-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CoLTYjATTZI8mCKJXNLSMt+UYBYfY967YzLfWK7rEoUyn4YIlWw0YBJqpfmHhE30 appIXFOSkHsKpXXMbU7G8Q== 0000950134-00-002664.txt : 20000411 0000950134-00-002664.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950134-00-002664 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MESSAGEMEDIA INC CENTRAL INDEX KEY: 0001017829 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SERVICES, NEC [8900] IRS NUMBER: 330612860 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21751 FILM NUMBER: 583841 BUSINESS ADDRESS: STREET 1: 6060 SPINE ROAD STREET 2: SUITE 240 CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034407550 MAIL ADDRESS: STREET 1: 6060 SPINE ROAD CITY: BOULDER STATE: CO ZIP: 80301 FORMER COMPANY: FORMER CONFORMED NAME: FIRST VIRTUAL HOLDINGS INC DATE OF NAME CHANGE: 19971219 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE PERIOD FROM TO . COMMISSION FILE NUMBER: 000-21751 MESSAGEMEDIA, INC. (Exact name of Registrant as specified in its charter) DELAWARE 33-0612860 (State or jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization)
6060 SPINE ROAD BOULDER, COLORADO 80301 (Address, including zip code, of principal executive offices) (303) 440-7550 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF ACT: None Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE (Title of Class) Indicate by check mark 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 in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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: [ ] As of March 10, 2000, there were outstanding 55,619,114 shares of the Registrant's common stock, $.001 par value. As of that date, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $396,018,784 when the closing price of such stock, as reported on the Nasdaq National Market, was $14.* Shares of common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be affiliates. DOCUMENTS INCORPORATED BY REFERENCE Certain information called for by Part III is incorporated by reference from the Proxy Statement relating to the Annual Meeting of Stockholders of the Registrant to be held on April 27, 2000. - --------------- * Excludes 27,332,058 shares of common stock held by directors and executive officers and stockholders whose ownership exceeds five percent of the shares outstanding at March 10, 2000. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management of policies of the Registrant, or that such person is controlled by or under common control with the Registrant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I This Report on Form 10-K contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. You can identify these forward-looking statements when you see words such as "expect", "anticipate", "estimate", and other similar expressions. Actual results could differ materially from those projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the subsection entitled "Factors Affecting Operating Results and Market Price of Stock" commencing on page 11. Readers are cautioned not to place undo reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update any forward-looking statements for any reason even if new information becomes available or other events occur in the future. ITEM 1. BUSINESS MessageMedia, Inc. ("MessageMedia" or the "Company") is a leading provider of permission-based, comprehensive e-messaging solutions. E-messaging is the term used to describe our suite of services that utilize the medium of e-mail to develop and foster permission-based relationships with customers. The Company's suite of services and products, including Internet-based marketing ("e-marketing"), customer care, e-commerce messaging, survey ("e-survey") and information distribution solutions, enable businesses to use e-messaging as a strategic tool to increase sales, improve customer communication and develop long-term customer loyalty and customer dialog. The Company's e-messaging solutions, available on an outsourced, subscription basis or as packaged software licensed on a hosted or client in-house basis, allow businesses to establish and enhance two-way customer dialog across the extended enterprise, from marketing to sales to customer service. By leveraging the cost-effective reach, flexibility and widespread acceptance of e-mail, the Company's solutions enable businesses to create, deliver and continually refine targeted, permission-based e-messaging campaigns. Through its professional staff of client service representatives, the Company delivers its outsourced e-messaging services specifically tailored to each client's business objectives. After an initial sale is made, the Company appoints an account management team to act as the client's primary point of contact for all relationship and campaign management issues. The Company's end-to-end e-messaging mailing and campaign management solutions include creating a detailed specification of customer needs, developing the web interfaces, customizing the database, implementing project plans, the campaign roll-out and post-mailing analysis. The Company's proprietary technology allows us to track and review current and past e-messaging campaigns, providing valuable information that allows us to tailor and fine-tune our clients e-messaging campaigns to optimize effectiveness. The Company's outsourced services provide clients with the following benefits: - a comprehensive set of e-messaging solutions for businesses that seek to increase sales, improve customer communication and develop long-term customer loyalty; - permission-based e-messaging to create an immediate two-way dialogue with customers; - tools to track, review and refine e-messaging campaigns by leveraging MessageMedia's expertise and proprietary technology; - rapidly deployable, cost-effective outsourced solutions which eliminate the need to invest in the technology, hardware and human resources necessary to implement and manage a comprehensive set of e-messaging services; and - the ability to manage large volumes of simple or complex customer communications and easily integrate more advanced e-messaging applications. Our clients cover a broad range of industry segments, including Internet Service Providers ("ISPs") and portals, retail/e-commerce, publishing, hardware/software/technology, travel/hospitality and financial services. 1 3 In June 1998, we were recapitalized by SOFTBANK Corp. and affiliates, a leading investor in the Internet sector. We intend to leverage our strategic relationship with SOFTBANK ("SOFTBANK") through introductions to companies within the SOFTBANK family of investments and capitalize on the expertise and advice of its partners with respect to building e-businesses. MessageMedia, Inc. was formed with the acquisition of Email Publishing Inc. ("EPub") and Distributed bits, L.L.C. ("DBits") by First Virtual Holdings Inc. ("FVHI"). These firms were merged and consolidated in December 1998 into a single, combined company that was renamed MessageMedia, Inc. In August 1999, the Company acquired Revnet Systems Inc. ("Revnet") and Decisive Technologies Inc. ("Decisive"). The Company is a member of the family of companies funded and supported by SOFTBANK Holdings Inc. and its affiliates. The Company's singular focus is on e-messaging and it employs advanced technology, tools and applications to help corporations fully utilize this new channel for building and enhancing customer relationships online. INDUSTRY BACKGROUND Changing Business Environment and Need to Foster Customer Relationships The dramatic growth of the Internet and the proliferation of e-mail has changed the way businesses and customers interact. Prior to the advent of e-mail, businesses relied primarily on in-person interaction and physical proximity to the customer as well as techniques such as direct mail and telemarketing to foster customer relationships. Such methods, however, vary in their degree of effectiveness and are often characterized by high costs and slow response times. In the online environment, competitors are only a mouse click away, increasing the need to quickly and cost-effectively build and strengthen customer relationships. As a result, online businesses are increasingly in need of strategic applications that enable them to expand their customer base, foster customer loyalty and provide personalized, one-to-one communication. Providing a high quality service online is challenging due to the rapidly evolving nature of the Internet, shifts in customer demand and customers' sensitivity to uninvited business solicitation. To date, many attempts to leverage the Internet and e-mail as a business-to-customer communication medium have faltered because of the widespread use of blanketed, uninvited email, or SPAM, which many customers view as invasive. In the Internet world, unsatisfied customers not only can effortlessly turn to a competitor, but also can easily turn the Internet into their personal soapbox to criticize the company. Permission-based E-mail can be a Highly Strategic Tool for Online Business In contrast, permission-based, or "opt-in", e-mail is a highly reliable, cost-effective and timely way for businesses to create a personal, two-way dialogue with their customers. Forrester Research predicts that outsourced e-mail messages will grow from three billion in 1998 to 250 billion in 2002. While most e-mails sent today are simple in nature, the complexity and functionality of e-mail is changing dramatically. For example, e-mail can be used for a variety of highly strategic functions such as marketing, customer service and transaction confirmations. E-mail functions can also be quickly customized or adapted to allow businesses to target and shape their communications to meet the rapidly changing needs of their customers. As businesses and consumers grow more comfortable with conducting commerce over the Internet, e-mail volume associated with business communication and e-commerce is expected to grow even more quickly. The Gartner Group estimates that by 2001 businesses will receive 25% of all customer contacts and inquiries via e-mail and web-based forms. Furthermore, Forrester Research predicts that by 2001 the typical online consumer will participate in eight to ten commerce-related exchanges via e-mail per week. As e-mail grows in popularity, businesses will face the pressing challenge of using e-mail as a strategic tool for building customer relationships and responding to large volumes of inbound e-mail communications. Emergence of E-messaging E-messaging is the term used to describe the Company's suite of services that utilize the medium of e-mail to develop and foster permission-based relationships with customers. We believe customers are far more receptive to business' communications using the Company's "opt-in" driven approach, forming the 2 4 foundation for longer lasting and valuable customer relationships. E-messaging has numerous strategic applications. For example, it may be used as a strategic marketing tool whereby highly personalized and targeted messages can be sent to customers informing them of a special promotion or sale. The functionality of e-messaging also extends easily to a variety of other functions across the business enterprise including: gathering key customer feedback in e-mail based surveys; serving as a platform to provide customer service and technical support; distribution of newsletters; and sending notification and confirmation of e-commerce transaction-based activities. Moreover, businesses utilizing e-messaging are able to capture data generated in these electronic communications. This data can provide a wealth of information to better understand client needs and preferences for future interactions. Complexity of E-messaging Supports the Trend toward Comprehensive Outsourced Services To create strong and effective e-messaging programs, businesses will need a broad range of technology and strategic expertise to adapt and implement effective solutions in today's rapidly changing business and regulatory environment. We believe this will lead to an increase in the outsourcing of e-messaging applications. Forrester Research predicts that outsourced e-mail messages will grow from three billion in 1998 to 250 billion in 2002. In order to effectively leverage e-messaging as a key competitive tool, businesses not only must be able to gather information about customer preferences and needs, but employ systems that are robust enough to seamlessly and quickly respond to such data. The implementation of effective e-messaging systems requires substantial hardware, software, technical and administrative resources. As e-mail grows in volume and sophistication, the resources and expertise required to cost-effectively implement, enhance and scale e-messaging applications increases exponentially. Moreover, on a strategic front, the proliferation of blanketed and uninvited e-mail has spurred a wave of legislative and industry-group action to regulate the use of commercial, non-permissive e-mail, which complicates the use of e-mail for commercial purposes. Because of the complexities of these strategic and technical problems and the need to deploy a solution quickly and cost-effectively, businesses increasingly are looking to outsource their e-messaging services to "one-stop" outsourced providers. SERVICES AND SOFTWARE PRODUCTS MessageMedia offers a comprehensive suite of e-messaging solutions to businesses. Our service offerings are built on a scalable, web based architecture which is designed to meet the growth in Internet based communications. Our software products are also built on standards based technologies that are designed to integrate with existing customer applications. Outsourced Services We deliver e-messaging solutions on an outsourced service basis. All applications are managed by our staff so that our clients need only submit their content and e-mail lists and pay the monthly service bill. Each of our applications may be purchased separately, however, they are designed to work closely with one another. Service costs typically are priced with a minimum expenditure of $5,000 per month. 