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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
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-26371
EasyLink Services Corporation
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3787073
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
399 Thornall Street, Edison, NJ 08837
(Address of Principal Executive Office) (Zip Code)
(732) 906-2000
(Registrant's Telephone Number Including Area Code)
Mail.com, Inc.
11 Broadway, New York, NY 10004
(Former name, former address and former fiscal year,
if changed from last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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 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 | |
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 2000: Class A common stock was $58,254,128
Indicate the number of shares of each of the registrants' classes of common
stock as of February 28, 2000: Class A Common Stock, $0.01 par value, 70,851,123
shares: Class B Common Stock $0.01 par value 10,000,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are
incorporated by reference into Part III
Form 10-K Index
Item No. Page
Part I
1. Business ........................................................................................ 3
2. Properties....................................................................................... 39
3. Legal Proceedings................................................................................ 40
4. Submission of Matters to a Vote of Security Holders.............................................. *
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 41
6. Consolidated Selected Financial Data............................................................. 43
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 44
7a. Quantitative and Qualitative Disclosures About Market Risk....................................... 61
8. Consolidated Financial Statements and Supplementary Data......................................... 62
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. *
Part III
The information required by Items 10 through 13 in this part is omitted Pursuant
to Instruction G of Form 10-K since the Corporation intends to File with the
Commission a definitive Proxy Statement, pursuant to Regulation 14A, not later
than 120 days after December 31, 2000.
Signatures ........................................................................................ 107
Part IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................................................................. 108
(a) (1) Consolidated Financial Statements-See Item 8.
(2) Financial Statement Schedules
All schedules normally required by Form 10-K are
omitted since they are either not applicable or the
required information is shown in the consolidated
financial statements or the notes thereto.
(3) Exhibits
(b) Reports on Form 8-K-The Corporation filed two reports
on Form 8-K during the quarter ended December 31, 2000
The report dated October 27, 2000 reported that the
Company retained SG Cowen to sell its advertising
network business and that it will focus exclusively
on its outsourced messaging business; that the
Company had appointed Thomas Murawski as Chief
Executive Officer and Brad Schrader as President of
EasyLink Services Corporation; and that, as a result
of its decision to focus on its outsourced messaging
business and its drive to profitability, it is
streamlining the organization, taking advantage of
lower cost areas and further integrating its
technology and operational infrastructures, which
will result in restructuring and rationalization
charges of $8-10 million.
The report dated November 3, 2000 reported that the
Company would seek to sell all of its non-core
assets, including its Asia.com, Inc. and India.com,
Inc. subsidiaries and its portfolio of domain names.
* Not applicable.
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This report on Form 10-K has not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this report.
We make forward-looking statements within the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 throughout this report. These
statements relate to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "believes," "estimates," "plans" and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to such differences include, but
are not limited to, those discussed in the "Risk Factors" section of this
report. Mail.com undertakes no obligation to update publicly any forward-looking
statements for any reason even if new information becomes available or other
events occur in the future.
Unless otherwise indicated or the context otherwise requires, all references to
"we", "us", "our" and similar terms refer to EasyLink Services Corporation and
its direct and indirect subsidiaries.
Part I
Item 1 Business
Company Overview
EasyLink Services Corporation, formerly Mail.com, Inc., is a leading global
provider of outsourced messaging services to enterprises and service providers.
EasyLink Services combines the businesses of Mail.com Business Messaging
Services, Swift Telecommunications, Inc. and the Easylink Services business
acquired from AT&T Corp. by Swift Telecommunications. As a result of this
combination, Easylink Services Corporation offers a comprehensive portfolio of
messaging services to thousands of business customers worldwide including the
majority of the Fortune 500. By leveraging these relationships, Easylink
Services is positioned to grow in both of the major sectors of the messaging
services industry. Through continued expansion of its messaging services lines
of business and cross-selling and up-selling multiple services to its large
customer base, EasyLink Services seeks to establish a position in the emerging
managed and hosted e-mail markets while expanding its already established
position in the message delivery services market. Because the essential
communications infrastructure companies need to do business in today's 24x7x365
environment is common across all messaging services, Easylink Services is
further positioned to benefit from the scale this business combination created.
Our services include:
o e-mail and groupware services through which we host and operate on our
premises our customer's e-mail and groupware systems such as Microsoft
Exchange, Novell GroupWise and other Internet e-mail services which allow
users to send and receive their e-mail from any location connected to the
Internet;
o virus protection, unsolicited e-mail or spam control and content filtering
services that protect a customer's e-mail system from messages before they
enter or leave the corporate network; and
o message delivery services such as electronic data interchange or "EDI,"
telex, desktop fax, broadcast messaging and production messaging services;
o professional services such as managed messaging services support, on-site
messaging applications management, help desk and staff augmentation
services.
We provide services on a managed basis that enable our customers to provide
e-mail and groupware, virus protection, spam control and content filtering and
message delivery services to their customers or employees. We derive revenue
from license fees, monthly per-user fees, per-message charges, per-minute
charges and consulting fees.
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Industry Background
The Trend Toward Outsourcing
According to IDC, firms worldwide are now spending approximately 30% of
their overall IT services budgets on outsourcing. These services include:
o application outsourcing,
o network and desktop outsourcing,
o information services consulting and outsourcing and
o network consulting and integration.
Reasons for the growth of outsourcing include:
o the desire of companies to focus on their core businesses,
o the demand for 99.9% reliability including 24x7x365 monitoring,
o increased capital expenditures as companies attempt to capitalize on
leading-edge technologies,
o the challenges faced by companies in hiring, motivating and retaining
qualified application engineers and IT employees,
o the increased costs that businesses experience in developing and
maintaining their networks and software applications,
o the fast pace of technological change that shortens time to
obsolescence and
o the desire of companies to reduce deployment time and risk.
Outsourced Messaging Service Providers
The messaging industry is highly fragmented with large numbers of
businesses, ISPs and schools maintaining their own systems. We believe that as
the complexity and usage of messaging increases there will be an increasing
desire on the part of businesses and service providers to outsource their
messaging to third parties.
The total value of the e-mail outsourcing market reached $2.17 billion
by year-end 2000, and is expected to grow to $8.15 billion by 2004, according to
the Radicati Group. Included in these numbers are managed messaging services and
hosted messaging services. In providing managed messaging services, a service
provider such as EasyLink Services, fully manages and supports either on or off
customer premises specific e-mail platforms such as Microsoft Exchange, Lotus
Notes/Domino and Novell GroupWise. In providing hosted messaging services, the
service provider manages e-mailboxes off customer premises.
IDC expects the market for outsourced services that provide virus
protection, unsolicited e-mail or spam control and content filtering to grow
from $8 million in 2000 to $285 million in 2004. Furthermore, the market for
message delivery services, which includes desktop faxing, production fax and
e-mail, broadcast services, EDI and telex, is expected to grow from $3.8 billion
in 2000 to $5.9 billion in 2003, according to IDC.
We believe our comprehensive suite of services, economies of scale,
flexible technology platform and messaging focus enable us to offer these market
segments an attractive outsourcing alternative, both domestically and
internationally. Some of the advantages we have are:
o thousands of business customers worldwide, including a majority
of the Fortune 500, to which we can offer our comprehensive
suite of messaging services;
o the ability to spread the costs of specialized e-mail services
over large numbers of users;
o the ability to service many customer locations from one or more
large centralized data centers;
o sufficient global traffic to warrant 24 hour customer support and
system maintenance staff;
o volume purchasing of hardware, software, telecommunications and
other services;
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Business Strategy
Our mission is to be the leading outsourced provider of e-mail and
groupware services, services to protect corporate e-mail systems against
viruses, spam and offensive content, and message delivery and related services
for the enterprise, offering greater security, quality and reliability at less
total-cost than customers can provide for themselves.
Today, Easylink Services Corporation offers a comprehensive portfolio
of messaging and document delivery services to thousands of business customers
worldwide including the majority of the Fortune 500. By leveraging these
relationships with the worlds leading customers, Easylink Services is positioned
to grow in the rapidly emerging managed and hosted e-mail messaging market while
expanding the number of message delivery services through cross-selling and
upselling multiple services to its customer base. As a global provider of
outsourced messaging services, we intend to leverage our existing global
customer base and global network by providing the best message delivery services
today and satisfying their need for managed e-mail and other messaging services
in the future.
Our strategies include:
o Upsell/Cross-sell existing customer base. In February 2001, we
acquired Swift Telecommunications, Inc. which had previously
acquired the EasyLink Services business from AT&T Corp. From
this acquisition, we gained thousands of corporate customers. We
plan to sell additional services to these businesses.
Additionally, we plan to sell the services we now offer as a
result of the Swift Telecommunications acquisition to our
pre-existing customers.
o Increase our messaging revenues in the enterprise market by
expanding our customer base and acquiring businesses and
technologies. We offer a broad range of outsourced messaging
services to businesses and service providers. E-mail and
groupware services offered include managed Microsoft Exchange,
Novell GroupWise and Internet e-mail services. Our services that
protect corporate e-mail systems include virus protection, spam
control and content filtering. Our message delivery services
include EDI (electronic data interchange), telex, desktop fax and
broadcast and production messaging services. Our professional
services include managed services support, on-site messaging
applications management, help desk and staff augmentation
services. We intend to expand our enterprise and service provider
customer base. We will also seek to acquire businesses and
technologies to permit us to offer complementary messaging
services to an established customer base.
o Expand internationally and enter additional market segments.
EasyLink Services currently has relationships with over 90 major
global telecommunications carriers and over 150 solutions and
distribution partners in 50 countries. We plan to expand our
international presence by adding additional international
distributors and by expanding our portfolio of services abroad.
We also intend to explore business opportunities and partnerships
in other market segments. We will also continue to seek to
acquire strategic businesses and technology that will help us
serve these markets.
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Our Business Services
We offer a range of e-mail and groupware services; virus protection,
spam and content filtering services; message delivery services; and professional
services to businesses and service providers. The following chart describes our
current offering of services:
Service Description
EASYLINK E-MAIL AND GROUPWARE SERVICES:
EasyLink Managed Groupware Services:
EasyLink Managed Microsoft Exchange Services EasyLink maintains the necessary software, hardware and
communications connections to provide managed services for
Microsoft Exchange Server in a shared environment. A
dedicated platform is also an option where determined to be
necessary to meet the needs of the customer.
EasyLink Managed Novell GroupWise Services EasyLink maintains the necessary software, hardware and
communications connections to provide managed services for
Novell GroupWise version 5.5 in a dedicated environment.
EasyLink Managed Internet E-mail Services: The EasyLink Managed Internet E-mail Services are fully outsourced
e-mail services for enterprises and service providers. EasyLink's
managed e-mail service offers the following capabilities: managed
mailbox; multiple methods of access including POP3, IMAP4 and
Webmail which permits users to access their e-mail anywhere an
Internet connection is available; the ability to automatically
filter and process incoming e-mail messages; wireless access, SSL
security; LDAP compatibility which facilitates integration with
other customer applications; attachments; branding capabilities;
24x7 customer service; and integration with other EasyLink products.
We host and maintain on our network the customer's e-mail system.
The customer may administer its users access to these e-mail
services over the Internet without the need for computers, software
or e-mail dedicated technical personnel on the customers premises.
EASYLINK BOUNDARY SERVICES:
EasyLink MailWatch Services EasyLink's MailWatch Services are fully outsourced services that
protect corporate e-mail systems against viruses, spam, offensive
content and inappropriate attachments. EasyLink MailWatch is an
Internet-based solution that allows organizations to establish and
enforce policies controlling the use of the corporate e-mail system.
Messages are scanned while on the Internet, preventing suspect
e-mails from ever reaching or leaving the customer's network.
EASYLINK MESSAGE DELIVERY SERVICES:
EasyLink EDI Services:
EasyLink EDI-VAN Service EDI or Electronic Data Interchange is the electronic exchange of
business documents (such as purchase orders and invoices among
others) using a standardized format without human intervention. The
EasyLink EDI-VAN (value-added network) Service offers businesses all
the key elements needed for traditional EDI
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implementation including network, design, systems, software and
implementation support.
EasyLink IP-EDI Service The EasyLink IP- (Internet Protocol) EDI Service provides Internet
access to the traditional EasyLink EDI-VAN Service, enabling small
to medium sized enterprises to trade with their major partners in a
cost-effective and non-technical manner.
EasyLink Desktop Fax Services:
EasyLink E-mail to Fax Service The EasyLink E-mail to Fax Service is an e-mail-based Internet fax
service that enables users to send faxes right from their PCs by
addressing an e-mail to the recipient's fax number. This service does
not require the user to install any hardware or software. Documents or
files that can be attached to the e-mail and rendered as a fax include:
MS Office, MS Project, Lotus SmartSuite, Corel, Visio, HTML, RTF, TIFF,
PDF, PostScript and more.
EasyLink Fax to E-mail Service The EasyLink Fax to E-mail service is an Internet-based service that
allows users to receive their faxes as e-mail attachments to their
e-mail address. An account can receive multiple faxes simultaneously
- it's never busy and faxes arrive in universal TIFF or PDF format.
Once received, the user may forward the fax to one or more other
e-mail addresses simply by forwarding the received e-mail that
contains the attachment. The user may also store the e-mail and
attachment in an e-mail folder and print out received faxes.
EasyLink PC to Fax Service The EasyLink PC to Fax Service is desktop Internet fax software that
enables users to fax a document, whether text or graphics, directly
from any Windows application to any fax destination. The FaxMerge
feature enables users to distribute a highly customized broadcast
fax document so that it appears as a communication created
exclusively for each individual recipient.
EasyLink Web to Fax Service The EasyLink Web to Fax Service is an Internet-based fax service
that enables users to send faxes using their Web browser. Via
EasyLink's secure Web site, users can send both point to point and
broadcast faxes and check delivery status.
EasyLink IP Fax to Fax Service The EasyLink IP Fax to Fax Service allows the user to send faxes
from their fax machine, fax server or fax modem, using EasyLink
Services' patented connector, over the EasyLink Internet Fax
Network. Users benefit from low Internet-based rates to anywhere in
the world.
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EasyLink Broadcast Messaging Services: EasyLink Broadcast Messaging Services allow our customers to deliver
high volumes of newsletters, press releases, price notifications and
subscription content to thousands of recipients simultaneously through
various message delivery modes.
EasyLink Production Messaging Services: EasyLink Production Messaging Services allow our customers to
deliver high volumes of mission-critical documents such as invoices,
purchase orders, shipping notices, or bank wire transfers from
virtually any enterprise environment to global business partners
through various message delivery modes.
EasyLink Telex Services: EasyLink Telex Services are used by companies that require reliable,
hard copy messaging that supports and verifies the transaction.
EasyLink Telex Services are used extensively in the financial,
shipping and transportation industries. In addition, EasyLink Telex
Services are an important means of communication with underdeveloped
countries that are not yet capable of receiving information via
alternate electronic means. Telex messages can be originated from
personal computers and computer mainframe applications using a
variety of systems and transmission protocols, and delivered to
traditional telex networks.
EASYLINK PROFESSIONAL SERVICES: EasyLink provides a full range of messaging expertise to assist in
expanding, changing or managing a customer's messaging system. Our
professional services include managed services support, on-site
messaging applications management, help desk and staff augmentation
services. Coupled with EasyLink's complete suite of outsourced
messaging solutions, customers leverage the experience and knowledge
of an organization that operates one of the worlds' large managed
messaging networks.
In connection with our acquisition of Swift Telecommunications, we also
agreed to acquire Telecom International, Inc. Telecom International is an
affiliate of George Abi Zeid, the former sole shareholder of Swift
Telecommunications, and conducts business under the name "AlphaTel". Alpha-Tel
is a provider of voice-over-IP or Internet telephony services. This additional
transaction is subject to execution of definitive documentation, receipt of
regulatory approvals and other customary conditions. See Note 22(c) to our
consolidated financial statements for additional information.
Revenues
We derive revenues from monthly per-user or per-message fees for
managed mailbox and virus protection, spam control and content filtering
services; monthly per-message and usage-based charges for our message delivery
services; and
8
license and consulting fees for our professional services. With the completion
of our acquisition of Swift Telecommunications, we began generating revenues
from EDI and telex services in February 2001.
For our e-mail and groupware services, customers are billed monthly for
the number of mailboxes set up which includes universal access, administration
tools and customer support for the customer's e-mail administrator. Customers
are charged based upon the number of mailboxes regardless of mailbox usage. In
addition, customers may purchase additional increments of storage capacity on
our network. These customers are billed on a monthly basis per increment of
additional storage capacity. Customers may also choose to purchase telephone,
on-site and e-mail support for their individual users. This service is billed on
a monthly basis per e-mailbox.
For our virus protection, spam and content filtering services,
customers are charged either a monthly fee per user or per message charges.
Our message delivery services revenue is generated in a number of
different ways. Customers who purchase our desktop fax services are charged
initial site license fees based on the number of user seats being deployed plus
per page usage charges for all faxes successfully delivered by our network. Our
production messaging services are charged consulting fees based upon the level
of integration work and set up requirements plus per page usage charges for all
faxes successfully delivered by our network. Our broadcast messaging services
are charged on a per minute of usage or per page basis for all faxes
successfully delivered by our network. Our fax to e-mail services are charged on
a monthly basis per fax number and page. EDI customers are charged per message
and telex customers are charged per minute.
For our professional services, customers are charged service fees
depending on the services provided.
Marketing
Our primary marketing objectives are to:
o promote higher usage of all services in all segments;
o cross-sell and upsell our existing customer base.
o grow our customer and distribution base; and
o build our brand.
Domestic Sales and Marketing. We offer our business services in the
United States through multiple sales channels which include a direct field sales
force, and alternate channels which include value added resellers, service
aggregators, business technology solutions providers and various types of
telecommunications providers. Our own sales organization targets mid and large
size companies - typically those having greater than 2000 employees, and in some
cases smaller organizations that have a disproportionately large need for one or
more of our services. Smaller businesses are primarily reached through alternate
channels. We employ various marketing techniques to generate activity for our
sales channels, including advertising, telemarketing and exhibiting at trade
shows.
International Alliances. We have strategic sales and marketing
alliances with local Internet service providers, telecommunications companies
and resellers. These organizations will use their knowledge of the local market,
language, customs and regulations, as well as their existing distribution,
customer support and billing infrastructures, to establish, grow and properly
service an international EasyLink customer base. In return, we offer these
organizations either exclusive or non-exclusive rights to market our services in
their territories and offer to provide services on a wholesale price basis.
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In addition to strategic alliances, we have developed a network of
commission-based agents to sell our suite of services in foreign markets. We
have also implemented a reseller program for those agents who have the
infrastructure to generate invoices and perform collections. Under this program,
participating agents are provided detailed billing information on their accounts
from which they can create and distribute invoices in the local language and
currency and locally service customer billing inquiries.
Customer Support
Customer support is available by e-mail or telephone 24x7x365 and is
staffed by experienced technical support engineers and customer service
representatives. EasyLink Services provides a number of different types of
support, including e-mail support, phone support and technical support.
E-mail support: Customers can contact the customer service organization
via e-mail. Inbound e-mails are managed using e-mail management software,
allowing customer service to view the history of each customer, prioritize
issues based on customer status, classify topic issues and route issues to
appropriate customer service representatives.
Phone support: Inbound phone calls are managed using an Automated Call
Distribution (ACD) system which directs call-prioritization and skill-based
routing. Additionally, proprietary and commercial applications are used to
capture customer phone contact information and maintain customer contact history
files.
Technical support: The customer support teams include technical support
engineers. Any technical questions that cannot be resolved by technical support
engineers are escalated to the Operation Control Center (OCC) for ticketing,
tracking and notification. Technical support engineers provide internal subject
matter expertise to customer service representatives, analyze root causes for
customer contacts, recommend improvements to products, tools, knowledge bases
and training. The engineers also develop support preparation plans to enable
customer service to efficiently support new products and services.
Technology
EasyLink E-mail and Groupware Services Network
EasyLink e-mail and groupware services are centrally managed and
provided using generally available hardware and software components which are
hosted in secure data centers.
Hardware Network. Our hardware network is designed to provide high
availability, scalability and performance. The six primary elements of our
hardware infrastructure are:
o Mail transfer machines: Redundant banks of computers receive,
transfer and send e-mail.
o Database machines: E-mailbox account data is stored in disk
storage arrays. The data is managed using database software.
o E-mail storage: E-mail messages are stored separately from
account data in disk storage arrays.
o Bill presentment servers: Redundant computers run the secure
on-line billing system.
o Data network: Our computer network uses high speed routers and
switches and is connected to the Internet through high capacity
links from BBN Planet, MCI WorldCom, AT&T, Sprint and UUNET.
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For our core infrastructure, we use industrial grade hardware from
leading manufacturers. Generally, our hardware infrastructure is built using
redundant components. Our customer account data is saved to tape and stored off
site on a daily basis. Customer e-mails are stored on redundant hard drives
within our e-mail storage machines in case a hard drive should fail.
Software. We have developed certain software internally as well as
licensed software from third parties. Wherever applicable and available, we use
systems and applications software from software suppliers such as Oracle,
Novell and Microsoft.
EasyLink MailWatch (Virus Protection, Spam Conrol and Content Filtering
Services) Network
Hardware Network. The MailWatch architecture is designed for optimal
volume and maximum fail over capability. All MailWatch servers are Compaq
ProLiant servers, each equipped with multiple Pentium III processors, RAID 5
storage arrays, Microsoft Windows NT 4.0 and Microsoft SQL Server 7.
Software. MailWatch incorporates third party virus and content
filtering technology which we have configured for use in a shared services
environment across our customer base. The MailWatch Web-based administrative
interface is hosted on servers that utilize Microsoft Windows NT 4.0 and
Internet Information Server. The site's pages consist of HTML, Active Server
Pages (ASP) and JavaScript.
EasyLink Message Delivery Services Network
The EasyLink Services messaging network, recently purchased from AT&T,
currently resides on AT&T's managed network and is being operated and maintained
for EasyLink Services by AT&T pursuant to a Transition Services Agreement
between EasyLink Services and AT&T. EasyLink Services plans to migrate off the
AT&T network to EasyLink Services network within the next two years.
The EasyLink message delivery services network is a distributed,
managed Internet Protocol (IP) -based global network that supports all of our
message delivery services (broadcast messaging, production messaging, EDI and
telex). The EasyLink Services distributed message network is built upon a
combination of highly reliable message switching computer systems dispersed
around the world. The message systems operate at 99.95% availability. This high
availability ensures continuous reliability for EasyLink Services customer's
business critical applications. The message switching systems are currently
operating, on average, at 50% computer capacity. This enables EasyLink Services
to meet its message delivery volume growth objectives without the need for
additional capacity investment.
The message switching systems are located at various EasyLink Services
operational centers in the United States as well as in the United Kingdom. The
operational centers are located in major metropolitan centers with easy access
to major network providers such as AT&T. This enables EasyLink Services to
easily address facility growth. It also allows efficient access to EasyLink
Services' major customers and potential markets. All of the EasyLink Services
operational centers are secured with continuous power supply. As part of the
purchase of the EasyLink messaging services, some of the message switches are
located at AT&T sites. EasyLink Services will relocate the message switches to
EasyLink Services sites within the next year.
The EasyLink Services messaging nodes are connected by a managed
IP-based backbone. The IP backbone is constantly monitored by EasyLink Services
operational centers. This allows for diverse routing and efficient management of
volumes so that customers do not experience delays in the routing of messages.
If a remote node does experience a problem, messages can be re-routed to prevent
delays in message delivery. EasyLink Services maintains robust firewalls to
prevent any unsolicited intrusions from the Internet. Any unauthorized attempt
is tracked and investigated. The constant monitoring of the network ensures
integrity of all messages within the EasyLink Services network.
EasyLink Services offers its customers a wide range of secure access
methods into the EasyLink Services network. Access methods can include X.25,
dedicated point-to-point circuits, frame relay, and virtual private networks
(VPN). EasyLink Services' operational centers work in conjunction with its
customers to ensure the constant availability of access into the network. Any
circuit problems are proactively reported by the EasyLink Services' operational
centers. EasyLink Services can also offer its customers managed and secure
access on a global basis utilizing AT&T Global.
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Network Operations
EasyLink's Network Operations Center or NOC is where network system
specialists monitor the status of servers and messaging operations. An on-site
team of engineers staffs the NOC 24x7x365 and uses a combination of industry
leading third party applications and internally developed tools to automate the
monitoring and management of the entire system.
The NOC is responsible for the management of infrastructure performance,
security and system uptime. RemedySM is used to track all administrative events
and subsequently manage performance reports, recovery times and event
correlation analysis.
Security - Because organizations are transferring mission-critical
messages through the network, EasyLink Services has put in place stringent tools
and procedures to address security issues.
Employees - Security is paramount among our employees. All NOC personnel
backgrounds are scrutinized and a high proportion of our staff have prior
experience in secure environments. Personnel go through continual training to
stay on top of the latest security related issues and technologies.
Technologies - Proxy Based Firewall - This level of intervention means
that the content of the data is scrutinized, allowing data to pass if it matches
the more sophisticated rule base. SSL (Secure Sockets Layer) - Provides data
encryption, server authentication, message integrity, and client authentication.
Access Control - Authorized personnel must access to and from secured
areas through a specially designed single entry monitored door. Specific
security protocols such as monitors, security badges and passcodes are in place
and enhanced with advancement in security technology.
Environmental - Fire protection - Robust fire sensory components are
placed strategically throughout the Network Operations Center. Halon 1211 and
Halon 1301 are on standby due to the fact that they have been proven extremely
effective in fire suppressant and leave no residue. Back-up generators - The
entire NOC system is fully protected with back up generators in case of utility
power failure. These generators provide the power for the entire infrastructure,
including security, climate control, and fire control. Climate control -
EasyLink Services has put in place state-of-the-art cooling, heating and
humidity controls to keep the entire infrastructure operating at optimum
conditions.
Transition Services Agreement and Master Carrier Agreement with AT&T Corp.
Transition Services Agreement
On February 23, 2001, we completed the acquisition of Swift
Telecommunications, Inc. and the EasyLink Services business that Swift had just
acquired from AT&T Corp. The EasyLink Services business acquired from AT&T
provides a variety of messaging services such as e-mail, EDI, fax and telex
services. This business was a division of AT&T and was not a separate
independent operating entity. We hired only a portion of the employees of the
business. The messaging network for this business resides on AT&T's managed
network and is being operated and maintained for EasyLink Services by AT&T
pursuant to a Transition Services Agreement. In addition, AT&T will continue to
provide a variety of business and administrative functions for the business
under this agreement. EasyLink Services plans to migrate off the AT&T network to
the EasyLink Services network and to assume responsibility for these other
functions over the next two years.
Under the Transition Services Agreement, we are purchasing a variety of
services from AT&T to enable us to continue to operate the business pending the
transition to EasyLink Services. These include:
o Personnel services under which AT&T personnel perform various
services for us, including:
o Product management
o Network care/network operations, including 7x24 maintenance of
the computer network
o Research and development relating to maintenance, development and
support of the software systems used in the business
o Billing and collection
o Telex engineering and network support
o Customer care and support services
o Sales support
o Access to sales management software tools
o Finance Support
o Management support relating to transition of business to us
o Decision support services, including standard reports and
information services to assist product managers in tracking
service operations
o Network telecommunication facility expenses, which are those
expenses required for customer messaging services/products access
and egress to the EasyLink Service platforms
o Other non-personnel based services, including:
o Space, facilities, network connectivity and administrative
services at AT&T work locations
o Network hosting services under which AT&T will continue to host
equipment used in the business where currently located at AT&T
data centers
Master Carrier Agreement
In connection with the acquisition of the EasyLink Services business
from AT&T Corp., we entered into a Master Carrier Agreement with AT&T. Under
this agreement, AT&T will provide us with a variety of telecommunications
services that are required in connection with the provision of our services. The
term of the agreement for network connection services is 36 months commencing
after an initial ramp-up period of 6 months and the term of the agreement for
private line and satellite services is 36 months commencing with the first full
month in which any of these services are provided. Under the agreement, we have
a minimum revenue commitment for network connection services equal to $3 million
for each of the three years of the contract. In addition, we have a minimum
revenue commitment for private line and satellite services equal to $280,000 per
month during the three-year term. If we terminate the network connection
services or the private line and satellite services prior to the term or AT&T
terminates the services for our breach, we must pay to AT&T a termination charge
equal to 50% of the unsatisfied minimum revenue commitment for these services
for the period in which termination occurs plus 50% of the minimum revenue
commitment for each remaining commitment period in the term.
Competition
Depending on the messaging application area, we compete with a range of
companies in the messaging market, including both premises-based and
service-based solutions providers. We believe that our ability to compete
successfully will depend upon a number of factors, including market presence;
the capacity, reliability and security of our network infrastructure; the
pricing policies of our competitors and suppliers; the timing of introductions
of new services and service enhancements by us and our competitors; and industry
and general economic trends.
For e-mail applications, our primary competition comes from
corporations purchasing, deploying and managing for themselves premises-based
systems such as Microsoft Exchange, Lotus Notes, Novell GroupWise or any other
e-mail software system, rather than choosing to purchase these services on an
outsourced basis from us. We also have competitors who provide outsourced e-mail
services, including Critical Path, Commtouch Software, USA.net, US
Internetworking and Interliant.
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Competition in the message delivery sector varies. Our current and
prospective competitors in the facsimile transmission services market include
telecommunications companies, such as AT&T, MCI WorldCom, Sprint, the regional
Bell operating companies and telecommunications resellers, and direct fax
delivery competitors, including PTEK Holdings Inc.'s Xpedite product and IDT
Corporation. Competitors in the EDI market include Peregrine Systems, Inc.,
Internet Commerce Corp., GE Global eXchange Service, a subsidiary of GE
Information Services, Inc., IBM Global Solutions and Sterling Commerce, Inc., a
subsidiary of SBC Communications Inc. Competitors in the telex services market
include MCI WorldCom, Graphnet and Xpedite Systems Inc. in the U.S. market and
major PTT's such as British Telecom Plc, France Telecom, Deutsche Telekom, KDD
in Japan, Korea Telecom, Singapore Telecom and other PTT's around the world.
The professional services consulting markets are converging as more
enterprises become extended enterprises and Internet service providers
increasingly enter the solutions consulting space, providing Web enablement and
enterprise systems integration. Competitors in the professional services market
include Electronic Data Systems Corp., Perot Systems, IBM Global Solutions,
Compaq Solutions, and Wang Global.
Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to us. As a result, they may be able to develop and expand
their communications and network infrastructures more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their services to address the needs of our current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In addition
to direct competitors, many of our larger potential customers may seek to
internally fulfill their messaging needs through the deployment of their own on
premises messaging systems.
Other Operations
EasyLink Services, formerly Mail.com, previously operated an
advertising network business. On October 26, 2000, we announced our intention to
sell our advertising network business to focus exclusively on our established
outsourced messaging business. On March 30, 2001, we completed the sale of the
advertising network business to Net2Phone, Inc. Included in the sale were our
rights to provide e-mail-based advertising and permission marketing solutions to
advertisers, as well as our rights to provide e-mail services directly to
consumers at the www.mail.com Web site and in partnership with other Web sites.
The www.mail.com domain name will also be transitioned to Net2Phone. In
connection with the sale, we entered into a hosting agreement under which we
will host or arrange to host the consumer e-mailboxes for Net2Phone for a
minimum of one year. We plan to transition the hosting of the consumer e-mail
boxes to a third party provider in the near future.
In March 2000, EasyLink Services, formerly Mail.com, formed WORLD.com,
Inc. to develop the Company's portfolio of domain names into independent Web
properties, and subsequently acquired or formed its subsidiaries Asia.com, Inc.
and India.com, Inc. in which WORLD.com is the majority owner. In November 2000,
the Company announced its intention to sell all assets not related to its core
outsourced messaging business, including Asia.com, Inc., India.com, Inc. and its
portfolio of domain names. The factors that affect the realizable value of these
assets were determined by management which may ultimately prove to be less than
the carrying value currently reflected in our consolidated financial statements
as of and for the year ended December 31, 2000. We cannot assure you that we
will be able to sell all or any of these properties on terms favorable to the
Company or at all. This could result in material charges in the future. See
Notes 1, 2, 17 and 22 to our consolidated financial statements for additional
information.
Intellectual Property
Our intellectual property is among our most valued assets. We protect our
intellectual property, technology and trade secrets primarily through contract,
copyrights, trademarks, trade secret laws, restrictions on disclosure and other
methods. Parties with whom we discuss, or to whom we show, proprietary aspects
of our technology, including employees and consultants, are required to sign
confidentiality and non-disclosure agreements. If we fail to protect our
intellectual property effectively, our business, operating results and financial
condition may suffer. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others.
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Notwithstanding these protections, there is a risk that a third party could copy
or otherwise obtain and use our technology or trade secrets without
authorization. In addition, others may independently develop substantially
equivalent technology. The precautions we take may not prevent misappropriation
or infringement of our technology.
We have patents related to our faxSAV Connector and our "e-mail Stamps" security
technology incorporated into our faxMailer service.
As part of a settlement entered into in September 1998, NetMoves Corporation,
which we acquired in February 2000, received a perpetual license from AudioFAX
IP, L.L.P. to use certain of AudioFAX's patents relating to store-and-forward
technology. The license is fully paid-up.
There can be no assurance that third parties will not assert infringement claims
against us in the future. Patents have been granted recently on fundamental
technologies in the communications and desktop software areas, and patents may
be issued which relate to fundamental technologies incorporated into our
services. As patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which, if issued as
patents, could relate to our services. It is also possible that claims could be
asserted against us because of the content of e-mails or other messages sent
over our system. We could incur substantial costs and diversion of management
resources with respect to the defense of any claims that we have infringed upon
the proprietary right of others, which costs and diversion could have a material
adverse effect on its business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which could
effectively block our ability to license and sell our services in the United
States or abroad. Any such judgment could have a material adverse effect on its
business, financial condition and results of operations. In the event a claim
relating to proprietary technology or information is asserted against us, we may
seek licenses to such intellectual property. There can be no assurance, however,
that licenses could be obtained on terms acceptable to us, or at all. The
failure to obtain any necessary licenses or other rights could have a material
adverse effect on its business, financial condition and results of operations.
We incorporate licensed, third-party technology in our services. In these
license agreements, the licensors have generally agreed to defend, indemnify and
hold us harmless with respect to any claim by a third party that the licensed
software infringes any patent or other proprietary right. The outcome of any
litigation between these licensors and a third party or between us and a third
party may lead to our having to pay royalties for which we are not indemnified
or for which such indemnification is insufficient, or we may not be able to
obtain additional licenses on commercially reasonable terms, if at all. In the
future, we may seek to license additional technology to incorporate in our
services. The loss of or inability to obtain or maintain any necessary
technology licenses could result in delays in introduction of new services or
curtailment of existing services, which could have a material adverse effect on
our business, results of operations and financial condition.
To the extent that we license any of our content from third parties, our
exposure to copyright infringement actions may increase because we must rely
upon these third parties for information as to the origin and ownership of the
licensed content. We generally obtain representations as to the origins and
ownership of any licensed content and indemnification to cover breaches of any
representations. However, such representations may be inaccurate or any
indemnification may be insufficient to provide adequate compensation for any
breach of these representations.
Government Regulation
There are currently few laws or regulations that specifically regulate activity
on the Internet. However, laws and regulations may be adopted in the future that
address issues such as user privacy, pricing, and the characteristics and
quality of products and services. For example, the Telecommunications Act of
1996 restricts the types of information and content transmitted over the
Internet. Several telecommunications companies have petitioned the FCC to
regulate ISPs and online service providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. This could
increase the cost of transmitting data over the Internet. Any new laws or
regulations relating to the Internet could adversely affect our business.
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Moreover, the extent to which existing laws relating to issues such as property
ownership, pornography, libel and personal privacy are applicable to the
Internet is uncertain. We could face liability for defamation, copyright, patent
or trademark infringement and other claims based on the content of the email
transmitted over our system. We do not and cannot screen all the content
generated and received by our users. Some foreign governments, such as Germany,
have enforced laws and regulations related to content distributed over the
Internet that are more strict than those currently in place in the United
States. We may be subject to legal proceedings and damage claims if we are found
to have violated laws relating to email content.
We are subject to regulation by various state public service and public utility
commissions and by various international regulatory authorities with respect to
our fax services. We are licensed by the FCC as an authorized telecommunications
company and are classified as a "non-dominant interexchange carrier." Generally,
the FCC has chosen not to exercise its statutory power to closely regulate the
charges or practices of non-dominant carriers. Nevertheless, the FCC acts upon
complaints against such carriers for failure to comply with statutory
obligations or with the FCC's rules, regulations and policies. The FCC also has
the power to impose more stringent regulatory requirements on us and to change
its regulatory classification. There can be no assurance that the FCC will not
change its regulatory classification or otherwise subject us to more burdensome
regulatory requirements.
In connection with the deployment of Internet-capable nodes in countries
throughout the world, we are required to satisfy a variety of foreign regulatory
requirements. We intend to explore and seek to comply with these requirements on
a country-by-country basis as the deployment of Internet-capable facsimile nodes
continues. There can be no assurance that we will be able to satisfy the
regulatory requirements in each of the countries currently targeted for node
deployment, and the failure to satisfy such requirements may prevent us from
installing Internet-capable facsimile nodes in such countries. The failure to
deploy a number of such nodes could have a material adverse effect on its
business, operating results and financial condition.
Our facsimile nodes and our faxLauncher service utilize encryption technology in
connection with the routing of customer documents through the Internet. The
export of such encryption technology is regulated by the United States
government. We have authority for the export of such encryption technology other
than to Cuba, Iran, Iraq, Libya, North Korea, and Rwanda. Nevertheless, there
can be no assurance that such authority will not be revoked or modified at any
time for any particular jurisdiction or in general. In addition, there can be no
assurance that such export controls, either in their current form or as may be
subsequently enacted, will not limit our ability to distribute our services
outside of the United States or electronically. While we take precautions
against unlawful exportation of our software, the global nature of the Internet
makes it virtually impossible to effectively control the distribution of our
services. Moreover, future Federal or state legislation or regulation may
further limit levels of encryption or authentication technology. Any such export
restrictions, the unlawful exportation of our services, or new legislation or
regulation could have a material adverse effect on our business, financial
condition and results of operations.
The legal structure and scope of operations of our subsidiaries in some foreign
countries may be subject to restrictions which could result in severe limits to
our ability to conduct business in these countries and this could have a
material adverse effect on our financial position, results of operations and
cash flows. We have also announced that we intend to expand our outsourced
messaging business in international markets. To the extent that we offer
outsourced messaging services in foreign countries, we will be subject to the
laws and regulations of these countries. The laws and regulations relating to
the Internet in many countries are evolving and in many cases are unclear as to
their application. If these limitations apply to our activities, our
opportunities to generate revenue will be reduced and our ability to compete
successfully in these markets will be adversely affected. Moreover, to the
extent we are limited in our ability to engage in certain activities or are
required to contract for these services from a licensed or authorized third
party, our costs of providing our services will increase and our ability to
generate profits may be adversely affected.
Our Employees
As of February 28, 2001, we had approximately 461 employees. Of these personnel,
134 persons worked in technology, product management, professional services,
telex settlements and customer service; 123 persons worked in sales, marketing
and business development; and 204 persons worked in operations and
administration. Additionally, as of February 28, 2001, we had 523 employees
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at our Asia.com subsidiary and 291 employees at our India.com subsidiary. We
have never had a work stoppage and no personnel are represented under collective
bargaining agreements. We consider our employee relations to be good.
We believe that our future success will depend in part on our continued ability
to attract, integrate, retain and motivate highly qualified sales, technical,
and managerial personnel, and upon the continued service of our senior
management and key sales and technical personnel. To help us retain our
personnel, all of our full-time employees have received stock option grants.
None of our personnel are bound by employment agreements that prevent them from
terminating their relationship at any time for any reason.
Competition for qualified personnel is intense, and we may not be successful in
attracting, integrating, retaining and motivating a sufficient number of
qualified personnel to conduct our business in the future. Our rapid expansion
is straining our existing resources, and if we are not able to manage our growth
effectively, our business and operating results will suffer.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
We Have Only a Limited Operating History, We Are Involved in a New and Unproven
Industry and We Have Determined To Focus On Our Core Outsourced Messaging
Business.
