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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 000-27993
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD__________ TO_____________ .
EXACTIS.COM, INC.
(Name of Registrant in its charter)
DELAWARE 84-1359618
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
717 17TH STREET, SUITE 500, DENVER, CO 80202
(Address of principal executive offices, including zip code)
(303) 675-2300
(Registrant's telephone number, including area code)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 9, 2000
Common Stock, par value $.01 per share 12,751,434 Shares
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EXACTIS.COM, INC.
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1 Condensed Financial Statements (unaudited) ............................... 3
Condensed Balance Sheets ................................................. 3
Condensed Statements of Operations ....................................... 4
Condensed Statements of Cash Flows ....................................... 5
Notes to Interim Financial Statements .................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk ............... 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings......................................................... 19
Item 2 Changes in Securities and Use of Proceeds................................. 19
Item 3 Defaults upon Senior Securities .......................................... 19
Item 4 Submission of Matters to a Vote of Security Holders....................... 19
Item 5 Other Information......................................................... 19
Item 6 Exhibits and Reports on Form 8K........................................... 19
Signatures ............................................................... 20
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
EXACTIS.COM, INC.
Condensed Balance Sheets
(Unaudited)
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ASSETS DECEMBER 31, MARCH 31,
1999 2000
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Current assets:
Cash and cash equivalents $ 52,349,712 39,805,975
Investments -- 2,936,917
Restricted cash 1,200,000 1,200,000
Accounts receivable, net of allowance of $100,000 and
$125,000, respectively 3,070,685 4,467,268
Prepaid expenses and other 1,353,712 1,386,097
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Total current assets 57,974,109 49,796,257
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Property and equipment, at cost:
Computers and equipment - production 5,713,751 7,888,678
Computers and equipment - administrative 860,833 1,222,932
Furniture and fixtures 794,825 1,323,988
Purchased computer software 1,566,333 1,800,801
Leasehold improvements 1,411,711 2,122,535
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10,347,453 14,358,934
Less accumulated depreciation and amortization (3,736,961) (4,413,069)
-------------- --------------
6,610,492 9,945,865
Other assets 257,903 260,695
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Total assets $ 64,842,504 60,002,817
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, MARCH 31,
1999 2000
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Current liabilities:
Accounts payable $ 1,290,851 1,831,668
Accrued liabilities 2,119,952 1,810,079
Accrued payroll and benefits 640,555 457,085
Deferred revenue 3,860,444 4,191,277
Current portion of notes payable 527,351 --
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Total current liabilities 8,439,153 8,290,109
Deferred revenue, net of current portion 3,200,000 1,900,000
Notes payable, less current portion 127,831 --
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Total liabilities 11,766,984 10,190,109
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Stockholders' equity:
Undesignated preferred stock, 3,500,000 shares authorized,
none issued or outstanding -- --
Common stock, par value $.01, 35,000,000 shares authorized 126,689 127,355
Additional paid-in capital 89,508,055 89,673,222
Unearned stock option compensation (2,623,764) (2,429,301)
Accumulated deficit (33,935,460) (37,558,568)
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Total stockholders' equity 53,075,520 49,812,708
Commitments and contingencies
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Total liabilities and stockholders' equity $ 64,842,504 60,002,817
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</TABLE>
See accompanying notes to condensed financial statements.
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EXACTIS.COM, INC.
Condensed Statements of Operations
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1999 2000
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Revenue:
Email and other services $ 1,759,003 4,008,945
Online publishing 246,433 271,086
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Total revenue 2,005,436 4,280,031
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Cost of revenue:
Email and other services 143,272 338,733
Online publishing 223,707 261,016
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Total cost of revenue 366,979 599,749
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Gross profit 1,638,457 3,680,282
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Operating expenses:
Marketing and sales 612,155 1,839,269
Research, development and engineering 962,872 3,898,924
General and administrative 1,117,812 1,585,429
Depreciation and amortization 309,769 704,100
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Total operating expenses 3,002,608 8,027,722
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Loss from operations (1,364,151) (4,347,440)
Interest income, net 2,244 724,332
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Net loss (1,361,907) (3,623,108)
Accretion of preferred stock to liquidation value (26,306) --
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Net loss attributable to common stockholders $ (1,388,213) (3,623,108)
=============== ===============
Net loss per share - basic and diluted $ (1.38) (.29)
=============== ===============
Weighted average number of common shares
outstanding - basic and diluted 1,009,053 12,694,903
=============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
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EXACTIS.COM, INC.
Condensed Statements of Cash Flows
(Unaudited)
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THREE MONTHS ENDED MARCH 31,
--------------------------------
1999 2000
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Cash flows from operating activities:
Net loss $ (1,361,907) (3,623,108)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 309,769 704,100
Amortization of deferred marketing and
financing costs 25,597 25,409
Common stock options issued for services and compensation 580,996 244,437
Accretion of premium on notes payable 13,411 21,484
Changes in operating assets and liabilities:
Receivables (410,755) (1,396,583)
Prepaid expenses and other (71,319) (32,385)
Other assets (1,814) (28,201)
Accounts payable and accrued liabilities 339,567 47,475
Deferred revenue (1,119,623) (969,167)
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Net cash used by operating activities (1,696,078) (5,006,539)
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Cash flows from investing activities:
Purchase of property and equipment (473,768) (4,039,474)
Purchase of investments -- (2,936,917)
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Net cash used by investing activities (473,768) (6,976,391)
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Cash flows from financing activities:
Proceeds from issuance of common and preferred stock -- 115,859
Principal payments on capital lease obligations (8,056) --
Payments on notes payable (162,563) (676,666)
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Net cash used by financing activities (170,619) (560,807)
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Net decrease in cash and cash equivalents (2,340,465) (12,543,737)
Cash and cash equivalents at beginning of period 6,383,255 52,349,712
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Cash and cash equivalents at end of period $ 4,042,790 39,805,975
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</TABLE>
See accompanying notes to condensed financial statements.
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EXACTIS.COM, INC.
Notes to Condensed Financial Statements
(Unaudited)
1. Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
Exactis.com, Inc. (the Company) provides permission-based outsourced
email marketing and communications services. The Company completed an
initial public offering of shares of its common stock in November 1999.
On February 29, 2000, the Company agreed to be acquired by 24/7 Media,
Inc. Under the terms of the proposed transaction, each outstanding share
of the Company's common stock is to be exchanged for 0.60 shares of
common stock of 24/7 Media, Inc. Completion of the transaction is
subject to regulatory and stockholder approval.
(b) Interim Results
The condensed financial statements and related notes as of March 31,
2000 and for the three month periods ended March 31, 1999 and 2000 are
unaudited. In management's opinion, the unaudited condensed financial
statements have been prepared on the same basis as the annual financial
statements and reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial
position as of March 31, 2000 and the results of operations and cash
flows for the three month periods ended March 31, 1999 and 2000. The
results for the three month period ended March 31, 2000 are not
necessarily indicative of the results to be expected for any subsequent
quarter or the entire fiscal year ending December 31, 2000. The
consolidated balance sheet at December 31, 1999 has been derived from
the audited financial statements at that date.
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. It is
suggested that these unaudited financial statements be read in
conjunction with the Company's audited financial statements and notes
thereto as included in the Company's report on Form 10-K for the year
ended December 31, 1999.
(c) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
(d) Investments
Investments at March 31, 2000 consist of commercial paper with a
maturity of greater than three months.
(e) Loss Per Share
Loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS No. 128). Under SFAS No. 128, basic earnings (loss) per share
(EPS) excludes dilution for potential common stock and is computed by
dividing income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Basic and diluted EPS are the same for the three months ended
March 31, 1999 and 2000 as all potential common stock instruments are
antidilutive.
