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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 Par Value NASDAQ
Securities registered pursuant to Section 12(g) of the Act: NONE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x ---
The Registrant's revenue for its most recent fiscal year was:
$10,986,384.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $158,220,763 as of March 15, 2000.*
The number of shares of Common Stock outstanding was 12,700,898 as of March
15, 2000.
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* Excludes 7,720,704 shares of Common Stock held by directors and officers
and stockholders whose beneficial ownership exceeds five percent of the
shares outstanding at March 15, 2000. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person is controlled
by or under common control with the Registrant.
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EXACTIS.COM, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
<S> <C> <C>
Item 1 Business..................................................................................... 2
Item 2 Properties...................................................................................13
Item 3 Legal Proceedings............................................................................13
Item 4 Submission of Matters to a Vote of Security Holders..........................................14
PART II
Item 5 Market for Registrants' Common Equity and Related Stockholder Matters........................14
Item 6 Selected Financial Data......................................................................15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........16
Item 7A Quantitative and Qualitative Disclosures About Market Risk...................................31
Item 8 Financial Statements.........................................................................32
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........50
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the
Exchange Act.................................................................................51
Item 11 Executive Compensation.......................................................................53
Item 12 Security Ownership of Certain Beneficial Owners and Management...............................55
Item 13 Certain Relationships and Related Transactions...............................................58
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K..............................60
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Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in this section, as well as in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of permission-based outsourced email marketing
and communications solutions. We provide a comprehensive and scalable suite of
email services which enable our clients to deliver large numbers of custom email
messages in an efficient, timely and cost-effective manner. Our primary services
consist of the distribution of email newsletters and information bulletins, as
well as the delivery of personalized order and trade confirmation messages,
which are triggered by specific transactions or events. We also serve targeted
banner advertisements within the email communications that we deliver to over
two million subscribers of Sony Music's daily email newsletters. Our newest
product launched in December 1999 offers targeted messaging capabilities to
allow our clients to conduct personalized one-to-one email marketing campaigns.
Our advanced, proprietary technology allows us to deliver a large volume of
email messages for our clients. In the fourth quarter of 1999, we delivered over
675 million email messages for over 75 clients, primarily in the media,
ecommerce and financial services industries.
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 consummated
in the Spring of 2000.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND EMAIL
The Internet has emerged as a significant tool for global communications,
commerce and media. According to Computer Industry Almanac, there were over 110
million Internet users in the United States at the end of 1999. Jupiter
Communications expects this number to grow to over 157 million users by the end
of 2003. The growth of the Internet is the result of a number of factors,
including the extensive and growing installed base of advanced personal
computers in the home and workplace, increasingly faster and cheaper access to
the Internet, improvements in network infrastructure and bandwidth, development
of Internet-based applications and increasingly useful content available online.
The proliferation of alternative access devices providing Internet connectivity,
including Internet appliances, pagers and Internet capable wireline and wireless
phones, is also contributing to the increasing use of the Internet.
Email is now the most used Internet application. Increased use of the
Internet has resulted in the widespread adoption of email as a regular and
dependable communications medium. Initially developed for people working on
single mainframe computers or on small networks, email has expanded rapidly to
become a widely used medium for business and personal communications worldwide.
The ability to inexpensively communicate at any time and from
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any location with Internet access has resulted in the rapid increase in email
use in recent years. Continued growth in the use of email is being driven by its
convenience, speed, low cost and the ability to send increasingly large and
complex files and attachments, including documents, spreadsheets and multimedia.
Today, email is a powerful, cost-effective business communication tool.
Forrester Research estimates that by 2004, U.S. marketers will send 200 billion
emails generating a $1.6 billion opportunity for email list owners and $3.2
billion for email marketing services outsourcers. Because email provides an
immediate, targeted and inexpensive method to reach an expanding number of
online consumers, businesses are facing increasing competitive pressure to
develop comprehensive Internet and email communications strategies. These email
strategies are driving a wide range of customer communications, including
promotional messages, announcements, confirmations, order acknowledgments,
customer requested information and one-to-one marketing initiatives.
GROWTH OF PERMISSION-BASED EMAIL MARKETING AND COMMUNICATIONS
Consumer marketing has traditionally been conducted through a variety of
media, including direct mail and telephone. The widespread adoption of the
Internet and email has enabled companies to create new direct marketing and
communications strategies to target and acquire new customers, as well as retain
and enhance existing customer relationships. The Direct Marketing Association
estimates that online direct marketing expenditures will increase from $1.3
billion in 1999 to $8.6 billion in 2004.
Permission-based email marketing and communications strategies are gaining
acceptance as unsolicited commercial email receives negative reaction and
banner ads have declining response rates. Permission-based email marketing is
currently used to generate leads, increase sales, retain, cross-sell and up-sell
customers, and build site traffic. Permission-based email marketing and
communications strategies have several advantages over traditional direct
marketing methods, including the following:
o Cost-Effectiveness -- The cost for traditional direct mail can range
from $1.00 to $2.00 per piece compared to $0.01 to $0.25, per email
piece, depending on the level of targeting and customization required.
o Instantaneous Communication -- As compared to many other traditional
marketing channels, email enables significantly faster communication
with a large audience. Jupiter Communications reports that 80% of all
responses to an email campaign occur within two days, as compared to
six to eight weeks for a marketing campaign done via mail.
o Higher Response Rates -- Jupiter Communications research shows
click-through rates of opt-in email lists to be between 5.0-15.0%,
compared to response rates of 0.5-2.0% for postal mail.
CHALLENGES IN IMPLEMENTING EMAIL MARKETING AND COMMUNICATIONS SOLUTIONS
Companies seeking to successfully utilize email as a channel for marketing
and communications face several challenges. Many companies attempting to develop
and manage an in-house solution to expanding and increasingly sophisticated
email systems lack the resources and expertise required to cost-effectively
launch email marketing initiatives. Businesses often find it difficult and
costly to integrate state-of-the-art technology into their infrastructure,
resulting in email marketing efforts which are defined by a company's
technological capabilities, rather than the company's strategic marketing and
communications goals. Sophisticated email marketing initiatives require
technology solutions with the following capabilities:
o sufficient bandwidth to handle peak volumes of emails;
o email content integration with selected email lists;
o inbound message management, including bounces from undeliverable
addresses and responses from recipients;
o subscriber and recipient database management, including email
addresses and demographic, transactional and behavioral data;
o applications which enable campaign management, Web-based reporting and
targeting and predictive modeling; and
o safeguards to avoid distribution of unsolicited bulk mail, or spam,
and to operate in accordance with existing governmental regulations.
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The demonstrated success of the Internet and permission-based email as a
marketing and communications channel, combined with the challenges of developing
and managing in-house solutions, has led many companies to seek email
outsourcing services that can rapidly deploy large-scale marketing and
communications programs.
OUR SOLUTION
We offer a comprehensive suite of end-to-end outsourced email marketing and
communications solutions. Our email services provide our clients with the
following benefits:
LEADING EDGE TECHNOLOGIES
Our advanced, proprietary technologies enable us to quickly distribute large
quantities of email messages for our clients. In addition, our technologies
allow us to deliver customized messages according to user-defined preferences or
client-defined message templates, which are personalized through our mail merge
technology. Our Internet-based email solutions are designed to afford our
clients choice and flexibility. Our clients are able to:
o send email messages in both text and graphically-rich HyperText Markup
Language, commonly known as HTML, formats;
o send email messages including rich media such as audio, video, and
streaming media;
o define bounce rules for handling undeliverable emails;
o select the schedule for delivery of their email communications one
month in advance;
o generate report information based on a variety of menu options and
dates; and
o create the content in subscribe and unsubscribe confirmation messages
and provide users multiple ways to subscribe and unsubscribe.
We also serve targeted advertising banners within the email newsletters that
we deliver to over two million subscribers of Sony Music's InfoBeat newsletters,
enabling Sony Music to generate advertising revenue.
HIGHLY SCALABLE AND RELIABLE SOLUTION
Our email engine delivered an average of over 10 million email messages per
weekday in December 1999. We have the capacity to deliver up to 30 million email
messages per day without additional hardware or infrastructure improvements. Our
system can accommodate rapid growth in the volume and complexity of the
messaging needs of our clients and is designed to be highly reliable. We have
identified single points of failure and designed redundancy where appropriate.
We maintain two separate Internet connections and have separate routers
connected to one another in the event a router fails. We do not need to
interrupt our service during maintenance periods. Automated performance
monitoring allows us to intervene promptly if required.
BROAD SUITE OF INTEGRATED EMAIL APPLICATIONS
Our comprehensive suite of email marketing and communications solutions is
designed to address all aspects of our clients' email program needs. Currently,
we send and manage email news and information bulletins as well as deliver
personalized order and trade confirmation messages triggered by specific
transactions and events. We also offer a wide variety of targeted marketing
capabilities to allow our clients to conduct one-to-one email marketing
campaigns. Our end-to-end solution includes email list administration,
subscription management, bounce and reply processing, logging and reporting,
customer service, content submission and a high level of account management with
availability 24 hours per day, seven days per week.
COST-EFFECTIVE OUTSOURCED SOLUTIONS
Compared to internally developed solutions, our outsourcing services allow
our clients to conduct cost-effective email marketing and communications
initiatives. We offer our clients a complete turnkey solution, from professional
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implementation of all required systems to 24 hours per day, seven days per week
account service. By outsourcing their email programs to us, our clients can
focus on their core business competencies rather than managing a complex email
delivery system. This reduces our clients' need to invest in complex
infrastructure, bandwidth and technical professionals.
SECURE DATA CAPABILITIES
To ensure protection of client data, we have established strict security
measures including multiple firewalls to prevent unauthorized sending of email,
tampering or unauthorized access to files. Our clients' data and lists are kept
confidential and we do not sell their lists or data. All data and client
interfaces are password protected and our clients oversee the permission process
for sending and scheduling capabilities to appropriate parties. We have
procedures for regular on-site and off-site back-up of client information,
including subscriber databases, reports and logging and account information.
COMPREHENSIVE SPAM POLICY
We understand that if email is used improperly, it can cause significant
harm to our own and our clients' reputations and customer relationships. It is
our policy not to send unsolicited commercial email. We assist our clients in
conducting email programs that are anti-spam compliant. Our clients are required
to represent to us that their email addresses have been obtained using
permission-based methods.
We are members of the Internet Alliance Federal Policy Council, Direct
Marketing Association and the Association for Interactive Media and serve on its
Council for Responsible Email. These associations provide us with updates of
legislative activity around the country that could affect our clients' email
marketing initiatives and result in changes to our spam policy.
STRATEGY
Our objective is to be a world leader in the delivery of permission-based
email marketing and communications services. We plan to achieve this objective
by pursuing the following strategies:
EXTEND INDUSTRY LEADING TECHNOLOGIES
We intend to further develop our technology infrastructure to increase our
email capacity, system reliability and security. Our goal is to increase our
capacity to 100 million email messages per day by the end of 2000. In addition
to expanding our capacity, we plan to continue to offer a high level of system
reliability and security by improving our redundancy and failsafe features in
our primary data center and in our secondary data center for disaster recovery
and additional failsafe capabilities.
We are developing a unified software-based platform that will support our
entire range of services and offer our clients a consistent user interface and
single database. This will allow us to share new features and capabilities that
we develop among different products and clients. This new platform is being
designed to reduce product development and implementation time, allowing us
quicker time-to-market while spreading infrastructure costs across our various
service offerings.
BROADEN OUR SUITE OF EMAIL SERVICES
We intend to continue to offer our clients a full line of feature-rich email
marketing and communications services to meet their email needs across a variety
of applications. We are enhancing our email marketing solutions. New features
that we plan to introduce over the next 12 months include:
o Targeted Ad-Serving Capabilities - to enable all of our clients to
insert targeted banner advertisements within the body of an email.
o Expanded TargetMessaging Capabilities - to enable our clients to
conduct triggered sends and target their content based on marketing
rules.
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o SelectMessaging Capabilities - to provide clients with the ability to
allow their subscribers to customize the content they receive based
upon predefined categories.
We also plan to provide professional services that complement our email
service offerings. These professional services are intended to extend our
relationships with current clients, attract new clients and allow us to
differentiate ourselves in the outsourced email services market. These services
may consist of the procurement of email lists, email program consulting and
campaign results analysis.
CONTINUE TO DEVELOP AND LEVERAGE STRATEGIC RELATIONSHIPS
In order to strengthen our market position and offer our clients additional
services, we plan to develop strategic relationships with companies that possess
complementary technical and marketing services. Through these strategic
relationships, we will undertake joint product development and marketing
efforts, such as integrating email with ecommerce applications and developing
relationships with permission-based email list partners. Potential strategic
partners include database design, ad-serving, ecommerce, secure email and
language translation companies, as well as technology service providers.
INCREASE MARKETING AND SALES EFFORTS
We intend to increase the size of our direct sales force substantially over
the next 12 to 18 months. As our sales force grows, we intend to move from our
current geographic focus to a vertical market focus, allowing our sales staff to
become experts within specific vertical markets and to offer more consultative
email marketing and communications solutions specifically tailored to each
client's individual needs. We also plan to increase our sales efforts by
developing relationships with a network of partners that are in a position to
influence their clients' marketing strategies and tactics, including advertising
agencies, marketers and systems integrators. Additionally, we are expanding into
international markets through the opening of our sales office in London and
developing alliances with international partners.
ACQUIRE NEW BUSINESSES AND TECHNOLOGIES
We intend to pursue acquisitions of businesses, products, services and
technologies that are complementary to our existing business. These may include
acquisitions of secure email solutions, permission-based lists of email
addresses, statistical analysis and consulting services, inbound email
processing capabilities and Internet ad-serving solutions. We currently have no
agreements regarding acquisitions.
SERVICES AND FEATURES
We provide a comprehensive suite of email services which enable our clients
to develop and send large numbers of custom email messages. Our services are
designed to offer clients a reliable, timely and cost-effective means of
communicating with their customers and prospects. Our clients can select from a
broad array of features and functions to develop email messaging solutions for a
wide range of business communication needs. We offer clients a complete turnkey
solution, from professional implementation of all required systems to 24 hours
per day, seven days per week account service. We generally charge clients on a
per message basis.
CURRENT SERVICES
We offer our comprehensive suite of email services to a variety of clients,
primarily in the media, ecommerce and financial services industries. Our
solutions include:
News and Information Distribution. Our services enable our clients to send
the same message to a large number of recipients or subscribers. A Web-based
interface allows our clients to input content, preview the message and approve
the message for sending. Typically, news and information distributions are sent
in response to consumer requests for information. Our clients utilize these
services to retain customers and drive traffic to their Web sites. Messages
distributed through this service offering include newsletters, announcements and
welcome notices.
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We currently offer a highly customized version of our news and information
distribution service to two clients, Sony Music for its InfoBeat newsletters and
Tribune Media Services for its MovieQuest service. Our service allows Sony
Music's email subscribers to select preferences from a menu or list of options
and receive only the information they have requested, thereby customizing the
news, weather and financial, entertainment and other information that they
receive via email. The MovieQuest service allows Tribune Media's subscribers to
receive weekly updates of movie listings for theatres they have selected. We are
further developing our capabilities to offer a standard customized messaging
solution that can be used by all of our clients across a range of industries and
applications.
Event-Driven Customer Communications. This service allows our clients to
send high volumes of personalized email messages that are triggered by a
specific event or transaction, such as executing an online trade or making an
online purchase. These emails have a similar format but include content that is
unique and personalized to each recipient. We create, maintain and store a
customized template for each client and use mail merge technology to insert data
from the clients into the template to create a personalized message for each
customer. These messages may be archived in a manner that meets regulatory
requirements that apply to the financial services industry. This service is
faster and less expensive than traditional mailings.
Targeted Customer Communications. We have developed a system to enable
targeted marketing initiatives across a wide range of industries. Our system is
designed to enable our clients to communicate with their customers through
targeted and personalized communications based on selected demographics,
purchase behavior or other characteristics. Under this service, we would host
the client's customer database, perform database queries and evaluate the
effectiveness of each email marketing campaign. We also offer clients access to
a Web-based interface to perform these querying and analysis activities on their
own. Targeted email uses templates and the client's database to merge customer
specific information with messages or content similar to a segmented direct mail
program, allowing us to send personalized messages based on the name, purchase
behavior, demographic profile or any other attribute of an individual customer.
We believe that our database querying and targeting capabilities will result in:
o more cost-effective direct marketing efforts due to improved customer
response rates;
o immediate feedback;
o reporting and measurability features; and
o one-to-one customer communication capabilities.
ProspectMessaging. This service allows clients to do customer prospecting
and acquisition through permission-based opt-in email. The solution is
full-service and consultative. Our experienced list and acquisition experts
guide clients in list selection, then manage client email campaigns aimed at
turning prospects into customers. We have partnered with respected email list
owners to offer clients access to permission-based opt-in email address lists.
We have five list partners, including Mail.com, yesmail.com and 24/7 Media.
Combined, our list partners represent more than 48 million permission-based
opt-in email addresses.
We have strict criteria in selecting list partners. Partners must compile
lists in adherence to the industry's opt-in standard and be adept in list
hygiene processes, including effectively and efficiently handling bounce mail
and unsubscribe requests. Also important is the partner's ability to limit the
number of messages sent to any one name within a given time period. Lastly,
partner lists must offer a variety of selections based on key targeting
variables, such as demographics, lifestyle and purchase behavior.
Ad-Serving Capabilities. We currently serve targeted advertising banners
within the email newsletters to subscribers of Sony Music's InfoBeat
newsletters. Our ad-serving capabilities generate additional revenue
opportunities for Sony Music, which receives advertising revenue based upon
clickthrough rates and images served as a result of the banner ads embedded
within the email messages. We are currently serving banner advertisements to
over two million subscribers of Sony Music's daily email newsletters. This
service is included in our per message price to Sony Music and does not generate
additional revenue for us. However, we intend to further develop and offer our
ad-serving services to other clients.
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CURRENT FEATURES AND FUNCTIONS
Our current email services include a variety of standard and optional
features and functionality that can be flexibly implemented based upon the
client's preferences, including the following:
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FEATURE/FUNCTION DESCRIPTION BENEFITS
------------------------ ---------------------------- -----------------------------
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Targeting and o Gives clients the o More proactive
Predictive Modeling ability to perform marketing capabilities.
sophisticated analyses o More relevant
to target potential content.
customers based on their
profiles and on a
comparison model to
current buyers.
------------------------ ---------------------------- -----------------------------
List Management o Manages invalid email o Keeps subscriber
addresses. lists accurate.
o Lowers costs.
------------------------ ---------------------------- -----------------------------
Web Interface o Using a Web interface, o Client controls approval.
client can submit o Client controls
content, approve email scheduling.
and schedule sending o User-friendly interface.
time.
------------------------ ---------------------------- -----------------------------
Online Reporting o Using a Web interface, o Client generates timely
client can request reports.
information about email o Client selects time
sends, i.e. messages periods to evaluate
delivered, bounces, results.
clickthroughs and mail
opened.
------------------------ ---------------------------- -----------------------------
Bounce Management o Tracks undeliverable o Keeps subscriber lists
email addresses. accurate
o Lowers costs.
------------------------ ---------------------------- -----------------------------
Inbound Reply o Handles reply emails on o Timely response to
Processing client's behalf. customer emails.
o Less staff required
by client.
------------------------ ---------------------------- -----------------------------
Content Archiving o All content is stored at o Ability to recreate email
Exactis.com. distributions.
o Less storage space
required at client site.
------------------------ ---------------------------- -----------------------------
Personalization o Ability to personalize o Personalized to each
email content using customer
customer data and o Higher response rates.
template.
------------------------ ---------------------------- -----------------------------
Clickthrough Reporting o Ability to determine o Tracking of customer
which customers clicked response.
on specific URLs in the
email.
------------------------ ---------------------------- -----------------------------
Open Mail Reporting o Ability for HTML emails o Tracking of customer
to determine which response.
customers opened the
email.
------------------------ ---------------------------- -----------------------------
Attachments o Ability to send an o Client can send more
attachment with the customized information.
email.
------------------------ ---------------------------- -----------------------------
Format Identification o Ability to determine in o HTML email messages
which format (HTML or receive higher response
text) an email message rates, but not all
should be sent. browsers can read them.
------------------------ ---------------------------- -----------------------------
Alternate Content o Client can submit o Flexible for client.
Submission content via email, web or
user interface.
------------------------ ---------------------------- -----------------------------
Expanded Database o Ability to store o Segmentation of customers
demographic and response for varying offers.
information about each
customer.
------------------------ ---------------------------- -----------------------------
Database o Ability to transport and o Flexibility in
Synchronization synchronize databases database management and
between Exactis.com and hosting.
client.
------------------------ ---------------------------- -----------------------------
Advanced Response o Ability to analyze o Improve effectiveness
Analysis and Reporting campaign results. of campaigns over time.
o Tracking and analysis of
results.
------------------------ ---------------------------- -----------------------------
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MARKETING AND SALES
MARKETING STRATEGY
The key components of our marketing strategy are to:
o continue to develop our reputation as an industry leader;
o build brand awareness; and
o aggressively generate sales leads.
We employ a number of marketing methods to promote our brand and
reputation, as well as to generate leads for our sales organization. The essence
of our brand is "precision," reflecting our ability to precisely target, time
and personalize email messages even at very high message volumes. Our
positioning statement is as follows: "For large companies marketing online
seeking to establish one-to-one reliant relationships with 'best' customers, we
provide outsourcing solutions to complex, online communications requiring
precision targeting, messaging and impact through a legacy of marketing
expertise and front-line Internet technology."
Our marketing methods include media relations, press releases, magazine and
newspaper advertisements, speaking engagements and attendance at trade shows and
seminars. We also use our Web site to build our image and to provide information
about our services, technology and organization to potential clients. We are
scheduled to have a presence at more than 20 national and international
conferences and trade shows during 2000, including Jupiter Consumer Online,
Internet World, as well as New Media Marketing in London. We are implementing an
aggressive lead generation program using direct marketing campaigns to key
decision makers within specific targeted markets, including ecommerce, media and
financial services companies.
SALES STRATEGY
Through our direct sales force, we have historically targeted the media,
ecommerce and financial services segments. Currently, our sales force is
geographically focused, with sales representatives covering a particular region.
As our sales force grows, we intend to move to a vertical market focus, allowing
our sales staff to become experts within specific vertical markets and to offer
more consultative email marketing and communications solutions specifically
tailored to each client's individual needs.
As of February 29, 2000, we had seven sales professionals in our direct
sales force located in San Francisco, Denver, Boston, Tampa, New York, and
London. We plan to significantly expand this group in the next 12 months. In
addition to the sales professionals, we had two sales engineers and three lead
generation associates who support potential clients and the sales process.
SUBSCRIBER SERVICES AND ACCOUNT MANAGEMENT
We offer a high level of subscriber service and account management to our
clients and to their customers. As of February 29, 2000, we employed 12
subscriber service representatives who handle all incoming responses via email.
Typical responses include subscribing, unsubscribing, format changes and report
requests. In many cases, we utilize an automated response tool to respond
without human intervention. Our subscriber service representatives attempt to
handle all responses within 24 hours of receipt.
In addition to our subscriber service representatives, as of February 29,
2000, we employed 11 account managers who oversee the day-to-day relationships
with our clients. Account managers are available 24 hours per
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day, seven days per week. As the clients' primary point of contact, our account
managers are responsible for providing day-to-day operational support through
regular client interactions. Automated monitoring tools inform the account
manager and operations staff of the status of client mailings.
STRATEGIC RELATIONSHIPS
We seek to enter into strategic relationships to expand our services and
product offerings and to undertake joint product development and marketing
efforts. Our existing strategic relationships include Sony Music and E.piphany.
SONY MUSIC
In connection with the sale of our online publishing business to Sony Music
Entertainment in December 1998, we entered into a long-term strategic
relationship under which we provide the editorial services, content and
technical operations for the InfoBeat newsletters and deliver more than 7.0
million InfoBeat newsletters per weekday. Subscribers can choose from a menu of
preferences to customize the news, weather, financial, entertainment and other
information that they receive via email. Additionally, we provide Sony Music
with customer support and database management services and host and maintain Web
sites on our servers related to the delivery of the services.
Our service agreement with Sony Music has a three-year term and Sony Music
may, at its sole option, renew the agreement for up to two additional years. In
addition, the agreement may be terminated early under certain circumstances upon
60 days written notice by either party. We will recognize minimum revenue of
$14.8 million during the initial three-year term for sending a base amount of
email messages each quarter. We are also entitled to a monthly editorial fee, a
variable per message fee for each email message we send in excess of the base
amount and an hourly fee for requested custom engineering development work.
E.PIPHANY
In March 1999, we entered into an agreement with E.piphany, a leader in
software solutions for analysis of customer data and marketing campaign
management. Under the agreement, we offer E.piphany E.4 analytic applications as
part of the highly targeted email marketing solution we have developed. Our
agreement with E.piphany includes a perpetual software license and specified
pricing terms and conditions. E.piphany's E.4 solutions enables our clients to
develop and implement highly-targeted relationships via email. E.piphany's E.4
solutions assist clients to quickly profile customers and design and execute
customer-specific marketing campaigns, measure results and refine future
campaigns based on those results. We believe that the combination of E.piphany's
solutions with our technologies and expertise enable our clients to precisely
target their marketing efforts to appropriate audiences and deliver relevant,
personalized information in each email message in a timely and cost-effective
manner.
TECHNOLOGY
ARCHITECTURE
Our technology infrastructure has been designed to achieve reliable,
scalable and secure operations. We currently process between seven and twelve
million messages per day and plan to expand our data center to support 100
million messages per day by the end of 2000. Our technology is based on a
distributed architecture utilizing Sun Microsystems processor systems and
servers, Intel processor based servers, Cisco Systems routers and Oracle
databases. Our system is designed to enable parallel processing while providing
redundancy at any point of failure. Our current software environment is
primarily UNIX and Linux based.
Our distributed architecture manages outbound and inbound message flow which
enables us to scale rapidly by adding additional servers to assemble and deliver
email. All of the system functions may be replicated, enabling the network to
expand for additional functionality and volume growth.
10.
<PAGE> 12
DATA CENTER AND NETWORK ACCESS
Our principal data facility is located in Denver, Colorado. Our data center
has a high-speed connection to two Internet service providers to allow
high-bandwidth access to the Internet. We operate separate production, test and
development networks. The test and development networks have the same hardware
and software environment as our production network, which enables us to develop
and fully test our services prior to putting any upgrades, enhancements or fixes
into our production system.
We are in the process of relocating our data center operations to a new data
center located in Denver, Colorado. The relocation will be completed in April
2000. The new data center has two separate high-speed connections to our
Internet service providers to prevent a loss of connectivity and will provide
the environment necessary to support our planned increase in messaging capacity.
In addition, the new center features redundant systems for power, cooling, fire
protection and security surveillance 24 hours per day, seven days per week by
both personnel and video monitors.