We have only a limited operating history upon which you can evaluate
our business and our prospects. We have offered a commercial email service since
November 1996 under the name iName. We changed our company name to Mail.com,
Inc. in January 1999. In February 2000, we acquired NetMoves Corporation, a
provider of a variety of Internet message delivery services to businesses. In
March 2000, we formed WORLD.com to develop and operate our domain name
properties as independent Web sites. In the fourth quarter of 2000, we announced
our intention to focus exclusively on our outsourced messaging business and to
sell all assets not related to this business. In February 2001, we acquired
Swift Telecommunications, Inc. which had contemporaneously acquired the EasyLink
Services business from AT&T Corp. The EasyLink Services business is a provider
of outsourced e-mail services and of message delivery services such as
electronic data interchange or EDI, fax and telex services. Swift is a provider
of telex services. On March 30, 2001, we announced that we had sold our
advertising network business to Net2Phone, Inc. Our success will depend in part
upon our ability to maintain or expand our sales of message delivery services
such as EDI and fax services to enterprises, the the development of a viable
market for fee-based e-mail and groupware services on an outsourced basis, our
ability to compete successfully in those markets and our ability to successfully
sell our non-core assets on favorable terms. For the reasons discussed in more
detail below, there are substantial obstacles to our achieving and sustaining
profitability.
We Have Incurred Losses Since Inception and Expect to Incur Substantial Losses
in the Future.
We have generated only limited revenues to date. We have not achieved
profitability in any period, and we may not be able to achieve or sustain
profitability. We incurred a net loss attributable to common stockholders of
$85.8 million for the fourth quarter of 2000 and $229.5 million for the year
ended December 31, 2000. We had an accumulated deficit of $307.2 million as of
December 31, 2000. We expect to continue to incur substantial net losses and
negative operating cash flow for the foreseeable future. We intend to expand our
sales and marketing operations, upgrade and enhance our technology, continue our
international expansion, and improve and expand our management information and
other internal systems. We intend to continue to make strategic acquisitions and
investments, which may result in significant amortization of goodwill and other
expenses. We are making these expenditures in anticipation of higher revenues,
but there will be a delay in realizing higher revenues even if we are
successful. If we do not succeed in substantially increasing our revenues or
integrating the EasyLink Services and Swift businesses with our historical
business, our losses will continue indefinitely and will increase.
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If We Are Unable to Raise Necessary Capital in the Future, We May Be Unable to
Fund Necessary Expenditures.
We anticipate the need to raise additional capital in the future. See
Part II. Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources. However, we may
not be able to raise on terms favorable to us, or at all, amounts necessary to
fund our anticipated expenditures or future expansion, develop new or enhanced
services, respond to competitive pressures, promote our brand name or acquire
complementary businesses, technologies or services. Some of our stockholders
have registration rights that could interfere with our ability to raise needed
capital.
If we raise additional funds by issuing equity securities or debt
convertible into equity securities, stockholders may experience dilution of
their ownership interest. The amount of dilution resulting from issuance of
additional shares of Class A common stock and securities convertible into Class
A common stock and the potential dilution that may result from future issuances
has significantly increased in light of the decline in our stock price.
Moreover, we could issue preferred stock that has rights senior to those of the
Class A common stock. If we raise funds by issuing debt, our lenders may place
limitations on our operations, including our ability to pay dividends.
We Intend to Sell All of Our Assets Not Related to Our Core Outsourced messaging
Business But May Experience Difficulty Completing Any or All of Such Sales on
Favorable Terms or At All.
We recently announced our intention to sell all of our non-core assets,
including our advertising network business, our Asia.com, Inc. and India.com,
Inc. subsidiaries and our portfolio of Internet domain names. On March 30, 2001,
we completed the sale of our advertising network business to Net2Phone. We
cannot assure you that we will be able to sell all or any of our remaining
non-core assets on favorable terms or at all. We also cannot assure you as to
the timing or the terms and conditions of the sale of any of these assets or the
form or amount of consideration (if any) that may be received. The realizable
value of these assets may ultimately prove to be less than the carrying value
currently reflected in our consolidated financial statements. Moreover, if the
sales are not successfully completed, the market price of our common stock may
decline to the extent that the current market price reflects a market assumption
that such sales will be successfully completed. To the extent that we receive
non-cash consideration in any of these sales, we may not be able to liquidate
this consideration or otherwise turn it into cash for a period of time after we
receive it or at all.
We Intend to Continue to Acquire, or Make Strategic Investments in, Other
Businesses and Acquire or License technology and Other Assets and We May Have
Difficulty Integrating These Businesses or Generating an Acceptable Return.
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We have completed a number of acquisitions and strategic investments
since our initial public offering. For example, we acquired NetMoves
Corporation, a provider of a variety of message delivery services to businesses,
and The Allegro Group, Inc., a provider of email and email related services,
such as virus blocking and content screening, to businesses. We recently
acquired Swift Telecommunications, Inc. and the EasyLink Services business that
it had contemporaneously acquired from AT&T Corp. We will continue our efforts
to acquire or make strategic investments in businesses and to acquire or license
technology and other assets, and any of these acquisitions may be material to
us. We cannot assure you that acquisition or licensing opportunities will
continue to be available on terms acceptable to us or at all. Such acquisitions
involve risks, including:
o inability to raise the required capital;
o difficulty in assimilating the acquired operations and
personnel;
o inability to retain any acquired member or customer accounts;
o disruption of our ongoing business;
o the need for additional capital to fund losses of acquired
businesses;
o inability to successfully incorporate acquired technology into
our service offerings and maintain uniform standards,
controls, procedures and policies; and
o lack of the necessary experience to enter new markets.
We may not successfully overcome problems encountered in connection
with potential acquisitions. In addition, an acquisition could materially impair
our operating results by diluting our stockholders' equity, causing us to incur
additional debt or requiring us to amortize acquisition expenses and acquired
assets.
We May Be Unable to Successfully Integrate the EasyLink Services Business
Acquired From AT&T.
On February 23, 2001, we completed the acquisition of Swift
Telecommunications, Inc. which had contemporaneously acquired the EasyLink
Services business of AT&T Corp. The EasyLink Services business acquired from
AT&T provides a variety of messaging services such as e-mail, EDI, fax and telex
services. This business was a division of AT&T and was not a separate
independent operating entity. We hired only a portion of the employees of the
business. The messaging network for this business resides on AT&T's managed
network and is being operated and maintained for EasyLink Services by AT&T
pursuant to a Transition Services Agreement. In addition, AT&T will continue to
provide a variety of business and administrative functions for the business.
EasyLink Services plans to migrate off the AT&T network to the EasyLink Services
network and to assume responsibility for these other functions over the next two
years.
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Under the Transition Services Agreement, we are purchasing a variety of
services from AT&T to enable us to continue to operate the business pending the
transition to EasyLink Services. See Part I. Item 1. Business -- Transition
Services Agreement and Master Carrier Agreement with AT&T Corp.
We cannot assure you that we will be able to successfully transition
the EasyLink Services network and other operations from AT&T to us, or
successfully integrate them into our operations, in a timely manner or without
incurring substantial unforeseen expense. Even if successfully transitioned and
integrated, we may be unable to operate the business at expense levels that are
ultimately profitable for us. Our inability to successfully transition,
integrate or operate the network and operations of the EasyLink Services
business will result in a material adverse effect on our business, results of
operations and financial condition.
We Have Incurred Significant Indebtedness For Money Borrowed.
As of March 31, 2001, we had approximately $108 million principal
amount of outstanding indebtedness for borrowed money. We may incur substantial
additional indebtedness in the future. The level of our indebtedness, among
other things, could (1) make it difficult for us to make payments on our
indebtedness, (2) make it difficult to obtain any necessary financing in the
future for working capital, capital expenditures, debt service requirements or
other purposes, (3) limit our flexibility in planning for, or reacting to
changes in, our business, and (4) make us more vulnerable in the event of a
downturn in our business.
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We May Be Unable to Pay Debt Service on Our Indebtedness for Money Borrowed and
Other Obligations.
We had an operating loss and negative cash flow during the fourth
quarter of 2000 and for the year ended December 31, 2000 and expect to incur
substantial losses and negative cash flows for the foreseeable future. In
addition, we have a substantial amount of outstanding accounts payable.
Accordingly, cash generated by our operations would have been insufficient to
pay the amount of interest payable annually on our outstanding indebtedness or
to pay our other obligations. We cannot assure you that we will be able to pay
interest and other amounts due on our outstanding indebtedness, or our other
obligations, on the scheduled dates or at all. If our cash flow and cash
balances are inadequate to meet our obligations, we could face substantial
liquidity problems. We cannot assure you that the proposed sale of our remaining
non-core assets will not negatively impact our cash flow available to service
our debt. If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments, or if we otherwise fail to comply
with any covenants in our indebtedness, we would be in default under these
obligations, which would permit these lenders to accelerate the maturity of the
obligations and could cause defaults under our indebtedness. Any such default
could have a material adverse effect on our business, results of operations and
financial condition. We cannot assure you that we would be able to repay amounts
due on our indebtedness if payment of the indebtedness were accelerated
following the occurrence of an event of default under, or certain other events
specified in, the indenture for the convertible notes, including any deemed sale
of all or substantially all of our assets.
Outsourcing of E-mail and Groupware Services and Message Delivery Services May
Not Prove to Be Viable Businesses.
An important part of our business strategy is to leverage our existing
global customer base and global network by continuing to provide the best
message delivery services today and by offering these customers managed e-mail
and other messaging services in the future. The market for managed e-mail,
groupware services and other messaging services such as virus protection, spam
control and content filtering services and professional messaging services is
only beginning to develop. Our success will depend on the continued expansion of
the market for outsourced message delivery services such as EDI and fax services
and the development of viable markets for the outsourcing of managed e-mail and
groupware services, services to protect corporate e-mail systems from viruses,
spam and offensive content and related professional messaging services. Each of
these developments is somewhat speculative.
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There are significant obstacles to the development of a sizable market
for messaging services outsourcing. Outsourcing is one of the principal methods
by which we will attempt to reach the size we believe is necessary to be
successful. Security and the reliability of the Internet, however, are likely to
be of concern to enterprises and service providers deciding whether to outsource
their messaging services or to continue to provide it themselves. These concerns
are likely to be particularly strong at larger businesses and service providers,
which are better able to afford the costs of maintaining their own systems.
While we intend to focus exclusively on our outsourced messaging services, we
cannot be sure that we will be able to maintain or expand our business customer
base or that we will be able to sell managed messaging services such as e-mail
and groupware hosting services, virus protection, spam control or content
filtering services or professional services to this customer base. In addition,
the sales cycle for managed messaging services such as hosting services is
lengthy and could delay our ability to generate revenues in the managed
messaging services market. As part of our business strategy, we plan to offer
additional outsourced messaging and other services to existing customers. We
cannot assure you that these customers will purchase these services or will
purchase them at prices that we wish to charge. Furthermore, we may not be able
to generate significant additional revenues by providing our outsourced e-mail
and groupware services to businesses. Standards for pricing in the business
e-mail and groupware services market are not yet well defined and some
businesses and service providers may not be willing to pay the fees we wish to
charge. We cannot assure you that the fees we intend to charge will be
sufficient to offset the related costs of providing these services.
We May Fail to Meet Market Expectations Because of Fluctuations in Our Quarterly
Operating Results, Which Would Cause Our Stock Price to Decline.
Although we intend to steadily increase our spending and investment to
support our planned growth, our revenues (and some of our costs) will be much
less predictable. This is likely to result in significant fluctuations in our
quarterly results, and to limit the value of quarter-to-quarter comparisons.
Because of our limited operating history, the emerging nature of our industry
and our planned sale of our non-core assets, we anticipate that securities
analysts will have difficulty in accurately forecasting our results. It is
likely that our operating results in some quarters will be below market
expectations. In this event, the price of our Class A common stock is likely to
decline.
The following are among the factors that could cause significant
fluctuations in our operating results:
o incurrence of other cash and non-cash accounting charges,
including charges resulting from acquisitions or dispositions
of assets, including from the disposition of non-core assets
such as our Asia.com and India.com subsidiaries;
o non-cash charges associated with repriced stock options;
o system outages, delays in obtaining new equipment or problems
with planned upgrades;
o disruption or impairment of the Internet;
21
o demand for outsourced messaging services;
o attracting and retaining customers and maintaining customer
satisfaction;
o introduction of new or enhanced services by us or our
competitors;
o changes in our pricing policy or that of our competitors;
o changes in governmental regulation of the Internet and
messaging in particular; and
o general economic and market conditions.
Other such factors in our non-core businesses include:
o incurrence of additional expenditures without receipt of
offsetting revenues pending the sale of these businesses.
We Expect Significant Stock Based Compensation Charges Related to Repriced
Options.
In light of the decline in our stock price and in an effort to retain
our employee base, on November 14, 2000, the Company offered to certain of its
employees, officers and directors, other than Gerald Gorman, the right to
reprice certain outstanding stock options to an exercise price equal to the
closing price of the Company's Class A common stock on NASDAQ on November 14,
2000. Options to purchase 6,327,986 shares are subject to repricing. The
repriced options vest at the same rate that they would have vested under their
original terms except that shares issuable upon exercise of these options may
not be sold until after November 14, 2001. In March 2000, Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25" ("Interpretation"). Among other issues, this Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. As a result, under the
Interpretation, stock options repriced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
remeasure compensation cost for outstanding repriced options each reporting
period based on changes in the market value of the underlying common stock.
Depending upon movements in the market value of the Company's common stock, this
accounting treatment may result in significant non-cash compensation charges in
future periods.
22
Several of Our Competitors Have Substantially Greater Resources, Longer
Operating Histories, Larger Customer Bases and Broader Product Offerings.
Our business is, and we believe will continue to be, intensely
competitive. See "Part I Item 1- Business -Competition."
Many of our competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to us. As a result, they may be able to develop and expand
their communications and network infrastructures more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their services to address the needs of our current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In addition
to direct competitors, many of our larger potential customers may seek to
internally fulfill their messaging needs through the deployment of their own on
premises messaging systems.
Some of our competitors provide a variety of business services and
products such as Internet access and other telecommunications services, browser
software, homepage design, Web site hosting and software and hardware solutions
in addition to messaging services. The ability of these competitors to offer a
broader suite of complementary services may give them a considerable advantage
over us.
The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. In the future, as we expand our service offerings, we expect to
encounter increased competition in the development and delivery of these
services. We may not be able to compete successfully against our current or
future competitors.
Our Rapid Expansion Is Straining Our Existing Resources, and if We Are Not Able
to Manage Our Growth Effectively, Our Business and Operating Results Will
Suffer.
We have aggressively expanded our operations in anticipation of
continued growth in our business and as a result of our acquisitions. We have
also developed the technology and infrastructure to offer a range of services in
the market for outsourced messaging services. At the same time, we announced our
intention to sell all of our non-core assets, including our advertising network
business, our World.com subsidiaries Asia.com and India.com and our portfolio of
domain names. This expansion and the decision to sell all of our non-core assets
has placed, and we expect it to continue to place, a significant strain on our
managerial, operational and financial resources. If we cannot manage our growth
or the sale of non-core assets effectively, our business, operating results and
financial condition will suffer.
23
It Is Difficult to Retain Key Personnel and Attract Additional Qualified
Employees in Our Business and the Loss of Key Personnel and the Burden of
Attracting Additional Qualified Employees May Impede the Operation and Growth of
Our Business and Cause Our Revenues to Decline.
Our future success depends to a significant extent on the continued
service of our key technical, sales and senior management personnel, but they
have no contractual obligation to remain with us. In particular, our success
depends on the continued service of Gerald Gorman, our Chairman, Thomas
Murawski, our Chief Executive Officer, Brad Schrader, our President, and Debra
McClister, our Executive Vice President and Chief Financial Officer. The loss of
the services of Messrs. Gorman, Murawski or Schrader or of Ms. McClister, or
several other key employees, would impede the operation and growth of our
business. The successful dispostion of our non-core businesses depends on the
continued services of Gary Millin, Chief Executive Officer of World.com.
To manage our existing business and handle any future growth, we will
have to attract, retain and motivate additional highly skilled employees. In
particular, we will need to hire and retain qualified salespeople if we are to
meet our sales goals. We will also need to hire and retain additional
experienced and skilled technical personnel in order to meet the increasing
technical demands of our expanding business. Competition for employees in
messaging-related businesses is intense. We have in the past experienced, and
expect to continue to experience, difficulty in hiring and retaining employees
with appropriate qualifications. If we are unable to do so, our management may
not be able to effectively manage our business, exploit opportunities and
respond to competitive challenges.
Our Business is Heavily Dependent on Technology, Including Technology that Has
Not Yet Been Proven Reliable at High Traffic Levels and Technology That We Do
Not Control.
The performance of our computer systems is critical to the quality of
service we are able to provide to our customers. If our services are unavailable
or fail to perform to their satisfaction, they may cease using our service.
Reduced use of our service decreases our revenues by decreasing the advertising
space that we have available to sell. In addition, our agreements with several
of our customers establish minimum performance standards. If we fail to meet
these standards, our customers could terminate their relationships with us and
assert claims for monetary damages.
We Need to Upgrade our Computer Systems to Accommodate Increases in Messaging
Traffic and to Accommodate Increases in the Usage of Our Services, but We May
Not Be Able to Do So While Maintaining Our Current Level of Service, or At All.
We must continue to expand and adapt our computer systems as the number
of customers and the amount of information they wish to transmit increases and
as their requirements change, and as we further develop our messaging services.
Because we have only been providing some of our services such as managed e-mail
and groupware services for a limited time, and because our computer systems for
these services have not been tested at greater capacities, we cannot guarantee
the ability of our computer systems to connect and manage a substantially larger
number of customers or meet the needs of business customers at high transmission
speeds. If we cannot provide the necessary service while maintaining expected
performance, our business would suffer and our ability to generate revenues
through our services would be impaired.
24
The expansion and adaptation of our computer systems will require
substantial financial, operational and managerial resources. We may not be able
to accurately project the timing of increases in email traffic or other customer
requirements. In addition, the very process of upgrading our computer systems is
likely to cause service disruptions. This is because we will have to take
various elements of the network out of service in order to install some
upgrades.
Our Computer Systems May Fail and Interrupt Our Service.
Our members and customers have in the past experienced interruptions in
our services. We believe that these interruptions will continue to occur from
time to time. These interruptions are due to hardware failures, unsolicited bulk
emails that overload our system and other computer system failures. In
particular, we have experienced outages and delays in email delivery and access
to our email service related to disk failures, the implementation of changes to
our computer system, insufficient storage capacity and other problems. These
failures have resulted and may continue to result in significant disruptions to
our service. Although we plan to install backup computers and implement
procedures to reduce the impact of future malfunctions in these systems, the
presence of these and other single points of failure in our network increases
the risk of service interruptions. Some aspects of our computer systems are not
redundant. These include our member database system and our email storage
system, which stores emails and other data for our members. In addition,
substantially all of our computer and communications systems relating to our
email services other than the systems located and operated by AT&T Corp. under
our Transition Services Agreement with them are currently located in our primary
data centers in Manhattan, Edison, New Jersey and Dayton, Ohio. We currently do
not have alternate sites from which we could conduct these operations in the
event of a disaster. Our computer and communications hardware is vulnerable to
damage or interruption from fire, flood, earthquake, power loss,
telecommunications failure and similar events. Our services would be suspended
for a significant period of time if any of our primary data centers was severely
damaged or destroyed. We might also lose stored emails and other member or
customer files, causing significant member dissatisfaction and possibly giving
rise to claims for monetary damages.
Our Services Will Become Less Desirable or Obsolete if We Are Unable To Keep Up
with the Rapid Changes Characteristic of Our Business.
Our success will depend on our ability to enhance our existing services
and to introduce new services in order to adapt to rapidly changing
technologies, industry standards and customer demands. To compete successfully,
we will have to accurately anticipate changes in business and consumer demand
and add new features to our services very rapidly. We also have to regularly
upgrade our software to ensure that it remains compatible with the wide and
changing variety of Web browsers and other software used by our members and
business customers. We may not be able to integrate the necessary technology
into our computer systems on a timely basis or without degrading the performance
of our existing services. We cannot be sure that, once integrated, new
technology will function as expected. Delays in introducing effective new
services could cause existing and potential customers to forego use of our
services and to use instead those of our competitors.
25
Our Business Will Suffer if We Are Unable to Provide Adequate Security for Our
Service, or if Our Service Is Impaired By Security Measures Imposed by Third
Parties.
Security is a critical issue for any outsourced messaging service, and
presents a number of challenges for us.
If we are unable to maintain the security of our service, our
reputation and our ability to attract and retain customers may suffer, and we
may be exposed to liability. Third parties may attempt to breach our security or
that of our customers whose networks we may maintain or for whom we provide
services to or that of our members. If they are successful, they could obtain
information that is sensitive or confidential to a customer or otherwise disrupt
a customer's operations or obtain confidential information, including our
customer's profiles, passwords, financial account information, credit card
numbers, stored email or other personal or business information. Our customers
or their employees may assert claims for money damages for any breach in our
security and any breach could harm our reputation.
Our computers are vulnerable to computer viruses, physical or
electronic break-ins and similar incursions, which could lead to interruptions,
delays or loss of data. We expect to expend significant capital and other
resources to license or create encryption and other technologies to protect
against security breaches or to alleviate problems caused by any breach.
Nevertheless, these measures may prove ineffective. Our failure to prevent
security breaches may expose us to liability and may adversely affect our
ability to attract and retain members and develop our business market.
Security measures taken by others may interfere with the efficient
operation of our service, which may harm our reputation, adversely impact our
ability to attract and retain members and impede the delivery of advertisements
from which we currently generate revenues. "Firewalls" and similar network
security software employed by many ISPs, employers and schools can interfere
with the operation of our services.
We are dependent on Licensed Technology.
We license a significant amount of technology from third parties,
including technology related to our managed e-mail and groupware services, virus
protection, spam control and content filtering services, Internet fax services,
billing processes and database. We anticipate that we will need to license
additional technology to remain competitive. We may not be able to license these
technologies on commercially reasonable terms or at all. Third-party licenses
expose us to increased risks, including risks relating to the integration of new
technology, the diversion of resources from the development of our own
proprietary technology, a greater need to generate revenues sufficient to offset
associated license costs, and the possible termination of or failure to renew an
important license by the third-party licensor.
26
If the Internet and Other Third-Party Networks on Which We Depend to Deliver Our
Services Become Ineffective as a Means of Transmitting Data, the Benefits of Our
Service May Be Severely Undermined.
Our business depends on the effectiveness of the Internet as a means of
transmitting data. The recent growth in the use of the Internet has caused
frequent interruptions and delays in accessing and transmitting data over the
Internet. Any deterioration in the performance of the Internet as a whole could
undermine the benefits of our services. Therefore, our success depends on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. We also depend on telecommunications network
suppliers such as AT&T Corp., Worldcom, MFS, BBN Planet and UUNET for a variety
of telecommunications and Internet services
Pending the transition of the network and operations for the EasyLink
Services business acquired from AT&T, we are dependent on the services being
provided to us under our Transition Services Agreement with AT&T. See "Risk
Factors - We May Be Unable to Successfully Integrate the EasyLink Services
Business Acquired From AT&T." and "Item 1. Business - Technology."
Gerald Gorman Controls Mail.Com and Will Be Able to Prevent A Change of Control.
Gerald Gorman, our Chairman, beneficially owned as of March 31, 2001
Class A and Class B common stock representing approximately 55% of the voting
power of our outstanding common stock. Each share of Class B common stock
entitles the holder to 10 votes on any matter submitted to the stockholders. As
a result of his share ownership, Mr. Gorman will be able to determine the
outcome of all matters requiring stockholder approval, including the election of
directors, amendment of our charter and approval of significant corporate
transactions. Mr. Gorman will be in a position to prevent a change in control of
Mail.com even if the other stockholders were in favor of the transaction.
We have agreed to permit Federal Partners, L.P., a holder of our senior
convertible notes and Class A common stock, to designate one member of our board
of directors. In addition, in connection with the acquisition of Swift
Telecommunications, Inc., we agreed to appoint George Abi Zeid, the former sole
shareholder of Swift, as a director and as our President of International
Operations. In addition, we and Mr. Gorman have agreed to permit our
stockholders who formerly held our preferred stock to designate a total of three
members of our board of directors. Currently, such former holders of our
preferred stock have no designee on our board.
27
Our charter contains provisions that could deter or make more expensive
a takeover of Mail.com. These provisions include the ability to issue "blank
check" preferred stock without stockholder approval.
Our Goal of Building Brand Identity Is Likely to Be Difficult and Expensive.
We announced on March 31, 2001 that we have changed our corporate name
to EasyLink Services Corporation to more accurately, to more accurately reflect
the strengths, relationships and solutions that we offer. We believe that a
quality brand identity will be essential if we are to develop our business
services market. We do not have experience with some of the types of marketing
that we are currently using. If our marketing efforts cost more than anticipated
or if we cannot increase our brand awareness, our losses will increase and our
ability to succeed will be seriously impeded.
Our Expansion into International Markets Is Subject to Significant Risks and Our
Losses May Increase and Our Operating Results May Suffer if Our Revenues from
International Operations Do Not Exceed the Costs of Those Operations.
We intend to continue to expand into international markets and to
expend significant financial and managerial resources to do so. We have limited
experience in international operations and may not be able to compete
effectively in international markets. If our revenues from international
operations do not exceed the expense of establishing and maintaining these
operations, our losses will increase and our operating results will suffer. We
face significant risks inherent in conducting business internationally, such as:
o uncertain demand in foreign markets for messaging services;
o difficulties and costs of staffing and managing international
operations;
o differing technology standards;
o difficulties in collecting accounts receivable and longer
collection periods;
o economic instability and fluctuations in currency exchange
rates and imposition of currency exchange controls;
o potentially adverse tax consequences;
o regulatory limitations on the activities in which we can
engage and foreign ownership limitations on our ability to
hold an interest in entities through which we wish to conduct
business;
o political instability, unexpected changes in regulatory
requirements, and reduced protection for intellectual property
rights in some countries;
28
o export restrictions, and
o difficulties in enforcing contracts and potentially adverse
consequences.
Regulation of Messaging Services and Internet Use Is Evolving and May Adversely
Impact Our Business.
There are currently few laws or regulations that specifically regulate
activity on the Internet. However, laws and regulations may be adopted in the
future that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act of 1996 restricts the types of information and content
transmitted over the Internet. Several telecommunications companies have
petitioned the FCC to regulate ISPs and online service providers in a manner
similar to long distance telephone carriers and to impose access fees on these
companies. This could increase the cost of transmitting data over the Internet.
Any new laws or regulations relating to the Internet could adversely affect our
business.
Moreover, the extent to which existing laws relating to issues such as
property ownership, pornography, libel and personal privacy are applicable to
the Internet is uncertain. We could face liability for defamation, copyright,
patent or trademark infringement and other claims based on the content of the
email or fax transmitted over our system. We do not and cannot screen all the
content generated and received by our members. Some foreign governments, such as
Germany, have enforced laws and regulations related to content distributed over
the Internet that are more strict than those currently in place in the United
States. We may be subject to legal proceedings and damage claims if we are found
to have violated laws relating to email content.
We are subject to regulation by various state public service and public
utility commissions and by various international regulatory authorities with
respect to some of our fax services. We are licensed by the FCC as an authorized
telecommunications company and are classified as a "non-dominant interexchange
carrier." Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges or practices of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on us and to change its regulatory classification. There can be no
assurance that the FCC will not change its regulatory classification or
otherwise subject us to more burdensome regulatory requirements.
Continued changes in telecommunications regulations may significantly
reduce the cost of domestic and international calls. To the extent that the cost
of domestic and international calls decreases, we will face increased
competition for our fax services which may have a material adverse effect on our
business, financial condition or results in operations.
29
In connection with the deployment of Internet-capable nodes in
countries throughout the world, we are required to satisfy a variety of foreign
regulatory requirements. We intend to explore and seek to comply with these
requirements on a country-by-country basis as the deployment of Internet-capable
fax nodes continues. There can be no assurance that we will be able to satisfy
the regulatory requirements in each of the countries currently targeted for node
deployment, and the failure to satisfy such requirements may prevent us from
installing Internet-capable fax nodes in such countries. The failure to deploy a
number of such nodes could have a material adverse effect on our business,
operating results and financial condition.
Our fax nodes and our faxLauncher service utilize encryption technology
in connection with the routing of customer documents through the Internet. The
export of such encryption technology is regulated by the United States
government. We have authority for the export of such encryption technology other
than to Cuba, Iran, Iraq, Libya, North Korea, and Rwanda. Nevertheless, there
can be no assurance that such authority will not be revoked or modified at any
time for any particular jurisdiction or in general. In addition, there can be no
assurance that such export controls, either in their current form or as may be
subsequently enacted, will not limit our ability to distribute our services
outside of the United States or electronically. While we take precautions
against unlawful exportation of our software, the global nature of the Internet
makes it virtually impossible to effectively control the distribution of our
services. Moreover, future Federal or state legislation or regulation may
further limit levels of encryption or authentication technology. Any such export
restrictions, the unlawful exportation of our services, or new legislation or
regulation could have a material adverse effect on our business, financial
condition and results of operations.
The legal structure and scope of operations of our subsidiaries in some
foreign countries may be subject to restrictions which could result in severe
limits to our ability to conduct business in these countries and this could have
a material adverse effect on our financial position, results of operations and
cash flows. To the extent that we develop or offer messaging services in foreign
countries, we will be subject to the laws and regulations of these countries.
The laws and regulations relating to the Internet in many countries are evolving
and in many cases are unclear as to their application. For example, in India,
the PRC and other countries we may be subject to licensing requirements with
respect to the activities in which we propose to engage and we may also be
subject to foreign ownership limitations or other approval requirements that
preclude our ownership interests or limit our ownership interests to up to 49%
of the entities through which we propose to conduct any regulated activities. If
these limitations apply to our activities, including our activities conducted
through our subsidiaries, our opportunities to generate revenue will be reduced,
our ability to compete successfully in these markets will be adversely affected,
our ability to raise capital in the private and public markets may be adversely
affected and the value of our investments and acquisitions in these markets may
decline. Moreover, to the extent we are limited in our ability to engage in
certain activities or are required to contract for these services from a
licensed or authorized third party, our costs of providing our services will
increase and our ability to generate profits may be adversely affected.
30
Our Intellectual Property Rights Are Critical to Our Success, But May Be
Difficult to Protect.
We regard our copyrights, service marks, trademarks, trade secrets,
domain names and similar intellectual property as critical to our success. We
rely on trademark and copyright law, trade secret protection and confidentiality
and/or license agreements with our employees, members, strategic partners and
others to protect our proprietary rights. Despite our precautions, unauthorized
third parties may improperly obtain and use information that we regard as
proprietary. Third parties may submit false registration data attempting to
transfer key domain names to their control. Our failure to pay annual
registration fees for key domain names may result in the loss of these domains
to third parties. Third parties have challenged our rights to use some of our
domain names, and we expect that they will continue to do so, which may affect
the value that we can derive from the planned disposition of the domain names
included among our non-core assets.
The status of United States patent protection for software products is
not well defined and will evolve as additional patents are granted. If we apply
for a patent in the future, we do not know if our application will be issued
with the scope of the claims we seek, if at all. The laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. Our means of protecting our proprietary rights in the United
States or abroad may not be adequate and competitors may independently develop
similar technology.
Third parties may infringe or misappropriate our copyrights, trademarks
and similar proprietary rights. In addition, other parties have asserted and may
in the future assert infringement claims against us. We cannot be certain that
our services do not infringe issued patents. Because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our services.
We have been and may continue to be subject to legal proceedings and
claims from time to time in the ordinary course of our business, including
claims related to the use of our domain names and claims of alleged infringement
of the trademarks and other intellectual property rights of third parties. Third
parties have challenged our rights to register and use some of our domain names
based on trademark principles and on the recently enacted Anticybersquatting
Consumer Protection Act. If domain names become more valuable to businesses and
other persons, we expect that third parties will continue to challenge some of
our domain names and that the number of these challenges may increase. In
addition, the existing or future laws of some countries, in particular countries
in Europe, may limit or prohibit the use in those countries or elsewhere of some
of our geographic names that contain the names of a city in those countries or
the name of those countries. Intellectual property litigation is expensive and
time-consuming and could divert management's attention away from running our
business. These claims and the potential for such claims may reduce the value
that we can expect to receive from the dispositon of our domain names.
31
A Substantial Amount of Our Common Stock May Come onto the Market in the Future,
Which Could Depress Our Stock Price.
Sales of a substantial number of shares of our common stock in the
public market could cause the market price of our Class A common stock to
decline. As of February 28, 2000, we had an aggregate of 80,851,123 shares of
Class A and Class B common stock. On March 20, 2001, we issued an additional
3,000,000 shares of Class A common stock in a capital raising transaction and
are obligated to issue to the purchaser in this financing an additional
1,000,000 shares subject to certain conditions if the closing price of our Class
A common stock has not traded at or above $10 per share for five consecutive
days. As of February 28, 2001, we had options to purchase approximately 13.9
million shares of Class A common stock outstanding. As of March 31, 2001, we had
warrants to purchase 1,071,233 shares of Class A common stock outstanding. As of
March 31, 2000, after giving effect to our recent note exchanges and senior note
issuances, we had approximately 30,798,598 shares of Class A common stock
issuable upon conversion of outstanding senior convertible notes at exercise
prices ranging from $1 per share to $1.75 per share and up to an additional
7,699,649 shares of Class A common stock issuable over five years in payment of
a portion of the interest on such senior notes. In addition, we had 1,271,504
shares of Class A common stock issuable upon conversion of our remaining
outstanding 7% Convertible Subordinated Notes due 2005 at an exercise price of
$18.95 per share. In addition, the holders of Series A Preferred Stock of our
India.com subsidiary have the right during the 60 day period commencing December
31, 2000 to exchange such preferred stock for shares of our Class A common stock
based on the original purchase price of such stock, which in the aggregate was
$14.25 million, divided by the closing price of our Class A common stock around
December 31, 2000. Under the original exchange agreement, the exchange price was
subject to a floor of $4.50. In consideration for a $5 million bridge funding
arrangement provided to us by India.com during the first quarter of 2001, the
exchange price floor was initially reduced to $3.00 and is subject to further
reduction to $1.30 for the percentage of shares of Series A preferred stock
equal to the percentage of the India.com bridge loan drawn down. As of March 31,
2001, 80% of the $5 million bridge loan has been drawn down. If the full amount
of the India.com bridge loan is drawn down, and all of the shares of preferred
stock are exchanged and the closing price of our Class A common stock around
December 31, 2001 is $1.30 per share or less, then we would be obligated to
issue 10,961,538 shares of Class A common stock.
As of February 28, 2001, approximately 53,761,110 shares of Class A
common stock and Class B common stock were freely tradable, in some cases
subject to the volume and manner of sale limitations contained in Rule 144. As
of such date, approximately 27,090,013 shares of Class A common stock will
become available for sale at various later dates upon the expiration of one-year
holding periods or upon the expiration of any other applicable restrictions on
resale. We are likely to issue large amounts of additional Class A common stock,
which may also be sold and which could adversely affect the price of our stock.
32
As of March 31, 2001, the holders of approximately 25,932,333 shares of
outstanding Class A common stock and the holders of approximately 51,731,289
shares of Class A common stock issuable upon conversion of our outstanding
senior or subordinated convertible notes, issuable in payment of interest over
the next five years on our senior convertible notes, issuable upon exercise of
the exchange right held by holders of India.com preferred stock and issuable
upon exercise of the warrants issued to India.com, had the right, subject to
various conditions, to require us to file registration statements covering their
shares, or to include their shares in registration statements that we may file
for ourselves or for other stockholders. By exercising their registration rights
and selling a large number of shares, these holders could cause the price of the
Class A common stock to fall. An undetermined number of these shares have been
sold publicly pursuant to Rule 144.
Our Class A Common Stock May Be Subject to Delisting from the Nasdaq National
Market.
Our Class A common stock faces potential delisting from the Nasdaq
National Market which could hurt the liquidity of our Class A common stock. We
may be unable to comply with the standards for continued listing on the Nasdaq
National Market. These standards require, among other things, that our Class A
common stock have a minimum bid price of $1 and state that a deficiency shall
exist if such minimum bid price remains below $1 for a period of thirty
consecutive business days. In addition, if our stock price is below $5 per
share, we must maintain minimum net tangible assets of at least $4 million. The
minimum bid price of our stock has been below $1 during various periods during
the fourth quarter of 2000 and the first quarter of 2001 and has been below $1
during the period from March 14, 2001 through March 31, 2001. In addition, as of
December 31, 2000, the company did not have a minimum tangible net assets of $4
million. If we are unable to demonstrate compliance with the Nasdaq criteria for
maintaining our listing, our Class A common stock could be subject to delisting.
If our common stock were to be delisted from trading on the Nasdaq National
Market and were neither re-listed thereon nor listed for trading on the Nasdaq
Small Cap Market or other recognized securities exchange, trading, if any, in
the common stock may continue to be conducted on the OTC Bulletin Board or in
the non-Nasdaq over-the-counter market. Delisting would result in limited
release of the market price of the common stock and limited news coverage of
EasyLink Services and could restrict investors' interest in our Class A common
stock and materially adversely affect the trading market and prices for our
Class A common stock and our ability to issue additional securities or to secure
additional financing.
Our Stock Price Has Been Volatile and We Expect that It Will Continue to Be
Volatile.
Our stock price has been volatile since our initial public offering and
we expect that it will continue to be volatile. As discussed above, our
financial results are difficult to predict and could fluctuate significantly. In
addition, the market prices of securities of Internet-related companies have
been highly volatile. A stock's price is often influenced by rapidly changing
perceptions about the future of the Internet or the results of other Internet or
technology companies, rather than specific developments relating to the issuer
of that particular stock. As a result of volatility in our stock price, a
securities class action may be brought against us. Class-action litigation could
result in substantial costs and divert our management's attention and resources.
We Have Continuing Obligations in Connection With the Sale of Our Advertising
Network Business.
On March 30, 2001, we completed the sale of our advertising network
business to Net2Phone, Inc. Included in the sale were our rights to provide
e-mail-based advertising and permission marketing solutions to advertisers, as
well as our rights to provide e-mail services directly to consumers at the
www.mail.com Web site and in partnership with other Web sites. In connection
with the sale, we entered into a hosting agreement under which we will host or
arrange to host the consumer e-mailboxes for Net2Phone for a minimum of one
year. We plan to transition the hosting of the consumer e-mail boxes to a third
party provider in the near future.
A portion of the payments payable to us by Net2Phone under our hosting
agreement with them are conditioned upon the successful transition of the
hosting of the consumer e-mail boxes to the third party provider as well as the
assignment to Net2Phone of our contracts to provide consumer e-mail services for
third party Web sites. We cannot assure you that we will successfully complete
the transition to the third party provider or that the contracts with the third
party Web sites will be successfully assigned to Net2Phone. If we do not satisfy
or we experience delays in these transition and assignment requirements, our
payments under the hosting agreement with Net2Phone will be reduced or delayed.
If we do not successfully transition to the third-party provider, we will
continue to be obligated to host or arrange for the hosting of the consumer
e-mail boxes for Net2Phone. Moreover, even after transition to a third party
provider and assignment of our contracts with third party Web sites to
Net2Phone, we may nonetheless remain liable for our obligations under these
contracts. Accordingly, we may have liability if there is a breach on the part
of the third party to which we transition the hosting or on the part of
Net2Phone under the third party Web site agreements that are assigned to them.
33
WE INTEND TO SELL OUR ASIA.COM, INC. AND INDIA.COM, INC. SUBSIDIARIES AND OUR
PORTFOLIO OF DOMAIN NAMES. UNTIL A SALE OR OTHER DISPOSITION IS COMPLETED, THE
FOLLOWING SPECIAL RISKS WILL CONTINUE TO APPLY TO THESE OPERATIONS:
The Limited Installed Personal Computer Base and High Cost of Accessing the
Internet in China and India Limits the Pool of Potential Customers for Asia.Com
and India.Com.
The market penetration rates of personal computers and on-line access
in China and India are far lower than such rates in the United States. Alternate
methods of obtaining access to the Internet, such as through cable television
modems or set-top boxes for televisions, are currently unavailable in India and
China. There can be no assurance that the number or penetration rate of personal
computers in China and India will increase rapidly or at all or that alternate
means of accessing the Internet will develop and become widely available in
China and India.