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2. Stock Option Activity
In the quarter ended March 31, 2000, the Company granted a total of
311,600 stock options to employees under the 1999 Equity Incentive Plan,
277,000 of which were incentive stock options with exercise prices ranging
from $17.81 to $35.00 per share, based on the fair market value of the
underlying common stock at the time of grant, and 34,600 of which were
non-qualified stock options with exercise prices of $20.18 per share,
based on 85% of the fair market value of the underlying common stock at
the time of grant. Additional unearned stock option compensation of
$132,251 was recorded related to the 34,600 stock options which were
granted with exercise prices less than fair value.
3. Notes Payable
The Company's notes payable were repaid in March 2000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of federal securities law. Such statements can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. Although we believe that
the expectations reflected in the forward-looking statements are based on
reasonable assumptions, certain factors such as rapid changes in the markets in
which we compete or general economic conditions might cause a difference between
actual results and such forward-looking statements. When considering such
forward-looking statements, prospective investors should consider the "Risk
Factors" and other cautionary statements in this report.
OVERVIEW
We are a leading provider of permission-based outsourced email marketing and
communications solutions primarily to companies in the media, ecommerce and
financial services industries. We were founded in January 1996 under the name
Mercury Mail, Inc. In August 1997, we changed our name to InfoBeat Inc. and in
January 1999 we changed our name to Exactis.com, Inc. In November 1999, we
completed our initial public offering.
On February 29, 2000, we entered into a definitive Agreement and Plan of
Merger by and among us, 24/7 Media, Inc. and Evergreen Acquisition Sub Corp., a
wholly owned subsidiary of 24/7 Media, pursuant to which, 24/7 Media will
acquire us in a reverse triangular merger. Pursuant to the Merger Agreement, we
will continue to operate as a wholly-owned subsidiary of 24/7 Media. We believe
the combined strengths of the two companies will enable us to offer an
integrated, end-to-end customer relationship management solution that will help
the combined companies' clients to acquire new customers and retain existing
customers. Under the terms of the merger agreement, each outstanding share of
our common stock will be exchanged for 0.60 shares of 24/7 Media common stock.
Our board of directors and the board of directors of 24/7 Media have approved
the merger. The merger is subject to various conditions, including regulatory
approval and stockholder approval. We expect that the Merger will be completed
in June 2000.
Our initial business was the publication of a suite of advertising supported
newsletters delivered daily to subscribers via email, which we refer to as the
online publishing business. This business consisted of the online publication of
newsletters and other bulletins about a variety of topics of interest to
consumers, which we refer to as the InfoBeat newsletters. In 1997, we began
using the email technologies we developed for the online publishing business to
deliver email newsletters for another client. In early 1998, we launched our
outsourced email marketing and communications services, which we refer to as our
email services business. In addition, we provide other services related to the
email services business, primarily consisting of custom engineering development
work.
In December 1998, we sold our online publishing business to Sony Music and
simultaneously entered into a service agreement to manage the production and
delivery of the InfoBeat newsletters for Sony Music. Under the service
agreement, we will provide services to Sony Music through December 2001. Sony
Music agreed to pay us a minimum of $14.8 million associated with the sale and
service agreements. The assets sold to Sony Music consisted primarily of
intangible assets, the fair value of which were not
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objectively determinable. Therefore, under applicable accounting standards, the
$14.8 million of proceeds is being recognized as email and other services
revenue over the term of the service agreement based on the monthly minimum
number of email messages to be provided under the service agreement. Because the
Sony Music revenue includes the proceeds of the sale and service agreements,
margins recognized on the Sony Music contract may not be indicative of other
email services contracts. We received advance payments from Sony Music of $7.8
million in cash and receivables in December 1998 and $2.8 million in December
1999 which have been recorded as deferred revenue and will be recognized as
revenue in the period in which services are performed. The deferred revenue
balance related to Sony Music totaled $7.1 million at December 31, 1999 and $6.1
million at March 31, 2000. We will recognize a minimum of $4.9 million in
revenue in 2000 and $5.2 million in 2001 from the deferred revenue and the $3.0
million remaining to be paid by Sony Music over the balance of the service
agreement.
Total revenue from services provided to Sony Music constituted $2.4 million,
or 55%, of our total revenue in the three months ended March 31, 2000.
Since January 1999, we have focused primarily on providing outsourced email
marketing and communications solutions to a wide range of clients primarily in
the media, ecommerce and financial services industries. We generate revenue
based on a fee per email message sent, charges for related services and custom
engineering development work. The actual per message fees are related to each
client's monthly email message volume and generally decline as a client's volume
increases. The majority of our clients execute a 12-month contract with
guaranteed monthly minimum charges based upon their expected volume of messages.
Revenue is recognized in the period in which services are provided. We record
deferred revenue for payments received and receivables which are contractually
due in advance of services provided. In January 1999 we agreed to provide Sony
Music with editorial services related to the InfoBeat newsletters. Our online
publishing revenue consists of cost reimbursements by Sony Music for employees
providing these editorial services.
Cost of revenue consists primarily of editorial costs associated with the
InfoBeat newsletters, sales commissions and network connectivity charges from
our Internet service providers. Internet service providers charge us for network
connectivity based on monthly minimum charges up to a certain level of usage and
incrementally for usage above that level. Sales commissions are paid monthly
based on a percentage of revenue recognized during the month.
Our average cost to deliver an email message is significantly influenced by
the volume of email messages processed by our systems. As we continue to add new
clients, and as our existing clients increase both the size of their email lists
as well as their overall usage of our services, we expect our average cost to
deliver an email message to decline over the long term. In addition, a portion
of our research, development and engineering efforts are devoted to improving
the performance and efficiency of our systems.
We incurred net losses of approximately $3.4 million from January 30, 1996,
the date of our inception, through December 31, 1996, $7.7 million in 1997, $7.9
million in 1998, $14.6 million in 1999 and $3.6 million in the three months
ended March 31, 2000. We had an accumulated deficit of $37.6 million at March
31, 2000. We expect to increase spending on marketing and sales as we expand our
sales force and increase promotional and advertising expenditures. We also
expect substantially higher general and administrative and research, development
and engineering expenses as we expand our infrastructure to support expected
growth and as we broaden our suite of email services. As a result of these
increases, we expect to continue to incur significant net losses on a quarterly
and annual basis through at least 2000.
In view of the rapidly evolving nature of our business, our limited
operating history and our recent focus on providing outsourced email marketing
and communications solutions, we believe that period-to-period comparisons of
our revenue and operating results, including our operating expenses as a
percentage of total revenue, are not meaningful and should not be relied upon as
an indication of future performance. In addition, we do not believe that our
historical growth rates are indicative of future results.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenue. Total revenue consists of email and other services revenue and
online publishing revenue. Our total revenue increased to $4.3 million in the
first three months of 2000 from $2.0 million in the first three months of 1999.
Email and other services revenue increased to $4.0 million in the first three
months of 2000 from $1.8 million in 1999. Sony Music, our largest client,
represented $2.1 million of the email and other services revenue for the first
three months of 2000 versus $1.3 million for the first three months of 1999.
Fees for custom engineering development work were responsible for the majority
of the Sony revenue increase. The balance of the growth is attributable to
increases in both the balance of our client base and the volume of email
messages sent by those clients. Excluding Sony Music, we sent approximately 340
million email messages for 90 clients in the first three months of 2000, as
compared to approximately 65 million email messages for 44 clients for the
comparable period in 1999.
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Cost of Revenue. Cost of revenue increased to $600,000 in the first three
months of 2000 from $367,000 in the 1999 period. Sales commissions related to
our email and other services revenue growth and higher network connectivity
costs related to our increased email message volume and the addition of a second
internet service provider for redundancy were responsible for the majority of
the increase in the 2000 period.
Marketing and Sales. Marketing and sales costs consist primarily of salaries
and other personnel costs related to our sales, account management, customer
care and marketing employees, as well as travel, advertising and other
promotional costs. Marketing and sales costs increased to $1.8 million in the
first three months of 2000 from $612,000 in the first three months of 1999.