NETWORK SECURITY
We seek to assure network security through multiple firewalls. External
firewalls operate at the network link layer and a second layer of firewalls
separates every public network from its companion private network.
OFFSITE DISASTER RECOVERY
We have established an offsite disaster recovery facility, which is located
in an existing data center in Sunnyvale, California. This data center is acting
solely as a recovery site, which is operational within twenty-four hours of a
service interruption at our principal facility. By June 2000, this center will
receive continuous data feeds from our principal facility. This facility will be
able to convert to sending mode within 30 minutes of any service interruption at
our principal facility by September 2000. Ultimately, we plan to expand this
facility into a full production center.
NEW SERVICE DEVELOPMENT
Our ability to design, develop, test and support new services, features and
functions on a timely basis is critical to our success. Our product managers
define new service and feature requirements by analyzing market trends, client
needs and competitive offerings. Under the supervision of the product manager, a
team creates a design and specifications document, development schedule and
ultimately a new service or feature.
We cannot assure you that we will be successful in developing and marketing
new services and enhancements that meet changing customer needs or which respond
to technology changes or evolving industry standards. Our current services are
compatible with widely used and accepted standards. Current and future use of
our services will depend, in part, on industry acceptance of these standards and
practices as they apply to the Internet and ecommerce.
COMPETITION
The email marketing industry is intensely competitive. There are few
barriers to entry, as evidenced by the many new entrants to the market over the
last year, and we expect that established and new entities will continue to
enter the market. We cannot assure you that we will compete effectively with
current or future competitors or that competitive pressures will not harm our
business, operating results and financial condition.
We offer clients a combination of both scalability and functionality. Our
email engine allows us to send large volumes of complex email messages within
client-defined time frames. Our ability to compete depends upon our ability to
offer:
o technical expertise;
o scalability;
o consistent and reliable service;
o features and functionality;
o full service solutions; and
o direct marketing expertise.
11.
<PAGE> 13
The majority of businesses today use their internal email systems to provide
solutions to manage and deliver outbound email campaigns. For companies seeking
outsourced solutions, we compete with email outsourcing companies that offer
services similar to ours, including email distribution, list management,
reporting and bounce processing. In addition, several of these competitors offer
email consulting and campaign analysis. Key competitors in this category include
Bigfoot International, Digital Impact, floNetwork, InterStep, L-Soft
International, Lyris Technologies, MarketHome, MessageMedia, Post Communications
and Responsys.com. Many of these competitors, such as L-Soft, Lyris and
MessageMedia, also offer customers the choice of purchasing or licensing
software to internally handle their own email marketing programs. Other email
outsourcing companies that specialize in corporate email management, including
Critical Path, Mail.com and USA.Net, have the technical capabilities and
infrastructure to enter our market.
Several competitors maintain and rent permission-based email lists that
identify customers by certain interest categories or demographic areas. Clients
pay the list brokers a one-time use fee that includes sending the email to the
customer and tracking results. Competitors in this category include MatchLogic,
MyPoints.com, NetCreations and yesmail.com. Clients must currently use the email
sending service provided by the list broker to reach the end-customer.
There are several other potential competitors that could enter the email
marketing and communications industry, including direct marketing companies,
Internet service providers, Internet ad networks, advertising agencies and
others with large established Internet businesses. Potential competitors include
America Online, Acxiom, DoubleClick, Experian Information Solutions, Harte-Hanks
Communications, IBM, Microsoft and Netscape Communications. Large Internet
portals, such as Yahoo!, also have the financial resources and technical
capabilities to enter this market. Email communication offers Internet portals a
powerful tool to build customer loyalty while driving traffic to their Web site.
These potential competitors could enter the market by acquiring one of our
existing competitors or by forming strategic alliances with our competitors.
Either of these occurrences could harm our ability to compete effectively.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have no service marks and only one registered trademark
to date; however, we have several applications currently pending. It may be
possible for unauthorized third parties to copy certain portions of our products
or reverse engineer to obtain and use information that we regard as proprietary.
Certain end-user license provisions protecting against unauthorized use may be
unenforceable under the laws of certain jurisdictions and foreign countries. We
have two patents that have been issued and two patents pending in the United
States. We do not know whether these pending patents will be issued or, if
issued, that the patents will not be challenged or invalidated. In addition, the
laws of some foreign countries do not protect proprietary rights to the same
extent, as do the laws of the United States. We cannot assure you that our means
of protecting our proprietary rights in the United States or abroad will be
adequate or that competing companies will not independently develop similar
technology.
We also strategically license certain technology from third parties,
including E.piphany and the Accipter Ad-Manager product from Engage
Technologies, Inc. In the future, if we add certificate technology to our
systems, we may license additional technology from third-party vendors. We
cannot be certain that these third-party content licenses will be available to
us on commercially reasonable terms, "or at all", or that we will be able to
successfully integrate the technology into our products and services. These
third-party content licenses may expose us to increased risks, including risks
associated with the assimilation of new technology, the diversion of resources
from the development of our own proprietary technology and our inability to
generate revenues from new technology sufficient to offset associated
acquisition and maintenance costs. The inability to obtain any of these licenses
could result in delays in product and service development until equivalent
technology can be identified, licensed and integrated. Any delays in services
could cause our business, financial condition and operating results to suffer.
12.
<PAGE> 14
We have also been subject, and may be subject in the future, to claims
alleging that we have infringed third party proprietary rights. We are not
currently subject to any material claims alleging the infringement of third
party proprietary rights. If we were to discover that any of our services
infringed third party rights, we may not be able to obtain permission to use
those rights on commercially reasonable terms. This may require us to expend
significant resources to make our services non-infringing or to discontinue the
use of our services. We might incur substantial costs defending against an
infringement claim, even if the claim is invalid. If we have to defend against
an infringement claim, it could distract our management from our business.
Further, a party making a claim could secure a judgment that requires us to pay
substantial damages or that prevents us from using or selling our products and
services. Any of these events could harm our business, financial condition and
operating results. Our success depends significantly on our proprietary
technology.
GOVERNMENT REGULATION
As the Internet continues to evolve, we expect that federal, state or
foreign agencies will adopt regulations covering such issues as user privacy,
pricing, content and quality of products and services. A number of legislative
and regulatory proposals are currently under consideration by federal and state
lawmakers and regulatory bodies and may be adopted with respect to the Internet.
In particular, a number of states have already passed statutes prohibiting
unsolicited commercial email, or spam. A number of statutes have also 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.
The adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the projected demand for email services
or increase our cost of doing business. The applicability to the Internet of
existing United States and international laws governing issues such as property
ownership, copyright, trade secret, libel, taxation and personal privacy is
uncertain and developing and may take years to resolve.
Any new legislation or regulation, or application or interpretation of
existing laws could harm our business, operating results and financial
condition. Additionally, because we expect to expand our operations outside the
United States, the international regulatory environment relating to the Internet
could harm our business, operating results and financial condition.
EMPLOYEES
As of February 29, 2000, we employed 178 people, all of whom were full-time.
The 178 employees included 16 in general and administrative functions, 86 in
engineering, 38 in sales and marketing, 22 in subscriber service/account
management, 14 editors and two Sony/InfoBeat sales persons. Employees are not
represented by a labor union or covered by any collective bargaining agreements.
We consider our employee relations to be good.
ITEM 2. PROPERTIES
We are relocating our principal executive offices into 46,418 square feet
of space in Denver, Colorado under a lease expiring on February 28, 2010. The
relocation, which includes our data center, will be completed in April 2000. We
also lease 20,281 square feet of space in Denver, Colorado under a lease
agreement expiring on December 31, 2001. In addition, we are also leasing 23,209
square feet of space on a temporary month-to-month basis until we complete our
relocation. We believe that our facilities will be adequate for our needs for
the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to legal proceedings arising out of our
operations. We are not currently a party to any material legal proceedings.
13.
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 17, 1999, we obtained the written consent of our stockholders
to approve the form of Restated Certificate of Incorporation to be adopted upon
the closing of our initial public offering. The following votes were cast by the
Company's stockholders with respect to the adoption of the Restated Certificate
of Incorporation:
Shares Voted For Shares Voted Against Shares Voted Withheld
- ---------------- -------------------- ---------------------
7,903,249 0 638,080
The foregoing votes resulted in the adoption of such proposal.
On November 17, 1999, we obtained the written consent of our preferred
stockholders to approve the conversion of the outstanding preferred stock into
common stock upon the closing of our initial public offering. The following
votes were cast by the Company's stockholders with respect to the conversion of
outstanding preferred stock into common stock upon the closing of our initial
public offering:
Shares Voted For Shares Voted Against Shares Voted Withheld
- ---------------- -------------------- ---------------------
6,885,560 0 416,497
The foregoing votes resulted in the adoption of such proposal.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our Common Stock is listed on the Nasdaq National Market under the
symbol "XACT." The following table sets forth the high and low closing sale
prices for the Common Stock for the periods indicated, as reported by the Nasdaq
National Market. These prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
1999
--------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter $ 28.63 $ 20.25
</TABLE>
As of March 15, 2000 there were approximately 80 holders of record of the
Common Stock.
We have never declared or paid dividends on our common stock. We currently
intend to retain any future earnings to finance the growth and development of
our business and therefore do not anticipate paying any cash dividends in the
foreseeable future.
On various dates between March 1997 and March 2000, we issued an aggregate
of 297,736 shares of our common stock to 21 employees pursuant to the exercise
of options granted under our stock options. The exercise prices per share range
from $0.75 to $4.32, for aggregate consideration of $620,291. We relied on the
exemption provided by Rule 701 of the Securities Act.
On December 13, 1999, we issued an aggregate of 4,690 shares of common
stock for an aggregate purchase price of $37,520 upon the exercise of warrants
to 19 accredited investors. We relied on the exemption provided by Rule 506 of
Regulation D under the Securities Act.
On December 1, 1999, we issued an aggregate of 76,415 shares of common
stock for an aggregate purchase price of $586,720 upon the exercise of warrants
to two accredited investors. We relied on the exemption provided by Rule 506 of
Regulation D under the Securities Act.
On July 15, 1999, we issued an aggregate of 630,738 shares of our common
stock at a purchase price of $6.50 per share and warrants to purchase up to
94,608 shares of common stock at an exercise price of $8.00 per share to nine
accredited investors for cash proceeds in the aggregate amount of $4.1 million.
In a second closing held on August 13, 1999, we issued an additional 726,546
shares of our common stock at a purchase price of $6.50 per share and warrants
to purchase up to 108,978 shares of common stock at an exercise price of $8.00
per share to 29 accredited investors for cash proceeds in the aggregate amount
of $4.7 million. We relied on the exemption provided by Rule 506 of Regulation D
under the Securities Act.
On December 30, 1998, we issued a warrant to purchase an aggregate of
600,000 shares of our common stock at an exercise price of $6.00 per share to
one accredited investor in connection with our sale of certain assets. On
November 18, 1999, this warrant was amended to provide for the purchase of
400,000 shares of common stock at an exercise price of $6.00. We relied on the
exemption provided by Rule 506 of Regulation D under the Securities Act.
14.
<PAGE> 16
On June 8, 1998, we issued an aggregate of 625,001 shares of our common
stock to eight accredited investors at a purchase price of $5.08 per share for
cash proceeds in the aggregate amount of $3.2 million. We relied on the
exemption provided by Rule 506 of Regulation D under the Securities Act.
On July 24, 1997, we issued an aggregate of 1,911,533 shares of our common
stock at a purchase price of $4.00 per share and warrants to purchase up to
210,917 shares of common stock at an exercise price of $4.00 per share to six
accredited investors for cash proceeds in the aggregate amount of $7.6 million.
On July 20, 1999, we issued 4,906 shares of common stock for an aggregate
purchase price of $19.6 million, upon exercise of a warrant. We relied on the
exemption provided by Rule 506 of Regulation D under the Securities Act.
On July 24, 1997, we issued a warrant to purchase an aggregate of 425,000
shares of our common stock at an exercise price of $6.00 per share to one
accredited investor in connection with a marketing agreement. We relied on the
exemption provided by Rule 506 of Regulation D under the Securities Act.
On June 20, 1997, we issued convertible promissory notes in the aggregate
principal amount of $2.0 million bearing simple interest at a rate of 12.0% per
annum and warrants to purchase up to 75,000 shares of common stock at an
exercise price of $4.00 per share to five accredited investors for cash proceeds
in the aggregate amount of $2.0 million. We relied on the exemption provided by
Rule 506 of Regulation D under the Securities Act.
In connection with a Loan and Security Agreement dated March 27, 1997, we
issued warrants to two lenders to purchase up to an aggregate of 46,666 shares
of common stock at an exercise price of $3.00 per share. We relied on the
exemption provided by Rule 506 of Regulation D under the Securities Act.
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. All recipients had adequate access, through
employment or other relationships, to information about us.
(b) Our Registration Statement on Form S-1 (No. 333-85315) was declared
effective on November 18, 1999, and the offering commenced, on November 19,
1999. All securities were sold and the offering has terminated. The managing
underwriters were Thomas Weisel Partners LLC, Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated, and Wit Capital Corporation. The class of
securities registered was common stock. An aggregate of 4,020,000 shares of
common stock were registered and sold for our account, and the aggregate
offering proceeds were $56,280,000. Aggregate underwriting discounts and
commissions were $3,939,600. Other expenses for the offering were $1,067,935.
The net proceeds to us were $51,272,465 and have been invested in short-term,
investment grade, interest-bearing securities.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes to such statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Historical results are not necessarily indicative of the results to be expected
in the future.
We have not paid any dividends on our common stock since inception.
Net loss attributable to common stockholders includes the effect of the
accretion on redeemable convertible preferred stock which increases net loss
attributable to common stockholders. This accretion will not be recognized in
the future as all outstanding series of preferred stock were converted into
common stock upon completion of our initial public offering.
Pro forma basic and diluted net loss per share is computed using the
weighted average number of common shares outstanding, including the pro forma
effects of the automatic conversion of all outstanding series of preferred stock
into common stock upon completion of our initial public offering as if the
conversion occurred on January 1, 1999, or at the date the preferred stock was
actually issued, if later.
15.
<PAGE> 17
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 30,
1996
(INCEPTION) TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1996 1997 1998 1999
------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
Email and other services........... $ -- $ 359 $ 821 $ 10,087
Online publishing.................. -- 496 1,958 899
---------- ----------- ----------- -----------
Total revenue............... -- 855 2,779 10,986
---------- ----------- ----------- -----------
Cost of revenue:
Email and other services........... -- 132 256 920
Online publishing.................. 161 1,907 2,524 862
---------- ----------- ----------- -----------
Total cost of revenue....... 161 2,039 2,780 1,782
---------- ----------- ----------- -----------
Gross profit (loss)................ (161) (1,184) (1) 9,204
---------- ----------- ----------- -----------
Operating expenses:
Marketing and sales................ 935 1,458 1,810 8,071
Research, development and
engineering...................... 1,206 2,201 2,915 10,259
General and administrative......... 1,009 1,978 2,039 4,003
Depreciation and amortization...... 174 805 1,031 1,740
---------- ----------- ----------- -----------
Total operating expenses.... 3,324 6,442 7,795 24,073
---------- ----------- ----------- -----------
Loss from operations... (3,485) (7,626) (7,796) (14,869)
Interest income (expense), net....... 93 (73) (101) 225
---------- ----------- ----------- -----------
Net loss............... (3,392) (7,699) (7,897) (14,644)
Accretion of preferred stock to
liquidation value.................. (3) (53) (103) (144)
---------- ----------- ----------- -----------
Net loss attributable to common
Stockholders.................. $ (3,395) $ (7,752) $ (8,000) $ (14,788)
========== =========== =========== ===========
Net loss per share-- basic
and diluted............... $ (3.40) $ (7.75) $ (7.96) $ (6.26)
========== =========== =========== ===========
Shares used in computing net loss per
share-- basic and diluted.......... 1,000,000 1,000,255 1,004,461 2,360,958
Pro forma basic and diluted net loss
per share.......................... $ (1.83)
===========
Shares used in computing pro forma
net loss per share-- basic and
diluted............................ 8,003,590
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1997 1998 1999
---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 3,798 $ 3,747 $ 6,383 $ 52,350
Working capital............................. 3,420 3,863 3,484 49,535
Total assets................................ 5,791 7,065 10,806 64,843
Long-term debt and capital lease obligations,
net of current portion and discount....... 30 824 610 128
Redeemable convertible preferred stock and
warrants.................................. 7,540 15,349 18,673 --
Total stockholders' equity (deficit)........ (2,288) (10,039) (18,000) 53,076
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and notes attached to
those statements included elsewhere in this report. This discussion contains
certain forward-looking statements.
16.
<PAGE> 18
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.
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 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. 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 $7.1 million,
or 65%, of our total revenue for the year ended December 31, 1999. For more
information about the sale of our online publishing business, please refer to
note 2 to the financial statements.
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. Beginning in January 1999, we agreed to
provide Sony Music with editorial services related to the InfoBeat newsletters.
Our online publishing revenue in 1999 consists of cost reimbursements by Sony
Music for employees providing these editorial services. Prior to 1999, we also
received revenue from the sale of advertising within the InfoBeat newsletters.
Since January 1999, 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. Prior to 1999, our cost of revenue also included advertising sales
and subscriber acquisition costs related to our online publishing business. Sony
Music is now responsible for these costs. Because the components of our cost of
revenue have changed significantly, we do not believe period-to-period
comparisons of our gross margins are meaningful. Please refer to note 8 to the
financial statements for additional information on our email and other services
and online publishing segments.
17.
<PAGE> 19
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.
As a result of stock option grants in 1999 with exercise prices below fair
value, we are recognizing total non-cash compensation expense of $3.7 million
over the vesting periods of the options, which are generally three or four
years. For the year ended December 31, 1999, we recognized non-cash general and
administrative compensation expense of $1.1 million with respect to these option
grants.
In December 1998, we issued to Sony Music a warrant to purchase 600,000
shares of Series D preferred stock at an exercise price of $6.00 per share. The
vesting of this warrant was contingent upon the achievement by Sony Music of
certain performance milestones. On November 18, 1999, the terms of this warrant
were amended. The amended warrant is for the purchase of 400,000 shares of
Series D preferred stock at an exercise price of $6.00 per share. The warrant is
fully vested and expires on December 31, 2003. In connection with the amended
warrant, we recorded non-cash charges of $4.7 million as sales and marketing
expense in the fourth quarter of 1999.
In July 1997, we issued to American Express a warrant to purchase 425,000
shares of Series C preferred stock at a purchase price of $6.00 per share. The
warrant expires in July 2000. The vesting of this warrant is contingent upon the
achievement by American Express of certain performance milestones. In accordance
with accounting standards in effect at the time of the issuance of this warrant,
the estimated fair value of the warrant, using the Black-Scholes option pricing
model, was calculated at the time awarded and is being amortized over the life
of the warrant. We estimate the number of warrant shares that will ultimately
vest under the warrant at the end of each reporting period and, based upon these
estimates, may recognize additional non-cash charges both currently and over the
remaining life of the warrant. We recognized non-cash charges of $46,000 in
1997, $118,000 in 1998 and $105,000 for the year ended December 31, 1999 related
to the American Express warrant and, based on estimates as of December 31, 1999
as to the ultimate vesting of the warrant, we plan to recognize an additional
$22,000 of non-cash charges over the next year. Should American Express achieve
one or both remaining milestones in 2000, then we would record additional
non-cash charges of up to approximately $150,000.
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 and $14.6 million in 1999. We had an accumulated deficit of
$33.9 million at December 31, 1999. 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.
18.
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RECENT DEVELOPMENTS
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 consummated
in the Spring of 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue. Total revenue consists of email and other services revenue and
online publishing revenue. Our total revenue increased to $11.0 million in 1999
from $2.8 million in 1998. Email and other services revenue consists of charges
for providing email messaging services and includes fees based on the volume of
email messages sent, charges for related services and custom engineering
development work. Email and other services revenue increased to $10.1 million in
1999 from $821,000 in 1998. Email and other services revenue from Sony Music for
providing the InfoBeat services under our contract which began on January 1,
1999 constituted $6.2 million, or 61% of the 1999 email and other services
revenue. The balance of the growth is attributable to increases in both our
client base and the volume of email messages sent. Excluding Sony Music, we sent
approximately 580 million email messages for 91 clients in 1999, as compared to
approximately 115 million email messages for 25 clients in 1998. We also sent
approximately 1.4 billion email messages for Sony Music in 1999.
In 1999 online publishing revenue consists of cost reimbursements by Sony
Music for employees providing editorial services related to the InfoBeat
newsletters. In 1998 online publishing revenue was derived from the sale of
advertising within the InfoBeat newsletters. We had no advertising revenue in
1999.
Cost of Revenue. Cost of revenue currently consists primarily of editorial
costs associated with the InfoBeat newsletters, sales commissions and network
connectivity charges from our Internet service providers. Prior to 1999, cost of
revenue also included advertising sales and subscriber acquisition costs related
to our online publishing business. Cost of revenue declined to $1.8 million in
1999 from $2.8 million in 1998, reflecting the change in our business from
online publishing to email services. Of the 1999 amount, editorial costs
reimbursed by Sony Music related to the Infobeat newsletters totaled $862,000,
approximating the amount of online publishing revenue. Costs related to our
online publishing business represented $2.5 million of the 1998 amount. Sales
commissions related to email services increased $298,000 in 1999 as a result of
our growing sales force and corresponding email services revenue growth. Because
the components of our cost of revenue have changed significantly, we do not
believe period-to-period comparisons of our gross margins are meaningful.
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 $8.1 million in 1999
from $1.8 million in 1998. 1999 costs included $4.7 million in non-cash charges
related to the 400,000 warrants issued to Sony Music. Marketing and sales costs
related to our online publishing business represented $189,000 of the 1998
amount. Salaries and other personnel costs represented the majority of the 1999
increase as the number of marketing and sales employees increased to 49 as of
December 31, 1999 from 15 at the beginning of 1998. We expect to significantly
increase the number of employees, as well as advertising and promotional
spending in this area 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 $10.3 million in 1999 from $2.9
million in 1998. The cost of outside contractors and consultants, who are
utilized to speed development efforts, increased by $5.1 million in 1999. In
addition, salaries and other
19.
<PAGE> 21
personnel costs significantly increased in 1999 as the number of research,
development and engineering employees increased to 74 as of December 31, 1999
from 22 at the beginning of 1998. Research, development and engineering costs
related to our online publishing business represented $1.1 million of the 1998
amount; however, since most of the employees of the online publishing business
were redeployed to the email services business in 1999, costs related to those
employees are included in the 1999 period. 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 $4.0 million in 1999 from
$2.0 million in 1998. Non-cash stock option compensation expense increased by
$1.1 million in 1999 as a result of options granted in 1999 with exercise prices
below fair value. Professional fees increased $220,000 in 1999, primarily due to
costs related to recently settled patent infringement lawsuits. Occupancy and
general office costs represented $220,000 of the increase in the 1999 period due
to an increase in the total number of our employees. Increased salaries and
other personnel costs accounted for $298,000 of the increase in the 1999 period,
as the number of general and administrative employees increased to 14 as of
December 31, 1999 from six at the beginning of 1998.
Depreciation and Amortization. Depreciation and amortization expense
consists primarily of depreciation of equipment, software and furniture and
amortization of leasehold improvements. Fixed assets are recorded at cost and
depreciated over the estimated useful lives of the assets which range from three
to five years. Depreciation and amortization expense increased to $1.7 million
in 1999 from $1.0 million in 1998. 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 1999 period.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenue. Our total revenue increased to $2.8 million in 1998 from $855,000
in 1997. Email and other services revenue increased to $821,000 in 1998 from
$359,000 in 1997 as a result of increases in our client base, email message
volume and average price per message sent. We sent approximately 115 million
email messages for 25 clients in 1998 as compared to approximately 104 million
email messages for one client in 1997. We did not begin to make our outsourced
email services generally available until early 1998.
Online publishing revenue increased to $2.0 million in 1998 from $496,000 in
1997 as we expanded both our advertising sales efforts and the distribution of
the InfoBeat newsletters.
Cost of Revenue. Cost of revenue increased to $2.8 million in 1998 from $2.0
million in 1997. Costs related to our online publishing business represented
$2.5 million of 1998 and $1.9 million of 1997 amounts. These costs increased
primarily due to a $400,000 increase in advertising sales commissions due to
revenue growth. Sales commissions related to email services revenue increased
$76,000 in 1998 due to the establishment of a sales force and the associated
payment of commissions. Network connectivity charges increased $121,000 in 1998
due to higher email message volume.
Marketing and Sales. Marketing and sales costs increased to $1.8 million in
1998 from $1.5 million in 1997. Salaries and other personnel costs increased in
1998 due to the increase in the number of marketing and sales employees to 32 as
of December 31, 1998 from 12 at the beginning of 1997. This increase in salaries
and other personnel costs was partially offset by a decline of $244,000 in
advertising and other promotional costs in 1998.
Research, Development and Engineering. Research, development and engineering
costs increased to $2.9 million in 1998 from $2.2 million in 1997. Salaries and
other personnel costs increased in 1998, as the number of research, development
and engineering employees increased to 36 as of December 31, 1998 from 21 at the
beginning of 1997.
General and Administrative. General and administrative costs remained
relatively unchanged at $2.0 million in both 1998 and 1997. Occupancy and
general office costs increased $168,000 in 1998 due to the increase in the
number of our employees. This increase was partially offset by a $127,000
decline in salaries and other personnel
20.
<PAGE> 22
costs for general and administrative functions in 1998.
Depreciation and Amortization. Depreciation and amortization expense
increased to $1.0 million in 1998 from $806,000 in 1997. 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 1998.
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 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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our historical unaudited quarterly
information for our most recent eight quarters. This quarterly information has
been prepared on a basis consistent with our audited financial statements and,
we believe, includes all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information shown. Our
quarterly operating results have fluctuated and may continue to fluctuate
significantly as a result of a variety of factors and operating results for any
quarter are not necessarily indicative of results for a full fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998 1999 1999 1999 1999
---------- -------- ------------- ------------- ------------ ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Email and other
services............. $ 52 $ 102 $ 295 $ 372 $ 1,759 $ 2,250 $ 2,597 $ 3,481
Online publishing....... 411 526 604 417 246 189 226 238
-------- -------- ------- ------- -------- -------- ------- -------
Total revenue... 463 628 899 789 2,005 2,439 2,823 3,719
-------- -------- ------- ------- -------- -------- ------- -------
Cost of revenue:
Email and other
services............. 46 47 88 75 143 264 234 279
Online publishing....... 574 583 699 668 224 203 217 218
-------- -------- ------- ------- -------- -------- ------- -------
Total cost of
revenue....... 620 630 787 743 367 467 451 497
-------- -------- ------- ------- -------- -------- ------- -------
Gross profit
(loss)........ (157) (2) 112 46 1,638 1,972 2,372 3,222
-------- -------- ------- ------- -------- -------- ------- -------
Operating expenses:
Marketing and sales..... 257 421 592 540 612 663 783 6,013
Research, development and
engineering.......... 551 631 878 855 963 2,171 3,097 4,028
General and
administrative....... 331 528 471 708 1,118 810 833 1,242
Depreciation and
amortization......... 235 240 275 282 310 379 485 566
-------- -------- ------- ------- -------- -------- ------- -------
Total operating
expenses...... 1,374 1,820 2,216 2,385 3,003 4,023 5,198 11,849
-------- -------- ------- ------- -------- -------- ------- -------
Loss from
operations.. (1,531) (1,822) (2,104) (2,339) (1,365) (2,051) (2,826) (8,627)
Interest income (expense),
Net..................... (9) (21) (15) (56) 3 (21) 7 236
-------- -------- ------- ------- -------- -------- ------- -------
Net loss.................. $ (1,540) $ (1,843) $(2,119) $(2,395) $ (1,362) $ (2,072) $(2,819) $(8,391)
======== ======== ======= ======= ======== ======== ======= =======
</TABLE>
Our limited operating history and the emerging nature of the Internet-based
email services market make it very difficult for us to accurately forecast our
revenue. Our revenue could fall short of our expectations if we experience
delays or cancellations of even a small number of contracts. A number of factors
are likely to cause fluctuations in our operating results, including but not
limited to:
21.