Our growth is limited by the cost to Chinese and Indian consumers of
obtaining the hardware, software and communications links necessary to connect
to the Internet in China and India. If the overall costs required to access the
Internet do not significantly decrease, most of China's and India's population
will not be able to afford to use our services. The failure of a significant
number of additional Chinese and Indian consumers to obtain affordable access to
the Internet would make it very difficult to execute our business plan.
We believe that wireless access to the Internet through a variety of
hand-held and other devices such as mobile phones will become increasingly
important in Asia. Accordingly, our Asia.com subsidiary has made wireless
Internet services for businesses an important part of its business focus. We
cannot assure you that wireless access to the Internet will in fact develop and
reach wide use and acceptance in Asia as we expect.
We Are Relying on Electronic Commerce as a Significant Part of Asia.com's and
India.com's Future Revenue, but the Internet Has Not Yet Been Proven as an
Effective Commerce Medium in China and India.
Asia.com's and India.com's revenue growth depends in part on the
increasing acceptance and use of electronic commerce in China and India. The
Internet may not become a viable commercial marketplace in Asia for various
reasons, many of which are beyond our control, including:
o inexperience with the Internet as a sales and distribution
channel;
o inadequate development of the necessary infrastructure to
facilitate electronic commerce;
34
o concerns about security, reliability, cost, ease of
deployment, administration and quality of service associated
with conducting business over the Internet; and
o inexperience with credit card usage or with other means of
electronic payment.
Underdeveloped Telecommunications Infrastructure and Unclear Telecommunications
Regulations Have Limited and May Continue to Limit the Growth of the Internet
Market in China and India.
The telecommunications infrastructure in China and India is not well
developed. The underdeveloped Internet infrastructure in China and India has
limited the growth of Internet usage there. If the necessary Internet
infrastructure is not developed, or is not developed on a timely basis, future
growth of the Internet in China and India will be limited and our business could
be harmed.
On September 25, 2000, the Chinese government promulgated PRC
Telecommunication Regulations ("Telecom Regulations"). The Telecom Regulations
define two types of telecommunication business, basic telecommunication business
and value-added telecommunication business. The Telecom Regulations also provide
that the State Council will promulgate separate rules to regulate foreign
entities' investment and operation of telecommunication business in China. We
cannot predict the effect of the new laws and regulations to be promulgated by
the State Council in this regard.
Our Asia.Com Business May Be Adversely Affected by Chinese Government Regulation
of Internet Companies.
China has recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding the legality of foreign
investment in the Chinese Internet sector, the existence and enforcement of
content restrictions on the Internet and the availability of securities
offerings by companies operating in the Chinese Internet sector. There are
substantial uncertainties regarding the proper interpretation of current and
future Chinese Internet laws and regulations.
Issues, risks and uncertainties relating to Chinese government
regulation of the Chinese Internet sector include the following:
A prohibition of foreign investment in businesses providing value-added
telecommunication services, including computer information services or
electronic mail box services, may be applied to Internet businesses such as
ours. Some officials of the Chinese Ministry of Information and Industry, or
MII, have taken the position that foreign investment in the Internet sector is
prohibited.
The MII has also stated recently that it intends to adopt new laws or
regulations governing foreign investment in the Chinese Internet sector in the
near future. If these new laws or regulations forbid foreign investment in the
Internet sector, our business in China will be severely impaired.
35
On September 25, 2000, the Chinese government promulgated
Administrative Measures on Internet Information Services ("Administrative
Measures"). The Administrative Measures require commercial Internet information
service providers to apply for an Internet information service value-added
telecommunication business license from the telecommunication administration
authority to be able to engage in Internet information service businesses and
activities in China. The Administrative Measures also provide that any initial
public offering and listing project or any equity or contractual joint venture
project with foreign investors by a commercial Internet information service
provider requires a prior consent from the central information industry
authority. It remains uncertain what percentage will be allowed for foreign
investment in the Internet information service business under existing laws and
regulations. We operate our business in China through our subsidiaries, and are
currently in the process of applying for an Internet information service
value-added telecommunication business license. We cannot predict whether this
application will be successful.
Under the agreement reached in November 1999 between China and the
United States concerning the United States' support of China's entry into the
World Trade Organization, or WTO, foreign investment in Chinese Internet
services will be liberalized to allow for 30% foreign ownership in key
telecommunication services, including Chinese Internet ventures, for the first
year after China's entry into the WTO (subject to certain geographic
limitations), 49% in the second year (with expanded geographic coverage) and 50%
thereafter (with no geographic limitations). The implementation of this
agreement is subject to approval by the U.S. Congress, China's completion of
bilateral negotiations with other WTO members, the multilateral negotiation of
China's accession protocol with the WTO and the completion of China's own
domestic procedures for accession. Within the United States, China's WTO
accession faces opposition from trade unions, environmentalists and human rights
organization.
The MII has also stated recently that the activities of Internet
content providers are also subject to regulation by various Chinese government
authorities, depending on the specific activities conducted by the Internet
content provider. Various government authorities have stated publicly that they
are in the process of preparing new laws and regulations that will govern these
activities. The areas of regulation may include online advertising and online
news reporting. In addition, the new laws and regulations may require various
Chinese government approvals for securities offerings by companies engaged in
the Internet sector in China.
The interpretation and application of existing Chinese laws and
regulations, the stated positions of the MII and the possible new laws or
regulations have created substantial uncertainties regarding the legality of
existing and future foreign investments in, and the businesses and activities
of, Chinese Internet businesses, including our Asia.com business.
Accordingly, it is possible that the relevant Chinese authorities
could, at any time, assert that any portion or all of Asia.com's existing or
future ownership structure and businesses violates Chinese laws and regulations.
It is also possible that the new laws or regulations governing the Chinese
Internet sector that may be adopted in the future will prohibit or restrict
foreign investment in, or other aspects of, any of Asia.com's current or
proposed businesses and operations. In addition, these new laws and regulations
may be retroactively applied to Asia.com.
36
If Asia.com is found to be in violation of any existing or future
Chinese laws or regulations, the relevant Chinese authorities would have broad
discretion in dealing with such a violation, including, without limitation, the
following:
o levying fines;
o revoking our business license;
o requiring us to restructure our ownership structure or
operations; and
o requiring us to discontinue any portion or all of our Internet
business.
Even if Asia.Com Complies with Chinese Governmental Regulations, the Chinese
Government May Prevent Us from Distributing, and We May Be Subject To Liability
for, Content that It Believes Is Inappropriate.
China has enacted regulations governing Internet access and the
distribution of news and other information. Even if we comply with Chinese
governmental regulations relating to licensing and foreign investment
prohibitions, if the Chinese government takes any action to limit or prohibit
the distribution of information through our network or to limit or regulate any
current or future content or services available to users on our network, our
Asia.com business would be harmed.
Some of Our Operations Are Based in India, which Presents Special Regulatory and
Other Risks to Our Business.
India has also recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding various Internet activities in
India and the legality of foreign investment in the Indian Internet sector.
There are substantial uncertainties regarding the proper interpretation of
current and future Indian Internet laws and regulations. Issues, risks and
uncertainties relating to Indian government regulation of the Indian Internet
sector include risks similar to those in China, in particular with respect to
limitations on foreign investment.
The Indian government is attempting to liberalize this sector and has
enacted or is currently considering enacting new legislation in that regard. For
example, Press Note No. 7 (2000 series) dated July 14, 2000, permits 100%
foreign investment in business-to-business e-commerce companies, subject to the
condition that "such investing companies" divest 26% of their equity in favor of
the Indian public in five years, if "these companies" are listed in other parts
of the world. It remains unclear as to whether the referenced listing is of the
Indian subsidiary or of the investor company. For retail e-commerce companies,
51% foreign equity investment is permitted. Press Note No. 8 (2000 series) dated
August 29, 2000, removes the earlier restriction on automatic approvals in cases
where a foreign investor had a previous or existing joint venture or technology
transfer/trade mark agreements in the same or allied field in India for all
proposals relating to information technology.
37
In the telecom sector, the present cap on foreign equity is 49% and a
license is required to provide such services. However, the license required for
ISPs has been waived until October 31, 2003. Also, in Press Note No. 9 (2000
series) dated September 8, 2000 the Indian government recently permitted 100%
foreign direct investment in relation to certain activities including:
o ISPs not providing gateways (applicable both for satellite and
submarine cables);
o Infrastructure providers providing dark fiber (IP category 1);
o Electronic mail; and
o Voice mail.
However, the above activities are still subject to the 26% divestment
rule, certain security restrictions and other regulations.
The government has also recently passed the Information Technology Act,
2000 which focuses on recognizing and regulating electronic transactions and
records, affecting:
o authentication of digital records;
o legal recognition of electronic records and digital
signatures;
o attribution, acknowledgment and dispatch of electronic
records;
o secure electronic records and digital signatures; and
o regulation of certifying authorities.
More legislation that is presently being discussed is a draft
Information Communication and Entertainment Bill, 2000 ("ICE Bill") that would
govern the rapid convergence of broadcasting, telecommunications and information
technologies. The ICE Bill contemplates the establishment of a Communication
Commission to license and regulate the provision of network facilities, network
services, application services or content application services and ownership of
wireless apparatus.
It is unclear how the ICE Bill, if enacted, or any of the legislation
previously discussed, will affect India.com's business and operations. Further,
political instability could halt or delay the liberalization of the Indian
economy and adversely affect business and economic conditions in India generally
and our business in particular. Although during the past decade, the government
of India has pursued policies of economic liberalization, including
significantly relaxing restrictions on the private sector and further reforms
are still expected under the current policy to promote the information
technology and software industries, political uncertainty still exists and a
significant change in India's economic liberalization and deregulation policies
could adversely affect business and economic conditions in India generally and
our India.com business in particular. Our Asia.com and India.com properties
developed by WORLD.com compete with the major business and consumer portals and
other providers of Internet services in the markets in which they operate.
38
Item 2 Properties
April 2, 2001, our headquarters are located in Edison, New Jersey. We
occupy approximately 38,000 square feet of office space under several leases
expiring between May 2002 and February 2006. Our three U.S. network facilities
are co-located in telehousing facilities under short-term leases. In addition,
we lease offices for our business messaging staff in the Chicago, Dallas, Ft.
Lauderdale, Los Angeles, New York and San Francisco metropolitan areas. While we
believe that these facilities are adequate for our present needs, we continually
review our needs and may add facilities in the future. We believe that any
required additional space would be available on commercially reasonable terms.
Finally, in connection with our deployment of Internet-capable facsimile nodes,
we have entered into, and will continue to enter into, short-term leases in
telehousing facilities worldwide.
We lease office space in Manhattan, New York consisting of approximately 40,000
square feet. We have approximately 10 years remaining on our lease, which ends
June 2011. This was our former headquarters and we are attempting to sublease
this space. Our landlord is entitled to relocate us to a similar space for any
reason upon 60 days written notice. Our landlord may cancel our lease upon 90
days written notice if the landlord plans to demolish the building.
We have approximately 25,000 square feet of leased space in Morristown, New
Jersey. This lease expires in October 2002. We are vacating this space and are
attempting to sublease these premises.
We sublease approximately 13,000 square feet of space in Jersey City, New
Jersey. We no longer utilize this space and are negotiating with the landlord to
recapture this space. This sublease expires in December 2005.
One of our data centers is housed in approximately 1,200 square feet of space
leased from a commercial data center in Manhattan. Under our current terms, the
lease covering this space expires in June 2001. We have leased an additional
1,925 square feet in this facility, for a total of 3,125 square feet. The data
center provides 24-hour security, fire protection, computer grade air handling
and backup power facilities.
We have committed to lease approximately 1,000 square feet of space at a data
center operated by AT&T. The lease expires in April 2001. We are negotiating
with the landlord to extend the term of this lease.
We lease approximately 12,600 square feet of space in Dayton, Ohio. Under its
current terms, the lease expires in May 2002.
39
We lease approximately 18,000 square feet of office space in four locations in
England. The leases expire between May 2002 and June 2017, with cancellation
provisions available in the two longer term leases, 10 years prior to expiration
in 2004 and 2007.
As part of our acquisition of the EasyLink Services business and pursuant to a
transition services agreement, we sublease approximately 34,000 square feet of
space at various locations in the United States from the former owner. These
leases expire at varying times between April and December 2001. One equipment
facility has an option to renew for another 12 months.
Item 3 Legal Proceedings
From time to time we have been, and expect to continue to be, subject
to legal proceedings and claims in the ordinary course of business. These
include claims of alleged infringement of third-party patents, trademarks,
copyrights, domain names and other similar proprietary rights. These claims,
even if not meritorious, could require us to expend significant financial and
managerial resources.
The Company has received notices or claims from certain third parties
for disputed and unpaid accounts payable. One of such vendors, Initiative Media
Worldwide, Inc. has commenced legal proceedings in California to collect
approximately $2 million alleged to be owed to it in connection with advertising
alleged to have been run on our behalf. The Company believes that they have
appropriately reserved for the amount of any liability that may arise out of
this matter, and management believes that this matter will be resolved without a
material effect on the Company's financial position or results of operations.
40
Part II
Item 5 Market for the Registrant's common Equity and Related Stockholder Matters
Stockholder Data
2000
----
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Market Price
High...................................... $ 5.31 $ 9.88 $ 17.13 $ 20.63
Low....................................... 0.41 5.03 4.50 13.00
End of Quarter............................ 0.72 5.22 5.69 17.25
1999
----
Fourth Third Second First
Quarter Quarter Quarter Quarter(1)
------- ------- ------- ----------
Market Price
High...................................... $ 29.00 $ 26.75 $ 21.38 N/A
Low....................................... 13.00 10.75 8.25 N/A
End of Quarter............................ 18.75 14.38 18.81 N/A
(1) The Company's shares were first publicly traded beginning June 18, 1999. The
NASDAQ closing market price at February 28, 2000 was $1.16.
Dividends
The Company has never declared or paid any cash dividends on its common stock
and does not anticipate paying any cash dividends on its stock in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to finance the expansion of our business.
Number of Security Holders
At February 28, 2001, the approximate number of holders of record of Class A and
Class B common stock was 382 and 1, respectively.
Stock listings
The principal market on which the common stock is traded is the NASDAQ National
Market (NASD) under the symbol "EASY".
Recent Sales of Unregistered Securities
During the three months ended December 31, 2000, Mail.com issued Class A common
stock to third parties in connection with business transactions or granted
options to employees in reliance upon the exemption from registration pursuant
to Section 4(2) of the Securities Act of 1933 and Rule 701 or Regulation S
promulgated thereunder in various transactions as follows:
During the three months ended December 31, 2000, we issued 25,860 shares of
Class A common stock to employees upon exercise of options at a weighted average
exercise price of $1.25 per share.
41
During the three months ended December 31, 2000 we issued 102,003 shares of
Class A common stock to employees at a weighted average price of $1.46 per share
representing the Company's matching contribution to its 401(k) plan.
During the three months ended December 31, 2000 we issued 60,444 shares of Class
A common stock to employees at the price of $0.61 per share representing
employees participation in the Company's employee stock purchase plan.
42
Item 6 Consolidated Selected Financial Data
The following consolidated selected financial data should be read in conjunction
with the consolidated financial statements and the notes to these statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" elsewhere in this document. The consolidated financial statements
included herein have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1(b) to the consolidated financial
statements, the Company has suffered recurring losses from operations since
inception and has a working capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to this matter are also described in Note 1(b). The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Five Year Summary of Selected Financial Data
(in thousands, except per share and employee data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Consolidated Statement of Operations Data for
the Year Ended December 31,
Revenues......................................... $ 61,222 $ 12,709 $ 1,495 $ 173 $ 19
Total operating expenses......................... 282,191 66,352 14,626 3,170 568
Loss from operations............................. (220,969) (53,643) (13,131) (2,997) (549)
Net loss......................................... (229,527) (47,015) (12,525) (2,996) (544)
Cumulative dividends on settlement
of contingent obligations to
preferred stockholders........................ -- (14,556) -- -- --
Net loss attributable to common stockholders..... (229,527) (61,571) (12,525) (2,996) (544)
Basic and diluted net loss per common share...... (4.01) (1.96) (0.86) (0.21) (0.04)
Weighted average basic and diluted
shares outstanding............................ 57,179 31,374 14,608 14,098 13,725
Consolidated Balance Sheet Data at December 31,
Cash and cash equivalents........................ 7,409 36,870 8,414 910 128
Marketable securities............................ 22,202 7,006 -- -- --
Total current assets............................. 46,121 50,137 9,970 947 187
Property and equipment, net...................... 50,916 28,935 4,341 928 239
Domain names, net................................ 6,975 7,934 1,010 651 233
Total assets..................................... 330,261 137,267 20,344 2,646 666
Total current liabilities........................ 61,811 28,336 4,894 1,137 149
Deferred revenue................................. 2,700 1,335 1,905 329 --
Long-term capital lease obligations.............. 14,319 12,016 1,437 569 146
Long term portion of domain purchase obligations. 85 176 217 150 --
Convertible and other long-term notes payable.... 100,321 -- -- -- --
Redeemable convertible preferred stock........... -- -- 13,048 -- --
Convertible preferred stock...................... -- -- 62 42 7
Total stockholders' equity (deficit)............. 138,746 96,014 (333) 567 370
Number of Employees at December 31,.............. 1,401 276 89 29 9
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of factors that affect the comparability of the
selected financial data in the years presented above.
43
Item 7 Management's Discussion and Analysis of Financial Condition And Results
of Operations
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this annual report. The
consolidated financial statements included herein have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(b) to
the consolidated financial statements, the Company has suffered recurring losses
from operations since inception and has a working capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to this matter are also described in Note 1(b). The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Overview
On April 2, 2001, we changed our name to EasyLink Services Corporation.
The name change was made to help create a corporate identity tied to our focus
on outsourced messaging services.
EasyLink Services Corporation, formerly Mail.com, Inc., is a leading
global provider of outsourced messaging services to enterprises and service
providers. Upon the completion of our acquisition of Swift Telecommunications,
Inc. on February 23, 2001, we combined the businesses of Mail.com Business
Messaging Services, Swift Telecommunications and the Easylink Services business
acquired from AT&T Corp. by Swift Telecommunications. As a result of this
combination, Easylink Services Corporation offers a comprehensive portfolio of
messaging services to thousands of business customers worldwide, including a
majority of the Fortune 500. We offer a broad range of messaging services to
businesses and service providers, including managed e-mail and groupware hosting
services; services that protect corporate e-mail systems such as virus
protection, spam control and content filtering services; message delivery
services such as electronic data interchange or "EDI," telex, desktop fax,
broadcast and production messaging services; and professional messaging services
and support.
Until March 30, 2001, we also offered advertising services and consumer
e-mail services to Web sites, ISP's and direct to consumers. In this market, we
provided Web-based e-mail services or WebMail to Internet Service Providers
(ISPs) including several of the world's top ISPs, and we partnered with top
branded Web sites to provide WebMail services to their users. In addition, we
served the market directly through our flagship web site www.mail.com. On
October 26, 2000, the Company announced its intention to sell its advertising
network business and stated that it will focus exclusively on its established
outsourced messaging business. The Company also announced that as a result of
its decision to focus on its outsourced messaging business, it is streamlining
the organization, taking advantage of lower cost areas and further integrating
its technological and operational infrastructures. On March 30, 2001, we
completed the sale of our advertising network and consumer e-mail business to
Net2Phone. In connection with the sale, we entered into a hosting agreement
under which we will host or arrange to host the consumer e-mailboxes for
Net2Phone for a minimum of one year. We plan to transition the hosting of the
consumer e-mail boxes to a third party provider in the near future.
In March 2000, Mail.com formed WORLD.com to develop the Company's
extensive portfolio of domain names into major Web properties, such as Asia.com
and India.com, which serve the worldwide business-to-business and
business-to-consumer marketplace. Through its subsidiaries, WORLD.com generates
revenues primarily from sales of information technology products, system
integration and website development for other companies, advertising related
sales and commissions earned from booking travel arrangements. On November 2,
2000, the Company announced that it will sell all assets not related to its core
outsourced messaging business, including its Asia.com Inc., and India.com Inc.
subsidiaries, and its portfolio of category-defining domain names. See Notes 1,
2, 17 and 22 to our consolidated financial statements for additional
information.
For the year ended December 31, 2000, total revenues were $61.2 million compared
to $12.7 million for the year ended December 31, 1999 and $1.5 million for the
year ended 1998. Net loss attributable to common shareholders was $229.5 million
for the year ended December 31, 2000 as compared to $61.6 million for the year
ended December 31, 1999 and $12.5 million for the year ended December 31, 1998.
During 2000, we generated approximately 50% of our revenues from business
messaging services and approximately 36% of our revenue from the advertising
network business. We also generated approximately 14% of our revenues from the
sales of information technology products and the provision of local content and
other Internet services associated with WORLD.com. A small portion of our
revenues came from the sale of domain name assets. For the years ended December
31, 2000 and 1999, approximately $37.5 million and $1.8 million of our revenue
was generated from companies we acquired since January 1, 1999. As indicated in
Note 1 of the notes to our consolidated financial statements, in the future, our
focus will be centered exclusively on the outsourced business messaging market.
44
For the year ended December 31, 1999, we generated approximately 81% of our
revenues from our advertising network business related sales and approximately
14% of our revenues from business messaging services. We also generated a small
portion of our revenues from the sale of domain name assets and from e-mail
service outsourcing fees paid by Web sites. We recognize revenues from the sale
of domain names at the time of sale.
Our business messaging services include managed e-mail and groupware hosting
services; services that protect corporate e-mail systems such as virus
protection, spam control and content filtering services; message delivery
services such as electronic data interchange or "EDI," telex, desktop fax,
broadcast and production messaging services; and professional messaging services
and support. We derive revenues from monthly per-user or per-message fees for
managed e-mail and groupware hosting and virus protection, spam control and
content filtering services; monthly per-message and usage-based charges for our
message delivery services; and license and consulting fees for our professional
services.
Revenue from e-mail and groupware hosting services, virus protection, spam
control and content filtering services, message delivery services and
professional services is recognized as the services are performed.
Facsimile license revenue is recognized over the average estimated customer life
of 3 years. Business revenues for the years ended December 31, 2000 and 1999
were $30.3 million and $1.8 million, respectively. There were no business
revenues during 1998.
Historically, our basic advertising network e-mail services were free to our
members. Prior to our acquisition of NetMoves, we generated the majority of our
revenues from our advertising network e-mail services, primarily from
advertising related sales, including direct marketing and e-commerce promotion.
We also generated revenues in the consumer market sector from subscription
services, such as increased storage capacity. In December 2000, we delivered
approximately 386 million page views and approximately 1.6 billion
advertisements in our advertising network e-mail services. During 2000, we
delivered approximately 4.7 billion page views.
We priced advertisements based on a variety of factors, including whether the
advertising is targeted to a specific category of members or whether it is run
across our entire network. We attempted to sell our available advertising space,
or inventory, through a combination of advertisements that we sold on either a
"cost per thousand" or "CPM" basis, or a "cost per action" basis. Advertising
sales billed on a CPM basis require that the advertiser pay us an agreed amount
for each 1,000 advertisements delivered. In a CPM-based advertising contract, we
recognized revenues from advertising sales ratably as we deliver individual
advertisements or impressions. In a cost per action contract, we recognized
revenues as members "click" or otherwise respond to the advertisement. In the
case of contracts requiring actual sales of advertised items, we experienced
delays in recognizing revenues pending receipt of data from the advertiser.
We also delivered advertisements to our members through our Special Delivery
permission-marketing program. Under this program, members identified categories
of products and services of interest to them and requested that notices be sent
to their e-mailbox about special opportunities, information and offers from
companies in those categories. We recognized revenue as mailings were delivered.
On some occasions, we received upfront "placement" fees from advertising related
to direct marketing and e-commerce promotion. These arrangements gave the
customer the exclusive right to use our network to promote goods or services
within their category. These exclusive arrangements generally lasted one year.
We recorded placement fees as deferred revenues, and ratably recognized the
revenues over the term of the agreement.
We also engaged in barter transactions. Under these arrangements, we delivered
advertisements promoting a third party's goods and services in exchange for
their agreement to run advertisements promoting our Webmail service. The number
of advertisements that each party agrees to deliver, and hence the effective
CPM, may not be equal. We recognized barter revenues ratably as the third
party's advertisements were delivered to our members. We recorded cost of
revenues ratably as our advertisements were delivered by the third party.
Although our revenues and related costs of revenues were equal at the conclusion
of the barter transaction, the amounts may not be equal in any particular
period. We recorded barter revenues and expenses at the fair market value of
either
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the services we provided or of those we received, whichever is more readily
determinable under the circumstances. Barter revenues were approximately 3% of
total revenues for the year ended December 31, 2000 as compared to 3% for the
year ended December 31, 1999, and 11% for the year ended December 31, 1998.
Previously, we offered one-year, two-year, five-year and lifetime subscription
periods. During March 1999, we increased our subscription rates and began
offering only monthly and annual subscriptions. We recorded subscriptions as
deferred revenues and recognize the revenues ratably over the term of the
subscription. We used an eight-year amortization period for lifetime
subscriptions. We offered a 30-day trial period for certain subscription
services. We do not recognize any revenue during such period. We provided
pro-rated refunds and chargebacks to subscription members who elect to
discontinue their service. The actual amount of refunds and chargebacks
approximated our expectations for all periods presented. In August 1999, in an
effort to increase member sign ups and retention, we eliminated subscription
fees for most of our premium e-mail addresses.
In the consumer market sector some of our contracts provide Webmail service at
no cost to the partner. In connection with the sale of our advertising network,
we have agreed to assign our rights under substantially all of these contracts
to Net2Phone. In addition to assuming the costs to provide service, we also pay
a percentage (up to 50%) of any advertising and subscription revenues
attributable to our Webmail service at the partner's site. While most of our
partners share in advertising and subscription revenues on a quarterly basis
during the contract term, some of our partners are compensated or have the
option to be compensated based on the number of member registrations. These
contracts require us to pay an amount in cash for each member registration or
confirmed member registration at the partner's site. In addition, under some of
our contracts we paid our partners guaranteed minimum amounts and/or upfront
scheduled payments, usually in the form of sponsorship or license fees. Because
we expected to retain, at contract termination, most of the members that
establish e-mailboxes, we accounted for both revenue sharing and per member
costs as customer acquisition costs. We recorded these costs as sales and
marketing expenses as we incur them.
Domain development revenues include revenues generated by WORLD.com and consist
primarily of sales of information technology products. Revenues are also
generated from system integration and website development, advertising, and
commissions from booking travel arrangements. Revenues for the year ended
December 31, 2000 were $8.5 million. There were no domain development revenues
during 1999 or 1998.
Although we have experienced substantial growth in revenues in recent periods,
we have incurred substantial operating losses since inception and will continue
to incur substantial losses for the foreseeable future. As of December 31, 2000,
we had an accumulated deficit of approximately $307.2 million.
In light of the evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our revenues and
operating results are not meaningful and should not be relied upon as
indications of future performance. We believe that advertising sales in
traditional media, such as television and radio, generally are lower in the
first calendar quarter. Our revenues are also affected by seasonal patterns in
advertising, as well as current market conditions. We do not believe that our
historical growth rates are indicative of future results.
Our prospects should be considered in light of risks, expenses and difficulties
encountered by companies in the early stages of development, particularly
companies in the rapidly evolving Internet market. See "Risk Factors That May
Affect Future Results".
STOCK AND WARRANT ISSUANCES
Historically, some of our contracts have required us to issue shares of Class A
common stock on a contingent basis. The amount of stock we were required to
issue was usually based upon the number of member registrations during the
preceding quarter or upon the achievement of performance targets. We recorded
the non-cash expense as of the date we issued the stock or as of the date the
targets were achieved, at the then fair market value of our stock. These
expenses aggregated approximately $0; $2.5
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million and $3.0 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Upon the closing of our initial public offering in June of 1999,
we issued an aggregate of 2,368,907 shares of Class A common stock to CNET and
Snap and 210,000 shares of Class A common stock to NBC Multimedia, valued an
aggregate of $18.1 million, to settle in full our contingent obligation to
issue shares to these parties. We no longer issue stock to third parties in
connection with member registrations.
Under an agreement with CNN entered into August 1998, we issued 253,532 shares
of our Class A common stock upon execution of a contract in August 1998. We
agreed to issue the shares in anticipation of CNN's fulfillment of promotional
obligations under the contract. We capitalized approximately $887,000 as a
partner advance, the market value of the stock we issued and then amortized that
amount over the length of the contract. During 2000 we recorded approximately
$270,000 of amortization expense for this agreement as compared to $444,000 in
1999 and $173,000 in 1998. This amortization is included in sales and marketing
expenses.
Under our agreement with GeoCities entered into in September 1998, GeoCities
received 1.0 million shares of Class A common stock upon the commencement of the
contract in consideration of the advertising, subscription and customer
acquisition opportunities. In addition to our obligation to share revenue
generated from the partnership with GeoCities, we were required to pay GeoCities
a $1.5 million fee in three installments, the first of which was paid in
December 1998. On May 1, 1999, GeoCities and Mail.com agreed to cancel and
rescind the contract. Under this agreement, GeoCities retained the first
$500,000 non-refundable payment that we paid to them under the original
agreement and we are not required to pay the remaining $1 million. In addition,
GeoCities returned to us the 1.0 million shares of Class A common stock issued
to them. We also agreed to deliver advertisements over our network on behalf of
GeoCities for the sixteen-month period commencing May 1999. The total payments
by GeoCities for this advertising were $125,000 per month or $2 million in the
aggregate over the sixteen-month period. In the second quarter of 1999, we
reversed the issuance of shares and expensed the non-refundable fee previously
paid to GeoCities.
In 1998, we entered into a partner agreement with CNET, which was amended
shortly thereafter to include Snap, a newly formed entity. Under the agreement,
we were obligated to issue warrants for a total of 1.5 million shares of our
Class A common stock upon achievement of a member registration target. The
warrants were divided between CNET and Snap, and Snap subsequently assigned its
portion to NBC Multimedia. CNET and NBC Multimedia exercised their warrants
prior to our initial public offering, and upon the closing of our initial public
offering on June 23, 1999, $7.5 million was transferred from an escrow account
to our account and we issued the common stock to CNET and NBC Multimedia.
Under a letter agreement and interim agreement dated May 26, 1999 and July 26,
1999, respectively, AT&T Corp. ("AT&T") and the Company agreed to negotiate in
good faith to complete definitive agreements to establish a strategic
relationship. We have not entered into a definitive agreement to establish the
proposed strategic relationship, and, effective March 30, 2000, the letter
agreement and the Interim Agreement were terminated. Under the May 26, 1999
letter agreement, we issued warrants to purchase 1.0 million shares of Class A
common stock at $11.00 per share. AT&T had the option to exercise the warrants
at any time on or before December 31, 2000. Since AT&T did not exercise the
warrants on or before December 31, 2000, the warrants expired and were
cancelled.
The Company recorded a deferred cost of approximately $4.3 million in the
aggregate as a result of the issuance of these warrants to AT&T. As a result of
the termination of the May 26 letter agreement and the July 26 interim
agreement, the remaining unamortized portion of deferred costs of $3.3 million
was expensed during 2000. The Company had amortized approximately $980,000
during 1999.
ACQUISITIONS, INVESTMENTS AND DIVESTITURES
On February 8, 2000, we acquired NetMoves Corporation ("NetMoves"), a
provider of Internet fax transmission services for approximately $168.3 million
including acquisition costs of approximately $2.1 million. The acquisition was
accounted for as a purchase business combination. We issued 6,343,904 shares of
Class A common stock valued at approximately $145.7 million based upon our
average trading price at the date of acquisition. In addition, we assumed
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outstanding options and warrants of NetMoves which represent the right to
purchase 962,443 shares and 57,343 shares respectively, of our Class A common
stock at weighted average exercise prices of $6.69 and $8.64, respectively. The
options and warrants were valued at an aggregate of approximately $20.5 million.
NetMoves (now named Mail.com Business Messaging Services, Inc.) designs,
develops and markets to businesses a variety of Internet document delivery
services, including e-mail-to-fax, fax-to-e-mail, fax-to-fax and broadcast fax
services. This acquisition enhances our presence in the domestic and
international business service market, provides us with an established sales
force and international distribution channels and expands our offering of
Internet-based messaging services.
On March 14, 2000, we acquired eLong.com, Inc., a Delaware corporation
("eLong.com") for approximately $62 million including acquisition costs of
approximately $365,000. eLong.com, through its wholly owned subsidiary in the
People's Republic of China, operates the Web Site www.eLong.com, which is a
provider of local content and other internet services. The acquisition was
accounted for as a purchase business combination. Concurrently with the merger,
eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the merger, we
issued to the former stockholders of eLong.com an aggregate of 3,599,491 shares
of Mail.com Class A common stock valued at approximately $57.2 million, based
upon our average trading at the date of acquisition. All outstanding options to
purchase eLong.com common stock were converted into options to purchase an
aggregate of 279,289 shares of Mail.com Class A common stock. The options were
valued at approximately $4.4 million.
During the fourth quarter of 2000, we wrote off approximately $7.8 million of
goodwill, as it was determined that the carrying value had become permanently
impaired as a result of our November 2, 2000 decision, as approved by the Board
of Directors, to sell all assets not related to its core outsourcing business,
including its Asia-based businesses. Please see the discussion on Impairment
Charges included in the Results of Operations and Liquidity and Capital
Resources - Subsequent Events sections below for additional information.
In addition, we were obligated to issue up to an additional 719,899 shares of
Mail.com Class A common stock in the aggregate to the former stockholders of
eLong.com if Mail.com or Asia.com acquires less than $50.0 million in value of
businesses engaged in developing, marketing or providing consumer or business
internet portals and related services focused on the Asian market or a portion
thereof, or businesses in furtherance of such a business, prior to March 14,
2001. The actual amount of shares issued will be based upon the amount of any
shortfall in acquisitions below the $50.0 million target amount. We will either
adjust goodwill and amortize such costs over the remaining life of the goodwill
or record an additional impairment charge after assessing its recoverability, at
the time the consideration becomes issuable. Based upon the value of the
acquisitions completed as of March 14, 2001 we expect that we may be obligated
to issue up to approximately 403,000 shares of our Class A common stock to the
former stockholders of eLong.com. See Note 2 to our consolidated financial
statements for additional information.
In the merger, certain former stockholders of eLong.com retained shares of Class
A common stock of Asia.com representing approximately 4.0% of the outstanding
common stock of Asia.com. Under a separate Contribution Agreement with Asia.com
these stockholders contributed an aggregate of $2.0 million in cash to Asia.com
in exchange for additional shares of Class A common stock of Asia.com,
representing approximately 1.9% of the outstanding common stock of Asia.com.
Pursuant to the Contribution Agreement, Mail.com (1) contributed to Asia.com the
domain names Asia.com and Singapore.com and $10.0 million in cash and (2) agreed
to contribute to Asia.com up to an additional $10.0 million in cash over the
next 12 months and to issue, at the request of Asia.com, up to an aggregate of
242,424 shares of Mail.com Class A common stock for future acquisitions. As a
result of the transactions effected pursuant to the Merger Agreement and the
Contribution Agreement, Mail.com initially owned shares of Class B common stock
of Asia.com representing approximately 94.1% of the outstanding common stock of
Asia.com. Our ownership percentage decreased to 92% as of December 31, 2000.
Asia.com granted to management employees of Asia.com options to purchase Class A
common stock of Asia.com representing, as of December 31, 2000, 9% of the
outstanding shares of common stock after giving effect to the exercise of such
options.
The shares of Class A common stock of Asia.com are entitled to one vote per
share and the shares of Class B common stock of Asia.com are entitled to 10
votes per share. The shares of Class A common stock and Class B common stock are
otherwise subject to the same rights and restrictions.
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On March 16, 2000, in exchange for $2 million in cash and 185,686
shares of our Class A common stock valued at approximately $2.9 million, we
acquired a domain name from and made a 10% investment in Software Tool and Die,
a Massachusetts Corporation. Software Tool and Die is an Internet Service
Provider and provides Web hosting services. We concluded that the carrying value
of this cost-based investment was permanently impaired based on the achievement
of business plan objectives and milestones and the fair value of the investment
relative to our carrying value. During the fourth quarter of 2000, we recorded
an impairment charge of $4.2 million due to an other-than-temporary decline in
the value of this investment due to the decrease in net book value of the
investment caused by its losses, as well as a result of our November 2, 2000
decision, as approved by the Board of Directors, to sell all assets not related
to its core outsourcing business, including its Asia-based businesses. This
amount is included in impairment of investments within other income (expense) in
our 2000 statement of operations. Please see the section on Impairment Charges
included in the Results of Operations section below for additional information.
On March 31, 2000, we acquired a Mauritius entity, which in turn owned
80% of an Indian subsidiary, to facilitate future investments in India. The
terms were $400,000 in cash and a $1 million 7% note payable due one year from
closing. In June 2000, the Company acquired through the Mauritius entity the
remaining 20% of the Indian subsidiary for $2.2 million in cash. In connection
with this acquisition, we incurred a $1.8 million charge related to the issuance
of 104,347 shares of Class A common stock, as compensation for services
performed, and we paid $200,000 cash and an additional $200,000 payable in our
Class A common stock as compensation for employees.
On April 17, 2000, in exchange for $500,000 in cash, we acquired
certain source code technologies, trademarks and related contracts relating to
the InTandem collaboration product ("InTandem") from IntraACTIVE, Inc., a
Delaware corporation (now named Bantu, Inc., "Bantu"). On the same date, we also
paid Bantu an upfront fee of $500,000 for further development and support of the
InTandem product. On the same date, pursuant to a Common Stock Purchase
Agreement, Mail.com acquired shares of common stock of Bantu representing
approximately 4.6 % of Bantu's outstanding capital stock in exchange for $1
million in cash and 462,963 shares of Class A common stock, valued at
approximately $3.6 million. Pursuant to the Common Stock Purchase Agreement,
Mail.com also agreed to invest up to an additional $8 million in the form of
shares of Mail.com Class A Common stock in Bantu in three separate increments of
$4 million, $2 million and $2 million, respectively, based upon the achievement
of certain milestones in exchange for additional shares of Bantu common stock
representing 3.7%, 1.85% and 1.85%, respectively, of the outstanding common
stock of Bantu as of April 17, 2000. The number of shares of our Class A common
stock issuable at each closing will be based on the greater of $9 per share and
the average of the closing prices of our Class A common stock over the five
trading days prior to such closing date. In July 2000, we issued an additional
92,593 shares of our Class A common stock valued at approximately $590,000 to
Bantu in accordance with a true-up provision in the Common Stock Purchase
Agreement. In September 2000, we issued an additional 444,444 shares of our
Class A common stock valued at approximately $2.9 million as payment for the
achievement of a milestone indicated above. We account for this investment under
the cost method.
During the second quarter of 2000, Asia.com acquired three companies
for approximately $18.4 million, including acquisition costs. Payments consisted
of cash approximating $500,000, 1,926,180 shares of Mail.com Class A common
stock valued at approximately $11.6 million and 4,673,448 shares of Asia.com
Class A common stock valued at approximately $6.1 million, all of which were
based upon our average trading price on the dates of acquisition.
During the fourth quarter of 2000, approximately $12 million of goodwill was
written off as the Company determined that the carrying value of the goodwill
associated with one of these acquisitions focused on the wireless sector had
become permanently impaired as a result of our November 2, 2000 decision, as
approved by the Board of Directors, to sell all assets not related to its core
outsourcing business, including its Asia-based businesses. Please see the
discussion on Restructuring Charges included in the Results of Operations
section below for additional information.
Under a stock purchase agreement associated with one of the Asia.com
acquisitions, the Company agreed to pay a contingent payment of up to $5 million
if certain wireless revenue targets are reached after the closing. The
contingent payment was payable in Mail.com Class A common stock, cash or, under
certain circumstances, Asia.com Class A common stock. Management currently does
not expect to achieve these wireless revenue targets and, accordingly, does not
expect to issue any additional consideration.
49
During the third quarter of 2000, the Company acquired two business
messaging companies by issuing 710,195 shares of Mail.com Class A common stock
valued at approximately $4.3 million based upon the Company's average trading
price at the date of acquisition. These acquisitions were accounted for as a
purchase business combination.
