficit................................ (507,388) (2,213,793) (7,688,595)
--------- ----------- -----------
Total stockholders' equity (deficit)....... (346,508) (2,053,341) 1,852,623
--------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)................................ $ 284,276 $ 642,938 $ 6,676,412
========= =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-4
<PAGE> 64
YESMAIL.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------- ------------------- ------------------- NOTES PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL
---------- ------ ---------- ------ ---------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995....................... -- -- 4,629,629 $ 463 -- -- -- $ 537
Stock awarded to employees
for services............. -- -- 694,445 69 -- -- -- 38,931
Stock split treated as a
dividend to
shareholders............. -- -- 3,009,259 301 -- -- -- (301)
Treasury stock purchase.... -- -- -- -- (925,926) (1,120) --
Distribution of minority
interest in subsidiary to
a third party............ -- -- -- -- -- -- -- 16,000
Net loss................... -- -- -- -- -- -- -- --
---------- ----- ---------- ------ ---------- ------ ---------- -----------
Balance at December 31,
1996....................... -- -- 8,333,333 833 (925,926) (1,120) -- 55,167
Stock awarded to employees
by principal
stockholders............. -- -- -- -- -- -- -- 39,000
Treasury stock awarded to
employees for services... -- -- -- -- 428,241 518 -- 66,482
Net loss................... -- -- -- -- -- -- -- --
---------- ----- ---------- ------ ---------- ------ ---------- -----------
Balance at December 31,
1997....................... -- -- 8,333,333 833 (497,685) (602) -- 160,649
Treasury stock purchase.... -- -- -- -- (335,648) (428) -- --
Net loss................... -- -- -- -- -- -- -- --
---------- ----- ---------- ------ ---------- ------ ---------- -----------
Balance at December 31,
1998....................... -- -- 8,333,333 833 (833,333) (1,030) -- 160,649
Treasury stock retired
(unaudited).............. -- -- (833,333) (83) 833,333 1,030 -- (947)
Issuance of common stock
for cash (unaudited)..... -- -- 1,875,000 188 -- -- -- 312
Issuance of options for
services and acquisition
(unaudited).............. -- -- -- -- -- -- -- 421,778
Issuance of common stock to
officers for notes
receivable (unaudited)... -- -- 2,394,546 239 -- -- (3,831,274) 3,831,035
Issuance of preferred stock
for cash (unaudited)..... 5,154,548 515 -- -- -- -- -- 8,949,485
Deferred compensation...... -- -- -- -- -- -- -- 419,888
Amortization of deferred
compensation............. -- -- -- -- -- -- -- --
Net loss (unaudited)....... -- -- -- -- -- -- -- --
---------- ----- ---------- ------ ---------- ------ ---------- -----------
Balance at June 30, 1999
(unaudited)................ 5,154,548 515 11,769,546 1,177 -- -- (3,831,274) 13,782,200
========== ===== ========== ====== ========== ====== ========== ===========
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
Balance at December 31,
1995....................... -- $ (13,357) $ (12,357)
Stock awarded to employees
for services............. -- -- 39,000
Stock split treated as a
dividend to
shareholders............. -- -- --
Treasury stock purchase.... -- -- (1,120)
Distribution of minority
interest in subsidiary to
a third party............ -- -- 16,000
Net loss................... -- (79,997) (79,997)
-------- ----------- -----------
Balance at December 31,
1996....................... -- (93,354) (38,474)
Stock awarded to employees
by principal
stockholders............. -- -- 39,000
Treasury stock awarded to
employees for services... -- -- 67,000
Net loss................... -- (414,034) (414,034)
-------- ----------- -----------
Balance at December 31,
1997....................... -- (507,388) (346,508)
Treasury stock purchase.... -- -- (428)
Net loss................... -- (1,706,405) (1,706,405)
-------- ----------- -----------
Balance at December 31,
1998....................... -- (2,213,793) (2,053,341)
Treasury stock retired
(unaudited).............. -- -- --
Issuance of common stock
for cash (unaudited)..... -- -- 500
Issuance of options for
services and acquisition
(unaudited).............. -- -- 421,778
Issuance of common stock to
officers for notes
receivable (unaudited)... -- -- --
Issuance of preferred stock
for cash (unaudited)..... -- -- 8,950,000
Deferred compensation...... (419,888) -- --
Amortization of deferred
compensation............. 8,488 -- 8,488
Net loss (unaudited)....... -- (5,474,802) (5,474,802)
-------- ----------- -----------
Balance at June 30, 1999
(unaudited)................ (411,400) (7,688,595) 1,852,623
======== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-5