<PAGE> 23
o continued growth of the Internet, in general, and of email usage, in
particular;
o demand for our services;
o our ability to attract and retain clients and maintain client
satisfaction;
o our ability to upgrade, develop and maintain our systems and
infrastructure;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our business and infrastructure;
o technical difficulties or system outages;
o the announcement or introduction of new or enhanced services by our
competitors;
o pricing policies of our competitors;
o our ability to attract and retain qualified personnel with Internet
and direct marketing industry expertise, particularly technology,
sales and marketing personnel; and
o governmental regulation regarding the Internet, email and direct
marketing.
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 $6.9 million in 1997, $302,000
in 1998 and $6.8 million in 1999.
Net cash used by investing activities was $1.0 million in 1997, $885,000 in
1998 and $6.5 million in 1999. In each year, net cash used by investing
activities was primarily the result of capital expenditures for equipment and
software used in our data centers from which we operate our email message
platform.
Net cash provided by financing activities was $7.9 million in 1997, $3.8
million in 1998 and $59.3 million in 1999. Proceeds from our initial public
offering in November 1999 and the sale of preferred stock in 1999 and prior
years, net of payments for debt and capital lease obligations, were the primary
source of the net cash provided by financing activities. In the year ended 1997,
proceeds from notes payable of $3.5 million were also a significant source of
financing. Approximately $2.0 million of this amount was converted into
preferred stock in July 1997. The balance consists primarily of proceeds from
bank loans.
At December 31, 1998 and 1999, we had $6.4 million and $52.3 million,
respectively, in cash and cash equivalents. In July 1999, we received a $1.5
million payment from Sony Music related to the sale of our online publishing
business. In July and August 1999, we received net proceeds of $8.8 million from
the sale of Series E preferred stock and warrants. In November and December 1999
we received net proceeds of $51.2 million from our initial public offering. In
December 1999 we received $2.8 million from Sony Music related to future
services to be provided under our service agreement. We plan to increase our
general level of spending in the future and plan to expend significant resources
on capital expenditures in 2000 for equipment and software, furniture, and
leasehold improvements. We plan to relocate our existing data center and
corporate offices in the first quarter of 2000. We expect to incur 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.
22.
<PAGE> 24
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 and $14.6
million in 1999. We had an accumulated deficit of $33.9 million at December 31,
1999. 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.
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.
23.
<PAGE> 25
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 1999, Sony Music
accounted for approximately 65% of our total revenue and our two next largest
clients accounted for approximately 11% 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. See "Business --
Competition" for a list of our current and potential competitors.
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 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 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.
24.
<PAGE> 26
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 with exercise prices below fair value, we are recognizing total non-cash
compensation expense of $3.7 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
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:
25.
<PAGE> 27
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.
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
26.
<PAGE> 28
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.
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
27.
<PAGE> 29
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.
IF WE DO NOT SUCCESSFULLY RELOCATE OUR DATA CENTER TO A FACILITY WITH
APPROPRIATE BACK-UP POWER AND COOLING CAPABILITIES, WE MAY EXPERIENCE AN OUTAGE
AND OUR CURRENT SYSTEMS MAY TEMPORARILY CEASE OPERATING.
Due to insufficient access to back-up power and cooling capabilities in our
current data center, we may experience a system interruption. We are currently
in the process of relocating our offices and data center to a facility with more
extensive back-up power and cooling capabilities. This relocation is expected to
be complete in April 2000. Any failure of our systems would materially harm our
business. Moreover, our relocation to a new site requires that we rebuild and
enhance our system. Although we plan to continue operating in our current site
until our new site is fully operational, any defects or delays in building our
system at the new site could harm our business.
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.
28.
<PAGE> 30
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
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.
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:
29.
<PAGE> 31
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.
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. Spam-blocking efforts
by others may also result in the blocking of our clients' legitimate messages.
Additionally, 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.
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;
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
30.
<PAGE> 32
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 approximately
63.4% 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, we had debt in the aggregate amount of $655,000 and we
may incur additional debt in the future. A change in interest rates would not
affect our obligations related to debt existing as of December 31, 1999, as the
interest payments related to that debt are fixed over the term of the debt.
Increases in interest rates could, however, increase the interest expense
associated with future borrowings.
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 decline as the result of changes in equity markets and interest rates.
31.
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Exactis.com, Inc.:
We have audited the accompanying balance sheets of Exactis.com, Inc. as of
December 31, 1998 and 1999 and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Exactis.com, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
January 31, 2000, except as to
note 9, which is as of
February 29, 2000
32.
<PAGE> 34
EXACTIS.COM, INC.
Balance Sheets
December 31, 1998 and 1999
<TABLE>
<CAPTION>
ASSETS 1998 1999
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,383,255 52,349,712
Restricted cash -- 1,200,000
Accounts receivable, net of allowance of $75,000 and
$100,000, respectively 727,295 3,070,685
Receivable from sale of online publishing business 1,500,000 --
Prepaid expenses and other 96,961 1,353,712
------------ -----------
Total current assets 8,707,511 57,974,109
------------ -----------
Property and equipment, at cost:
Computers and equipment - production 2,304,982 5,713,751
Computers and equipment - administrative 465,920 860,833
Furniture and fixtures 438,630 794,825
Purchased computer software 322,973 1,566,333
Leasehold improvements 314,879 1,411,711
------------ -----------
3,847,384 10,347,453
Less accumulated depreciation and amortization (2,010,118) (3,736,961)
------------ -----------
1,837,266 6,610,492
Other assets 261,494 257,903
------------ -----------
Total assets $ 10,806,271 64,842,504
============ ===========
</TABLE>
33.
<PAGE> 35
EXACTIS.COM, INC.
Balance Sheets -- (continued)
December 31, 1998 and 1999
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1999
------------ -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 194,540 1,290,851
Accrued liabilities 517,019 2,119,952
Accrued payroll and benefits 181,995 640,555
Deferred revenue 3,644,452 3,860,444
Current portion of notes payable 677,777 527,351
Obligations under capital leases 8,056 --
------------ -----------
Total current liabilities 5,223,839 8,439,153
Deferred revenue, net of current portion 4,300,000 3,200,000
Notes payable, less current portion 609,700 127,831
------------ -----------
Total liabilities 10,133,539 11,766,984
------------ -----------
Mandatorily redeemable preferred stock, converted to common
stock during 1999; none authorized issued or outstanding at
December 31, 1999:
Series B, par value $.01, authorized 2,570,000 shares; issued and
outstanding 2,523,333 shares (aggregate
liquidation preference of $7,569,999) 7,553,489 --
Series C, par value $.01, authorized 3,550,000 shares;
issued and outstanding 1,911,533 shares (aggregate
liquidation preference of $7,646,132) 7,318,061 --
Series D, par value $.01, authorized 1,300,000 shares;
issued and outstanding 625,001 shares in 1998
(aggregate liquidation preference of $3,175,005) 3,153,037 --
Warrants for the purchase of mandatorily redeemable
preferred stock 647,936 --
------------ -----------
18,672,523 --
------------ -----------
Stockholders' equity (deficit):
Undesignated preferred stock, 3,500,000 shares authorized
in 1999, none issued or outstanding -- --
Series A preferred stock, par value $.01, authorized, issued
and outstanding 880,000 shares (aggregate liquidation
preference of $1,100,000) in 1998, converted to common
stock in 1999 1,094,413 --
Common stock, par value $.01. Authorized 35,000,000
shares; issued and outstanding 1,009,053 and 12,688,872
shares, respectively 10,091 126,689
Additional paid-in capital 43,138 89,508,055
Unearned stock option compensation -- (2,623,764)
Accumulated deficit (19,147,433) (33,935,460)
------------ -----------
Total stockholders' equity (deficit) (17,999,791) 53,075,520
Commitments and contingencies
------------ -----------
Total liabilities and stockholders' equity (deficit) $ 10,806,271 64,842,504
============ ===========
</TABLE>
See accompanying notes to financial statements.
34.
<PAGE> 36
EXACTIS.COM, INC.
Statements of Operations
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Email and other services $ 358,801 821,410 10,087,611
Online publishing 496,099 1,957,700 898,773
----------- ---------- -----------
Total revenue 854,900 2,779,110 10,986,384
----------- ---------- -----------
Cost of revenue:
Email and other services 132,000 255,859 920,115
Online publishing 1,906,768 2,524,175 862,133
----------- ---------- -----------
Total cost of revenue 2,038,768 2,780,034 1,782,248
----------- ---------- -----------
Gross profit (loss) (1,183,868) (924) 9,204,136
Operating expenses:
Marketing and sales 1,457,898 1,809,645 8,071,090
Research, development and engineering 2,200,920 2,914,771 10,259,019
General and administrative 1,977,760 2,039,367 4,002,549
Depreciation and amortization 805,520 1,031,607 1,739,960
----------- ---------- -----------
Total operating expenses 6,442,098 7,795,390 24,072,618
----------- ---------- -----------
Loss from operations (7,625,966) (7,796,314) (14,868,482)
Interest income (expense), net (72,947) (100,907) 224,856
----------- ---------- -----------
Net loss (7,698,913) (7,897,221) (14,643,626)
Accretion of preferred stock to liquidation value (53,473) (102,782) (144,401)
----------- ---------- -----------
Net loss attributable to common stockholders $(7,752,386) (8,000,003) (14,788,027)
=========== ========== ===========
Net loss per share - basic and diluted $ (7.75) (7.96) (6.26)
=========== ========== ===========
Weighted average number of common shares
outstanding - basic and diluted 1,000,255 1,004,461 2,360,958
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
35.
<PAGE> 37
EXACTIS.COM, INC.
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 880,000 $ 1,094,413 1,000,000 $ 10,000 2,282
Exercise of common stock options -- -- 1,000 10 1,241
Accretion of redeemable preferred
stock to liquidation value -- -- -- -- --
Net loss -- -- -- -- --
-------- ----------- ---------- -------- -----------
Balances at December 31, 1997 880,000 1,094,413 1,001,000 10,010 3,523
Exercise of common stock options -- -- 8,053 81 9,911
Issuance of common stock options
for services -- -- -- -- 29,704
Accretion of redeemable preferred
stock to liquidation value -- -- -- -- --
Net loss -- -- -- -- --
-------- ----------- ---------- -------- -----------
Balances at December 31, 1998 880,000 1,094,413 1,009,053 10,091 43,138
Exercise of common stock options -- -- 256,657 2,567 490,549
Exercise of common stock warrants -- -- 81,105 811 623,609
Issuance of common stock in public
offering, net of issuance costs -- -- 4,020,000 40,200 51,232,265
Issuance of common stock options
at less than fair value -- -- -- -- 3,711,835
Amortization of unearned
compensation -- -- -- -- --
Accretion of redeemable preferred
stock to liquidation value -- -- -- -- --
Conversion of preferred stock to
common stock (880,000) (1,094,413) 7,322,057 73,020 33,406,659
Net loss -- -- -- -- --
-------- ----------- ---------- -------- -----------
Balances at December 31, 1999 -- $ -- 12,688,872 $126,689 89,508,055
======== =========== ========== ======== ===========
<CAPTION>
UNEARNED
STOCK OPTION ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
Balances at January 1, 1997 -- (3,395,044) (2,288,349)
Exercise of common stock options -- -- 1,251
Accretion of redeemable preferred
stock to liquidation value -- (53,473) (53,473)
Net loss -- (7,698,913) (7,698,913)
---------- ----------- -----------
Balances at December 31, 1997 -- (11,147,430) (10,039,484)
Exercise of common stock options -- -- 9,992
Issuance of common stock options
for services -- -- 29,704
Accretion of redeemable preferred
stock to liquidation value -- (102,782) (102,782)
Net loss -- (7,897,221) (7,897,221)
---------- ----------- -----------
Balances at December 31, 1998 -- (19,147,433) (17,999,791)
Exercise of common stock options -- -- 493,116
Exercise of common stock warrants -- -- 624,420
Issuance of common stock in public
offering, net of issuance costs -- -- 51,272,465
Issuance of common stock options
at less than fair value (3,711,835) -- --
Amortization of unearned
compensation 1,088,071 -- 1,088,071
Accretion of redeemable preferred
stock to liquidation value -- (144,401) (144,401)
Conversion of preferred stock to
common stock -- -- 32,385,266
Net loss -- (14,643,626) (14,643,626)
---------- ----------- -----------
Balances at December 31, 1999 (2,623,764) (33,935,460) 53,075,520
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
36.
<PAGE> 38
EXACTIS.COM, INC.
Statements of Cash Flows
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(7,698,913) (7,897,221) (14,643,626)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 805,520 1,031,607 1,739,960
Amortization of deferred marketing and
financing costs 77,606 162,237 130,554
Preferred stock and preferred stock warrants
issued for debt financing costs, marketing costs
and interest expense 113,197 -- 4,666,000
Common stock options issued for services and
compensation -- 29,704 1,088,071
Accretion of premium on notes payable 29,748 53,286 45,482
Changes in operating assets and liabilities:
Receivables (193,687) (2,033,608) (843,390)
Prepaid expenses and other 26,601 7,246 (1,256,751)
Other assets (12,692) (66,693) (30,275)
Accounts payable and accrued liabilities (75,170) 479,494 3,157,804
Deferred revenue 12,591 7,931,861 (884,008)
----------- ---------- -----------
Net cash used by operating activities (6,915,199) (302,087) (6,830,179)
----------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,056,942) (894,493) (6,513,651)
Proceeds from sale of equipment 7,358 9,275 466
----------- ---------- -----------
Net cash used by investing activities (1,049,584) (885,218) (6,513,185)
----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock 5,414,330 3,160,588 61,195,654
Principal payments on capital lease obligations (19,768) (22,307) (8,056)
Proceeds from notes payable 3,522,658 477,343 --
Payments on notes payable (253,471) (542,087) (677,777)
Change in restricted cash (750,320) 750,320 (1,200,000)
----------- ---------- -----------
Net cash provided by financing activities 7,913,429 3,823,857 59,309,821
----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents (51,354) 2,636,552 45,966,457
Cash and cash equivalents at beginning of year 3,798,057 3,746,703 6,383,255
----------- ---------- -----------
Cash and cash equivalents at end of year $ 3,746,703 6,383,255 52,349,712
=========== ========== ===========
Supplemental cash flow information -
cash paid for interest $ 86,865 107,558 76,841
=========== ========== ===========
Supplemental noncash investing and financing activities:
Redeemable preferred stock warrants issued for
financing and marketing costs $ 320,394 70,223 4,762,688
=========== ========== ===========
Notes payable and accrued interest payable converted
to preferred stock $ 2,021,697 -- --
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
37.
<PAGE> 39
EXACTIS.COM, INC.
Notes to Financial Statements
December 31, 1998 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Exactis.com, Inc. (formerly InfoBeat Inc.) (the Company), a Delaware
corporation, was formed on January 30, 1996. In January 1999, the
Company changed its name from InfoBeat Inc. to Exactis.com, Inc. The
Company provides permission-based outsourced email marketing and
communications services. Through December 1998, the Company also
operated an online publishing business, which consisted of the
publication of advertising supported newsletters delivered daily to
subscribers via email (see note 2).
The Company completed an initial public offering of shares of its
common stock in November 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ significantly from those estimates.
(b) CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments with maturities
of three months or less at the date of purchase to be cash
equivalents. Cash equivalents at December 31, 1999 consists primarily
of money market funds.
Restricted cash at December 31, 1999 consists of a certificate of
deposit securing a line of credit from a financial institution. The
line of credit was required by the lessor under a lease agreement
which commences in January 2000.
(c) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization is calculated using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 5 years.
Leasehold improvements are amortized over the lesser of the lease
term or the estimated lives, which range from 3 to 10 years.
(d) INCOME TAXES
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS No. 109). Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax
assets and
38.
<PAGE> 40
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date. A valuation allowance is
required to the extent any deferred tax assets may not be realizable.
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company's financial
instruments, including accounts receivable and accrued liabilities,
approximate fair value because of their short maturities. Because the
interest rates on the Company's certificates of deposit and notes
payable reflect market rates and terms, the fair values of these
instruments approximate carrying amounts.
(f) REVENUE RECOGNITION
Email and other services revenue generally is derived from the
delivery of email messages for clients on a pre-determined price per
message basis and is recognized upon delivery. The Company records
deferred revenue for payments received and receivables contractually
due in advance of services performed. See note 2 for revenue
recognition related to the email and other services provided to Sony
Music.
Online publishing revenue consisted principally of short-term
advertising contracts whereby the Company guaranteed a minimum number
of impressions (a view of an advertisement by a consumer) for a fixed
fee. The Company recorded deferred revenue for payments received in
advance of delivered impressions.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the
Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
generally measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is equal to the amount by which the carrying amounts of
the assets exceed the fair values of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value, less costs to sell.
(h) STOCK-BASED COMPENSATION
The Company accounts for its stock option plans in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeds the exercise price of the option. Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123) permits entities to recognize as
expense, over the vesting period, the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income or loss disclosures as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures required by SFAS
No. 123.
39.
<PAGE> 41
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
(i) CONTINGENT STOCK PURCHASE WARRANTS
The Company recorded contingent stock purchase warrants issued prior
to November 21, 1997 in accordance with Emerging Issues Task Force
Bulletin 96-3: Accounting for Equity Instruments That Are Issued for
Consideration Other Than Employee Services under FASB Statement No.
123. Under EITF 96-3, the number of warrants estimated to eventually
be issued are recorded at fair value at the grant date. The Company
expenses subsequent revisions to the estimated number of warrants to
be issued based on the fair value of the warrants, as determined at
the grant date.
The Company has recorded contingent stock purchase warrants issued
subsequent to November 20, 1997 in accordance with Emerging Issues
Task Force Bulletin 96-18: Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. At the grant date, the minimum number of
warrants which may eventually be issued are recorded at their fair
value, which is adjusted in subsequent periods for revisions of the
minimum number of warrants to be issued and the then current fair
value of the warrants.
(j) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development costs totaled approximately $265,000, $546,000 and
$3,500,000 in 1997, 1998 and 1999, respectively.
(k) 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 in
1997, 1998 and 1999, as all potential common stock instruments are
antidilutive.
The weighted average number of common shares outstanding for 1997,
1998 and 1999 were computed as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -----------
<S> <C> <C> <C>
Common shares outstanding at
beginning of year 1,000,000 1,001,000 1,009,053
Effect of shares issued during
the year 255 3,461 1,351,905
------------- ------------- -----------
Basic and diluted weighted average
common shares 1,000,255 1,004,461 2,360,958
============= ============= ===========
</TABLE>
40.
<PAGE> 42
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
(2) SALE OF ONLINE PUBLISHING BUSINESS
Prior to December 1998, the Company operated in two lines of business.
The Company's initial business, the online publishing business, was the
publication of advertising supported newsletters delivered daily to
subscribers via email. In early 1998, the Company launched its outsourced
email marketing and communications services business (the email services
business).
In December 1998 the Company sold the online publishing business,
including rights to the InfoBeat brand, the consumer newsletters and the
subscriber lists to Sony Music, a Group of Sony Music Entertainment Inc.
The Company also entered into a service agreement to manage the
production and delivery of the InfoBeat newsletters for Sony Music
through December 2001. At December 31, 1999, the Company had received
$11.8 million under the sales agreement and related service agreement.
The agreements also provide for additional minimum payments of $3.0
million over the term of the service agreement. In connection with the
agreements, Sony Music was granted preferred stock purchase warrants with
contingent vesting provisions based on future performance criteria. In
November 1999, the warrants were replaced with 400,000 fully vested
warrants (see note 3).
The separate fair values of the sales and service agreements were not
objectively determinable. Therefore, the proceeds of the sales and
service agreements are being recognized as email 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. At December
31, 1999 substantially all of the current and long-term deferred revenue
is related to the Sony Music agreements.
Beginning in January 1999, the Company agreed to provide Sony Music with
editorial services related to the InfoBeat newsletters. Online publishing
revenue in 1999 consists of cost reimbursements by Sony Music for
employees providing these editorial services.
(3) PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(a) PREFERRED STOCK
In June 1998, the Company issued 625,001 shares of Series D preferred
stock at $5.08 per share. In July and August 1999, the Company issued
1,357,284 shares of Series E preferred stock at $6.50 per share.
Warrants were also issued in conjunction with the sale of the Series
E preferred stock (see below). All preferred stock was converted into
an equal number of shares of common stock in connection with the
Company's November 1999 initial public offering of common stock.
(b) WARRANTS
In April 1997, the Company issued warrants to purchase 46,666 shares
of Series B preferred stock at $3.00 per share in connection with the
issuance of notes payable to a bank. The warrants expire in 2007 and
at December 31, 1999, all of the warrants were exercisable. The fair
value of the warrants at the date of issuance was recorded as
deferred financing costs and is being amortized to interest expense
over the term of the notes using the interest method.
41.
<PAGE> 43
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
In June 1997, the Company issued warrants to purchase 75,000 shares
of Series C preferred stock at $4.00 per share in connection with a
bridge financing. The warrants expire in 2001 and at December 31,
1999, 7,656 warrants had been exercised and 67,344 warrants were
exercisable. The fair value of the warrants at the date of issuance
was recognized as interest expense in 1997.
In July 1997, the Company issued warrants to purchase 210,917 shares
of Series C preferred stock at $4.00 per share in connection with the
issuance of Series C preferred stock. The warrants expire in 2001 and
at December 31, 1999, 3,355 warrants had been exercised and 207,562
warrants were exercisable. The fair value of the warrants at the date
of issuance was separately recorded as warrants for the purchase of
mandatorily redeemable preferred stock and as a reduction to the
Series C preferred stock.
In July 1997, the Company issued warrants to purchase 425,000 shares
of Series C preferred stock at $6.00 per share in connection with a
marketing agreement. Vesting of the warrants is contingent upon the
recipient meeting certain performance requirements under the
agreement. The warrants expire in 2000 and at December 31, 1999,
170,000 of the warrants were vested and exercisable. The fair value
of the warrants is being recognized as marketing and sales expense
over the term of the agreement, based on management's periodic
estimate of the number of warrants which will ultimately vest under
the agreement. Such estimate was adjusted in 1999 and the Company
recorded an additional $96,688 of deferred marketing expense.
In December 1998, the Company issued warrants to purchase 600,000
shares of Series D preferred stock in connection with the agreements
described in note 2. In November 1999, the warrants were replaced
with warrants to purchase 400,000 shares of Series D preferred stock
at $6.00 per share. The fair value of the warrants was determined to
be $4,666,000 and was recognized as marketing and sales expense in
1999.
In July and August, 1999, the Company issued warrants to purchase a
total of 203,586 shares of Series E preferred stock at $8.00 per
share in connection with the issuance of Series E preferred stock.
The warrants expire in 2004 and at December 31, 1999, 75,000 of the
warrants had been exercised and 128,586 of the warrants were
exercisable. The fair value of the warrants at the date of issuance
was separately recorded as warrants for the purchase of mandatorily
redeemable preferred stock and as a reduction to the Series E
preferred stock.
In November 1999, all warrants issued by the Company to purchase
shares of Series B, C, D and E preferred stock were converted to
warrants to purchase an equivalent number of shares of common stock
in conjunction with the Company's initial public offering.
(C) STOCK OPTIONS
In 1996, 1997 and 1999 the Company adopted stock option plans (the
1996 Plan, the 1997 Plan and the 1999 Plan) pursuant to which the
Company's Board of Directors may grant incentive stock options and
non-qualified stock options to employees, directors and consultants.
The 1996 Plan, the 1997 Plan and the 1999 Plan authorize grants of
options to purchase up to an aggregate of 3,000,000 shares of
authorized but unissued common stock. No further options will be
granted under the 1996 and 1997 Plans. Options currently outstanding
under the 1996
42.
<PAGE> 44
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
and 1997 Plans will continue to be outstanding under the terms of the
1996 and 1997 Plans until exercised or terminated. Options forfeited
under the 1996 Plan are available for grant under the 1997 Plan and
options forfeited under the 1997 Plan are available for grant under
the 1999 Plan. Stock options are generally granted with an exercise
price equal to the stock's fair market value at the date of grant.
Incentive stock options have ten-year terms and generally vest 25%
one year from the grant date with the remainder vesting on a pro-rata
basis over 36 months. Non-qualified stock options have ten-year terms
and generally vest over periods up to four years from the grant date,
although 658,000 non-qualified stock options with three-year vesting
were granted in May 1999.
At December 31, 1999, 821,211 shares were available for grant under
the 1999 Equity Incentive Plan. The per share weighted-average fair
value of stock options granted with exercise prices equal to the
stock's fair market value at the date of grant during 1997, 1998 and
1999 was $0.33, $0.41 and $2.57, respectively, on the date of grant.
Prior to the Company's initial public offering in November 1999, the
fair values of stock options granted were calculated using the Black
Scholes option-pricing model with the following weighted-average
assumptions: no volatility or dividends, risk-free interest rate of
6%, and an expected life of 2 years. Subsequent to the initial public
offering, the same assumptions were used except volatility was
assumed to be 100%.
The Company utilizes APB Opinion No. 25 in accounting for its Plans
and, accordingly, since the Company generally grants options at fair
value, no compensation cost was recognized for stock options in the
accompanying financial statements in 1997 and 1998. In 1999, a total
of 1,117,000 stock options were granted with exercise prices less
than fair value, resulting in total compensation expense to be
recognized over the vesting period of $3,711,835, $1,088,071 of which
was recognized during the year ended December 31, 1999. If the
Company determined compensation cost based on the fair value of the
options at the grant date under SFAS No. 123, the Company's net loss
would have been approximately $7,714,000, $7,963,000 and $14,809,133
and the Company's net loss per share would have been $7.71, $7.93 and
$6.27 in 1997, 1998 and 1999, respectively.