On July 14, 1999, we purchased an equity interest in 3Cube, Inc
("3Cube"). Under the agreement, we paid $1.0 million in cash and issued 80,083
shares of our Class A common stock, valued at approximately $2.0 million, in
exchange for 307,444 shares of 3Cube convertible preferred stock, which
represents an equity interest of less than 20% in 3Cube. We recorded this
transaction under the cost method. This agreement also included a technology
licensing arrangement, whereby 3Cube agreed to integrate its Internet facsimile
technology into our email service across our partner network. On June 30, 2000,
the Company made an additional investment in 3Cube by issuing 255,049 shares of
Class A common stock valued at approximately $1.5 million in exchange for 50,411
shares of 3Cube Series C Preferred Stock. As of December 31, 2000 Mail.com owned
preferred stock of 3Cube representing an ownership interest of 21% of the
combined common and preferred stock outstanding of 3Cube. Accordingly, we now
account for this investment under the equity method of accounting. Under the
equity method, our proportionate share of each investee's operating losses and
amortization of the investor's net excess investment over its equity in each
investee's net assets is included in loss on equity investments. The effect of
this change from the cost method to the equity method of accounting resulted in
a decrease of the carrying value of the investment by $2.1 million which is
included in loss on equity investment in our 2000 statement of operations. In
addition, in December 2000, we wrote down the value of its investment in 3Cube
by $200,000 as it was determined that the decline in its value was
other-than-temporary which is included in impairment of investments within other
income (expense) in our 2000 statement of operations. Please see the section on
Impairment Charges included in the Results of Operations section below for
additional information.
On August 20, 1999, we acquired The Allegro Group, Inc. ("Allegro").
Pursuant to the terms of the merger agreement, Allegro became a wholly owned
subsidiary of Mail.com. In connection with this acquisition, we paid
approximately $3.2 million in cash and issued 1,102,973 shares of our Class A
common stock to the shareholders of Allegro valued at $17.1 million based upon
our average trading price at the date of acquisition. We also paid one-time
signing bonuses of $800,000 to employees of Allegro who were not shareholders of
Allegro. We were obligated to pay additional amounts based upon Allegro's
achievement of specified revenue and spending targets in 2000. This contingent
payment would consist of up to $3.2 million payable in cash, additional bonus
payments of up to $800,000 and up to $16.0 million payable in shares of our
Class A common stock based on the market value of the stock at the time of
payment, up to a maximum of 2,000,000 shares. We also granted options to Allegro
employees to purchase approximately 625,000 shares of our Class A common stock
at an exercise price of $16.00 per share. These options vest quarterly over four
years, subject to continued employment. This acquisition has been accounted for
as a purchase business combination. On November 2, 2000, the Company settled its
contingent consideration obligation with Allegro. We will pay to the former
shareholders of Allegro 283,185 shares of our Class A common stock. Payment
shall be made on December 31, 2001. At the time the consideration becomes
issuable, the Company will adjust the purchase price and reflect additional
goodwill, and will ratably amortize such costs over the remaining life of the
goodwill.
The valuation of the write-off of acquired in-process technology in the amount
of $900,000 in connection with the acquisition of Allegro was based on an
independent appraisal which determined that the new versions of MailZone
technology acquired from Allegro had not been developed into the platform
required by us at the date of acquisition. As a result, we were required to
expend significant capital expenditures to successfully integrate and develop
the new versions of the MailZone technology, and there is considerable risk that
this technology will not be successfully developed. If this technology is not
successfully developed, there will be no alternative use for the technology. The
MailZone technology is an enabling technology for e-mail communications and
includes message management, license, traffic and reporting. Our consolidated
statements of operations reflect a one-time write-off of the amount of the
purchase price of Allegro allocated to acquired in-process technology of
$900,000.
On October 18, 1999, the Company acquired TCOM, Inc. ("TCOM") a
software technology development firm specializing in the design of software for
the telecommunications and computer telephony industries. The addition of TCOM
expanded the Company's ability to deliver Internet services that meet the demand
of our business customers.
The Company is not continuing the business operations of TCOM but made the
acquisition in order to obtain technology and development resources. We paid $2
million in cash and 439,832 shares of our Class A common stock valued at
approximately $6.1 million based upon our average trading price at the date of
acquisition. In addition we are obligated to pay to the continuing
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employees of TCOM, bonuses totaling $400,000, payable in six-month installments
after the closing date in the amounts of $74,000, $88,000, $116,000 and
$122,000, provided such employees continue their employment through the
applicable payment dates. As of December 31, 2000 approximately $143,000 was
paid.
We may be obligated to pay additional consideration to the sellers of TCOM based
upon the achievement of certain objectives over an 18-month period. The
additional consideration would consist of up to $1.0 million payable in cash and
up to $2.75 million payable in shares of our Class A common stock based on the
market value at the time of payment, although the market value shall be deemed
to be not less than $4.00 per share. We also granted options to TCOM employees
to purchase approximately 459,330 shares of our Class A common stock at an
exercise price of $13.06 per share. These options vest quarterly over 4 years
subject to continued employment. On November 1, 2000, the Company settled its
contingent consideration obligation with TCOM. We will pay the former
shareholders of TCOM a total of $3.75 million, comprised of a cash payment of $1
million and $2.75 million in Mail.com Class A common stock, on April 18, 2001,
determined based on the market price at that time, but not less than $4.00 per
share. The Company adjusted the purchase price for the $1 million payment and is
amortizing such costs over the remaining life of the other intangible assets,
namely workforce. Upon the issuance of the shares, we will either adjust other
intangible assets and amortize such costs over the remaining life of the other
intangible assets or record an impairment charge after assessing its
recoverability. Please see the discussion on our first quarter of 2001
restructuring charge in the Liquidity and Capital Resources -- Subsequent Events
section and Note 22(f) to our consolidated financial statements.
On November 24, 1999, the Company acquired iFan, Inc. ("iFan"), which
owns various domain names. The acquisition has been accounted for as an
acquisition of assets. IFan had limited operations. We issued 72,704 shares of
our Class A common stock valued at approximately $1.6 million. The value was
determined by using the average of the Company's Class A common stock around the
closing date, which occurred simultaneously with the announcement date. In
addition, all outstanding iFan, stock options were converted into 16,965
non-qualified stock options of Mail.com at a weighted-average exercise price of
$11.41 per share. The value ascribed to the options using the Black Scholes
pricing model ($370,000) was part of the $2.1 million purchase price. The excess
of the purchase price over the net book value of the domain assets acquired of
iFan has been allocated to other intangible assets (non-compete agreements).
Such amount is being ratably amortized over a period of three years, the
expected period of benefit. In December 2000, we wrote off $160,000 of domain
names as part of our restructuring program. Please see the Restructuring section
below for additional information.
On December 30, 1999, we acquired Lansoft U.S.A., Inc., ("Lansoft") a
provider of email management, e-commerce and Web hosting services to businesses
and added approximately 690 business customers. The acquisition was accounted
for as a purchase business combination. We issued 152,006 shares of our Class A
common stock valued at approximately $2.7 million based upon our average trading
price at the date of acquisition. In addition the board of directors approved
the Lansoft Stock Option Plan, providing for the issuance of 100,000
non-qualified stock options at an exercise price of $17.06 per share to selected
employees of Lansoft. All such options were issued immediately after the
consummation of the Lansoft acquisition and vest quarterly over 4 years subject
to continued employment.
We may be obligated to issue up to 375,000 Shares of Class A common stock as
additional consideration to the sellers of Lansoft based upon the achievement of
certain targets in calendar year 2000. Management has determined that the
revenue targets were not achieved for the calendar year 2000.
On February 23, 2001, we acquired Swift Telecommunications, Inc.,
("STI"). In January 2001, STI acquired the EasyLink Services business ("EasyLink
Services") from AT&T Corp. STI, together with its newly acquired EasyLink
Services business, is a global provider of messaging services such as telex,
fax, electronic data interchange and e-mail.
At the closing of the acquisition by STI of the EasyLink Services business from
AT&T, Mail.com advanced $14 million to STI in the form of a loan, the proceeds
of which were used to fund part of the cash portion of the purchase price to
AT&T. Upon the closing of the acquisition of STI, Mail.com assumed a $35 million
note issued by STI to AT&T. The $35 million note will be secured by the assets
of STI, including the EasyLink Services business, and the shares of Mail.com
Class A
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common stock to be issued to the sole shareholder in the Merger. The note is
payable in equal monthly installments over four years and bears interest at the
rate of 10% per annum. The note is subject to mandatory prepayment upon the
sale of specified assets of STI, including the EasyLink Services business, and
in certain other events. The note also contains certain customary covenants and
events of default, including limitations on the ability of Mail.com to incur
additional indebtedness and to incur additional liens on the STI and EasyLink
assets.
Upon the closing of the acquisition of STI, Mail.com paid to the sole
shareholder of STI $835,294 in cash and issued an unsecured note for
approximately $9.2 million and approximately 19 million shares of Mail.com Class
A common stock valued at approximately $23 million as the purchase price for the
acquisition of STI. Mail.com will also pay additional consideration to the sole
shareholder of STI equal to the amount of the net proceeds, after satisfaction
of certain liabilities of STI and its subsidiaries, from the sale or liquidation
of the assets of one of STI's subsidiaries. Mail.com also reimbursed the sole
shareholder of STI for a $1.5 million advance made to STI, the proceeds of which
were used to fund the balance of the cash portion of the purchase price for
STI's acquisition of the EasyLink Services business and certain other
obligations to AT&T. The $9.2 million note will be payable in four equal
semi-annual installments over two years and may be prepaid in whole or in part
at any time and from time to time without payment of premium or penalty. The
note will be non-interest bearing unless Mail.com fails to make a required
payment within 30 days after the due date therefore. Thereafter, the note will
bear interest at the rate of 10% per annum. The note also contains certain
customary events of default.
As part of the transaction with STI, Mail.com has also agreed to acquire Telecom
International, Inc. (which is an affiliate of STI and conducts business under
the name "AlphaTel") and the 25% minority interests in two STI subsidiaries for
$164,705 in cash, promissory notes in the aggregate principal amount of
approximately $1.8 million and 3.7 million shares of Mail.com Class A common
stock. These additional transactions are subject to execution of definitive
documentation, receipt of regulatory approvals and other customary conditions.
DEFERRED COMPENSATION
We have recorded amortization of deferred compensation of approximately
$274,000, $365,000 and $71,000 for the years ended December 31, 2000, 1999 and
1998, respectively, in connection with the grant of stock options to one of our
officers. This deferral, which totaled $1.1 million at the date of the grant,
represents the difference between the deemed fair value of our common stock for
accounting purposes and the exercise price of the options at the date of grant.
This amount is represented as a reduction of stockholders' equity and amortized
over the three-year vesting period. Amortization of deferred stock compensation
is charged to sales and marketing expense on the statement of operations. During
the fourth quarter of 2000, the officer's employment terminated and the
remaining $387,000 of unamortized deferred compensation was charged to
additional paid in capital, representing forfeited options.
During the second quarter of 1999, the Company issued 105,150 and 5,000 stock
options to certain employees at $5.00 per share. The fair value of the Company's
common stock on the dates of grant was $11 and $7 per share, respectively.
Accordingly, the Company recorded deferred compensation of approximately
$641,000 in connection with these options. At December 31, 2000, 40,400 stock
options are outstanding and the unamortized deferred compensation of $141,000 is
being amortized over the four-year vesting period of the applicable options.
Stock Option Repricing
On May 31, 2000, the Board of Directors approved the cancellation and
re-issuance of 500,000 options to an executive at an exercise price of $5.53 per
share based on the closing price of the Company's Class A common stock on May
31, 2000. The options had an original exercise price of $12.44. The new options
vest at the same rate that they would have vested under
52
previous plans. Pursuant to FIN 44, stock options re-priced after December 15,
1998 are subject to variable plan accounting. The total compensation charge for
the year ended December 31, 2000 approximated $6,000.
On November 14, 2000, the Company offered to certain employees, officers and
directors, other than the chairman, the right to reprice certain outstanding
stock options to an exercise price equal to the closing price of the Company's
Class A common stock on NASDAQ on November 14, 2000. Options to purchase an
aggregate of 6,327,986 shares are subject to repricing, including 500,000
options previously repriced on May 31, 2000. The repriced options will vest at
the same rate that they would have vested under their original terms except that
shares issuable upon exercise of these options may not be sold until after
November 14, 2001. In March 2000, Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB Opinion No. 25"
("Interpretation"). Among other issues, this Interpretation clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. As a result, under the
Interpretation, stock options repriced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
remeasure compensation cost for outstanding repriced options each reporting
period based on changes in the market value of the underlying common stock.
Depending upon movements in the market value of the Company's common stock, this
accounting treatment may result in significant non-cash compensation charges in
future periods.
RESULTS OF OPERATIONS
Revenue
Revenues in 2000 were $61.2 million as compared to $12.7 million in 1999 and
$1.5 million in 1998. The increase of $48.5 million in 2000 was due primarily to
revenues from the business messaging market, which we entered during the third
quarter of 1999, an increase in the growth in our number of seats and
corresponding page views, and revenues generated from the sales of information
technology products and the provision of local content and other Internet
services associated with WORLD.com, which we commenced during the first quarter
of 2000. The increase of $11.2 million in 1999 was due primarily to commencing
advertising sales in the second half of 1998 and an increase in the growth in
our number of seats and corresponding page views. During 2000, our members
established approximately 10.8 million seats as compared to 6.9 million in 1999
and 2.9 million in 1998. The cumulative total of seats established approximates
21.2 million as of December 31, 2000.
Business messaging revenues for the year ended December 31, 2000 was $29.0
million as compared to $1.8 million in 1999. Business messaging revenues were
derived from facsimile transmission services including email to fax, fax to
email, enhanced fax, broadcast services; Internet email services, consisting of
services that enable networks to connect to the Internet, email hosting services
and email message management services including virus scanning, attachment
control, spam control, legal disclaimers and real time Web-based reporting and
collaboration, software and services such as group calendar, document sharing
and project management; and sales of software licenses.
Revenues from subscription services were $719,000, $601,000 and $285,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Other revenue, primarily from the sale or lease of domain names, was $642,000,
$672,000 and $93,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Advertising network revenues for the year ended December 31, 2000 were $22.4
million as compared to $9.7 million in 1999 and $1.1 million in 1998. Included
in advertising network revenues are barter revenues of $1.6 million, $404,000
and $162,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
For the years ended December 31, 2000, 1999 and 1998, revenue from the Company's
five largest advertisers accounted for approximately 8%, 23% and 44%,
respectively. Approximately 31% of our revenue came from one advertiser in 1998.
No advertiser exceeded 10% of our revenue in either 2000 or 1999.
53
Domain development revenues were $8.5 million for the year ended December 31,
2000. These revenues were generated by WORLD.com and consist primarily of sales
of information technology products. Revenues were also generated from system
integration and website development for companies, advertising and commissions
for booking travel arrangements. There were no domain development revenues
during 1999 or 1998.
As previously mentioned, we announced our intention to sell our advertising
network business and focus exclusively on its established outsourced messaging
business. We also announced that as a result of our decision to focus on our
outsourced messaging business, we are streamlining the organization, taking
advantage of lower cost areas and further integrating our technological and
operational infrastructures. Additionally, we announced that we would sell all
assets not related to our core outsourced messaging business, including our
Asia.com Inc. and, India.com Inc. subsidiaries, and our portfolio of
category-defining domain names. Upon the completion of the sale of these assets
we anticipate that future revenues will be derived from our outsourced business
messaging operations.
OPERATING EXPENSES
Cost of Revenues
Cost of revenues for the year ended December 31, 2000 was $55.7 million as
compared to $13.8 million and $2.9 million in 1999 and 1998, respectively. Cost
of revenues consists primarily of costs incurred in the delivery and support of
our email service and facsimile services, including depreciation of equipment
used in our computer systems, the cost of telecommunications services including
local access charges, leased network backbone circuit costs and long distance
domestic and international termination charges, and personnel costs associated
with our systems, databases and graphics. Cost of revenues also includes costs
associated with licensing third party network software. In addition, we report
the cost of barter trades, amortization of certain domain assets, and the cost
of domain names that have been sold in cost of revenues. During 2000, we
purchased and leased significant amounts of capital equipment for our computer
systems to accommodate the current growth and in anticipation of the future
growth in the number of e-mailboxes. As a result, depreciation expense increased
significantly during the year ended December 31, 2000 as compared to 1999. Cost
of revenues was also significantly impacted during 2000 due to our entry into
the business messaging market during the third quarter of 1999 and the
development of WORLD.com during the first quarter of 2000. In addition, we
substantially increased headcount in the technology related departments during
2000 as compared to 1999. During 2000, barter expense was approximately $1.6
million as compared to $360,000 and $233,000 in 1999 and 1998, respectively. We
anticipate that cost of revenues will decrease upon the sale of our advertising
network and domain properties, but will continue to increase in the outsourced
messaging business.
Comparing 1999 to 1998, the increase of $10.9 million was primarily due to the
purchase and leasing of significant amounts of capital equipment for our
computer systems to accommodate the current growth and in anticipation of the
future growth in the number of e-mailboxes. As a result there was a significant
increase in depreciation expense. At the same time, we substantially increased
headcount in the relevant groups in 1999.
Sales and Marketing Expenses
Sales and marketing expenses were $66.9 million in 2000 as compared to $29.5
million in 1999 and $6.7 million in 1998. The $37.4 million increase in 2000 was
primarily due to the expansion of sales and marketing efforts and the
establishment of partner agreements with third party Web sites. The primary
component of sales and marketing expenses are customer acquisition costs. The
costs related to customer acquisitions paid in cash to partners were $ 4.5
million in 2000, $3.0 million in 1999 and $1.7 million in 1998. The costs
related to customer acquisitions through the issuance of Class A common stock
were none in 2000, approximately $8.9 million in 1999, $3 million in 1998. We
are no longer incurring customer acquisition costs through the issuance of
stock. An amendment to the CNET, Snap and NBC agreement signed during the second
quarter of 1999 eliminated
54
the monthly issuance of shares, but required us to issue the remaining shares
under the contract simultaneously with our initial public offering. The value of
these shares ($18.1 million) is being amortized over the subsequent two-year
period. We recorded approximately $ 9.2 million and $5.0 million of amortization
expense in connection with the issuance of these shares in 2000 and 1999,
respectively. We also recorded approximately $270,000, $444,000 and $173,000 in
amortization of partner advances of shares to CNN for the years ended December
31, 2000, 1999 and 1998, respectively. As previously mentioned, during the first
quarter of 2000, the Company expensed $3.3 million of deferred costs related to
the AT&T warrants and amortized approximately $980,000 in 1999. Also included in
this category are advertising expenses related to the radio, television and
print advertising campaigns during 2000 and the second half of 1999 to build our
brand. The remainder of the costs in this category relates to salaries and
commissions for sales, marketing, and business development personnel. Sales and
marketing costs were also impacted during the year ended December 31, 2000 as a
result of our entry into the business messaging market during the third quarter
of 1999 and the development of WORLD.com during the first quarter of 2000. We
anticipate that sales and marketing costs will decrease in the future based upon
our strategy of focusing on our outsourced messaging business.
Comparing 1999 to 1998, the $22.8 million increase resulted from entering into
several new partner relationships and the related customer acquisition costs,
and the hiring of an advertising sales force to support the commencement of
advertising sales. Additionally we incurred advertising costs related to the
launch of our national radio and television advertising campaign during the
second half of 1999 to build our brand. We also amortized costs related our
partner advances with CNN, AT&T and CNET.
General and Administrative
General and administrative expenses were $45.4 million in 2000 as compared to
$12.1 million in 1999 and $3.5 million in 1998. The $33.3 million increase in
2000 was attributable to increased personnel and related costs, including
recruiting fees and increased facilities costs. At December 31, 2000, the number
of employees was 1,401 as compared to 276 at December 31, 1999 and 89 at
December 31, 1998. General and administrative expenses consist primarily of
compensation and other employee costs including customer support and other
corporate functions as well our provision for doubtful accounts and overhead
expenses. In addition, general and administrative expenses increased during 2000
as compared to 1999 and 1998 due to our entry into the business messaging market
and the development of WORLD.com. In connection with the Mauritius acquisition,
we incurred a $1.8 million charge related to the issuance of 104,347 shares of
our Class A common stock as compensation for services performed and $200,000
cash and an additional $200,000 payable in our Class A common stock as
compensation for employees. We anticipate that general and administrative costs
will decrease upon the sale of our advertising network and domain properties.
Comparing 1999 to 1998, the $8.6 million increase was primarily due to an
increased personnel and personnel related costs, including recruiting fees,
primarily due to an increase in the number of employees, the impact of a full
year of customer service coverage to 24 hours per day, 7 days per week, and
increased facilities costs.
Product Development
Product development costs were $19.5 million in 2000 as compared to $7.0 million
in 1999 and $1.6 million in 1998, respectively. The $12.5 million increase was
primarily due to increased staffing and consulting costs to add new features,
design new services and upgrade existing services. Product development costs
consist primarily of personnel and consultants' time and expense to research,
conceptualize, and test product launches and enhancements to e-mail products and
our partners' and our e-mail web site. Additionally, product development costs
have increased during 2000 as compared to 1999 and 1998 due to our entry into
the business messaging market during the third quarter of 1999 and development
of WORLD.com during the first quarter of 2000. We anticipate that product
development costs will decrease upon the sale of our advertising network and
domain properties.
55
Comparing 1999 to 1998, the $5.4 million increase was primarily due to increased
staffing and consulting costs to add new features, design new services and
redesign existing services. During 1999 a portion of the consulting expenses
were paid through the issuance of 55,000 shares of our Class A common stock
valued at $275,000.
Amortization of Goodwill and Other Intangible Assets and Write-Off of Acquired
In-Process Technology
Amortization of goodwill and other intangible assets and the write-off of
acquired in-process technology resulted from the acquisitions made during 2000
and 1999. Goodwill represents the excess of the purchase price over the fair
market value of the net assets acquired and is being amortized over a 3 to 5
year period. Purchased in process technology was $7.7 million for the year ended
December 31, 2000 and $900,000 for the year ended December 31, 1999.
Amortization of goodwill and other intangible assets was $60.8 million and $3.0
million for the years ended December 31, 2000 and 1999, respectively. There was
no amortization of goodwill or write-off of acquired in-process technology in
1998.
Restructuring Charges
On October 26, 2000, we announced our intention to sell our advertising network
business and that we will focus exclusively on our established outsourced
messaging business. We also announced that as a result of our decision to focus
on our outsourced messaging business, we are streamlining the organization,
taking advantage of lower cost areas and further integrating our technological
and operational infrastructures and sale of our non-core assets. On November 2,
2000, we announced that we will sell all assets not related to our core
outsourced messaging business, including our Asia.com Inc. and India.com Inc.
subsidiaries, and our portfolio of category-defining domain names.
During the fourth quarter of 2000, we recorded a restructuring charge of $18.4
million in accordance with the provisions of EITF 94-3, SFAS 121 and Staff
Accounting Bulletin 100. Our restructuring initiatives are related to our
strategic decisions to exit the consumer messaging business and to focus on the
Company's outsourced messaging business (business messaging). The restructuring
program includes an aggregate net reduction in the workforce of approximately
125 employees. Asset disposals of $13.9 million reflect write-downs of goodwill
and other intangible assets of $12.2 million in connection with management's
decision to abandon two of its Asian based business units (the majority of which
relates to its wireless business unit), $0.2 million of impaired domain names
and a writedown of $1.5 million of fixed assets and leasehold improvements in
connection with our exit of certain leased office space, including our former
New York City based headquarters.
The following sets forth the activity in our restructuring reserve (in
thousands):
Beginning Current year- Current year- Ending
balance provision utilization balance
------- --------- ----------- -------
Employee termination
benefits $-- $ 818 $ 259 $ 559
Lease abandonments -- 3,136 -- 3,136
Asset disposals -- 13,926 13,926 --
Other exit costs -- 508 155 353
--- --------- --------- ----------
$-- $ 18,388 $ 14,340 $ 4,048
=== ========= ========= ==========
Impairment Charges
The Company's management performs on-going business reviews and, based on
quantitative and qualitative measures, assesses the need to record impairment
losses on long-lived assets used in operations when impairment indicators are
present. Where impairment indicators were identified, management determined the
amount of the impairment charge by comparing the carrying value of goodwill and
other long-lived assets to their fair values. These evaluations of impairments
are based upon an achievement of business plan objectives and milestones of each
business, the fair value of each ownership interest relative to its carrying
value, the financial condition and prospects of the business and other relevant
factors. The business
56
plan objectives and milestones that are considered include among others, those
related to financial performance, such as achievement of planned financial
results and completion of capital raising activities, if any, and those that
are not primarily financial in nature, such as launching or enhancements of a
web site or product, the hiring of key employees, the number of people who have
registered to be part of the associated business' web community, and the number
of visitors to the associated business' web site per month. Management
determines fair value based on the market approach, which includes analysis of
market price multiples of companies engaged in lines of business similar to the
business being evaluated. The market price multiples are selected and applied
to the business based on the relative performance, future prospects and risk
profile of the business in comparison to the guideline companies. As a result,
during management's quarterly review of the value and periods of amortization
of both goodwill and other long-lived assets, it was determined that the
carrying value of goodwill and certain other intangible assets were not fully
recoverable.
The business for which impairment charges were recorded (eLong.com) operates in
the Chinese portal market, which has experienced a significant and continuing
decline in revenue multiples over the past several quarters in comparison to the
metrics in place at the time the acquisition was valued. In addition, both
Chinese and US portals have experienced declines in operation and financial
metrics over the past several quarters, primarily due to the continued weak
overall demand of on-line advertising and marketing services combined with lower
than expected e-commerce transactions, in comparison to metrics forecasted at
the time of their respective acquisitions. These factors significantly impacted
current projected revenue generated from this business. The impairment analysis
considered that this business was recently acquired and that the intangible
assets recorded upon acquisition of this business were being amortized over a
three-year useful life. The amount of the impairment charge was determined by
comparing the carrying value of goodwill and other long-lived assets to fair
value at December 31, 2000. The methodology used to test for and measure the
amount of impairment was based on the same methodology we used during our
initial acquisition value of eLong.com. As a result management determined that
the carrying value eLong.com should be adjusted. Accordingly, during the fourth
quarter of 2000, we recorded an impairment charge of approximately $7.8 million
to adjust the carrying value of eLong. The impairment factors evaluated by
management may change in subsequent periods, given that our business operates in
a highly volatile business environment. This could result in material impairment
charges in the future.
Other Income (Expense), Net
Other income (expense), net includes interest income from our cash investments
and marketable securities, gain on the sale of investments and interest expense
related to our convertible note offering, notes payable and capital lease
obligations.
Interest income for the year ended December 31, 2000 was $5.2 million as
compared to $1.9 million in 1999 and $277,000 in 1998. The increase in 2000 was
principally due to higher cash balances after we completed our convertible note
offering in January 2000. The increase in 1999 was due to higher cash balances
after we completed a private placement of preferred stock in March 1999, our
initial public offering in June 1999, additional proceeds from the exercise of
the underwriters over-allotment of shares in July 1999 as it related to our
initial public offering and the proceeds relating to the exercise of warrants.
In 1999, we realized a net gain of $5.5 million when we sold an equity
investment and wrote down another investment in a private company. During 1998,
we realized a gain of approximately $438,000 when we sold shares of Lycos common
stock. We received the Lycos stock as consideration in March 1998 when Lycos
exercised an option to acquire our Class A preferred stock. We had granted Lycos
the option when we entered into a partner contract with them in October 1997.
Interest expense was $9.6 million in 2000 as compared to $751,000 in 1999 and
$109,000 in 1998. The increase in 2000 was primarily due to interest related to
our convertible note offering as well as new capital lease obligations. Most of
our computer equipment purchases are financed under capital leases. The increase
in 1999 was due to interest recorded on our capital lease obligations, as we
financed most of our computer equipment purchases.
57
As indicated above, management performs on-going business reviews and, based on
quantitative and qualitative measures, assesses the need to record impairment
losses on its investments when impairment indicators are present. Management
determined that the decline in value of its cost investment in Software Tool and
Die was other-than-temporary and recorded a charge of $4.2 million for the year
ended December 31, 2000. Additionally, as a result of sequential declines in the
operating results of 3Cube, management made an assessment of the carrying value
of its equity investment and determined that it was in excess of its estimated
fair value. Consequently, we wrote down our investment and recorded an
impairment charge of $200,000 in the fourth quarter of 2000.
Preferred Stock Dividend
Upon the closing of our initial public offering, we settled in full all of our
contingent obligations to issue additional shares of stock to our former
preferred stockholders by issuing 968,800, 944,139, and 166,424 shares of our
Class A common stock to stockholders who formerly held Classes A, C and E
preferred shares, respectively. All outstanding shares of preferred stock were
converted on an one-for-one basis into shares of Class A common stock.
Liquidity and Capital Resources
Since our inception, we have obtained financing through private placements of
convertible debt and equity securities, equipment leases, our initial public
offering including the exercise of the over-allotment option and through a
convertible debt offering. In March 1999, we received net proceeds of $15.2
million from the sale of our Class E convertible preferred stock. In June 1999,
we received net proceeds of approximately $50.6 million from our initial public
offering and the concurrent share issuance to CNET and NBC Multimedia for the
exercise of their warrants to purchase Class A common stock. In July 1999, we
received an additional $6.7 million when the underwriters exercised their
over-allotment option. In January 2000, we received net proceeds of $96.1
million from our convertible debt offering. We also finance the majority of our
capital expenditures through lease lines.
During the third quarter of 2000, India.com Inc, our majority owned subsidiary,
issued 13,657,692 shares of Series A convertible exchangeable preferred stock
for proceeds of approximately $14.2 million. These shares are convertible into
India.com Class A common stock at the initial purchase price of the preferred
shares, subject to certain anti dilution adjustments.
On March 30, 2000, we entered into a $12 million Master Lease Agreement with
GATX Technology Services Corporation ("GATX") for equipment lease financing
(hardware and software). Terms of individual leases signed under the Master
Lease Agreement will call for a 36-month lease term, with rent payable monthly
in advance. The effective interest rate is 12.1% and is adjustable based on
prime. GATX holds a first priority security interest in the equipment under the
facility. For certain leases entered into under the $12 million master lease
agreement, the Company has exercised an option to extend the term for an
additional 24 months.
Under terms of the Master Lease Agreement, we have the option to purchase the
equipment at the then fair market value of the equipment at lease expiration. In
December 2000, GATX reduced the $12 million line to $10.4 million, the amount
that was drawn down and outstanding at December 31, 2000.
On March 31, 2000, we entered into a $2 million Master Lease Agreement with
Leasing Technologies International, Inc ("Leasing Technologies"). The lease line
provides for the lease of new computers, office automation and other equipment.
Terms of individual leases signed under the Master Lease Agreement call for a
36-month lease term, rent payable monthly in advance. The effective interest
rate is 14.7% and is adjustable based on prime. In addition, a security deposit
equal to one months rent is payable at individual lease inception. In December
2000, Leasing Technologies reduced the $2 million line to $1.2 million, the
amount that was drawn down and outstanding at December 31, 2000.
58
Under terms of the Master Lease Agreement at the end of the lease term, the
Company has the option to either purchase, return the equipment, or extend the
lease term by twelve months, at a set percent of the original price. In the
latter case, the lease terms provide for a discounted monthly rental and a
bargain purchase option at the expiration of the twelve-month extension.
Net cash used in operating activities was $112.2 million for the year ended
December 31, 2000, $28.4 million for the year ended December 31, 1999, and $4.8
million for the year ended December 31, 1998. Cash used in operating activities
was impacted by the net loss from operations and purchases of marketable
securities, offset in part by a write-off of in-process technology, non-cash
charges principally related to the amortization of partner advances,
depreciation and amortization of fixed assets, amortization of goodwill and
other intangible assets, proceeds from the sales and maturities of marketable
securities, the provision for restructuring and impairments, and changes in
operating assets and liabilities. In 1999, cash used in operating activities was
impacted by the net loss from operations, and purchases of marketable securities
and gain on the sale of investments, offset in part by increases in accounts
payable and accrued expenses, non-cash charges related to partner agreements,
non-cash compensation, depreciation of fixed assets and amortization of goodwill
and other intangible assets. In 1998, cash used in operating activities was
impacted by the net loss from operations, offset in part by non-cash
compensation related to partner agreements, and changes in operating assets and
liabilities.
Net cash used in investing activities was $18.9 million for the year ended
December 31, 2000, $13.5 million for the year ended December 31, 1999, and $3.9
million for the year ended December 31, 1998. Net cash used in investing
activities consisted primarily of purchases of property and equipment, purchases
of investments and purchases of intangible assets, offset in part by proceeds
from the sale and leaseback of certain of our computer equipment and from net
cash received from acquired companies. In 1999, net cash used in investing
activities consisted primarily of purchases of computer equipment as we expanded
our technology infrastructure, cash paid for the acquisitions of Allegro, TCOM
and iFan, purchases of domain assets, and purchases of restricted investment,
offset in part by the proceeds from the sale of investment and proceeds from the
sale/leaseback of computer equipment. In 1998, net cash used in investing
activities was impacted by purchases of property and equipment and purchases of
domain assets, offset in part by proceeds from the sale/leaseback of computer
equipment.
Net cash provided by financing activities were $101.9 million for the year ended
December 31, 2000, $70.3 million for the year ended December 31, 1999, and $16.2
million for the year ended December 31, 1998. During the year ended December 31,
2000, $96.1 million was received from our convertible note offering, net of
issuance costs, $16.2 million was received from the sale of a subsidiary
interest, partially offset by payments under capital lease obligations of $8.4
million and by principal payments of notes payable of $4.8 million. During the
year ended December 31, 1999, $49.8 million was received from our initial public
offering including the underwriters' over-allotment option. This excludes an
additional $8.1 million of proceeds from the exercise of Class A common stock
warrants from CNET and NBC Multimedia and from the exercise and purchase of some
employee stock options. Additionally, $15.2 million was received in net proceeds
from the sale of Class E preferred stock in 1999.
At December 31, 2000, the Company maintained approximately $1.7 million in
letters of credit ("LC") with various parties. One LC approximating $1.1
million, including reinvested interest, is with a bank to secure obligations
under an office space lease. The LC expires on January 31, 2002 and will
automatically renew for an additional periods of one year but not beyond January
31, 2006. The bank may choose not to extend the LC by notifying the Company not
less than 30 days but not more than 60 days prior to an expiry date. The Company
is required to maintain a $1 million balance on deposit with the bank in an
interest bearing account, which is included in restricted investments in the
accompanying consolidated balance sheet. The other LC's, which also require a
cash deposit, are related to the leasing of telecommunications equipment and for
consulting services. Through December 31, 2000, there were no drawings under the
LC.
At December 31, 2000, we had $7.4 million of cash and cash equivalents and $22.2
million of marketable securities. Our principal commitments consist of
subordinated convertible notes, notes payable, obligations under capital leases,
domain asset purchase obligations, accounts payable and commitments for capital
expenditures. We have received a report from our independent accountants
containing an explanatory paragraph stating that we suffered recurring losses
from operations since inception and have a working capital deficiency that raise
substantial doubt about our ability to continue as a going concern. We incurred
a net loss of $229.5 million during the year ended December 31, 2000, and have
an accumulated deficit of $307.2 million as of December 31, 2000. We believe
that we will need additional financing to meet cash requirements for our
operations, and the availability of such financing when needed, on terms
acceptable to us, or if at all, is uncertain. If we are unable to raise
additional financing or generate sufficient cash flow, we may be unable
to continue as a going concern.
Our consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should we be unable to
continue as a going concern. We believe our ability to continue as a going
concern is dependent upon our ability to generate sufficient cash flow to meet
our obligations on a timely basis, to obtain additional financing or refinancing
as may be required, and ultimately to achieve profitable operations. During the
first quarter of 2001, we raised $16.9 million through the sale of senior debt
securities and common equity. We also acquired STI and EasyLink Services,
requiring a cash outlay of $16 million. Management believes that this
acquisition significantly enhances the scale of our customer base and global
network. Management is implementing internal actions to improve our operations
and liquidity including a reduction of our workforce, closure of some of our
businesses operating with negative cash flows, and we recently sold its
advertising network. Management is in the process of further reducing operating
costs, increasing our sales efforts with a new combined sales force and seeking
financing that is acceptable to us. See Note 22.
Sales of additional equity securities could result in additional dilution to our
stockholders. In addition, on an ongoing basis, we continue to evaluate
potential acquisitions to complement our business messaging services. In order
to complete these potential acquisitions, we may need additional equity or debt
financing in the future.
59
In addition, we announced that we will seek to sell all assets not related to
our core outsourced messaging business, including our Asia.com Inc. and
India.com Inc. subsidiaries, and our portfolio of domain names. No assurance can
be given that the company will be successful in selling these businesses or
otherwise raising the amount of capital needed to fund our operations. The
proceeds from the sale of these assets may not supply enough cash to fund our
operations, and we may experience delays in the completion of these sales or
receiving or converting into cash the consideration received in these sales.
SUBSEQUENT EVENTS (see Note 22 to our Consolidated Financial Statements for
additional information)
On January 8, 2001, we received approximately $10 million relating to our
issuing 10% Senior Convertible Notes due on January 8, 2006.
On February 23, 2001, we completed the acquisition of STI. In January 2001, STI
acquired from AT&T Corp. its EasyLink Services business ("EasyLink Services").
See Acquisition, Investments and Divestitures above for additional details.
On February 14, 2001, we announced that we entered into a bridge funding and
amendment agreement that would allow us to borrow up to $5 million from our
majority-owned subsidiary India.com pursuant to a bridge note.
On March 19, 2001, we completed the issuance of $3.9 million principal amount of
10% Senior Convertible Notes due January 8, 2006.
On March 20, 2001, we completed the private placement of 3,000,000 shares of our
Class A common stock to a private investor for an aggregate price of $3 million.
During the first quarter of 2001, we took additional actions to further reduce
our cash burn. These actions included additional staff layoffs in some of our
businesses as well as the decision to sell certain of our businesses at reduced
prices. Accordingly, additional restructuring and impairment charges to reduce
the value of certain of our acquisitions and investments. This is due to the
continuous and prolonged decline in valuations of Chinese and U.S. business and
consumer portals, including revenue multiples, as well as the lack of capital
funding available to Internet-related businesses in order to fund their
operating losses, and continual investments that their management teams believe
are necessary to sustain operations. We estimate that such charges will be in
the range of $40 to $50 million, of which less than $3 million would be cash
charges. Most of these charges are expected to cover additional write-downs of
tangible and intangible assets and the carrying value of certain investments.
On March 28, 2001, we completed the issuance of an aggregate of $23,840,250
principal amount of senior convertible notes in exchange for the cancellation of
$75,905,000 principal amount of 7% Convertible Subordinated Notes. $2,531,250 of
the Senior Convertible Notes is subject to cancellation in exchange for the
issuance of 1,420,714 shares of Class A common stock, subject to satisfaction
of certain conditions. The reduction in outstanding indebtedness, together with
the ability to pay up to one-half of interest on the Senior Convertible Notes in
shares of Class A common stock, will reduce our cash interest requirements.
On March 30, 2001, we sold our advertising network to Net2Phone, Inc. Net2Phone
paid us $3 million in cash upon the closing and and will pay us up to an
additional $0.5 million based upon the achievement of certain milestones by us.
In connection with the sale the parties entered into a hosting agreement whereby
we will receive payments for hosting the consumer mailboxes for a minimum of one
year. We plan to transition the hosting of these consumer mailboxes to a third
party provider in the near future for which we will make payments.
Recent Accounting Pronouncements
In March 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web
60
site. The Company has elected early adoption of this EITF and has implemented
the provisions as of April 1, 2000 and it did not have a significant impact on
our financial statements.
In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). Among other
issues, FIN 44 clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. Pursuant
to FIN 44, stock options re-priced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
re-measure compensation cost for outstanding re-priced options each reporting
period based on changes in the market value of the underlying common stock.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition In Financial Statements" ("SAB No. 101") which summarizes certain
of the SEC staff's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company has adopted the
accounting provisions of SAB No. 101 as of April 1, 2000 and it did not have a
significant impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. During June 1999, SFAS No. 137 was issued which delayed the
effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to affect the Company, as it does not have any derivative
instruments or hedging activities.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, primarily from changes in interest rates,
foreign exchange rates and credit risk. The Company maintains operations in the
Peoples Republic of China and India. Fluctuations in exchange rates may have an
adverse effect on the Company's results of operations and could also result in
exchange losses. The impact of future rate fluctuations cannot be predicted
adequately. To date the Company has not sought to hedge the risks associated
with fluctuations in exchange rates.