<PAGE> 65
YESMAIL.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................... $ (79,997) $(414,034) $(1,706,405) $(460,186) $(5,474,802)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities --
Depreciation.............................. 16,015 49,443 101,783 42,664 280,560
Stock issuance for compensation........... 55,000 106,000 -- -- 253,266
Minority interest......................... (8,821) (8,716) 10,547 7,354 34,356
Changes in operating assets and
liabilities --
Accounts receivable.................... (119,176) (48,142) (66,498) (41,777) (620,834)
Deposits and prepaid expenses.......... (4,469) 668 (15,562) (1,049) (593,886)
Accounts payable and accrued
expenses............................. 108,125 143,123 1,681,790 512,411 1,552,693
Deferred revenue....................... 12,517 106,504 (4,720) (64,507) 180,712
--------- --------- ----------- --------- -----------
Net cash provided by (used in)
operating activities............... (20,806) (65,154) 935 (5,090) (4,387,935)
--------- --------- ----------- --------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment......... (45,040) (69,639) (102,232) (8,939) (832,294)
Purchase of minority interest............... -- -- -- -- (150,000)
--------- --------- ----------- --------- -----------
Net cash used in investing
activities......................... (45,040) (69,639) (102,232) (8,939) (982,294)
--------- --------- ----------- --------- -----------
Cash Flows from Financing Activities:
Borrowings from related parties............. 66,110 -- -- -- --
Payment to related parties.................. -- (12,878) (19,933) (10,900) (56,788)
Borrowings of short term debt............... -- 263,561 312,259 137,259 50,000
Repayments of short term debt............... -- (114,320) (118,630) (88,999) (28,422)
Repurchase of stock......................... (1,120) -- (428) (428) --
Proceeds from issuance of common stock...... -- -- -- -- 500
Proceeds from issuance of preferred stock... -- -- -- -- 8,950,000
Principal payments under capital lease
obligations............................... (403) (8,935) (47,600) (15,363) (63,169)
--------- --------- ----------- --------- -----------
Net cash provided by financing
activities......................... 64,587 127,428 125,668 21,569 8,852,121
--------- --------- ----------- --------- -----------
Net Increase (Decrease) in Cash............... (1,259) (7,365) 24,371 7,540 3,481,892
Cash, beginning of year....................... 10,465 9,206 1,841 1,841 26,212
--------- --------- ----------- --------- -----------
Cash, end of year............................. $ 9,206 $ 1,841 $ 26,212 $ 9,381 $ 3,508,104
========= ========= =========== ========= ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for interest.... $ 3,590 $ 18,098 $ 45,075 $ 16,491 $ 41,585
========= ========= =========== ========= ===========
Noncash Transactions:
Equipment acquired under capital leases..... $ 12,237 $ 32,827 $ 251,782 $ 36,064 $ 335,494
Issuance of note payable for purchase of
minority interest......................... -- -- -- -- $ 150,000
Issuance of common stock options for
purchase of minority interest............. -- -- -- -- $ 177,000
Note receivable from issuance of restricted
common stock.............................. -- -- -- -- $ 3,831,274
========= ========= =========== ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-6
<PAGE> 66
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND DESCRIPTION OF BUSINESS
yesmail.com, inc. (the "Company") provides Internet marketing services to
companies that conduct part or all of their business through e-commerce. The
Company's services include targeted direct email campaigns to specific members
in the YesMail Network who have given express permission to receive direct
marketing messages in specific categories of interest. The Company also offers a
variety of services focused on delivering Internet users to a particular Web
site.
Superhighway Consulting, Inc. ("SCI", doing business as WebPromote) was
founded in 1995 and was merged with WP Holding, Inc. ("WP Holding") on March 29,
1999, in a stock for stock transaction (the "Merger"), with the SCI stockholders
receiving 80% of the outstanding shares of WP Holding. WP Holding was organized
as a Delaware corporation in October 1998 and five investors purchased 5 million
shares of common stock at par value on March 25, 1999. As the SCI stockholders
retained a controlling interest in the surviving entity and WP Holding had no
prior operations, the Company accounted for this merger as a recapitalization.
The shares of SCI have been retroactively adjusted as if there had been an 11.57
for one stock-split.