43.
<PAGE> 45
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
The following table summarizes stock option activity for the three years ended
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Balance at January 1, 1997 616,143 $ .93
Exercised (1,000) 1.25
Granted 657,160 2.88
Forfeited (378,667) 1.14
---------
Balance at December 31, 1997 893,636 1.71
Exercised (8,053) 1.25
Granted 513,065 3.74
Forfeited (385,729) 2.04
---------
Balance at December 31, 1998 1,012,919 3.05
Exercised (256,657) 1.92
Granted 1,797,500 5.30
Forfeited (640,683) 3.30
---------
Balance at December 31, 1999 1,913,079 5.26
=========
</TABLE>
At December 31, 1999, the weighted average remaining contractual life of
outstanding options was 9.24 years. At December 31, 1999, 151,337 incentive
options and 68,342 non-qualified options were exercisable.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ --------------------------------
WEIGHTED NUMBER
RANGE AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES OUTSTANDING LIFE PRICE 1999 PRICE
----------------- ----------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.25 74,694 6.88 $ 1.25 74,694 $1.25
1.50 481,000 9.36 1.50 -- --
3.00 - 3.40 189,969 7.88 3.28 99,248 3.24
4.32 474,916 9.27 4.32 45,737 4.32
5.53 432,500 9.65 5.53 -- --
12.00 185,500 9.88 12.00 -- --
25.38 - 27.00 74,500 9.98 26.34 -- --
----------- -------------
1,913,079 9.24 5.26 219,679 2.79
=========== =============
</TABLE>
44.
<PAGE> 46
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
(4) INCOME TAXES
Income tax benefit relating to losses for the years ended December 31
differs from the amounts that would result from applying the federal
statutory rate of 34% in 1997 and 1998 and 35% in 1999 as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
------------ ----------- ----------
<S> <C> <C> <C>
Expected tax benefit $(2,617,630) (2,685,055) (4,978,833)
State income taxes, net of federal benefit (152,438) (156,364) (289,942)
Change in valuation allowance for deferred
tax assets 2,841,912 2,869,286 5,315,497
Other, net (71,844) (27,867) (46,722)
----------- ---------- ----------
Actual income tax benefit $ -- -- --
=========== ========== ==========
</TABLE>
No tax benefit has been recorded by the Company due to net operating
losses and an increase in the valuation allowance for deferred tax
assets.
45.
<PAGE> 47
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
Temporary differences that give rise to significant components of
deferred tax assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 4,372,641 8,301,912
Receivables due to allowance for doubtful accounts
for tax purposes only 27,771 37,021
Deferred revenue 2,362,453 1,961,002
Equipment and leasehold improvements due to
differences in depreciation and amortization 71,082 110,359
Accrued expenses 78,692 78,692
Stock warrants -- 1,726,420
Other, net 49,827 62,557
----------- -----------
Gross deferred tax asset 6,962,466 12,277,963
Valuation allowance (6,962,466) (12,277,963)
----------- -----------
Net deferred tax asset $ -- --
=========== ===========
</TABLE>
At December 31, 1999, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $22 million, which is
available to offset future federal taxable income, if any, through 2019.
Management believes the utilization of carryforwards will be limited by
Internal Revenue Code Section 382 relating to changes in ownership, as
defined.
Due to the uncertainty regarding the realization of the deferred tax
assets relating to the net operating loss carryforwards and other
temporary differences, a valuation allowance has been recorded for the
Company's net deferred tax asset at December 31, 1997, 1998 and 1999.
(5) NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- -------
<S> <C> <C>
14.0% note, payable in monthly installments of $31,669,
including interest, with final payment of $75,000 due
March 1, 2000; secured by computer equipment $502,994 167,034
12.5% note, payable in monthly installments of $12,815,
including interest, with final payment of $30,622 due
October 1, 2000; secured by computer equipment and
furniture 276,148 149,368
12.5% note, payable in monthly installments of $3,585,
including interest, with final payment of $8,577 due
December 1, 2000; secured by computer equipment 82,830 48,044
</TABLE>
46.
<PAGE> 48
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
----------- --------
<S> <C> <C>
12.3% note, payable in monthly installments of $3,487,
including interest with final payment of $8,359 due
May 1, 2001, secured by computer equipment 93,631 61,409
12.3% note, payable in monthly installments of $11,454,
including interest, with final payment of $27,442 due
August 1, 2001, secured by computer equipment 331,874 229,327
----------- --------
1,287,477 655,182
Less current portion (677,777) (527,351)
----------- --------
Notes payable, net of current portion $ 609,700 127,831
=========== ========
</TABLE>
The above notes payable are included in a bank financing agreement. The
aggregate maturities for long-term debt for each of the years subsequent
to December 31, 1999 are as follows: 2000 -$527,351 and 2001 - $127,831.
(6) COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases office facilities under operating lease
agreements which expire in 2001 and 2010. Future minimum lease
payments as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
------------
<S> <C>
2000 $ 949,846
2001 1,143,255
2002 974,778
2003 1,052,141
2004 1,144,977
Thereafter 6,459,839
------------
Total future minimum lease
payments $ 11,724,836
============
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999
was $152,461, $167,862 and $245,285, respectively.
47.
<PAGE> 49
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
(b) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that allows eligible employees to
contribute up to 15% of their compensation up to a maximum amount
provided by the Internal Revenue Code. The Company may make
discretionary contributions to the 401(k) plan. The Company has
made no contributions to the Plan since inception.
(c) LITIGATION
The Company is subject to litigation and claims incidental to its
business. While it is not feasible to predict or determine the
financial outcome of these matters, management does not believe
that the ultimate resolution of these matters will result in a
significant adverse effect on the Company's financial position,
results of operations or liquidity.
(7) SIGNIFICANT CUSTOMERS
Revenue attributable to significant customers (as a percentage of total
revenue) in 1997, 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ---- -----
<S> <C> <C> <C>
Customer A - online publishing and email and other services -- -- 65%
Customer B - email and other services 42% 2% --
Customer C - online publishing and email and other services 13% 6% --
</TABLE>
Receivables from Customer A represented 52% of total accounts receivable
at December 31, 1999. Receivables from Customer B represented 11% of
total accounts receivable at December 31, 1998.
(8) BUSINESS SEGMENTS
The Company had two reportable business segments, email and other
services and online publishing. The online publishing business was sold
to Sony Music in December 1998 (see note 2). The following sets forth
selected segment data for the years ended December 31, 1997 and 1998.
Online publishing revenue for 1999 consists of cost reimbursements by
Sony Music for employees providing editorial services related to the
InfoBeat newsletters. The Company operates in a single segment in 1999 as
it does not prepare segment financial information related to the
editorial services provided to Sony Music. The Company primarily
evaluates segment performance based on net income or loss. General and
administrative costs, depreciation and amortization and interest were
allocated between the two segments based upon revenue. The tangible
assets used by the two segments were not separately identifiable.
48.
<PAGE> 50
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------
EMAIL
AND OTHER ONLINE
SERVICES PUBLISHING TOTAL
--------- ---------- ------
(in thousands)
<S> <C> <C> <C>
Revenue $ 359 496 855
Cost of revenue 132 1,907 2,039
------- ------ ------
Gross profit (loss) 227 (1,411) (1,184)
------- ------ ------
Operating expenses:
Marketing and sales 1,033 425 1,458
Research, development and engineering 701 1,500 2,201
General and administrative 831 1,147 1,978
Depreciation and amortization 338 467 805
------- ------ ------
Total operating expenses 2,903 3,539 6,442
------- ------ ------
Loss from operations (2,676) (4,950) (7,626)
Interest expense (104) (148) (252)
Interest income 74 105 179
------- ------ ------
Net loss $(2,706) (4,993) (7,699)
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------
EMAIL
AND OTHER ONLINE
SERVICES PUBLISHING TOTAL
--------- ---------- ------
(in thousands)
<S> <C> <C> <C>
Revenue $ 821 1,958 2,779
Cost of revenue 256 2,524 2,780
------- ------ ------
Gross profit (loss) 565 (566) (1)
------- ------ ------
Operating expenses:
Marketing and sales 1,621 189 1,810
Research, development and engineering 1,807 1,108 2,915
General and administrative 602 1,437 2,039
Depreciation and amortization 305 726 1,031
------- ------ ------
Total operating expenses 4,335 3,460 7,795
------- ------ ------
Loss from operations (3,770) (4,026) (7,796)
Interest expense (64) (157) (221)
Interest income 35 85 120
------- ------ ------
Net loss $(3,799) (4,098) (7,897)
======= ====== ======
</TABLE>
49.
<PAGE> 51
EXACTIS.COM, INC.
Notes to Financial Statements -- (continued)
December 31, 1998 and 1999
(9) SUBSEQUENT EVENT
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
50.
<PAGE> 52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of ours.
Officers, directors and greater than ten percent stockholders are required by
SEC regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended December 31, 1999, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were filed.
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
----------------------------- --- -----------------------------------------------------
<S> <C> <C>
E. Thomas Detmer, Jr......... 46 Chief Executive Officer, President and Director
Kenneth W. Edwards, Jr....... 39 Chief Financial Officer, Secretary and Treasurer
Cynthia L. Brown............. 41 Vice President of Engineering
Michael J. Rosol............. 39 Vice President of Sales
Gregory B. Schneider......... 39 Vice President of Marketing and Business Development
Adam Goldman (1)............. 39 Chairman of the Board of Directors
Pierric D. Beckert (2)....... 33 Director
Linda Fayne Levinson (1)..... 57 Director
David D. Williams (2)........ 52 Director
</TABLE>
- ----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
E. Thomas Detmer, Jr. has served as our president and chief executive
officer since January 1999 and as a director since July 1996. From March 1998 to
January 1999, Mr. Detmer served as the president of BehaviorBank/Atlantes, a
division of Experian, Inc., a provider of consumer information solutions to
businesses. In September 1991, Mr. Detmer founded Atlantes Corporation, a
consumer database marketing company, which was acquired by Metromail Company in
July 1997. Metromail was acquired by Experian in March 1998. Prior to Atlantes,
Mr. Detmer founded and served as president of the publishing division of
Telelink Systems, Inc., a telemarketing company. Additionally, Mr. Detmer spent
ten years with National Demographics and Lifestyles, a consumer information
management and resale company. He holds a B.A. from Williams College and an
M.B.A. from the University of Denver.
Kenneth W. Edwards, Jr. has served as our chief financial officer,
secretary and treasurer since March 1999. From March 1998 to March 1999, Mr.
Edwards served as corporate controller and director of business operations for
Atlantes, a division of Experian, a provider of consumer information solutions
to businesses. In January 1994, Mr. Edwards joined Atlantes Corporation, a
consumer database marketing company, as corporate controller. Atlantes was
acquired by Metromail Company in July 1997, which was acquired by Experian in
1998. From March 1988 to September 1993, Mr. Edwards served as controller for CT
Publications Corp., a privately-held magazine publishing company. He also
co-founded and served as a partner with Cordovano and Company, Certified Public
Accountants. Mr. Edwards holds a B.S. from Metropolitan State College of Denver.
Cynthia L. Brown has served as our vice president of engineering since June
1999. From September 1997 to May
51.
<PAGE> 53
1999, Ms. Brown served as a founding partner of Anova Partners, a management
consulting firm specializing in technology and Internet-based companies. From
June 1993 to August 1997, Ms. Brown served as the president and chief operating
officer of System One, a software vendor company, prior to its merger with MC
Health Care Holdings. From June 1983 to May 1993, Ms. Brown held various senior
technology positions with Tandem Telecommunications, a subsidiary of Tandem
Computers Inc. and Applied Communications, Inc. From June 1981 to May 1983, Ms.
Brown was employed by Data General Corporation, a computer company, as a systems
engineer. Ms. Brown holds a B.A. from Park College in Kansas City, Missouri.
Michael J. Rosol has served as our vice president of sales since May 1998.
From August 1996 to May 1998, he served as senior account executive for SCC
Communications Corp., a provider of 911 emergency services and
telecommunications technology systems. From September 1995 to July 1996, Mr.
Rosol served as the vice president of sales for Datasonix Corporation, a
portable storage device company. From March 1991 to September 1995, he was the
director of North American Sales for XVT Software Inc, a manufacturer of
cross-platform development tools. Mr. Rosol holds a B.A. and an M.S. from the
University of Colorado, Boulder.
Gregory B. Schneider has served as our vice president of marketing and
business development since February 1997. From August 1989 to February 1997, he
held various marketing positions in product management, market development and
business planning with Hewlett-Packard Company. Mr. Schneider holds a B.A. from
Santa Clara University and an M.B.A. from the J.L. Kellogg Graduate School of
Management at Northwestern University.
Adam Goldman has served as a director since March 1996 and as chairman of
the board since January 1999. Mr. Goldman is a general partner of Centennial
Fund IV, LP and Centennial Fund V, LP, and is a managing principal of Centennial
Fund VI, LLC. The Centennial Ventures manages over $750 million in private
equity and specialize in communication, media and technology investments. Mr.
Goldman also serves on the boards of VIA Net.Works, an Internet service
provider. Mr. Goldman is a senior vice president of Centennial Holdings, Inc., a
venture capital investment company, which he joined in 1992. Mr. Goldman
received a B.A. from Northwestern University and an M.M. from the J.L. Kellogg
Graduate School of Management at Northwestern University.
Pierric D. Beckert has served as a director since August 1999. Since
January 2000, Mr. Beckert has served as the senior vice president of Interactive
Investments, a division of American Express Relationship Services and part of
American Express Travel Related Services Company, Inc. From January 1998 to
December 1999, Mr. Beckert served as vice president of Interactive Enterprise
Development, within American Express Relationship Services where he was
responsible for developing the global American Express Interactive strategy, as
well as all strategic equity investments in interactive companies. From August
1996 to December 1998, Mr. Beckert served as the director of Interactive New
Business Development within American Express Relationship Services. From 1994 to
1996, Mr. Beckert was a director of the Customer Information Management group
within American Express Travel Related Services. Mr. Beckert is also a director
of Paytrust, Inc. Mr. Beckert received an M.A. from the Ecole Nationale de la
Statistique et de l'Administration Economique.
Linda Fayne Levinson has served as a director since July 1998. Ms. Levinson
is a partner of Global Retail Partners, L.P., a private equity investment fund,
where she has been since April 1997. From 1994 to 1997, she served as the
president of Fayne Levinson Associates, a senior management consulting firm.
During 1993, Ms. Levinson served as an executive at Creative Arts Agency, Inc.,
a talent agency. Prior to that, Ms. Levinson was a partner at Alfred Checchi
Associates, Inc., a merchant banking firm; a senior vice president of American
Express Travel related Services Company, Inc.; and a partner at McKinsey & Co.,
a global consulting firm. She is a director of NCR Corporation, Administaff,
Inc., Jacobs Engineering Group Inc., GoTo.com, Inc., CyberSource, Inc. and
Lastminute.com, Inc. plc. Ms. Levinson received an A.B. from Barnard College, an
M.A. from Harvard University and an M.B.A. from New York University.
David D. Williams has served as a director since December 1996. Since
December 1991, Mr. Williams has served as president and chief executive officer
of Tribune Media Services, Inc., a creator and marketer of editorial and
advertising content for multiple media distribution. From July 1990 to November
1991, Mr. Williams served as the executive vice president and chief operating
officer of Tribune Media Services. Prior to joining Tribune Media Services, Mr.
Williams held various advertising and marketing positions at the Chicago
Tribune. Mr. Williams is a director of the Newspaper Features Council and a
regional director for the Chicagoland United Way. He received a B.A. from
Michigan State University.
52.
<PAGE> 54
CLASSIFIED BOARD OF DIRECTORS
We currently have five directors. In August 1999 and November 1999, our
board of directors and stockholders, respectively, approved our restated
certificate of incorporation. Among other things, our restated certificate of
incorporation provides for a classified board of directors. The restated
certificate of incorporation states that the terms of office of the board of
directors will be divided into three classes:
o class I, whose term will expire at the annual meeting of stockholders
to be held in 2000;
o class II, whose term will expire at the annual meeting of stockholders
to be held in 2001; and
o class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. At each annual meeting of
stockholders beginning with the 2000 annual meeting, the successors to
directors whose terms expire will be elected to serve from the time of
election and qualification until the third annual meeting following
election and until their successors have been elected.
BOARD COMMITTEES AND MEETINGS
AUDIT COMMITTEE. Our audit committee consists of Mr. Goldman and Ms.
Levinson. The audit committee makes recommendations to the board of directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors and
evaluates our internal accounting procedures.
COMPENSATION COMMITTEE. Our compensation committee consists of Mr. Beckert
and Mr. Williams. The compensation committee reviews and approves compensation
and benefits for our executive officers. The compensation committee also
administers our compensation and stock plans and makes recommendations to the
board of directors regarding such matters.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. No member of
the compensation committee has been an officer or employee of us at any time.
None of our executive officers serves as a member of the board of directors or
compensation committee of any other company that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
During the fiscal year ended December 31, 1999, our board of directors held
ten (10) meetings. During the fiscal year ended December 31, 1999, all directors
attended seventy five percent (75%) or more of the aggregate of the meetings of
the board and of the committees on which they served, held during the period for
which he or she was a director or committee member, respectively.
ITEM 11. EXECUTIVE COMPENSATION
Other than reimbursing directors for customary and reasonable expenses
incurred in attending board of directors and committee meetings, we do not
currently compensate our directors.
The following table sets forth all compensation received during 1999 by our
current and former chief executive officers and our other current executive
officers whose annual salary and bonus exceeded $100,000 for services rendered
in all capacities to us during 1999.
53.
<PAGE> 55
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------------ ------------- ------------- -------------------- -------------
<S> <C> <C> <C> <C>
Raymond H. Van Wagener, Jr.,
Former President and Chief Executive
Officer................................ $ 11,383 -- -- --
E. Thomas Detmer, Jr.,
President and Chief Executive Officer.. $ 147,692 $ 40,000 750,000 --
Kenneth W. Edwards, Jr.,
Chief Financial Officer, Treasurer and
Secretary.............................. $ 96,923 $ 25,000 50,000 --
Michael J. Rosol,
Vice President of Sales................ $ 100,000 $ 183,482 35,000 --
Gregory B. Schneider,
Vice President of Marketing and Business
Development............................ $ 122,231 $ 25,000 -- --
Cynthia L. Brown,
Vice President of Engineering.......... $ 89,231 $ 35,000 50,000 --
</TABLE>
Mr. Van Wagener served as our president and chief executive officer from
February 1997 to January 1999. Mr. Detmer has served as our president and chief
executive officer since January 1999. Ms. Brown has served as our vice president
of engineering since June 1999. Mr. Edwards has served as our chief financial
officer since March 1999.
OPTION GRANTS IN 1999
The following table sets forth information regarding options granted to the
executive officers listed in the Summary Compensation table during 1999.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
NUMBER OF GRANTED TO EXERCISE ANNUAL RATES OF STOCK PRICE
OPTIONS EMPLOYEES IN PRICE APPRECIATION FOR OPTION TERM
NAME GRANTED 1999 ($/SHARE) DATE 0% 5% 10%
---- ------- ---- -------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond H ..........
Van Wagener, Jr .. -- -- -- -- -- -- --
E. Thomas
Detmer, Jr., ..... 92,000 5.1% $ 4.32 5/11/09 -- $ 249,948 $ 633,417
E. Thomas
Detmer, Jr., ..... 658,000 36.6% $ 1.50 5/11/09 $1,855,560 $3,643,231 $6,385,869
Kenneth W ..........
Edwards, Jr ...... 50,000 2.8% $ 4.32 5/11/09 -- $ 135,841 $ 344,248
Michael J .........
Rosol ............ 35,000 1.9% $ 4.32 5/11/09 -- $ 95,089 $ 240,974
Gregory B ..........
Schneider ........ -- -- -- -- -- -- --
Cynthia L ..........
Brown ............ 50,000 2.8% $ 4.32 7/15/09 -- $ 135,841 $ 344,248
</TABLE>
The percent of total options granted to employees in the above table is
based on 1,797,500 total options granted in 1999. Our board of directors may
reprice options under the terms of our stock option plans.
The 658,000 options granted to Mr. Detmer at an exercise price of $1.50 are
non-statutory options. The difference between the exercise price of $1.50 and
the $4.32 fair value on the date of grant has been recorded as deferred
compensation and is being recognized as compensation expense over the vesting
period. The 658,000 options vest as follows: 177,000 vested on his hire date,
177,000 vest on the 1st year anniversary of his hire date, 177,000 vest on the
2nd year anniversary of his hire date, and 127,000 vest on the 3rd year
anniversary of his hire date. The 92,000 options granted to Mr. Detmer at an
exercise price of $4.32 are incentive stock options and vest as follows: 23,000
vested on his hire date, 23,000 vest on the 1st year anniversary of his hire
date, 23,000 vest on the 2nd year anniversary of his hire date, and 23,000 on
the 3rd year anniversary of his hire date.
All other options granted to officers were granted at an exercise price
equal to the fair market value of our common stock, as determined by our board
of directors on the date of grant. In making this determination, the board
54.
<PAGE> 56
of directors considered a number of factors, including:
o our historical and prospective future revenue and profitability;
o our cash balance and rate of cash consumption;
o the development and size of the market for our services;
o the status of our financing activities;
o the stability of our management team; and
o the breadth of our service offerings.
The amounts reflected in the "Potential Realizable Value" column of the
foregoing table are calculated assuming that the fair market value of the common
stock on the date of the grant as determined by the board of directors
appreciates at the indicated annual rate compounded annually for the entire term
of the option, and that the option is exercised and the common stock received
therefor is sold on the last day of the term of the option for the appreciated
price. The five percent and ten percent rates of appreciation are mandated by
the rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future increases in the price of the common stock.
1999 OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options held by each of the executive officers listed in the
Summary Compensation table at December 31, 1999. Two of the executive officers
exercised options to purchase common stock in 1999.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON VALUE ----------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Raymond H. Van Wagener, Jr -- -- -- -- -- --
E. Thomas Detmer, Jr., ... 215,312 $ 1,189,797 173 554,515 $ 3,618 $12,446,992
Kenneth W. Edwards, Jr .. -- -- -- 50,000 -- $ 999,650
Michael J. Rosol ....... -- -- 10,377 49,623 $ 217,014 $ 1,005,566
Gregory B. Schneider .... 25,310 $ 64,777 6,506 18,184 $ 142,610 $ 380,990
Cynthia L. Brown ........ -- -- -- 50,000 -- $ 999,650
</TABLE>
In the table above, the value of the unexercised in-the-money options is
based on the closing market price of our common stock as reported by Nasdaq on
December 31, 1999 minus the per share exercise price, multiplied by the number
of shares underlying the option.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of our common stock as of March 15, 2000 for:
o each person or group of affiliated persons known to us to own
beneficially more than five percent of our common stock;
o each of our directors;
o our executive officers listed in the Summary Compensation Table; and
o all of our directors and executive officers as a group.
In accordance with the rules of the Securities and Exchange Commission, the
following table gives effect to the shares of common stock that could be issued
upon the exercise of outstanding options within 60 days of March 15, 2000.
Unless otherwise noted in the footnotes to the table and subject to community
property laws where applicable, the following individuals have sole voting and
investment control with respect to the shares beneficially owned by them.
55.
<PAGE> 57
We have calculated the percent of shares beneficially owned based on
12,700,898 shares of common stock outstanding as of March 15, 2000. An asterisk
indicates ownership of less than one percent.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------------
NAME NUMBER PERCENTAGE
- -------------------------------- --------- ------------
<S> <C> <C>
Centennial Fund IV, L.P.(1) ............................. 2,237,789 17.5%
American Express Travel Related
Services Company, Inc.(2) ............................. 1,282,500 9.8%
Tribune Company(3) ...................................... 1,218,374 9.5%
Telecom Partners, L.P.(4) ............................... 1,031,290 8.1%
Global Retail Partners, L.P.(5) ......................... 944,393 7.4%
Boulder Ventures, L.P., Boulder Ventures II, L.P.,
Boulder Ventures II (Annex), L.P., Boulder
Ventures III, L.P. and
Boulder Ventures II (Annex), L.P. (6) ................... 716,949 5.6%
Janus Capital Corporation(7) ............................ 675,000 5.3%
Pierric D. Beckert(8) ................................... -- --
Cynthia L. Brown(9) ..................................... 3,500 *
E. Thomas Detmer, Jr.(10) ............................... 431,655 3.4%
Kenneth W. Edwards, Jr. (11) ............................ 15,679 *
Adam Goldman(12) ........................................ -- --
Linda Fayne Levinson(13) ................................ 944,393 7.4%
Michael J. Rosol (14) .................................. 25,736 *
Gregory B. Schneider (15) ............................... 38,247 *
Raymond H. Van Wagener, Jr.(16) ......................... 20,319 *
David D. Williams(17) ................................... -- --
Officers and directors as a group (9
Persons)(18) .......................................... 1,459,210 11.25%
</TABLE>
- ----------
(1) Includes 117,691 shares of common stock issuable upon exercise of warrants.
The address of Centennial Fund IV, L.P. is 1428 Fifteenth Street, Denver,
Colorado 80202.
(2) Includes 407,500 shares of common stock issuable upon exercise of vested
warrants. Excludes 148,750 shares of common stock issuable upon exercise of
unvested warrants. The address of American Express Travel Related Services
Company, Inc. is 3 World Financial Center, 40th Floor, New York, New York
10285.
(3) Includes 71,821 shares of common stock issuable upon exercise of warrants.
The address of Tribune Company is 435 North Michigan Avenue, Suite 1500,
Chicago, Illinois 60611.
(4) Includes 30,000 shares of common stock issuable upon exercise of warrants.
The address of Telecom Partners, L.P. is 4600 S. Syracuse St., Suite 1000,
Denver, Colorado 80237.
(5) Consists of (i) the following shares of common stock (A) 575,902 shares
held by Global Retail Partners, L.P., (B) 171,609 shares held by DLJ
Diversified Partners, L.P., (C) 63,729 shares held by DLJ Diversified
Partners -- A, L.P. , (D) 37,439 shares held by GRP Partners, L.P., (E)
39,652 shares held by Global Retail Partners Funding, Inc. and (F) 9,912
shares held by DLJ ESC II, L.P., and (ii) the following shares of common
stock issuable upon exercise of warrants (A) 29,590 shares held by Global
Retail Partners, L.P., (B) 8,817 shares held by DLJ Diversified Partners,
L.P., (C) 3,274 shares held by DLJ Diversified Partners -- A, L.P., (D)
1,923 shares held by GRP Partners, L.P., (E) 2,037 shares held by Global
Retail Partners Funding, Inc., and (F) 509 shares held by DLJ ESC II, L.P.
The address of Global Retail Partners, L.P. and its affiliates is 2121
Avenue of the Stars, Suite 1630, Los Angeles, California 90067.