Market Risk - Our accounts receivables are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result we do not anticipate any material
losses in this area.
Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a
security resulting from changes in the general level of interest rates.
Investments that are classified as cash and cash and equivalents have original
maturities of three months or less. Changes in the market's interest rates do
not affect the value of these investments. Marketable securities are comprised
of U.S. Treasury Notes and are classified as available-for-sale and subject to
interest rate fluctuations. At December 31, 2000, unrealized gains of
approximately $62,000 were recorded.
61
Item 8 Consolidated Financial Statements and Supplementary Data
EasyLink Services Corporation
(formerly Mail.com, Inc,)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report........................................................... 63
Consolidated Balance Sheets as of December 31, 2000 and 1999........................... 64
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.................................................... 65
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss
for the years ended December 31, 2000, 1999 and 1998................................ 66
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.................................................... 69
Notes to Consolidated Financial Statements............................................. 71
62
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EasyLink Services Corporation (formerly Mail.com, Inc.):
We have audited the accompanying consolidated balance sheets of
EasyLink Services Corporation (formerly Mail.com, Inc.) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive loss, and cash
flows for each of the years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EasyLink
Services Corporation (formerly Mail.com, Inc.) and subsidiaries as of December
31, 2000 and 1999, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1(b) to the consolidated financial statements, the Company has suffered
recurring losses from operations since inception and has a working capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
1(b). The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/KPMG LLP
New York, New York
February 15, 2001
63
EasyLink Services Corporation
(formerly Mail.com, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
------------
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 7,409 $ 36,870
Marketable securities ....................................................................... 22,202 7,006
Accounts receivable, net of allowance for doubtful accounts
$887 and $197 as of December 31, 2000 and 1999, respectively.............................. 13,727 4,138
Prepaid expenses and other current assets.................................................... 2,783 1,940
Receivable from sale-leaseback............................................................... -- 183
----------- ----------
Total current assets...................................................................... 46,121 50,137
----------- ----------
Property and equipment, net..................................................................... 50,916 28,935
Domain assets, net.............................................................................. 6,975 7,934
Partner advances, net........................................................................... 3,841 16,809
Investments..................................................................................... 14,851 2,962
Goodwill and other intangible assets, net....................................................... 200,994 28,964
Restricted investments.......................................................................... 1,710 1,000
Debt issuance costs............................................................................. 3,089 --
Other .......................................................................................... 1,764 526
----------- ----------
Total assets.............................................................................. $ 330,261 $ 137,267
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................. $ 15,465 $ 7,546
Accrued expenses............................................................................. 25,888 11,735
Restructuring reserve........................................................................ 4,048 --
Current portion of capital lease obligations................................................. 11,443 5,483
Current portion of domain asset purchase obligations......................................... 39 400
Current portion of notes payable............................................................. 1,861 143
Deferred revenue............................................................................. 1,925 610
Other current liabilities.................................................................... 1,142 2,419
----------- ----------
Total current liabilities................................................................. 61,811 28,336
----------- ----------
Capital lease obligations, less current portion................................................. 14,319 12,016
Domain asset purchase obligation, less current portion.......................................... 85 176
Deferred revenue................................................................................ 775 725
Notes payable, less current portion............................................................. 100,321 --
----------- ----------
Total liabilities......................................................................... 177,311 41,253
----------- ----------
Minority interest............................................................................... 14,204 --
Stockholders' equity:
Common stock, $0.01 par value; 160,000,000 and 130,000,000 shares authorized at
December 31, 2000 and 1999, respectively:
Class A--150,000,000 and 120,000,000 shares authorized; 51,789,201 and 35,218,461 shares
issued and outstanding at December 31, 2000 and 1999, respectively........................ 518 352
Class B--10,000,000 shares authorized, issued and outstanding at December
31, 2000 and 1999; with an aggregate liquidation preference of $1,000..................... 100 100
Additional paid-in capital...................................................................... 445,675 174,315
Subscriptions receivable........................................................................ (33) --
Deferred compensation........................................................................... (214) (1,117)
Accumulated other comprehensive loss............................................................ (137) --
Accumulated deficit............................................................................. (307,163) (77,636)
----------- ----------
Total stockholders' equity ............................................................... 138,746 96,014
----------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity ............................................... $ 330,261 $ 137,267
=========== ==========
See accompanying notes to consolidated financial
statements.
64
EasyLink Services Corporation
(formerly Mail.com, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Year Ended December 31,
-----------------------
2000 1999 1998
---------------------------------------
Revenues
Messaging.......................................................... $ 52,698 $ 12,709 $ 1,495
Domain development (WORLD.com) .................................... 8,524 -- --
--------------- --------------- --------------
Total revenues.................................................. 61,222 12,709 1,495
Operating expenses:
Cost of revenues
Messaging.......................................................... $ 49,201 $ 13,778 $ 2,891
Domain development (WORLD.com) .................................... 6,531 -- ---
--------------- --------------- --------------
Total cost of revenues.......................................... 55,732 13,778 2,891
Sales and marketing................................................ 66,891 29,542 6,680
General and administrative......................................... 45,439 12,136 3,482
Product development................................................ 19,528 7,017 1,573
Amortization of goodwill and other intangible assets............... 60,763 2,979 --
Write-off of acquired in-process technology........................ 7,650 900 --
Impairment of intangible assets.................................... 7,800 -- --
Restructuring charges.............................................. 18,388 -- --
--------------- --------------- --------------
Total operating expenses........................................ 282,191 66,352 14,626
--------------- --------------- --------------
Loss from operations............................................... (220,969) (53,643) (13,131)
--------------- --------------- --------------
Other income (expense):
Interest income.................................................... 5,194 1,885 277
Interest expense................................................... (9,632) (751) (109)
Impairment of investments.......................................... (4,400) -- --
Gain on sale of investments, net................................... -- 5,494 438
Loss on equity investment.......................................... (2,100) -- --
Other, net......................................................... (104) -- --
--------------- --------------- --------------
Total other (expense) income, net............................... (11,042) 6,628 606
--------------- --------------- --------------
Loss before minority interest...................................... (232,011) (47,015) (12,525)
--------------- --------------- --------------
Minority interest.................................................. 2,484 -- --
--------------- --------------- --------------
Net loss.............................................................. (229,527) (47,015) (12,525)
Cumulative dividends on settlement of contingent
obligations to preferred stockholders.............................. -- (14,556) --
--------------- --------------- --------------
Net loss attributable to common stockholders.......................... $ (229,527) $ (61,571) $ (12,525)
=============== =============== ==============
Basic and diluted net loss per common share........................... $ (4.01) $ (1.96) $ (0.86)
=============== =============== ==============
Weighted-average basic and diluted shares outstanding................. 57,178,562 31,373,645 14,607,915
=============== =============== ==============
See accompanying notes to consolidated financial
statements.
65
EasyLink Services Corporation
(formerly Mail.com, Inc.)
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss
(in thousands, except share data)
Class A Preferred Class A Common Class B Common
Stock Stock Stock
Shares Amount Shares Amount Shares Amount
Balance at December 31, 1997 4,185,000 $ 42 4,097,500 $ 41 10,000,000 $ 100
Issuance of Class A common stock to vendor -- -- 2,745 -- -- --
Issuance of Class A common stock in
connection with partner agreements -- -- 1,831,160 18 -- --
Proceeds from stock subscriptions receivable -- -- -- -- -- --
Issuance of Class A preferred stock as a result
of options exercised, net of $227 issuance costs 2,000,000 20 -- -- -- --
Issuance of warrants for Class A common stock -- -- -- -- -- --
Issuance of warrants in connection with Class C
redeemable convertible preferred stock -- -- -- -- -- --
Offering costs in connection with Class C redeemable
convertible preferred stock -- -- -- -- -- --
Issuance of stock options to officer -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Issuance of stock options to partner -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,185,000 62 5,931,405 59 10,000,000 100
- ----------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-in Subscriptions Deferred
Capital receivable Compensation
Balance at December 31, 1997 $ 4,652 $ (728) --
Issuance of Class A common stock to vendor 5 -- --
Issuance of Class A common stock in
connection with partner agreements 7,213 -- --
Proceeds from stock subscriptions receivable -- 727 --
Issuance of Class A preferred stock as a result
of options exercised, net of $227 issuance costs 3,753 -- --
Issuance of warrants for Class A common stock 130 -- --
Issuance of warrants in connection with Class C
redeemable convertible preferred stock 170 -- --
Offering costs in connection with Class C redeemable
convertible preferred stock (853) -- --
Issuance of stock options to officer 1,096 -- (1,096)
Amortization of deferred compensation -- -- 71
Issuance of stock options to partner 371 -- --
Net loss -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 16,537 (1) (1,025)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Other Accumulated Stockholders'
Comprehensive Loss Deficit Equity/(Deficit)
Balance at December 31, 1997 -- $ (3,540) $ 567
Issuance of Class A common stock to vendor -- -- 5
Issuance of Class A common stock in
connection with partner agreements -- -- 7,231
Proceeds from stock subscriptions receivable -- -- 727
Issuance of Class A preferred stock as a result
of options exercised, net of $227 issuance costs -- -- 3,773
Issuance of warrants for Class A common stock -- -- 130
Issuance of warrants in connection with Class C
redeemable convertible preferred stock -- -- 170
Offering costs in connection with Class C redeemable
convertible preferred stock -- -- (853)
Issuance of stock options to officer -- -- --
Amortization of deferred compensation -- -- 71
Issuance of stock options to partner -- -- 371
Net loss -- (12,525) (12,525)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- (16,065) (333)
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
66
EasyLink Services Corporation
(formerly Mail.com, Inc.)
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss (continued)
(in thousands, except share data)
Class A Preferred Class E Preferred
Stock Stock
Shares Amount Shares Amount
Balance at December 31, 1998 6,185,000 $62 - $ -
Issuance of Class E preferred stock net of issuance
costs of $835 - - 3,200,000 32
Domain assets purchased - - - -
Issuance of Class A common stock in connection
with partner agreements - - - -
Issuance of stock options to consultant in lieu of services - - - -
Issuance of Class A common stock to vendor/consultant
in lieu of services - - - -
Issuance of warrants to vendor and partner - - - -
Proceeds from stock subscription receivable - - - -
Issuance of stock options to employees below fair value - - - -
Amortization of deferred compensation net of cancellations - - - -
Return of common stock from GeoCities - - - -
Exercise of employee stock options - - - -
Purchase of employee stock at fair value - - - -
Issuance of Class A common stock in IPO including
overallotment option, net of $5,351 issuance costs - - - -
Exercise of warrants by CNET/Snap - - - -
Issuance of Class A common Stock to CNET/Snap/NBC
Multimedia in connection with settlement of
contingent obligation - - - -
Conversion of preferred stock (6,185,000) (62) (3,200,000) (32)
Conversion of redeemable Class C preferred stock - - - -
Issuance of common stock in connection with settlement
of contingent obligation to preferred stockholders - - - -
Issuance of Class A common stock to 3Cube - - - -
Issuance of Class A common stock to Allegro - - - -
Issuance of Class A common stock to TCOM - - - -
Issuance of Class A common stock and options to iFan - - - -
Issuance of Class A common to Lansoft - - - -
Net loss - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Class A Common Class B Common
Stock Stock
Shares Amount Shares Amount
Balance at December 31, 1998 5,931,405 $59 10,000,000 $100
Issuance of Class E preferred stock net of issuance
costs of $835 - - - -
Domain assets purchased 508,571 5 - -
Issuance of Class A common stock in connection
with partner agreements 485,616 5 - -
Issuance of stock options to consultant in lieu of services - - - -
Issuance of Class A common stock to vendor/consultant
in lieu of services 65,801 2 - -
Issuance of warrants to vendor and partner - - - -
Proceeds from stock subscription receivable - - - -
Issuance of stock options to employees below fair value - - - -
Amortization of deferred compensation net of cancellations - - - -
Return of common stock from GeoCities (1,000,000) (10) - -
Exercise of employee stock options 182,142 1 - -
Purchase of employee stock at fair value - - - -
Issuance of Class A common stock in IPO including
overallotment option, net of $5,351 issuance costs 7,877,500 79 - -
Exercise of warrants by CNET/Snap 1,500,000 15 - -
Issuance of Class A common Stock to CNET/Snap/NBC
Multimedia in connection with settlement of
contingent obligation 2,578,907 25 - -
Conversion of preferred stock 9,385,000 94 - -
Conversion of redeemable Class C preferred stock 3,776,558 38 - -
Issuance of common stock in connection with settlement
of contingent obligation to preferred stockholders 2,079,363 20 - -
Issuance of Class A common stock to 3Cube 80,083 1 - -
Issuance of Class A common stock to Allegro 1,102,973 11 - -
Issuance of Class A common stock to TCOM 439,832 4 - -
Issuance of Class A common stock and options to iFan 72,704 1 - -
Issuance of Class A common to Lansoft 152,006 2 - -
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 35,218,461 352 10,000,000 100
- ---------------------------------------------------------------------------------------------------------------------------------
Additional Accumulated
Paid-in Subscriptions Deferred Other
Capital receivable Compensation Comprehensive Loss
Balance at December 31, 1998 $16,537 ($1) ($1,025) $-
Issuance of Class E preferred stock net of issuance
costs of $835 15,133 - - -
Domain assets purchased 5,225 - - -
Issuance of Class A common stock in connection
with partner agreements 2,517 - - -
Issuance of stock options to consultant in lieu of services 93 - - -
Issuance of Class A common stock to vendor/consultant
in lieu of services 403 - - -
Issuance of warrants to vendor and partner 4,278 - - -
Proceeds from stock subscription receivable - 1 - -
Issuance of stock options to employees below fair value 641 - (641) -
Amortization of deferred compensation net of cancellations (68) - 549 -
Return of common stock from GeoCities (3,490) - - -
Exercise of employee stock options 350 - - -
Purchase of employee stock at fair value 211 - - -
Issuance of Class A common stock in IPO including
overallotment option, net of $5,351 issuance costs 49,693 - - -
Exercise of warrants by CNET/Snap 7,485 - - -
Issuance of Class A common Stock to CNET/Snap/NBC
Multimedia in connection with settlement of
contingent obligation 18,027 - - -
Conversion of preferred stock - - - -
Conversion of redeemable Class C preferred stock 13,010 - - -
Issuance of common stock in connection with settlement
of contingent obligation to preferred stockholders 14,536 - - -
Issuance of Class A common stock to 3Cube 1,959 - - -
Issuance of Class A common stock to Allegro 17,044 - - -
Issuance of Class A common stock to TCOM 6,117 - - -
Issuance of Class A common stock and options to iFan 1,933 - - -
Issuance of Class A common to Lansoft 2,681 - - -
Net loss - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 174,315 - (1,117) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total
Accumulated Stockholders'
Deficit Equity/(Deficit)
Balance at December 31, 1998 ($16,065) ($333)
Issuance of Class E preferred stock net of issuance
costs of $835 - 15,165
Domain assets purchased - 5,230
Issuance of Class A common stock in connection
with partner agreements - 2,522
Issuance of stock options to consultant in lieu of services - 93
Issuance of Class A common stock to vendor/consultant
in lieu of services - 405
Issuance of warrants to vendor and partner - 4,278
Proceeds from stock subscription receivable - 1
Issuance of stock options to employees below fair value - -
Amortization of deferred compensation net of cancellations - 481
Return of common stock from GeoCities - (3,500)
Exercise of employee stock options - 351
Purchase of employee stock at fair value - 211
Issuance of Class A common stock in IPO including
overallotment option, net of $5,351 issuance costs - 49,772
Exercise of warrants by CNET/Snap - 7,500
Issuance of Class A common Stock to CNET/Snap/NBC
Multimedia in connection with settlement of
contingent obligation - 18,052
Conversion of preferred stock - -
Conversion of redeemable Class C preferred stock - 13,048
Issuance of common stock in connection with settlement
of contingent obligation to preferred stockholders (14,556) -
Issuance of Class A common stock to 3Cube - 1,960
Issuance of Class A common stock to Allegro - 17,055
Issuance of Class A common stock to TCOM - 6,121
Issuance of Class A common stock and options to iFan - 1,934
Issuance of Class A common to Lansoft - 2,683
Net loss (47,015) (47,015)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1999 (77,636) 96,014
- ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
67
EasyLink Services Corporation
(formerly Mail.com, Inc.)
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss (continued)
(in thousands, except share data)
Class A Common Class B Common Additional
Stock Stock Paid-in
Shares Amount Shares Amount Capital
Balance at December 31, 1999 35,218,461 $352 10,000,000 $100 $174,315
Net loss - - - - -
Unrealized holding gains on marketable securities - - - - -
Cumulative foreign exchange currency translation - - - - -
Comprehensive loss - - - - -
Exercise of employee stock options 1,414,971 14 - - 2,592
Issuance of Class A common stock in connection
with 401(k) plan 151,203 2 - - 532
Issuance of Class A common stock in connection with
employee stock purchase plan 60,444 1 - - 36
Exercise of warrants 20,000 - - - 20
Issuance of Class A common stock and options to NetMoves 6,354,483 63 - - 166,132
Issuance of Class A common stock and options to eLong 3,599,491 36 - - 61,534
Amortization of deferred compensation, net of cancellations - - - - (538)
Purchase of employee stock options at fair value - - - - 63
Issuance of Class A common stock to STD 185,686 2 - - 2,865
Issuance of Class A common stock in lieu of compensation 104,347 1 - - 1,799
Adjustment of Class A common stock in connection with
partner agreement (8,148) - - - (84)
Issuance of Class A common stock to Bantu 1,000,000 10 - - 7,042
Issuance of Class A common stock in connection with Asia.com
acquisitions 1,926,180 19 - - 17,131
Issuance of Class A common stock to 3Cube 255,049 3 - - 1,513
Issuance of Class A common stock in connection with
messaging acquisitions 710,195 7 - - 4,269
Issuance of Class A common stock to CheetahMail 102,215 1 - - 871
Issuance of Class A common stock in connection with purchase
of domain names 13,750 - - - 117
Issuance of Class A common stock to BulletN.net 364,431 4 - - 3,105
Issuance of Class A common stock as payment for software and
software licenses 316,443 3 - - 2,361
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 51,789,201 $518 10,000,000 $100 $445,675
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Subscriptions Deferred Other
Receivable Compensation Comprehensive Loss
Balance at December 31, 1999 $ - ($1,117) $0
Net loss - - -
Unrealized holding gains on marketable securities - - 62
Cumulative foreign exchange currency translation - - (199)
---------------------
Comprehensive loss - - (137)
---------------------
Exercise of employee stock options (33) - -
Issuance of Class A common stock in connection
with 401(k) plan - - -
Issuance of Class A common stock in connection with
employee stock purchase plan - - -
Exercise of warrants - - -
Issuance of Class A common stock and options to NetMoves - - -
Issuance of Class A common stock and options to eLong - - -
Amortization of deferred compensation, net of cancellations - 903 -
Purchase of employee stock options at fair value - - -
Issuance of Class A common stock to STD - - -
Issuance of Class A common stock in lieu of compensation - - -
Adjustment of Class A common stock in connection with
partner agreement - - -
Issuance of Class A common stock to Bantu - - -
Issuance of Class A common stock in connection with Asia.com
acquisitions - - -
Issuance of Class A common stock to 3Cube - - -
Issuance of Class A common stock in connection with
messaging acquisitions - - -
Issuance of Class A common stock to CheetahMail - - -
Issuance of Class A common stock in connection with purchase
of domain names - - -
Issuance of Class A common stock to BulletN.net - - -
Issuance of Class A common stock as payment for software and
software licenses - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ (33) $ (214) $ (137)
- ---------------------------------------------------------------------------------------------------------------------------------
Total
Accumulated Stockholders'
Deficit Equity/(Deficit)
Balance at December 31, 1999 ($77,636) $96,014
Net loss (229,527) (229,527)
Unrealized holding gains on marketable securities - 62
Cumulative foreign exchange currency translation - (199)
---------------------------------
Comprehensive loss (229,527) (229,664)
---------------------------------
Exercise of employee stock options - 2,573
Issuance of Class A common stock in connection
with 401(k) plan - 534
Issuance of Class A common stock in connection with
employee stock purchase plan - 37
Exercise of warrants - 20
Issuance of Class A common stock and options to NetMoves - 166,195
Issuance of Class A common stock and options to eLong - 61,570
Amortization of deferred compensation, net of cancellations - 365
Purchase of employee stock options at fair value - 63
Issuance of Class A common stock to STD - 2,867
Issuance of Class A common stock in lieu of compensation - 1,800
Adjustment of Class A common stock in connection with
partner agreement - (84)
Issuance of Class A common stock to Bantu - 7,052
Issuance of Class A common stock in connection with Asia.com
acquisitions - 17,150
Issuance of Class A common stock to 3Cube - 1,516
Issuance of Class A common stock in connection with
messaging acquisitions - 4,276
Issuance of Class A common stock to CheetahMail - 872
Issuance of Class A common stock in connection with purchase
of domain names - 117
Issuance of Class A common stock to BulletN.net - 3,109
Issuance of Class A common stock as payment for software and
software licenses - 2,364
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 ($307,163) $138,746
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
68
EasyLink Services Corporation
(formerly Mail.com, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss....................................................................... $ (229,527) $ (47,015) $ (12,525)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of partner advances......................................... 12,968 6,463 3,017
Non-cash compensation.................................................... -- 3,021 521
Depreciation and amortization............................................ 17,385 5,605 903
Amortization of goodwill and other intangible assets..................... 60,763 2,979 --
Provision for doubtful accounts.......................................... 1,603 203 92
Provision for restructuring and impairments.............................. 30,342 -- --
Loss on equity investment................................................ 2,100 -- --
Amortization of domain assets............................................ 1,929 899 201
Amortization of deferred compensation.................................... 365 481 71
Gain on the sale of investments.......................................... -- (5,644) --
Write-off of GeoCities contract.......................................... -- 500 --
Amortization of debt issuance costs...................................... 687 -- --
Amortization of debt discount............................................ (213) -- --
Write-off of acquired in-process technology.............................. 7,650 900 --
Write-off of investment.................................................. -- 150 --
Non-cash advertising..................................................... (125) -- --
Issuance of common stock in lieu of compensation......................... 2,063 -- --
Share of loss from equity investment..................................... 118 -- --
Minority interest loss................................................... (2,484) -- --
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net................................................. (7,492) (3,016) (794)
Prepaid expenses and other current assets................................ 1,493 (1,621) (186)
Purchases of marketable securities....................................... (125,902) (7,006) --
Proceeds from sales and maturities of marketable securities.............. 110,981 -- --
Partner advances......................................................... -- (230) (500)
Other assets............................................................. (589) (468) (36)
Accounts payable, accrued expenses and other current liabilities......... 2,319 15,964 2,894
Deferred revenue......................................................... 1,365 (570) 1,576
---------- ---------- ----------
Net cash used in operating activities.................................... (112,211) (28,405) (4,766)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of domain assets............................................... (1,130) (1,243) (385)
Purchase of restricted investment........................................ (710) (1,000) --
Purchases of intangible assets........................................... (1,426) -- --
Purchase of investments.................................................. (2,900) (1,000) --
Proceeds from sale leaseback............................................. 1,448 4,292 643
Proceeds from sales of investments....................................... -- 5,744 --
Purchases of property and equipment, including capitalized software...... (16,180) (15,133) (4,188)
Acquisitions, net of cash paid (acquired)................................ 1,970 (5,116) --
---------- ---------- ----------
Net cash used in investing activities.................................... (18,928) (13,456) (3,930)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of Class A, C and E preferred stock........... -- 15,165 16,682
Net proceeds from issuance of Class A common stock ...................... -- 49,772 12
Proceeds from issuance of Class A common stock in
connection with the exercise and purchase of warrants and options.... 2,656 8,062 --
Issuance of shares to employee benefit plans............................. 570 -- --
Proceed from issuance of convertible notes, net.......................... 96,139 -- --
Payments under capital lease obligations................................. (8,415) (2,522) (284)
Due to officer........................................................... -- -- (200)
Principal payments of notes payable...................................... (4,825) -- --
Proceeds from sale of subsidiary interest................................ 16,204 -- --
Payments under domain asset purchase obligations......................... (452) (160) (10)
---------- ---------- ----------
Net cash provided by financing activities...................................... 101,877 70,317 16,200
---------- ---------- ----------
Effect of foreign exchange rate changes on cash and cash equivalents........... (199) -- --
Net (decrease) increase in cash and cash equivalents........................... (29,461) 28,456 7,504
Cash and cash equivalents at begsinning of the year............................. 36,870 8,414 910
---------- ---------- ----------
Cash and cash equivalents at the end of the year............................... $ 7,409 $ 36,870 $ 8,414
========== ========== ==========
69
Supplemental disclosure of non-cash information:
During the years ended December 31, 2000, 1999 and 1998, the Company
paid approximately $6.7 million, $751 thousand and $85 thousand,
respectively, for interest.
Non-cash investing activities:
During the year ended December 31, 2000, the Company issued
1,652,332 shares of its Class A common stock in connection
with certain investments. These transactions resulted in a
non-cash investing activities of $14.0 million (see Note 5).
During the year ended December 31, 2000, the Company issued
12,590,349 shares of its Class A common stock plus stock
options in connection with certain acquisitions. These
transactions resulted in non-cash investing activities of
$249.2 million (see Note 3).
During the year ended December 31, 2000 and 1999, the Company
purchased an equity interest in an Internet company by
issuing 255,049 shares and 80,083 shares of Class A common
stock. These transactions resulted in non-cash investing
activities of $ $1.5 million and $2.0 million,
respectively.
During the year ended December 31, 2000, the Company issued
316,443 shares of its Class A common stock in exchange for
software and licenses. These transactions resulted in
non-cash investing activities of approximately $2.4
million.
During the year ended December 31, 1999 and 1998, the Company
issued 3,130,324 shares and 1,831,160 shares of its Class A
common stock in connection with some of its Mail.com
partner agreements and vendor services. These transactions
resulted in a non-cash investing activity of approximately
$21 million and $7.2 million, respectively.
During the years ended December 31, 2000 and 1999 the Company
purchased domain assets with 13,750 and 508,571 shares of
Class A common stock, respectively. These transactions
resulted in a non-cash investing activity of $117 thousand
and $5.2 million, respectively.
Non-cash financing activities:
The Company entered into various capital leases for computer
equipment. These capital lease obligations resulted in
non-cash financing activities aggregating $16.7 million,
$22.3 million and $1.4 million for the years ended December
31, 2000, 1999, and 1998, respectively.
The Company is obligated under various agreements to purchase
domain assets. These obligations resulted in non-cash
financing activities aggregating $350 thousand and
$169 thousand for the years ended December 31, 1999 and
1998, respectively.
See accompanying notes to consolidated financial statements.
70
EasyLink Services Corporation
(formerly Mail.com, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
(All information subsequent to December 31, 2000 is unaudited)
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
EasyLink Services Corporation (formerly Mail.com Inc., the "Company", Mail.com
or "EasyLink"), is a global provider of Internet messaging services. On April 2,
2001, Mail.com, Inc. changed its name to EasyLink Services Corporation. The name
change was made to help create a corporate identity tied to the Company's focus
on outsourced messaging services. The Company offers its services to both the
business and consumer markets. The Company generates revenues in the business
market from email service fees related to its email system connection services,
e-mail monitoring services, outsourced mailbox fees from facsimile transmission
services (including desktop to fax, enhanced fax and broadcast fax services);
and from software licensing and service fees related to its collaboration
software and services; including group calendaring, document sharing and project
management. The Company's basic advertising network e-mail services are free to
members. The Company generates revenues from these e-mail services primarily
from advertising related sales, including direct marketing and e-commerce
promotions. The Company also generates revenues in this market from subscription
services, such as a service that allows members to purchase increased storage
capacity for their e-mails. In March 2000, Mail.com formed WORLD.com to develop
the Company's portfolio of domain names into major Web properties which serve
the worldwide business-to-business and business-to-consumer marketplace. Through
its subsidiaries, WORLD.com generates revenues primarily from sales of
information technology products, system integration and website development for
other companies, advertising related sales ands commissions earned from booking
travel arrangements.
On October 26, 2000, as approved by the Board of Directors, the Company
announced its intention to sell its advertising network business and stated that
it will focus exclusively on its established outsourced messaging business. The
Company also announced that as a result of its decision to focus on its
outsourced messaging business, it recorded a restructuring charge (see Note 17).
On November 2, 2000, as approved by the Board of Directors, the Company
announced that it will sell all assets not related to its core outsourced
messaging business, including its Asia.com, Inc. and India.com, Inc.
subsidiaries, and its portfolio of category-defining domain names (see Notes 3
and 18).
The factors that affect the realizable value of these assets were determined by
management, which may ultimately prove to be less than the carrying value
currently reflected in the accompanying consolidated financial statements.
Management cannot be assured that they will be able to sell all or any of its
properties on terms favorable to the Company or at all. This could result in
material impairment charges in the future. (see Note 22)
(b) Consolidated Results Of Operations and Management's Plan
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. To date, the Company has
suffered recurring losses from operations since inception and has a working
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. As shown in the accompanying consolidated financial statements,
the Company incurred a net loss of $229.5 million during the year ended December
31, 2000, and has an accumulated deficit of $307.2 million as of December 31,
2000. The Company believes that it will need additional financing to meet cash
requirements for its operations,
71
and the availability of such financing when needed, on terms acceptable to the
Company, or if at all, is uncertain. If the Company is unable to raise the
additional financing or generate sufficient cash flow, the Company may be unable
to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. Management believes
the Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing or refinancing as may be required, and
ultimately to achieve profitable operations. During the first quarter of 2001,
the Company raised $16.9 million through the sale of senior debt securities and
common equity. It also acquired STI and EasyLink Services, which required a cash
outlay of $16 million. Management believes that this acquisition enhances the
scale of the Company's customer base and global network. Management is
implementing internal actions to improve the Company's operations and liquidity
including a reduction of its workforce, closure of some of the businesses
operating with negative cash flows, and recently sold its advertising network.
Management is in the process of further reducing operating costs, increasing its
sales efforts with a new combined sales force and seeking financing that is
acceptable to the Company. See Note 22.
(c) Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. These estimates and assumptions
relate to the estimates of collectiblility of accounts receivable, the
realization of goodwill and other intangibles, accruals and other factors.
Actual results could differ from those estimates.
(d) Principles of Consolidation
The consolidated financial statements include the accounts of Mail.com and its
subsidiaries from the dates of acquisition. WORLD.com, a wholly owned
subsidiary, along with Mail.com, owns 92% of Asia.com and 89% of India.com (see
Note 3). The interest of shareholders other than those of Mail.com is recorded
as minority interest in the accompanying consolidated statements of operations
and consolidated balance sheets. When losses applicable to minority interest
holders in a subsidiary exceed the minority interest in the equity capital of
the subsidiary, these losses are included in the Company's results, as the
minority interest holder has no obligation to provide further financing to the
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation.
(e) Cash and Cash Equivalents
The Company considers all highly liquid securities, with original maturities of
three months or less when acquired, to be cash equivalents.
72
(f) Marketable Securities
Marketable securities consist of available-for-sale securities, which are
carried at fair value, with the changes in fair value reported in accumulated
other comprehensive loss. Realized gains and losses (including declines in value
judged to be other than temporary) as well as the amortization of premiums and
accretion of discounts are included within other income (expenses). The specific
identification method is used to determine the cost of securities sold.
Investments that are publicly traded are treated as available-for-sale and are
available to support current operations or to take advantage of other investment
opportunities and are stated at their fair value based upon publicly available
market quotes. Unrealized gains and losses are computed on the basis of specific
identification and are included within accumulated other comprehensive loss in
stockholders' equity (deficit). At December 31, 2000, unrealized gains of
$62,000 were included in accumulated other comprehensive loss.
(g) Letter of Credit and Restricted Investment
At December 31, 2000, the Company maintained approximately $1.7 million in
letters of credit ("LC") with various parties. One LC approximating $1.1
million, including reinvested interest, is with a bank to secure obligations
under an office space lease. The LC expires on January 31, 2002 and will
automatically renew for additional periods of one year but not beyond January
31, 2006. The bank may choose not to extend the LC by notifying the Company not
less than 30 days but not more than 60 days prior to an expiry date. The Company
is required to maintain a $1 million balance on deposit with the bank in an
interest bearing account, which is included in restricted investments in the
accompanying consolidated balance sheet. The other LC's, which also require a
cash deposit, are related to the leasing of telecommunications equipment and for
consulting services. Through December 31, 2000, there were no drawings under the
LC.
(h) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(i) Domain Assets and Registration Fees
A domain name is the part of an email address that comes after the @ sign (for
example, if membername@mail.com is the email address then "mail.com" is the
domain name). Domain assets represent the purchase of domain names and are
amortized using the straight-line method over their economic useful lives, which
have been estimated to be five years. Domain assets are recorded at cost. Domain
assets acquired in exchange for future payment obligations are recorded at the
net present value of such payments using a discount rate of 8.5%. The associated
payment obligation is also recorded at the net present value of the payment
obligations (see Note 4). Payment terms vary from two to seven years.
Amortization of domain assets is charged to cost of revenues if currently being
used or available for sale and to sales and marketing if designated for new
business development. The Company's policy is to evaluate its domain assets
prior to paying its annual registration renewal fees. Any impairment is charged
to cost of revenues. Retirements, sales and disposals of domain assets are
recorded by removing the cost and accumulated amortization with the resulting
amount charged to cost of revenues.
The Company pays domain name registration fees in advance to InterNIC, a
cooperative activity between the US government and Network Solutions, Inc.,
which is the national registry for domain names in the US. Payment of these fees
ensures legal ownership and registration of domain names. The initial
registration period is for a two-year period with subsequent one-year renewal
periods. These costs are deferred and amortized over the related registration
period.
73
(j) Investments
Investments in which the Company owns less than 20% of a company's stock and
does not have the ability to exercise significant influence are accounted for on
the cost basis. Such investments are stated at the lower of cost or market
value. The equity method of accounting is used for companies and other
investments in which the Company has significant influence; generally this
represents common stock ownership of at least 20% but not more than 50%. Under
the equity method, the Company's proportionate share of each investee's
operating losses and amortization of the investor's net excess investment over
its equity in each investee's net assets is included in loss on equity
investments. The Company assesses the need to record impairment losses on
investments and records such losses when the impairment is determined to be
other-than-temporary.
(k) Goodwill and Other Intangible Assets
Goodwill and other intangible assets are stated net of accumulated amortization.
Goodwill and other intangible assets are being amortized on a straight-line
basis over their expected period of benefit ranging from three to five years
(see Notes 3 and 4).
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in results of operations in the period that
the tax change occurs. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
(m) Revenue Recognition
The Company generates revenues in the business market by providing businesses
with Internet e-mail services, facsimile transmission services and collaboration
software and services. These services include e-mail to fax, fax to email,
enhanced fax, and broadcast fax; e-mail system connection services, e-mail
hosting services and e-mail monitoring services, (including virus scanning,
attachment control, spam control, legal disclaimers and other legends affixed to
outgoing emails and real time Web-based reporting); and collaboration software
and services such as group calendar, document sharing and project management.
Most of these services are billed on a usage or per seat basis. Revenues from
business fax and e-mail services is recognized as the services are performed.
Facsimile license revenue is recognized over the average estimated customer life
of 3 years. The Company also licenses software under noncancellable,
non-exclusive license agreements. License fee revenues are recognized when a
noncancellable license fee is in force, the product has been delivered and
accepted, the license fee is fixed, vendor specific objective evidence exists
for the undelivered element and collectibility is reasonable assured.
Maintenance and support revenues are recognized ratably over the term of the
related agreements. The Company also may host the software if requested by the
customer. Pursuant to Emerging Issues Task Force 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements That Include the Right to Use
Software on Another Entity's Hardware, because the customer has the option of
hosting the software themselves or contracting with an unrelated third party to
host the software, the hosting fee is ratably recognized over the hosting
period.
The Company's advertising revenues are derived principally from the sale of
banner advertisements. Other advertising revenue sources include up-front
placement fees and promotions. The Company's advertising products currently
consist of banner advertisements that appear on pages within the Company's
properties, promotional sponsorships that are typically focused on a particular
event and merchant buttons on targeted advertising inventory encouraging users
to complete a transaction.
The Company sells advertising space through a combination of advertisements that
are sold on either a cost per thousand ("CPM") basis whereby the advertiser pays
an agreed upon amount for each thousand advertisements or on a cost per action
basis whereby revenue is generated only if the member responds to the
advertisement with an action such as by "clicking" on the advertisement or
purchasing the product advertised. In a CPM based advertising contract, revenue
is recognized ratably as advertisements or impressions are delivered. In a cost
per action contract, revenue is recognized as members "click" or otherwise
74
respond to the advertisement. In instances where revenue is the result of a
purchase by a member, the Company's commission is recognized after the item is
purchased based upon notification from the vendor.
The Company also delivers advertisements to its members through our Special
Delivery permission-marketing program. Under this program, members can identify
categories of products and services of interest to them and request that notices
be sent to their e-mailbox about special opportunities, information and offers
from companies in those categories. The Company recognizes revenue as mailings
are delivered.
The Company also generates advertising related revenues by facilitating
transactions for third party e-commerce sites. The Company's e-commerce partners
may pay acquisition fees on a per customer basis or commissions on the sale of
products or services. The Company recognizes this revenue based upon
notification by the third party e-commerce site.
On some occasions, the Company receives upfront "placement" fees from
advertising related to direct marketing and e-commerce promotions. These
arrangements give the customer the exclusive right to use the Company's network
to promote goods or services within their category. These exclusive arrangements
generally last one year. The Company records placement fees as deferred
revenues, and ratably recognizes the revenues over the term of the agreement.
Deferred revenue represents advertising revenues that have been received in
advance of the advertisements running on the Company's advertising network.
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or received;
whichever is more determinable in the circumstances. Revenue from barter
transactions is recognized as income when advertisements are delivered on the
Company's Web properties. Barter expense is recognized when the Company's
advertisements are run on other companies' Web sites, which is typically in the
same period when barter revenue is recognized. If the advertising impressions
are received from the customer prior to the Company delivering the advertising
impressions, a liability is recorded, and if the Company delivers the
advertising impressions to the other companies' Web sites prior to receiving the
advertising impressions, a prepaid expense is recorded. At December 31, 2000,
1999 and 1998, the Company recorded a liability of approximately $0, $27,000,
and $71,000, respectively, for barter advertising to be delivered. Barter
revenues, which are a component of advertising revenue, amounted to $1.6
million, $404,000 and $162,000 for the years ended December 31, 2000, 1999 and
1998, respectively. For the years ended December 31, 2000, 1999 and 1998, barter
expenses, which is a component of cost of revenues, were approximately $1.6
million, $360,000 and $233,000, respectively.
Subscription services are deferred and recognized ratably over the term of the
subscription periods of one, two and five years as well as eight years for its
lifetime subscriptions. Commencing March 10, 1999, the Company no longer offered
lifetime memberships and only offers monthly and annual subscriptions. The
eight-year amortization period for lifetime subscriptions is based on the
weighted-average expected usage period of a lifetime member. The Company offers
30-day trial periods for certain subscription services. The Company only
recognizes revenue after the 30-day trial period expires. Deferred revenues
principally consist of subscription fees received from members for use of the
Company's premium email services. The Company is obligated to provide any
enhancements or upgrades it develops and other support in accordance with the
terms of the applicable Mail.com Partner agreements. The Company provides an
allowance for credit card chargebacks and refunds on its subscription services
based upon historical experience. The Company provides pro rated refunds and
chargebacks to subscription members who elect to discontinue their service. The
actual amount of refunds and chargebacks approximated management's expectations
for all periods presented.
Domain development revenues include revenues generated by World.com and consist
primarily of sales of information technology products. Revenue is recognized at
the time of the sale provided collectibility is reasonably assured. Revenues are
also generated from system integration and website development for other
companies, advertising, and commissions for booking travel arrangements.
Revenues are recognized using the percentage of completion method for system
integration and Web
75
development projects. Advertising revenue is recognized as the advertisements
are delivered. Commission revenue is recognized on a net basis for travel
services upon notification of a booking, provided collectibility is reasonably
assured.
