<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
____________ to ____________.
Commission File No.: 0-26871
YESMAIL.COM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-4280596
(State of Incorporation) (I.R.S. Employer Identification No.)
565 Lakeview Parkway,
Suite 135
Vernon Hills, Illinois 60061
(847) 918-9292
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period than the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No. [ ]
As of September 30, 1999, there were 20,324,094 shares of the Registrant's
Common Stock outstanding.
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YESMAIL.COM, INC.
Index
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998........................................................................................2
Unaudited Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 1999 and September 30, 1998..............................................3
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and September 30, 1998..............................................4
Notes to Unaudited Condensed Consolidated Financial Statements...........................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................................8
PART II - OTHER INFORMATION
Item 5. Other Information.......................................................................................19
Item 6. Exhibits and Reports on Form 8-K........................................................................19
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
YESMAIL.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Current Assets:
Cash $ 34,779,978 $ 26,212
Accounts Receivable, net of allowance of $262,000 and $56,000 2,226,439 242,757
Deposit and prepaid expenses 604,901 19,348
------------ ------------
Total current assets 37,611,318 288,317
Property & Equipment, net 1,614,767 353,871
Intangible and other assets, net of amortization of $37,000 and $0 428,202 750
------------ ------------
Total Assets $ 39,654,287 $ 642,938
============ ============
Liabilities:
Current Liabilities:
Accounts payable $ 3,987,577 $ 1,391,509
Short term debt 223,955 342,870
Due to related party - 56,788
Obligations under capital leases, current 497,917 87,165
Accrued payroll and payroll related expenses 1,316,441 213,291
Accrued professional expenses 1,772,477 250,000
Accrued other 400,616 208,903
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Total current liabilities 8,198,983 2,550,526
Obligations Under Capital Leases, less current portion 688,718 152,743
Commitments And Contingencies
Minority Interest - (6,990)
Stockholders' Equity:
Common stock, $.0001 par value; 75,000,000 shares authorized;
20,324,094 and 8,333,333 shares issued and outstanding 2,032 2,222
Common stock in treasury, no shares and 833,333 shares at cost - (1,030)
Additional paid-in capital 44,510,954 159,260
Deferred Compensation (1,069,462) -
Accumulated Deficit (12,676,938) (2,213,793)
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Total stockholders' equity 30,766,586 (2,053,341)
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Total liabilities and stockholders' equity $ 39,654,287 $ 642,938
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements
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YESMAIL.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------------------- ---------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues $ 3,824,894 $ 1,125,774 $ 7,467,317 $ 3,172,263
Cost of Revenues 2,824,164 782,499 5,301,533 1,924,693
------------ ------------ ------------ ------------
Gross Profit 1,000,730 343,275 2,165,784 1,247,570
Operating Expenses
Sales and marketing expenses 3,485,313 341,771 6,586,168 1,019,240
General and administrative expenses 1,045,867 194,724 2,830,310 578,397
Research and development costs 937,143 122,398 2,360,312 398,842
Stock based compensation 483,594 - 694,621 -
------------ ------------ ------------ ------------
Total operating expenses 5,951,917 658,893 12,471,411 1,996,479
Operating loss (4,951,187) (315,618) (10,305,627) (748,909)
Interest expense (37,156) (7,771) (123,162) (25,605)
Net loss before minority interest (4,988,343) (323,389) (10,428,789) (774,514)
Minority Interest - (11,139) (34,356) (20,200)
------------ ------------ ------------ ------------
Net loss $ (4,988,343) $ (334,528) $(10,463,145) $ (794,714)
============ ============ ============ ============
Net loss per share:
Basic and diluted $ (0.40) $ (0.18) $ (1.02) $ (0.14)
Weighted average shares-
basic and diluted 12,427,588 1,869,863 10,290,704 5,745,688
============ ============ ============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements
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YESMAIL.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998
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<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(10,463,145) $ (794,714)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 572,963 73,975
Stock based compensation 956,127
Minority Interest 34,356 11,139
Changes in operating assets and liabilities:
Accounts receivable (1,983,682) (54,080)
Deposits and prepaid expenses (585,553) (711)
Accounts payable and accrued expenses 5,419,343 723,026
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Net cash used in (6,049,591) (41,365)
operating activities
Cash Flows from Investing Activities:
Purchases of property and equipment (1,447,671) (41,734)
Purchases of minority interest (150,000) -
------------ ------------
Net cash used in investing activities (1,597,671) (41,734)
Cash Flows from Financing Activities:
Payments to related parties (56,788) (400)
Borrowings of short term debt - 196,219
Repayments of short term debt (290,493)
Repurchase of stock (428)
Net Proceeds from Issuance of common stock 33,143,331 -
Proceeds from Issuance of preferred stock 8,950,000 -
Proceeds from Sale-leaseback 745,715 -
Principal payments under capital lease obligations (90,737) (29,553)
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Net cash provided by financing activities 42,401,028 165,838
------------ ------------
Net increase in cash 34,753,766 82,739
Cash, beginning of period 26,212 1,841
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Cash, end of period $ 34,779,978 $ 84,580
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 102,407 $ 25,605
============ ============
Noncash Transactions:
Equipment acquired under capital leases $ 354,652 $ 158,733
Issuance of note payable for purchase of minority interest $ 150,000 $ -
Issuance of warrants for common stock under capital leases $ 56,614 $ -
Issuance of common stock options for
purchase of minority interest $ 177,000 $ -
Note receivable from issuance of restricted common stock
common stock $ 3,831,274 $ -
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements
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YESMAIL.COM, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND DESCRIPTION OF BUSINESS
yesmail.com, inc. (the "Company") provides Internet marketing
services to companies engaged in e-commerce. The Company's services include
targeted direct email campaigns to consumers who have given express
permission to receive direct marketing messages in specific categories of
interest.