(6) Consists of (i) the following shares of common stock: (A) 185,100 shares
held by Boulder Ventures, L.P., (B) 154,236 shares held by Boulder Ventures
II, L.P., (C) 23,048 shares held by Boulder Ventures II (Annex), L.P., (D)
334,248 shares held by Boulder Ventures III, L.P., and (E) 20,317 shares
held by
56.
<PAGE> 58
Boulder Ventures III (Annex), L.P. Boulder Ventures, Boulder Ventures II,
Boulder Ventures II (Annex), Boulder Ventures III and Boulder Ventures III
(Annex) are affiliated entities. The address of Boulder Ventures, Boulder
Ventures II, Boulder Ventures II (Annex), Boulder Ventures III and Boulder
Ventures III (Annex) is 1634 Walnut Street, Suite 301, Boulder, Colorado
80302.
(7) The address of Janus Capital Corporation is 100 Fillmore Street, Denver, CO
80206. We relied on a Schedule 13D filed by Janus Capital Corporation
pursuant to which it reported sole or shared voting power over an aggregate
of 675,000 shares of common stock as of December 31, 1999.
(8) Mr. Beckert is the vice president of Interactive Enterprise Development, a
division of American Express Relationship Services and part of American
Express Travel Related Services.
(9) Includes 3,500 shares of common stock owned by Ms. Brown's spouse.
(10) Includes 509 shares of common stock issuable upon exercise of warrants and
174,735 shares of common stock issuable upon exercise of stock options.
(11) Includes 14,829 shares of common stock issuable upon exercise of stock
options.
(12) The sole general partner of Centennial Fund IV is Centennial Holdings IV,
L.P. Centennial Holdings IV may be deemed to beneficially own the shares
owned by Centennial Fund IV. Mr. Goldman is a general partner of Centennial
Holdings IV and may be deemed to be the indirect beneficial owner of the
shares owned by Centennial Fund IV. Mr. Goldman disclaims beneficial
ownership of all shares held by Centennial Fund IV, except to the extent of
his pecuniary interest.
(13) Ms. Levinson is a partner of Global Retail Partners, L.P. The shares listed
represent shares held by Global Retail Partners, L.P. and it affiliated
entities. Ms. Levinson disclaims beneficial ownership of all shares held by
Global Retail Partners, L.P. and it affiliated entities, except to the
extent of her pecuniary interest. The address of Ms. Levinson is Global
Retail Partners, L.P., 2121 Avenue of the Stars, Suite 1630, Los Angeles,
California 90067.
(14) Includes 23,236 shares of common stock issuable upon exercise of stock
options.
(15) Includes 10,437 shares of common stock issuable upon exercise of stock
options.
(16) The address of Mr. Van Wagener is 9230 East Crestline Avenue Greenwood
Village, Colorado 80111.
(17) Mr. Williams is president and chief executive officer of Tribune Media
Services, Inc., a wholly-owned subsidiary of Tribune Company.
(18) Includes shares included pursuant to note (13).
57.
<PAGE> 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES E FINANCING
On July 15, 1999 and August 13, 1999, we issued an aggregate of 1,357,284
shares of Series E preferred stock to certain principal stockholders and certain
other investors at a purchase price of $6.50 per share. We also issued warrants
to purchase an aggregate of 94,608 shares of Series E preferred stock at an
exercise price of $8.00 per share, exercisable on or prior to July 15, 2004 and
warrants to purchase an aggregate of 108,978 shares of Series E preferred stock
at an exercise price of $8.00 per share, exercisable on or prior to August 13,
2004. Of the 1,357,284 shares of Series E preferred stock sold by us, an
aggregate of 1,307,657 shares were sold to the following principal stockholders
for an aggregate purchase price of approximately $8.5 million:
<TABLE>
<CAPTION>
NUMBER NUMBER AGGREGATE
PURCHASER OF SHARES OF WARRANTS PURCHASE PRICE
------------------------------- --------- ----------- --------------
<S> <C> <C> <C>
Boulder Ventures II, L.P....... 461,539 70,310 $3,000,707
Centennial Fund IV, L.P........ 384,615 57,961 2,500,574
Global Retail Partners, L.P.... 197,272 29,590 1,282,564
DLJ Diversified Partners, L.P.. 58,785 8,817 382,191
DLJ Diversified Partners-- A, 21,830 3,274 141,928
L.P............................
GRP Partners, L.P.............. 12,825 1,923 83,382
Global Retail Partners Funding, 13,584 2,037 88,316
Inc............................
DLJ ESC II, L.P................ 3,396 509 22,079
Tribune Company................ 153,811 23,071 1,000,002
</TABLE>
Boulder Ventures, Centennial Fund and Tribune Company are each greater than
five percent stockholders of us. The remaining entities are all affiliated with
Global Retail Partners, L.P., a greater than five percent stockholder of us. Mr.
Goldman, one of our directors, is a general partner of Centennial Fund. Ms.
Levinson, one of our directors, is a principal of Global Retail Partners, L.P.
Mr. Williams, one of our directors, is president and chief executive officer of
Tribune Media Services, a wholly owned subsidiary of Tribune Company.
SERIES D FINANCING
On June 8, 1998, we issued an aggregate of 625,001 shares of Series D
preferred stock to certain principal stockholders and certain other investors at
a purchase price of $5.08 per share. Of the 625,001 shares of Series D preferred
stock sold by us, an aggregate of 605,315 shares were sold to the following
principal stockholders for an aggregate purchase price of approximately $3.1
million:
<TABLE>
<CAPTION>
NUMBER AGGREGATE
PURCHASER OF SHARES PURCHASE PRICE
--------- --------- --------------
<S> <C> <C>
Boulder Ventures, L.P.......... 14,764 $ 75,001
Global Retail Partners, L.P.... 378,630 1,923,440
DLJ Diversified Partners, L.P.. 112,824 573,146
DLJ Diversified Partners-A, L.P. 41,899 212,847
GRP Partners, L.P.............. 24,614 125,039
Global Retail Partners Funding, 26,068 132,425
Inc............................
DLJ ESC II, L.P................ 6,516 33,101
</TABLE>
SERIES C FINANCING
On July 25, 1997, we issued an aggregate of 1,911,533 shares of Series C
preferred stock to certain principal stockholders and certain other investors at
a purchase price of $4.00 per share. We also issued warrants to purchase
58.
<PAGE> 60
an aggregate of 210,917 shares of Series C preferred stock at an exercise price
of $4.00 per share, exercisable on or prior to July 24, 2001, and a warrant to
purchase an aggregate of 425,000 shares of Series C preferred stock at an
exercise price of $6.00 per share exercisable, subject to certain conditions, on
or prior to July 24, 2000. Of the 1,911,533 shares of Series C preferred stock
sold by us, an aggregate of 1,845,413 shares were sold to the following
principal stockholders for an aggregate purchase price of approximately $7.4
million:
<TABLE>
<CAPTION>
NUMBER NUMBER AGGREGATE
PURCHASER OF SHARES OF WARRANTS PURCHASE PRICE
--------- --------- ----------- ---------------
<S> <C> <C> <C>
American Express Travel Related
Services Company.................... 875,000 556,250 $3,500,556
Boulder Ventures, L.P................ 40,898 3,355 163,598
Centennial Fund IV, L.P.............. 402,150 30,268 1,608,632
Telecom Partners, L.P................ 201,290 12,160 805,173
Tribune Company...................... 326,075 33,884 1,304,335
</TABLE>
American Express and Telecom Partners are each greater than five percent
stockholders of us. Mr. Beckert, one of our directors, is vice president of a
division affiliated with American Express.
BRIDGE FINANCING
On June 20, 1997, we issued promissory notes in the aggregate principal
amount of $2.0 million bearing simple interest at a rate of 12.0% per annum to
certain principal stockholders and certain other investors. We also issued
warrants to purchase an aggregate of 75,000 shares of Series C preferred stock
at an exercise price of $4.00 per share exercisable on or prior to June 17,
2001. Immediately upon the closing of the Series C preferred stock financing,
the principal amount outstanding under the notes and accrued interest thereon
automatically converted into shares of Series C preferred stock at $4.00 per
share.
Of the principal amount of $2.0 million issued by us, an aggregate principal
amount of $1.7 million and warrants to purchase an aggregate of 65,188 shares of
Series C preferred stock were issued to the following principal stockholders:
<TABLE>
<CAPTION>
AGGREGATE NUMBER
PURCHASER PRINCIPAL AMOUNT OF WARRANTS
--------- ---------------- -----------
<S> <C> <C>
Centennial Fund IV, L.P...... $ 792,864 29,732
Telecom Partners, L.P........ 475,719 17,840
Boulder Ventures, L.P........ 73,340 2,750
Tribune Company.............. 396,432 14,866
</TABLE>
We are not currently indebted to any of our directors, officers or greater
than five percent stockholders.
We believe that each of the transactions described above was carried out on
terms that were no less favorable to us than those that would have been obtained
from unaffiliated third parties. Any future transactions between us and any of
our directors, officers or principal stockholders will be on terms no less
favorable to us than could be obtained from unaffiliated third parties and will
be approved by a majority of the independent and disinterested members of the
board of directors.
59.
<PAGE> 61
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1* -- Agreement and Plan of Reorganization, by and among
Exactis.com, 24/7 Media, Inc. and Evergreen Acquisition Sub
Corp., a wholly owned subsidiary of 24/7 Media, Inc., dated
February 29, 2000.
3.1** -- Restated Certificate of Incorporation of Exactis.com.
3.2** -- Amended and Restated Bylaws of Exactis.com.
4.1** -- Reference is made to Exhibits 3.1 through 3.2.
4.2** -- Specimen stock certificate representing shares of common stock
of Exactis.com.
10.1** -- 1996 Stock Option Plan of Exactis.com.
10.2** -- 1997 Stock Option Plan of Exactis.com.
10.3** -- 1999 Equity Incentive Plan of Exactis.com.
10.4** -- 1999 Employee Stock Purchase Plan of Exactis.com.
10.5** -- Third Amended and Restated Stockholders' Agreement, among
Exactis.com and certain of its stockholders, dated July 15,
1999.
10.6** -- Form of Indemnity Agreement entered into between Exactis.com
and each of its directors and executive officers.
10.7 -- Lease Agreement, between Exactis.com and Prudential
Insurance Company of America, dated January 19, 2000.
10.8** -- Sublease Agreement, between Exactis.com and Atlantic Richfield
Company, as amended, dated August 7, 1996.
10.9** -- Series A Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated February 14,
1996 and March 15, 1996.
10.10** -- Series B Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated July 22,
1996, September 19, 1996 and November 27, 1996.
10.11** -- Series C Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated July 24,
1997.
10.12** -- Series D Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated June 8, 1998.
10.13** -- Series E Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated July 15,
1999.
10.14**+ -- Asset Purchase Agreement, between Exactis.com and Sony Music,
a Group of Sony Music Entertainment Inc., dated December 15,
1998.
10.15**+ -- Service Bureau Agreement, between Exactis.com and Sony Music,
a Group of Sony Music Entertainment Inc., dated January 1,
1999.
10.16** -- Form of Series B Preferred Stock Warrant.
10.17** -- Form of Series C Preferred Stock Warrant.
10.18** -- Form of Series C Preferred Stock Warrant issued to American
Express on July 24, 1997.
10.19** -- Form of Series D Preferred Stock Warrant.
10.20** -- Form of Series E Preferred Stock Warrant.
27 -- Financial Data Schedule.
</TABLE>
* Incorporated by reference to the Registrant's Report on Form 8-K, File No.
000-27993, filed with the Securities and Exchange Commission on March 10,
2000
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, File No. 333-85315, as amended.
+ Confidential treatment granted.
(b) REPORTS ON FORM 8-K
None.
60.
<PAGE> 62
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EXACTIS.COM, INC.
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)
March 30, 2000
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Adam Goldman Chairman of the Board of Directors March 30, 2000
- -----------------------------------
Adam Goldman
/s/ E. Thomas Detmer, Jr. President, Chief Executive Officer and March 30, 2000
- ----------------------------------- Director (Principal Executive Officer)
E. Thomas Detmer, Jr.
/s/ Kenneth W. Edwards, Jr. Chief Financial Officer, Secretary and March 30, 2000
- ----------------------------------- Treasurer (Principal Financial and
Kenneth W. Edwards, Jr. Accounting Officer)
Director March 30, 2000
- -----------------------------------
Pierric D. Beckert
/s/ Linda Fayne Levinson Director March 30, 2000
- -----------------------------------
Linda Fayne Levinson
/s/ David D. Williams Director March 30, 2000
- -----------------------------------
David D. Williams
</TABLE>
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1* -- Agreement and Plan of Reorganization, by and among
Exactis.com, 24/7 Media, Inc. and Evergreen Acquisition Sub
Corp., a wholly owned subsidiary of 24/7 Media, Inc., dated
February 29, 2000.
3.1** -- Restated Certificate of Incorporation of Exactis.com.
3.2** -- Amended and Restated Bylaws of Exactis.com.
4.1** -- Reference is made to Exhibits 3.1 through 3.2.
4.2** -- Specimen stock certificate representing shares of common stock
of Exactis.com.
10.1** -- 1996 Stock Option Plan of Exactis.com.
10.2** -- 1997 Stock Option Plan of Exactis.com.
10.3** -- 1999 Equity Incentive Plan of Exactis.com.
10.4** -- 1999 Employee Stock Purchase Plan of Exactis.com.
10.5** -- Third Amended and Restated Stockholders' Agreement, among
Exactis.com and certain of its stockholders, dated July 15,
1999.
10.6** -- Form of Indemnity Agreement entered into between Exactis.com
and each of its directors and executive officers.
10.7 -- Lease Agreement, between Exactis.com and Prudential
Insurance Company of America, dated January 19, 2000.
10.8** -- Sublease Agreement, between Exactis.com and Atlantic Richfield
Company, as amended, dated August 7, 1996.
10.9** -- Series A Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated February 14,
1996 and March 15, 1996.
10.10** -- Series B Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated July 22,
1996, September 19, 1996 and November 27, 1996.
10.11** -- Series C Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated July 24,
1997.
10.12** -- Series D Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated June 8, 1998.
10.13** -- Series E Preferred Stock Purchase Agreement, among Exactis.com
and the parties named therein, as amended, dated July 15,
1999.
10.14**+ -- Asset Purchase Agreement, between Exactis.com and Sony Music,
a Group of Sony Music Entertainment Inc., dated December 15,
1998.
10.15**+ -- Service Bureau Agreement, between Exactis.com and Sony Music,
a Group of Sony Music Entertainment Inc., dated January 1,
1999.
10.16** -- Form of Series B Preferred Stock Warrant.
10.17** -- Form of Series C Preferred Stock Warrant.
10.18** -- Form of Series C Preferred Stock Warrant issued to American
Express on July 24, 1997.
10.19** -- Form of Series D Preferred Stock Warrant.
10.20** -- Form of Series E Preferred Stock Warrant.
27 -- Financial Data Schedule.
</TABLE>
* Incorporated by reference to the Registrant's Report on Form 8-K, File No.
000-27993, filed with the Securities and Exchange Commission on March 10,
2000
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, File No. 333-85315, as amended.
+ Confidential treatment granted.
<PAGE> 1
EXHIBIT 10.7
LEASE
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey corporation
(as Landlord)
and
EXACTIS.COM. INC.,
a Delaware corporation
(as Tenant)
<PAGE> 2
LEASE
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey corporation
(as Landlord)
and
EXACTIS.COM, INC., a Delaware corporation
(as Tenant)
<TABLE>
<CAPTION>
Paragraph Page
--------- ----
<S> <C>
1. PREMISES ............................................................... 1
2. TERM ................................................................... 1
3. RENT ................................................................... 1
4. COMPLETION OR REMODELING OF THE PREMISES ............................... 1
5. OPERATING EXPENSES ..................................................... 2
6. SERVICES ............................................................... 8
7. QUIET ENJOYMENT ........................................................ 10
8. DEPOSIT ................................................................ 10
9. CHARACTER OF OCCUPANCY ................................................. 10
10. MAINTENANCE, ALTERATIONS AND REENTRY BY LANDLORD ....................... 11
11. ALTERATIONS AND REPAIRS BY TENANT ...................................... 11
12. MECHANICS' LIENS ....................................................... 13
13. SUBLETTING AND ASSIGNMENT .............................................. 13
14. DAMAGE TO PROPERTY ..................................................... 15
15. INDEMNITY TO LANDLORD .................................................. 15
16. SURRENDER AND NOTICE ................................................... 16
17. INSURANCE, CASUALTY, AND RESTORATION OF PREMISES ....................... 16
18. CONDEMNATION ........................................................... 17
19. DEFAULT BY TENANT ...................................................... 17
20. DEFAULT BY LANDLORD .................................................... 20
21. SUBORDINATION AND ATTORNMENT ........................................... 21
22. REMOVAL OF TENANT'S PROPERTY ........................................... 21
23. HOLDING OVER: TENANCY MONTH-TO-MONTH ................................... 21
24. PAYMENTS AFTER TERMINATION ............................................. 22
25. STATEMENT OF PERFORMANCE ............................................... 22
26. MISCELLANEOUS .......................................................... 22
27. AUTHORITIES FOR ACTION AND NOTICE ...................................... 24
28. RULES AND REGULATIONS .................................................. 24
29. PARKING ................................................................ 24
30. SUBSTITUTE PREMISES .................................................... 25
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
31. BROKERAGE .............................................................. 25
32. ERISA .................................................................. 25
33. TIME OF ESSENCE ........................................................ 26
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS/ATTACHMENTS LIST
-------------------------
<S> <C>
Exhibit A Floor Plan
Exhibit B Legal Description
Exhibit C Commencement Certificate
Exhibit D Rules and Regulations
Exhibit E Letter of Credit
Exhibit F Work Letter
Exhibit G Tank License
Exhibit H Expansion Space
</TABLE>
13
<PAGE> 4
OFFICE BUILDING LEASE
THIS LEASE is made this 19th day of January, 2000, by and between
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation
("Landlord") and EXACTIS.COM, INC., a Delaware corporation ("Tenant").
W I T N E S S E T H :
1. PREMISES. In consideration of the payment of rent and the keeping
and performance of the covenants and agreements by Tenant, as hereinafter set
forth, Landlord hereby leases and demises unto Tenant the premises located on
the 4th and 5th floors of the Building, known as Suite 500 comprised of
approximately 46,418 rentable square feet (hereinafter referred to as the
"Premises"), as depicted on the plat hereto attached as Exhibit A, and being a
part of the building known as Johns Manville Plaza, located at 717 17th Street,
Denver, Colorado (the "Building"), together with a non-exclusive right, subject
to the provisions hereof, to use all appurtenances thereto, including, but not
limited to, any plazas, common areas, or other areas on the real property
(described more particularly on Exhibit B "Real Property") designated by
Landlord for the exclusive or non-exclusive use of the tenants of the Building.
The Building, Real Property, plazas, common areas, other areas, and
appurtenances are hereinafter collectively sometimes called the "Building
Complex."
2. TERM. The term of the Lease shall commence at 12:01 a.m. on the 1st
day of March, 2000 (subject to the terms of the Work Letter), and shall
terminate at 12:00 midnight on the 28th day of February, 2010, (said ten-year
term is referred to herein as the "Primary Lease Term").
3. RENT. Tenant shall pay the annual rental for the Primary Lease Term
in the monthly amounts of:
<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
March 1, 2000-February 28, 2001 $77,363.33
March 1, 2001-February 28, 2002 $81,231.50
March 1, 2002-February 29, 2004 $88,967.83
March 1, 2004-February 28, 2006 $96,704.17
March 1, 2006-February 29, 2008 $104,440.50
March 1, 2008-February 28, 2010 $112,176.83
</TABLE>
(the "Base Rent"), commencing March 1, 2000, and continuing on the first day of
each month thereafter during the term hereof. All rents shall be paid in
advance, without notice, set off, abatement, or diminution, at the office of
Landlord in Denver, Colorado, or at such place as Landlord from time to time
designates in writing. Tenant shall prepay the first three month's Base Rent
upon the execution hereof, which shall be credited against such amount as of the
date that Tenant's rental obligations commence. Notwithstanding anything to the
contrary stated herein, Tenant shall have the right to occupy for purposes of
installing and operating a computer facility in a portion of the Premises
designated as Tenant's computer room, consisting of approximately ________
rentable square feet on the 5th floor (the "Computer Room"), commencing on the
date that is seven (7) days following completion of the Tenant Finish Work in
the Computer Room. Tenant's occupancy of the Computer Room prior to the
commencement of the Primary Lease Term shall be subject to all terms of the
Lease, including payment of the monthly Base Rent calculated on the basis of an
annual rate of $20.00 per rentable square foot. Except for the foregoing, Tenant
shall not be obligated for payment of Rent during the time Tenant occupies the
Premises prior to the Commencement Date for construction of the Tenant Finish
Work (as defined in the Work Letter).
4. COMPLETION OR REMODELING OF THE PREMISES.
A. Provisions regarding any remodeling of or tenant finish work to
be completed in the Premises, if any, shall be set forth in a work letter
attached to this Lease as an exhibit (the "Work Letter"). Except as set forth in
the Work Letter or elsewhere in this Lease, Landlord shall have no obligations
for the completion or remodeling of the Premises, and Tenant shall accept the
Premises in their "as is" condition on the date the Primary Lease Term
commences. If Landlord is delayed in delivering the Premises to Tenant
<PAGE> 5
then the obligation for the payment of rent and the commencement of the Primary
Lease Term hereof shall be postponed until Landlord delivers the Premises to
Tenant whereupon all of the covenants, conditions, and agreements cOntained
herein shall be in full force and effect. The postponement of Tenant's
obligation to pay rent and other sums hereunder shall be in full settlement of
all claims which Tenant may otherwise have by reason of such delay of delivery.
B. If the commencement of the Primary Lease Term is delayed pursuant
to subparagraph A above or any provision of the Work Letter, and such
commencement date would otherwise occur on other than the first day of the
month, the commencement date of the Primary Lease Term shall be further delayed
until the first day of the following month and Tenant shall pay proportionate
rent at the same monthly rate set forth herein (also in advance) for such
partial month. In the event said commencement date is so delayed, the expiration
of the term hereof shall be extended so that the Primary Lease Term will
continue for the full period set forth in Paragraph 2 hereof. As soon as the
Primary Lease Term commences, Landlord and Tenant shall execute a commencement
certificate in the form attached hereto as Exhibit C, which may be requested by
either party, setting forth the exact date on which the Primary Lease Term
commenced and the expiration date of the Primary Lease Term.
C. Except. as provided in the Work Letter attached hereto, taking
possession of the Premises by Tenant shall be conclusive evidence as against
Tenant that the Premises were in the condition agreed upon between Landlord and
Tenant and acknowledgment of satisfactory completion of any fix-up or
remodeling, as the case may be, which Landlord has agreed in writing to perform.
5. OPERATING EXPENSES.
A. Definitions. In addition to terms hereinabove defined, the
following terms shall have the following meanings with respect to the provisions
of this Lease:
(1) "Base Operating Expenses" shall mean an amount equal to the
Operating Expenses (as hereinafter defined) for the calendar year 2000, as
determined by Landlord following the end of such year, in accordance with this
Paragraph 5. It is understood and acknowledged by Tenant that Landlord has not
made any representation or given Tenant any assurances that the Base Operating
Expenses will equal any specified amounts (any estimate provided by Landlord
being deemed non-binding estimates only).
(2) "Landlord's Accountants" shall mean that individual or firm
employed by Landlord from time to time to keep the books and records for the
Building Complex, and/or to prepare the federal and state income tax returns for
Landlord with respect to the Building Complex, all of which books and records
shall be certified to by an appropriate representative of Landlord.
(3) "Building Standard" means the level of tenant finish
improvements or the level of Building services, as the context may require,
customarily offered from time to time by Landlord to all tenants of the
Building.
(4) "Rentable Area" shall mean 672,343 rentable square feet. If
there is a significant change in the aggregate Rentable Area as a result of an
addition to the Building, partial destruction thereof, modification to building
design, or similar cause which causes a reduction or increase thereto on a
permanent basis, Landlord's Accountants shall make such adjustments in the
computations as shall be necessary to provide for any such change.
(5) "Tenant's Pro Rata Share" shall mean, subject to the
limitations hereinafter set forth, a fraction, the numerator of which is the
rentable square feet comprising the Premises and the denominator of which is
the Rentable Area. In the event Tenant, at any time during the Primary Lease
Term, or any extensions thereof, leases additional space in the Building,
Tenant's Pro Rata Share shall be recomputed by dividing the total rentable
square footage of space then being leased by Tenant (including any additional
space) by the Rentable Area and the resulting figure shall become Tenant's Pro
Rata Share.
(6) "Operating Expense Year" shall mean each calendar year during
the term of this Lease, except that the first Operating Expense Year shall begin
on the date the Primary Lease Term commences and end on December 31 of such year
and the last Operating Expense Year shall begin on January 1 of the year in
2
<PAGE> 6
which this Lease expires or is terminated and end on the date of such expiration
or termination. In the case of an Operating Expense Year of less than twelve
(12) months, Operating Expenses for such year shall be prorated.