In connection with the Merger, SCI and the stockholders of WP Holding
entered into a Founders' Agreement, which, among other things, gives the former
SCI stockholders the right to retain the first $16 million in value of the
Company upon subsequent sale or merger or the WP Holding stockholders' interest
in the first $16 million in value of the Company upon the Company's initial
public offering. In the case of an initial public offering, such payment shall
be made with a transfer of shares among the stockholders. The $16 million
represented the negotiated value of SCI as of the date of the Merger.
The financial statements reflect the historical accounts of SCI, with the
number of SCI shares retroactively adjusted to reflect the stock split referred
to above. On May 10, 1999, WP Holding changed its name to yesmail.com, inc.
Starting Point, L.L.C. ("Starting Point"), was incorporated by the Company
as a wholly-owned subsidiary in February 1996. Starting Point manages and
operates an Internet directory and search resource. Starting Point owns a list
of permission e-mail addresses and sells Web site banner advertisements for its
Web site. In September 1996, the Company distributed a 30% interest to and
entered into an operating agreement with a third party retained to manage
Starting Point. This 30% ownership distribution resulted in a $16,000
compensation charge based on the fair market value of the 30% interest as
determined by the Board of Directors. In June 1999, the Company purchased the
30% minority ownership as further described in Note 11.
2. LIQUIDITY AND FINANCING CONSIDERATIONS
The Company has sustained net losses since its inception. The Company's
ability to meet its obligations in the ordinary course of business is dependent
upon its ability to establish profitable operations or to obtain additional
funding through public or private equity financing, collaborative or other
arrangements with corporate sources, and, ultimately, to establish profitable
operations.
The Company's operating plan is to rapidly expand its sales and marketing,
product development and administrative operations and to develop new strategic
relationships to promote the Company's future growth. This will likely result in
negative cash flow from operations at least through the year 2000. The Company
raised $9 million of equity capital in May 1999 (see Note 11), but will likely
need to raise additional capital prior to the end of 1999. As discussed in Note
11, the Company is preparing for an initial public offering of stock. In the
opinion of
F-7
<PAGE> 67
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
management, alternative financing from new or existing investors will be
available to the Company if the initial public offering is delayed or canceled.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany balances and transactions have
been eliminated in the consolidation process.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
In the opinion of the Company's management, the June 30, 1998 and 1999
unaudited interim consolidated financial statements include all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
such financial statements. The results of operations for the six months ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the entire year.
USE OF 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 expenses during the reporting period.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets or, for
leasehold improvements, the shorter of the lease term or the estimated useful
life of the asset, as follows:
<TABLE>
<S> <C>
Computer equipment................................. 1 - 2 years
Computer software.................................. 1 - 2 years
Telephone equipment................................ 2 - 5 years
Furniture and fixtures............................. 5 - 7 years
Leasehold improvements............................. 1 - 5 years
</TABLE>
Maintenance and repairs are charged to expense as incurred and improvements
and betterments are capitalized. When assets are retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the consolidated statement of operations
for the period in which it is realized.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities are determined based on
temporary differences between the financial statement and tax bases of assets
and liabilities and net operating loss and credit carryforwards using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to
F-8
<PAGE> 68
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
the amounts expected to be realized. A provision for income tax expense is
recognized for income taxes payable for the current period, plus the net changes
in deferred tax amounts.
REVENUE RECOGNITION
The Company earns revenues from its customers by (i) charging fees for
sending targeted email to its owned and represented subscribers, (ii) placing
advertisements on Web sites and (iii) providing services to Web site owners.
Revenue is recognized when emails are transmitted to subscribers, as
advertisements are placed on Web sites, and when services are performed.
Deferred revenue represents liabilities for services not yet rendered or for
advertisements not yet placed.
The Company becomes obligated to make payments to third-party Web sites,
which have contracted with the Company to be part of the YesMail Network, in the
period the email messages are delivered. Such expenses are classified as cost of
revenues in the consolidated statements of operations.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in the development of its Web site, products, and related
applications to be used in connection with the Company's services have been
expensed to operations as incurred through the year ended December 31, 1998. In
March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. The Company adopted SOP No. 98-1 on January 1, 1999.
As a result, the Company has continued to expense its development costs as
incurred as the rapid pace of technological change results in an estimated
useful life of such software of one year or less.