On September 23, 1999, the Company sold 3.4 million shares of common
stock at $11 per share in an initial public offering. Upon the closing of
the Company's initial public offering all issued convertible preferred
shares were mandatorily converted into common shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of the
Company furnished herein reflects all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
fairly state the Company's financial position, results of operations and
cash flows for the periods presented. This Quarterly Report on Form 10-Q
should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Registration Statement on Form S-1,
as amended, filed with the Securities and Exchange Commission on September
22, 1999. The results of operations for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire year ending December
31, 1999.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
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 consisted of options to purchase 613,302 and
1,525,334 shares of common stock for the three months and nine months ended
September 30, 1999, respectively.
3. SHORT-TERM DEBT
The company currently has a line of credit with a bank providing for
maximum borrowings of $2,500,000. The line is not subject to any financial
covenants, is collateralized by all of the assets and property of the
Company, and expires on June 30, 2000. Interest rate on the line was 8.25%
as of September 30, 1999. There were no outstanding borrowings as of
September 30, 1999.
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4. COMMON STOCK
On July 13, 1999, the Company's Board of Directors approved a 3 for
8 reverse stock split of the Company's outstanding shares of common stock
and convertible preferred stock. The reverse stock split became effective on
September 21, 1999. All share and per share information included in these
financial statements have been retroactively adjusted to reflect this
reverse stock split.
In September 1999, the Company sold 3.4 million shares of common
stock at $11 per share in an initial public offering. Upon closing of the
initial public offering, 5,154,548 preferred shares were converted to common
stock.
5. COMMON STOCK WARRANTS
In August 1999, the Company issued a warrant to a financing company
in conjunction with an executed lease agreement. The warrant to purchase
7,602 shares of common stock was exercisable immediately, at an exercise
price of $2.67 per share and expires on August 24, 2004. Using the
Black-Scholes option pricing model, the warrant was valued at $57,000.
In September 1999 the Company issued a warrant to a recruiting firm
in conjunction with the hiring of one of the Company's executives. The
warrant to purchase 17,969 shares of common stock was exercisable
immediately, at an exercise price of $8.99 per share and expires on
September 12, 2006. Using the Black-Scholes option pricing model, the
warrant was valued at $70,000 and was charged to stock based compensation
expense.
6. STOCK OPTION ACTIVITY
ISSUED OPTIONS
During 1999, the Company issued incentive stock options to purchase
an aggregate of 459,375 shares of common stock and nonstatutory stock
options to purchase an aggregate of 1,443,193 shares of common stock. The
stock options generally vest over a period ranging from date of grant to a
four-year period. Of the nonstatutory stock options issued, 91,318 were
issued to consultants in consideration for services and 18,750 options were
issued as consideration for the purchase of the minority interest in
Starting Point. In addition, the Company issued nonstatutory stock options
to an employee, which is subject to performance and is forfeited if certain
performance measures are not achieved. During the nine months ended
September 30, 1999, the Company recorded stock based compensation expense of
approximately $839,000 related to the issuance of the performance based
options granted to the employee and the issuance of options to the
consultants. The performance based options were valued using the intrinsic
value method at September 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.
DEFERRED STOCK COMPENSATION
For the nine months ended September 30, 1999, employees were granted
options to purchase an aggregate of 969,375 shares of common stock. 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
$1.1 million related to these grants will be charged to operations over the
four-year vesting period. Non-cash compensation expense relating to these
grants totaling approximately $51,000 has been recorded during the nine
months ended September 30, 1999 as a stock based compensation expense.