(7) "Operating Expenses" shall mean all operating expenses of any
kind or nature which are necessary, ordinary, or customarily incurred in
connection with the operation and maintenance of the Building Complex as
determined by Landlord's Accountants. Operating Expenses shall include, but not
be limited to:
(a) All real property taxes and assessments levied against the
Building Complex by any governmental or quasi-governmental authority. The
foregoing shall include any taxes, assessments, surcharges, or service or
other fees of a nature not presently in effect which shall hereafter be
levied on the Building Complex as a result of the use, ownership or
operation of the Building Complex or for any other reason, whether in lieu
of or in addition to, any current real estate taxes and assessments;
provided, however, any taxes which shall be levied on the rentals of the
Building Complex shall be determined as if the Building Complex were
Landlord's only property and, provided, further, that in no event shall
the term "taxes or assessments," as used herein, include any net federal or
state income taxes levied or assessed on Landlord, unless such taxes are a
specific substitute for real property taxes. Such term shall, however,
include gross taxes on rentals. Expenses incurred by Landlord for tax
consultants and in contesting the amount or validity of any such taxes or
assessments shall be included in such computations (all of the foregoing
are collectively referred to herein as the "Taxes"). "Assessment" shall
include so-called special assessments, license tax, business license fee,
business license tax, commercial rental tax, levy, charge penalty or tax,
imposed by any authority having the direct power to tax, including any
city, county, state or federal government, or any school, agricultural,
lighting, water, drainage or other improvement or special district
thereof, against the Premises, the Building or Building Complex or any
legal or equitable interest of Landlord therein. For the purposes of this
Lease, any special assessments shall be deemed payable in such number of
installments as is permitted by law, whether or not actually so paid and
shall include any applicable interest on such installments (if such
interest is actually paid by Landlord);
(b) Costs of supplies for maintenance of the Building, including,
but not limited to, the cost of relamping and replacing ballasts in all
Building Standard tenant lighting as the same may be required from time to
time;
(c) Costs incurred in connection with obtaining and providing
energy for the Building Complex, including, but not limited to, costs of
propane, butane, natural gas, steam, electricity, solar energy and fuel
oils, coal or any other energy sources;
(d) Costs of water and sanitary and storm drainage services;
(e) Costs of janitorial and security services and systems;
(f) Costs of general maintenance and repairs, including costs
under HVAC and other mechanical maintenance contracts, carpet replacement
and painting in Common Areas; and repairs and replacements of equipment
used in connection with such maintenance and repair work;
(g) Costs of maintenance and replacement of landscaping;
(h) Insurance premiums, including fire and all-risk or
multi-peril coverage, together with loss of rent endorsement, if
applicable; the part of any claim required to be paid under the deductible
portion of any insurance policy carried by Landlord in
3
<PAGE> 7
connection with the Building Complex (where Landlord is unable to obtain
insurance without such deductible from a major insurance carrier at
reasonable rates); public liability insurance; and any other insurance
carried by Landlord on the Building Complex or any component parts
thereof (all such insurance shall be in such amounts as may be required
by any Mortgagee [as defined in Paragraph 20 hereof] or as Landlord may
reasonably determine);
(i) Labor costs, including wages and other payments, costs to
Landlord of workmen's compensation and disability insurance, payroll taxes,
welfare fringe benefits, and all legal fees and other costs or expenses
incurred in resolving any labor dispute;
(j) Professional building management fees of no more than 2.5% of
gross collections of Rent, costs and expenses, including costs of office
space and storage space and leasing or amortized costs of acquisition of
office furniture and equipment required by management for performance of
its services as contemplated herein;
(k) Legal, accounting, inspection, and other consultation fees
(including, without limitation, fees charged by consultants retained by
Landlord for services that are designed to produce a reduction in Operating
Expenses or to reasonably improve the operation, maintenance or state of
repair of the Building Complex) incurred in the ordinary course of
operating the Building Complex;
(l) The costs of capital improvements and structural repairs and
replacements made in or to the Building Complex in order to conform to
changes subsequent to the effective date of this Lease in any applicable
laws, ordinances, rules, regulations, or orders of any governmental or
quasi-governmental authority having jurisdiction over the Building Complex
or parts and supplies therein (herein "Required Capital Improvements"); and
the costs of any capital improvements and structural repairs and
replacements that reduce Operating Expenses (herein "Cost Savings
Improvements"). The expenditures for Required Capital Improvements and Cost
Savings Improvements shall be amortized at a market rate of return over the
useful life of such capital improvement or structural repair or replacement
(as determined by Landlord's Accountants); provided that the amortized
amount of any Cost Savings Improvement in any year will be equal to the
estimated reduction in Operating Expenses as a result thereof; and
(m) Costs incurred by Landlord's Accountants in engaging experts
or other consultants to assist them in making the computations required
hereunder.
"Operating Expenses" shall not include:
(1) Costs of work, including painting and decorating and tenant
change work, which Landlord performs for any tenant or in any tenant's
space in the Building;
(2) Costs of repairs or other work occasioned by fire, windstorm
or other insured casualty to the extent of insurance proceeds received;
(3) Leasing commissions, advertising expenses, and other costs
incurred in leasing space in the Building;
4
<PAGE> 8
(4) Costs of repairs or rebuilding necessitated by condemnation;
(5) Interest, principal, points and fees on debt or amortization
on any mortgage or mortgagees or any other debt instrument encumbering the
Building;
(6) Depreciation on the Building;
(7) Any ground lease rental affecting all or a portion of the
Building;
(8) Costs incurred by Landlord for the repair of damage to the
Building or as a result of Landlord's gross negligence or willful
misconduct, to the extent that Landlord is reimbursed by a third party or
insurance proceeds;
(9) Costs incurred by Landlord for alterations which are
considered capital improvements and replacements under generally accepted
accounting principles, consistently applied, except as provided in
(5(A)(7)(1) above;
(10) Expenses in connection with services or other benefits which
are not offered to Tenant, or for which Tenant is charged directly but
which are not provided to another tenant or occupant of the Building;
(11) Costs incurred by Landlord due to the violation by Landlord
or any other tenant of the Building of the terms and conditions of any
lease of space in the Building;
(12) Overhead and profit increments paid to Landlord or to
subsidiaries or affiliates of Landlord for services in the Building to the
extent the same exceeds the cost of such services rendered at the same
level of service for similar quality buildings in Denver, by unaffiliated
third parties on a competitive basis;
(13) Landlord's general corporate overhead and general
administrative expenses;
(14) Any compensation paid to clerks, attendants or other persons
in commercial concessions operated by Landlord or in parking garages for
the Building;
(15) All items and services for which Tenant or any other tenant
of the Building reimburses Landlord (other than through the pass-through of
Operating Expenses) and which Landlord provides selectively to one or more
tenants (other than Tenant) without reimbursement;
(16) Advertising and promotional expenditures, and costs of
purchase and installation of signs in or on the Building (except for the
Building directory) identifying the owner of the Building;
(17) Electrical power costs for which any tenant directly
contracts with the local public service company;
(18) Labor or other costs incurred in connection with any
operation of any restaurant or garage in the Building;
(19) Tax penalties incurred as a result of Landlord's negligence
or inability or unwillingness to make payments when due or legal fees in
connection therewith or incurred contesting such penalties;
(20) Any other expenses which, in accordance with customary
industry practice, would not normally be treated as Operating Expenses by
landlords of comparable similar institutional quality office buildings;
5
<PAGE> 9
(21) Any costs, fines or penalties incurred due to violations by
Landlord of any government rule or authority;
(22) Purchase price of sculpture, Paintings, or other objects of
art placed in common areas of the Building; and
(23) Wages, salaries, medical, surgical and general welfare
benefits, pension payments, payroll taxes, workers' compensation costs or
other compensation paid to or for any executive employees above the grade
of building manager.
Notwithstanding anything contained herein to the contrary, if any lease entered
into by Landlord with any tenant in the Building is on a so-called "net" basis,
or provides for a separate basis of computation for any Operating Expenses with
respect to its leased premises, then, to the extent that Landlord's Accountants
determine that an adjustment should be made in making the computations herein
provided for, Landlord's Accountants shall be permitted to modify the
computation of Base Operating Expenses, Rentable Area, and Operating Expenses
for a particular Operating Expense Year in order to eliminate or otherwise
modify any such expenses which are paid for in whole or in part by such tenant.
Furthermore, in making any computations contemplated hereby, Landlord's
Accountants shall also be permitted to make such adjustments and modifications
to the provisions of this Paragraph 5 as shall be reasonably necessary to
achieve the intention of the parties hereto.
B. If any increase occurs in Operating Expenses during any Operating
Expense Year during the Primary Lease Term, or any extension thereof, including
the first Operating Expense Year, in excess of the Base Operating Expenses,
Tenant shall pay to Landlord Tenant's Pro Rata Share of the amount of such
increaSe. All amounts required to be paid by Tenant as a result of any such
increase shall be paid within thirty (30) days following billing therefor by
Landlord. In addition to the foregoing, it is agreed that, during each Operating
Expense Year beginning with the first month of the second Operating Expense Year
and continuing each month thereafter during the Primary Lease Term, or any
extension thereof, Tenant shall pay to Landlord, at the same time as the Base
Rent is paid, an amount equal to one-twelfth (1/12) of Landlord's estimate (as
determined by Landlord's Accountants) of Tenant's Pro Rata Share of any
projected increases in the Operating Expenses for the particular Operating
Expense Year in excess of the Base Operating Expenses, with a final adjustment
to be made between the parties at a later date for said Operating Expense Year.
In computing the increase in the monthly rental payments. based upon Tenant`s
Pro Rata Share of the estimated increase of Operating Expenses for any
particular Operating Expense Year, Landlord's Accountants shall take into
account any prior increases in the monthly rental payments attributable to
Tenant's Pro Rata Share of previously estimated increases. If, during any
Operating Expense Year, Landlord's projected increase in Operating Expenses for
said year over the Base Operating Expenses is less than the projected increase
for the previous Operating Expense Year on which Tenant's monthly rental
payments for said year were based, the rental payments to be paid by Tenant for
the new Operating Expense Year shall be decreased accordingly; provided,
however, in no event will the rental to be paid by Tenant hereunder ever be less
than the Base Rent.
As soon as practicable following the end of each Operating Expense Year
during the Primary Lease Term, or any extension thereof, including the first
Operating Expense Year, Landlord shall submit to Tenant a statement prepared by
a representative of Landlord setting forth the exact amount of Tenant's Pro
Rata Share of the increase, if any, of the Operating Expenses for the Operating
Expense Year just completed over the Base Operating Expenses. Beginning with
said statement for the second Operating Expense Year, it shall also set forth
the difference, if any, between Tenant's actual Pro Rata Share of the increase
in Operating Expenses for such Operating Expense Year just completed and the
estimated amount of Tenant's Pro Rata Share of such increase on the basis of
which Tenant's monthly rent was computed for such particular Operating Expense
Year. Each such statement shall also set forth the projected increase, if any,
in Operating Expenses for the new Operating Expense Year over the Base
Operating Expenses and the corresponding increase or decrease in Tenant's
monthly rent for such new Operating Expense Year above or below the rental paid
by Tenant for the immediately preceding Operating Expense Year computed in
accordance with the foregoing provisions. To the extent that Tenant's Pro Rata
Share of the increase in Operating Expenses for the period covered by such
statement is different from the estimated amount upon which Tenant paid rent
during the Operating Expense Year just completed, Tenant shall pay to Landlord
the difference in cash within thirty (30) days following receipt by Tenant of
such statement from Landlord or
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receive a credit on the next months' rental owing hereunder, as the case may be.
Until Tenant receives such statement, Tenant's monthly rent for the new
Operating Expense Year shall continue to be paid at the rate paid for the
particular Operating Expense Year just completed, but Tenant shall commence
payment to Landlord of the monthly installments of rent on the basis of said
statement beginning on the first day of the month following the month in which
Tenant receives such statement. Moreover, Tenant shall pay to Landlord or deduct
from the rent, as the case may be, on the date required for the first payment of
rent, as adjusted, the difference, if any, between the monthly installments of
rent so adjusted for the new Operating Expense Year and the monthly installments
of rent actually paid during the new Operating Expense Year. In addition to the
above, if, during any particular Operating Expense Year, there is a change in
the information on which Landlord's Accountants based the estimate upon which
Tenant is then making its estimated rental payments so that such estimate
furnished to Tenant is no longer accurate, Landlord shall be permitted to revise
such estimate by notifying Tenant and there shall be such adjustments made in
the monthly rental on the first day of the month following the serving of such
statement on Tenant as shall be necessary by either increasing or decreasing, as
the case may be, the amount of monthly rent then being paid by Tenant for the
balance of the Operating Expense Year (but in no event shall any such decrease
result in a reduction of the rent below the Base Rent), as well as an
appropriate adjustment in cash based upon the amount theretofore paid by Tenant
during such particular Operating Expense Year pursuant to the prior estimate.
Landlord's and Tenant's responsibilities with respect to the Operating
Expense adjustment described herein shall survive the expiration or early
termination of this Lease.
In the event the Rentable Area is not fully occupied during any particular
Operating Expense Year (including the Year 2000), Landlord's Accountants may
adjust those Operating Expenses which are affected by the occupancy rates for
the particular Operating Expense Year, or portion thereof, as the case may be,
to reflect an occupancy of ninety-five percent (95%) of all such Rentable Area.
C. If Tenant shall dispute the amount of an adjustment submitted by
Landlord's Accountants or the proposed estimated increase or decrease on the
basis of which Tenant's rent is to be adjusted as provided in subparagraph B
above, Tenant shall give Landlord written notice of such dispute within thirty
(30) days after Landlord's Accountants advise Tenant of such adjustment or
proposed increase or decrease. If Tenant does not give Landlord such notice
within such time, Tenant shall have waived its right to dispute the amounts so
determined. If Tenant timely objects, Tenant shall have the right to engage its
own certified public accountants ("Tenant's Accountants") for the purpose of
verifying the accuracy of the statement complained of or the reasonableness of
the estimated increase or decrease. If Tenant's Accountants determine that an
error has been made, Landlord's Accountants and Tenant's Accountants shall
endeavor to agree upon the matter, failing which the parties shall submit such
matter to an independent certified public accountant selected by Landlord and
reasonably acceptable to Tenant, for a determination which shall be final,
conclusive and binding upon Landlord and Tenant. All costs incurred by Tenant
in obtaining its own accountants shall be paid for by Tenant unless Tenant's
Accountants disclose an error, acknowledged by Landlord's Accountants (or found
to have occurred in a judicial action), of more than four percent (4%) in the
computation of the total amount of Operating Expenses as set forth in the
statement submitted by Landlord's Accountants which is challenged, in which
event Landlord shall pay the reasonable costs incurred by Tenant in obtaining
such audit. Notwithstanding the pendency of any dispute over any particular
statement, Tenant shall continue to pay Landlord the amount of the adjusted
monthly installments of rent determined by Landlord's Accountants until the
adjustment has been determined to be incorrect as aforesaid. If it shall be
determined that any portion of the Operating Expenses were not properly
chargeable to Tenant, then Landlord shall promptly credit or refund the
appropriate sum to Tenant. Delay by Landlord or Landlord's Accountants in
submitting any statement contemplated herein for any Operating Expense Year
shall not affect the provisions of this Paragraph 5 or constitute a waiver of
Landlord's rights as set forth herein for said Operating Expense Year or any
subsequent Operating Expense Years during the Primary Lease Term and any
extensions thereof.
D. Notwithstanding anything to the contrary set forth herein, for the
purposes of calculating Tenant's Pro Share of Operating Expenses. "Controlled
Expenses" (as hereinafter defined) shall not exceed the "Maximum Controlled
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Expenses" (as hereinafter defined). "Controlled Expenses" shall mean all
Operating Expenses except those attributable to Taxes, costs of insurance,
including, without limitation, liability insurance, casualty insurance and
worker's compensation insurance, costs of utilities, and costs of compliance
with any laws, rules or regulations as provided in Paragraph 5.A(7)(1). If
Landlord is managing the Building itself the management fees included within
Operating Expenses shall be a Controlled Expense. "Maximum Controlled Expenses"
shall mean: (a) for calendar year 2000, the full amount of the actual expenses
for Controlled Expenses as determined in accordance with the foregoing
provisions: (b) for calendar year 2001 and each calendar year thereafter, the
prior calendar year's Maximum Controlled Expenses multiplied by 1.05. The
limitations described above shall be a limitation only on the calculation and
passthrough to Tenant of Tenant's Pro Rata Share of Operating Expenses and such
limitation shall not prohibit Landlord from spending amounts in excess of such
limitations. Landlord may, in accordance with advice from its accountants and
other professionals, reasonably contest any utility rate increases associated
with the Building and/or tax assessments and to apply for all rebates to which
it is entitled so long as it has knowledge thereof. The costs of all such
contests and applications shall be included in Operating Expenses, however, any
penalties or fines in connection with such amounts shall not be so included. To
the extent any rebates or refunds are actually received by Landlord, they shall
be applied to reduce the total Operating Expenses for the year in which such
amounts are received. If any such amounts attributable to periods during the
term hereof are received by Landlord following the expiration of the term hereof
(according to its terms and not as a result of an Event of Default, as
hereinafter defined), Landlord agrees to forward to Tenant any amounts to which
Tenant is entitled as and when received notwithstanding the fact that this
Lease has so expired, provided Tenant has given to Landlord a valid forwarding
address.
6. SERVICES.
A. Subject to the provisions of subparagraph D below, Landlord, without
charge, except as provided herein, and in accordance with standards from time to
time prevailing for the Building, agrees: (1) to furnish running water at those
points of supply for general use of tenants of the Building; (2) to furnish to
public areas of the Building Complex heated or cooled air (as applicable),
electrical current, janitorial services, and maintenance to the extent Landlord
deems necessary; (3) to furnish, during Ordinary Business Hours, as hereinafter
defined, such heated or cooled air to the Premises standard in the downtown
Denver area, for the comfortable use and occupancy of the Premises, provided
that the recommendations of Landlord's engineer regarding occupancy and use of
the Premises are complied with by Tenant and, with respect to cooled air,
provided the same is used only for standard office use; (4) to furnish, subject
to availability and capacity of building systems, unfiltered treated cooling
tower water for use in Tenants' packaged HVAC systems, provided that such
systems are equipped with Landlord-approved strainers, pumping systems and
controls, and that such systems are connected only after approval of Landlord's
engineer; (5) to provide, during Ordinary Business Hours, the general use of
passenger elevators for ingress and egress to and from the Premises (at least
one such elevator shall be available at all times, except in the case of
emergencies or repair); (6) to provide janitorial services for the Premises to
the extent of the Building Standard tenant finish work items contained therein
(including such window washing of the outside of exterior windows as may, in the
judgment of Landlord, be reasonably required), but unless and until the Building
Standard changes, such janitorial services shall be provided after Ordinary
Business Hours on Monday through Thursday and Sunday only, except for Legal
Holidays; and (7) to cause electric current to be supplied to the Premises for
all of Tenant's Standard Electrical Usage, as hereinafter defined. "Tenant's
Standard Electrical Usage", as used herein, shall mean and refer to weekly
electrical consumption in an amount equal to multiplying three and one-half
(3.5) watts/square foot by fifty-nine (59) hours and by then multiplying the
product thereof by the number of rentable square feet in the Premises.
"Ordinary Business Hours" as used herein shall mean and refer to 7:00 a.m. to
6:00 p.m. Monday through Friday and 9:00 a.m. to 12:00 p.m. on Saturdays, Legal
Holidays excepted. "Legal Holidays," as used herein, shall mean New Year's Day,
Martin Luther King Day, Presidents' Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, Christmas Day, and such other national holidays as may be
hereafter established by the United States Government. Notwithstanding anything
to the contrary stated herein, Tenant shall have access to the Building 24 hours
a day, seven (7) days a week, subject to Landlord's standard security and access
procedures.
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B. "Excess Usage" shall be defined as any usage of electricity (1)
during other than Ordinary Business Hours; or (2) in an amount in excess of
Tenant's Standard Electrical Usage; or (3) for "Special Equipment"; or (4) for
any requirement for standard HVAC services during other than Ordinary Business
Hours. "Special Equipment", as used herein, shall mean (a) any equipment
consuming more than 0.5 kilowatts at rated capacity, (b) any equipment requiring
a voltage other than 120 volts, single phase, or (c) equipment that requires the
use of self-contained HVAC units. Tenant shall reimburse Landlord for actual
costs incurred by Landlord in providing services for Excess Usage, which costs
are subject to change from time to time. Such reasonable costs will include
Landlord's costs for materials, additional wear and tear on equipment,
utilities, and labor (including fringe and overhead costs). Computation of
Landlord's cost for providing such services will be made by Landlord's engineer,
based on his engineering survey of Tenant's Excess Usage. Tenant shall also
reimburse Landlord for all costs of supplementing the Building HVAC System
and/or extending or supplementing any electrical service, as Landlord may
determine is necessary, as a result of Tenant's Excess Usage. Prior to
installation or use by Tenant of any equipment which will result in Excess Usage
or operation of the Premises for extended hours on an ongoing basis, Tenant
shall notify Landlord of such intended installation or use and obtain Landlord's
consent thereof. In addition to the foregoing, Tenant, at Tenant's option,
upon such notice or at any time thereafter, may request Landlord, at Tenant's
sole cost and expense, to install a check meter and/or flow meter to assist in
determining the cost to Landlord of Tenant's Excess Usage. If Tenant desires
electric current and/or heated or cooled air to the Premises during periods
other than Ordinary Business Hours, Landlord will use reasonable efforts to
supply the same, but at the expense of Tenant (such expense shall be reasonably
allocated on a pro rata basis among all tenants requesting and utilizing such
services during the respective periods), at Landlord's standard rate as
established by it, from time to time, for such services. Charges for HVAC
are currently $65 per hour and $15 per hour for fan circulation only however,
such charges are subject to change. Not less than twenty-four (24) hours' prior
notice shall be given by Tenant to Landlord of Tenant's desire for such
services. It is also understood and agreed that Tenant shall pay the cost of
replacing light bulbs and/or tubes and ballast used in all lighting in the
Premises other than Building Standard lighting. The electricity for the Computer
Room and for the coolers serving the Computer Room (which are to be installed on
the roof pursuant to a separate Rooftop License Agreement with Landlord) shall
be separately metered and Tenant shall pay for the actual costs of electricity
as metered upon billing by agreement with Public Service Company of Colorado
("PSCO") from time to time. Electricity for standby or backup mode operation
of desktop computers, facsimile machines and similar electronic devices (other
than equipment in the Computer Room) outside Ordinary Business Hours shall not
be considered Excess Usage.
C. If Tenant requires janitorial services other than those required to
be provided to other tenants of the Building Complex generally, Tenant shall
separately pay for such services monthly upon billings by Landlord, or Tenant
shall, at Landlord's option, separately contract for such services with the same
company furnishing janitorial services to Landlord. Notwithstanding the
foregoing, Tenant shall have the right, subject to Landlord's prior written
consent and such rules, regulations and requirements as Landlord may impose
(including but not limited to the requirement that such janitors belong to a
trade union), to employ janitors, other than those employed by Landlord, to
perform such additional services.
D. Tenant agrees that Landlord shall not be liable for failure to
supply any such heating, air conditioning, elevator, electrical, janitorial,
lighting or other services, or during any period Landlord is required to reduce
or curtail such services pursuant to any applicable laws, rules, or regulations,
including regulations of any utility now or hereafter in force or effect, it
being understood that Landlord may discontinue, reduce, or curtail such
services, or any of them (either temporarily or permanently), at such times as
it may be necessary by reason of accident, repairs, alterations, improvements,
strikes, lockouts, riots, acts of God, application of applicable laws, statutes,
or rules and regulations or due to any other happening beyond the control of
Landlord. In the event of any interruption, reduction, or discontinuance of
Landlord's services (either temporary or permanent), Landlord shall not be
liable for damages to person or property as a result thereof nor shall the
occurrence of any such event in any way be construed as an eviction of Tenant;
or cause or permit an abatement, reduction or setoff of rent; or operate to
release Tenant from any of Tenant's obligations hereunder.
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E. Tenant agrees to notify promptly the Landlord or its representative
of any accidents or defects in the Building of which Tenant becomes aware
including defects in pipes, electric wiring, and HVAC equipment. In addition,
Tenant shall provide Landlord with prompt notification of any matter or
condition which may cause injury or damage to the Building or any person or
property therein. Notwithstanding the foregoing: (i) in the event that Landlord
is unable, for reasons within Landlord's reasonable control, to supply any of
the Building's sanitary, electrical, heating, air conditioning, water, elevator,
life safety or other essential systems serving the Premises (collectively, the
"Essential Services"), and such inability of Landlord materially impairs
Tenant's ability to carry on its business in the Premises for a period of five
(5) business days, the Base Rent and Additional Rent shall be abated commencing
with the sixth (6th) business day of such material interference with Tenant's
business, based upon the extent to which such inability to supply Essential
Services materially impairs Tenant's ability to carry on its business in the
Premises. Such abatement shall continue until the Essential Services have been
restored to such extent that the lack of any remaining services no longer
materially impairs Tenant's ability to carry on its business in the Premises.
Tenant shall not be entitled to such an abatement to the extent that Landlord's
inability to supply Essential Services to Tenant is caused by Tenant, its
employees, contractors, agents, licensees or invitees.
7. QUIET ENJOYMENT. So long as Tenant is not in default under this
Lease, Tenant shall be entitled to the quiet enjoyment and peaceful possession
of the Premises, subject to the terms and provisions of the Lease.
8. DEPOSIT. [SEE PARAGRAPH 2 OF RIDER TO LEASE]
9. CHARACTER OF OCCUPANCY. Tenant covenants and agrees to occupy the
Premises for the Permitted Use and for no other purpose, and to use them in a
careful, safe, and proper manner; to pay on demand for any damage to the
Premises caused by misuse or abuse thereof by Tenant, Tenant's agents or
employees, or of any other person entering upon the Premises under express or
implied invitation of Tenant. The term "Permitted Use" shall mean: general
office use for administrative, clerical, and professional office purposes,
including, customer support (the "Primary Use") and for activities ancillary
thereto, such as computer facilities (the "Ancillary Uses"), provided that
Ancillary Uses shall not be the primary use of the Leased Premises and any
other uses that are approved by Landlord, which approval shall not be
unreasonably withheld if such uses are consistent with first class general
office
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building uses and so long as in keeping with Building's first-class quality and
allowed under zoning applicable to the Building. Tenant shall be responsible for
obtaining any approvals or Permits required for the Ancillary Uses under
Applicable Laws and the Declaration. Tenant, at Tenant's expense, shall comply
with all laws, codes, rules, and regulations of the United States, the State of
Colorado, or of the City and County of Denver ("Applicable Laws") now in effect,
or which may hereafter be in effect, which shall impose any duty upon Landlord
or Tenant with respect to the occupation or alteration of the Premises. Tenant
shall not commit waste or suffer or permit waste to be committed or permit any
nuisance on or in the Premises. Tenant agrees that it will not store, keep, use,
sell, dispose of or offer for sale in, upon or from the Premises any article or
substance which may be prohibited by any insurance policy in force from time to
time covering the Building nor shall Tenant keep, store, produce or dispose of
on, in or from the Premises or the Building any substance which may be deemed a
hazardous substance or infectious waste under any state, local or federal rule,
statute, law, regulation or ordinance as may be promulgated or amended from time
to time. Notwithstanding the foregoing or anything to the contrary contained in
this Lease, Tenant shall not be responsible for compliance with any laws, codes,
ordinances or other governmental directives where such compliance is not related
specifically to Lessee's use and occupancy of the Premises. For example, if any
governmental authority should require the Building or the Premises to be
structurally strengthened against earthquake, or should require the removal of
asbestos from the Premises and such measures are imposed as a general
requirement applicable to all tenants rather than as a condition to Tenant's
specific use or occupancy of the Premises, such work shall be performed by and
at the sole cost of Landlord (subject to Landlord's right to include such cost
in Operating Expenses).
10. MAINTENANCE, ALTERATIONS AND REENTRY BY LANDLORD.
A. Unless otherwise expressly provided herein, Landlord shall not be
required to make any improvements or repairs of any kind or character to the
Premises during the Primary Lease Term, or any extension thereof, except: (i)
such repairs to HVAC, mechanical, life safety and electrical systems in the
Premises (to the extent such systems are Building Standard) as may be deemed
necessary by Landlord for normal maintenance operations of the Building Complex;
and (ii) upkeep, maintenance, and repairs to all Common Areas in the Building
Complex so long as the need for any such repair is not the result of Tenant's
negligence.