ADVERTISING COSTS
Costs of developing the advertisements are expensed as incurred. Costs of
placing the media are expensed as the advertisements are run. Such costs are
included in sales and marketing on the consolidated statement of operations and
totaled approximately $199,000, $571,000, $699,000, $234,000, and $1,350,000 for
the years ended December 31, 1996, 1997 and 1998 and for the six months ended
June 30, 1998 and 1999, respectively.
DEFERRED OFFERING COSTS
As of June 30, 1999, the Company had incurred approximately $183,000 in
costs related to the Company's proposed initial public offering. These costs
have been capitalized and are included in deposits and prepaid expenses in the
accompanying consolidated balance sheet at June 30, 1999. Upon completion of the
Company's proposed initial public offering, the deferred offering costs will be
reclassified to common stock as a reduction of the proceeds from the offering.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets are stated at cost and amortized using
the straight-line method over the estimated economic useful life. The Company
continually evaluates whether subsequent events and circumstances have occurred
that indicate the remaining estimated useful life of goodwill or an intangible
asset may warrant revision, or that the remaining balance of
F-9
<PAGE> 69
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
goodwill or an intangible asset may not be recoverable. The Company evaluates
the recoverability of goodwill and intangible assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of such assets are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, there were no adjustments to the carrying value of
goodwill or intangible assets in 1999.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, accounts receivable,
accounts payable, short-term debt, obligations under capital leases and accrued
liabilities. At December 31, 1997 and 1998, the fair market value of these
instruments approximated their financial statement carrying amount because of
the short term maturity of these instruments. The Company does not require
collateral for accounts receivable, but does evaluate customer creditworthiness
and establish allowances as necessary based on management estimates of
collectibility. For the six months ended June 30, 1999, one customer accounted
for approximately 13% of revenues.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements with
employees in accordance with provisions of Accounting Principles Board ("APB"),
Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the measurement date, between the estimated fair value of
the Company's stock and the exercise price of options to purchase that stock or
price paid for shares of stock. For directors and consultants receiving
stock-based compensation, the Company complies with the provisions of SFAS No.
123.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss for the period by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is computed by dividing the net loss for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. However, the Company had securities outstanding which could potentially
dilute basic earnings per share in the future, but were excluded in the
computation of diluted net loss per share in the periods presented, as their
effect would have been antidilutive. Such outstanding securities consist of the
following at June 30, 1999: 5,154,548 shares of convertible preferred stock and
options to purchase 708,623 shares of common stock.
F-10
<PAGE> 70
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements. Other
comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The disclosures prescribed in SFAS No. 131 are effective
for the year ended December 31, 1998. The Company has determined that it does
not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in 2001.
Although the Company has not fully assessed the implications of SFAS No. 133,
the Company does not believe that the adoption of this statement will have a
material impact on the Company's financial position or results of operations.
4. RELATED-PARTY TRANSACTIONS
The Company had amounts payable to certain stockholders for expenses
incurred on behalf of the Company in the amounts of $76,721 and $56,788 as of
December 31, 1997 and 1998, respectively. These amounts were fully paid by
January 1999.
Subsequent to December 31, 1998, the Company obtained advances from certain
stockholders totaling $600,000. These advances have been classified as due to
related parties in the accompanying consolidated balance sheet. All advances
were converted to series A preferred stock on May 18, 1999 as described further
in Note 11.
Starting Point paid a management fee to its minority member for services
related to operating and managing the business. Management fees paid to the
minority member were $5,000, $22,500, $81,000, $48,000 and $115,000 for the
years ended December 31, 1996, 1997 and 1998 and for the six months ended June
30, 1998 and 1999, respectively.
Certain stockholders personally guarantee a portion of the Company's short
term debt and certain equipment leases as further described in Notes 6 and 8.
As further described in Note 11, the Company entered into certain
transactions with employees and/or directors subsequent to December 31, 1998.