3 5 The outsourced e-messaging solutions provided by the Company are designed to enable our clients to expand their customer base, foster customer loyalty and provide personalized, one-to-one communications. The development of a dialog with one's customers is the critical business problem facing businesses that are moving to a web-enabled, e-commerce sales, service and support business model. The process of establishing e-messaging based customer dialog involves several important processes. These processes are: GAIN PERMISSION - Clients must realize that this is not direct mail. There are groups that work to restrict unwanted junk e-mail ("Spam"). Legislative action is looming in this area in the U.S. and exists already in Europe. - The level of permission given by a customer is critical. Potential customers should request to receive e-mail ("opt-in"). The opt-in is then confirmed to make sure that the potential customer really wants to receive the senders e-mail is even better recognition of the potential customers' interest. Building customer loyalty and establishing customer dialog is all about having the customer say that they like the clients e-mail and want to continue to receive it. - Create a Permission Center -- This is a central location for customers to Opt-in. It contains the client's permission policies. The opt-in process can be used to define the types of information and communication desired by the customer who is opting-in. It can also be used to better control the requests to "opt-out" or unsubscribe. - Maintain high quality permission practices -- It should be clear where a message is coming from and why. Client should make it easy to unsubscribe from their e-mail list. Confirmed opt-in practices should be utilized to ensure real customer interest. E-mail lists should not be rented to other parties. Message copy that could be considered Spam must be avoided. DELIVER THE RIGHT MESSAGE - Value through Content -- The appearance of the message sent is critical. High quality creative design, use of colors and effective formats (HTML instead of text) are all aspects of content that are important to customer receptivity to the message. We can imbed audio and video in a message which can be very powerful communications tools. - Personalization -- Use of a personal greeting and targeted messages is very important along with asking for information only once. - Valuable Offer -- It is important to the dialog process that the communications be about compelling products, with compelling economics and have reasonable terms and restrictions. GAIN CUSTOMER INTELLIGENCE - Permission profiling -- Use the opt-in process to gather relevant customer information and insight into a customer's desires regarding communication without crossing the privacy line. - Keep a history of all contacts -- Campaign management and message reporting tools should be used to analyze trends in customer contacts. - Track in-bound responses -- Be responsive to customer messages. Inquiries and complaints should be handled promptly to help understand why customers unsubscribe. - Utilize database marketing techniques -- Use data marts, data overlays, data modeling and scoring technologies. - Use email based surveys -- Use of e-survey for transaction or periodic surveys is a way to measure customer satisfaction and to provide updated profile information. 4 6 ESTABLISH AN ON-GOING DIALOG - Create opportunities for dialog -- Dialog doesn't happen when your only communication is newsletters or marketing offers. It is about enhanced communications which include transaction acknowledgements, thank you communications, monthly/annual recaps, etc. - Enhancing "Buying Levels" -- Utilize up-sell and cross-sell opportunities whenever possible. Create and monitor levels of usage and reward usage with added value. - Create loyalty programs -- Create points programs or clubs, etc. MessageMedia's suite of outsourced services are designed to address the issues presented by these customer dialog processes. Our outsourced services utilize the following core competencies: CORE COMPETENCIES - Permission -- We maintain a staff of full-time permission advocates who work with our clients on the development of permission policies, the establishment of permission centers, review e-mail list sources and other permission and privacy related issues. - Account Management and Client Services -- Through our professional staff of account management and client service representatives, we deliver e-messaging services specifically tailored to each client's business objectives. Each client has an account management team (comprised of an account manager and one or more client services representatives) which acts as the client's primary point of contact for all relationship and campaign management issues. They work with the client to develop an e-messaging calendar, create a specification of campaign needs, develop the necessary web interfaces, customize the client database through which we maintain, import and manipulate data, implement project plans, and manage pre-production and production testing, campaign roll-out and post-mailing analysis. Additionally, our client services professionals have extensive experience in the development and delivery of effective customer communications programs. This expertise is used extensively by clients and their creative/advertising agencies as dialog/communications campaigns are designed and placed into production. - Outbound Messaging -- We manage all logistics of e-messaging delivery, from time-scheduled outbound message distribution to highly interactive and event-driven communications, such as confirming an Internet consumer purchase. E-messages with personalized content can be precisely targeted to segments of our clients e-mailing list. Our technology will also determine which format the e-mail reader uses in order to maximize the visual impact of the sender's message. We provide reliable, large-scale delivery of messages, personalized and customized to each of our client's customers in an e-messaging campaign, as well as sophisticated error-handling and "bounce" processing to ensure a clean and current customer e-mailing list. Our outbound messaging capabilities include the ability to include rich media (audio and video) in the e-mail message being sent by clients. - Inbound Messaging -- We manage all logistics of response processing from customers of our clients, including response validation, response tracking, performance of client defined actions and automated database updates. Our response-handling capabilities enable our clients to engage in interactive, two-way marketing campaigns, entirely via e-mail. The ability to process and respond to customers' inquiries improves the quality of the customer relationship by ensuring our client's ability to hear, acknowledge and respond to such request in a personalized manor. - E-Survey -- We provide our customers with a wide array of email based survey services. These services range from the development of the permission profiling questions that may be asked in the permission center to periodic and on-going transaction surveys to measure customer satisfaction to surveys directed at a specific target audience/question/problem. We have a staff of professional quantitative methods personnel with extensive experience in the design, development and deployment of surveys in both the conventional and e-survey delivery modes. These professionals also have 5 7 extensive data analysis and data modeling experience that is used by customers in the targeting and database segmentation aspects of their outbound e-messaging campaigns. - Database Services -- We track and review the success of current and past e-messaging campaigns and can deliver multiple offers to separately defined customer groups. This allows our client to identify what worked and what did not and adaptively update and manage their campaigns in a proactive manner. All messaging activity is automatically tracked and logged into our database, creating a clear history of all customer actions to aid in resolution of individual requests as well as total campaign analysis. This detailed customer record provides a wealth of information and enables clients to fine-tune their direct marketing efforts and increase the return on investment in the next campaign. Additionally, clients often bring other data from their legacy systems to their e-messaging database maintained by us so that this additional data may be used to more effectively segment and target their customer communications. SERVICE OFFERINGS MessageMedia's outsourced services are delivered through five service offerings. Within each of these service offerings we provide a wide range of capabilities. Clients often use more than one of these services. In the fourth quarter of calendar year 1999, 24% of our outsourced services clients utilized three or more of these service offerings. The service offering descriptions provided below are meant to provide a brief, general description of the capabilities offered and are not meant to be a detailed, all encompassing description of our capabilities. - Information Delivery -- Services in this area utilize our outbound messaging capabilities to deliver newsletters and other similar communications to an e-mail address list. Clients using this service are typically delivering large numbers of simple newsletters without limited personalization. - e-Marketing -- E-marketing services extend the basic information delivery services by adding more sophisticated customer targeting, enhanced messaging services including HTML messaging, trackable URL's, rich media content (audio and video), dynamically variable content and other services. - e-Customer Care -- This service offering integrates our inbound message handling capabilities with the clients outbound e-marketing programs. It provides automated handling of database updates for undeliverable and returned messages. Messages which cannot be handled in an automated fashion are then routed to the clients customer service call center or other client defined location for handling. - e-Commerce Messaging -- e-Commerce Messaging services provide our clients with a sophisticated customer communications program following an e-commerce transaction. This might involve sending an order receipt confirmation, then a shipping notice when the product is shipped, followed by a thank you for your order message. This is often followed by a questionnaire asking about the recent experience and product satisfaction. Finally, if there is no additional activity after a period of time other e-marketing communications are sent often with a discount offer to come back and purchase again. - e-Survey -- The use of e-mail based surveys is a powerful tool that can be used to determine customer satisfaction, customer communications preferences, product and service evaluations, as well as to study corporate image and brand equity. Clients have also used e-Survey for employee relationship management, including employee commitment studies and culture assessments. INDUSTRY BASED SALES FOCUS The outsourced services offered by the Company are targeted toward six major industry groups. These industry groups are: ISP's and portals; publishing; retail/consumer; technology; financial services; and the travel and entertainment industry. In each of these industry groups, we have developed an understanding of the unique marketing requirements and have learned how to customize e-marketing and communications programs that meet the challenges unique to each specific industry. Our extensive experience in serving clients in each of these industries has allowed our client services professionals the opportunity to work with clients on a wide range of innovative, cutting edge e-marketing and customer communications programs. 6 8 ISP's, portals and the publishing industry have been the industry groups that have utilized our services for the longest period of time. We have seen increasing interest on the part of firms in the retail/consumer, financial services and travel and entertainment industry for business to consumer ("B2C") communications and dialog programs. In the technology industry we have seen clients developing both B2C and business to business ("B2B") communications and dialog programs. In the case of B2B, these programs typically involve client communications by a client to its distributors, dealers, resellers, consultants and other middlemen. Packaged Software Solutions Our software solutions provide a complete solution for targeted, personalized e-mail marketing and communication. UnityMail performs all standard e-mail list server functions such as reliable high throughput e-mail delivery, bounce management, discussion lists, announcement lists, and easy unsubscribes. Integrated with relational databases such as Oracle or SQL Server, UnityMail can perform functions such as targeted e-mail (filtering and data segmentation), personalized e-mail, dynamic content editing, trackable URLs and campaign sequencing. UnityMail is licensed for amounts ranging from $10,000 to $500,000. Additionally, for clients with small databases and the need for limited e-mail marketing functionality, we offer MailKing, an entry level PC-based e-mail distribution software package. MailKing is priced at $99.95 for single copy purchases. While these software applications assist businesses conducting basic e-mail campaigns, we believe that as our software customers adopt more sophisticated e-messaging campaigns and larger databases, many of these customers will migrate to our outsourced solutions. For our software products, we provide help desk support 24 hours per day, seven days a week. Additionally, we provide installation, training and integration services on a billable hours basis. SALES Our sales efforts are conducted through a regionally based direct sales force. The Company's sales force typically markets our solutions to the senior level marketing personnel and senior corporate management within potential client organizations. Our sales efforts for the outsourced services portion of our business are focused on a number of industry vertical segments. Within these industry vertical segments, we have developed expertise and knowledge of the business, marketing and technical issues faced by clients in these industries. We have worked with a number of "blue chip" clients who have agreed to help facilitate the Company's sales efforts by acting as client references. We maintain a separate group of regionally based sales professionals that are responsible for selling our packaged software applications, principally UnityMail. Our regionally based direct sales force is focused on attracting new clients. The Company's existing clients are supported by the account management and client services organization. This group is responsible for working with current clients on their communications and dialog programs, for retaining these clients and for increasing the usage of our services by these clients. Our account management and client services professionals are highly effective at managing relationships and selling additional services to existing clients when the need arises. As of December 31, 1999, we had 33 people in our sales group, and we plan to significantly expand this group in the next 12 months. We currently have regional sales offices in New York, NY and will be opening regional offices in Chicago, IL and San Francisco, CA during 2000. MARKETING Our marketing strategy is to build brand awareness as a leading provider of e-messaging solutions and includes a media relations, industry representation and public speaking focus to develop a reputation as an industry leader for e-messaging solutions. We use narrowly focused print and online advertising campaigns for lead generation and use event, forum and trade show participation to establish and enhance our business-to-business brand presence. 7 9 RESEARCH, DEVELOPMENT AND ENGINEERING Our research, development and engineering activities are focused primarily on the design, development and enhancement of e-messaging services, as well as on increasing the capacity and reliability of existing products and services. We have devoted a significant portion of our resources to research, development and engineering programs. The Company's research, development and engineering expenses were $4.9 million, $4.8 million, and $6.