Other revenues includes revenues from the sale of domain names, which are
recognized at the time when the ownership of the domain name is transferred
provided that no significant Company obligation remains and collection of the
resulting receivable is probable.
(n) Product Development Costs
Product development costs consist primarily of personnel and consultants' time
and expense to research, conceptualize, and test product launches and
enhancements to e-mail products on our partners' and our email web sites.
(o) Sales and Marketing Costs
The primary component of sales and marketing expenses are customer acquisition
costs and advertising costs. The remainder of the costs in this category relates
to salaries and commissions for sales, marketing, and business development
personnel. The Company expenses the cost of advertising and promoting its
services as incurred.
The Company has entered into certain partner agreements whereby the Company
compensates its partners based upon a percentage of net revenues generated by
the Company on its partners' email Web sites. The Company's partner payments are
included as a component of sales and marketing expenses.
(p) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash, cash equivalents, restricted
investments, marketable securities, accounts receivable, notes payable and
convertible notes payable. At December 31, 2000 and December 31, 1999, the fair
value of cash, cash equivalents, restricted investments, marketable securities
and accounts receivable approximated their financial statement carrying amount
because of the short-term maturity of these instruments. The recorded values of
notes payable and convertible notes payable approximate their fair values, as
interest approximates market rates with the exception of the Convertible
Subordinated Notes payable which has an estimated fair value of $13 million at
December 31, 2000 based upon quoted market prices.
Credit is extended to customers based on the evaluation of their financial
condition and collateral is not required. The Company performs ongoing credit
assessments of its customers and maintains an allowance for doubtful accounts.
The Company has not experienced any significant credit loss to date. One
customer accounted for 10% of the accounts receivable at December 31, 2000.
Subsequent to December 31, 2000, that customer was acquired by the Company (see
Note 23). No single customer exceeded 10% of either total revenues or accounts
receivable in 1999. One customer accounted for 31% of the Company's total
revenues and 36% of accounts receivable in 1998. Revenues from the Company's
five largest customers accounted for an aggregate of 8%, 23% and 44% of the
Company's total revenues in 2000, 1999 and 1998, respectively.
(q) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principle Board ("APB") Opinion No. 25 and provide pro
forma net earnings (loss) disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
76
(r) Basic and Diluted Net Loss Per Share
Loss per share is presented in accordance with the provisions of SFAS No. 128,
"Earnings Per Share", and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Under SFAS No. 128, basic Earnings per Share ("EPS")
excludes dilution for common stock equivalents and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock. Diluted net loss per share is equal to basic loss per share since
all common stock equivalents are anti-dilutive for each of the periods
presented.
Diluted net loss per common share for the years ended December 31, 2000, 1999
and 1998, does not include the effects of employee options to purchase
13,344,290, 9,776,953, and 6,656,296 shares of common stock, respectively,
226,871, 1,218,899, and 3,021,134, common stock warrants, respectively, and 0,
0, and 13,161,558 shares of convertible preferred stock, respectively.
Similarly, the computation of diluted net loss per common share for 2000
excludes the effect of shares issuable upon the conversion of the $100 million
7% Convertible Subordinated Notes due 2005.
(s) Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived assets,
including intangible assets, used in operations when indicators of impairment
are present. On an on-going basis, management reviews the value and period of
amortization or depreciation of long-lived assets, including goodwill and other
intangible assets. During this review, the Company reevaluates the significant
assumptions used in determining the original cost of long-lived assets. Although
the assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets based upon events or circumstances, which have
occurred since acquisition. The impairment policy is consistently applied in
evaluating impairment for each of the Company's wholly owned subsidiaries and
investments. It is reasonably possible that the impairment factors evaluated by
management will change in subsequent periods, given that the Company operates in
a volatile business environment. This could result in material impairment
charges in the future.
(t) Restructuring Activities
Restructuring activities are accounted for in accordance with the guidance
provided in the consensus opinion of the Emerging Issues Task Force ("EITF") in
connection with EITF Issue 94-3 ("EITF 94-3"). EITF 94-3 generally requires,
with respect to the recognition of severance expenses, management approval of
the restructuring plan, the determination of the employees to be terminated, and
communication of benefit arrangement to employees (see Notes 17 and 22).
(u) Stock Split
Effective September 30, 1998, the Company authorized and implemented a 2-for-1
stock split of all preferred and common stock. Accordingly, all share and per
share amounts in the accompanying consolidated financial statements have been
retroactively restated to affect the stock split.
(v) Computer Software
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 provides guidance for
determining whether computer software is internal-use software and guidance on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company adopted SOP 98-1 in 1999 and
it did
77
not have a significant impact on the Company's 1999 financial statements.
Capitalized computer software is depreciated using the straight-line method
over the estimated useful life of the software, generally 3 years.
(w) Recent Accounting Pronouncements
In March 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The Company has elected early adoption of this EITF and has
implemented the provisions as of April 1, 2000 and it did not have a significant
impact on the Company's financial statements.
In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). Among other
issues, FIN 44 clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. Pursuant
to FIN 44, stock options re-priced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
re-measure compensation cost for outstanding re-priced options each reporting
period based on changes in the market value of the underlying common stock.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition In Financial Statements" ("SAB No. 101") which summarizes certain
of the SEC staff's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company has adopted the
accounting provisions of SAB No. 101 as of April 1, 2000 and it did not have a
significant impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. During June 1999, SFAS No. 137 was issued which delayed the
effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to affect the Company, as it does not have any derivative
instruments or hedging activities.
(x) Foreign Currency
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. The financial statements are maintained in local
currencies and are translated to United States dollars using period-end rates of
exchange for assets and liabilities and average rates during the period for
revenues, cost of revenues and expenses. Translation gains and losses are
included in accumulated other comprehensive loss as a separate component of
stockholders' equity (deficit). Net gains and losses from foreign currency
transactions are included in the 2000 consolidated statements of operations and
were not significant.
(y) Reclassifications
Certain prior period amounts have been reclassified to conform to the current
presentation.
78
(2) Acquisitions
NetMoves
On February 8, 2000, Mail.com acquired NetMoves Corporation ("NetMoves") for
approximately $168.3 million including acquisition costs. Pursuant to the
merger, NetMoves stockholders received 0.385336 of a share of Mail.com Class A
common stock for each issued and outstanding share of NetMoves common stock. The
consideration payable by Mail.com in connection with the acquisition of NetMoves
consisted of the following:
6,343,904 shares of Mail.com Class A common stock valued at
approximately $145.7 million based upon the average trading price
before and after the date the agreement was signed and announced
(December 13, 1999) at $22.96 per share;
The assumption by Mail.com of options to purchase shares of NetMoves'
common stock, par value of $.01 per share, exchanged for options to
purchase approximately 1.0 million shares of Mail.com Class A common
stock. The options were valued at approximately $19.4 million based
on the Black-Scholes pricing model with a 111% volatility factor, a
weighted average term of 4.75 years, an exercise price of $6.69 per
share and a fair value of $22.96 per share. Such options have an
aggregate exercise price of approximately $6.6 million.
The assumption by Mail.com of warrants to purchase shares of
NetMoves' common stock, par value of $.01 per share, exchanged for
warrants to purchase approximately 58,000 shares of Mail.com Class A
common stock. The warrants were valued at approximately $1.1 million
based on the Black-Scholes pricing model with a 111% volatility
factor, a weighted average term of 10 years, an exercise price of
$8.64 per share and a fair value of $22.96 per share. Such warrants
have an aggregate exercise price of approximately $496,000; and
Acquisition costs of approximately $2.1 million related to the
merger.
The acquisition has been accounted for using the purchase method of accounting.
Mail.com has allocated a portion of the purchase price to the fair market value
of the acquired assets and assumed liabilities of NetMoves as of February 8,
2000. The excess of the purchase price over the fair market value of the
acquired assets and assumed liabilities of NetMoves has been allocated to
goodwill ($147.1 million), assembled employee workforce ($3.1 million) and
technology ($5.5 million). Goodwill is being amortized over a period of 5 years;
the expected estimated period of benefit, and assembled employee workforce and
technology are being amortized over a period of 3 years, the expected estimated
period of benefit. The fair value of the technology, assembled workforce and
goodwill was determined by management using the excess earnings method, a
risk-adjusted cost approach and the residual method, respectively.
In performing the purchase price allocation, Mail.com considered, among other
factors, the attrition rate of the active users of the technology at the date of
acquisition and the research and development projects in-process at the date of
acquisition. With regard to the in-process research and development projects,
Mail.com considered, among other factors, the stage of development of each
project at the time of acquisition, the importance of each project to the
overall development plan, and the projected incremental cash flows from the
projects when completed and any associated risks. Associated risks included the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the impact of potential
changes in future target markets.
Approximately $7.7 million of the purchase price of NetMoves was allocated to
in-process technology based upon a management determination that the new
versions of the various fax technologies acquired from NetMoves had not been
developed into the platform required by Mail.com as of the acquisition date. The
fair value of acquired existing and in-process technologies was determined by
management using a risk-adjusted income valuation approach with a discount rate
of approximately 30%. As a result, Mail.com is required to expend significant
capital expenditures to successfully integrate and develop the new versions of
various fax technologies, for which there is considerable risk that such
technologies will not be successfully developed, and if such technologies are
not successfully developed, there will be no alternative use for the
technologies. The various fax technologies are enabling technologies for fax
communications and
79
include message management and reporting. Accordingly, on the date of
acquisition, Mail.com's statements of operations reflected a write-off of the
amount of the purchase price allocated to in-process technology of approximately
$7.7 million.
We allocated two projects to in-process technology: FaxMailer and Production
Fax. FaxMailer is an email based Internet fax service that enables the user to
send a fax from their PC to the recipient's fax number. Production Fax allows
users to fax documents using SMTP, SNA, RJE, FTP or other standard protocols,
without any additional software, hardware or changes to existing systems or
networks. The $7.7 million referred to above represents the portion of purchase
price allocated to these two projects. These projects, or in-process technology,
were 83% complete at the date of acquisition. The percentage of completion was
determined by the quotient of the (i) costs incurred to date divided by (ii) the
total development costs for the new technologies.
Mail.com intends to incur in excess of approximately $12.0 million related
primarily to salaries, to develop the in-process technology into commercially
viable products over the next year. Remaining development efforts are focused on
addressing security issues, architecture stability and electronic commerce
capabilities, and completion of these projects will be necessary before revenues
are produced. Mail.com expects to begin to benefit from the purchased in-process
research and development by its fiscal year 2000. If these projects are not
successfully developed, Mail.com may not realize the value assigned to the
in-process research and development projects.
In addition to the rollover of existing options contemplated by the merger
agreement, NetMoves' former President, Chief Executive Officer and Chairman of
the board of directors, as an employee of Mail.com received 231,201 options from
Mail.com on February 8, 2000 to purchase Mail.com Class A common stock with an
exercise price equal to $17.50 per share, the then fair value of Mail.com's
Class A common stock. All such options were issued immediately after the
NetMoves acquisition.
eLong.com, Inc.
On March 14, 2000, Mail.com acquired eLong.com, Inc., a Delaware corporation
("eLong.com") for approximately $62 million including acquisition costs of
$365,000. eLong.com, through its wholly owned subsidiary in the People's
Republic of China ("PRC"), operates the Web Site www.eLong.com, which is a
provider of local content and other internet services. Concurrently with the
merger, eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the
merger, Mail.com issued to the former stockholders of eLong.com an aggregate of
3,599,491 shares of Mail.com Class A common stock valued at approximately $57.2
million, based upon the Company's average trading price at the date of
acquisition. All outstanding options to purchase eLong.com common stock were
converted into options to purchase an aggregate of 279,289 shares of Mail.com
Class A common stock. The value of the options was approximately $4.4 million
based on the Black-Scholes pricing model with a 110% volatility factor, a term
of 10 years, an weighted average exercise price of $1.24 per share and a
weighted average fair value of $15.69 per share.
The acquisition has been accounted for as a purchase business combination. The
excess of the purchase price over the fair market value of the acquired assets
and assumed liabilities of Asia.com has been allocated to goodwill ($62
million). Goodwill is being amortized over a period of 3 years, the expected
estimated period of benefit. During the fourth quarter of 2000, approximately
$7.8 million of goodwill was written off as it was determined that the carrying
value had become permanently impaired as a result of the November 2, 2000
decision, as approved by the Board of Directors, to sell all assets not related
to its core outsourcing business, including its Asia-based businesses.
After giving effect to the write off, the net goodwill balance at December 31,
2000 was $38.2 million (see Note 22).
In addition, Mail.com was obligated to issue up to an additional 719,899 shares
of Mail.com Class A common stock in the aggregate to the former stockholders of
eLong.com if Mail.com or Asia.com acquires less than $50.0 million in value of
businesses engaged in developing, marketing or providing consumer or business
internet portals and related services focused on the Asian market or a portion
thereof, or businesses in furtherance of such a business, prior to March 14,
2001. Based upon the value of the acquisitions completed as of March 14, 2001,
the Company expects that it may be obligated to issue up to approximately
403,000 shares of its Class A common stock to the former stockholders of
eLong.com. The Company will either adjust goodwill and amortize such costs over
the remaining life of goodwill or record an additional impairment charge after
assessing its recoverability at the time the consideration is issued.
In the Merger, certain former stockholders of eLong.com retained shares of Class
A common stock of Asia.com, representing approximately 4.0% of the outstanding
common stock of Asia.com. Under a Contribution Agreement with Asia.com, these
stockholders contributed an aggregate of $2.0 million in cash to Asia.com in
exchange for additional shares of Class A common stock of Asia.com, representing
approximately 1.9% of the outstanding common stock of Asia.com. Pursuant to the
Contribution Agreement, Mail.com (1) contributed to Asia.com the domain names
Asia.com and Singapore.com and $10.0 million in cash and (2) agreed to
contribute to Asia.com up to an additional $10.0 million in cash over the next
12 months and to issue, at the request of Asia.com, up to an aggregate of
242,424 shares of Mail.com Class A common stock for future acquisitions. As of
June 30, 2000, Mail.com has fulfilled this obligation. See also "Asia.com
Acquisitions", below. As a result of the transactions effected pursuant to the
Merger Agreement and the Contribution Agreement, Mail.com initially owned shares
80
of Class B common stock of Asia.com representing approximately 94.1% of the
outstanding common stock of Asia.com. Mail.com's ownership percentage decreased
to 92% as of December 31, 2000. Asia.com granted to management employees of
Asia.com options to purchase Class A common stock of Asia.com representing, as
of December 31, 2000, 9% of the outstanding shares of common stock after giving
effect to the exercise of such options.
Asian Impairment Charges
The Company's management performs on-going business reviews and, based on
quantitative and qualitative measures, assesses the need to record impairment
losses on long-lived assets used in operations when impairment indicators are
present. Where impairment indicators were identified, management determined the
amount of the impairment charge by comparing the carrying value of goodwill and
other long-lived assets to their fair values. These evaluations of impairments
are based upon an achievement of business plan objectives and milestones of each
business, the fair value of each ownership interest relative to its carrying
value, the financial condition and prospects of the business and other relevant
factors. The business plan objectives and milestones that are considered include
among others, those related to financial performance, such as achievement of
planned financial results and completion of capital raising activities, if any,
and those that are not primarily financial in nature, such as launching or
enhancements of a web site or product, the hiring of key employees, the number
of people who have registered to be part of the associated business's web
community, and the number of visitors to the associated business's web site per
month. Management determines fair value based on the market approach, which
includes analysis of market price multiples of companies engaged in lines of
business similar to the business being evaluated. The market price multiples are
selected and applied to the business based on the relative performance, future
prospects and risk profile of the business in comparison to the guideline
companies. As a result, during management's quarterly review of the value and
periods of amortization of both goodwill and other long-lived assets, it was
determined that the carrying value of goodwill and certain other intangible
assets were not fully recoverable.
The business for which impairment charges were recorded (eLong.com) operates in
the Chinese portal market, which has experienced a significant and continuing
decline in revenue multiples over the past several quarters in comparison to the
metrics in place at the time the acquisition was valued. In addition, both
Chinese and US portals have experienced declines in operation and financial
metrics over the past several quarters, primarily due to the continued weak
overall demand of on-line advertising and marketing services combined with lower
than expected e-commerce transactions, in comparison to metrics forecasted at
the time of their respective acquisitions. These factors significantly impacted
current projected revenue generated from this business. The impairment analysis
considered that this business was recently acquired and that the intangible
assets recorded upon acquisition of this business were being amortized over a
three-year useful life. The amount of the impairment charge was determined by
comparing the carrying value of goodwill and other long-lived assets to fair
value at December 31, 2000. The methodology used to test for and measure the
amount of impairment was based on the same methodology the Company used during
its initial acquisition value of eLong.com. As a result management determined
that the carrying value of eLong.com should be adjusted. Accordingly, during the
fourth quarter of 2000, the Company recorded an impairment charge of
approximately $7.8 million to adjust the carrying value of eLong. The impairment
factors evaluated by management may change in subsequent periods, given that the
business operates in a highly volatile business environment. This could result
in material impairment charges in the future.
Asia.com Acquisitions
During the second quarter of 2000, Asia.com acquired three companies for
approximately $18.4 million, including acquisition costs. Payment consisted of
cash approximating $500,000, 1,926,180 shares of Mail.com Class A common stock
valued at approximately $11.6 million and 4,673,448 shares of Asia.com Class A
common stock valued at approximately $6.1 million, all of which were based upon
the Company's average trading price at the date of acquisition. These
acquisitions have been accounted for as purchase business combinations. The
excess of the purchase price over the fair market value has been allocated to
goodwill ($17.8 million) and is being amortized over a period of three years,
the expected estimated period of benefit. During the fourth quarter of 2000,
approximately $12 million of goodwill was written off as the Company determined
that the carrying value of the goodwill associated with one of these
acquisitions, focused in the wireless sector had become permanently impaired.
The impairment results from the November 2, 2000 decision, as approved by the
Board of Directors, to sell all assets not related to its core outsourcing
business, including its Asia-based businesses. After giving effect to the
writeoff, the net goodwill balance at December 31, 2000, was $3.2 million. (see
Note 22)
Under a stock purchase agreement associated with one of the acquisitions, the
Company agreed to pay a contingent payment of up to $5 million if certain
wireless revenue targets are reached after the closing. The contingent payment
was payable in Mail.com Class A common stock, cash or, under certain
circumstances, Asia.com Class A common stock. Management currently does not
expect to achieve these wireless revenue targets and, accordingly, does not
expect to issue any additional consideration.
Mauritius Entity
On March 31, 2000, the Company acquired 100% of a Mauritius entity, which in
turn owned 80% of an Indian subsidiary. The terms were $400,000 in cash and a $1
million 7% note payable one year from closing. The acquisition was accounted for
as a purchase business combination. The excess of the purchase price over the
fair market value of the assets acquired and assumed liabilities of the
Mauritius entity has been allocated to goodwill ($2.1 million). Goodwill is
being amortized over a period of five years, the expected estimated period of
benefit.
In June 2000, the Company acquired, through the Mauritius entity, the remaining
20% of the Indian subsidiary for $2.2 million. The acquisition was accounted for
as a purchase business combination. The excess of the purchase price over the
fair market value of the assets acquired has been allocated to goodwill ($2.2
million), and is being amortized over a period of five years, the expected
estimated period of benefit.
In connection with the Mauritius acquisition, the Company incurred a $1.8
million charge related to the issuance of 104,347 shares of Class A common
stock, as compensation for services performed, $200,000 cash and an additional
$200,000 payable in Mail.com Class A common stock as compensation for employees.
81
Messaging Acquisitions
During the third quarter of 2000 the Company acquired two companies by issuing
710,195 shares of Mail.com Class A common stock valued at approximately $4.3
million based upon the Company's average trading price at the date of
acquisition. The excess of the purchase price over the fair market value of the
assets acquired and liabilities assumed has been allocated to goodwill and is
being amortized over a period of three years, the expected period of benefit.
These acquisitions were accounted for as a purchase business combination.
Allegro
Mail.com acquired The Allegro Group, Inc. ("Allegro"), for approximately $20.4
million including acquisition costs pursuant to the terms of an Agreement and
Plan of Merger dated August 20, 1999 (the "Merger Agreement"), among Mail.com,
AG Acquisition Corp., a wholly-owned subsidiary of Mail.com ("Acquisition
Corp."), Allegro and the shareholders of Allegro. Pursuant to the terms of the
Merger Agreement, Allegro merged with and into Acquisition Corp. and became a
wholly owned subsidiary of Mail.com. The acquisition was accounted for as a
purchase business combination. The consideration payable by Mail.com in
connection with the acquisition of Allegro consisted of the following:
approximately $3.2 million in cash and 1,102,973 shares of Mail.com Class A
common stock valued at approximately $17.1 million. The Company also incurred
acquisition costs of approximately $150,000. In addition, one-time signing
bonuses of $800,000, which is included in the operating expenses in the
statement of operations, were paid to employees of Allegro who were not
shareholders of Allegro, pursuant to employment agreements entered into with
them upon the closing date. In connection with their employment agreements with
Mail.com, Mail.com also granted options to Allegro employees to purchase
approximately 625,000 shares of Mail.com Class A common stock at an exercise
price of $16.00 per share, the then fair value. These options vest quarterly
over four years subject to continued employment.
Mail.com may have been obligated to pay additional consideration (the
"Contingent Consideration") upon completion of its audited financial statements
for the year ended December 31, 2000 based on the achievement of certain
performance standards for such year. The Contingent Consideration would consist
of up to $3.2 million payable in cash, additional bonus payments up to $800,000,
and up to $16.0 million payable in shares of Mail.com Class A common stock based
on the market value of such stock at the time of payment (but such market value
shall be deemed to be not less than $8.00 per share). On November 2, 2000, the
Company settled its contingent consideration obligation with Allegro. Mail.com
will pay to the former shareholders of Allegro 283,185 shares of Mail.com Class
A common stock. Payment shall be made on December 31, 2001. At the time the
consideration becomes issuable, the Company will adjust the purchase price and
reflect additional goodwill, and will ratably amortize such costs over the
remaining life of the goodwill.
The consideration payable by Mail.com was determined as a result of negotiations
between Mail.com and Allegro. The number of shares of Mail.com Class A common
stock issued to Allegro shareholders, was determined based on the exchange rate
of 2,770.5561 shares of Mail.com Class A common stock for each share of Allegro
common stock. Funds paid in connection with the acquisition of Allegro were
provided from Mail.com's cash on hand.
The Company has allocated a portion of the purchase price to the net book value
of the acquired assets and assumed liabilities of Allegro as of the date of
acquisition. The excess of the purchase price over the net book value of the
acquired assets and liabilities of Allegro of $20.1 million has been allocated
to goodwill ($19.4 million) and other intangible assets of approximately
$700,000, consisting of employee workforce, trade names and contracts. Goodwill
and other intangible assets will be amortized over a period of three years, the
expected period of benefit.
The valuation of the write-off of acquired in-process technology in the amount
of $900,000 in connection with the acquisition of Allegro is based on an
independent appraisal which determined that the new versions of MailZone
technology acquired from Allegro had not been developed into the platform
required by the Company at the date of acquisition. As a result, the Company
will be required to expend significant capital expenditures to successfully
integrate and develop the new versions of the MailZone technology, for which
there is considerable risk that such technology will not be successfully
developed, and if such
82
technology is not successfully developed, there will be no alternative use for
the technology. The MailZone technology is an enabling technology for email
communications and includes message management, license, traffic and reporting.
The Company's 1999 consolidated statement of operations reflects a write-off of
the amount of the purchase price allocated to acquired in-process technology of
$900,000.
TCOM
On October 18, 1999, the Company acquired TCOM, Inc. ("TCOM"), a software
technology development firm, specializing in the design of carrier class
applications for the telecommunications and computer telephony industries. The
Company is not continuing the business operations of TCOM but made the
acquisition in order to obtain technology and development resources. The
acquisition has been accounted for an acquisition of assets. The Company paid $2
million in cash and issued 439,832 shares of Class A common stock valued at
approximately $6.1 million. In addition, the Company will pay to the former
employees of TCOM bonuses totaling $400,000, payable in six-month installments
after the closing date in the amounts of $74,000, $88,000, $116,000 and
$122,000, provided such employees continue their employment through the
applicable payment dates. As of December 31, 2000 approximately $143,000 was
paid. The excess of the purchase price over the net book value of the assets
acquired and assumed liabilities of TCOM of approximately $8.1 million has been
allocated to other intangible assets (workforce). Such amounts will be ratably
amortized over a period of three years, the expected period of benefit.
Mail.com may be obligated to pay additional consideration to the sellers of TCOM
based upon the achievement of certain objectives over an 18-month period. The
additional consideration would consist of up to $1.0 million payable in cash and
up to $2.75 million payable in shares of Mail.com Class A common stock based on
the market value of such stock at the time of payment, although the market value
will be deemed to be not less than $4.00 per share. On November 1, 2000, the
Company settled its contingent consideration obligation with TCOM. Mail.com will
pay the former shareholders of TCOM a total of $3.75 million, comprised of a
cash payment of $1 million and $2.75 million in Mail.com Class A common stock,
on April 18, 2001, determined based on the market price at that time, but not
less than $4.00 per share. The Company adjusted the purchase price for the $1
million payment and is amortizing such costs over the remaining life of the
other intangible assets, namely workforce. Upon the issuance of the shares, the
Company will either adjust other tangible assets and amortize such costs over
the remaining life of the other intangible assets or record an impairment charge
after assessing its recoverability. See Note 22(f) for details regarding first
quarter of 2001 restructuring plans.
iFan, Inc.
In November 1999, the Company acquired iFan, Inc. ("iFan") a Web site with
various domain names. The acquisition has been accounted for as an acquisition
of assets. iFan had limited operations. The Company issued 72,704 shares of
Class A common stock valued at approximately $1.6 million. The value was
determined by using the average of the Company's Class A common stock
surrounding the closing date, which occurred simultaneously with the
announcement date. The Company is also obligated to pay $150,000 to the former
owners for certain indebtedness. In addition, all iFan stock options were
converted into 16,965 Mail.com non-qualified stock options at a weighted-average
exercise price of $11.41 per share. The value ascribed to the options using the
Black Scholes pricing model ($370,000) was part of the $2.1 million purchase
price. The excess of the purchase price over the net book value of the domain
assets has been allocated to other intangible assets (non compete agreements).
Such amount is being ratably amortized over a period of three years, the
expected period of benefit. In December 2000, the Company wrote off $160,000 of
impaired domain names as part of its restructuring program (see Note 18).
Lansoft U.S.A.
In December 1999, the Company acquired Lansoft U.S.A. ("Lansoft"), a provider of
email management, e-commerce and Web hosting services to businesses. The
acquisition has been accounted for as a purchase business combination. The
Company issued 152,006 shares of Class A common stock valued at approximately
$2.7 million, which approximated the value allocated to goodwill and other
intangible assets. The value was determined by using the average of the
Company's Class A common stock surrounding the closing date, which occurred
simultaneously with the announcement date. Such amount will be amortized over
83
a period of three years, the expected period of benefit. In addition, the Board
of Directors approved the Lansoft Stock Option Plan, providing for the issuance
of 100,000 non-qualified stock options at an exercise price of $17.06 per share
to selected employees of Lansoft. All such options were issued immediately
after the consummation of the Lansoft acquisition.
The Company may be obligated to issue up to 375,000 shares of Class A common
stock as additional consideration to the sellers of Lansoft based upon the
achievement of certain revenue targets in calendar year 2000. Management has
determined that the revenue targets were not achieved for the calendar year
2000.
The following unaudited pro-forma consolidated amounts give effect to the
acquisitions as if they had occurred on January 1, 1999, by consolidating their
results of operations with the results of Mail.com for the years ended December
31, 2000 and 1999. The unaudited pro-forma consolidated results are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods presented
and should not be construed as being representative of future operating results.
The pro forma basic and diluted net loss per common share is computed by
dividing the net loss attributable to common stockholders by the
weighted-average number of common shares outstanding. Diluted net loss per share
equals basic net loss per share, as common stock equivalents are anti-dilutive
for all pro forma periods presented.
December 31,
------------
(In thousands, except per share amounts) 2000 1999
---- ----
Revenues............................................................................. $ 65,814 $ 44,346
Net loss attributable to common stockholders......................................... $ (245,379) $ (134,559)
Basic and diluted net loss per common share.......................................... $ (4.09) $ (3.09)
Weighted average shares used in net loss
per common share calculation (1)................................................. 60,009 43,606
(1) The Company computes net loss per share in accordance with provisions
of SFAS No. 128, "Earnings per Share". Basic net loss per share is
computed by dividing the net loss for the period by the
weighted-average number of common shares outstanding during the
period. The calculation of the weighted average number of shares
outstanding assumes that 13,834,749 shares of Mail.com's common stock
issued in connection with its acquisitions were outstanding for the
entire period or date of inception, if later. The weighted average
common shares used to compute pro forma basic net loss per share
includes the actual weighted average common shares outstanding for the
periods presented, respectively, plus the common shares issued in
connection with the acquisitions from January 1, 1999 or date of
inception if later. Diluted net loss per share is equal to basic net
loss per share as common stock issuable upon exercise of the Company's
employee stock options and upon exercise of outstanding warrants are
not included because they are antidilutive. In future periods, the
weighted-average shares used to compute diluted earnings per share
will include the incremental shares of common stock relating to
outstanding options and warrants to the extent such incremental shares
are dilutive.
(3) Balance Sheet Components
Property and equipment, including equipment under capital leases, are stated at
cost and are summarized as follows, in thousands:
December 31,
------------
2000 1999
---- ----
Computer equipment and software, including
amounts related to capital leases of $40,444 and $23,774, respectively.............. $ 66,874 $ 34,671
Furniture and fixtures.................................................................. 2,072 300
Web development......................................................................... 4,628 --
Leasehold improvements.................................................................. 1,096 466
Construction in progress................................................................ 242 --
------------ ------------
74,912 35,437
Less accumulated depreciation and amortization,
including amounts related to capital leases
of $14,286 and $4,056, respectively................................................ 23,996 6,502
------------ ------------
Total.......................................................................... $ 50,916 $ 28,935
============ ============
During the year ended December 31, 1999, the Company purchased approximately
$3.8 million of computer software that was financed through a periodic payment
schedule. Amounts payable under such agreements are included in other current
liabilities.
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Domain assets consist of the following, in thousands:
December 31,
------------
2000 1999
---- ----
Domain names............................................................................ $ 10,068 $ 9,138
Less accumulated amortization........................................................... 3,093 1,204
------------ ------------
Domain assets, net .............................................................. $ 6,975 $ 7,934
============ ============
Goodwill and other intangible assets consists of the following, in thousands:
December 31,
------------
2000 1999
---- ----
Goodwill................................................................................ $ 237,736 $ 22,276
Other intangible assets................................................................. 27,007 9,667
------------ ------------
264,743 31,943
Less accumulated amortization........................................................... 63,749 2,979
------------ ------------
Total............................................................................ $ 200,994 $ 28,964
============ ============
Accrued expenses consist of the following, in thousands:
December 31,
------------
2000 1999
---- ----
Payroll and related costs............................................................... $ 6,272 $ 1,998
Advertising costs....................................................................... 5,654 4,367
Interest................................................................................ 2,917 --
Carrier charges......................................................................... 2,300 --
Payments due to former owners of acquired companies..................................... 1,550 --
Professional services and consulting fees............................................... 1,151 1,494
Payments due under partner contracts.................................................... 1,068 1,252
Software and fixed asset obligations.................................................... -- 706
Other ................................................................................. 4,976 1,918
------------ ------------
Total............................................................................ $ 25,888 $ 11,735
============ ============
The Company has received notices or claims from certain third parties for
disputed and unpaid accounts payable. One of such vendors, Initiative Media
Worldwide, Inc. has commenced legal proceedings in California to collect
approximately $2 million alleged to be owed to it in connection with advertising
alleged to be owed to it in connection with advertising alleged to have been run
on our behalf. The Company believes that they have appropriately reserved for
the amount of any liability that may arise out of this matter.
(4) Investments
The Company assesses the need to record impairment losses on investments and
records such losses when the impairment of an investment is determined to be
other-than-temporary.
On March 16, 2000, the Company acquired a domain name and made a 10% investment
in Software Tool and Die, a Massachusetts company, in exchange for $2.0 million
in cash and 185,686 shares of Class A common stock valued at approximately $2.9
million. Software Tool and Die is an Internet Service Provider and provides Web
hosting services. The Company concluded that the carrying value of this
cost-based investment was permanently impaired based on the achievement of
business plan objectives and milestones and the fair value of the investment
relative to its carrying value. During the fourth quarter of 2000, Mail.com
recorded an impairment charge of $4.2 million due to an other-than-temporary
decline in the value of this investment as well as a result of the November 2,
2000 decision as approved by the Board of Directors, to sell all assets not
related to its core outsourcing business, including its Asia-based businesses.
This amount is included in impairment of investments within other income
(expense) in the 2000 statement of operations.
On April 17, 2000, in exchange for $500,000 in cash, Mail.com acquired certain
source code technologies, trademarks and related contracts relating to the
InTandem collaboration product ("InTandem") from IntraACTIVE, Inc., a Delaware
corporation (now named Bantu, Inc., "Bantu"). On the same date, Mail.com also
paid Bantu an upfront fee of $500,000 for further development and support of the
InTandem product. On the same date, pursuant to a Common Stock Purchase
Agreement,
85
Mail.com acquired shares of common stock of Bantu representing approximately
4.6 % of Bantu's outstanding capital stock in exchange for $1 million in cash
and 462,963 shares of Class A common stock, valued at approximately $3.6
million. Pursuant to the Common Stock Purchase Agreement, Mail.com also agreed
to invest up to an additional $8 million in the form of shares of Mail.com
Class A common stock in Bantu in three separate increments, of $4 million, $2
million and $2 million, respectively, based upon the achievement of certain
milestones in exchange for additional shares of Bantu common stock representing
3.7%, 1.85% and 1.85%, respectively, of the outstanding common stock of Bantu
as of April 17, 2000. The number of shares of Mail.com Class A common stock
issuable at each closing date will be based on the greater of $9 per share or
the average of the closing prices of Mail.com's Class A common stock over the
five trading days prior to such closing dates. In July 2000, Mail.com issued an
additional 92,593 shares of Class A common stock valued at approximately
$590,000 to Bantu, in accordance with a true-up provision in the Common Stock
Purchase Agreement. In September 2000, Mail.com issued an additional 444,444
shares of our Class A common stock valued at approximately $2.9 million as
payment for the achievement of a milestone indicated above. The Company
accounts for this as a cost investment.
Mail.com is amortizing the $500,000 associated with the source code
technologies, trademarks and contracts relating to the InTandem collaboration
product over a 3-year period, the expected useful life. Mail.com has
capitalized, as other assets, the $500,000 associated with the development and
support of the InTandem product until such product is available for use and will
then amortize such amount over its expected useful life.
During 1999, the Company acquired an equity interest in 3Cube, Inc. ("3Cube"),
which was accounted for under the cost method. Under the agreement, the Company
paid $1.0 million in cash and issued 80,083 of its Class A common stock, valued
at approximately $2.0 million, in exchange for 307,444 shares of 3Cube
convertible preferred stock which represents an equity interest of less than 20%
of 3Cube. On June 30, 2000, the Company made an additional investment in 3Cube,
Inc. by issuing 255,049 shares of Class A common stock valued at approximately
$1.5 million in exchange for 50,411 shares of 3Cube Series C Preferred Stock. At
December 31, 2000, Mail.com owned preferred stock of 3Cube, representing an
ownership interest of 21% of the combined common and preferred stock outstanding
of 3Cube, Inc. Accordingly, the Company now accounts for this investment under
the equity method of accounting. The change from the cost method to the equity
method of accounting resulted in a decrease of the carrying value of the
investment by $2.1 million which is included in loss on equity investments in
the 2000 statement of operations. In addition, as a result of sequential
declines in operating results of 3Cube, management made an assessment of the
carrying value of its equity investment and determined that it was in excess of
its estimated fair value. Accordingly, in December 2000, Mail.com wrote down the
value of its investment in 3 Cube by $200,000 as it determined that the decline
in its value was other-than-temporary which is included in impairment of
investments within other income (expense) in the 2000 statement of operations.
On July 25, 2000, Mail.com issued 102,215 shares of its Class A common stock
valued at approximately $872,000 as an investment in Madison Avenue Technology
Group, Inc. (CheetahMail). The investment has been accounted for under the cost
method of accounting as Mail.com owns less than 20% of the outstanding stock of
CheetahMail. In consideration thereof, Mail.com received 750,000 shares of
Series B convertible preferred stock and a warrant to purchase 75,000 shares of
common stock of CheetahMail.
On July 25, 2000, Mail.com entered into a strategic relationship with
BulletN.net, Inc. The investment has been accounted for under the cost method of
accounting, as Mail.com owns less than 20% of the outstanding stock of
BulletN.net. As part of this agreement BulletN.net issued 666,667 shares of its
common stock and a warrant to purchase up to 666,667 shares of BulletN.net
common stock to Mail.com in exchange for 364,431 shares of Mail.com Class A
common stock valued at approximately $3.1 million.
During 1999, the Company sold its available for sale investments and realized a
gain of approximately $5.7 million and wrote-down a non-marketable investment of
$150,000 that was deemed to be impaired.
86
(5) Marketable Securities
The fair value, amortized cost and gross unrealized holding gains for the
Company's marketable securities at December 31, 2000 and 1999 consist of the
following, in thousands:
Net Unrealized Holding
----------------------
Fair Value Gains Amortized Cost
---------- ----- --------------
At December 31, 2000
U.S. Government Securities................................... $ 22,140 $ 62 $ 22,202
At December 31, 1999
U.S. Government Securities................................... $ 7,006 $ -- $ 7,006
(6) Notes Payable
On March 31, 2000, the Company acquired 100% of a Mauritius entity,
which in turn owned 80% of an Indian subsidiary. The terms were $400,000 in cash
and a $1 million 7% note payable one year from closing (see Note 3).
On January 26, 2000, the Company issued $100 million of 7% Convertible
Subordinated Notes ("the Notes"). Interest on the Notes is payable on February 1
and August 1 of each year, beginning on August 1, 2000. The Notes are
convertible by holders into shares of Mail.com Class A common stock at a
conversion price of $18.95 per share (subject to adjustment in certain events)
beginning 90 days following the issuance of the Notes.
The notes will mature on February 1, 2005. Prior to February 5, 2003 the Notes
may be redeemed at the Company's option ("the Provisional Redemption"), in whole
or in part, at any time or from time to time, at certain redemption prices, plus
accrued and unpaid interest to the date of redemption if the closing price of
the Class A common stock shall have equaled or exceeded specified percentages of
the conversion price then in effect for at least 20 out of 30 consecutive days
on which the NASDAQ national market is open for the transaction of business
prior to the date of mailing the notice of Provisional Redemption. Upon any
Provisional Redemption, the Company will be obligated to make an additional
payment in an amount equal to the present value of the aggregate value of the
interest payments that would thereafter have been payable on the notes from the
Provisional Redemption Date to, but not including, February 5, 2003. The present
value will be calculated using the bond equivalent yield on U.S. Treasury notes
or bills having a term nearest the length to that of the additional period as of
the day immediately preceding the date on which a notice of Provisional
Redemption is mailed.
On or after February 5, 2003, the Notes may be redeemed at the Company's option,
in whole or in part, in cash at the specified redemption prices, plus accrued
interest to the date of redemption.
In connection with the issuance of these Notes, the Company incurred
approximately $3.8 million of debt issuance costs. Such costs have been
capitalized and are being amortized ratably over the original term of the Notes.
The Company incurred approximately $7.2 million of interest expense including
accrued interest and amortization of the debt issuance costs for the year ended
December 31, 2000 (see Note 22 for additional information regarding the exchange
of certain of these notes).
As part of the acquisition of NetMoves in February 2000, the Company
assumed the following:
In 1998, the Company entered into a $500,000 equipment line of credit
with a bank. Interest is at the bank's prime interest rate plus an applicable
margin, as defined. This line was fully utilized at December 31, 1999.
87
In February 1999, the Company entered into a new $1 million equipment
line of credit with a lender. Draw-downs are to be paid over a term of 42 months
with an effective interest rate of 16%. This line was fully utilized by December
31, 1999.