F-11
<PAGE> 71
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
-------- --------- ----------
<S> <C> <C> <C>
Computer equipment.................................... $117,029 $ 268,384 $ 862,606
Computer software..................................... 24,793 126,147 566,120
Telephone equipment................................... 16,851 57,528 57,578
Furniture and fixtures................................ 10,878 10,878 96,430
Leasehold improvements................................ -- 60,628 108,619
-------- --------- ----------
169,551 523,565 1,691,353
Accumulated depreciation.............................. (67,911) (169,694) (450,254)
-------- --------- ----------
$101,640 $ 353,871 $1,241,099
======== ========= ==========
</TABLE>
6. SHORT-TERM DEBT
The Company has lines of credit with two banks, providing for maximum
borrowings of $370,000 as of both December 31, 1998 and June 30, 1999. Interest
rates ranged from 9.25% to 14.75%, with a weighted average rate of 9.37% as of
December 31,1998. One line of credit matures on July 15, 1999 and the other line
of credit has no expiration date. Outstanding borrowings under the lines of
credit were $149,241, $298,955 and $322,972, as of December 31, 1997 and 1998
and June 30, 1999. Borrowings are personally guaranteed by certain stockholders.
On March 12, 1998 the Company borrowed $50,000 from a bank at an interest
rate of 10.0% that matures on July 15, 1999. The balance of the note was $43,915
and $41,476 as of December 31, 1998 and June 30, 1999. The loan is
collateralized by all of the assets and property of the Company.
7. 401(k) SAVINGS PLAN
In September 1997, the Company established a 401(k) Savings Plan (the
"Plan") that covers substantially all employees. Under the Plan, employees are
permitted to contribute a portion of gross compensation not to exceed standard
limitations provided by the Internal Revenue Service. The Company maintains the
right to match employee contributions, but for the years ended December 31, 1997
and 1998 and for the six months ended June 30, 1999, no Company matching
contributions were made.
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through the year 2003. Rent
expense amounted to approximately, $19,000, $51,000, $86,000, $35,000 and
$101,000 for the years ended December 31, 1996, 1997 and 1998 and for the six
months ended June 30, 1998 and 1999, respectively. Certain equipment leases,
with an aggregate outstanding balance of approximately $449,000 at June 30,
1999, are personally guaranteed by certain stockholders.
F-12
<PAGE> 72
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
Future minimum lease payments under noncancelable capital leases and
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999........................................................ $112,683 $102,850
2000........................................................ 74,916 105,935
2001........................................................ 42,440 109,113
2002........................................................ 39,601 103,091
2003........................................................ 24,295 86,172
-------- --------
Total minimum lease payments................................ $293,935 $507,161
========
Less -- Amount representing interest........................ (54,027)
--------
Present value of capital lease obligations.................. 239,908
Less -- Current portion..................................... (87,165)
--------
Long-term portion........................................... $152,743
========
</TABLE>
LITIGATION
In connection with the termination of employment of a stockholder, the
Company exercised its right to repurchase the stockholder's shares in accordance
with the Shareholders' Agreement described in Note 9. The former stockholder has
filed a lawsuit contesting the repurchase amount. During 1998, the Company
recorded a reserve of $250,000 in other expense in the accompanying financial
statements. Subsequent to year end, the case was settled for approximately
$250,000.
Additionally, the Company is, at times, subject to pending and threatened
legal actions and proceedings. After reviewing pending and threatened actions
and proceedings with counsel, management believes that the outcome of such
actions or proceedings is not expected to have a material adverse effect on the
financial position or results of operations of the Company.
9. COMMON STOCK
During 1996, a stock split, treated as a dividend of 3,009,259 shares, was
declared and distributed to the shareholders. Additionally, the Company issued
694,445 shares of common stock to employees for services. This issuance resulted
in a compensation charge of $39,000 based on the estimated fair market value of
the stock at the time of issuance.
In June 1997, the Company's Board of Directors authorized a four for one
stock split. In January 1998, the Board of Directors authorized a five hundred
for one stock split. In connection with the Merger, the financial statements
reflect an 11.57 for one stock split on March 29, 1999. The consolidated
financial statements have been restated to reflect these stock splits.
During June 1997, two principal stockholders awarded 231,482 shares from
their holdings of common stock of the Company to employees. Additionally, the
Company granted stock awards from treasury stock to several employees in lieu of
cash compensation. In both instances, compensation expense was recorded for the
entire amount of the awards based upon the estimated fair value of the stock at
the time of the issuance.
In February 1999, the Company retired all treasury shares outstanding.
F-13
<PAGE> 73
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
The stock of SCI, prior to the Merger, was subject to a Shareholders'
Agreement which gave SCI the right to repurchase the stock, at a formula price,
from stockholders who terminated employment with SCI. The Shareholders'
Agreement also gave SCI the right of first refusal to repurchase shares offered
to a third party. The Shareholders' Agreement was terminated in connection with
the Merger with WP Holding.