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. We believe that significant research, development and engineering expenditures will be required in order for us to remain competitive. Accordingly, we expect that research, development and engineering expenses will continue to constitute a significant portion of our overall expenses in the future. Our ability to design, develop, test and support new software products and enhancements on a timely basis is critical to our future success. There can be no assurance that we will be successful in developing and marketing new software products and enhancements that meet changing customer needs and respond to such technological changes or evolving industry standards. Our current services are designed around certain widely used and accepted standards, including the MIME and SMTP e-mail standards and upon process-based security via an e-mail confirmation. Current and future use of our services will depend, in part, on industry acceptance of such standards and practices as they apply to the Internet and Internet commerce. INTERNATIONAL The market for outsourced e-mail services is growing dramatically. According to Forrester Research, online trade in Europe will be a euro 36 billion business in 2000. Forrester's research indicates that "European eCommerce will grow by more than 100% per year until 2003, reaching euro 1.6 trillion or 6.3% of total trade by 2004." European firms are quickly learning from the U.S. market how to more effectively utilize e-messaging. To date, we have had limited business dealings outside the United States. In October 1999, we entered into an agreement to establish a joint venture in Europe with @viso ("Atviso"), a strategic partnership between Vivendi, the leading European communications firm, and Softbank. On March 13, 2000, we announced that the definitive agreements between @viso and MessageMedia had been completed thus forming MessageMedia Europe. We will own 51% of the joint venture while @viso will own 49%. @viso will act as an incubator, providing capital, infrastructure, technical facilities and personnel resources to MessageMedia Europe. COMPETITION The market for our products and services is intensely competitive. There are no substantial barriers to entry into our business, and we expect that established and new entities will enter the market for e-messaging services and interactive Internet communications in the near future. Our principal competitors in the e-messaging services arena include 24x7, Inc., Axciom, Inc., Cyber Data Systems, Inc., DoubleClick, Inc., eGain Communications Corporation, EmailChannel, Inc., Exactis.com, Inc., Experian, Inc., Kana Communications, Inc., MarketHome, Inc., MatchLogic, Inc., Mustang Software, Inc., NetCreations, Inc., PostX Corporation and ReplyNet, Inc. We also compete with BroadVision, Inc., Digital Impact, E-Care Group, Mypoints.com, Inc. and Post Communications for one-to-one marketing. We may experience additional competition from ISPs and other large established businesses that enter the market for e-messaging services. Companies such as ADVO Inc., America Online, Inc., AT&T, IBM Corporation, Harte-Hanks, Inc., Hewlett-Packard Company, Integrion Financial Network LLC, The Interpublic Group of Companies, Inc., Microsoft Corporation, Netscape Communications and Foote Cone & Belding, some of whom are current clients of ours, which possess large, existing customer bases, substantial financial resources and established distribution channels could develop, market or resell a number of messaging services. The Internet, in general, and our e-messaging solutions, in particular, also must compete for a share of advertisers' total advertising budgets with traditional advertising media such as television, radio, cable and 8 10 print. Consequently, we compete with advertising and direct marketing agencies. To the extent that e-messaging is perceived to be a limited or ineffective advertising medium, companies may be reluctant to devote a significant portion of their advertising budget to our e-messaging solutions, which could limit the growth of e-messaging and negatively effect our business. We also expect that competition may increase as a result of industry consolidation. Potential competitors may choose to enter the market for e-messaging services by acquiring one or more of our existing competitors or by forming strategic alliances with such competitors. 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 products or services to address the needs of our potential e-messaging customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition. We also may experience competition from internal information systems and development groups of our current and prospective clients that have better access to senior management. Many of our current and potential competitors have longer operating histories, greater name recognition, larger customer bases, more diversified lines of products and services and significantly greater resources than we do. These competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential customers. In addition, many of our current or potential competitors have broad distribution channels that may be used to bundle competing products or services directly to end-users or purchasers. If these competitors bundle competing products or services for their customers, the demand for our products and services could substantially decline. As a result of the above factors, we cannot assure you that we will compete effectively with current or future competitors or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. LIMITED INTELLECTUAL PROPERTY We rely on a combination of trade secret, copyright and trademark laws, nondisclosure agreements, and other contractual provisions and technical measures to protect our proprietary rights. We believe that, due to the rapid pace of technological innovation for Internet products, our ability to establish and maintain a position of technology leadership in the industry depends more on the skills of our development personnel than upon the legal protections afforded our existing technology. There can be no assurance that trade secret, copyright and trademark protections will be adequate to safeguard the proprietary software underlying our products and services, or that our agreements with employees, consultants and others who participate in the development of its software will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise become known. Moreover, notwithstanding our efforts to protect our intellectual property, there is no assurance that competitors will not be able to develop functionally equivalent interactive messaging technologies without infringing any of our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use products or technology that we consider proprietary, and third parties may attempt to develop similar technology independently. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. Accordingly, there can be no assurance that our means of protecting its proprietary rights will be adequate or that our competitors will not independently develop similar technology. As the volume of Internet commerce increases, and the number of products and service providers that support Internet commerce increases, we believe that Internet commerce technology providers may become increasingly subject to infringement claims. There can be no assurance that plaintiffs will not file infringement claims in the future. In particular, on October 19, 1998, Exactis.com, Inc filed a complaint against our subsidiary Epub in the Federal District Court of Colorado. The complaint alleged infringement of a patent held by Exactis.com, Inc. and sought injunctive relief and unspecified damages. On October 28, 1998, we filed a complaint in the U.S. District Court for the Southern District of California against Exactis.com, Inc. The complaint alleged infringement of a patent held by us and sought injunctive relief and unspecified damages. 9 11 On October 13, 1999 both parties agreed to a settlement of theses actions which have subsequently been dismissed by the courts with prejudice. Litigation to determine the validity of any claims could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not such litigation is determined in our favor. In addition, patent litigation such as the Exactis.com, Inc. lawsuit often gives rise to counterclaims by the defendants, which could include challenges to the validity of patents held by us. In the event of an adverse ruling in any such litigation, we may be required to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. The failure by us to develop or license a substitute technology could have a material adverse effect on our business, financial condition and results of operations. GOVERNMENT REGULATION A number of states have adopted laws restricting the distribution of unsolicited commercial emails or SPAM. We actively monitor such legislation and regulatory development to minimize the risk of our participation in activities that violate such anti-SPAM legislation. Additionally, a number of legislative and regulatory proposals are under consideration by federal and state lawmakers and regulatory bodies and may be adopted with respect to the Internet. Some of the issues that such laws or regulations may cover include user privacy, obscenity, fraud, pricing and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the projected demand for our products and services or increase our cost of doing business. Moreover, the applicability to the Internet of existing U.S. and international laws governing issues such as property ownership, copyright, trade secret, libel, taxation and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business, results of operations, financial condition and prospects. EMPLOYEES As of December 31, 1999, we employed a total of 273 full time employees. Of these, 152 were in account management, client services and production functions, 35 were in research, development and engineering, 45 were in marketing and sales and 41 were in general and administration functions. Our future success depends to a significant extent upon the continued service of our key technical and senior management personnel and upon our ability to attract and retain additional highly skilled creative, technical, financial and strategic marketing personnel. Competition for such personnel is intense. There can be no assurance that we will be successful in attracting and retaining such personnel, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations. None of our employees are represented by a labor union. We have never experienced a work stoppage and believe that our relationships with its employees are good. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names, ages and positions of the executive officers of the Company as of March 28, 2000:
NAME AGE POSITION - ---- --- -------- A. Laurence Jones.............. 47 President and Chief Executive Officer Martin T. Johnson.............. 48 Senior Vice President, Chief Financial Officer and Secretary Mary Beth Loesch............... 39 Senior Vice President of Corporate Development Elizabeth Wallace.............. 40 Senior Vice President of Sales and Service
Mr. Jones became our President in March 1999 and our Chief Executive Officer and a director in April 1999. Prior to joining our company, Mr. Jones served as an operating affiliate of McCown De Leeuw & Co., a private equity firm, from January 1998 to February 1999. From 1993 to January 1998, Mr. Jones served as 10 12 President and Chief Executive Officer of Neodata Services, Inc., a privately held direct marketing company. Mr. Jones serves as a director of Exabyte Corp. and Cooperative Computing, Inc./Triad. Mr. Jones received a B.S. in Computer Science from Polytechnic Institute in 1975 and an M.B.A. from Boston University in 1980. Mr. Johnson has served as our Senior Vice President and Chief Financial Officer and Secretary since February 2000. From October 1999 through February 1999 he served as Vice President and Chief Financial Officer and Secretary. From 1994 through 1999, Mr. Johnson was Senior Vice President and Chief Financial Officer of Technology Solutions Company. Prior to joining Technology Solutions Company, Mr. Johnson was Corporate Controller of The Marmon Group, Inc., an autonomous association of over 70 independent member companies. In February 1998, he became a member of the Issuer Affairs Committee of The Nasdaq Stock Market. Mr. Johnson received a Bachelor of Science in Electrical Engineering from Lehigh University in 1973 and a Masters of Management from Northwestern University in 1976. Ms. Loesch has served as our Senior Vice President of Corporate Development since February 1999. From April 1999 to February 1999, she served as Vice President of Corporate Development. From January 1998 until April 1999, she served as President of the Advanced Network Solutions Group at Internet Communications Corp. From 1996 until 1998 she worked for KPMG Peat Marwick where she served as managing director of the high-technology consulting practice. Prior to that she held various executive-level positions at CSG Systems Incorporated and U S WEST, Inc. Ms. Loesch received an M.B.A. from Creighton University in 1986 and graduated summa cum laude with a B.S.B.A. from Creighton University in 1982. Ms. Wallace has served as our Senior Vice President of Sales and Services since November 1999. From April 1999 to November 1999, she served as Vice President of Operations. From October 1996 until October 1998, Ms. Wallace served as Vice President of Customer Management at Telecommunications, Inc., and from February to October 1996 as Director of Client Services of TeleTech TeleService, Inc. From 1992 to 1996, Ms. Wallace was Executive Director at DDB Needham Worldwide. Ms. Wallace attended Rick's College in 1985 and received an associates degree in Business Administration from Truman College in 1986. FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. WE HAVE A HISTORY OF OPERATING LOSSES AND FUTURE LOSSES ARE LIKELY. We have incurred net losses applicable to common shares of approximately $91 million since our inception in March 1994. We have not achieved profitability and expect to continue to incur operating losses at least into 2001. We intend to continue to invest heavily in acquisitions, infrastructure development and marketing. Accordingly, we expect to continue to incur significant operating and capital expenditures and, as a result, we will need to generate significant revenue to achieve and maintain profitability. Although our revenue has grown in recent quarters, we cannot assure you that we will achieve sufficient revenue for profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenue grows slower than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected. OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND RECENTLY HAVE CHANGED OUR BUSINESS MODEL. We were incorporated in March 1994 for the purpose of developing an Internet payment system. In 1998 we changed our business model and acquired two e-messaging companies, EPub and DBits. In August 1999, we acquired two additional e-messaging companies, Revnet and Decisive. An investor in our common stock 11 13 must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, including the Internet e-messaging market. These risks include our: - ability to sustain historical revenue growth rates; - need to manage our expanding operations; - need to successfully integrate our recent and any future acquisitions; - competition; - ability to attract, retain and motivate qualified personnel; - ability to maintain our current, and develop new, strategic relationships; - ability to anticipate and adapt to the changing Internet market; and - ability to attract and retain a large number of customers from a variety