B. Tenant covenants and agrees to permit Landlord at any time to enter
the Premises after reasonable prior notice (except in the case of janitorial
services or an emergency when no notice is required) to examine and inspect the
same or, if Landlord so elects, to perform any obligations of Tenant hereunder
which Tenant shall fail to perform or to perform such cleaning, maintenance,
janitorial services, repairs, additions, or alterations as Landlord may deem
necessary or proper for the safety, improvement, or preservation of the Premises
or of other portions of the Building Complex or as may be required by
governmental authorities through any code, rule, regulation, ordinance, and/or
law. Any such reentry shall not constitute an eviction or entitle Tenant to
abatement of rent. Furthermore, Landlord shall at all times have the right at
Landlord's election to make such alterations or changes in other portions of the
Building Complex as Landlord may from time to time deem necessary and desirable
as long as such alterations and changes do not unreasonably interfere with
Tenant's use and occupancy of the Premises. Landlord may use one or more of the
street entrances to the Building Complex and such public areas thereof as may be
necessary, in Landlord's determination to complete such alterations or changes.
11. ALTERATIONS AND REPAIRS BY TENANT. [SEE RIDER]
A. Tenant covenants and agrees not to make any Alterations in or
additions to the Premises (subsequent to the work in the Premises performed by
Landlord pursuant to the Work Letter), including installation of any equipment
or machinery therein which requires modification of or additions to any existing
electrical outlet or which would increase Tenant's usage of electricity beyond
Tenant's Standard Electrical Usage (all such alterations are referred to herein
collectively as "Alterations") without in each such instance first obtaining the
written consent of Landlord which consent shall not be unreasonably withheld so
long as the Alteration does not adversely affect any base building systems or
structural portions of the Building. No consent shall be required to the extent
such Alterations are cosmetic in nature and cost less than $25,000.00 for each
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such Alteration; however, in any event, Landlord's consent shall be required
for any electrical, telephone or telecommunications connections or
installations outside the Premises. Landlord's consent to any Alterations by
Tenant or Landlord's approval of the plans, specifications and working drawings
for Tenant's Alterations shall create no responsibility or liability on the part
of Landlord for their completeness, design sufficiency, or compliance with all
laws, rules and regulations of governmental agencies or authorities now in
effect or which may hereafter be in effect. If expressly requested by Tenant at
the time Landlord consents to any Alteration, Landlord shall inform Tenant as
to whether Landlord will require Tenant to remove such alteration at the
expiration or earlier termination of the Lease. Tenant, at its expense, shall
pay all reasonable engineering and design costs incurred by Landlord
attributable to the Alterations and obtain all necessary, governmental permits
and certificates required for any Alterations to which Landlord has consented
and shall cause such alterations to be completed in compliance therewith and
with all applicable laws and requirements of public authorities and all
applicable requirements of Landlord's insurance carriers. All Alterations which
Tenant is permitted to make shall be performed in a good and workmanlike manner,
using new materials and equipment at least equal in quality to the original
installations in the Premises. All repair and maintenance work required to be
performed by Tenant pursuant to the provisions of subparagraph B below and any
Alterations permitted by Landlord pursuant to the provisions hereof, including,
but not limited to, any installations desired by Tenant for Tenant's
telegraphic, telephonic or electrical connections, shall be done at Tenant's
expense by Landlord's employees or, with Landlord's consent, by persons
requested by Tenant and authorized in writing by Landlord; provided, however if
such work is performed by persons who are not employees of Landlord, Tenant
shall pay to Landlord, upon receipt of billing therefor, the reasonable costs
for supervision and control of such persons as Landlord may determine to be
necessary. If Landlord authorizes persons requested by Tenant to perform such
work, prior to the commencement of any such work, on request, Tenant shall
deliver to Landlord certificates issued by insurance companies qualified to do
business in the State of Colorado, evidencing that workmen's compensation,
public liability insurance, and property damage insurance, all in the amounts,
with companies and on forms satisfactory to Landlord, are in force and effect
and maintained by all contractors and subcontractors engaged by Tenant to
perform such work. All such policies shall name Landlord and any Mortgagee (as
defined in Paragraph 20) as an additional insured. Each such certificate shall
provide that the same may not be canceled or modified without thirty (30)
days' prior written notice to Landlord and such Mortgagee. Further, Landlord
and such Mortgagee shall have the right to post notices in the Premises in
locations which will be visible by parties performing any work on the Premises
stating that Landlord is not responsible for the payment for such work and
setting forth such other information as Landlord may deem necessary.
Alterations, repair, and maintenance work shall be performed in a manner which
will not unreasonably interfere with, delay, or impose any additional expense
upon Landlord in the maintenance or operation of the Building or upon other
tenants' use of their premises.
B. Tenant shall keep the Premises in as good order, condition, and
repair and in an orderly state, as when they were entered upon, loss by fire or
other casualty or ordinary wear excepted. Subject to Landlord's obligation to
make repairs in the event of certain casualties, as set forth in Paragraph 17
below, and except as otherwise set forth herein Landlord shall have no
obligation for the repair or replacement of any portion of the interior of the
Premises which is damaged or wears out during the term hereof regardless of the
cause therefor, including but not limited to, carpeting, draperies, window
coverings, wall coverings, painting or any of Tenant's property or betterments
in the Premises. Landlord hereby agrees that Tenant shall have the right, at its
discretion, to hypothecate Tenant's trade fixtures, equipment and other personal
property within the Premises as security for its obligation under any equipment
lease or other financing arrangement related to the conduct of Tenant's
business.
C. All Alterations and permanent fixtures installed in the Premises
(other than Tenant's Trade Fixtures (defined below) and personal property),
including, by way of illustration and not by limitation, all partitions,
paneling, carpeting, drapes or other window coverings, and light fixtures (but
not including movable office furniture not attached to the Building and modular
furniture), shall be deemed a part of the real estate and the property of
Landlord and shall remain upon and be surrendered with the Premises as a part
thereof without molestation, disturbance, or injury at the end of the Primary
Lease Term, or any extension thereof, whether by lapse of time or otherwise,
unless Landlord by notice given to Tenant no later than fifteen (15) days prior
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to the end of the term or as provided in Paragraph 11.A above, shall elect to
have Tenant remove all or any of the Alterations, and in such event, Tenant
shall promptly remove at Tenant's expense the Alterations specified by Landlord
and restore the Premises to their condition prior to the making of the same,
reasonable wear and tear excepted. The term "Tenant's Trade Fixtures" shall
mean, without limitation, all racking, uninterruptible power supplies (UPS)
and other computer equipment, chillers and generators installed by Tenant.
12. MECHANICS' LIENS. Tenant shall pay or cause to be paid all costs for work
done by Tenant or caused to be done by Tenant on the Premises (including work
performed by Landlord or its contractor at Tenant's request following the
commencement of the Primary Lease Term) of a character which will or may result
in liens on Landlord's interest therein and Tenant will keep the Premises free
and clear of all mechanics' liens, and other liens on account of work done for
Tenant or persons claiming under it, excluding any Tenant Finish Work
performed by Landlord pursuant to the Work Letter. Tenant hereby agrees to
indemnify, defend, and save Landlord harmless of and from all liability, loss,
damage, costs, or expenses, including attorneys' fees, on account of any claims
of any nature whatsoever including claims or liens of laborers or materialmen
or others for work performed for or materials or supplies furnished to Tenant
or persons claiming under Tenant. Should any liens be filed or recorded
against the Premises or any action affecting the title thereto be commenced as
a result of such work (which term includes the supplying of materials), Tenant
shall cause such liens to be removed of record within ten (10) days after
notice from Landlord. If Tenant desires to contest any claim of lien, Tenant
shall furnish to Landlord adequate security (which may be in the form of a
bond) of at least one hundred fifty percent (150%) of the amount of the claim,
plus estimated costs and interest and, if a final judgment establishing the
validity or existence of any lien for any amount is entered, Tenant shall pay
and satisfy the same at once. If Tenant shall be in default of the foregoing or
suit to foreclose the lien has been recorded or filed and shall not have given
Landlord security as aforesaid, Landlord may (but without being required to do
so) pay such lien or claim and any costs, and the amount so paid, together with
reasonable attorney's fees incurred in connection therewith, shall be
immediately due from Tenant to Landlord.
13. SUBLETTING AND ASSIGNMENT. [SEE PARAGRAPH 3 OF RIDER TO LEASE]
A. Tenant shall neither sublet any part of the Premises nor assign this
Lease or any interest herein without the written consent of Landlord first being
obtained, which consent, as to any subletting of less than twenty-five percent
(25%) of the Premises, will not be unreasonably withheld provided that: (1)
Tenant has complied with the provision of subparagraph D below and Landlord has
declined to exercise its rights thereunder; (2) the proposed subtenant or
assignee is engaged in a business and the Premises will be used in a manner
which is in keeping with the then standards of the Building and does not
conflict with any exclusive use rights granted to any other tenant; (3) the
proposed subtenant or assignee has a reputation and standing in the business
community consistent with the image of tenants in a first-class office building
and has reasonable financial worth in light of the responsibilities involved and
Tenant shall have provided Landlord with reasonable proof thereof; (4) Tenant is
not in default hereunder at the time it makes its request for such consent; (5)
the proposed subtenant or assignee is not a governmental or quasi-governmental
agency; (6) the proposed subtenant or assignee is not a tenant under, or is not
currently negotiating, a lease with Landlord in the Building or in the building
located at 633 Seventeenth Street owned by Landlord; (7) the rent under such
sublease or assignment is not less than the rent to be paid by Tenant for such
space under the Lease and is not less than 85% of the rental rate then being
offered by Landlord for similar space in the Building; or (8) such subletting or
assignment does not result in a violation or create a prohibited transaction
under ERISA (as defined herein). Notwithstanding anything contained herein to
the contrary, Tenant acknowledges that if the use of the Premises by any
proposed subtenant or assignee would require compliance by Landlord and the
Building with any current or future laws to a greater extent than that required
prior to the proposed occupancy by such subtenant or assignee, Landlord, at its
sole option, may refuse to grant such consent, unless, as an express condition
thereof, Tenant and/or such assignee or subtenant bears the entire cost of such
greater compliance.
B. If this Lease is assigned, or if the Premises or any part thereof is
sublet or occupied by anybody other than Tenant, Landlord may, after an Event of
Default by Tenant, collect the rent from the assignee, subtenant, or occupant
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and apply the net amount collected to the rent herein reserved, but no such
assignment, subletting, occupancy, or collection shall be deemed an acceptance
of the assignee, subtenant, or occupant as the Tenant hereof or a release of
Tenant from further performance by Tenant of covenants on the part of Tenant
herein contained. A sale by Tenant of all or substantially all of its assets or
all or substantially all of its stock if Tenant is a publicly traded
corporation, a merger of Tenant with another corporation, the transfer of
twenty-five percent (25%) or more of the stock in a corporate tenant whose stock
is not publicly traded, or transfer of twenty-five percent (25%) or more of the
beneficial ownership interests in a partnership tenant shall constitute a
prohibited assignment hereunder. Consent by Landlord to any one Assignment or
sublease shall not in any way be construed as relieving Tenant from obtaining
the Landlord's express written consent to any further Assignment or sublease.
Notwithstanding the consent of Landlord to any sublease or Assignment, Tenant
shall not be relieved from its primary obligations hereunder to Landlord,
including, but not limited to the payment of all Base Rent and Tenant's Pro Rata
Share of increases in Operating Expenses. Landlord's consent to any requested
sublease or Assignment shall not waive Landlord's right to refuse to consent to
any other such request or to terminate this Lease if such request is made, all
as provided herein. If Tenant collects any rental or other amounts from a
subtenant or assignee in excess of the Base Rent and Tenant's Pro Rata Share of
increases in Operating Expenses for any monthly period, and reasonable leasing
commissions, and the unamortized value of the tenant improvements paid for by
Tenant in connection with such subletting or assignment. Tenant shall pay to
Landlord on a monthly basis, as and when Tenant receives the same, 50% of such
excess amounts received by Tenant.
C. Notwithstanding anything contained in this Paragraph 13 to the
contrary, in the event Tenant requests Landlord's consent to sublet twenty-five
percent (25%) or more of the Premises or to assign twenty-five percent (25%) or
more of its interest in this Lease for all or substantially all of the remainder
of the Primary Lease Term (or the current Option Term, as applicable), Landlord
shall have the right to (1) consent to such sublease or Assignment in its
reasonable discretion; (2) refuse to grant such consent in Landlord's reasonable
discretion; or (3) refuse to grant such consent and terminate this Lease as to
the portion of the Premises with respect to which such consent was requested;
provided, however, if Landlord refuses to grant such consent and elects to
terminate the Lease as to such portion of the Premises, Tenant shall have the
right within fifteen (15) days after notice of Landlord's exercise of its right
to terminate to withdraw Tenant's request for such consent and remain in
possession of the Premises under the terms and conditions hereof. In the event
the Lease is terminated as set forth herein, such termination shall be effective
as of the effective date of the proposed Assignment or subletting and Landlord
shall make alterations to the extent necessary to create demising walls
separating the terminated space from the remainder of the Premises.
D. Tenant hereby agrees that in the event it desires to sublease all or
any portion of the Premises or assign this Lease to any party, in whole or in
part, (herein "Assignment"), Tenant shall notify Landlord not less than sixty
(60) days prior to the date Tenant desires to sublease such portion of the
Premises or assign this Lease ("Tenant's Notice"). Tenant's Notice shall set
forth the description of the portion of the Premises to be so sublet or assigned
and the terms and conditions on which Tenant desires to sublet the Premises or
assign this Lease. Landlord shall have thirty (30) days following receipt of
Tenants Notice to respond pursuant to Paragraph 13C above.
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E. All documents utilized by Tenant to evidence any subletting or
assignment to which Landlord has consented shall be subject to prior approval by
Landlord or its counsel. Tenant shall pay on demand all of Landlord's costs and
expenses, including reasonable attorneys' fees, incurred in determining whether
or not to consent to any requested sublease or Assignment and in reviewing and
approving such documentation.
F. Landlord and Tenant understand that notwithstanding certain
provisions to the contrary contained herein, a trustee or debtor in possession
under the Bankruptcy Code of the United States may have certain rights to assume
or assign this Lease. If a trustee in bankruptcy is entitled to assume control
over Tenant's rights under this Lease and assigns such rights to any third
party, the Base Rent to be paid hereunder by such party shall be increased to
the then current Base Rent (if greater than then being paid for the Premises)
which Landlord would charge for comparable space in the Building as of the date
of such third party's occupancy of the Premises. Landlord and Tenant further
understand that in any event Landlord is entitled under the Bankruptcy Code to
Adequate Assurance of future performance of the terms and provisions of this
Lease. For purposes of any such assumption or assignment, the parties hereto
agree that the term "Adequate Assurance" shall include at least the following:
(1) In order to assure Landlord that the proposed assignee will
have the resources with which to pay the rent called for herein, any proposed
assignee must have as demonstrated to Landlord's satisfaction a net worth (as
defined in accordance with generally accepted accounting principles consistently
applied) at least as great as the net worth of Tenant on the date this Lease
became effective increased by seven percent (7%), compounded annually, for each
year from the Lease Commencement Date through the date of the proposed
assignment. The financial condition and resources of Tenant were a material
inducement to Landlord in entering into this Lease.
(2) Any proposed assignee of this Lease must assume and agree
to be personally bound by the terms, provisions, and covenants of this Lease.
14. DAMAGE TO PROPERTY. Tenant shall neither hold nor attempt to hold Landlord
liable for any injury or damage, either proximate or remote, occurring through
or caused by fire, water, steam, or any repairs, alterations, injury, accident,
or any other cause to the Premises, to any furniture, fixtures, Tenant
improvements, or other personal property of Tenant kept or stored in the
Premises, or in other parts of the Building Complex not herein demised, whether
by reason of the negligence or default of the owners or occupants thereof or any
other person or otherwise and the keeping or storing of all property of Tenant
in the Building Complex and/or Premises shall be at the sole risk of Tenant.
Tenant shall obtain and maintain throughout the term of this Lease "all risk" or
"multi-peril" insurance on and for the full cost of replacement of all of
Tenant's property and betterments in the Premises, including, without limitation
all furniture, fixtures, personal property and all tenant finish in excess of
Building Standard items. Any proceeds from such insurance shall be payable to
Tenant.
15. INDEMNITY TO LANDLORD.
A. Tenant hereby agrees to indemnify, defend, and save Landlord
harmless of and from all liability, loss, damages, costs, or expenses, including
attorneys' fees, on account of injuries to the person or property of Landlord or
of any other tenant in the Building Complex or to any other person rightfully in
said Building Complex for any purpose whatsoever, where the injuries are caused
by the negligence, misconduct or breach of this Lease by the Tenant, Tenant's
agent's, servants, or employees or of any other person entering upon the
Premises under express or implied invitation of Tenant or where such injuries
are the result of the violation of the provisions of this Lease by any of such
persons. This indemnity shall survive termination or earlier expiration of this
Lease.
B. In addition to the above, Tenant shall obtain and maintain
throughout the term of this Lease a commercial general liability policy,
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including protection against death, personal injury and property damage, issued
by an insurance company qualified to do business in the State of Colorado with
an AM Best rating of no less than A-, VII, with a single limit of not less
than One Million Dollars (1,000,000.00). All such policies shall name Landlord
as an additional insured. Each such policy shall provide that the same may not
be canceled or modified without at least twenty (20) days' prior written
notice to Landlord and any Mortgagee (as defined in Paragraph 20). Prior to
occupancy of the Premises, and thereafter from time to time, Tenant shall
deliver certificates evidencing that such insurance, as required under Paragraph
14 above and this Paragraph 15, is in force and effect. The limits of said
insurance shall not, under any circumstances, limit the liability of Tenant
hereunder.
16. SURRENDER AND NOTICE. Upon the expiration or other termination of the term
of this Lease, Tenant shall promptly quit and surrender to Landlord the Premises
broom clean, in good order and condition, ordinary wear and tear and loss by
fire or other casualty or condemnation excepted unless due to the negligence of
Tenant (and not covered by insurance), and Tenant shall remove all of its
movable furniture and other effects and such Alterations, as Landlord may be
entitled to require Tenant to remove pursuant to Paragraph 11 hereof. In the
event Tenant fails to vacate the Premises on a timely basis as required, Tenant
shall be responsible to Landlord for all costs incurred by Landlord as a result
of such failure, including, but not limited to, any amounts required to be paid
to third parties who were to have occupied the Premises.
17. INSURANCE, CASUALTY, AND RESTORATION OF PREMISES.
A. Landlord shall maintain casualty insurance on the shell and core of
the Building, on the Premises to the extent of the base tenant finish per the
then-current standard allowance provided by Landlord to tenants in the Building
therein and in the Building Complex, in such amounts, from such companies, and
on such terms and conditions, including loss of rental insurance for such period
of time as Landlord deems appropriate, from time to time.
B. If the Premises or the Building shall be so damaged by fire or other
casualty as to render the Premises wholly untenantable and if such damage shall
be so great that a competent architect, in good standing, selected by Landlord
shall certify in writing to Landlord and Tenant within sixty (60) days of said
casualty that the Premises, with the exercise of reasonable diligence, cannot be
made fit for occupancy within one hundred eighty (180) working days from the
happening thereof, then this Lease shall cease and terminate from the date of
the occurrence of such damage and Tenant shall thereupon surrender to Landlord
the Premises and all interest therein hereunder and Landlord may reenter and
take possession of the Premises and remove Tenant therefrom. Tenant shall pay
rent, duly apportioned, up to the time of such termination of this Lease. If,
however, the damage shall be such that said architect shall certify within said
sixty (60) day period that the Premises can be made tenantable within said one
hundred eighty (180) day period, then, except as hereinafter provided, Landlord
shall repair the damage so done (to the extent of the base tenant finish per the
then-current standard allowance provided by Landlord to tenants in the Building)
with all reasonable speed.
C. If the Premises shall be slightly damaged by fire or other casualty,
but not so as to render the same wholly untenantable or to require a repair
period in excess of one hundred eighty (180) days, then, Landlord, after
receiving notice in writing of the occurrence of the casualty, except as
hereafter provided, shall cause the same to be repaired to the extent of the
base tenant finish per the then-current standard allowance provided by Landlord
to tenants in the Building with reasonable promptness. If the estimated repair
period as established in accordance with the provisions of subparagraph B above
exceeds one hundred eighty (180) days, then the provisions of subparagraph B
shall control notwithstanding the fact that the Premises are not wholly
untenantable.
D. In case the Building throughout shall be so injured or damaged,
whether by fire or otherwise (though said Premises may not be affected, or if
affected, can be repaired within said one hundred eighty (180) days), that,
within sixty (60) days after the happening of such injury, Landlord shall decide
not to reconstruct or rebuild said Building, then, notwithstanding anything
contained herein to the contrary, upon notice in writing to that effect given by
Landlord to Tenant within said sixty (60) days, Tenant shall pay the rent,
properly apportioned up to such date, this Lease shall terminate from the date
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of delivery of said written notice, and both parties hereto shall be freed and
discharged of all further obligations hereunder.
E. Landlord and Tenant hereby waive any and all rights of recovery
against the other, their officers, agents, and employees occurring out of the
use and occupancy of the Premises for loss or damage to their respective real
and/or personal property arising as a result of a casualty or condemnation
contemplated by this Paragraph 17. Each of the parties shall, upon obtaining the
policies of insurance required by this Lease, notify the insurance carrier that
the foregoing waiver is contained in this Lease and shall require such carrier
to include an appropriate waiver of subrogation provision in the policies.
F. Provided that the casualty is not the fault of Tenant, Tenant's
agents, servants, or employees, Tenant's rent shall abate during any such period
of repair and restoration, but only to the extent of any recovery by Landlord
under its rental insurance related to the Premises in the same proportion that
the part of the Premises rendered untenantable bears to the whole.
18. CONDEMNATION. If the entire Premises or substantially all of the Premises or
any portion of the Building Complex which shall render the Premises untenantable
shall be taken by right of eminent domain or by condemnation or shall be
conveyed in lieu of any such taking, then this Lease, at the option of either
Landlord or Tenant exercised by either party giving notice to the other of such
termination within thirty (30) days after such taking or conveyance, shall
forthwith cease and terminate and the rent shall be duly apportioned as of the
date of such taking or conveyance. Tenant thereupon shall surrender the Premises
and all interest therein under this Lease to Landlord and Landlord may reenter
and take possession of the Premises or remove Tenant therefrom. In the event
less than all of the Premises shall be taken by such proceeding, Landlord shall
promptly repair the Premises as nearly as possible to its condition immediately
prior to said taking, unless Landlord elects not to reconstruct or rebuild as
described in subparagraph D of Paragraph 17 above. In the event of any such
taking or conveyance, Landlord shall receive the entire award or consideration
for the portion of the Building so taken.
19. DEFAULT BY TENANT.
A. Each one of the following events is herein referred to as an "Event
of Default":
(1) Any failure by Tenant to pay the rent or any other monetary
sums required to be paid hereunder on the date such sums are due shall be deemed
as default. Notwithstanding the foregoing, Tenant may cure a default under this
provision at any time prior to five (5) business days after written notice of
such default is given by Landlord exercising its remedies as to such default
under this Lease; provided, however, Tenant shall not be entitled to more than
two (2) notices of a delinquency in payment during any calendar year and, if
thereafter during such calendar year any rent or other amounts owing hereunder
are not paid when due, an Event of Default shall be deemed to have occurred
immediately even though no notice thereof is given;
(2) Tenant shall abandon the Premises;
(3) This Lease or the estate of Tenant hereunder shall be
transferred to or shall pass to or devolve upon any other person or party in
violation of the provisions set forth in Paragraph 13;
(4) This Lease or the Premises or any part thereof shall be taken
upon execution or by other process of law directed against Tenant or shall be
taken upon or subject to any attachment at the instance of any creditor of or
claimant against Tenant and said attachment shall not be discharged or disposed
of within fifteen (15) days after the levy thereof;
(5) The filing of any petition or the commencement of any case or
proceeding by the Tenant under any provision or chapter of the Federal
Bankruptcy Act, the Federal Bankruptcy Code, or any other federal or state law
relating to insolvency, bankruptcy, or reorganization or the adjudication that
the Tenant is insolvent or bankrupt or the entry of an order for relief under
the Federal Bankruptcy Code with respect to Tenant;
(6) The filing of any petition or the commencement of any case
or proceeding described in subparagraph (5) above against the Tenant, unless
such
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petition and all proceedings initiated thereby are dismissed within sixty (60)
days from the date of such filing; the filing of an answer by Tenant admitting
the allegations of any such petition; the appointment of or taking possession by
a custodian, trustee or receiver for all or any assets of the Tenant, unless
such appointment is vacated or dismissed within sixty (60) days from the date of
such appointment;
(7) The insolvency of the Tenant or the execution by the Tenant
of an assignment for the benefit of creditors; the convening by Tenant of a
meeting of its creditors, or any class thereof, for purposes of effecting a
moratorium upon or extension or composition of its debts; or the failure of the
Tenant generally to pay its debts as they mature;
(8) The admission in writing by Tenant, or any partner of Tenant
if Tenant is a partnership, that he is unable to pay his debts as they mature or
he is generally not paying his debts as they mature;
(9) [Intentionally Deleted]
(10) Tenant shall fail to perform any of the other agreements
terms, covenants, or conditions hereof on Tenant's part to be performed and such
non-performance shall continue for a period of thirty (30) days after written
notice thereof by Landlord to Tenant or, if such performance cannot be
reasonably had within such thirty (30) day period, Tenant shall not in good
faith have commenced such performance within such thirty (30) day period and
shall not diligently proceed therewith to completion; provided, however, if
Tenant fails to perform any of the other agreements, covenants or conditions
hereof repeatedly during the term of this Lease, Tenant shall no longer have the
opportunity to cure any subsequent failure and an Event of Default shall be
deemed to have occurred immediately upon such failure.
B. Remedies of Landlord. If any one or more Event of Default shall
happen, then Landlord shall have the right at Landlord's election, then or at
any time thereafter, either:
(1) (a) Without demand or notice, to reenter and take possession
of the Premises or any part thereof and repossess the same as of Landlord's
former estate and expel Tenant and those claiming through or under Tenant and
remove the effects of both or either, without being deemed guilty of any manner
of trespass and without prejudice to any remedies for arrears of rent or
preceding breach of covenants or conditions. Should Landlord elect to reenter,
as provided in this subparagraph (1), or should Landlord take possession
pursuant to legal proceedings or pursuant to any notice provided for by law,
Landlord may, from time to time, without terminating this Lease, relet the
Premises or any part thereof, either alone or in conjunction with other
portions of the Building of which the Premises are a part, in Landlord's or
Tenant's name but for the account of Tenant, for such term or terms (which may
be greater or less than the period which would otherwise have constituted the
balance of the term of this Lease) and on such conditions and upon such other
terms (which may include concessions of free rent and alteration and repair of
the Premises) as Landlord, in its uncontrolled discretion, may determine and
Landlord may collect and receive the rents therefor. Landlord shall in no way
be responsible or liable for any failure to relet the Premises, or any part
thereof, or for any failure to collect any rent due upon such reletting but
Landlord shall use reasonable efforts to mitigate damages caused by Tenants'
default, but Landlord shall have the right to Lease other vacant space in the
Building Complex in preference to leasing the Premises. No such reentry or
taking possession of the Premises by Landlord shall be construed as an election
on Landlord's part to terminate this Lease unless a written notice of such
intention be given to Tenant. No notice from Landlord hereunder or under a
forcible entry and detainer statute or similar law shall constitute an election
by Landlord to terminate this Lease unless such notice specifically so states.