In 1996 and 1998, the Company repurchased 925,926 and 335,648 shares,
respectively, of common stock for the amounts of $1,120 and $428 from terminated
employees in accordance with a formula contained in the then existing
shareholders' agreement.
10. INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $1,423,000, which begin to expire in the year 2010.
As a result of various equity transactions during 1999, the Company
believes that it may have undergone an "ownership change" as defined in section
382 of the Internal Revenue Code. Accordingly, the utilization of a portion of
the net operating loss carryforwards may be limited. Due to the uncertainty
regarding the ultimate utilization of the net operating carryforwards, the
Company has not recorded any benefit for losses and a valuation allowance has
been recorded for the entire amount of the net deferred tax asset. In addition,
sales of the Company's stock, including shares sold in the Company's initial
public offering, may further restrict its ability to utilize its net operating
loss carryforwards.
The difference between the income tax benefit at the federal statutory rate
of 34% and the Company's effective tax rate is due primarily to recognition of a
full valuation allowance to offset the deferred tax assets.
The estimated tax effects of significant temporary difference and
carryforwards that give rise to deferred income tax assets as of December 31,
1998, are as follows:
<TABLE>
<S> <C>
Deferred income tax assets --
Net operating loss carryforwards.......................... $ 554,787
Accrued liabilities and other............................. 453,448
----------
Gross deferred income tax assets.................. 1,008,235
Less: valuation allowance................................... (839,316)
----------
Deferred income tax liabilities --
Deferred revenue.......................................... (156,629)
Depreciation on property and equipment.................... (12,290)
----------
Gross deferred income tax liabilities............. (168,919)
----------
Net deferred tax assets........................... $ --
==========
</TABLE>
The Company has recorded a valuation allowance against gross deferred tax
assets due to uncertainties surrounding their realization. The amount of net
deferred tax assets considered realizable, however, could be increased in the
future if estimates of future taxable income are increased.
F-14
<PAGE> 74
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
11. SUBSEQUENT EVENTS
BRIDGE LOAN/WARRANT
On December 28, 1998, the Company agreed to issue a warrant to a
shareholder in connection with a loan of $1.0 million ("Bridge Loan"), which was
to be converted into series A convertible preferred stock at the option of the
holder. The warrant was only exercisable upon an event of default. The bridge
loan which accrues interest at the prime rate (7.5%) matures upon the closing of
the private equity placement or upon event of default. No value was ascribed to
the warrant. The proceeds from the loan were received and the warrant was issued
in January 1999. On May 18, 1999, the loan was converted into 572,727 shares of
series A convertible preferred stock in connection with the Company's private
equity placement (see Note 11) and the warrant was canceled.
RESTRICTED COMMON STOCK
In May, 1999, the Company issued an aggregate of 2,394,546 shares of
restricted common stock to officers for $1.60 per share. In the event of a
change of control (as defined in the Restricted Stock Purchase Agreement), 25%
of the shares purchased vest (in addition to any shares vested at such time). In
connection with such issuance, the officers paid for the stock by issuing notes
payable to the Company that are secured by the shares of the Company's common
stock purchased. The secured notes receivable bear interest at 5.22% per annum
with the entire principal balance of the note, together with all accrued and
unpaid interest, due and payable on the earlier of (a) the sale of the
underlying common stock, (b) May 10, 2008 or (c) termination of employment. The
Company has recourse against the signers of the notes for 75% of the principal
and all accrued interest. The notes receivable from the stockholders has been
classified as a reduction of equity. The shares generally vest over a four-year
period; however, 900,000 shares vest seven months from the occurrence of an
initial public offering. The stock is restricted in that any unvested shares are
subject to repurchase rights by the Company upon the occurrence of certain
events or conditions, such as employment termination, at the original purchase
price.
STOCK OPTION PLAN
On April 1, 1999, the Company adopted the 1999 Stock Plan (the "Stock
Plan") which provides for the grant of up to 3,225,000 incentive or
non-statutory stock options or shares of restricted stock to employees,
directors and consultants ("Optionee") of the Company. On May 17, 1999, the
Board of Directors increased the number of authorized options to 3,675,000 and
on July 13, 1999, the Board of Directors increased the number of authorized
options to 4,425,000. Options granted under the Stock Plan generally vest
ratably over a period of four years and expire ten years from the date of grant.