of industries. We also depend on the growing use of the Internet for marketing, advertising, commerce and communication. We cannot assure you that our business strategy will be successful or that we will successfully address these risks. OUR MARKETS ARE RELATIVELY NEW AND UNPROVEN AND OUR SUCCESS DEPENDS ON MARKET ACCEPTANCE AND THE EFFECTIVENESS OF OUR E-MESSAGING SERVICES. Demand and market acceptance for Internet e-messaging solutions is uncertain. Our future success is highly dependent on an increase in the use of the Internet as a marketing, advertising and communications medium. The adoption of Internet e-messaging, particularly by those entities that historically have relied upon traditional media for marketing and advertising, requires the acceptance of a new way of conducting business, exchanging information and marketing products and services. Many of our current or potential e-messaging customers have little or no experience using the Internet for marketing and advertising purposes and they have allocated only a limited portion of their budgets to Internet e-messaging. Moreover, our customers may find Internet e-messaging to be less effective for promoting their products and services relative to traditional marketing and advertising media. If our e-messaging platform fails to meet customers' demands, the use of our e-messaging services may decline over time and our business would suffer. WE ADOPTED OUR CURRENT BUSINESS MODEL IN THE FOURTH QUARTER OF 1998 AND ITS PROFIT POTENTIAL IS UNCERTAIN. The profit potential for our business model, which is to generate revenue solely by providing Internet e-messaging solutions to our customers, is unproven. To be successful, both Internet marketing and our future and current service offerings, including information distribution, e-mail marketing, e-customer care, e-commerce messaging and e-surveys, will need to achieve broad market acceptance. Our ability to generate significant revenue will depend, in part, on our ability to contract with a sufficient number of customers. The intense competition among Internet e-messaging companies has led to the creation of a number of pricing alternatives for Internet e-messaging solutions. These alternatives make it difficult for us to project future levels of revenue and applicable gross profit that can be sustained by us or the Internet e-messaging industry in general. SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR LARGE STOCKHOLDERS COULD CAUSE OUR STOCK PRICE TO FALL. A limited number of stockholders hold a large portion of our common stock. To the extent our large stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. Several transactions completed by us during the last fiscal year increased both the number of our securities available for resale to the public and the number of our securities held by our largest stockholders. For instance, in connection with our acquisition of Revnet and Decisive, we issued 5,316,618 shares of our common stock and assumed options to purchase up to approximately 1,148,493 additional shares of our common stock. Additionally, we issued 4,095,124 shares of our common stock in a private 12 14 placement. Affiliates of two of our largest stockholders, Softbank Corp and Pequot Capital Management, Inc. acquired 975,611 of the shares sold in the private placement. All of the shares referred to above have been registered for resale on Registration Statements on Form S-3 which have been declared effective by the SEC. Accordingly, all such shares may be resold into the public markets without restrictions. WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE REVNET AND DECISIVE OR FUTURE ACQUISITIONS. In August 1999 we acquired Revnet and Decisive. As a result, companies that had previously operated independently and with distinct business models must now work together. The integration will require significant effort from our personnel and the personnel of the acquired companies who are now our employees. We may not be able to profitably consolidate these businesses. The following risks are common to the integration of different companies, and may be associated with recent or future acquisitions, including the recent acquisitions of Revnet and Decisive: - the difficulty of incorporating new operations, technology and personnel into one company; - the potential effects on operating results from increases in goodwill amortization, acquired in-process technology, stock compensation expense and increased compensation expense resulting from newly hired employees; - the diversion of management attention from other aspects of our business; - the potential disruption of our ongoing business; - the potential reduction of the value of our e-messaging solutions or reputation if an acquired company turns out to be a poor performer; - the additional expense associated with amortization of acquired intangible assets; - the maintenance of uniform standards, controls, procedures and policies; - the potential of disputes with the sellers of one or more acquired entities; - the possible failure to retain key acquired personnel; - the assumption of most or all of the liabilities of the acquired companies, some of which may be hidden, significant or not reflected in the final acquisition price; and - the impairment of relationships with employees and customers. As part of our business strategy, we intend to focus on acquiring, or making significant investments in, additional companies, products and technologies that complement our business. The successful implementation of this strategy depends on our ability to identify suitable acquisition candidates, acquire those companies on acceptable terms and integrate their operations successfully with our business. If we make additional acquisitions, we could have difficulty in assimilating the acquired products, services or technologies into our operations. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. OUR FAILURE TO ENHANCE OUR EXISTING PRODUCTS AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS COULD CAUSE OUR REVENUE TO FALL. We are continually developing significant enhancements for our e-messaging services and products. Any delay or difficulty associated with the introduction of these enhancements could significantly harm our business, results of operations and financial condition. We also may not be able to develop the underlying core technologies necessary to create new products or enhancements, or to license those products from third parties. 13 15 WE NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL AND MAY NOT BE ABLE TO DO SO. Our success depends on the continued service of our key senior management personnel, in particular, A. Laurence Jones, our President and Chief Executive Officer. The loss of any member of our senior management team could have a material adverse effect on our future operating results. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees. We face significant competition for individuals with the skills and experience required to perform in required roles and may not be able to attract or retain such individuals in the future. OUR MANAGEMENT TEAM HAS ONLY WORKED TOGETHER FOR A SHORT PERIOD OF TIME AND MAY NOT WORK WELL TOGETHER. Virtually all of our executive officers, including our President and Chief Executive Officer, Chief Financial Officer, Senior Vice President of Sales and Service and Senior Vice President of Corporate Development, have joined our company in 1999. Due to the fact that many of our executive officers are new to our company and never have worked together, our management may not be able to function effectively, individually or as a team. WE ANTICIPATE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS. We expect that our future operating results will fluctuate significantly. These fluctuations may be due to a number of factors, many of which are beyond our control. Some of the factors that may cause fluctuations include the following: - Market response to our e-messaging services; - Difficulties in the development or deployment of new e-messaging products or services; - The timing and rate at which we increase our expenses to support projected growth; - Fluctuating market demand for our products and services; - The degree of acceptance of the Internet as a medium for communicating with customers; - Product introductions and service offerings by our competitors; - The mix of the products and services provided by us; and - The cost of compliance with applicable government regulations, including anti-SPAM legislation. Our revenue for the foreseeable future will remain dependent on e-messaging activity, the fees that we charge for our services and license fees for software products. These future revenues are difficult to forecast. In addition, we plan to significantly increase our operating expenses to increase our sales and marketing operations, to upgrade and enhance our e-messaging solutions and to market and support our solutions. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenue in relation to our expenses, or if our expenses precede increased revenue, our business, results of operations and financial condition would be materially and adversely affected. This would likely affect the market price of our common stock in a manner which may be unrelated to our long-term operating performance. We believe that marketing and advertising sales in traditional media, such as television and radio, generally are lower in the first calendar quarter of each year. Seasonal or cyclical patterns may develop in our industry if our market makes the transition from an emerging to a more developed medium. Our revenue may also be affected by seasonal and cyclical patterns in Internet e-messaging spending if they emerge. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as an indication of our future performance. Due to the factors we have listed above and other factors, it is likely that our future operating results will at times not meet the expectations of market analysts or investors. If our operating results fail to meet expectations, the price of our common stock could fall. 14 16 WE NEED TO EFFECTIVELY MANAGE OUR GROWTH. An effective planning and management process is required to successfully implement our business plan in the rapidly evolving market for Internet e-messaging. We continue to increase the scope of our operations, and we have grown our workforce substantially. As of January 1, 1995, we had 5 employees and, as of December 31, 1999, we had 273 employees. In addition, we plan to continue to expand our sales and marketing and service offerings. This growth has placed, and our anticipated future growth in our operations will continue to place, a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to expand, train and manage our workforce. Our future performance also may depend on the effective integration of acquired businesses. Such integration, even if successful, may require a significant period of time and expense, and may place a significant strain on our resources. Our business, results of operations and financial condition will be materially and adversely affected if we are unable to effectively manage our expanding operations. WE DEPEND ON THIRD-PARTY PROVIDERS OVER WHOM WE HAVE NO CONTROL TO OPERATE OUR E-MESSAGING PLATFORM. We depend heavily on several third-party providers of Internet and related telecommunication services, including hosting and co-location companies, in operating our e-messaging platform. These companies may not continue to provide services to us without disruptions in service, at the current cost, or at all. Although we believe that we could obtain these services from other sources if need be, the costs associated with any transition to a new service provider would be substantial, requiring us to reengineer our computer systems and telecommunications infrastructure to accommodate a new service provider. This process would be both expensive and time-consuming. In addition, failure of our Internet and related telecommunications providers to provide the data communications capacity in the time frame required by us could cause interruptions in the services we provide. Despite precautions taken by us, unanticipated problems affecting our computer and telecommunications systems in the future could cause interruptions in the delivery of our e-messaging services, causing a loss of revenue and potential loss of customers. WE RELY ON A FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE. A significant portion of our revenues are generated by a limited number of customers. We expect that we will continue to depend on large contracts with a small number of significant customers. This situation can cause our revenue and earnings to fluctuate between quarters based on the timing of contracts. None of our customers has any obligation to purchase additional products or services from us. Consequently, if we fail to develop relationships with significant new customers, our business and financial condition will suffer. COMPETITION IN OUR INDUSTRY IS INTENSE. We believe none of our competitors offer the full range of solutions provided by us. However, the market for our products and services is intensely competitive. There are no substantial barriers to entry into our business, and we expect that established and new entities will enter the market for e-messaging services and interactive Internet communications in the near future. Our principal competitors in the e-messaging services arena include 24x7, Inc., Axciom, Inc., Cyber Data Systems, Inc., DoubleClick, Inc., eGain Communications Corporation, EmailChannel, Inc., Exactis.com, Inc., Experian, Inc., Kana Communications, Inc., MarketHome, Inc., MatchLogic, Inc., Mustang Software, Inc., NetCreations, Inc., PostX Corporation and ReplyNet, Inc. We also compete with BroadVision, Inc., Digital Impact, E-Care Group and Mypoints.com, Inc. for one-to-one marketing. We may experience additional competition from ISPs and other large established businesses that enter the market for e-messaging services. Companies such as ADVO Inc., America Online, Inc., AT&T, IBM Corporation, Harte-Hanks, Inc., Hewlett-Packard Company, Integrion Financial Network LLC, The Interpublic Group of Companies, Inc., Microsoft Corporation, Netscape Communications and Foote Cone & 15 17 Belding, some of whom are current clients of ours, which possess large, existing customer bases, substantial financial resources and established distribution channels could develop, market or resell a number of messaging services. The Internet, in general, and our e-messaging solutions, in particular, also must compete for a share of advertisers' total advertising budgets with traditional advertising media such as television, radio, cable and print. Consequently, we compete with advertising and direct marketing agencies. To the extent that e-messaging is perceived to be a limited or ineffective advertising medium, companies may be reluctant to devote a significant portion of their advertising budget to our e-messaging solutions, which could limit the growth of e-messaging and negatively effect our business. We also expect that competition may increase as a result of industry consolidation. Potential competitors may choose to enter the market for e-messaging services by acquiring one or more of our existing competitors or by forming strategic alliances with such competitors. 