Landlord reserves the right following any such reentry and/or reletting to
exercise its right to terminate this Lease by giving Tenant such written
notice, in which event the Lease will terminate as specified in said notice.
(b) If Landlord elects to take possession of the Premises as
provided in this subparagraph (1) without terminating the Lease, Tenant shall
pay to Landlord (i) the rent and other sums as herein provided, which would be
payable hereunder if such repossession had not occurred, less (ii) the net
proceeds, if any, of any reletting of the Premises after deducting all of
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Landlord's expenses incurred in connection with such reletting, including, but
without limitation, all repossession costs, brokerage commissions, legal
expenses, attorneys' fees, expenses of employees, alteration, remodeling, and
repair costs and expenses of preparation for such reletting. If, in connection
with any reletting, the new lease term extends beyond the existing term or the
premises covered thereby include other premises not part of the Premises, a fair
apportionment of the rent received from such reletting and the expenses
incurred in connection therewith, as provided aforesaid, will be made in
determining the net proceeds received from such reletting. In addition, in
determining the net proceeds from such reletting, any rent concessions will be
apportioned over the term of the new lease. Tenant shall pay such amounts to
Landlord monthly on the days on which the rent and all other amounts owing
hereunder would have been payable if possession had not been retaken and
Landlord shall be entitled to receive the same from Tenant on each such day; or
(2) To give Tenant written notice of intention to terminate this
Lease on the date of such given notice or on any later date specified therein
and, on the date specified in such notice, Tenant's right to possession of the
Premises shall cease and the Lease shall thereupon be terminated, except as to
Tenant's liability hereunder as hereinafter provided, as if the expiration of
the term fixed in such notice were the end of the term herein originally
demised. In the event this Lease is terminated pursuant to the provisions of
this subparagraph (2), Tenant shall remain liable to Landlord for damages in an
amount equal to the rent and other sums which would have been owing by Tenant
hereunder for the balance of the term had this Lease not been terminated less
the net proceeds, if any, of any reletting of the Premises by Landlord
subsequent to such termination, after deducting all Landlord's expenses in
connection with such reletting, including, but without limitation, the expenses
enumerated above. Landlord shall be entitled to collect such damages from Tenant
monthly on the days on which the rent and other amounts would have been payable
hereunder if this Lease had not been terminated and Landlord shall be entitled
to receive the same from Tenant on each such day. Alternatively, at the option
of Landlord, in the event this Lease is terminated, Landlord shall be entitled
to recover forthwith against Tenant as damages for loss of the bargain and not
as a penalty an amount equal to the worth at the time of termination of the
excess, if any, of the amount of rent reserved in this Lease for the balance of
the term hereof over the then Reasonable Rental Value of the Premises for the
same period plus all amounts incurred by Landlord in order to obtain possession
of the Premises and relet the same, including attorneys' fees, reletting
expenses, alterations and repair costs, brokerage commissions and all other like
amounts. It is agreed that the "Reasonable Rental Value" shall be the amount of
rental which Landlord can obtain as rent for the remaining balance of the term.
C. Cumulative Remedies. Suit or suits for the recovery of the rents and
other amounts and damages set forth hereinabove may be brought by Landlord, from
time to time, at Landlord's election, and nothing herein shall be deemed to
require Landlord to await the date whereon this Lease or the term hereof would
have expired had there been no such default by Tenant or no such termination, as
the case may be. Each right and remedy provided for in this Lease shall be
cumulative and shall be in addition to every other right or remedy provided for
in this Lease or now or hereafter existing at law or in equity or by statute or
otherwise, including, but not limited to, suits for injunctive relief and
specific performance. The exercise or beginning of the exercise by Landlord of
any one or more of the rights or remedies provided for in this Lease or now or
hereafter existing at law or in equity or by statute or otherwise shall not
preclude the simultaneous or later exercise by Landlord of any or all other
rights or remedies provided for in this Lease or now or hereafter existing at
law or in equity or by statute or otherwise. All such rights and remedies shall
be considered cumulative and non-exclusive. All costs incurred by Landlord in
connection with collecting any rent or other amount and damages owing by Tenant
pursuant to the provisions of this Lease, or to enforce any provision of this
Lease, shall also be recoverable by Landlord from Tenant. Further, if an action
is brought pursuant to the terms and provisions of the Lease, the prevailing
party in such action shall be entitled to recover from the other party any and
all reasonable attorneys' fees incurred by such prevailing party in connection
with such action.
D. No Waiver. No failure by Landlord to insist upon the strict
performance of any agreement, term, covenant or condition hereof or to exercise
any right or remedy consequent upon a breach thereof and no acceptance of full
or partial rent during the continuance of any such breach shall constitute a
waiver of any such breach or of such agreement, term, covenant, or condition.
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No agreement, term, covenant, or condition hereof to be performed or complied
with by Tenant and no breach thereof shall be waived, altered, or modified,
except by written instrument executed by Landlord. No waiver of any breach shall
affect or alter this Lease but each and every agreement, term, covenant, and
condition hereof shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof. Notwithstanding any
termination of this Lease, the same shall continue in force and effect as to any
provisions which require observance or performance by Landlord or Tenant
subsequent to such termination.
E. Bankruptcy. Nothing contained in this Paragraph 19 shall limit or
prejudice the right of Landlord to prove and obtain as liquidated damages in any
bankruptcy, insolvency, receivership, reorganization, or dissolution proceeding
an amount equal to the maximum allowed by any statute or rule of law governing
such a proceeding and in effect at the time when such damages are to be proved,
whether or not such amount be greater, equal to, or less than the amounts
recoverable, either as damages or rent, referred to in any of the preceding
provisions of this Paragraph. Notwithstanding anything contained in this
Paragraph to the contrary, any such proceeding or action involving bankruptcy,
insolvency, reorganization, arrangement, assignment for the benefit of
creditors, or appointment of a receiver or trustee, as set forth above, shall be
considered to be an Event of Default only when such proceeding, action, or
remedy shall be taken or brought by or against the then holder of the leasehold
estate under this Lease.
F. Late Payment Charge. Any rents or other amounts owing hereunder
which are not paid within five (5) days after the date they are due shall
thereafter bear interest at the rate of three percentage points over the Prime
Rate then being charged by Wells Fargo Bank, N.A., or its successor, to its most
credit-worthy customers on an unsecured basis for short term loans (the "Prime
Rate") or the highest rate permitted by applicable usury law, whichever is
lower, until paid. Further, in the event any rents or other amounts owing
hereunder are not paid within five (5) days after written notice, Landlord and
Tenant agree that Landlord will incur additional administrative expenses, the
amount of which will be difficult if not impossible to determine. Accordingly,
Tenant shall pay to Landlord an additional, one-time late charge for any such
late payment in the amount of five percent (5%) of such payment. Any amounts
paid by Landlord to cure any defaults of Tenant hereunder, which Landlord shall
have the right but not the obligation to do, shall, if not repaid by Tenant
within five (5) days of demand by Landlord, thereafter bear interest at the rate
of three percentage points over the Prime Rate or the highest rate permitted by
applicable usury law, whichever is lower, until paid.
G. Waiver of Jury Trial. Tenant and Landlord hereby waive (to the
extent allowed by law) any and all rights to a trial by jury in suit or suits
brought to enforce any provision of this Lease or arising out of or concerning
the provisions of this Lease.
20. DEFAULT BY LANDLORD. In the event of any alleged default on the part of
Landlord hereunder, Tenant shall give written notice to Landlord in the manner
herein set forth and shall afford Landlord a reasonable opportunity to cure any
such default. Notice to Landlord of any such alleged default shall be
ineffective unless notice is simultaneously delivered to any holder of a
Mortgage and/or Trust Deed affecting all or any portion of the Building Complex
("Mortgagees"), as hereafter provided. Tenant agrees to give all Mortgagees, by
certified mail, return receipt requested, a copy of any notice of default served
upon Landlord, provided that prior to such notice Tenant has been notified, in
writing (by way of notice of Assignment of Rents and Leases, or otherwise), of
the address of such Mortgagees. Tenant further agrees that if Landlord shall
have failed to cure such default within the time provided for in this Lease,
then the Mortgagees shall have an additional thirty (30) days within which to
cure such default or, if such default cannot be cured within that time, then
such additional time as may be necessary, if, within such thirty (30) days, any
Mortgagee has commenced and is diligently pursuing the remedies necessary to
cure such default (including, but not limited to, commencement of foreclosure
proceedings, if necessary to effect such cure), in which event this Lease shall
not be terminated while such remedies are being so diligently pursued. In no
event will Landlord or any Mortgagee be responsible for any consequential
damages incurred by Tenant as a result of any default, including, but not
limited to, lost profits or interruption of business as a result of any alleged
default by Landlord hereunder.
20
<PAGE> 24
21. SUBORDINATION AND ATTORNMENT. (SEE PARAGRAPH 4 OF RIDER TO LEASE)
A. This Lease, at Landlord's option, shall be subordinate to any
mortgage or deed of trust (now or hereafter placed upon the Building Complex, or
any portion thereof), including any amendment, modification, or restatement of
any of such documents, and to any and all advances made under any mortgage or
deed of trust and to all renewals, modifications, consolidations, replacements,
and extensions thereof. Tenant agrees that with respect to any of the foregoing
documents, no documentation, other than this Lease, shall be required to
evidence such subordination.
B. If any holder of a mortgage or deed of trust shall elect to have
this Lease superior to the lien of the holder's mortgage or deed of trust and
shall give written notice thereof to Tenant, this Lease shall be deemed prior to
such mortgage or deed of trust, whether this Lease is dated prior or subsequent
to the date of said mortgage or deed of trust or the date of recording thereof.
C. In confirmation of such subordination or superior position, as the
case may be, Tenant agrees to execute such documents as may be required by
Landlord or its Mortgagee to evidence the subordination of its interest herein
to any of the documents described above, or to evidence that this Lease is prior
to the lien of any mortgage or deed of trust, as the case may be, and failing to
do so within ten (10) days after written demand, Tenant does hereby make,
constitute, and irrevocably appoint Landlord as Tenant's attorney-in-fact and in
Tenant's name, place, and stead, to do so.
D. Tenant hereby agrees to attorn to all successor owners of the
Building Complex, whether or not such ownership is acquired as a result of a
sale, through foreclosure of a deed of trust or mortgage, or otherwise.
22. REMOVAL OF TENANT'S PROPERTY.
A. All movable furniture and personal effects of Tenant not removed
from the Premises upon the vacation or abandonment thereof or upon the
termination of this Lease for any cause whatsoever shall conclusively be deemed
to have been abandoned and may be appropriated, sold, stored, destroyed, or
otherwise disposed of by Landlord without notice to Tenant or any other person
and without obligation to account therefor and Tenant shall pay Landlord all
expenses incurred in connection with the disposition of such property.
B. [Intentionally Deleted]
23. HOLDING OVER: TENANCY MONTH-TO-MONTH. If, after the expiration of this
Lease, Tenant shall remain in possession of the Premises and continue to pay
rent, and Landlord shall accept such rent, without any express written agreement
as to such holding over, then such holding over shall be deemed and taken to be
a holding upon a tenancy from month-to-month, subject to all the terms and
conditions hereof on the part of Tenant to be observed and performed and at a
monthly rent equivalent to one hundred fifty percent (150%) of the monthly
installments paid by Tenant immediately prior to such expiration or the Current
Market Rental Rate for the Premises, whichever is greater. All such rent shall
be payable in advance on the same day of each calendar month. Such
month-to-month tenancy may be terminated by either party upon ten (10) days'
notice prior to the end of any such monthly period. Nothing contained herein
shall be construed as obligating Landlord to accept any rental tendered by
Tenant after the expiration of the term hereof or as relieving Tenant of its
liability pursuant to Paragraph 16 and any holdover without Landlord's consent
shall be deemed a default hereunder entitling Landlord to all of its
21
<PAGE> 25
rights and remedies set forth in Paragraph 19 above, including, without
limitation, its right to recover consequential damages resulting from said
holdover.
24. PAYMENTS AFTER TERMINATION. No payments of money by Tenant to Landlord after
the termination of this Lease, in any manner, or after giving of any notice
(other than a demand for payment of money) by Landlord to Tenant shall
reinstate, continue, or extend the term of this Lease or affect any notice given
to Tenant prior to the payment of such money, it being agreed that after the
service of notice or the commencement of a suit or other final judgment granting
Landlord possession of the Premises, Landlord may receive and collect any sums
of rent due or any other sums of money due under the terms of this Lease or
otherwise exercise Landlord's rights and remedies hereunder and the payment of
such sums of money, whether as rent or otherwise; shall not waive said notice or
in any manner affect any pending suit or judgment theretofore obtained.
25. STATEMENT OF PERFORMANCE. Tenant agrees at any time and from time to time,
upon not less than ten (10) days' prior written request by Landlord, to execute,
acknowledge, and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or, if there have been
modifications, that the same is in full force and effect as modified and stating
the modifications), that there have been no defaults thereunder by Landlord or
Tenant (or, if there have been defaults, setting forth the nature thereof), the
date to which the rent and other charges have been paid in advance, if any, and
such other information as Landlord may request. It is intended that any such
statement delivered pursuant to this Paragraph may be relied upon by any
prospective purchaser of all or any portion of Landlord's interest herein or a
holder of any mortgage or deed of trust encumbering the Building Complex.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that: (i) this Lease is in full force and effect, without
modification except as may be represented by Landlord; (ii) there are no uncured
defaults in Landlord's performance; and (iii) not more than one (1) month's rent
has been paid in advance. Further, upon request, Tenant will supply to Landlord
a corporate or partnership resolution, as the case may be, certifying that the
party signing said statement of Tenant is properly authorized to do so.
26. MISCELLANEOUS.
A. The term "Landlord" as used in this Lease, so far as covenants or
obligations on the part of Landlord are concerned, shall be limited to mean and
include only the owner or owners of the Building Complex at the time in question
and, in the event of any transfer or transfers of the title thereto, Landlord
herein named (and in the case of any subsequent transfers or conveyances, the
then grantor) shall be automatically released, from and after the date of such
transfer or conveyance, of all liability as respects the performance of any
covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed, provided that any funds in the hands of Landlord or
the then grantor at the time of such transfer in which Tenant has an interest
shall be turned over to the grantee and any amount then due and payable to
Tenant by Landlord or the then grantor under any provisions of this Lease shall
be paid to Tenant.
B. The termination or mutual cancellation of this Lease shall not work
a merger, and such termination or mutual cancellation shall, at the option of
Landlord, either terminate all subleases and subtenancies or operate as an
assignment to Landlord of any or all such subleases or subtenancies.
C. The Tenant agrees that, for the purposes of completing or making
repairs or alterations in any portion of the Building, Landlord may use one or
more of the street entrances, the halls, passageways, and elevators of the
Building.
D. This Lease shall be construed as though the covenants herein between
Landlord and Tenant are independent and not dependent and Tenant shall not be
entitled to any setoff of the rent or other amounts owing hereunder against
Landlord if Landlord fails to perform its obligation set forth herein (except as
expressly set forth herein); provided, however, the foregoing shall in no way
impair the right of Tenant to commence a separate action against Landlord for
any violation by Landlord of the provisions hereof so long as notice is first
given to Landlord and any holder of a mortgage or deed of trust covering the
Building Complex or any portion thereof and an opportunity granted to Landlord
and such holder to correct such violation as provided in Paragraph 20 above.
22
<PAGE> 26
E. If any clause or provision of this Lease is illegal, invalid, or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event it is the intention of the parties hereto that the
remainder of this Lease shall not be affected thereby and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
of this Lease that is illegal, invalid, or unenforceable there be added as a
part of this Lease a clause or provision as similar in terms to such illegal,
invalid, or unenforceable clause or provision as may be possible and be legal,
valid, and enforceable.
F. The caption of each paragraph is added as a matter of convenience
only and shall be considered of no effect in the construction of any provision
or provisions of this Lease.
G. Except as herein specifically set forth, all terms, conditions, and
covenants to be observed and performed by the parties hereto shall be applicable
to and binding upon their respective heirs, administrators, executors, and
assigns. The terms, conditions, and covenants hereof shall also be considered to
be covenants running with the land to the fullest extent permitted by law.
H. Tenant and the party executing this Lease on behalf of Tenant
represent to Landlord that such party is authorized to do so by requisite
action of the board of directors or partners, as the case may be, and agree,
upon request, to deliver to Landlord a resolution or similar document or opinion
of counsel to that effect.
I. If there are more than one entity or person which or who are the
Tenant under this Lease, the obligations imposed upon Tenant under this Lease
shall be joint and several.
J. No act or thing done by Landlord or Landlord's agents during the
term hereof, including, but not limited to, any agreement to accept surrender of
the premises or to amend or modify this Lease, shall be deemed to be binding on
Landlord, unless such act or thing shall be by a partner or officer of
Landlord, as the case may be, or a party designated in writing by Landlord as
so authorized to act. The delivery of keys to Landlord, or Landlord's agents,
employees, or officers shall not operate as a termination of this Lease or a
surrender of the Premises. No payment by Tenant or receipt by Landlord of a
lesser amount than the monthly rent and all other amounts owing, as herein
stipulated, shall be deemed to be other than on account of the earliest
stipulated rent or other amounts nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy available to Landlord.
K. Landlord shall have the right at any time to change the name of the
Building, to increase the size of the Building Complex by adding additional
real property thereto, to construct other buildings or improvements on any
portion of the Building Complex or to change the location and/or character of or
to make alterations of or additions to the Building Complex. In the event any
such additional buildings are constructed or Landlord increases the size of the
Building Complex, Landlord and Tenant shall execute an Amendment to Lease which
incorporates such modifications, additions, and adjustments to Tenant's Pro Rata
Share, if necessary. Tenant shall not use the Building's name for any purpose
other than as a part of its' business address. Any use of such name in the
designation of Tenant's business shall constitute a default under this Lease.
L. Tenant covenants and agrees that no diminution of light, air, or
view of or from the Building or any other building (whether or not constructed
or owned by Landlord) shall entitle Tenant to any reduction of rent or other
charges under this Lease, result in any liability of Landlord to Tenant, or in
any way affect this Lease or Tenant's obligations hereunder.
M. Notwithstanding anything to the contrary contained herein,
Landlord's liability under this Lease shall be limited to Landlord's interest in
the Building Complex.
N. Tenant acknowledges and agrees that it has not relied upon any
statements, representations, agreements; or warranties by Landlord, its agents
or employees, except such as are expressed herein and that no amendment or
modification of this Lease shall be valid or binding unless expressed in writing
23
<PAGE> 27
and executed by the parties hereto in the same manner as the execution of this
Lease.
O. Tenant agrees to make such modification and amendments of this Lease
as may hereafter be required to conform to any lender's requirements, so long as
such modifications or amendments will not increase Tenant's obligations
hereunder or materially alter its rights as set forth herein.
P. Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or an option for lease, and it is not
effective as a lease or otherwise until execution and delivery by both Landlord
and Tenant.
21. AUTHORITIES FOR ACTION AND NOTICE.
A. Except as herein otherwise provided, Landlord may act in any manner
provided for herein by and through Landlord's Building Manager or any other
person who shall from time to time be designated in writing.
B. All notices, demands, statements or communications required or
permitted to be given to Landlord hereunder shall be in writing and shall be
deemed duly served when delivered personally to any officer of Landlord (or a
partner of Landlord if Landlord is a partnership or to Landlord individually if
Landlord is a sole proprietor) or manager of Landlord whose principal office is
in the Building, or when deposited in the United States mail, postage prepaid,
certified or registered, return receipt requested, addressed to Landlord at
Landlord's principal office in the Building or at the most recent address of
which Landlord has notified Tenant in writing. All notices, demands, statements
or communications required to be given to Tenant hereunder shall be in writing
and shall be deemed duly served when delivered personally to any officer of
Tenant (or a partner of Tenant if Tenant is a partnership or to Tenant
individually if Tenant is a sole proprietor) or manager of Tenant whose office
is in the Building, when deposited in the United States mail, postage prepaid,
certified or registered, return receipt requested, addressed to Tenant at the
Premises, or, prior to Tenant's taking possession of the Premises, to the
address known to Landlord as Tenant's principal office address. Either party
shall have the right to designate in writing, served as above provided, a
different address to which notice is to be mailed. The foregoing shall in no
event prohibit notice from being given as provided in Rule 4 of Colorado Rules
of Civil Procedure, as the same may be amended from time to time.
28. RULES AND REGULATIONS. It is further agreed that the rules and regulations
set forth on Exhibit D attached hereto shall be and are hereby made a part of
this Lease and Tenant agrees that Tenant's employees and agents or any others
permitted by Tenant to occupy or enter the Premises will at all times abide by
said rules and regulations. A breach of any of such rules or regulations shall
be deemed an Event of Default under this Lease and Landlord shall have all
remedies as set forth in Paragraph 19 hereof.
29. PARKING. Landlord agrees to make available to Tenant one (1) in and out
non-assigned parking space per one thousand (1,000) rentable square feet of the
Premises in the parking facilities (parking lot or parking structure) located on
block 159 or 1801 California block, made available by Landlord for use by
tenants in the Building, in Denver, Colorado, at the current rate charged for
such spaces from time to time (which rate is currently $130.00 per month per
non-assigned space, $160.00 to $185.00 per month per reserved space and $120.00
per month per space for the adjacent surface lot), and Tenant shall pay the
going monthly building rate for all such spaces it elects to lease. Tenant shall
notify Landlord in writing prior to the commencement date of the Primary Lease
Term of Tenant's acceptance of all or any portion of the spaces so offered, and
Landlord agrees to make the same available to Tenant within thirty (30) days
following the commencement date of the Primary Lease Term. The number of parking
spaces which Tenant elects to lease pursuant to the terms of this Paragraph
shall be evidenced on the Commencement Certificate attached hereto as Exhibit C
to be signed by Landlord and Tenant. In the event Tenant does not elect prior to
the Primary Lease Term to lease all parking spaces to which Tenant is entitled,
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. Tenant shall receive one bill monthly for all spaces
24
<PAGE> 28
leased by it hereunder and Tenant shall pay for all spaces in one lump payment
directly to Landlord. The right granted to Tenant herein to use said parking
spaces shall be deemed a license only and Landlord's in ability to make such
spaces available at any time during the term of the Lease for reasons beyond
Landlord's reasonable control shall not be deemed a material breach by Landlord
of any of its obligations under the Lease. The abatement of Tenant's obligation
to pay for such spaces during any period the same are unavailable shall
constitute Tenant's sole remedy in the event of such unavailability. If at any
time during the term hereof Tenant fails to timely make payment of parking
rental due hereunder, Tenant shall forfeit its rights to all parking spaces
granted hereunder. Tenant may license additional parking spaces on a
month-to-month, as-available basis ("Month-to-Month Spaces"). Tenant
acknowledges that Landlord has the right to terminate Tenant's use of all or
any of such Month-to-Month Spaces upon 10 days' notice to Tenant.
30. SUBSTITUTE PREMISES. [INTENTIONALLY DELETED]
31. BROKERAGE. Tenant hereby represents and warrants that Tenant has not
employed any broker in regard to this Lease and that Tenant has no knowledge of
any broker being instrumental in bringing about this Lease transaction except
Cushman & Wakefield of Colorado, Inc., a Colorado corporation ("Cushman"), which
has acted as Landlord's leasing agent and CB Richard Ellis Inc. Tenant shall
indemnify Landlord against any expense incurred by Landlord as a result of any
claim for brokerage or other commissions made by any other broker, finder, or
agent, whether or not meritorious, employed by Tenant or claiming by, through,
or under Tenant. Tenant acknowledges that Landlord shall not be liable for any
representations by Cushman or CB Ricard Ellis Inc. regarding the Premises,
Building, or this lease transaction.
32. ERISA. Tenant represents as follows:
A. Neither Tenant nor any of its affiliates (within the meaning of Part
V(c) of Prohibited Transaction Exemption 84-14, 49 Fed.Reg. 9494 (1984), as
amended ("PTE 84-14")) has, or during the immediately preceding year has,
exercised authority to:
(1) appoint or terminate the Prudential Insurance Company of
America or Prudential Real Estate Investors ("Prudential") as investment
manager over assets of any employee benefit plan invested in Landlord; or
(2) negotiate the terms of a management agreement with Prudential
on behalf of any such plan;
B. Tenant is not a "related party" of Prudential (as defined in Part
V(h) of PTE 84-14);
C. Tenant has negotiated and determined the terms of this Lease at
arm's length, as such terms would be negotiated and determined by Tenant
with unrelated parties; and
D. Tenant is not an "employee benefit plan" as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), a
"plan" as defined in Section 4965 (e)(1) of the Internal Revenue Code of 1986,
as amended (the "Code") or any entity deemed to hold "plan assets" within the
meaning of 29 C.P.R. Section 2510.3-101 of any such employee benefit plan or
plan.
25
<PAGE> 29
33, TIME OF ESSENCE. Time is of the essence herein.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed on the dates below their respective signatures. This Lease shall be
deemed effective upon delivery of a fully executed copy hereof to Tenant by
Landlord. Landlord and Tenant, by execution hereof, agree that the day and year
first above written shall be used for reference purposes only and shall not be
deemed the effective date hereof.
EXACTIS.COM, INC., a Delaware THE PRUDENTIAL INSURANCE COMPANY OF
corporation AMERICA, a New Jersey corporation
By Cushman & Wakefield of Colorado,
By: /s/ E. Thomas Detmer Jr. Inc., a Colorado corporation,
---------------------------- Authorized Agent
Title: President & CEO
------------------------
Date: 1/19/00
------------------------
"Tenant"
By: /s/ Illegible
--------------------------------
Director
Date: 1/19/00
-------------------------------
"Landlord"
26
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 52,349,712
<SECURITIES> 0
<RECEIVABLES> 3,170,685
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 57,974,109
<PP&E> 10,347,453
<DEPRECIATION> 3,736,961
<TOTAL-ASSETS> 64,842,504
<CURRENT-LIABILITIES> 8,439,153
<BONDS> 127,831
0
0
<COMMON> 126,689
<OTHER-SE> 52,948,831
<TOTAL-LIABILITY-AND-EQUITY> 64,842,504
<SALES> 10,986,384
<TOTAL-REVENUES> 10,986,384
<CGS> 1,782,248
<TOTAL-COSTS> 1,782,248
<OTHER-EXPENSES> 24,072,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (224,856)
<INCOME-PRETAX> (14,643,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,643,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,643,626)
<EPS-BASIC> (6.26)
<EPS-DILUTED> (6.26)
</TABLE>