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7. SUBSEQUENT EVENTS
WARRANT
In October 1999, the Company issued a warrant in connection with an
agreement. The warrant to purchase 100,000 shares of common stock at an
exercise price of $11 per share, is exercisable immediately and expires in
September 2005.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information, the discussion in this report
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 other similar
language. Our actual results could differ materially from those discussed
herein. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this report. Factors that could cause or
contribute to such differences include, but are not limited to, the risks
discussed in "Certain Factors That May Affect Future Results of Operations."
OVERVIEW
We provide permission email direct marketing services. We were founded
in 1995 and 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 7 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
25% of revenue in the third quarter of 1998 to approximately 88% of revenue in
the third quarter of 1999.
We derive revenue by charging fees for sending permission email
messages. Revenue is recognized when emails are sent to subscribers. Our
customers are primarily e-commerce companies 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 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 were
unable to secure new contracts from existing customers or obtain new 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. This is primarily attributable to higher
costs, as a percentage of revenue, associated with the resale of permission
email lists which are managed by third parties. As a result of our change in
focus to permission email, our gross margin percentage declined for the nine
month period ended September 30, 1999, compared to 1998.
We have incurred significant losses since inception and as of September
30, 1999, we had an accumulated deficit of $12.7 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.
-8-
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RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 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 $1.1 million and $3.8 million for the
three months ended September 30, 1998 and 1999, respectively, and $3.2 million
and $7.5 million for the nine months ended September 30, 1998 and 1999,
respectively. Permission email revenues were $278,000 and $3.4 million for the
three months ended September 30, 1998 and 1999, respectively, representing 25%
and 88% of total revenue in the respective periods. Permission email revenues
were $454,000 and $5.6 million for the nine months ended September 30, 1998 and
1999, respectively, representing 14% and 74% 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 Revenue. 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 $783,000 and $2.8 million
for the three months ended September 30, 1998 and 1999, respectively. Cost of
revenues were $1.9 million and $5.3 million for the nine months ended September
30, 1998 and 1999, respectively. The increase in cost of revenues was primarily
due to the increase in sales volume. Gross margins decreased from 30% for the
three months ended September 30, 1998 to 26% for the three months ended
September 30, 1999. Gross margins decreased from 39% for the nine months ended
September 30, 1998 to 29% for the nine months ended September 30, 1999. The
decrease was primarily a result of increased revenues associated with our
permission email strategy because payments we make to third party list managers
are greater as a percentage of revenues than other costs of revenues.
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 $342,000 and $3.5 million for the three months ended
September 30, 1998 and 1999, respectively. Sales and marketing expenses were
$1.0 million and $6.6 million for the nine months ended September 30, 1998 and
1999, respectively. The increases were primarily due to increases in of our
direct sales force 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 $195,000 and $1.0 million for the three months
ended September 30, 1998 and 1999, respectively. General and administrative
expenses were $578,000 and $2.8 million for the nine months ended September 30,
1998 and 1999, respectively. The increases were primarily due to increases 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, third party consulting fees, and related costs for our
product development and technology initiatives. To date, all research and
development costs have been expensed as incurred. Research and development
expenses were $122,000 and $937,000 for the three months ended September 30,
1998 and 1999, respectively. Research and development expenses were $399,000 and
$2.4 million for the nine months ended September 30, 1998 and 1999,
respectively. The increases were 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.
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Stock Based Compensation. Stock based compensation expenses consist of
non-cash stock compensation charges for stock options granted to employees,
consultants and warrants issued to service providers. Stock based compensation
was $0 and $484,000 for the three months ended September 30, 1998 and 1999,
respectively. Stock based compensation was $0 and $695,000 for the nine months
ended September 30, 1998 and 1999, respectively. The compensation charge
represents the excess of the fair market value of the options granted over their
exercise price. In addition, deferred compensation charges of $480,000 and
$900,000 were recorded in the three month and nine month periods ended September
30, 1999, respectively, resulting from options issued to employees which vest
over a four-year period. Deferred compensation will be charged to stock based
compensation expense over the vesting period.
Interest Expense. Interest expense consists of interest on capital lease
and debt obligations. Interest expense was $8,000 and $37,000 for the three
months ended September 30, 1998 and 1999, respectively. Interest expense was
$27,000 and $123,000 for the nine months ended September 30, 1998 and 1999,
respectively. The increases were the result of increased borrowings associated
with our working capital facilities and borrowings under capital lease
facilities.