Salaries and other personnel costs represented the majority of the 2000 increase
as the number of marketing and sales employees increased to 69 as of March 31,
2000 from 32 at the beginning of 1999. We also significantly increased our
spending on advertising and other promotional costs in the 2000 period. We
expect to significantly increase the number of employees, as well as advertising
and promotional spending in the future.
Research, Development and Engineering. Research, development and engineering
costs consist primarily of salaries and other personnel costs related to our
operations and research and development groups, consultants and outside
contractor costs, and software and hardware maintenance expenses. Research,
development and engineering costs increased to $3.9 million in the first three
months of 2000 from $963,000 in the first three months of 1999. Salaries and
other personnel costs significantly increased by $1.4 million in 2000 as the
number of research, development and engineering employees increased to 93 as of
March 31, 2000 from 36 at the beginning of 1999. In addition, the cost of
outside contractors and consultants increased by $1.3 million in 2000. We are
continuing to invest substantially in this area to develop the new features and
services required to meet the needs of current and potential clients, and plan
to maintain or increase the dollar amount we spend on research, development and
engineering activities in the future.
General and Administrative. General and administrative costs consist
primarily of salaries and other personnel costs related to executive and
administrative personnel, occupancy and general office costs and professional
fees. General and administrative costs increased to $1.6 million in the first
three months of 2000 from $1.1 million in the first three months of 1999.
Non-cash compensation related to the grant of stock options below fair market
value declined from $581,000 in the first three months of 1999 to $244,000 in
the first three months of 2000. Salaries and other personnel costs increased
approximately $220,000 in the 2000 period as the number of general and
administrative employees increased to 20 as of March 31, 2000 from 7 at the
beginning of 1999. Occupancy and general office costs increased approximately
$200,000 due to an increase in the total number of employees and the leasing of
additional office space. Costs associated with operating as a public company and
costs related to the pending merger with 24/7 Media also contributed to the 2000
increase.
Depreciation and Amortization. Depreciation and amortization expense
consists primarily of depreciation of equipment, software and furniture and
amortization of leasehold improvements. Depreciation and amortization expense
increased to $704,000 in the first three months of 2000 from $310,000 in the
first three months of 1999. Purchases of equipment and software necessary to
deliver higher email message volume, as well as for general corporate use, were
responsible for this increase in the 2000 period.
Interest income, net. Interest income, net of interest expense, increased
to $724,000 in the first three months of 2000 from $2,000 in the first three
months of 1999. Investment of the proceeds of our November 1999 initial public
offering were responsible for the increase in the 2000 period.
INCOME TAXES
As of December 31, 1999, a net operating loss carryforward for federal
income tax purposes of approximately $22 million was available to offset future
federal taxable income, if any, through 2019. No tax benefit for these losses
has been recorded by us in 1999 or 2000 due to uncertainties regarding the
utilization of the loss carryforward. The utilization of a portion of the net
operating loss carryforwards will be limited under Section 382 of the Internal
Revenue Code due to changes in ownership interests.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations primarily
from sales of our preferred stock and, to a lesser extent, proceeds from bank
loans. Net cash used by operating activities was $5.0 million in the first three
months of 2000 and $1.7 million in the first three months of 1999. We incurred
net losses of $3.6 million in the first three months of 2000 and $1.4 million in
the first three months of 1999. Noncash items related to depreciation and
amortization and costs related to common stock options issued for services and
compensation were $949,000 in the 2000 period and $891,000 in the 1999 period.
Net cash used in each
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period also included significant changes in operating assets and liabilities,
particularly increases in accounts receivable and decreases in deferred revenue.
Receivables increased by $1.4 million in the 2000 period and $411,000 in the
1999 period, primarily due to increases in revenue billed. Deferred revenue
decreased $969,000 in the 2000 period and $1.1 million in the 1999 period due to
the structure of the agreements with Sony Music described above.
Net cash used by investing activities was $7.0 million in the first three
months of 2000 and $474,000 in the first three months of 1999. In 2000, $4.0
million of net cash used by investing activities was the result of capital
expenditures for equipment and software used in our data centers from which we
operate our email message platform and capital expenditures related to our new
corporate offices and data center. Net cash used by investing activities in 2000
also included $3.0 million of cash invested in commercial paper with a maturity
of greater than three months. In 1999, net cash used by investing activities was
primarily the result of capital expenditures for equipment and software for our
email message platform.
Net cash used by financing activities was $561,000 in the first three months
of 2000 and $171,000 in the first three months of 1999, mainly from the payment
of notes payable. In March 2000 we repaid the balance due under our existing
loans in anticipation of the merger with 24/7 Media.
At March 31, 2000, we had $39.8 million in cash and cash equivalents. We
plan to continue increasing our general level of spending in the future and plan
to continue expending significant resources on capital expenditures in 2000 for
equipment and software, furniture, and leasehold improvements. We expect to
continue incurring operating losses through at least the end of 2000.
We expect that existing cash resources will be sufficient to fund currently
anticipated working capital and capital expenditure needs at least through the
end of 2000. Thereafter, we may require additional funds to support our working
capital requirements or for other purposes. If we are not successful in raising
capital when we need it and on terms acceptable to us, it could harm our
business, financial condition and operating results.
RISK FACTORS
RISKS ASSOCIATED WITH THE MERGER
Although we have entered into a definitive Agreement and Plan of Merger by
and among us, 24/7 Media, Inc. and Evergreen Acquisition Sub Corp., a wholly
owned subsidiary of 24/7 Media, pursuant to which, 24/7 Media will acquire us in
a reverse triangular merger, the merger is subject to various conditions,
including regulatory approval and stockholder approval. There can be no
assurances that such conditions will be satisfied. If the merger with 24/7 Media
does not occur, our business may be adversely affected. Specifically, our
operating results may suffer, the price of our common stock may decline, we may
lose existing and future customers and we may be unable to secure additional
financing to fund our operations when and as needed.
RISKS ASSOCIATED WITH OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, WE EXPECT CONTINUING LOSSES AND WE MAY NEVER
ACHIEVE PROFITABILITY.
We have not generated enough revenue to cover the substantial amounts we
have spent to create, launch and enhance our services. If our revenue does not
increase substantially, we may never become profitable. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. This may, in turn, cause our stock price to decline.
In addition, if we do not achieve or sustain profitability in the future, we may
be unable to continue our operations. Our operating costs have exceeded our
revenue in all quarters since our inception. We incurred net losses of
approximately $3.4 million from January 30, 1996, the date of our inception,
through December 31, 1996, $7.7 million in 1997, $7.9 million in 1998, $14.6
million in 1999 and $3.6 million in the first three months of 2000. We had an
accumulated deficit of $37.6 million at March 31, 2000. We expect to incur net
losses and negative cash flows from operations for the foreseeable future.
We have invested heavily in technology and infrastructure development. We
expect to continue to invest substantial financial and other resources to
develop and introduce new services and expand our sales and marketing
organizations, strategic relationships and operating infrastructure. We expect
that our cost of revenue, sales and marketing expenses, general and
administrative expenses, research development and engineering expenses,
operations and customer support expenses and depreciation and amortization
expenses will continue to increase in absolute dollars and may increase as a
percent of revenue. If our revenue does not correspondingly increase, we may
never become profitable.
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OUR BUSINESS WILL SUFFER IF THE MARKET FOR OUTSOURCED EMAIL MARKETING AND
COMMUNICATIONS SOLUTIONS FAILS TO GROW.
The market for outsourced email marketing and communications solutions is
new and rapidly evolving. If sufficient demand for our services does not
develop, we may not generate sufficient revenue to offset our costs and we may
never become profitable. Market acceptance of our existing and planned services
will depend on the acceptance and use of outsourced email marketing and
communications solutions. Our current and planned services are very different
from the traditional advertising and direct mail methods that our clients have
historically used to attract new customers and maintain customer relationships.