If an Optionee ceases employment with or service to the Company ("Termination"),
the Optionee may exercise any vested option at the time of Termination within
such period of time specified in the option agreement. In the absence of a
specified time in the option agreement, the option remains exercisable for three
months following the Optionee's Termination. Unvested options revert to the
Stock Plan at the date of the Termination. If, after Termination, the Optionee
does not exercise the options within the time specified, the Option shall
terminate and the shares revert to the Stock Plan.
F-15
<PAGE> 75
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
STOCK OPTION ACTIVITY
During 1999, the Company issued 243,750 incentive stock options and 663,750
non-qualified stock options. The Company believes the exercise price of these
stock options approximated or exceeded the fair value of its common stock. The
stock options vest over a two to four year period. Of these options issued,
30,000 options were issued to consultants in consideration for services rendered
and 18,750 options were issued as consideration for the purchase of the minority
interest in Starting Point, as discussed later in this Note. These options vest
on the date of grant. In addition, the Company issued stock to an employee which
is subject to performance and is forfeited if certain performance measures are
not met. The Company recorded an expense of approximately $245,000 for the
issuance of the performance options to the employee and the issuance of options
to the consultants. The performance options were valued using the intrinsic
value method at June 30, 1999. The options issued to consultants and options
issued as consideration for the purchase of minority interest were valued using
the Black-Scholes option pricing model at the date of grant as is described in
the additional stock plan information below.
DEFERRED STOCK COMPENSATION
During June 1999, employees were granted options to purchase an aggregate
of 93,750 shares of common stock. Giving effect to the Company's proposed
initial public offering, the deemed fair market value of the Company's common
stock exceeded the exercise price of the options granted. Total non-cash
compensation of approximately $420,000 related to these grants will be charged
to operations over the four-year vesting period. Non cash compensation expense
totaling approximately $9,000 has been recorded for the six months ended June
30, 1999 as a general and administrative expense.
A summary of the Company's stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Balance, January 1, 1999.................................... -- --
Granted................................................... 907,500 $2.02
Forfeited................................................. (31,875) 1.60
--------- -----
Balance, June 30, 1999...................................... 875,625 $2.04
=========
Available for grant at June 30, 1999........................ 1,154,829
</TABLE>
The following table summarizes information about currently outstanding and
vested stock options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
--------------------------------------------- -----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED VESTED AT WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE JUNE 30, AVERAGE
EXERCISE PRICE JUNE 30, 1999 LIFE EXERCISE PRICE 1999 EXERCISE PRICE
- -------------- -------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$1.60 729,375 10 $1.60 33,750 $1.60
1.79 -- -- -- 18,750 1.79
3.20 60,000 10 3.20 -- --
9.87 33,750 10 9.87 -- --
------- ----- ------ -----
823,125 $2.06 52,500 $1.67
======= ===== ====== =====
</TABLE>
F-16
<PAGE> 76
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 3, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" and its related interpretations.
SFAS No. 123 "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net loss and loss per share had the Company adopted the
fair value method since the Company's inception. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradeable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
The Company's calculations for employee grants were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
<S> <C>
Dividend yield.............................................. None
Expected volatility......................................... 90%
Risk free interest rate..................................... 5.0%
Expected term, in years..................................... 10
</TABLE>
The weighted average fair value per option as of the date of grant for
options granted during 1999 was $2.24.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
<S> <C>
Loss attributable to common stockholders (in thousands):
As reported............................................... $(5,475)
Pro forma................................................. $(5,627)
Basic and diluted net loss per share:
As reported............................................... $ (0.60)
Pro forma................................................. $ (0.61)
</TABLE>
CONVERTIBLE PREFERRED STOCK
On May 18, 1999, the Company issued 5,154,548 shares of $.0001 par value
series A convertible preferred stock at $1.75 per share ("Subscription Price")
for gross proceeds of $9.0 million, including the $1 million Bridge Loan and the
$600,000 of stockholder advances previously received. The Bridge Loan and
stockholder advances were converted to 916,364 shares of preferred stock.
F-17
<PAGE> 77
YESMAIL.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1998 AND 1999 IS UNAUDITED)
Each share of preferred stock is non-voting and convertible to one share of
common stock at any time, at the option of the holder and mandatorily upon an
initial public offering that exceeds a threshold, or sale of the business.
Dividends on the preferred stock are earned at a rate of $0.05 per share per
annum (approximating an 8% yield), and are only payable upon certain dividend
accrual events, such as a sale. Holders of the preferred stock are entitled to a
liquidation preference in the event of any liquidation and such holders have the
right to approve certain transactions.