Minority Interest. Minority interest consists of 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 or state income taxes was
recorded as we incurred net operating losses since inception through September
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 may further restrict our ability to utilize our net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
From inception to January 1999, we 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 a 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 $1.0 million 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. In September 1999, we raised approximately
$33.1 million of net proceeds through an initial public offering of common
stock. As of September 30, 1999, we had $34.8 million of cash and cash
equivalents.
Net cash used in operating activities was $41,000 and $6.0 million for
the nine months ended September 30, 1998 and 1999, respectively. The increases
were primarily the result of the net losses of $795,000 and $10.5 million, for
the nine months ended September 30, 1998 and 1999, respectively, and the
increases in accounts receivable and prepaid expenses. The increases in accounts
receivable were due to our increases in revenue. These net losses 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 $42,000 and $1.6 million for
the nine months ended September 30, 1998 and 1999, respectively. Cash used in
investing activities was primarily related to purchases of property and
equipment.
Net cash provided by financing activities was $166,000 and $42.4 million
for the nine months ended September 30, 1998 and 1999, respectively. Cash
provided by financing activities for the nine months ended September 30, 1998
resulted primarily from borrowings of short-term debt. Cash provided by
financing activities for the nine months ended September 30, 1999 resulted
primarily from the proceeds of our initial public offering and the issuance of
preferred stock.
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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 manage 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 have tested our internal IT and non-IT systems. We have tested these
internally and 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 and hardware are Year 2000 compliant.
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 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 September 30, 1999, we had incurred approximately $60,000 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 in
the aggregate. 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.
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CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE OPERATING RESULTS
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. For the nine months ended September 30, 1999, permission email marketing
services represented 74% of our revenue, compared to 14% in the nine months
ended September 30, 1998. 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 $10 million for the nine months ended September 30, 1999.
As of September 30, 1999, we had an accumulated deficit of $12.7 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:
o seasonality of direct marketing expenditures which are typically
higher in the second and fourth quarters and lower in the first
and third quarters;
o the level of market acceptance of our products and services;
o delays we may encounter in introducing new products and
services;
o competitive developments;
o demand for advertising on the Internet;
o changes in pricing policies and resulting margins;
o changes in the growth rate of Internet usage;
o the growth rate of our network affiliates;
o changes in the mix of products and services sold;
o changes in the mix of sales channels through which products and
services are sold;
o costs related to acquisitions of technology or businesses; and
o economic conditions generally as well as those specific to the
Internet and related industries.
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
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<PAGE> 14
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 customer to customer and several
customers have taken many months to evaluate our services 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, eManage, eTarget, and ePredict. If our customers do not
widely adopt and purchase our services, 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 to our service offering in a
timely manner, we may not be able to successfully compete.
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, Anthony Priore, our Vice President,
Marketing, Todd Love, our Vice President of Network Development, and Bruce
Mitchell, our Vice President of Strategic Development. 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.
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<PAGE> 15
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
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 website 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.
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 relations 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 one to three 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.
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
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<PAGE> 16
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.
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.
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;
- - 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.
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<PAGE> 17
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 difficult 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
- - and subscriber list management.
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
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<PAGE> 18
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 is 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 and 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 the 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 Internet, or the application
of existing laws to the Internet.
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.
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<PAGE> 19
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 22, 1999, in connection with the Company's initial public
offering, a Registration Statement on Form S-1 (No. 333-80137) was declared
effective by the Securities and Exchange Commission, pursuant to which 3,400,000
shares of the Company's Common Stock were offered and sold for the account of
the Company at a price of $11.00 per share, generating gross offering proceeds
of $37.4 million. After deducting approximately $2.6 million in underwriting
discounts and $1.7 million in other related expenses, the net proceeds of the
offering were approximately $33.1 million. The Company has not yet used any of
the funds from the initial public offering, and the $33.1 million has been
invested in investment grade, interest bearing securities. The Company intends
to use such remaining proceeds for general corporate purposes, including working
capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit # Description of Document
27.1 Financial Data Schedule
B. Reports on Form 8-K
None
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<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 15, 1999
YESMAIL.COM, INC.
(Registrant)
By: /s/ David B. Menzel
-----------------------------------
David B. Menzel
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
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<PAGE> 21
YESMAIL.COM, INC.
Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule
-20-
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 34,779,978
<SECURITIES> 0
<RECEIVABLES> 2,488,517
<ALLOWANCES> 262,078
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<CURRENT-ASSETS> 37,611,318
<PP&E> 2,321,538
<DEPRECIATION> 706,771
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<COMMON> 2,032
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