Businesses that have already invested substantial resources in traditional or
other methods of marketing and communications may be reluctant to adopt new
marketing strategies and methods. Consumers may also be reluctant to alter
established patterns of purchasing goods and services. Moreover, the sales cycle
for the new targeted messaging services that we are developing may be longer
than for existing services.
ONE OF OUR CLIENTS ACCOUNTED FOR A MAJORITY OF OUR REVENUE AND A SMALL NUMBER OF
CLIENTS ACCOUNTED FOR A HIGH PERCENTAGE OF OUR REVENUE IN A RECENT PERIOD;
THEREFORE, THE LOSS OF A MAJOR CLIENT COULD HARM OUR BUSINESS.
A small number of clients account for most of our revenue. If we lose
existing clients and do not replace them with new clients, our revenue will
decrease and may not be sufficient to cover our costs. In the first three months
of 2000, Sony Music accounted for approximately 55% of our total revenue and our
four next largest clients accounted for approximately 16% of our total revenue.
We expect that a small number of clients will continue to account for a high
percentage of our total revenue for at least the foreseeable future. This could
cause our revenue and earnings to fluctuate from quarter to quarter. The loss of
a major client could harm our business.
INTENSE COMPETITION EXISTS IN THE EMAIL SERVICES MARKET AND WE EXPECT
COMPETITION TO CONTINUE TO INTENSIFY.
Competition in the email services market is intense. If we do not respond
successfully to competitive pressures, we could lose market share. We may not be
able to compete successfully against our current or future competitors which
include the in-house email capabilities of many businesses. An increasing number
of companies are entering our market. Many of our competitors have greater brand
recognition, longer operating histories, larger customer bases and greater
financial, marketing and other resources than we have. These factors may place
us at a disadvantage when we respond to our competitors' pricing strategies,
technological advances and other initiatives. Additionally, our competitors may
develop or provide services that are superior to ours or that achieve greater
market acceptance. We expect competition to persist and intensify. Barriers to
entry may be insubstantial and we may face substantial and growing competitive
pressures from companies both in the United States and abroad.
DELAYS IN THE INTRODUCTION OF NEW SERVICES MAY HARM OUR BUSINESS.
We may experience delays in the development, sales and launch of new
services, which could adversely affect our revenue and profitability. We have
recently completed development of a new service to provide our clients with a
wide variety of targeted marketing capabilities. Our ability to sell and launch
these new targeted marketing services is unproven. We are also developing or
plan to develop other new services and enhancements to existing services. We may
experience delays in the development, sale and launch of these new services.
Additionally, actual service offerings and benefits could differ materially from
those currently planned for many reasons, some or all of which may be out of our
control, which could result in a loss of clients.
WE DEPEND ON KEY STRATEGIC RELATIONSHIPS, INCLUDING RELATIONSHIPS WITH SONY
MUSIC AND E.PIPHANY, INC., TO GENERATE REVENUE AND OUR BUSINESS COULD SUFFER IF
ANY OF THESE RELATIONSHIPS ARE TERMINATED.
We are highly dependent on our strategic relationships with Sony Music and
E.piphany, Inc. If these relationships are terminated early, our revenue will
decrease. Our relationship with Sony Music accounted for approximately 55% of
our total revenue in the first three months of 2000 and 65% of our total revenue
in 1999. Our relationship with E.piphany is critical to our recently developed
targeted messaging capabilities. Our agreement with Sony Music terminates in
December 2001 and certain terms of our agreement with E.piphany related to
pricing terminate in March 2001. These agreements, as well as others covering
future strategic relationships, may not be renewed at the end of their
respective terms or may be terminated early in certain circumstances upon
written notice by
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either party. We may also be unable to effectively reallocate personnel,
equipment and other resources that were allocated to these relationships.
In October 1999, we found that the software we use to deliver the InfoBeat
newsletter for Sony permitted certain advertisers to access the email addresses
of InfoBeat subscribers who elected to view advertisements in the newsletter.
Sony's privacy policy prohibits disclosure of a subscriber's email address to
advertisers without the subscriber's consent. We have revised our software to
prevent unauthorized disclosure of a subscriber's email address. We believe that
this issue has not seriously harmed our relationship with Sony. However, this
event and the November 8, 1999 Wall Street Journal article reporting this issue
may have harmed our reputation with our current and potential customers, which
could negatively impact our ability to retain and attract customers.
OUR FAILURE TO MANAGE OUR PLANNED RAPID GROWTH COULD CAUSE OUR BUSINESS TO
SUFFER.
Our failure to manage our growth effectively could result in service
disruptions, loss of competitive position and lack of adequate financial
controls. We plan to expand our operations rapidly and to significantly augment
our infrastructure. We must effectively manage our operational, customer service
and financial systems, procedures and controls to manage this future growth.
This expansion is expected to place a significant strain on our managerial,
operational and financial resources.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND MAY FALL BELOW MARKET
EXPECTATIONS AS A RESULT OF NON-CASH CHARGES RELATED TO STOCK OPTIONS.
Our operating results will be affected by non-cash charges associated with
stock-based arrangements with employees. As a result of stock option grants in
1999 and 2000 with exercise prices below fair value, we are recognizing total
non-cash compensation expense of $3.8 million over the vesting periods of the
options, which are generally three or four years.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND MAY FALL BELOW MARKET
EXPECTATIONS AS A RESULT OF VARIATIONS IN EQUIPMENT EXPENDITURES.
Our operating results may be affected by variations in equipment
expenditures. Due to lead times required to purchase, install and test
equipment, we typically need to purchase equipment well in advance of the
recognition of any expected revenue. Delays in obtaining this equipment could
result in unexpected revenue shortfalls. Small variations in the timing of the
recognition of specific revenue, including deferred revenue, could cause
significant variations in operating results from quarter to quarter.
Period-to-period comparisons of our operating results are not a good
indication of our future performance. Our operating results in some quarters may
be below market expectations. In this event, the price of our common stock is
likely to decline.
IF WE DO NOT SUCCESSFULLY EXPAND OUR EMAIL SERVICES AND OPERATIONS INTO
INTERNATIONAL MARKETS, OUR BUSINESS COULD SUFFER.
We are expanding into international markets and plan to spend significant
financial and managerial resources to do so. If our revenue from international
operations does not exceed the expense of establishing and maintaining these
operations, we may never achieve profitability or may attain significantly
reduced profitability. We do not have expertise in conducting business
internationally and may not be able to compete effectively in international
markets. Therefore, we face several risks, including:
o compliance with regulatory requirements which could change in unexpected
ways;
o difficulties and costs of staffing and managing international
operations;
o varying technology standards from country to country;
o uncertainties regarding protection of intellectual property rights in
certain countries;
o difficulties in collecting accounts receivable;
o fluctuations in currency exchange rates;
o imposition of currency exchange controls; and
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o potentially adverse tax consequences.
IF THE MERGER WITH 24/7 MEDIA DOES NOT OCCUR, WE MAY ENGAGE IN FUTURE
ACQUISITIONS THAT HARM OUR OPERATING RESULTS.
If the merger with 24/7 Media does not occur, we may review acquisition or
investment prospects that would complement our current services, enhance our
technical capabilities or offer growth opportunities. These actions by us could
harm our operating results and the price of our common stock. Acquisitions could
also entail many other risks, such as:
o difficulties in integrating acquired operations, technologies or
services;
o unanticipated costs associated with the acquisitions that harm our
operating results;
o negative effects on our reported results of operations from
acquisition-related charges and of amortization of acquired technology
and other intangibles; and
o risks of entering markets in which we have no or limited prior
experience.
Any of these risks could harm our business, operating results and financial
condition.
IF THE MERGER WITH 24/7 MEDIA DOES NOT OCCUR, WE MAY NOT BE ABLE TO OBTAIN
ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN NEEDED.
If the merger with 24/7 Media does not occur, and if our capital
requirements or revenue vary materially from our current plans or if unforeseen
circumstances occur, we may require additional financing sooner than we
anticipate. This financing may not be available on a timely basis, in sufficient
amounts or on terms acceptable to us. The financing may also dilute existing
stockholders.