ACQUISITION OF MINORITY INTEREST
In June 1999, the Company purchased the 30% ownership interest of Starting
Point from the minority interest shareholder for $477,000. The purchase price
included an initial cash payment of $150,000, an issuance of an $150,000 note
which accrues interest at a rate of 10% and is to be repaid one year from the
anniversary of the acquisition date and a grant of 18,750 options at an exercise
price of $1.79 which are fully vested on the date of grant. In addition, the
Company is required to make a contingency payment of a maximum of $200,000 in
the event that the options do not have a value of an amount specified per the
LLC Interest Purchase Agreement, no later than 180 days from the acquisition
date or upon sale of the Company. The Company recorded goodwill of approximately
$450,000 for the acquisition based on the difference between the purchase price
and the value of the 30% interest in the net assets acquired at the time of the
acquisition. The goodwill is being amortized over three years. If a contingency
payment becomes due, the Company intends to increase goodwill for this amount
and amortize it over the balance of the original amortization period.
INITIAL PUBLIC OFFERING
On June 4, 1999, the Company's Board of Directors authorized the Company to
file a registration statement with the Securities and Exchange Commission for
the purpose of an initial public offering of the Company's common stock. Upon
the completion of this offering, if requirements set forth in its Certificate of
Incorporation are met, the Company's preferred stock will be converted into
5,154,548 shares of common stock, and all outstanding shares of preferred stock
will be canceled and retired.
EMPLOYEE STOCK PURCHASE PLAN
In July 1999, the Company adopted an employee stock purchase plan (the
"Purchase Plan") which provides employees with an opportunity to purchase common
stock through accumulated payroll deductions up to a maximum of $25,000 for all
purchases within the same calendar year and up to a maximum of 2,000 shares for
the first purchase period and a maximum of 1,000 shares for each purchase period
thereafter. Under the Purchase Plan, employees may purchase the common stock at
a price equal to 85% of the fair market value of the common stock on the first
or last day of the offering period, whichever is lower. This Plan will become
effective upon the closing of the initial public offering. 200,000 shares of
common stock have been reserved for issuance under the Purchase Plan (subject to
an annual increase), none of which have been issued.
REVERSE STOCK SPLIT
On July 13, 1999, the Company's Board of Directors approved a 3:8 reverse
stock split of the Company's outstanding shares of common stock and convertible
preferred stock which will become effective prior to the closing of the initial
public offering. All share and per share information included in these financial
statements have been retroactively adjusted to reflect this reverse stock split.
F-18
<PAGE> 78
[ON INSIDE COVER
Photograph of peoples' hands raised to indicate that they are saying "yes" to
receiving permission email messages. A brief description of the YesMail Network
is provided. As an inset to the page is a chart which shows the comparative
response rates, documented by 3rd party sources, for permission email, direct
mail and banner advertising.]
[ON FOLD OUT FLAP INSIDE THE COVER
Chart which diagrams the flow of direct marketing messages from direct
marketers, through the YesMail Network, to consumers with arrows showing the
direction of messages and resulting responses. The YesMail Network, technology
and products are listed to illustrate their roles in enabling the process of
targeting, delivering and tracking permission email messages.]
[ON INSIDE BACK COVER
A case study of a real permission email campaign, with illustration/photo of
client Web site/logo. In summary form, the case study explains the campaign
objectives, implementation and results. On the right hand border of the page is
a panel with logos of some companies with whom yesmail.com works.]
<PAGE> 79
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED
IN THE PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF
COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER
TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE SHARES IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Special Note Regarding Forward-Looking
Statements and Industry Data......... 13
Use of Proceeds........................ 14
Dividend Policy........................ 14
Capitalization......................... 15
Dilution............................... 16
Selected Consolidated Financial Data... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 27
Management............................. 39
Related Party Transactions............. 47
Principal Stockholders................. 50
Description of Capital Stock........... 53
Shares Eligible for Future Sale........ 56
Underwriting........................... 57
Legal Matters.......................... 59
Experts................................ 59
Where You Can Find More Information.... 59
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATION:
UNTIL OCTOBER 17, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE IN THESE SHARES OF COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. DEALERS ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
3,400,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
VOLPE BROWN WHELAN
& COMPANY
Prospectus
September 22, 1999