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 products or services to address the needs of our potential e-messaging customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition. We also may experience competition from internal information systems and development groups of our current and prospective clients that have better access to senior management. Many of our current and potential competitors have longer operating histories, greater name recognition, larger customer bases, more diversified lines of products and services and significantly greater resources than we do. These competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential customers. In addition, many of our current or potential competitors have broad distribution channels that may be used to bundle competing products or services directly to end-users or purchasers. If these competitors bundle competing products or services for their customers, the demand for our products and services could substantially decline. As a result of the above factors, we cannot assure you that we will compete effectively with current or future competitors or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. THE MARKETS FOR OUR PRODUCTS ARE UNDEVELOPED AND RAPIDLY CHANGING, WHICH MAKES AN INVESTMENT IN OUR COMPANY RISKY. The Internet and Internet e-messaging markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, changing customer demands and increasing numbers of service providers. Our products and services are designed around current technical standards and our revenue depends on continued industry acceptance of these standards. While we intend to provide compatibility with the most popular industry standards, widespread adoption of a proprietary or closed standard could prevent us from doing so. The standards on which our products and services are or will be based may not be accepted by the industry. New market entrants have introduced or are developing products and services for use on the Internet and the World Wide Web that compete with our products. The products, services or technologies developed by others may render our products and services noncompetitive or obsolete. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies and to enhance existing solutions and develop and introduce a variety of new solutions to address new industry standards and our customers' changing demands. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our solutions. In addition, our new solutions or enhancements must meet the requirements of our current and prospective customers and must achieve significant market acceptance. Material delays in introducing new solutions and enhancements may cause customers to forego purchases of our solutions and purchase those of our competitors. 16 18 The degree to which our e-messaging platform is accepted and used in the marketplace will depend on continued growth in the use of e-mail as a primary means of communications by businesses and consumers. An increase in the use of e-messaging also will depend on market acceptance of e-mail as a method for targeted marketing of products and services. Our ability to successfully differentiate our services from random mass e-mailing products and services which have encountered substantial resistance from consumers will also be important. Businesses that already have invested substantial resources in traditional or other methods of conducting business may be reluctant to adopt new commercial methods or strategies that may limit or compete with their existing businesses. Individuals with established patterns of purchasing goods and services may be reluctant to alter those patterns. WE FACE RISKS OF DEFECTS AND DEVELOPMENT DELAYS IN OUR PRODUCTS AND SERVICES. Products and services based on sophisticated software and computing systems often encounter development delays. Our underlying software may contain hidden errors and failures when introduced or when usage increases. It is possible that we may experience delays in the development of the software and computing systems underlying our services. Despite testing that our clients and we conduct, we may not locate errors if they occur. Also, we may experience development delays. These occurrences could harm our reputation and revenue growth. IF CURRENT GROWTH RATES CONTINUE, THE CAPACITY OF OUR SOFTWARE OR HARDWARE COULD BE STRAINED, LEADING TO SLOWER RESPONSE TIMES OR SYSTEM FAILURES. If the volume of messages that our systems process significantly increases, the capacity of our software or hardware could be strained. This could lead to slower response time or system failures. We have made and intend to continue to make substantial investments to increase our server capacity by adding new servers and upgrading our software as necessary. However, our products and services may not be able to meet the growing demand as the number of World Wide Web and Internet users increases. We also depend, as do our customers, on Web browsers, e-mail clients and Internet and online service providers for access to our services. Some users of our services have experienced difficulties due to system failures unrelated to our system, products or services. If we cannot effectively address these capacity constraints, our business and financial condition could be materially and adversely affected. THE SUCCESS OF OUR E-MESSAGING PLATFORM DEPENDS ON INCREASED USAGE AND THE STABILITY OF THE INTERNET. Our success will depend, in large part, upon the maintenance of the Internet infrastructure, such as a reliable network backbone with the necessary speed, data capacity and security, and timely development of enabling products such as high speed modems, for providing reliable Internet access and services and improved content. We cannot assure you that the Internet infrastructure will continue to effectively support the demands placed on it as the Internet continues to experience increased numbers of users, frequency of use or increased bandwidth requirements of users. Even if the necessary infrastructure or technologies are developed, we may have to spend a considerable amount of money and time to adapt our solutions accordingly. Furthermore, the Internet has experienced a variety of outages and other delays due to damage to portions of its infrastructure. Any future outages or delays could impact the Internet sites of customers using our solutions. We believe that the future of the Internet as a center for commerce will depend in significant part on the following factors: - Continued rapid growth in the number of households and commercial, educational and government institutions with access to the Internet; - The level of usage by individuals; - The number and quality of products and services designed for use on the Internet; and - Expansion of the Internet infrastructure. 17 19 The degree to which e-mail will become a common method of communication depends on the extent that users increasingly prefer e-mail over traditional means of communication. The growth of e-mail also depends on widespread access to reliable and affordable e-mail services by individuals, businesses and other organizations. Because usage of the Internet as a medium for on-line exchange of information, advertising, merchandising and entertainment is a recent phenomenon, it is difficult to predict whether the number of users drawn to the Internet will continue to increase and whether any significant market for our e-messaging platform, or any substantial commercial use of the Internet, will develop. We cannot assure you that Internet usage patterns, and reliance on e-mail communication in particular, will continue to grow and will not decline as the newness of this method of communication wears off. It also is uncertain whether the cost of Internet access will decrease. If either the Internet or e-mail communication fails to achieve increased acceptance and does not become accessible to a broad audience at moderate costs, the market for our products and services will be jeopardized. The success of our business also depends on a significant expansion of the Internet infrastructure to provide adequate Internet access and proper management of Internet traffic. ANY SYSTEM FAILURE MAY HARM OUR BUSINESS OR REPUTATION. The continuing and uninterrupted performance of our computer systems and our customers' computer systems is critical to our ability to provide outsourced services. Sustained or repeated system failures would reduce the attractiveness of our solutions to our customers and could harm our business reputation. Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of e-messages delivered through our servers. To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition would be materially and adversely affected. Our operations are dependent on our ability to protect our computer systems against damage from fire, power loss, water damage, telecommunications failures, vandalism, infection by computer viruses, other malicious acts and similar unexpected adverse events. In addition, interruptions in our solutions could result from the failure of our Internet and related telecommunications providers to provide the necessary data communications capacity in the time frame we require. Despite precautions we have taken, unanticipated problems affecting our systems have from time to time in the past caused, and in the future could cause, interruptions in the delivery of our solutions. Our business results of operations and financial condition could be materially and adversely affected by any damage or failure that interrupts or delays our operations. WE FACE SECURITY RISKS AND POTENTIAL LIABILITY ASSOCIATED WITH MISAPPROPRIATION OF CONFIDENTIAL INFORMATION. We currently retain highly confidential customer information in a secure database server. We cannot assure you, however, that we will be able to prevent unauthorized individuals from gaining access to this database server. Any unauthorized access to our servers could result in the theft of confidential customer information such as e-mail addresses. It also is possible that one of our employees could attempt to misuse confidential customer information, exposing us to liability. We use disclaimers and limitation of warranty provisions in our client agreements in an attempt to limit our liability to clients, including liability arising out of systems failure. However, such provisions may not be enforceable or effective in limiting our exposure to damage claims. OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE TO COMPENSATE US FOR ALL POTENTIAL LOSSES. Although we carry insurance, which we believe to be adequate, the coverage it provides may not be adequate to compensate us for all losses that may occur. We are in the process of taking precautions to protect both our company and our customers from events that could interrupt delivery of our products and services or that could result in a loss of transaction or customer data. However, these measures will not eliminate a significant risk to our operations from a natural disaster or systems failure. We cannot guarantee that these measures would protect the company from an organized effort to inundate our servers with massive quantities of e-mail or other Internet message traffic which could overload our systems and result in a significant interruption of service. Our business interruption insurance would not fully compensate us for lost revenue, income, additional costs or increased costs that we would experience during the occurrence of any disruption 18 20 of our computer systems. We cannot guarantee that we will be able to obtain sufficient insurance coverage on reasonable terms or at all in the future. OUR MEANS OF PROTECTING OUR PROPRIETARY RIGHTS MAY BE INADEQUATE AND OUR COMPETITORS MAY DEVELOP SIMILAR TECHNOLOGY. We rely on a combination of trade secret, copyright and trademark laws, nondisclosure agreements, and other contractual provisions and technical measures to protect our proprietary rights. We believe that, due to the rapid pace of technological innovation for Internet products, our ability to establish and maintain a position of technology leadership in the industry depends more on the skills of our development personnel than upon the legal protections afforded our existing technology. Trade secret, copyright and trademark protections may not be adequate to safeguard the proprietary software underlying our products and services. We may not have adequate remedies for any breach and our trade secrets may otherwise become known. Moreover, notwithstanding our efforts to protect our intellectual property, competitors may be able to develop functionally equivalent e-messaging technologies without infringing any of our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use products or technology that we consider proprietary, and third parties may attempt to develop similar technology independently. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. Accordingly, our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. We cannot assure you that the steps we have taken will prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. We have licensed, and we may license in the future, elements of our trademarks, trade dress and similar proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by these business partners, such partners may take actions that could materially and adversely affect the value of our proprietary rights or our reputation. In addition, we currently license certain software and communication systems from third parties. Our failure to maintain these licenses, or to find replacements for such technology in a timely and cost-effective manner, could have a material adverse effect on our business, results of operations and financial condition. WE HAVE IN THE PAST, AND MAY IN THE FUTURE, BECOME INVOLVED IN PATENT INFRINGEMENT CLAIMS WHICH RESULT IN A SIGNIFICANT DRAIN ON OUR RESOURCES AND PREVENT OUR MANAGEMENT TEAM FROM FOCUSING ON MORE PROFITABLE TASKS. As the volume of Internet commerce increases, and the number of products and service providers that support Internet commerce increases, we believe that Internet commerce technology providers may become increasingly subject to infringement claims. We have been subject to claims of alleged infringement of intellectual property rights in the past, and may become involved in additional claims in the future. In addition, we may initiate claims of litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any such claims, with or without merit, could be time consuming, result in costly litigation, disrupt or delay the enhancement or shipment of our products and services or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable or favorable to us, which could have a material adverse effect on our business, financial condition and results of operations. Litigation to determine the validity of any claims could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not such litigation is determined in our favor. In addition, patent litigation often gives rise to counterclaims by the defendants, which could include challenges to the validity of patents held by us. In the event of an adverse ruling in any such litigation, we may be required to pay 19 21 substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. Our failure to develop or license a substitute technology could have a material adverse effect on our business. IN THE FUTURE, WE MAY BE SUBJECT TO INCREASED GOVERNMENT REGULATION. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. We believe that we are not currently subject to direct regulation by any government agency in the United States, other than regulations that are generally applicable to all businesses and newly enacted laws prohibiting unsolicited commercial e-mail, or spam, or laws intended to protect minors. A number of legislative and regulatory proposals are under consideration by federal and state lawmakers and regulatory bodies and may be adopted with respect to the Internet. Some of the issues that such laws or regulations may cover include user privacy, obscenity, fraud, pricing and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the projected demand for our products and services or increase our cost of doing business. Moreover, the applicability to the Internet of existing U.S. and international laws governing issues such as property ownership, copyright, trade secret, libel, taxation and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business. OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN THE FUTURE, REGARDLESS OF OUR ACTUAL OPERATING PERFORMANCE. The stock market in general, and Internet companies in particular, including our company, have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to operating performance. The trading prices of many Internet companies' stocks are at or near historical highs and these trading prices and multiples are substantially above historical levels. These trading prices and multiples may not be sustained. Broad market and industry factors may reduce our stock price, regardless of our actual operating performance. In addition, the trading price of our common stock could fluctuate in response to factors such as: - quarterly fluctuations in our revenue and financial results both in absolute terms and relative to analyst and investor expectations; - changes in recommendations of securities analysts; - announcements of technological innovations or new services or products; - publicity regarding actual or potential results with respect to technologies, services or products under development; - disputes or other developments concerning proprietary rights, including copyright and litigation matters; and - other events or factors, many of which are beyond our control. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of management's attention and resources. PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY AND MAY REDUCE THE MARKET PRICE OUR COMMON STOCK. Provisions in our charter documents may delay, defer or prevent a change in control of our company that a stockholder may consider favorable, may discourage bids for our common stock at a premium over the 20 22 market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include: - authorizing the issuance of preferred stock without stockholder approval; - providing for a classified board of directors with staggered, three -- year terms; - prohibiting cumulative voting in the election of directors; - requiring super-majority voting to effect certain amendments to our certificate of incorporation and bylaws; - limiting the persons who may call special meetings of stockholders; and - prohibiting stockholders actions by written consent. Other provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us. OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES EXERCISE SIGNIFICANT CONTROL OVER OUR COMPANY. Our directors and executive officers, and certain of their affiliates, individually and as a group, effectively control us and direct our affairs and business, including any determination with respect to the acquisition or disposition of assets by us, future issuance's of common stock or other securities by us, declaration of dividends on our common stock and the election of directors. This concentration of ownership also may have the effect of delaying, deferring or preventing a change in control of our company. YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN. This document contains certain forward-looking statements that involve risks and uncertainties. We use words such as "anticipate", "believe", "expect", "future", "intend", "plan" and similar expressions to identify forward-looking statements. These statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this document. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described on the preceding pages and elsewhere in this document. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors listed above, as well as any cautionary language in this document, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this document could have a material adverse effect on our business, operating results, financial condition and stock price. ITEM 2. PROPERTIES The Company's corporate facility consists of approximately 27,200 square feet of leased space in Boulder, Colorado. This primary facility lease expires on November 30, 2000. The Company leases space in Denver, Colorado for its computer processing center. On January 11, 1999, the Company closed its San Diego operations and did not renew its facility lease, which expired in May 1999. In December 1998, the Company acquired EPub. In doing so, the Company acquired a facility lease consisting of approximately 6,500 square feet of leased space in Boulder, Colorado. This facility lease expires in June 2002. Additionally, the company leases facilities in Huntsville, Alabama and New York City, New York. Our operations are dependent in part upon our ability to protect our operating systems against physical damage from fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events. 21 23 We do not presently have redundant, multiple site capacity in the event of any such occurrence. Despite the implementation of network security measures by us, our servers also are potentially vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. The occurrence of any of these events could result in interruptions, delays or cessations in service to users of our products and services, which could have a material adverse effect on our business, financial condition and results of operations. ITEM 3. LEGAL PROCEEDINGS On October 19, 1998, Exactis.com, Inc, filed a complaint against our subsidiary Epub in the Federal District Court of Colorado. The complaint alleged infringement of a patent held by Exactis.com, Inc. and sought injunctive relief and unspecified damages. On October 28, 1998, we filed a complaint in the U.S. District Court for the Southern District of California against Exactis.com, Inc. The complaint alleged infringement of a patent held by us and sought injunctive relief and unspecified damages. On October 13, 1999 both parties agreed to a settlement of theses actions which have subsequently been dismissed by the courts with prejudice. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no submissions of matters to a vote of security holders during the quarter ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MessageMedia's common stock commenced trading in the over-the-counter market on December 13, 1996 and was quoted on the Nasdaq National Market under the symbol "FVHI" (First Virtual Holdings Incorporated). On December 15, 1998, the Company changed its Nasdaq symbol to "MAIL" and on March 30, 1999, the Company changed its Nasdaq symbol to "MESG". The following table represents the high and low sales prices for the Company's common stock on the Nasdaq National Market.
1999 1998 ------------- ------------ HIGH LOW HIGH LOW ---- --- ---- --- First Quarter............................................... 9 9/16 4 7/8 3 1/8 11/16 Second Quarter.............................................. 26 3/4 7 3 1/16 21/32 Third Quarter............................................... 22 3/4 9 3/4 7 3/8 1 7/16 Fourth Quarter.............................................. 20 9 15/16 6 5/16 1 25/32
On March 10, 2000, the last reported sale price on The Nasdaq Stock Market for the Company's Common Stock was $14. The Company has never paid dividends on its Common Stock. The Company does not anticipate paying any dividends on its Common Stock in the foreseeable future. As of March 10, 1999, there were approximately 423 holders of record. The number of holders of the Company's common stock does not include beneficial owners of common stock whose shares are held in the name of banks, brokers, nominees or other fiduciaries. The market price for the Company's Common Stock may be significantly affected by factors such as the announcement of new products or services by the Company or its competitors, technological innovation by the Company, its competitors or other vendors, quarterly variations in the Company's operating results or the operating results of the Company's competitors, general conditions in the Company's and its customers' markets, changes in the earnings estimates by analysts or reported results that vary materially from such estimates. In addition, the stock market has experienced significant price fluctuations that have affected the 22 24 market prices of equity securities of many high technology and emerging growth companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may materially and adversely affect the market price of the Company's Common Stock. Following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company and its officers and directors. Any such litigation against the Company could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, operating results and financial condition. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Report on Form 10-K. STATEMENT OF OPERATIONS:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ----------- Revenues.................... $ 10,021,544 $ 1,287,790 $ 1,450,598 $ 695,866 $ 197,902 Cost of revenues............ 4,589,358 97,553 270,416 265,900 123,375 ------------ ------------ ------------ ------------ ----------- Gross profit................ 5,432,186 1,190,237 1,180,182 429,966 74,527 Operating expenses: Marketing and sales....... 9,704,452 1,934,486 5,424,110 1,836,545 346,400 Research, development and engineering............ 4,935,931 4,828,277 6,687,177 4,652,582 530,809 General and administrative......... 7,677,527 3,810,073 4,377,688 4,237,638 1,292,781 Restructuring expenses.... 1,025,000 812,166 -- -- -- Write-off of in-process technology............. -- 1,300,000 -- -- -- Depreciation and amortization........... 28,923,515 2,470,917 1,097,716 524,124 106,628 ------------ ------------ ------------ ------------ ----------- Total operating expenses.... 52,266,425 15,155,919 17,586,691 11,250,889 2,276,618 ------------ ------------ ------------ ------------ ----------- Loss from operations........ (46,834,239) (13,965,682) (16,406,509) (10,820,923) (2,202,091) Interest income (expense)... 564,978 133,659 459,227 130,983 (67,890) ------------ ------------ ------------ ------------ ----------- Net loss.................... (46,269,261) (13,832,023) (15,947,282) (10,689,940) (2,269,981) Dividends imputed on preferred stock........... -- (153,126) (1,250,000) -- -- ------------ ------------ ------------ ------------ ----------- Net loss applicable to common shares............. $(46,269,261) $(13,985,149) $(17,197,282) $(10,689,940) $(2,269,981) ============ ============ ============ ============ =========== Net loss per share, basic and diluted............... $ (1.00) $ (0.63) $ (1.94) $ (2.33) $ (0.54) Shares used in per share computation, basic and diluted................... 46,367,195 22,304,902 8,842,367 4,588,262 4,170,231
BALANCE SHEET DATA:
DECEMBER 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ---------- ---------- ----------- ---------- Cash, cash equivalents and short term investments................. $37,920,277 $4,659,375 $6,331,059 $17,127,971 $2,091,651 Furniture, equipment, software and information technology, net...... 4,727,839 1,475,720 1,878,893 2,023,861 471,653 Intangibles........................ 75,162,221 23,894,715 -- -- -- Total Assets....................... 123,191,245 31,220,981 9,048,089 19,692,557 2,574,826 Current Liabilities................ 5,765,314 2,670,602 4,769,958 3,236,037 622,403 Notes and amounts payable non current.......................... 35,808 53,786 162,500 1,912,500 1,200,000 Stockholders' equity (net capital deficiency)...................... 117,390,123 28,483,510 (571,869) 14,944,020 752,423
23 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company commenced operations in 1994. From inception through 1998, our revenues principally were derived from our Internet payment system and related services. In June 1998, we were recapitalized by SOFTBANK and affiliates through a series of transactions resulting in their acquisition of 19.1 million shares of our common stock. In July 1998, the Company made a strategic decision to focus exclusively on e-messaging and related services, leveraging the expertise of our key technical personnel and our existing proprietary technology from the Internet payment system, which was phased out. In December 1998, the Company changed its name from First Virtual Holdings Incorporated to MessageMedia, Inc. in connection with our acquisitions of two e-messaging companies, Email Publishing, Inc. ("EPub") and Distributed Bits, L.L.C. ("DBits"). As a result of the acquisitions, EPub and DBits became our wholly-owned subsidiaries. These acquisitions enabled us to expand our suite of e-messaging services. In August 1999, the Company acquired two additional e-messaging companies, Revnet Systems, Inc. ("Revnet") and Decisive Technology Corporation ("Decisive") to further broaden our comprehensive suite of e-messaging solutions and our customer base. All of these acquisitions were accounted for as purchase transactions. A summary of these acquisitions follows: - Email Publishing, Inc. EPub, based in Boulder, Colorado, was a leading provider of outsourced email message delivery services to businesses and organizations. On December 9, 1998, we acquired all of the common stock of EPub in exchange for 5,582,676 shares of our common stock and the assumption by us of options and warrants to acquire up to approximately 417,324 additional shares of our common stock. - Distributed Bits, L.L.C. DBits, based in Chicago, Illinois, was a development stage company developing customer email management systems and solutions. On December 11, 1998, we acquired all equity interests in DBits in exchange for 1,305,320 shares of our common stock and warrants to purchase an additional 500,000 shares of our common stock. - Revnet Systems, Inc. Revnet, based in Huntsville, Alabama, was a leading developer and supplier of software solutions providing businesses and organizations with "in-house" email message delivery capability. Revnet also provided outsourced email message delivery services. On August 9, 1999, we acquired all of the common stock of Revnet in exchange for 3,262,120 shares of our common stock and the assumption by us of options to purchase up to approximately 681,675 additional shares of our common stock. - Decisive Technology Corporation. Decisive, based in Mountain View, California, was a leading provider of online customer intelligence solutions such as e-surveys. On August 16, 1999, we acquired all of the common stock of Decisive in exchange for 2,054,498 shares of our common stock and the assumption by us of options and warrants to acquire up to approximately 466,818 additional shares of our common stock. Sources of Revenue and Revenue Recognition - E-MESSAGING SOLUTIONS The Company currently derives revenue from outsourced e-messaging services and software products and related