If we cannot obtain adequate funds on acceptable terms, we may be unable to:
o fund our capital requirements;
o take advantage of strategic opportunities;
o respond to competitive pressures; and
o develop or enhance our services.
Any of these failures could adversely affect our profitability. If we do not
achieve or sustain profitability in the future, we may be unable to continue our
operations.
WE MAY NOT BE ABLE TO ENTER INTO NEW STRATEGIC RELATIONSHIPS BECAUSE WE MAY
COMPETE WITH EXISTING OR FUTURE RELATIONSHIPS.
Our existing and future strategic relationships may limit our ability to
enter into other strategic relationships or sell our services to similar
businesses. This could limit our ability to compete effectively. For example,
our agreements with Sony Music prevent us from entering into a relationship that
is competitive with the online publishing services that we provide to Sony
Music. We may also enter into similar non-competition arrangements in connection
with future strategic relationships.
WE MAY NOT BE ABLE TO SUCCESSFULLY OPERATE OUR BUSINESS IF WE LOSE KEY
PERSONNEL.
The loss of any member of our senior management team could negatively affect
our future operating results. We believe that our success will depend on the
continued services of our key senior management personnel, especially E. Thomas
Detmer, Jr., our president and chief executive officer. None of the persons
currently in senior management are bound by an employment agreement with us.
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WE MAY NOT BE ABLE TO SUCCESSFULLY OPERATE OUR BUSINESS IF OUR NEWLY FORMED
MANAGEMENT TEAM DOES NOT WORK EFFECTIVELY TOGETHER.
If our management team is unable to work together effectively, our business
could be harmed. The majority of our executive officers, including E. Thomas
Detmer, Jr., our president and chief executive officer, Kenneth W. Edwards, Jr.,
our chief financial officer, and Cynthia L. Brown, our vice president of
engineering, joined us during 1999. Accordingly, our management team has had a
limited time to work together and may not be able to work together effectively.
OUR BUSINESS WILL SUFFER IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL HIGHLY
SKILLED PERSONNEL.
In order for us to succeed, we must identify, attract, retain and motivate
highly skilled technical, managerial, sales and marketing personnel. Failure to
retain and attract necessary personnel will limit our ability to compete
effectively and provide our services. We plan to significantly expand our
operations and we will need to hire additional personnel as our business grows.
Competition for qualified personnel is intense. In particular, we have
experienced difficulties in hiring highly skilled technical personnel and in
retaining employees due to significant competition for experienced personnel in
our market.
RISKS ASSOCIATED WITH OUR TECHNOLOGY
IF WE FAIL TO UPGRADE OUR SYSTEMS AND INFRASTRUCTURE TO CONTINUE TO EXPAND OUR
BUSINESS AND TO ACCOMMODATE INCREASES IN EMAIL TRAFFIC, WE MAY EXPERIENCE SLOWER
RESPONSE TIMES OR SYSTEM FAILURES.
We must continue to expand our network infrastructure as the number of our
clients increases. Additionally, we must adapt our network infrastructure to the
increasing volume and complexity of information our clients wish to transmit and
as their requirements change. If we do not add sufficient capacity to handle
growing volume and complexity of messages, we could suffer slower response times
or system failures which could result in a loss of clients. We have made and
intend to continue to make substantial investments to increase our capacity by
adding new hardware and upgrading our software. Our services may be unable to
handle growing message volume and complexity. The expansion of our network
infrastructure will also require substantial financial, operational and
managerial resources.
In addition, we may not be able to accurately project the rate or timing of
email traffic increases or upgrade our systems and infrastructure to accommodate
future traffic levels. As we upgrade our network infrastructure to increase
capacity available to our clients, we may encounter equipment or software
incompatibility which may cause delays in implementation. We may not be able to
expand or adapt our network infrastructure to meet additional demand or our
clients' changing requirements in a timely manner or at all.
WE MAY NOT COMPETE SUCCESSFULLY AND THE VALUE OF YOUR INVESTMENT MAY DECLINE IF
WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND MARKET CONDITIONS.
If we do not successfully respond to new technological developments in our
industry or are unable to respond in a cost-effective manner, we may experience
a loss of competitive position and lose market share. We operate in an industry
that is characterized by rapid technological change, frequent new service
introductions, changing client demands and the emergence of new industry
standards and practices that could render our existing services, proprietary
technology and systems obsolete. We must continually improve the performance,
features and reliability of our services, particularly in response to
competitive offerings. Our success depends, in part, on our ability to enhance
our existing services and to develop new services, functionality and technology
that address the increasingly sophisticated and varied needs of our prospective
clients. The development of our technology and necessary service enhancements
entail significant technical and business risks and require substantial
expenditures and lead-time. We may not be able to keep pace with the latest
technological developments or adapt our services to client requirements or
emerging industry standards.
IF WE ENCOUNTER SYSTEM FAILURE, WE MAY NOT BE ABLE TO PROVIDE ADEQUATE SERVICE
AND OUR BUSINESS AND REPUTATION COULD BE DAMAGED.
Our ability to successfully receive and send email messages and provide
acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems. All of our communications systems are located in Denver, Colorado. As a
result, if there were to be a natural disaster affecting the Denver area, our
communications systems could be disrupted and our business would be harmed. We
may not be able to relocate quickly under those circumstances.
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Our clients have experienced some interruptions in our email service in the
past due to network outages and internal system failures. Similar interruptions
may occur from time to time in the future. Our revenue depends on the number of
end users who use our email services. Our business will suffer if we experience
frequent or long system interruptions that result in the unavailability or
reduced performance of our systems or networks or reduce our abilities to
provide email services. Our systems and operations are also vulnerable to damage
or interruption from fire, flood, earthquake, power loss, telecommunications
failure, physical break-ins and similar events. If any of these events occur, we
could fail to meet our minimum performance standards and incur monetary
penalties under our contracts.
IF WE FAIL TO MEET MINIMUM PERFORMANCE STANDARDS, WE MAY BE UNABLE TO ATTRACT
AND RETAIN CLIENTS.
We have entered into service agreements with some of our clients that
require certain minimum performance standards. If we fail to meet these
standards, our clients could terminate their relationships with us and we could
be subject to contractual monetary penalties. Any unplanned interruption of
services may adversely affect our ability to attract and retain clients and
could damage our reputation.
SERVICE INTERRUPTIONS FROM OUR THIRD PARTY INTERNET AND TELECOMMUNICATIONS
PROVIDERS COULD HARM OUR BUSINESS.
We depend heavily on our third party providers of Internet and related
telecommunications services. Any interruption by our Internet and
telecommunications providers would likely disrupt the operation of our messaging
platform, causing a loss of revenue and a potential loss of clients. In the
past, we have experienced disruptions and delays in our email service due to
service disruption from those providers. These companies may be unable to
provide services to us without disruptions, at the current cost or at all. The
costs associated with a transition to a new service provider would be
substantial. We would have to reroute our computer systems and
telecommunications infrastructure to accommodate a new service provider. This
process would be both expensive and time consuming.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT OUR SERVICES, WHICH COULD HARM OUR
BUSINESS AND REPUTATION.
Our service offerings depend on complex software, both internally developed
and licensed from third parties. Complex software often contains defects,
particularly when first introduced or when new versions are released. These
defects could cause service interruptions, which could damage our reputation,
increase our service costs, cause us to lose revenue, delay market acceptance
and divert our development resources. Although we test our software, we may not
discover software defects that affect current or planned services or
enhancements until after they are deployed.
IF OUR SECURITY SYSTEM IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER.
We must securely receive and transmit confidential information over public
networks and maintain that information on internal systems. Our failure to
prevent security breaches could damage our reputation, expose us to risk of loss
or liability, result in a loss of our clients and adversely affect our ability
to obtain new clients. Although we have implemented network security measures,
our servers are vulnerable to computer viruses, which could lead to
interruptions, delays or loss of data. We may be required to expend significant
capital and other resources to license encryption technology and additional
technologies to protect against security breaches or to alleviate problems
caused by any breach.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT
OUR COMPETITIVE POSITION.