In 1997, the Company arranged for an equipment loan line of $500,000
and is in the form of two collateralized promissory notes, which required the
Company to pay over a term of 48 months with an effective interest rate of 16%.
In 1998 this agreement was amended to increase available borrowings by an
additional $1 million. This line is also evidenced by promissory notes which are
payable over 42 months. The new line was fully utilized by December 31, 1999.
Notes payable include the following, in thousands:
December 31, 2000
-----------------
1997 - 16% note payable due December 2001 $ 91
1998 - Floating rate note payable due March 2001 50
1998 - 9.25% note payable due March 2001 15
1998 - 16% note payable due June 2002 497
1999 - 16% note payable due December 2003 529
2000 - 7% note payable due March 2001 1,000
2000 - 7% Convertible Subordinated Notes due February 2005 100,000
--------
Total notes payable 102,182
Less current portion 1,861
--------
Non-current portion $100,321
--------
(7) Revenues
The following are the components of revenues, in thousands:
For the year ended December 31,
-------------------------------
2000 1999 1998
---- ---- ----
Business messaging.................................................... $ 28,967 $ 1,765 $ --
Advertising........................................................... 22,370 9,671 1,117
Sales of IT products.................................................. 4,849 -- --
Other domain development revenues..................................... 3,675 -- --
Subscriptions......................................................... 719 601 285
Other................................................................. 642 672 93
------------ ----------- ------------
Total revenues........................................................ $ 61,222 $ 12,709 $ 1,495
============ =========== ============
Other revenues consist of revenues generated principally from the sale or lease
of domain names.
88
(8) Business Segments
The Company's two business segments are Messaging and Domain Development, the
latter being attributable to the formation of WORLD.com. The following table
presents summarized financial information related to the business segments:
Year Ended December 31,
(In Thousands)
2000 1999 1998
---- ----- ----
Revenues:
Messaging.................................................. $ 52,698 $ 12,709 $ 1,495
Domain development:
Product sales........................................... 4,849 -- --
Services................................................ 3,675 -- --
----------- ---------- ----------
Domain development................................... 8,524 -- --
----------- ---------- ----------
Total revenues ......................................... $ 61,222 $ 12,709 $ 1,495
=========== ========== ==========
Cost of revenues:
Messaging ................................................. $ 49,201 $ 13,778 $ 2,891
Domain development:
Products................................................ 4,607 -- --
Services................................................ 1,924 -- --
----------- ---------- ----------
Domain development.................................... 6,531 -- --
----------- ---------- ----------
Total cost of revenues ................................. $ 55,732 $ 13,778 $ 2,891
=========== ========== ==========
Operating expenses, excluding cost of revenues:
Messaging ................................................. $ 154,995 $ 52,574 $ 11,735
Domain development......................................... 71,464 -- --
----------- ---------- ----------
Total operating expenses, excluding cost of revenues.......... $ 226,459 $ 52,574 $ 11,735
=========== ========== ==========
The following table reconciles total assets for business segments to
consolidated assets:
At December 31,
(In Thousands)
2000 1999 1998
---- ----- ----
Identifiable Assets
Messaging .............................................. $ 252,575 $ 137,267 $ 20,344
Domain development...................................... 74,491 -- --
Inter-segment eliminations.............................. 3,195 -- --
----------- ---------- ----------
Consolidated assets........................................... $ 330,261 $ 137,267 $ 20,344
=========== ========== ==========
The following table presents certain segment information, in thousands:
Messaging Domain Development Total
--------- ------------------ -----
December 31, 2000
Depreciation and amortization..........................$56,190 $21,958 $78,148
Restructuring charges....................................5,338 13,050 18,388
Impairment charges.........................................200 12,000 12,200
December 31, 1999
Depreciation and amortization...........................$8,584 $-- $ 8,584
December 31, 1998
Depreciation and amortization.............................$903 $-- $ 903
89
(9) Partner Agreements
The Company has entered into many partner agreements. Included in these
agreements are percentage of revenue sharing agreements, miscellaneous fees and
other customer acquisition costs with Mail.com Partners. The revenue sharing
agreements vary for each party but typically are based on selected revenues, as
defined, or on a per sign-up basis. At December 31, 2000 and 1999, the Company
accrued approximately $1.1 million and $1.3 million, respectively, to various
Mail.com Partners under such agreements.
Prior to 2000, the Company had issued stock to some of its Mail.com Partners and
capitalized such issuances when the measurement date for such stock grants was
fixed and there was a sufficient disincentive to breach the contract in
accordance with Emerging Issues Task Force Abstract No. 96-18, "Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Such amounts are amortized ratably
over the length of the contract commencing on the site launch date.
In August 1998, the Company entered into a two-year agreement with CNN. In
consideration of the advertising, subscription and customer acquisition
opportunities, CNN received 253,532 shares of Class A common stock upon the
commencement of the contract at $3.50 per share, the fair market value of
Mail.com's common stock on the date of grant, or $887,000. CNN also has the
right to receive a portion of the Company's selected revenues under the
agreement, as defined. The value of the stock issuance has been recorded in the
balance sheet as partner advances and is being amortized ratably to amortization
expense over the contract term. The launch of the services coincided with the
contract date. The Company recorded approximately $270,000, $444,000 and
$173,000 of amortization expense in 2000, 1999 and 1998, respectively.
In September 1998, the Company entered into an agreement with GeoCities. In
consideration of the advertising, subscription and customer acquisition
opportunities under this agreement, GeoCities received 1,000,000 shares of Class
A common stock upon the commencement of the contract valued at $3.50 per share,
the fair market value of Mail.com's common stock on the date of grant, or $3.5
million. The Company was also required to pay GeoCities $1.5 million in three
installments, the first of which was paid in December 1998. The value of the
stock issuance and cash payments were recorded in the balance sheet as partner
advances and would have been amortized ratably to amortization expense over the
contract term commencing upon the launch of the services under the agreement.
After the Company entered into the agreement, Yahoo! announced its agreement to
acquire GeoCities. In May 1999, the Company and GeoCities cancelled and
rescinded their agreement. As a result of the cancellation and rescission of the
agreement, GeoCities retained the $500,000 non-refundable fee that the Company
paid under the contract, but returned to the Company the 1,000,000 shares of
Class A common stock issued to them. Accordingly, the Company reversed the
issuance of 1,000,000 shares and recorded the $500,000 write-off in May 1999. In
addition, the Company agreed to deliver advertisements over its network on
behalf of GeoCities and GeoCities paid the Company $125,000 per month for
sixteen months, representing $2 million in the aggregate.
The Company issued an additional 485,616 and 577,628 shares of its common stock
at varying prices in 1999 and 1998 respectively, in connection with certain
strategic partnership agreements. When stock issuances are either contingent
upon the achievement of certain targets or the measurement date is not fixed,
the Company expenses the issuance of such stock at the time such stock is issued
or the targets are achieved at the then fair market value of the Company's
stock. Such amounts aggregated approximately $2.5 million and $2.8 million for
the years ended December 31, 1999 and 1998 respectively, and are included in
sales and marketing expenses in the statement of operations. The Company no
longer issues stock in connection with its strategic partnership agreements.
Prior to May 1, 1999, the Company was required to issue to CNET, Snap and NBC
Multimedia shares of its Class A common stock for each member who registers at
their sites. On May 1, 1999, the Company entered into an agreement to settle in
full its contingent obligation to issue shares of its Class A common stock to
CNET, Snap and NBC Multimedia as described above. Pursuant to this agreement,
the Company issued upon the closing of its initial public offering in June 1999,
2,368,907 shares of Class A common stock at a value of $7.00 per share in the
aggregate to CNET and Snap and 210,000 shares of Class A common stock at a value
of $7.00 per share to NBC Multimedia. The Company capitalized $18 million in
connection with the issuance of these shares and is ratably amortizing the
amount over the period from the closing of the initial public offering (June 23,
1999)
90
through May 2001. The Company recorded approximately $9.2 million and $5.0
million of amortization expense for the years ended December 31, 2000 and 1999,
respectively.
(10) Leases
The Company sold certain assets for approximately $1.3 million, $3.8 million and
$1.3 million during 2000, 1999, and 1998, respectively. The assets were leased
back from the purchaser over 3 to 5 years. The Company had not received
approximately $183,000 from such sales at December 31, 1999.
The Company leases facilities and certain equipment under agreements accounted
for as operating leases. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rent expense for operating
leases for the years ending December 31, 2000, 1999 and 1998 was approximately
$6.0 million, $1.5 million, and $380,000, respectively.
On March 30, 2000, the Company entered into a $12 million Master Lease Agreement
with GATX Technology Services Corporation ("GATX") for equipment lease financing
(hardware and software). Terms of individual leases signed under the Master
Lease Agreement will call for a 36-month lease term with rent payable monthly in
advance. The effective interest rate is 12.1% and is adjustable based on prime.
GATX holds a first priority security interest in the equipment under the
facility. For certain leases entered into under the $12 million master lease
agreement, the Company has exercised an option to extend the term for an
additional 24 months.
Under terms of the Master Lease Agreement, the Company has the option to
purchase the equipment at the then fair market value of the equipment at lease
expiration. In December 2000, GATX reduced the $12 million line to $10.4
million, the amount that was drawn down and outstanding at December 31, 2000.
On March 31, 2000, the Company entered into a $2 million Master Lease Agreement
with Leasing Technologies International, Inc. The lease line provides for the
lease of new, brand name computers, office automation and other equipment. Terms
of individual leases signed under the Master Lease Agreement call for a 36-month
lease term, rent payable monthly in advance. The effective interest rate is
14.7% and is adjustable based on prime. In addition, a security deposit equal to
one month's rent is payable at each individual lease inception. In December
2000, Leasing Technologies reduced the $2 million line to $1.2 million, the
amount that was drawn down and outstanding at December 31, 2000.
Under terms of the Master Lease Agreement at the end of the lease term, the
Company has the option to either purchase or return the equipment at a set
percent of the original price, or extend the lease term by twelve months. In the
latter case, the lease terms provide for a discounted monthly rental and a
bargain purchase option at the expiration of the twelve-month extension.
The Company's lease obligations are collateralized by certain assets at December
31, 2000. Future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 2000 are as follows, in thousands:
Year ending December 31,
------------------------
Capital leases Operating leases
-------------- ----------------
2001 ............................................................................... $ 15,397 $ 6,193
2002 ............................................................................... 13,074 5,474
2003 ............................................................................... 3,959 4,189
2004 ............................................................................... 48 3,869
2005 ............................................................................... 10 3,975
2006 and later.......................................................................... -- 4,132
------------ ----------
Total minimum lease payments................................................... 32,488 $ 27,832
==========
Less estimated executory costs.......................................................... 3,206
------------
Net minimum lease payments....................................................... 29,282
Less amount representing interest (at a weighted-average interest rate of 10.7%)........ 3,520
------------
Present value of net minimum capital lease payments..................................... 25,762
Less current portion of obligations under capital leases................................ 11,443
------------
Obligations under capital leases, excluding current portion............................. $ 14,319
============
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(11) Capital Stock
Authorized Shares
In 1999, the Company amended and restated its certificate of incorporation
to increase the number of authorized shares to 190,000,000 consisting of
120,000,000 and 10,000,000 shares of Class A and Class B common stock,
respectively; and 12,000,000, 12,000,000, 10,000,000 and 10,000,000 shares of
Class A, C, D and E Preferred Stock respectively; and 16,000,000 undesignated
Preferred shares (collectively "Preferred Stock"), all classes with a par value
of $0.01 per share.
In 2000, the Company amended and restated its certificate of incorporation in
order to increase the number of authorized shares up to 220,000,000 consisting
of 150,000,000 and 10,000,000 shares of Class A and Class B common stock,
respectively; and 60,000,000 undesignated shares of preferred stock, all classes
with a par value of $0.01 per share.
Common Stock
Initial Public Offering
On June 23, 1999, the Company closed its Initial Public Offering ("IPO"), which
resulted in the issuance of 6,850,000 shares of Class A common stock at $7.00
per share. On July 12, 1999, 1,027,500 shares of Class A common stock were
issued in connection with the exercise of the underwriters' over-allotment
option. In addition, upon the closing of the IPO, 6,185,000, 3,776,558 and
3,200,000 shares of Series A, C and E convertible preferred stock, respectively,
automatically converted on a one-for-one basis into 13,161,558 shares of Class A
common stock. Net proceeds from the offering, after underwriting fees of $3.9
million and offering costs of $1.4 million, were approximately $49.8 million.
During 1999 and 1998, Mail.com issued 3,130,324 and 1,831,160 shares,
respectively of its Class A common stock primarily to vendors and consultants,
as well as to various Mail.com Partners (see note 7). During 2000 and 1999, the
Company issued 12,593,520 shares and 2,276,086 shares, respectively, of Class A
common stock primarily in connection with acquisitions, investments and
purchases of domain names.
Voting Rights
Each share of Class A common stock has one vote per share. Each share of Class B
common stock, which is owned by the Chairman, shall have ten votes per share,
and may convert into one share of Class A common stock.
Liquidation Preference
In the event the Company is liquidated, dissolved or wound up, the holders of
Class A and Class B common stock will be entitled to receive distributions only
after satisfaction of all liabilities and the prior rights of any outstanding
class of preferred stock. If the Company is liquidated, dissolved or wound up,
its legally available assets after satisfaction of all liabilities shall be
distributed to the holders of Class A and Class B common stock pro rata based on
the respective numbers of shares of Class A common stock held by these holders
or issuable to them upon conversion of Class B common stock.
92
Preferred Stock
Class A Convertible Preferred Stock
During March 1999, with the consent of the Class A preferred shareholders, the
Company agreed to eliminate in full the Class A contingent additional stock
issuance obligation described above in exchange for giving the existing Class A
preferred shareholders 968,800 shares of Class A common stock on an as if
converted basis, provided the Company completed an IPO before July 31, 1999.
Such IPO closed on June 23, 1999 and the applicable preferred shares converted
to Class A common shares at that time.
Redeemable Convertible Class C Preferred Stock
In July and August 1998 the company completed a private placement of 3,776,558
Class C preferred shares with detachable warrants at a combined offering price
of $3.50 per share ($3.455 per preferred C share and $0.12857 per warrant with
each share having 0.35 warrants) was completed for approximately $13.2 million.
During March 1999, with the consent of the Class C preferred shareholders, the
Company agreed to revise the Class C conversion price from $3.50 to $2.80 in
exchange for eliminating in full the Class C additional contingent stock
issuance obligation provisions described above. This revision equated to an
additional 944,139 shares of Class A common stock being issued to the Class C
preferred shareholders upon the closing of the IPO on June 23, 1999.
Class E Preferred Stock
In March 1999, the Company completed a private placement of 3.2 million shares
of Class E preferred stock at $5.00 per share for net proceeds of approximately
$15.2 million. These shares automatically converted on a one-for-one basis to an
equivalent number of Class A common shares upon the closing of the IPO. As a
result of an adjustment to the conversion price made immediately prior to the
consummation of the IPO, the Class E stockholders received an additional 166,424
shares of Class A common stock upon the conversion of the Class E preferred
stock at the closing of the IPO.
Conversion of Class A, C and E Preferred Stock
Upon the closing of the Company's initial public offering on June 23, 1999,
6,185,000 and 3,776,558 shares of Class A and C convertible preferred stock,
respectively, representing all of the outstanding shares of the convertible
preferred stock, automatically converted on a one-for-one basis into 9,961,558
shares of Class A common stock (before giving effect to the adjustments
described below). In addition, the 3.2 million Class E preferred shares
automatically converted into the same number of Class A common stock (before
giving effect to the adjustments described below). Further, the holders of Class
A, C and E preferred stock received an additional 968,800, 944,139 and 166,424,
Class A common shares, respectively, upon conversion of such preferred stock at
the closing of the initial public offering. This resulted in a $14. 6 million
dividend to preferred stockholders. This amount is reflected as an increase to
additional paid-in-capital and a dividend charge against accumulated deficit.
Class D Preferred Stock
In July 1998, the Company authorized 10,000,000 shares of Class D preferred
stock; however, no shares have been issued to date.
93
Undesignated Preferred Shares
The Company is authorized, without further stockholder approval; to issue
authorized but unissued shares of preferred stock in one or more classes or
series. At December 31, 2000 and 1999, 60,000,000 and 16,000,000 authorized
shares, respectively, of undesignated preferred stock were available for
creation and issuance in this manner.
Warrants
As part of the Private Placement of Class C preferred shares in July and August
1998, 1,321,778 detachable warrants were also issued for proceeds of $170,000 at
a value of $0.12857 per warrant. In connection with the March 1999 Class C
additional contingent stock issuance obligation settlement, all such warrants
were cancelled upon the closing of the IPO. In addition warrants were also
issued in July and August 1998 to purchase 179,356 shares of Class A common
stock at an exercise price of $3.50 per share. The Company recorded offering
costs of $130,000 in connection with the issuance of these warrants using a
Black Scholes pricing model. These warrants are exercisable for a period of five
years.
During 1999, the Company issued 19,543 warrants to various consultants and a
vendor at exercise prices ranging from $5.00 to $11.00 per share. The Company
recognized approximately $93,000 of expense using a Black Scholes pricing model.
(12) AT&T Warrant
Under a letter agreement dated May 26, 1999, AT&T Corp. ("AT&T") and the Company
agreed to negotiate in good faith to complete definitive agreements to establish
a strategic relationship. On July 26, 1999, the Company entered into an interim
agreement to provide the Company's e-mail services as part of a package of AT&T
or third party branded communication services that AT&T may offer to some of its
small business customers. The Company has not entered into a definitive
agreement to establish the proposed strategic relationship, and, effective March
30, 2000, the May 26, 1999 letter agreement and the July 26, 1999 Interim
Agreement were terminated. Under the May 26, 1999 letter agreement, Mail.com
issued warrants to purchase 1.0 million shares of Class A common stock at $11.00
per share. AT&T had the option to exercise the warrants at any time on or before
December 31, 2000. Since AT&T did not exercise the warrants on or before
December 31, 2000, the warrants expired and were cancelled.
The Company recorded a deferred cost of approximately $4.3 million in the
aggregate as a result of the issuance of these warrants to AT&T. As a result of
the termination of the May 26 letter agreement and the July 26 interim
agreement, $3.3 million of deferred costs were expensed during 2000. The Company
had amortized approximately $980,000 during 1999.
(13) CNET/Snap Stock Warrant
In 1998, the Company entered into a partner agreement with CNET, Inc., which was
amended shortly thereafter to include Snap, a newly formed entity. Under the
agreement, the Company was obligated to issue warrants to purchase a total of
1.5 million shares of Class A common stock upon achievement of a member
registration target. The warrants were divided between CNET and Snap and Snap
subsequently assigned its portion to NBC Multimedia. CNET and NBC Multimedia
exercised their warrants prior to Mail.com's initial public offering, and upon
the closing of the initial public offering on June 23, 1999, $7.5 million was
transferred from an escrow account to Mail.com's account and the Company issued
shares of Class A common stock to CNET and NBC Multimedia.
(14) Lycos Stock Warrant
In October 1997, the Company entered into a partner agreement with Lycos, Inc.
As part of this agreement, a stock warrant for 2,000,000 Class A preferred
shares was granted at an exercise price of $2.00 per share, the fair market
value at the date of grant. In March 1998, Lycos exercised its warrant in
accordance with this agreement whereby the Company received 100,062 shares of
Lycos stock valued at $39.98 per share on the closing date, which the Company
sold over the next week for proceeds totaling approximately $4.4 million. The
Company recognized a gain of approximately $438,000 on such sale.
94
(15) Stock Options
Between 1996 and 2000 the Board of Directors have approved stock option plans
that permit the issuance of incentive stock options and nonqualified stock
options to purchase up to 8,500,000 common shares. Most options are granted at
fair market value, except as noted below, and are for periods not to exceed 10
years.
During 1998, 40,000 options were issued to a key executive at an exercise price
of $3.50 per share. Such options were contingent upon the executive achieving a
specified target. Such options were issued when the executive achieved a
specific target at the then fair value of the Company's common stock of $3.50
per share. Accordingly, no compensation expense was recorded.
During 1998, 402,975 options were issued to a key executive at an exercise price
of $2.00 per share, all of which were granted in 1998. Such options were outside
of the Company's Stock Option Plans and contingent upon the Company achieving
specified advertising revenue targets, as defined. For the year ended December
31, 1998, the Company recorded deferred compensation expense of approximately
$1.1 million in the aggregate in connection with these grants, representing the
difference between the deemed fair value of the Company's stock at the date of
each grant and the $2.00 per share exercise price of the related options. This
amount is presented as a reduction of stockholders' equity (deficit) and is
being amortized over the three-year vesting period from the achievement of the
performance targets, which was concurrent with each option grant. The Company
has amortized $274,000, $365,000 and $71,000 of deferred compensation related to
this grant for the years ended December 31, 2000, 1999 and 1998, respectively.
During the fourth quarter of 2000, the officer's employment terminated and the
remaining $387,000 of unamortized deferred compensation representing the
unvested options forfeited was offset against to additional paid-in capital.
For the years ended December 31, 2000, 1999 and 1998, the Company recorded
compensation expense of approximately $0, $93,000 and $442,000, respectively,
for stock option and warrant issuances. Such amounts include the CNET and Lycos
warrants (see notes 13 and 14).
During 2000 and 1999, certain non-bonus eligible employees purchased 6,346 and
84,380 common stock options, respectively for $10 and $2.50 per share in cash
having an exercise price of $14.63 and $5.00 per share, the fair market value at
the date of the grant.
During the second quarter of 1999, the Company issued 105,150 and 5,000 stock
options to certain employees at $5.00 per share. The fair values of the
Company's common stock on the dates of grant were $11 and $7 per share,
respectively. Accordingly, the Company recorded deferred compensation of
approximately $641,000 in connection with these options. At December 31, 2000,
40,400 stock options are outstanding and the unamortized deferred compensation
of $141,000 is being amortized over the four-year vesting period of the
applicable options.
During 1999, the Board of Directors approved separate stock option plans that
permitted the issuance of nonqualified stock options to employees of Allegro,
TCOM, iFan and Lansoft to purchase shares of Mail.com Class A common stock. The
number of options authorized was 625,000, 459,330, 16,965 and 100,000,
respectively. The exercise prices were $16.00, $13.06, $11.41 and $17.06
respectively. All options were granted at fair value and vest quarterly over 4
years subject to continued employment.
The Company applies Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the fair value of the
underlying common stock on the date of grant, no compensation expense has been
recognized for its stock option grants to employees and directors. Had
compensation expense for the Company's stock option grants been determined based
on the fair value at the grant date for awards consistent with the method of
SFAS No. 123, the Company's net loss attributable to common stockholders would
have increased by the pro forma amounts for each year indicated below:
95
($ in thousands, except per share amounts) Year ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Net loss attributable to common stockholders:
As reported......................................... $ (229,527) $ (61,571) $ (12,525)
Pro forma........................................... $ (252,951) $ (66,158) $ (14,134)
Basic and diluted net loss per common share:
As reported......................................... $ (4.01) $ (1.96) $ (0.86)
Pro forma........................................... $ (4.42) $ (2.11) $ (0.97)
The resulting effect on the pro forma net loss disclosed for the years ended
December 31, 2000, 1999 and 1998 is not likely to be representative of the
effects of the net loss on a pro forma basis in future years, because the pro
forma results include the impact of only two, three and four years,
respectively, of grants and related vesting, while subsequent years will include
additional grants and vesting. For purposes of pro-forma disclosure, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
The fair value of each option grant is estimated on the date of grant using the
Black Scholes method option-pricing model (the minimum value method was used
through March 12, 1999, the date of the initial filing of the Company's S-1)
with the following assumptions used for grants made in 2000; dividend yield of
zero (0%) percent, average risk-free interest rate of 6.10%, expected life of 5
years and volatility of 107% and in 1999: dividend yield of zero (0%) percent,
average risk-free interest rate of 5.60%, expected life of 5 years and
volatility of 0% for grants made prior to Mail.com's initial public offering and
90% for grants made after Mail.com's initial public offering. The following
assumptions were used for grants made in 1998: dividend yield of zero (0%)
percent, average risk-free interest rate ranging from 5.81% to 6.89%, expected
life of 10 years and volatility of 0%.
A summary of the Company's stock option activity and weighted average exercise
prices is as follows:
For the Year Ended December 31,
-------------------------------
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Options outstanding at
beginning of period............. 9,776,953 $ 5.34 6,656,296 $ 1.93 3,901,321 $ 0.94
----------- ----------- -------------- --------- ------------- -------
Options granted.................... 14,879,380 $ 5.30 3,702,792 $ 11.25 3,086,884 $ 3.18
Options canceled................... (9,919,450) $ 9.11 (399,993) $ 5.44 (331,909) $ 1.85
Options exercised.................. (1,392,593) $ 1.82 (182,142) 1.93 -- --
----------- ----------- -------------- --------- ------------- -------
Options outstanding at
end of period................... 13,344,290 $ 2.86 9,776,953 $ 5.34 6,656,296 $ 1.93
=========== =========== ============== ========= =============
Options exercisable at period end.. 6,315,061 5,121,928 3,230,469
=========== ============== =============
Weighted average fair value of
options granted during the
period.......................... $ 5.02 $ 7.41 $ 1.48
====== ====== ======
96
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$ 0.10.................................... 900,002 5.4 $ 0.10 900,002 $ 0.10
$ 0.20.................................... 9,338 5.7 $ 0.20 9,338 $ 0.20
$ 0.50-$0.69.............................. 809,528 5.6 $ 0.52 802,829 $ 0.52
$ 1.00-$1.38.............................. 1,031,164 7.7 $ 1.03 745,965 $ 1.00
$ 1.59-$2.34.............................. 7,693,946 7.8 $ 1.75 2,507,998 $ 1.87
$ 3.24-$4.50.............................. 767,729 6.9 $ 3.51 663,516 $ 3.50
$ 5.00-7.46............................... 1,182,402 8.5 $ 5.55 409,836 $ 5.07
$ 7.93-$11.86............................. 115,852 7.0 $ 10.22 57,152 $ 10.90
$12.06-$18.00............................. 792,004 8.1 $ 15.03 195,881 $ 14.89
$18.13-$25.63............................. 42,325 7.4 $ 20.65 22,544 $ 20.84
-------------- ------ --------- ----------- ---------
13,344,290 7.5 $ 2.90 6,315,061 $ 2.28
============== ====== ========= =========== =========
On May 31, 2000, the Board of Directors approved the cancellation and
re-issuance of 500,000 options to an executive at an exercise price of $5.53 per
share based on the closing price of the Company's Class A common stock on May
31, 2000. The options had an original exercise price of $12.44. The new options
vest at the same rate that they would have vested under previous plans. Pursuant
to FIN 44, stock options re-priced after December 15, 1998 are subject to
variable plan accounting. The total compensation charge for the year ended
December 31, 2000 approximated $6,000.
On November 14, 2000, the Company offered to certain employees, officers and
directors, including the executive mentioned above, other than the chairman, the
right to re-price certain outstanding stock options to an exercise price equal
to $1.69, the closing price of the Company's Class A common stock on NASDAQ on
November 14, 2000. Options to purchase an aggregate of up to 6,327,986 shares
(including the reissuance of 500,000 options on May 31, 2000) are subject to
re-pricing. The re-priced options will vest at the same rate that they would
have vested under their original terms except that shares issuable upon exercise
of these options may not be sold until after November 14, 2001. Pursuant to FIN
44, since the new exercise price was equal to the fair market value of the
Company's common stock on the new measurement date, the Company did not record
any compensation cost in connection with this program. However, depending upon
movements in the market value of the Company's Class A common stock, this
accounting treatment may result in significant non-cash compensation charges in
future periods.
(16) Employee Stock and Savings Plans
401(k) Plan
On January 3, 2000, the Company established a 401(k) Plan ("the plan"). Subject
to Internal Revenue Service Code limitations, participants may contribute from
1% to 15% of pay each pay period on a before tax basis, subject to statutory
limits. Such contributions are fully and immediately vested. The Company will
match 50% of the first 6% of an employee's contribution with shares of Mail.com
Class A common stock. Vesting of the Company's matching contributions begins at
20% after the first anniversary of date of hire or plan commencement date,
whichever is later, increasing by 20% each year thereafter through the fifth
year until full vesting occurs. The Company's matching contributions
representing 151,203 shares of Class A common stock for the year ended December
31, 2000 were $534,000.
97
Employee Stock Purchase Plan
On March 14, 2000, the Board of Directors adopted, and on May 18, 2000, the
shareholders approved the Mail.com, Inc. Employee Stock Purchase Plan (the
"ESPP"). Eligible employees can contribute, through a payroll deduction in 1%
increments, from a minimum of 1% to a maximum of 10% of base salary or wages.
Each purchase period lasts for six months beginning on the first day of January
and the first day of July. The purchase price is set at 85% of the lower of the
fair market value of Mail.com Class A common stock on the first day of the
purchase period or on the last day of the purchase period. The fair market value
will be determined based on the closing sales price on the NASDAQ National
Market. If Mail.com shares cease to be traded on the NASDAQ National Market, a
committee of at least two members of Mail.com's board of directors will
determine the fair market value in the manner prescribed by the plan. During
2000, employees purchased 60,444 shares at an average price of $0.61 per share.
At December 31, 2000, approximately 940,000 shares were reserved for future
issuances.
(17) Restructuring Charges
During the fourth quarter of 2000, a restructuring charge of $18.4 million was
recorded by the Company in accordance with the provisions of EITF 94-3, and
Staff Accounting Bulletin 100. The Company's restructuring initiatives are
related to our strategic decisions to exit the consumer messaging business and
to focus on the Company's outsourced messaging business. The restructuring
program includes an aggregate net reduction in the workforce of approximately
125 employees plus costs to exit certain unoccupied lease premises. Asset
disposals of $13.9 million reflect write-downs of goodwill and other intangible
assets of $12.2 million in connection with management's decision to abandon two
of its Asian based business units, the majority of which related to its wireless
business (see Note 2), $0.2 million of impaired domain names (see Note 2) and a
write-down of $1.5 million of fixed assets and leasehold improvements in
connection with the exit of certain leased office space including the Company's
former New York City based headquarters.
The following sets forth the activity in the Company's restructuring reserve (in
thousands):
Beginning Current year- Current year- Ending
balance provision utilization balance
------- --------- ----------- -------
Employee termination
benefits $-- $ 818 $ 259 $ 559
Lease abandonments -- 3,136 -- 3,136
Asset disposals -- 13,926 13,926 --
Other exit costs -- 508 155 353
--- ------- ------- ---------
$-- $18,388 $14,340 $ 4,048
=== ======= ======= =========
(18) India.com Financing
During the third quarter of 2000, India.com, Inc. a wholly-owned subsidiary of
Mail.com, issued 13,657,692 shares of Series A convertible preferred stock to
private investors valued at $14.2 million. These shares are convertible into
India.com Class A common stock at the initial purchase price of the preferred
shares, subject to certain anti dilution adjustments. In addition, the preferred
share conversion price is also subject to reduction if the effective sales price
in India.com's next significant equity financing does not represent a 33%
premium to the current conversion price. The Company will measure the contingent
beneficial conversion feature at the commitment date and treat this feature as a
preferred dividend but will not recognize this preferred dividend in earnings
until the contingency is resolved, if ever. The holders of the Series A
convertible exchangeable preferred stock are entitled to a one time right
exercisable during the 60 days after September 13, 2001 to exchange these shares
for the number of shares of Mail.com Class A common stock equal to the original
purchase price of such shares divided by the lesser of the market price of
Mail.com's Class A common stock on September 13, 2001 (but not less than $4.50)
and $6.00.
98
(19) Income Taxes
There is no provision for federal, state or local income taxes for all periods
presented, since the Company has incurred losses since inception. At December
31, 2000 and 1999, the Company had approximately $188 million and $52.8 million,
respectively, of federal net operating loss carryforwards available to offset
future taxable income. Such carryforwards expire in various years through 2020.
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that, after considering all the available
objective evidence, it is not more likely than not that these assets will be
realized. The tax effect of temporary differences that give rise to significant
portions of federal deferred tax assets principally consists of the Company's
net operating loss carryforwards.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),
the utilization of net operating loss carryforwards may be limited under the
change in stock ownership rules of the Code. The Company has not yet determined
whether an ownership change has occurred.
The effects of temporary differences and tax loss carryforwards that give rise
to significant portions of federal deferred tax assets and deferred tax
liabilities at December 31, 2000 and 1999 are presented below, in thousands.
99
December 31,
------------
2000 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards................................ $ 86,511 $ 24,285
Deferred revenues............................................... 1,510 880
Accounts receivable principally due to
allowance for doubtful accounts.............................. 914 334
Non-cash compensation........................................... 438 270
Plant and equipment, principally due to
differences in depreciation.................................. 3,392 1,664
Write down of investments....................................... 2,990 --
Accrued expenses................................................ 1,748 --
Other .......................................................... 227 62
-------------- --------------
Gross deferred tax assets....................................... 97,730 27,495
Less: valuation allowance....................................... (97,730) (27,495)
-------------- --------------
Net deferred tax assets......................................... $ -- $ --
============== ==============
Of the total deferred tax assets of $97.7 million existing on December 31, 2000,
subsequently recognized tax benefits, if any, in the amount of approximately
$5.6 million will be applied directly to contributed capital when realized. This
amount relates to the tax effect deductions for stock options included in the
Company's net operating loss carryforward.
(20) Valuation and Qualifying Accounts
Additions and write-offs charged to the allowance for doubtful accounts is
presented below, in thousands.
Additions
Balance at charged to Balance
beginning of costs and Additions from Deductions/ at end
Allowance for doubtful accounts year expenses acquisitions write-offs of period
- ------------------------------- ---- -------- ---------------- ---------- ---------
For the year ended
December 31, 1998................ $ -- $ 92 $ -- $ -- $ 92
For the year ended
December 31, 1999................ $ 92 $ 203 $ -- $ 98 $ 197
For the year ended
December 31, 2000................ $ 197 $ 1,603 $ 403 $ 1,316 $ 887
(21) Quarterly Financial Information - Unaudited
Condensed Quarterly Consolidated Statements of Operations (in thousands, except
per share data)
2000 1999
---- ----
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Revenues...................... $ 17,710 $ 18,538 $ 15,023 $ 9,951 $ 6,116 $ 3,350 $ 2,057 $ 1,186
Cost of revenues.............. 15,401 16,575 13,895 9,861 6,058 4,199 2,043 1,478
--------- -------- -------- --------- -------- -------- -------- ---------
Gross profit/(loss)........... 2,309 1,963 1,128 90 58 (849) 14 (292)
Operating expenses............ 80,409 54,474 48,861 42,715 22,016 16,341 8,085 6,132
--------- -------- -------- --------- -------- -------- -------- ---------
Loss from operations.......... (78,100) (52,511) (47,733) (42,625) (21,958) (17,190) (8,071) (6,424)
Other income/(expense), net... (7,731) (744) (164) 81 5,885 618 109 16
---------- --------- --------- --------- -------- -------- -------- ---------
Net loss...................... (85,831) (53,255) (47,897) (42,544) (16,073) (16,572) (7,962) (6,408)
---------- --------- --------- --------- -------- -------- -------- ---------
Cumulative dividends.......... -- -- -- -- -- -- 14,556 --
Net loss attributable to common
stockholders................ (85,831) (53,255) (47,897) (42,544) (16,073) (16,572) (22,518) (6,408)
--------- -------- -------- --------- -------- -------- -------- ---------
Basic and diluted loss per
common share................ $ (1.39) $ (0.88) $ (0.84) $ (0.86) $ (0.36) $ (0.38) $ (1.09) $ (0.39)
--------- -------- -------- --------- ------- -------- -------- ---------
Due to changes in the number of shares outstanding, quarterly loss per share
amounts do not necessarily add to the totals for the years.
100
(22) Subsequent Events - Unaudited
(a) CONVERTIBLE NOTES
On January 8, 2001, Mail.com issued $10 million (subsequently increased
to $10.26 million) of 10% Senior Convertible Notes (the "Notes") to an investor
group due January 8, 2006. The Notes are joint and several obligations of
Mail.com and its subsidiaries Mail.com Business Messaging Services, Inc. and The
Allegro Group, Inc. (collectively, the "Companies").
The Notes bear interest semi-annually at the rate of 10% per annum. One half of
each interest payment is payable in cash and one half is payable in shares of
Mail.com Class A common stock, par value $.01 per share ("Class A common
stock"), until 18 months after the closing date of the financing. Thereafter,
one half of each interest payment may be paid in shares of Class A common stock
at the option of the Companies. For purposes of determining the number of shares
issuable upon payment of interest in shares of Class A common stock, such shares
will be deemed to have a value equal to the applicable conversion price at the
time of payment.
Each of the Notes is convertible at any time at the option of the holder into
Class A common stock at an initial conversion price equal to $1.00 per share.
The conversion price is subject to anti-dilution adjustments.
The Companies may, at their option, prepay the Notes, in whole or in part, at
any time (i) on or after the third anniversary of the closing date of the
financing, (ii) if the closing price of the Class A common stock on the NASDAQ
stock market, or other securities market on which the Class A common stock is
then traded, is at or above $5.00 per share (such amount to be appropriately
adjusted in the event of a stock split, stock dividend, stock combination or
recapitalization or similar event having a similar effect) for 30 consecutive
trading days or (iii) Mail.com desires to effect a merger, consolidation or sale
of all or substantially all of its assets in a manner that is prohibited by the
Note Purchase Agreement between Mail.com and the initial purchasers of the Notes
(the "Note Purchase Agreement") and the holders of the Notes fail to consent to
a waiver of such prohibition to permit such merger, consolidation or sale.
The Notes are secured by a pledge of the Company's and its wholly-owned
subsidiary WORLD.com, Inc.'s share interest in its majority owned subsidiary
India.com, Inc. The security interest will be released, among other
circumstances, (i) upon repayment of the Notes and accrued interest thereon,
(ii) upon a sale, transfer or other disposition of the shares as permitted under
the Note Purchase Agreement and the prepayment of Notes as become subject to
prepayment in accordance with the Note Purchase Agreement, or (iii) if Mail.com
raises at least $35 million in cash proceeds from the sale of assets (including
the pledged shares) or from the issuance of certain additional debt or equity
financings on or before April 30, 2001.
The net proceeds of the issuance of the Notes will be used for working capital
and other general corporate purposes.
In connection with the issuance of the Notes, the Company granted to the
investor group the right to designate one director to the Board of Directors for
so long as the investor group and certain other parties associated with it own a
specified number of shares of Class A common stock on a fully diluted basis (the
"Designation Agreement"). Pursuant to the Designation Agreement, the Board of
Directors appointed a director to the Board of Mail.com effective upon the
closing of the financing.
On January 31, 2001, the Company entered into a note exchange agreement
(the "Note Exchange Agreement"). Under the terms of the agreement, Mail.com
issued $11,694,000 principal amount of a new series of 10% Senior Convertible
Notes due January 8, 2006 in exchange for the cancellation of $38,980,000
principal amount of its 7% Convertible Subordinated Notes due February 1, 2005.
On February 8, 2001, the Company entered into an additional note
exchange agreement. Under the terms of the agreement, Mail.com issued $4,665,000
principal amount of a new series of 10% Senior Convertible Notes due January 8,
2006 in exchange for the cancellation of $15,550,000 principal amount of its 7%
Convertible Subordinated Notes due February 1, 2005.
101
On February 14, 2001, the Company entered into an additional note
exchange agreement. Under the terms of the agreement, Mail.com issued $7,481,250
principal amount of a new series of 10% Senior Convertible Notes due January 8,
2006 in exchange for the cancellation of $21,375,000 principal amount of its 7%
Convertible Subordinated Notes due February 1, 2005 (the "Subordinated Notes").
Upon effectiveness of a registration statement relating to the shares of Class A
common stock issuable upon conversion of the Senior Convertible Notes and the
shares referred to below, $2,531,250 in principal amount of these Senior
Convertible Notes will be exchanged for 1,420,714 shares of Class A common stock
(the "Exchange Shares"), leaving $4,950,000 in principal amount of this series
of Senior Convertible Notes outstanding.
The Senior Convertible Notes issuable under the January 31, February 8 and
February 14 note exchange agreements (the "Exchange Notes") are unsecured, joint
and several obligations of the Companies.
The Exchange Notes bear interest semi-annually at the rate of 10% per annum. One
half of each interest payment is payable in cash and one half is payable in
shares of Mail.com Class A common stock, par value $.01 per share ("Class A
common stock"), until 18 months after the closing date of the financing.