The unauthorized misappropriation of our proprietary rights could harm our
competitive position and adversely affect our profitability. If we resort to
legal proceedings to enforce our proprietary rights, the proceedings could be
burdensome and expensive and the outcome could be uncertain.
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Trademarks, service marks, trade secrets, copyrights, patents and other
proprietary rights are important to our success and competitive position. Our
efforts to protect our proprietary rights may be inadequate and may not prevent
others from claiming violations by us of their proprietary rights. Existing
trade secret, copyright and trademark laws offer only limited protection.
Further, effective trademark, copyright and trade secret protection may not be
available in every country in which our services are made available and policing
unauthorized use of our proprietary information is difficult.
In addition, the status of United States patent protection in the software
industry is not well defined and will evolve as the U.S. Patent and Trademark
Office grants additional patents. We have obtained two patents and we have two
patents pending in the United States. We may seek additional patents in the
future. We do not know if our pending patent applications or any future patent
applications will be issued with the scope of the claims we seek, if at all, or
whether the patents we own or any patents we receive will be challenged or
invalidated. Furthermore, we may not be successful in obtaining registration of
several pending trademark applications in the United States and in other
countries.
WE MAY BE SUBJECT TO CLAIMS ALLEGING INTELLECTUAL PROPERTY INFRINGEMENT.
We may be subject to claims alleging that we have infringed third party
proprietary rights. If we were to discover that we have infringed third party
rights, we may not be able to obtain permission to use those rights on
commercially reasonable terms. If we resort to legal proceedings to enforce our
proprietary rights or defend against alleged infringements, the proceedings
could be burdensome and expensive and could involve a high degree of risk.
WE ARE DEPENDENT ON LICENSED THIRD PARTY TECHNOLOGIES AND WE MAY NEED TO LICENSE
ADDITIONAL TECHNOLOGIES TO SUCCEED IN OUR BUSINESS.
We intend to continue to license technology from third parties. We are
highly dependent on the technology we license from SendMail, which enables us to
send email through the Internet, and E.piphany, Inc., which will allow us to
offer a variety of targeted marketing capabilities. The market is evolving and
we may need to license additional technologies to remain competitive. We may not
be able to license these technologies on commercially reasonable terms or at
all. Our inability to obtain any of these licenses could delay the development
of our services until equivalent technology can be identified, licensed and
integrated. Any delays could cause our operating results to suffer. In addition,
we may not be able to integrate any licensed technology into our services. These
third party licenses may expose us to increased risks, including risks related
to the integration of new technology, the diversion of resources from the
development of our own proprietary technology and our inability to generate
revenue from new technology sufficient to offset associated acquisition and
maintenance costs.
RISKS ASSOCIATED WITH THE INTERNET
WE MAY BE PREVENTED FROM DISTRIBUTING OUR EMAIL; WE MAY LOSE CLIENTS AND OUR
REPUTATION MAY SUFFER BECAUSE OF SPAM.
If we fail in our attempts to prevent the distribution of unsolicited bulk
email, or spam, our business and reputation may be harmed. Internet service
providers , or ISPs, and other organizations devote significant effort to
identifying spam and blocking its distribution. Spam-blocking efforts by these
groups may also result in the blocking of our clients' legitimate messages.
While we do not condone spam, and do not believe we distribute it, each of these
groups may set its own definition of what is, and what is not, spam. We have
recently been warned by one such group, MAPS, that the failure of certain of our
clients to use the subscription management methods advocated by MAPS could
result in MAPS listing us as a distributor of spam. Many ISPs use the MAPS
listings to identify distributors of email to block. We are currently working
with MAPS to resolve the issue. In addition, distribution of our email has been
blocked by various ISPs in the past and we anticipate blockages to occur in the
future. Spam may contain false email addresses or be generated by the use of
false email addresses. Our reputation may be harmed if email addresses with our
domain names are used in this manner. Any of these events may cause clients to
become dissatisfied with our service and terminate their use of our services.
OUR BUSINESS WILL SUFFER AND THE VALUE OF YOUR INVESTMENT WILL DECLINE IF THE
INTERNET DOES NOT ACHIEVE CONTINUING, WIDESPREAD ACCEPTANCE AS A MARKETING AND
COMMUNICATIONS MEDIUM.
Our revenue and profitability will be adversely affected if the Internet
does not achieve continuing, widespread acceptance as a marketing and
communications medium. Our future success will depend substantially upon our
assumption that the Internet will continue to evolve as an attractive platform
for marketing and communications applications and the use of outsourcing to
solve businesses' email marketing and communications needs. Most businesses and
consumers have only limited experience with the Internet as a marketing and
communications medium.
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WE WILL NOT BE ABLE TO GROW OUR BUSINESS UNLESS CONSUMERS AND BUSINESSES
INCREASE THEIR USE OF THE INTERNET AND THE INTERNET IS ABLE TO SUPPORT THE
DEMANDS OF THIS GROWTH.
Our success depends on increasing use of the Internet by consumers and
businesses. If use of the Internet as a medium for consumer and business
communications does not continue to increase, demand for our services will be
limited. Consumers and businesses might not increase their use of the Internet
for a number of reasons, such as:
o high Internet access costs;
o perceived security and privacy risks;
o legal and regulatory issues;
o inconsistent service quality; and
o unavailability of cost-effective, high-speed service.
Even if consumers and businesses increase their use of the Internet, the
Internet infrastructure may not be able to support demands of this growth. The
Internet infrastructure must be continually improved and expanded in order to
alleviate overloading and congestion. Failure to do so will degrade the
Internet's performance and reliability. Internet users may experience service
interruptions as a result of outages and other delays occurring throughout the
Internet. Frequent outages or delays may cause consumers and businesses to slow
or stop their use of the Internet as a communications medium.
WE MAY HAVE LIABILITY FOR INTERNET CONTENT AND WE MAY NOT HAVE ADEQUATE
LIABILITY INSURANCE.
As a provider of email services, we face potential liability for defamation,
negligence, copyright, patent or trademark infringement and other claims based
on the nature and content of the materials transmitted via email. We do not and
cannot screen all of the content generated by our users, and we could be exposed
to liability with respect to this content. Furthermore, some foreign governments
have enforced laws and regulations related to content distributed over the
Internet that are stricter than those currently in place in the United States.
Any imposition of liability, particularly liability that is not covered by
insurance or is in excess of insurance coverage, could harm our reputation and
our operating results or could result in the imposition of criminal penalties.
Although we carry general liability and umbrella liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. A single claim or multiple
claims, if successfully asserted against us, could exceed the total of our
coverage limits or may not qualify for coverage under our insurance policies as
a result of coverage exclusions that are contained within these policies. In
this case, we may need to use capital contributed by our stockholders to settle
claims.
INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES MAY IMPAIR THE GROWTH
OF THE INTERNET AND DECREASE DEMAND FOR OUR SERVICES OR INCREASE OUR COST OF
DOING BUSINESS.
Although there are currently few laws and regulations directly applicable to
the Internet and commercial email services, the adoption of additional laws or
regulations may impair the growth of our business and the Internet which could
decrease the demand for our services and increase our cost of doing business. A
number of laws have been proposed involving the Internet, including laws
addressing:
o user privacy;
o pricing;
o content;
o copyrights;
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o characteristics and quality of services; and
o consumer protection.
In particular, a number of states have already passed statutes prohibiting
unsolicited commercial email. A number of statutes have been introduced in
Congress and state legislatures to impose penalties for sending unsolicited
emails which, if passed, could impose additional restrictions on our business.
In addition, a California court recently held that unsolicited email
distribution is actionable as an illegal trespass for which the sender could be
subject for monetary damages.
Further, the growth and development of the market for online email may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online, including us.
If we were alleged to have violated federal, state or foreign, civil or criminal
law, even if we could successfully defend these claims, it could harm our
business and reputation.
CHANGES IN TELECOMMUNICATIONS REGULATIONS COULD CAUSE REDUCED DEMAND FOR OUR
SERVICES.
Several telecommunications carriers are advocating that the Federal
Communications Commission regulate the Internet in the same manner as other
telecommunications services by imposing access fees on Internet service
providers. These regulations could substantially increase the costs of
communicating on the Internet. This, in turn, could slow the growth in Internet
use and thereby decrease the demand for our services.
RISKS ASSOCIATED WITH OUR CORPORATE STRUCTURE
BECAUSE CERTAIN EXISTING STOCKHOLDERS HOLD A MAJORITY OF OUR COMMON STOCK, YOUR
ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS
REQUIRING STOCKHOLDER APPROVAL MAY BE LIMITED.
Our executive officers, directors and our stockholders who own over five
percent of our common stock, in the aggregate, beneficially own over 60% of our
outstanding common stock. These stockholders, if they vote together, are able to
significantly influence matters that we require our stockholders to approve,
including electing directors and approving significant corporate transactions.
This concentration of ownership may also have the effect of delaying or
preventing a change in control of us, which could result in a lower stock price.
CERTAIN PROVISIONS IN OUR CORPORATE DOCUMENTS MAY DISCOURAGE OUR ACQUISITION BY
OTHERS AND THUS DEPRESS OUR STOCK PRICE.
Our corporate documents and Delaware law could make it more difficult for a
third party to acquire us, even if a change in control would be beneficial to
our stockholders. These and other provisions might discourage, delay or prevent
a change in control of us or a change in our management. These provisions could
also limit the price that investors might be willing to pay in the future for
shares of common stock.
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK PRICE TO
FALL AND DECREASE THE VALUE OF YOUR INVESTMENT.
The market price of our common stock could fall if our stockholders
sell substantial amounts of common stock, including shares issued upon the
exercise of outstanding options and warrants, in the public market. These sales
might also make it more difficult for us to sell equity securities in the future
at a time and price that we deem appropriate. Additionally, Thomas Weisel
Partners LLC may, in its sole discretion, release all or some portion of the
securities subject to lock-up agreements. Some stock and warrant holders are
entitled to certain registration rights. The exercise of these rights could
adversely affect the market price of our common stock.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We repaid all of our notes payable in the three months ended March 31,
2000.
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We have invested a portion of our cash and cash equivalents in
short-term, investment-grade, interest-bearing securities. The value of these
investments may increase or decrease as a result of changes in equity markets
and interest rates.
PART II
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
In January and February of 2000, we issued an aggregate of 32,026
shares of our common stock to three employees pursuant to the exercise
of options granted under our stock option plans. The exercise prices
ranged from $1.50 to $4.32, for aggregate consideration of $115,932. We
relied on the exemption provided by Rule 701 of the Securities Act of
1933.
On March 21, 2000, we issued an aggregate of 34,576 shares of common
stock to six accredited investors upon exercises of warrants with an
exercise price of $8.00 per share. The shares were issued in cashless
exercises. We relied on the exemption provided by Rule 506 of
Regulation D under the Securities Act of 1933.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a
view for distribution thereof. Appropriate legends were affixed to the
stock certificates issued in such transactions. The recipients had
adequate access, through employment or another relationship, to
information about us.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. A. Exhibits
Exhibit # Description of Document
10.21 Amendment Number One to the Lease Agreement between
the Prudential Insurance Company of America and
Exactis.com, Inc., dated April 7, 2000
27 Financial Data Schedule
B. Reports on Form 8-K
We filed a report on Form 8-K dated March 10, 2000, reporting the
February 29, 2000 signing of a definitive Agreement and Plan of Merger
by and among Exactis.com, 24/7 Media, Inc. and Evergreen Acquisition
Sub Corp., a wholly owned subsidiary of 24/7 Media.
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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: May 15, 2000
EXACTIS.COM, INC.
(Registrant)
By: /s/ E. Thomas Detmer, Jr.
-----------------------------------------------
E. Thomas Detmer, Jr.
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Kenneth W. Edwards, Jr.
-----------------------------------------------
Kenneth W. Edwards, Jr.
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.21 Amendment Number One to the Lease Agreement between the Prudential
Insurance Company of America and Exactis.com, Inc., dated
April 7, 2000
27 Financial Data Schedule
</TABLE>
<PAGE> 1
AMENDMENT NUMBER ONE TO LEASE AGREEMENT
THIS AMENDMENT NUMBER ONE TO LEASE AGREEMENT is entered into as of the
7th day of April, 2000, by and between THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New Jersey corporation ("Landlord") and EXACTIS.COM, INC., a Delaware
corporation ("Tenant").
Recitals:
A0 On or about January 19, 2000, Landlord and Tenant entered into a
written lease agreement (the "Lease") pertaining to approximately 46,418
rentable square feet of space, known as Suite 500 (the "Premises") located on
the 4th and 5th floors of the building known as Johns Manville Plaza, located at
717 - 17th Street, Denver, Colorado. (Initially capitalized terms not otherwise
defined herein have the same meaning as in the Lease.)
B0 Landlord and Tenant now desire to amend the Lease in the manner and
form hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, Landlord and
Tenant hereby agree as follows:
1 The description of the Premises is amended by the addition of
approximately 37,045 rentable square feet of space, consisting of approximately
23,209 rentable square feet located in Suite 200 and 13,836 rentable square feet
located in Suite 310 (collectively, the "Additional Space"), as outlined on the
diagram of the 2nd and 3rd floors of the Building, attached hereto as Exhibit A
and made a part hereof by reference, for the term of the Lease on the following
basis:
A0 Tenant's right to occupy the Additional Space and its
obligations to pay Base Rent and Tenant's Pro Rata Share of increases in
Operating Expenses therefor commences on October 1, 2000 (the "Additional Space
Commencement Date") and terminates with the term of the Lease on February 28,
2010.
B0 Commencing on the Additional Space Commencement Date,
Tenant will pay Base Rent for the Additional Space in accordance with Paragraph
3 of the Lease in the following amounts:
<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
October 1, 2000-February 28, 2001 $61,741.67
March 1, 2001-February 28, 2002 $64,828.75
March 1, 2002-February 29, 2004 $71,002,92
March 1, 2004-February 28, 2006 $77,177.08
March 1, 2006-February 29, 2008 $83,351.25
March 1, 2008-February 28, 2010 $89,525.42
</TABLE>
Base Rent for the Additional Space is in addition to Base Rent payable by Tenant
for the existing Premises.
C0 Commencing on the Additional Space Commencement Date and
thereafter, Tenant will pay its Pro Rata Share of increases in Operating
Expenses attributable to the Additional Space as determined in accordance with
Paragraph 5 of the Lease.
D0 Tenant has agreed to perform certain improvements in the
Additional Space. Such work will be completed and paid for in accordance with
and subject to the terms and provisions of the Work Letter, attached hereto as
Exhibit B. Except for in accordance with Exhibit B and the terms of the Lease,
Landlord is not obligated to improve or pay for improvements to the Additional
Space and Tenant accepts the Additional Space for the remainder of the term of
the Lease in its "as is" condition on the Additional Space Commencement Date.
Subject to the provisions of Exhibit B, any improvements by Tenant to the
Additional Space will be at Tenant's sole cost and expense and subject to the
provisions of the Lease.
E0 In addition to any spaces that Tenant has a right to use
pursuant to the Lease, Tenant shall have the right to use thirty-seven (37) in
and out unassigned parking space located in parking structures or surface lots
located on block 159 or 1801 California block, at the current rate charged for
such spaces from time to time, in accordance with and subject to Paragraph 29 of
<PAGE> 2
the Lease; provided, however, if Tenant fails to notify Landlord on or before
the Additional Space Commencement Date of its acceptance of the offered space or
fails to continuously lease the parking space, Tenant shall forfeit its rights
to the parking space but Tenant may thereafter at any time during the Lease Term
elect to lease such spaces on the terms set forth above upon 45 days' prior
written notice to Landlord. Except as set forth herein, the use of all parking
spaces shall be governed by Paragraph 29 of the Lease.