Thereafter, one half of each interest payment may be paid in shares of Class A
common stock at the option of the Companies. For purposes of determining the
number of shares issuable upon payment of interest in shares of Class A common
stock, such shares will be deemed to have a value equal to the applicable
conversion price at the time of payment.
$11,694,000 of the Exchange Notes is convertible at any time at the option of
the holder into Class A common stock at an initial conversion price equal to
$1.30 per share.
$4,665,000 of the Exchange Notes is convertible at any time at the option of the
holder into Class A common stock at an initial conversion price equal to $1.75
per share. The conversion price is subject to anti-dilution adjustments.
$7,481,250 of the Exchange Notes is convertible at any time at the option of the
holder into Class A common stock at an initial conversion price equal to $1.50
per share. Also, $2,531,250 of the Exchange Notes is subject to cancellation in
exchange for the issuance of Exchange Shares as described above. The conversion
price is subject to anti-dilution adjustments.
The Companies may, at their option, prepay the Exchange Notes, in whole or in
part, at any time (i) on or after the third anniversary of the closing date of
the financing, (ii) if the closing price of the Class A common stock on the
NASDAQ stock market, or other securities market on which the Class A common
stock is then traded, is at or above $5.00 per share (such amount to be
appropriately adjusted in the event of a stock split, stock dividend, stock
combination or recapitalization or similar event having a similar effect) for 30
consecutive trading days or (iii) Mail.com desires to effect a merger,
consolidation or sale of all or substantially all of its assets in a manner that
is prohibited by the Note Purchase Agreement between Mail.com and the initial
purchasers of the Exchange Notes (the "Note Purchase Agreement") and the holders
of the Exchange Notes fail to consent to a waiver of such prohibition to permit
such merger, consolidation or sale.
All of the above exchange transactions (other than the exchange of $2,531,250 of
the Senior Convertible Notes described above) under the Exchange Note Agreements
closed on March 28, 2001. As a result of these exchanges, the Company expects to
record an approximate $52 million gain on these transactions which will be
recorded as an extraordinary item in the first quarter of 2001.
On March 19, 2001, the Company completed the issuance of $3.9 million
principal amount of 10% Senior Convertible Notes due January 8, 2006 (the
"Notes") to certain private investors. The Notes are unsecured, joint and
several obligations of Mail.com and its subsidiaries Mail.com Business Messaging
Services, Inc. and The Allegro Group, Inc. (collectively, the "Companies").
The Notes bear interest, payable semi-annually, at the rate of 10% per annum.
One half of each interest payment is payable in cash and one half is payable in
shares of Mail.com Class A common stock ("Class A common stock"), until 18
months after the closing date of the financing. Thereafter, one half of each
interest payment may be paid in shares of Class A
102
common stock at the option of the Companies. For purposes of determining the
number of shares issuable upon payment of interest in shares of Class A common
stock, such shares will be deemed to have a value equal to the applicable
conversion price at the time of payment.
The Companies may, at their option, prepay the Notes, in whole or in part, at
any time (i) on or after the third anniversary of the closing date of the
financing, (ii) if the closing price of the Class A common stock on the NASDAQ
stock market, or other securities market on which the Class A common stock is
then traded, is at or above $5.00 per share (such amount to be appropriately
adjusted in the event of a stock split, stock dividend, stock combination or
recapitalization or similar event having a similar effect) for 30 consecutive
trading days or (iii) Mail.com desires to effect a merger, consolidation or sale
of all or substantially all of its assets in a manner that is prohibited by the
Note Purchase Agreement dated as of March 13, 2001 between Mail.com and the
initial purchasers of the Notes and the holders of the Notes fail to consent to
a waiver of such prohibition to permit such merger, consolidation or sale.
Each of the Notes is convertible at any time at the option of the holder into
Class A common stock at an initial conversion price equal to $1.00 per share.
The conversion price is subject to anti-dilution adjustments.
The net proceeds from this financing will be used for working capital and other
general corporate purposes.
(b) STOCK OPTIONS
As a result of the previously announced appointment of its Chief
Executive Officer, the Board of Directors of the Company has approved the
grant of options to purchase 1,700,000 shares of Class A common stock of the
Company (the "Stock Options") to that individual. The grant was made on
January 26, 2001.
The Stock Options have an exercise price equal to $1.28 per share, the fair
market value of the Class A common stock on the date of grant. The Stock Options
will vest 25% on October 26, 2001 and quarterly thereafter over three years and
will expire upon the earlier of ten years after the date of grant and a
specified number of days after termination of employment depending upon the
reason for termination. The vesting of fifty percent of any unvested options
will accelerate upon a change of control of the Company, and 25% of the
remaining unvested options will vest on the first anniversary of such change of
control to the extent not otherwise vested on such first anniversary and the
remaining 25% on the second anniversary of such change of control to the extent
not otherwise vested on such second anniversary.
(c)ACQUISITION OF SWIFT TELECOMMUNICATIONS, INC AND EASYLINK SERVICES
On January 31, 2001, Mail.com and Swift Telecommunications, Inc ("STI")
a New York Corporation entered into an Agreement and Plan of Merger ("Merger
Agreement"). On February 23, 2001, the Company completed the acquisition of STI.
In January 2001, STI acquired from AT&T Corp. its EasyLink Services business
("EasyLink Services"). These transactions will be accounted for as a purchase
business combination.
STI together with its newly acquired EasyLink Services business is a global
provider of messaging services such as electronic data interchange, e-mail,
fax and telex.
At the closing of the acquisition by STI of the EasyLink Services business from
AT&T, the Company advanced $14 million to STI in the form of a loan, the
proceeds of which were used to fund part of the cash portion of the purchase
price to AT&T. Upon the closing of the acquisition of STI, the Company assumed a
$35 million note issued by STI to AT&T. The $35 million note will be secured by
the assets of STI, including the EasyLink Services business, and the shares of
Mail.com Class A common stock to be issued to the sole shareholder in the
Merger. The note is payable in equal monthly installments over four years and
bears interest at the rate of 10% per annum. The note is subject to mandatory
prepayment upon the sale of specified assets of STI, including the EasyLink
Services business, and in certain other events. The note also contains certain
103
customary covenants and events of default, including limitations on the ability
of Mail.com to incur additional indebtedness and to incur additional liens on
the STI and EasyLink assets.
Upon the closing of the acquisition of STI, the Company paid to the sole
shareholder of STI approximately $33 million consisting of $835,294 in cash and
issued an unsecured note for approximately $9.2 million and approximately 19
million shares of Mail.com Class A common stock valued at approximately $23
million as the purchase price for the acquisition of STI. The Company will also
pay additional consideration to the sole shareholder of STI equal to the amount
of the net proceeds, after satisfaction of certain liabilities of STI and its
subsidiaries, from the sale or liquidation of the assets of one of STI's
subsidiaries. The Company also reimbursed the sole shareholder of STI for a
$1.5 million advance made to STI, the proceeds of which were used to fund the
balance of the cash portion of the purchase price for STI's acquisition of the
EasyLink Services business and certain other obligations to AT&T. The $9.2
million note will be payable in four equal semi-annual installments over two
years and may be prepaid in whole or in part at any time and from time to time
without payment of premium or penalty. The note will be non-interest bearing
unless the Company fails to make a required payment within 30 days after the due
date therefore. Thereafter, the note will bear interest at the rate of 10% per
annum. The note also contains certain customary events of default.
As part of the transaction with STI, the Company has also agreed to acquire
Telecom International, Inc. (which is an affiliate of STI and conducts business
under the name "AlphaTel") and the 25% minority interests in two STI
subsidiaries for $164,705 in cash, promissory notes in the aggregate principal
amount of approximately $1.8 million and 3.7 million shares of Mail.com Class A
common stock. These additional transactions are subject to execution of
definitive documentation, receipt of regulatory approvals and other customary
conditions.
The Company will allocate a portion of the purchase price to the fair market
value of the acquired assets and liabilities assumed of STI and the EasyLink
Services businesses. The excess of the purchase price over the fair market value
of the acquired assets and liabilities assumed will be allocated to goodwill and
other intangible assets. Goodwill and other intangible assets are expected to be
amortized over a period of three to five years, the expected estimated period of
benefit. The purchase price allocation is dependant on the final outcome of the
valuation and appraisals of the fair value of the acquired assets and assumed
liabilities at the date of acquisition, as well as the potential identification
of certain intangible assets such as customer lists, etc.
Additionally, upon the closing of the STI acquisition, the President and sole
shareholder of STI, joined the Company as President of International Operations
and became a member of the Company's Board of Directors.
(d) INDIA.COM BRIDGE FUNDING AND AMMENDMENT AGREEMENT
The Company has entered into a Bridge Funding and Amendment Agreement (the
"Bridge Funding Agreement"). Under the Bridge Funding Agreement, the Company may
borrow up to $5 million from its majority-owned subsidiary India.com pursuant to
a bridge note (the "Bridge Note"). Under the Bridge Funding Agreement, the
Company committed to issue to India.com warrants to purchase 200,000 shares of
Mail.com's Class A common stock at an exercise price of $1.30 per share in
consideration of the commitment under the Bridge Funding Agreement. In addition,
India.com will be entitled to receive warrants to purchase an additional 160,000
shares of Mail.com Class A common stock for each $1 million drawn down by the
Company under the Bridge Funding Agreement. As of March 31, 2001, $4 million has
been drawn down and an additional 640,000 warrants have been issued at exercise
prices ranging from $0.63 to $0.75 per warrant.
If drawn upon, any outstanding amounts must be repaid on or before 120 days
after the initial advance of funds and out of the proceeds of certain other
fundings of the Company. Advances under the Bridge Note will bear interest at
the rate of 10% per annum. If payments are not made on the Bridge Note when due,
the Bridge Note bears additional interest at the rate of 1% per month and
warrants to purchase additional shares of Mail.com Class A common stock at the
rate of 100,000 shares
104
per month are issued until the payment is made. Obligations under the Bridge
Note will be secured by the Company's and WORLD.com's shares of India.com.
Any additional warrants issued pursuant to the Bridge Funding Agreement as
described above will have an exercise price based upon the market price of the
underlying Mail.com Class A common stock around the time such warrants are
issued. The number of shares issuable upon exercise of the warrants and the
exercise price of the warrants are subject to adjustment for stock splits, stock
dividends, stock combinations and reclassifications. The exercise price for all
of the warrants may be paid in cash or by exchanging Warrants to purchase a
number of underlying shares having an aggregate value based on the market price
around the time of exercise equal to the exercise price. All of the warrants
expire February 2, 2004.
In consideration of the commitments under the Bridge Funding Agreement, the
Company agreed to reduce the minimum price at which the holders of shares of
Series A Convertible Exchangeable Preferred Stock of India.com (the "India
Preferred Stock") may exchange such shares for Mail.com Class A common stock.
Under the Exchange Agreement dated September 13, 2000, the holders of India
Preferred Stock have a one-time right during the sixty day period commencing
September 13, 2001 to exchange shares of India Preferred Stock for Mail.com
Class A common stock based on the original purchase price for the India
Preferred Stock divided by the market price of Mail.com stock on September 13,
2001, subject to a floor on the exchange price of $4.50 and a cap of $6.00. The
aggregate original purchase price for the India Preferred Stock was $14.25
million. In consideration of the Bridge Funding Agreement, the period during
which the one-time exchange right may be exercised was changed from the 60-day
period immediately after September 13, 2001 to the 60-day period immediately
after December 31, 2001. In addition, the floor price at which shares of
Mail.com Class A common stock may be issued upon the exchange was reduced from
$4.50 per share to $3.00 per share immediately and will be further reduced to
$1.30 per share for a percentage of the total number of shares of India
Preferred Stock that is equal to the percentage of the Bridge Note drawn down.
(e) PRIVATE PLACEMENT OF COMMON STOCK
On March 20, 2001, the Company completed a private placement of
3,000,000 shares of Class A common stock (the "Common Shares") a private
investor for an aggregate price of $3,000,000. Pursuant to the Common Stock
Purchase Agreement dated as of March 13, 2001 between Mail.com and the private
investor and subject to the effectiveness of a registration statement covering
shares of Class A common stock issuable upon conversion of certain Mail.com
convertible notes, Mail.com is obligated to issue an additional 1,000,000 shares
of Class A common stock to the private investor if the closing price of the
Company's Class A common stock is not at or above $10 per share for at least
five consecutive trading days during 2001.
The net proceeds from the issuance of the Common Shares will be used for working
capital and other general corporate purposes.
(f) RESTRUCTURING AND IMPAIRMENT CHARGES
During the first quarter of 2001, the Company took additional actions to further
reduce its cash burn. These actions included additional staff layoffs in some of
our businesses as well as the decision to sell certain of its businesses at
reduced prices. Accordingly, additional restructuring and impairment charges to
reduce the value of certain of its acquisitions and investments are necessary.
This is due to the continuous and prolonged decline in valuations of Chinese and
US portals, including revenue multiples, and other providers of Internet
services in the markets in which they operate, as well as the lack of capital
financing available to Internet related businesses in order to fund operating
losses and continual investments that their management teams believe are
necessary to sustain operations. The Company estimates that such charges will be
in the range of $40 to $50 million, of which less than $3 million would be cash
related. Most of these charges are expected to cover additional write-downs of
tangible and intangible assets and the carrying value of certain investments.
105
(g) SALE OF ADVERTISING NETWORK
On March 30, 2001, the Company sold its advertising network to Net2Phone, Inc.
Net2Phone paid Mail.com $3 million in cash upon the closing and up to an
additional $0.5 million based upon the achievement of certain milestones by
Mail.com. In connection with the sale the parties entered into a hosting
agreement whereby Mail.com will receive payments for hosting the consumer
mailboxes for a minimum of one year. The Company plans to transition the hosting
of the consumer mailboxes to a third party provider in the near future.
106
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 2, 2001.
EasyLink Services Corporation
By /s/ GERALD GORMAN*
------------------------------------
(Gerald Gorman, Chairman)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 2, 2001.
/s/GERALD GORMAN* Chairman
- ---------------------------------------
(Gerald Gorman)
/s/THOMAS MURAWSKI* Chief Executive Officer
- --------------------------------------- (Principal Executive Officer) Director
(Thomas Murawski)
/s/GARY MILLIN* Chief Executive Officer, WORLD.com, Director
- ---------------------------------------
(Gary Millin)
/s/BRADLEY SCHRADER* President, Director
- ---------------------------------------
(Bradley Schrader)
/s/DEBRA MCCLISTER* Executive Vice President and Chief Financial Officer
- --------------------------------------- (Principal Accounting and Financial Officer)
(Debra McClister)
/s/DAVID AMBROSIA* Executive Vice President, General Counsel
- ---------------------------------------
(David Ambrosia) and Secretary
/s/GEORGE ABI ZEID* President, International Operations, Director
- ---------------------------------------
(George Abi Zeid)
/s/WILLIAM DONALDSON* Director
- ---------------------------------------
(William Donaldson)
/s/STEPHEN M. DUFF* Director
- ---------------------------------------
(Stephen M. Duff)
/s/STEPHEN KETCHUM* Director
- ---------------------------------------
(Stephen Ketchum)
/s/JACK KUEHLER* Director
- ---------------------------------------
(Jack Kuehler)
*By /S/ DAVID AMBROSIA
(David Ambrosia, Attorney-in-Fact)
107
Part III
The information required by Items 10 through 13 in this part is omitted Pursuant
to Instruction G of form 10-K since the Corporation intends to File with the
Commission a definitive Proxy Statement, pursuant to Regulation 14A, not later
than 120 days after December 31, 2000.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Exhibits.
Some of the exhibits referenced below are incorporated by reference to filings
made by Mail.com, Inc. before the date hereof. As disclosed on the cover page of
this Form 10-K, Mail.com, Inc. has changed it's name to EasyLink Services
Corporation.
2.1 Agreement and Plan of Merger dated as of December 11, 1999 by
and among Mail.com, Inc., Mast Acquisition Corp. and NetMoves
Corporation. (Incorporated by reference to Exhibit 2.1 of
Mail.com, Inc.'s Current Report on Form 8-K filed December
16, 1999.)
2.2 Form of Company Voting Agreement dated as of December 11,
1999 by and between Mail.com, Inc. and certain directors and
officers of NetMoves Corporation. (Incorporated by reference
to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K
filed on December 16, 1999)
2.3 Agreement and Plan of Merger dated as of March 14, 2000 by
and among Mail.com, Inc., Asia.com, Inc., eLong.com, Inc. and
the Stockholders of eLong.com, Inc. (Incorporated by
reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report
on Form 8-K filed on March 28, 2000)
2.4 Agreement and Plan of Merger by and among Mail.com, Inc., ML
Acquisition Corp., Swift Telecommunications, Inc. ("STI") and
George Abi Zeid, as sole shareholder of STI, dated as of
January 31, 2001. (Incorporated by reference to Exhibit 2.1
of Mail.com, Inc.'s Current Report on Form 8-K filed
February 8, 2001)
2.5 Letter Agreement dated January 31, 2001 between Mail.com,
Inc. and George Abi Zeid relating to Telecom International,
Inc. (Incorporated by reference to Exhibit 2.2 of Mail.com,
Inc.'s Current Report on Form 8-K filed February 8, 2001).
2.6 Letter Agreement dated January 31, 2001 between Mail.com,
Inc. and George Abi Zeid relating to the 25% minority
interests in Xtreme Global Communications (S) Pte Ltd. and
Xtreme Global Communications Sdn Bhd. (Incorporated by
reference to Exhibit 2.3 of Mail.com, Inc.'s Current Report
on Form 8-K filed February 8, 2001)
2.7 Asset Purchase dated December 14, 2000 between AT&T Corp. and
Swift Telecommunications, Inc. (Incorporated by reference to
Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K
filed March 9, 2001)
2.8**++ Asset Purchase Agreement dated as of March 30, 2001 by and
among Mail.com, Inc. and Net2Phone EMail, Inc.
3.1 Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 4.1 of Mail.com, Inc.'s
Registration Statement on Form S-8 filed June 19, 2000)
3.2 Certificate of Amendment of Amended and Restated Certificate
of Incorporation (Incorporated by reference to Exhibit 4.2 of
Mail.com, Inc.'s Registration Statement on Form S-8 filed
June 19, 2000)
3.3** Certificate of Ownership and Merger.
108
3.4 By-Laws. (Incorporated by reference to Exhibit 4.3 of
Mail.com, Inc.'s Registration Statement on Form S-8 filed
June 19, 2000)
4.1** Specimen Class A common stock certificate.
10.1 Employment Agreement between Mail.com, Inc. and Gerald Gorman
dated April 1, 1999. (Incorporated by reference to Exhibit
10.1 to the Registrant's Registration Statement on Form S-1
(File No. 333-74353) (the "IPO Registration Statement"))
10.2 Employment Agreement between Mail.com, Inc. and Gary Millin
dated April 1, 1999. (Incorporated by reference to Exhibit
10.2 to the IPO Registration Statement)
10.3 Employment Agreement between Mail.com, Inc. and Debra
McClister dated April 1, 1999. (Incorporated by reference to
Exhibit 10.4 to the IPO Registration Statement)
10.4 Employment Agreement between Mail.com, Inc. and David
Ambrosia dated May 19, 1999. (Incorporated by reference to
Exhibit 10.6 to the IPO Registration Statement)
10.5 Stock Option Agreement between Mail.com, Inc. and Gary Millin
dated December 31, 1996. (Incorporated by reference to
Exhibit 10.8 to the IPO Registration Statement)
10.6 Stock Option Agreement between Mail.com, Inc. and Gary Millin
dated June 1, 1996. (Incorporated by reference to Exhibit
10.9 to the IPO Registration Statement)
10.7 Stock Option Agreement between Mail.com, Inc. and Gary Millin
dated February 1, 1997. (Incorporated by reference to Exhibit
10.10 to the IPO Registration Statement)
10.8 Stock Option Agreement between Mail.com, Inc. and Gerald
Gorman dated December 31, 1996. (Incorporated by reference to
Exhibit 10.11 to the IPO Registration Statement)
10.9 Stock Option Agreement between Mail.com, Inc. and Gerald
Gorman dated June 1, 1996. (Incorporated by reference to
Exhibit 10.12 to the IPO Registration Statement)
10.10 1996 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.14 to the IPO Registration Statement)
10.11 1997 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.15 to the IPO Registration Statement)
10.12 1998 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.16 to the IPO Registration Statement)
10.13 1999 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.17 to the IPO Registration Statement)
10.14 Lease between Mail.com, Inc. and Braun Management and six
amendments thereto, the most recent dated May 21, 1998.
(Incorporated by reference to Exhibit 10.18 to the IPO
Registration Statement)
10.15 Lease between Mail.com, Inc. and Spitfire Marketing Systems
Inc. dated August 14, 1998. (Incorporated by reference to
Exhibit 10.19 to the IPO Registration Statement)
109
10.16 Space License Agreement and three amendments thereto between
Mail.com, Inc. and Telehouse International Corporation of
America, Inc., the most recent amendment dated March 9, 1999.
(Incorporated by reference to Exhibit 10.20 to the IPO
Registration Statement)
10.17 Lease between Mail.com, Inc. and 55 Madison Associates dated
September 15, 1998. (Incorporated by reference to Exhibit
10.21 to the IPO Registration Statement)
10.18 Lease Agreement between Mail.com, Inc. and Leastec Sylvan
Credit dated June 20, 1996. (Incorporated by reference to
Exhibit 10.22 to the IPO Registration Statement)
10.19 Master Lease Agreement between Mail.com, Inc. and RCC dated
July 17, 1998. (Incorporated by reference to Exhibit 10.23 to
the IPO Registration Statement)
10.20 Lease Agreement between Mail.com, Inc. and Pacific Atlantic
Systems Leasing, dated January 22, 1999. (Incorporated by
reference to Exhibit 10.24 to the IPO Registration Statement)
10.21 Class A Preferred Stock Purchase Agreement dated May 27,
1997. (Incorporated by reference to Exhibit 10.25 to the IPO
Registration Statement)
10.22 Waiver, Consent and Amendment to Class A Preferred Stock
Purchase Agreement and Investors' Rights Agreement, dated
July 31, 1998. (Incorporated by reference to Exhibit 10.26 to
the IPO Registration Statement)
10.23 Accession Agreement among Mail.com, Inc. and Primus Capital
Fund IV Limited Partnership and the Primus Executive Fund
Limited Partnership dated August 31, 1998. (Incorporated by
reference to Exhibit 10.27 to the IPO Registration Statement)
10.24 Letter Agreement among Gerald Gorman, Primus Capital Fund
Limited Partnership and the Primus Executive Fund Limited
Partnership dated August 31, 1998. (Incorporated by reference
to Exhibit 10.28 to the IPO Registration Statement)
10.25 Class E Preferred Stock Investors' Rights Agreement dated
March 10, 1999. (Incorporated by reference to Exhibit 10.29
to the IPO Registration Statement)
10.26 Observer Rights Agreement among the Company, Primus, et. al.,
and Sycamore Ventures dated August 31, 1998. (Incorporated by
reference to Exhibit 10.30 to the IPO Registration Statement)
10.27 Investors' Rights Agreement between NBC Multimedia, Inc.,
CNET, Inc. and Mail.com, Inc. dated March 1, 1999.
(Incorporated by reference to Exhibit 10.31 to the IPO
Registration Statement)
10.28 Lycos Term Sheet Agreement dated October 8, 1997 and the
amendments thereto. (Incorporated by reference to Exhibit
10.32 to the IPO Registration Statement)
10.29 CNET Warrants dated March 1, 1999. (Incorporated by reference
to Exhibit 10.33 to the IPO Registration Statement)
10.30 NBC Multimedia Warrants dated March 1, 1999. (Incorporated by
reference to Exhibit 10.34 to the IPO Registration Statement)
10.31 Stock Purchase Agreement between Mail.com, Inc. and CNN
Interactive dated July 7, 1998. (Incorporated by reference to
Exhibit 10.35 to the IPO Registration Statement)
110
10.32 Agreement between CNET, Inc., and Mail.com, Inc. dated May
13, 1998. (Incorporated by reference to Exhibit 10.36 to the
IPO Registration Statement)
10.33 Letter Agreement between CNET, Inc., Snap Internet Portal
Service and Mail.com, Inc. dated as of June 16, 1998.
(Incorporated by reference to Exhibit 10.37 to the IPO
Registration Statement)
10.34 Letter Agreement between CNET, Inc., Snap Internet Portal
Service, NBC Multimedia, Inc. and Mail.com, Inc. dated as of
February 8, 1999. (Incorporated by reference to Exhibit 10.38
to the IPO Registration Statement)
10.35 Agreement between NBC Multimedia, Inc. and Mail.com, Inc.
dated February 8, 1998. (Incorporated by reference to Exhibit
10.39 to the IPO Registration Statement)
10.36 Equipment Financing Agreement between Pentech Financial
Services, Inc. and Mail.com, Inc. dated May 1, 1999.
(Incorporated by reference to Exhibit 10.41 to the IPO
Registration Statement)
10.37 Equipment Financing Lease--EMC Corporation. (Incorporated by
reference to Exhibit 99.1 of Mail.com, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999)
10.38 Equipment Financing Lease--Pentech Financial Services,
Inc.(Incorporated by reference to Exhibit 99.2 of Mail.com,
Inc.'s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999)
10.39 Equipment Financing Lease--Pentech Financial Services, Inc.
(Incorporated by reference to Exhibit 99.3 of Mail.com,
Inc.'s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999)
10.40 Investor Rights Agreement dated July 14, 1999 between
Mail.com, Inc. and 3Cube, Inc. (Incorporated by reference to
Exhibit 99.4 of Mail.com, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999)
10.41 Agreement and Plan of Merger dated as of August 20, 1999
among Mail.com, Inc., AG Acquisition Corp., The Allegro
Group, Inc. and the Shareholders of The Allegro Group, Inc.
(Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s
Current Report on Form 8-K filed August 23, 1999)
10.42 Sublease Agreement between Mail.com, Inc. and Depository
Trust Company. (Incorporated by reference to Exhibit
10.ii(D)(1) of Mail.com, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999)
10.43 Data Center Office Lease with AT&T. (Incorporated by
reference to Exhibit 10.ii(D)(2) of Mail.com, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999)
10.44 Lease Agreement between Mail.com and Forsyth/McArthur
Associates. (Incorporated by reference to Exhibit 10.ii(D)(3)
of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999)
10.45 Mail.com, Inc. Allegro Group Stock Option Plan. (Incorporated
by reference to Exhibit 10.iii(A)(1) of Mail.com, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999)
10.46 Mail.com, Inc. TCOM Stock Option Plan. (Incorporated by
reference to Exhibit 10.iii(A)(2) of Mail.com, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999)
10.47 Indenture dated as of January 26, 2000 by and between
Mail.com, Inc. and American Stock Transfer & Trust Company,
as Trustee. (Incorporated by reference to Exhibit 10.55 of
Mail.com, Inc.'s Post-Effective Amendment No. 1 to Form S-4
registration Statement (File No. 333-94807) filed on February
3, 2000).
111
10.48 Registration Agreement dated as of January 26, 2000 by and
between Mail.com, Inc., Salomon Smith Barney Inc.,
PaineWebber Incorporated, SG Cowen Securities Corporation and
Sands Brothers & Co., Ltd. (Incorporated by reference to
Exhibit 10.56 of Mail.com, Inc.'s Post-Effective Amendment
No. 1 to Form S-4 registration Statement (File No. 333-94807)
filed on February 3, 2000).
10.49 1990 Stock Option Plan (Incorporated by reference to Exhibit
10.3 to NetMoves Corporation's Registration Statement on Form
S-1, Registration No. 333-09613 ("NetMoves Registration
Statement ")).
10.50 1996 Stock Option/Stock Issuance Plan (Incorporated by
reference to Exhibit 10.4 to the NetMoves Registration
Statement).
10.51* Telecommunications Services Agreement, between LDDS WorldCom
and NetMoves Corporation, dated December 1, 1996
(Incorporated by reference to Exhibit 10.8 to the NetMoves
Corporation's Report on Form 10-Q for the quarter ended March
31, 1997).
10.52* Agreement between MCI Telecommunications Corporation and
NetMoves Corporation, effective March 1, 1996 (Incorporated
by reference to Exhibit 10.9 to the NetMoves Registration
Statement).
10.53 Lease Agreement, dated May 28, 1992, between Metro Four
Associates Limited Partnership, Thornall Associates and
NetMoves Corporation (the "Metro Four Lease "), as extended
and amended prior to May 5, 1997 (Incorporated by reference
to Exhibit 10.10 to the NetMoves Registration Statement).
10.54 Amendment to Metro Four Lease, dated May 5, 1997.
(Incorporated by reference to Exhibit 10.9 to NetMoves
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.55 Loan and Security Agreement, dated September 26, 1997,
between NetMoves Corporation and Silicon Valley Bank.
(Incorporated by reference to Exhibit 10.10 to NetMoves
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.56 Letter Agreement, dated November 1, 1994 between Telstra
Incorporated and NetMoves Corporation (Incorporated by
reference to Exhibit 10.12 to the NetMoves Registration
Statement).
10.57 Series B Preferred Stock Warrant between NetMoves Corporation
and Comdisco, Inc., dated May 30, 1991 (Incorporated by
reference to Exhibit 10.14 to the NetMoves Registration
Statement).
10.58 Series B Preferred Stock Warrant between NetMoves Corporation
and Comdisco, Inc., dated September 16, 1992 (Incorporated by
reference to Exhibit 10.15 to the NetMoves Registration
Statement).
10.59 Loan and Security Agreement, dated March 27, 1998, between
NetMoves Corporation and Silicon Valley Bank. ( Incorporated
by reference to Exhibit 10.20 to NetMoves Corporation's
Annual Report on Form 10-K for the year ended December 31,
1998)
10.60 Purchase Agreement, dated December 24, 1998, between NetMoves
Corporation and the Tail Wind Fund Ltd. (Incorporated by
reference to Exhibit 10.1 to NetMoves Corporation's
Registration Statement on Form S-3, Registration No.
333-70915)
10.61 Common Stock Warrant between NetMoves Corporation and the
Tail Wind Fund Ltd., dated December 28, 1998 (Incorporated by
reference to Exhibit 10.2 to NetMoves Corporation's
Registration Statement on Form S-3, Registration No.
333-70915)
112
10.62 Registration Rights Agreement between Mail.com and certain
former stockholders of eLong.com, Inc. listed therein, dated
as of March 14, 2000. (Incorporated by reference to Exhibit
10.70 to Mail.com's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.63 Registration Rights Agreement between Mail.com and STD d/b/a
Software Tool & Die, dated as of March 16, 2000.
(Incorporated by reference to Exhibit 10.71 to Mail.com's
Annual Report on Form 10-K for the year ended December 31,
1999)
10.64 Mail.com, Inc. 2000 Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 of Mail.com, Inc.'s Registration
Statement on Form S-8 filed June 19, 2000)
10.65 Mail.com, Inc. Supplemental 1999 Stock Option Plan.
(Incorporated by reference to Exhibit 10.2 of Mail.com,
Inc.'s Registration Statement on Form S-8 filed June 19,
2000)
10.66 Mail.com, Inc. Supplemental 2000 Stock Option Plan.
(Incorporated by reference to Exhibit 10.3 of Mail.com,
Inc.'s Registration Statement on Form S-8 filed June 19,
2000).
10.67 Options Assumed by Mail.com, Inc. pursuant to an Agreement
and Plan of Merger dated as of March 14, 2000. (Incorporated
by reference to Exhibit 99.1 of Mail.com, Inc.'s Registration
Statement on Form S-8 filed June 19, 2000)
10.68 Lease agreement between Mail.com as guarantor and Newcourt
Leasing Corporation. (Incorporated by reference to Exhibit
10.ii(D)(1) of Mail.com, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000)
10.69 Lease agreement between Mail.com as guarantor and Newcourt
Leasing Corporation. (Incorporated by reference to Exhibit
10.ii(D)(2) of Mail.com, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000)
10.70 Master Lease agreement between Mail.com and Leasing
Technologies International, Inc. (Incorporated by reference
to Exhibit 10.ii(D)(3) of Mail.com, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2000)
10.71 Master Lease agreement between Mail.com and GATX Technology
Services Corporation. (Incorporated by reference to Exhibit
10.ii(D)(4) of Mail.com, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000)
10.72 Master Lease agreement between Mail.com and Newcourt Leasing
Corporation. (Incorporated by reference to Exhibit
10.ii(D)(5) of Mail.com, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000)
10.73 Note Purchase Agreement dated as of January 8, 2001, by and
among Mail.com, Inc., Mail.com Business Messaging Services,
Inc., The Allegro Group, Inc. and the purchasers listed
therein. (Incorporated by reference to Exhibit 99.1 of
Mail.com, Inc.'s Current Report on Form 8-K filed January 10,
2001)
10.74 Pledge Agreement dated as of January 8, 2001, by and among
Mail.com, Inc. and World.com, Inc. as pledgors, the holders
of Notes listed therein and The Clark Estates, Inc. as
collateral agent on behalf of the holders of Notes.
(Incorporated by reference to Exhibit 99.2 of Mail.com,
Inc.'s Current Report on Form 8-K filed January 10, 2001)
10.75 Registration Rights Agreement dated as of January 8, 2001, by
and among Mail.com, Inc. and the holders of Notes listed
therein. (Incorporated by reference to Exhibit 99.3 of
Mail.com, Inc.'s Current Report on Form 8-K filed January 10,
2001)
10.76 Designation Letter dated January 8, 2001 from Mail.com, Inc.
to Federal Partners, L.P. (Incorporated by reference to
Exhibit 99.4 of Mail.com, Inc.'s Current Report on Form 8-K
filed January 10, 2001)
113
10.77 Form of Notice To Record Shareholders of Mail.com, Inc.
(Incorporated by reference to Exhibit 99.1 of Mail.com,
Inc.'s Current Report on Form 8-K filed January 17, 2001)
10.78 Note Exchange Agreement dated as of January 31, 2001, by and
among Mail.com, Inc., Mail.com Business Messaging Services,
Inc., The Allegro Group, Inc. and the purchasers listed
therein. (Incorporated by reference to Exhibit 99.1 of
Mail.com, Inc.'s Current Report on Form 8-K filed February 7,
2001)
10.79 Registration Rights Agreement dated as of January 31, 2001,
by and among Mail.com, Inc. and the holders of Exchange Notes
listed therein. (Incorporated by reference to Exhibit 99.2 of
Mail.com, Inc.'s Current Report on Form 8-K filed February 7,
2001)
10.80 Amended and Restated Promissory Note dated January 31, 2001
in the original principal amount of $35 million issued by
Mail.com, Inc. and accepted by AT&T Corp. (Incorporated by
reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report
on Form 8-K filed February 8, 2001)
10.81 Promissory Note dated January 31, 2001 in the original
principal amount of $14 million issued by Swift
Telecommunications, Inc. in favor of Mail.com, Inc.
(Incorporated by reference to Exhibit 99.3 of Mail.com,
Inc.'s Current Report on Form 8-K filed February 8, 2001)
10.82 Note Exchange Agreement dated as of February 8, 2001, by and
among Mail.com, Inc., Mail.com Business Messaging Services,
Inc., The Allegro Group, Inc. and the purchasers listed
therein. (Incorporated by reference to Exhibit 99.1 of
Mail.com, Inc.'s Current Report on Form 8-K filed February
13, 2001)
10.83 Registration Rights Agreement dated as of February 8, 2001,
by and among Mail.com, Inc. and the holders of Exchange Notes
listed therein. (Incorporated by reference to Exhibit 99.2 of
Mail.com, Inc.'s Current Report on Form 8-K filed February
13, 2001)
10.84 Note Exchange Agreement dated as of February 14, 2001, by and
among Mail.com, Inc., Mail.com Business Messaging Services,
Inc., The Allegro Group, Inc. and the purchasers listed
therein. (Incorporated by reference to Exhibit 99.1 of
Mail.com, Inc.'s Current Report on Form 8-K filed February
26, 2001)
10.85 Registration Rights Agreement dated as of February 14, 2001,
by and among Mail.com, Inc. and the holders of Exchange Notes
listed therein. (Incorporated by reference to Exhibit 99.2 of
Mail.com, Inc.'s Current Report on Form 8-K filed February
26, 2001)
10.86 Bridge Funding and Amendment Agreement by and among
India.com, Inc., Mail.com, Inc. and the holders of India.com,
Inc. Preferred Stock signatories thereto, together with the
Forms of Bridge Notes and Warrants issuable pursuant thereto
attached as Exhibits thereto. (Incorporated by reference to
Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K
filed February 26, 2001)
10.87 Amendment No. 1 to Pledge Agreement by and among India.com,
Inc., Mail.com, Inc., the collateral agent thereunder and the
other parties thereto. (Incorporated by reference to Exhibit
99.4 of Mail.com, Inc.'s Current Report on Form 8-K filed
February 26, 2001)
10.88 Employment Agreement dated February 23, 2001 between Mail.com
and George Abi Zeid. (Incorporated by reference to Exhibit
10.1 of Mail.com, Inc.'s Current Report on Form 8-K filed
March 9, 2001)
10.89 Promissory Note in the original principal amount of
$9,188,235 in favor of George Abi Zeid. (Incorporated by
reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report
on Form 8-K filed March 9, 2001)
114
10.90 Pledge Agreement between Mail.com, Inc. and AT&T Corp. dated
January 31, 2001 securing promissory note in original
principal amount of $35 million. (Incorporated by reference
to Exhibit 99.2 of Mail.com, Inc.'s Current Report on Form
8-K filed March 9, 2001)
10.91 Pledge Agreement between Swift Telecommunications, Inc. and
AT&T Corp. dated January 31, 2001 securing promissory note in
original principal amount of $35 million. (Incorporated by
reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report
on Form 8-K filed March 9, 2001)
10.92 Security Agreement between Swift Telecommunications, Inc. and
AT&T Corp. dated January 31, 2001 securing promissory note in
original principal amount of $35 million. (Incorporated by
reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report
on Form 8-K filed March 9, 2001)
10.93 Security Agreement between Swift EasyLink Co., Inc. and AT&T
Corp. dated January 31, 2001 securing promissory note in
original principal amount of $35 million. (Incorporated by
reference to Exhibit 99.5 of Mail.com, Inc.'s Current Report
on Form 8-K filed March 9, 2001)
10.94 Note Purchase Agreement dated as of March 13, 2001, by and
among Mail.com, Inc., Mail.com Business Messaging Services,
Inc., The Allegro Group, Inc. and the purchasers listed
therein. (Incorporated by reference to Exhibit 99.1 of
Mail.com, Inc.'s Current Report on Form 8-K filed March 26,
2001)
10.95 Registration Rights Agreement dated as of March 13, 2001, by
and among Mail.com, Inc. and the holders of Notes listed
therein. (Incorporated by reference to Exhibit 99.2 of
Mail.com, Inc.'s Current Report on Form 8-K filed March 26,
2001)
10.96 Common Stock Purchase Agreement dated as of March 13, 2001,
by and between Mail.com, Inc., and the purchaser listed
therein. (Incorporated by reference to Exhibit 99.3 of
Mail.com, Inc.'s Current Report on Form 8-K filed March 26,
2001)
10.97 Registration Rights Agreement dated as of March 13, 2001, by
and between Mail.com, Inc. and the investor listed therein.
(Incorporated by reference to Exhibit 99.4 of Mail.com,
Inc.'s Current Report on Form 8-K filed March 26, 2001)
10.98+ Master Carrier Agreement dated January 31, 2001 between AT&T
Corp. and Swift Telecommunications, Inc. (Incorporated by
reference to Exhibit 2.3 of Mail.com, Inc.'s Current Report
on Form 8-K filed March 9, 2001)
10.99+ Transition Services Agreement dated January 31, 2001 between
AT&T Corp. and Swift Telecommunications, Inc. (Incorporated
by reference to Exhibit 2.2 of Mail.com, Inc.'s Current
Report on Form 8-K filed March 9, 2001)
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of Mail.com, Inc.
23 Consent of KPMG LLP.
24 Power of Attorney.
27 Financial Data Schedule
115
* Confidential treatment granted.
** Filed herewith
+ Confidential treatment has been requested for portions of
this exhibit.
++ Disclosure schedules and other attachments are omitted, but
will be furnished supplementally to the Commission upon
request.
116