F0 The addition of the 3rd floor Additional Space satisfies
Tenant's rights to add space pursuant to Paragraph 7 of the Rider to the Lease
and Tenant has no further rights to add space pursuant to that Paragraph. The
addition of the 2nd floor space partially satisfies Tenant's rights under
Paragraph 8 of the Rider to the Lease.
G0 As of the Additional Space Commencement Date, any reference
to "Premises" in the Lease includes the Additional Space as a part of the
Premises and Tenant's occupancy thereof is subject to all terms of the Lease
except as otherwise specifically herein provided.
2 Paragraph 10 of the Rider to the Lease is amended to provide that the
Options to extend the term of the Lease shall also apply to the Additional
Space.
3 Tenant shall provide to Landlord, at the time of execution hereof by
Tenant, a clean, unconditional, irrevocable letter of credit from a lending
institution reasonably acceptable to Landlord in the form attached hereto as
EXHIBIT C (the "Letter of Credit") as a guaranty and security for the
performance of Tenant's obligations under this Lease on the following terms and
conditions:
A. It is understood and agreed that the Letter of Credit, or a
renewal or substitute therefor approved by Landlord, shall be kept in effect
from the date of execution of this Lease through September 30, 2003 (the "LC
Termination Date") in the form attached hereto as EXHIBIT C or in form otherwise
approved by Landlord. The initial Letter of Credit shall be in the amount of
$1,200,000.00 (the "LC Maximum"). On September 30, 2001, if the Letter of Credit
has not been presented for payment in accordance with this paragraph, the LC
Maximum shall be reduced by $400,000.00 (resulting in the Letter of Credit in
the amount of $800,000.00); if the Letter of Credit has not been presented for
payment in accordance with this paragraph by September 30, 2002, the LC Maximum
shall be reduced by an additional $400,000.00 (resulting in a Letter of Credit
in the amount of $400,000.00). The foregoing reductions shall not be applicable
if and so long as there is an ongoing Event of Default or Tenant is the subject
of a proceeding under any provision of federal or state law relating to
insolvency, bankruptcy, or reorganization at the time. If the Letter of Credit
would otherwise expire prior to the LC Termination Date, Tenant shall present
Landlord with an extension or renewal of the initial Letter of Credit, or a
substitute Letter of Credit in the same form as EXHIBIT C in the amount of the
then applicable LC Maximum, no later than thirty (30) days prior to the
expiration date of such initial Letter of Credit, from a lending institution
subject to Landlord's reasonable approval; such extension, renewal or substitute
Letter of Credit shall be effective no later than the day prior to the
expiration of the initial Letter of Credit and shall continue in effect for not
less than the period ending with the LC Termination Date and shall be in the
amount provided above. Tenant agrees that in an Event of Default by Tenant (as
defined in Section 19), Landlord shall have a right to present the Letter of
Credit (or the renewal, extension or substitute) for payment, with amounts
received to be held and applied in accordance with subparagraph B below. Any
failure of Tenant to provide Landlord with an extension, renewal or substitute
Letter of Credit, as required hereunder, shall be deemed an Event of Default
under the Lease and Landlord shall have a right to present the Letter of Credit
in accordance with the foregoing provision. If the Letter of Credit has not been
presented for payment in accordance with this Section on or before the LC
Termination Date, Landlord shall return the Letter of Credit to Tenant within
thirty (30) days after the LC Termination Date. Tenant agrees that in the event
of any transfer or mortgage, Landlord shall have the right to transfer the
Letter of Credit or substitute to the transferee or mortgagee, and if the Letter
of Credit has been duly transferred, Tenant shall look solely to such transferee
for the return of the Letter of Credit (or substitute). Landlord shall give
written notice to Tenant of transfer of Landlord's interest resulting in
transfer of the Letter of Credit. Landlord shall deliver the then-current
effective Letter of Credit to Tenant upon receipt of any conforming renewal or
substitute Letter of Credit provided in accordance with this Paragraph and
cooperate with the issuing bank to effect the release of such then-current
effective Letter of Credit.
2
<PAGE> 3
B. If an Event of Default occurs or this Lease is terminated
pursuant to Section 19, Landlord may use, apply or retain all or any portion of
the amounts received under the Letter of Credit, if any, for the payment of any
rent or other charge in default or for the payment of any other sum to which
Landlord may become obligated by reason of Tenant's default, or to compensate
Landlord for any loss or damage which Landlord may suffer thereby in accordance
with Section 20 of the Lease. By the later of 60 days following the later of the
expiration of the Lease or Tenant's vacation of the Premises, any amounts drawn
upon the Letter of Credit that are not applied for payment of amounts in
accordance with the foregoing provision shall be returned to Tenant, without
payment of interest.
C. Landlord and Tenant agree that the annual fees charged by
the lending institution issuing the Letter of Credit (or any renewal, extension,
or substitute therefor) shall be paid by Tenant.
4 Tenant hereby represents and warrants to Landlord that it has not
engaged or dealt with any broker other than Cushman & Wakefield of Colorado,
Inc., a Colorado corporation ("Cushman"), which has acted as Landlord's agent,
and CB Richard Ellis ("CB") which has acted as Tenant's agent, in connection
with the negotiation and/or execution of this leasing transaction. Each party
agrees to indemnify and save the other and Cushman harmless from any claim,
demand, damage, liability, cost or expense (including, without limitation,
attorney's fees) paid or incurred by either of them as a result of any claim for
brokerage or other commissions made by any broker, finder, or agent (other than
CB or Cushman), whether or not meritorious, by employment by Tenant or by reason
of claim made by, through or under the indemnifying party. Tenant acknowledges
that Landlord shall not be liable for the representations of Cushman or CB
regarding the Building, Premises or this lease transaction. Landlord shall be
responsible for the payment of all commissions to Cushman and CB pursuant to a
separate agreement with Cushman and CB.
5 If there is any conflict between the terms and provisions of this
Amendment and the terms and provisions of the Lease or any prior amendments
thereto, the terms and provisions of this Amendment shall govern. Except as
herein specifically set forth, all other provisions of the Lease and any prior
amendments thereto shall remain in full force and effect and be binding upon the
parties in accordance with their terms.
6 Time is of the essence herein.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day and year first above written.
<TABLE>
<S> <C>
EXACTIS.COM, INC., a Delaware corporation THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New Jersey corporation
By Cushman & Wakefield of Colorado, Inc., a
By: Colorado corporation, Authorized Agent
--------------------------------------------------
Print Name:
------------------------------------------
Print Title:
----------------------------------------- By:
-----------------------------------------
ATTEST: Director
"Landlord"
By:
--------------------------------------------------
Print Name:
------------------------------------------
Print Title:
-----------------------------------------
"Tenant"
</TABLE>
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EXACTIS.COM, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001092393
<NAME> EXACTIS.COM
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 39,805,975
<SECURITIES> 4,136,917
<RECEIVABLES> 4,592,268
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 49,796,257
<PP&E> 14,358,934
<DEPRECIATION> 4,413,069
<TOTAL-ASSETS> 60,002,817
<CURRENT-LIABILITIES> 8,290,109
<BONDS> 0
0
0
<COMMON> 127,355
<OTHER-SE> 49,685,353
<TOTAL-LIABILITY-AND-EQUITY> 60,002,817
<SALES> 4,280,031
<TOTAL-REVENUES> 4,280,031
<CGS> 599,749
<TOTAL-COSTS> 599,749
<OTHER-EXPENSES> 8,027,722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (724,332)
<INCOME-PRETAX> (3,623,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,623,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,623,108)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