support services. The Company's outsourced e-messaging services include information distribution, email marketing, e-customer care, e-commerce messaging and e-survey. The Company's software products provide e-messaging and e-survey capabilities for clients desiring an in-house solution. The Company sells software products on-line and through our direct sales force and distributor network. - Outsourced e-messaging services. Revenue from information distribution, email marketing, e-customer care and e-commerce messaging is recognized as earned in accordance with individual customer contracts which typically provide for monthly minimums and varying revenue on a per message basis, depending upon monthly message volumes and mailing enhancements. The Company recognizes revenue from e-survey service agreements typically on a percentage-of-completion basis and bills customers as services are provided. Accordingly, revenue recognized in advance of billing milestones is 24 26 recorded as unbilled accounts receivable, and collections resulting from billing milestones achieved in advance of recognizing revenue are recorded as deferred revenue on the balance sheet. - Software products and support services. We recognize revenue at the time of shipment of the related software products. Typically, no significant post shipment obligations exist after the software sale. Substantially all of our customers that purchase our software products also enter into annual support and maintenance contracts. Revenue attributable to annual support and maintenance contracts is recognized ratably over the term of the respective agreement. - INTERNET PAYMENT SYSTEM In connection with our strategic decision to focus exclusively on e-messaging solutions, in the third quarter of 1998 we phased out our Internet payment system and related services. Revenue related to the Internet payment system, including consumer and merchant registrations, transaction, marketing and merchandising revenue, consulting fees and interactive advertising development, are separately reported as "Internet payment system" revenue. We currently do not generate any Internet payment system revenue. Revenue from registration fees and the related direct costs of processing such registrations was recognized over a 12 month period. Transaction and marketing revenue was recognized when earned. MessageMedia has incurred net operating losses in each quarter since inception. As of December 31, 1999, MessageMedia had an accumulated deficit of approximately $90.0 million. To date, the Company has not generated significant revenues. There can be no assurance that the Company's future revenues will increase and the Company's ability to generate significant future revenues is subject to substantial uncertainty. In addition, as the Company introduces the new functionality of its messaging platform and explores opportunities to merge with or acquire complementary businesses and technologies, the Company expects to continue to incur significant operating losses for the foreseeable future. RESULTS OF OPERATIONS Revenues The Company currently derives its revenue from outsourced e-messaging services and software products and related support services. The Company's outsourced e-messaging services include information distribution, e-mail marketing, e-customer care, e-commerce messaging and e-survey. The Company's software products provide e-messaging and e-survey capabilities for clients desiring their own "in-house" solution. Prior to July 1998, the Company derived its revenue from our First Virtual Internet Payment System ("FVIPS") and related services. In the third quarter of 1998, we phased out the operations of the FVIPS and launched our e-messaging services. Revenue for the periods presented was earned as detailed in the table below:
YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 ----------- ---------- ---------- Messaging and related services.................. $ 9,001,161 $ 424,564 $ -- Software licenses............................... 1,020,383 -- -- First Virtual Internet Payment System........... -- 863,226 1,450,598 ----------- ---------- ---------- Total revenues........................ $10,021,544 $1,287,790 $1,450,598 =========== ========== ==========
For the year ended December 31, 1999, revenues increased to approximately $10 million as compared to approximately $1.3 million for the year ended December 31, 1998. This increase is primarily attributable to the change in our business strategy from an internet payment system services to e-messaging services and software licenses. In July 1998, we began our e-messaging services, which is now our primary business, and phased out our FVIPS operations. The increase in revenue is also due to increases in the number of clients using our services, increased e-messaging volume, and an incremental increase in revenue as a result of the EPub, Revnet, and Decisive acquisitions. For the year ended December 31, 1999, revenue from Software licenses increased to $1 million due to the acquisition of Revnet and Decisive which both had software products. 25 27 For the year ended December 31, 1998, revenues decreased to approximately $1.3 million as compared to $1.5 million for the year ended December 31, 1997. The Company introduced its new messaging services in July 1998 and discontinued its FVIPS operations in the third quarter of 1998. Cost of Revenues The cost of e-messaging solutions revenues consists of salaries, benefits, consulting fees and operational costs related to providing our outsourced e-messaging services and software packaging and distribution costs. The cost of revenues from FVIPS consists of fees paid to third parties for processing transactions, costs of setting up new accounts and communication expenses related to providing services from the FVIPS. We have incurred cost of revenues from Messaging and related services, Software licenses, and FVIPS, as detailed in the table below:
YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 ---------- ------- -------- Messaging and related services....................... $4,589,358 $29,394 $ -- Software licenses.................................... -- -- -- First Virtual Internet Payment System................ -- 68,159 270,416 ---------- ------- -------- Total cost of revenues............................... $4,589,358 $97,553 $270,416 ========== ======= ========
For the year ended December 31, 1999, cost of revenues increased to approximately $4.6 million as compared to $97,553 for the year ended December 31, 1998. This increase is primarily attributable to increased headcount needed to service our growing e-messaging customer base and e-messaging volumes, and the incremental increase in cost of revenues as a result of acquiring Revnet and Decisive. For the year ended December 31, 1998, cost of revenues decreased to $97,553 from $270,416 for the year ended December 31, 1997. The Company discontinued its FVIPS operations in the third quarter of 1998, and ceased operations of both Interactive advertising development and merchandising in December 1997. Operating Expenses Operating expenses consist of marketing and sales, research, development and engineering, and general and administrative expenses. Overall operating expenses increased for the year ended December 31, 1999 as compared to the year ended December 31, 1998 due to increased headcount and related expenses. Additionally, the acquisitions of EPub and DBits were completed in December 1998 and the acquisitions of Revnet and Decisive were completed in August of 1999, therefore their operating results were not included in the comparable period in 1998. Operating expenses decreased for the year ended December 31, 1998 as compared to the year ended December 31, 1997 due to the Company's decision to phase out the FVIPS and related services. During the first quarter of 1999, the Company incurred merger integration and restructuring expenses in connection with the relocation of the Company's corporate headquarters from San Diego, California to Boulder, Colorado. During the second quarter of 1998, the Company incurred restructuring expenses in connection with ceasing operations of our FVIPS. The Company expects operating expenses to continue to be substantial as development and enhancement of technological capabilities associated with our e-messaging services continue, as we explore opportunities to merge with or acquire complementary businesses or technologies, and as we add staff to service our growing customer base. We also anticipate that expenses necessary for the introduction of new services and promotion of our products will be substantial. Marketing and sales expenses. Marketing and sales expenses, which include salaries and wages, consulting fees, advertising, trade show expenses, travel and other marketing expenses, increased to $9.7 million for the year ended December 31, 1999, as compared to $1.9 million for the year ended December 31, 1998. This increase is primarily due to increased headcount in sales, client services and marketing staff, as a result of increased sales efforts related to our e-messaging services and an incremental increase in headcount from acquisitions. Additionally, advertising and promotional spending increased as a 26 28 result of promoting our new e-messaging services and products. Marketing and Sales expense for the year ended December 31, 1999 includes a one-time charge of approximately $855,000 in compensation expense from acceleration of stock options. This compensation expense relates to an employment agreement with a former officer which included an option vesting acceleration clause that was triggered upon the company obtaining certain sales contracts and/or certain sales levels. For the year ended December 31, 1998, marketing and sales expenses decreased to $1.9 million as compared to $5.4 million for the year ended December 31,1997. This decrease is primarily due to the reduction in headcount in marketing staff, a decrease in consulting fees due to reductions in marketing research, a decrease in promotional expenses from elimination of sales efforts related to the payment system, a decrease in recruiting and relocation expenses as hiring new employees slowed, a decrease in travel related expenses and a general decrease in spending from lower headcount. Research, development and engineering expenses. Research, development and engineering expenses, which include salaries and wages and consulting fees to support the development, enhancement and maintenance of the Company's products and services, increased to $4.9 million for the year ended December 31, 1999, as compared to $4.8 million for the year ended December 31, 1998. This increase resulted primarily from an increase in headcount and related compensation expense. For the year ended December 31, 1998, research, development and engineering expenses decreased to $4.8 million as compared to $6.7 million for the year ended December 31, 1997. This decrease is primarily due to the reduction in headcount in the research, development and engineering staff, resulting in a decrease in salaries, wages and payroll taxes, a decrease in consulting fees due to the elimination of development consultants associated with the payment system, a decrease in travel related expenses, a decrease in communications expenses related to the shut down of the payment system and a general decrease in spending from lower department headcount and reduced overhead associated with both a general reduction in staff and with the closure of the Ann Arbor office in December 1997. General and administrative expenses. General and administrative expenses consist primarily of salaries and wages, professional and consulting fees and other expenses associated with the general management and administration of the Company. General and administrative expenses increased to $7.7 million for the year ended December 31, 1999, as compared to $3.8 million for the year ended December 31, 1998. This increase is primarily due to an increase in headcount in general and administrative staff and a related increase in compensation expense as a result of the Company's growth. Additionally, there was an incremental increase in headcount and related expenses due to the merger and integration of Revnet's and Decisive's operations. For the year ended December 31, 1998, general and administrative expenses decreased to $3.8 million as compared to $4.4 million for the year ended December 31, 1997. This decrease is primarily due to the reduction in headcount in general and administrative staff resulting in a decrease in salaries, wages and payroll taxes, a decrease in promotional expenses from less public relations and investor relations activities, offset in part, by an increase in legal expenses for patent litigation and Nasdaq listing issues, an increase in consulting expenses for merger and acquisition related research and analysis and a general increase in spending to support the Company's operations. Restructuring expenses. In the first quarter of 1999, the Company recorded a charge of $1,025,000 as a result of the Company's decision to relocate the Corporate headquarters from San Diego, California to a new facility in Boulder Colorado. This decision was made to create efficiencies in the Company's messaging services operations, reduce overhead by centralizing into one facility and eliminate duplication of efforts from similar positions in the separate offices. The merger integration and restructuring activity of MessageMedia, DBits, and EPub included a company wide staff reduction which resulted in approximately $632,000 of employee severance pay and other related expenses and, approximately $393,000 in moving expenses and costs related to closing the San Diego facility. In the second quarter of 1998, the Company recorded a restructuring charge of approximately $812,000 as a result of the Company's decision to focus its efforts on its messaging platform, initiate efforts to cease operations of our FVIPS and better align its cost structure with expected revenue projections. The 27 29 restructuring activity included the elimination of job responsibilities company wide, resulting in approximately $545,000 of employee severance pay and other related expenses, and approximately $267,000 related to relocating our corporate office and termination fees for cancellation of certain contracts related to FVIPS. Write-off of in-process technology. In connection with the EPub acquisition, the Company wrote-off $1.3 million of in-process technology. This amount was expensed as a non-recurring charge on December 9, 1998, the acquisition date. This write-off was necessary because the acquired technology had not yet reached technological feasibility and had no future alternative uses. MessageMedia is using the acquired in-process technology to build future functionality into its e-messaging platform and enhance its suite of services. The nature of the efforts required to develop the purchased in-process technology into a commercially viable product principally relate to the completion of all planning, designing, prototyping and testing activities that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. The value of the purchased in-process technology was determined with the assistance of an independent valuation, by estimating the projected net cash flows related to such products, including costs to complete the development of the technology and the future revenues to be earned upon commercialization of the products. These cash flows were discounted back to their net present value. The resulting projected net cash flows from such projects were based on management's estimates of revenues and operating profits related to such projects. If these projects to develop commercial products based on the acquired in-process technology are not successfully completed, the revenues and financial conditions of MessageMedia may be adversely affected in future periods. Fluctuations in operating results. The Company expects to experience significant fluctuations in its future quarterly operating results. These fluctuations will be due to several factors, many of which are beyond the control of the Company, including, among others, market response to the Company's messaging services; difficulties encountered in the development or deployment of products or services, including interactive messaging; difficulties encountered in acquiring and/or merging with other companies or technologies, including in particular any difficulties in integrating the technology and operations of Decisive and/or Revnet; market acceptance of Internet commerce in general and the Company's messaging services concept in particular; fluctuating market demand for the Company's products and services; the degree of acceptance of the Internet as an advertising and merchandising medium; the timing and effectiveness of collaborative marketing efforts initiated by the Company's strategic partners; the timing of the introduction of new products and services offered by the Company; the timing of the release of enhancements to the Company's products and services; product introductions and service offerings by the Company's competitors; the mix of the products and services provided by the Company; the timing and rate at which the Company increases its expenses to support projected growth; the cost of compliance with applicable government regulations; competitive conditions in the Company's marketplace; and general economic conditions. In addition, the fees charged by the Company for advertising, messaging, and consulting services, are subject to change as the Company introduces its messaging services and assesses its marketing strategy and competitive position. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had $37.9 million in cash and cash equivalents. On March 26, 1999, the Company issued 2,352,942 shares of its common stock in a private placement for net proceeds of approximately $10 million. On October 25, 1999, the Company closed a private placement in exchange for 4,095,124 of newly issued shares of the Company's common stock, for net cash proceeds of approximately $40.1 million. MessageMedia believes that existing cash resources will be sufficient to support MessageMedia's currently anticipated working capital and capital expenditure requirements through the end of 2000. MessageMedia will need to raise additional funds through the public or private sale of its equity or debt securities or from other sources during 2001. The timing and amount of MessageMedia's capital requirements will depend on a number of factors, including demand for MessageMedia's products and services, the need to develop new or enhanced products and services, competitive pressures and the availability of complementary businesses or technologies that MessageMedia may wish to acquire. If additional funds are 28 30 raised through the issuance of equity securities, the percentage ownership of MessageMedia's stockholders will be diluted and such equities may have rights, preferences or privileges senior to those of the holders of MessageMedia's common stock. There can be no assurance that additional financing will be available when needed or that, if available, will include terms favorable to MessageMedia or its stockholders. If adequate funds are not available on acceptable terms, MessageMedia may be unable to develop or enhance its products or services, take advantage of opportunities or respond to competition and the Nasdaq National Market may choose to discontinue the listing of MessageMedia's common stock. Management continues to pursue opportunities to increase its revenues and believes that the market for e-messaging based services is expanding dramatically. Management believes that these efforts and its continuing efforts to raise additional capital through equity placements with existing stockholders, their affiliates or strategic partners should allow MessageMedia to continue operations for the next twelve to eighteen months. If near term revenues do not increase or if MessageMedia is unable to raise additional equity, management would be required to further reduce its expenditures on research and development and general and administrative activities. These reductions could significantly hamper MessageMedia's ability to develop its messaging services. Net cash flows used in operating activities were approximately $19.0 million and $11.9 million for the years ended December 31, 1999 and 1998, respectively. Net operating cash flows were primarily attributable to net losses offset by non-cash charges for depreciation, amortization and stock-based compensation, as well as increases in accounts receivable. Net cash flows used in investing activities were approximately $1.7 million and $421,741 for the years ended December 31, 1999 and 1998 respectively. The net cash flows used in investing activities resulted from capital expenditures for fixed assets of approximately $3.8 million in 1999 offset by approximately $2.1 million in net cash acquired with the Revnet and Decisive acquisitions. Capital expenditures in 1998 were $436,474 in 1998 offset by $14,733 of proceeds from sales of fixed assets in 1998 Net cash flows from financing activities were approximately $54.0 million and $10.7 million for the years ended December 31, 1999 and 1998, respectively. The net cash flow from financing activities in 1999 primarily resulted from approximately $50.2 million in net proceeds from issuance of common stock as a result of two separate private placements of equity in March 1999 and October 1999 and common stock issued under our employee stock purchase plan. Additionally in 1999 there was approximately $3.3 million in proceeds from exercise of stock options and $1.0 million from issuance of warrants. The net cash flow from financing activities in 1998 primarily resulted from approximately $8.9 million in net proceeds from issuance of common stock, $1.4 million in proceeds from borrowings from stockholders and bank, and $271,308 in proceeds from exercise of stock options. The Company has no material financial commitments other than obligations under operating leases. In order to accommodate the growth in business, the Company expects to continue to make expenditures in expansion of the Company's facilities, infrastructure, additional sales and marketing employees, and network and bandwidth capacity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is incorporated by reference herein from Part IV, Item 14(a) (1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 29 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT IDENTIFICATION OF DIRECTORS The information required by this item concerning the directors of the Company is incorporated by reference from the section entitled "Election of Directors" in the Company's Proxy Statement anticipated to be filed within 120 days of December 31, 1999 with the Securities and Exchange Commission with respect to the Company's 2000 Annual Meeting of Stockholders to be held on April 27, 2000 (the "Proxy Statement"). IDENTIFICATION OF EXECUTIVE OFFICERS The information required by this item is incorporated by reference from the information set forth in the section entitled "Executive Officers of the Company" in Part I, Item 1 of this Report on Form 10-K. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 The information required by this item concerning the directors of the Company is incorporated by reference from the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The section labeled "Executive Compensation" appearing in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section labeled "Security Ownership of Certain Beneficial Owners and Management" appearing in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section labeled "Certain Relationships and Related Transactions" appearing in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Index to the consolidated financial statements
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 35 Consolidated Balance Sheets as of December 31, 1999 and 1998...................................................... 36 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......................... 37 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the years ended December 31, 1999, 1998 and 1997.................................................. 38 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 39 Notes to Financial Statements............................... 40 (a)(2) Consolidated Index to the Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts............ 54
30 32 (a)(3) Index to Exhibits
NUMBER EXHIBIT TITLE ------ ------------- 2.1.1***** -- Agreement and Plan of Merger and Reorganization dated July 22, 1999 among the Registrant, Revnet Systems Inc. and MM1 Acquisition Corporation. 2.1.2***** -- Agreement and Plan of Merger and Reorganization dated July 22, 1999 among the Registrant, Decisive Technology Corporation and MM2 Acquisition Corporation. 3.1* -- Amended and Restated Certificate of Incorporation of the Company. 3.2* -- Bylaws of the Company. 10.1* -- Form of Indemnification Agreement entered into between Company and its officers and directors. 10.2* -- The Company's 1994 Incentive and Non-Statutory Stock Option Plan. 10.3* -- The Company's 1995 Stock Plan. 10.4* -- The Company's Employee Stock Purchase Plan. 10.7* -- Marshall T. Rose Employment Agreement. 10.9* -- Series A Preferred Stock Purchase Agreement dated as of May 22, 1995 between the Company and the purchasers named therein. 10.10* -- Series B Preferred Stock Purchase Agreement dated as of December 22, 1995 between the Company and First USA Merchant Services, Inc.. 10.11* -- Securities Purchase Agreement between the Company and General Electric Capital Corporation, dated July 3, 1996. 10.12* -- Warrant to Purchase 47,619 shares of Common Stock, issued to General Electric Capital Corporation as of July 3, 1996. 10.13* -- Series D Preferred Stock Purchase Agreement between the Company and First Data Corporation, dated August 26, 1996. 10.14* -- Amended and Restated Shareholder Rights Agreement dated August 26, 1996 between the Company and First Data Corporation. 10.16* -- Warrant to purchase 475,734 shares of Series B Preferred Stock, issued to First USA Paymentech. 10.25* -- Master Lease Agreement dated as of October 24, 1996 between the Company and ComDisco, Inc. 10.32***** -- David Ehrenthal employment agreement 10.33***** -- Purchase Agreement dated April 30, 1998 among the Company, SOFTBANK Holdings and SOFTBANK Technology Ventures IV, LP 10.34***** -- Loan Agreement dated April 30, 1998 among the Company and SOFTBANK Holdings, Inc. 10.35***** -- Form of Convertible Promissory Note issued to SOFTBANK Holdings, Inc. 10.36***** -- Bert C. Klein employment agreement 10.37***** -- Philip Bane Severance Agreement 10.38***** -- Nathaniel Borenstein Severance Agreement 10.39***** -- John Stachowiak Severance Agreement 10.40***** -- Carolyn Turbyfill Severance Agreement 10.41** -- Dennis J. Cagan Employment Agreement 10.42** -- A. Laurence Jones Employment Agreement 10.43*** -- Robin Green Employment Agreement 10.44*** -- Mary Beth Loesch Employment Agreement
31 33
NUMBER EXHIBIT TITLE ------ ------------- 10.45*** -- Elizabeth Wallace Employment Agreement 10.46*** -- Sue Morse Employment Agreement 10.47*** -- Bert Klein Employment Agreement 10.48**** -- Stuart Obermann Employment Agreement 10.49**** -- Randy Bachmeyer Employment Agreement 10.50**** -- Kelly Wood Employment Agreement 10.51 -- Martin T. Johnson Employment Agreement 10.52 -- Denis Cagan Separation Agreement 21.1 -- List of Subsidiaries 23.1 -- Consent of Ernst & Young, LLP, Independent Auditors 27.1 -- Financial Data Schedule.
- --------------- * Previously filed as exhibits to the Company's Registration Statement on Form S-1 (SEC File #333-14573). ** Previously filed as exhibit to the Company's Form 10-Q, March 31, 1999 (SEC File #000-21751). *** Previously filed as exhibit to the Company's Form 10-Q, June 30, 1999 (SEC File #000-21751). **** Previously filed as exhibit to the Company's Form 10-Q, September 30, 1999 (SEC File #000-21751). ***** Previously filed. (b) Reports on Form 8-K None (c) Exhibits See (a)(3) above. (d) Financial Statement Schedules See (a)(2) above 32 34 SIGNATURE Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MESSAGEMEDIA, INC. By: /s/ A. LAURENCE JONES ---------------------------------- A. Laurence Jones President and Chief Executive Officer Dated: March 28, 2000 POWER OF ATTORNEY By signing this Form 10-K, I hereby appoint each of A. Laurence Jones and Martin T. Johnson as my attorneys-in-fact to sign all amendments to this Form 10-K on my behalf, and file this Form 10-K (including all exhibits and other documents related to the Form 10-K) with the Securities and Exchange Commission. I authorize each of my attorneys-in-fact to (1) appoint a substitute attorney-in-fact for himself and (2) perform any actions that he believes are necessary or appropriate to carry out the intention and purpose of this Power of Attorney. I ratify and confirm all lawful actions taken directly or indirectly by my attorneys-in-fact and by any properly appointed substitute attorneys-in-fact. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ A. LAURENCE JONES President and Chief Executive March 28, 2000 - ----------------------------------------------------- Officer and Director (Principal A. Laurence Jones Executive Officer) /s/ MARTIN T. JOHNSON Senior Vice President, Chief March 28, 2000 - ----------------------------------------------------- Financial Officer, and Secretary Martin T. Johnson (Principal Financial and Accounting Officer) /s/ BRADLEY A. FELD Co-Chairman of the Board March 28, 2000 - ----------------------------------------------------- Bradley A. Feld /s/ GERALD A. POCH Co-Chairman of the Board March 28, 2000 - ----------------------------------------------------- Gerald A. Poch /s/ DENNIS J. CAGAN Director March 28, 2000 - ----------------------------------------------------- Dennis J. Cagan /s/ R.TERRY DURYEA Director March 28, 2000 - ----------------------------------------------------- R. Terry Duryea
33 35
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD D. FISHER Director March 28, 2000 - ----------------------------------------------------- Ronald D. Fisher /s/ PAMELA H. PATSLEY Director March 28, 2000 - ----------------------------------------------------- Pamela H. Patsley /s/ GARY E. RIESCHEL Director March 28, 2000 - ----------------------------------------------------- Gary E. Rieschel
34 36 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors MessageMedia, Inc. We have audited the accompanying consolidated balance sheets of MessageMedia, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 1999. Our audits also include the financial statement schedules listed in the Index at Item 14a. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MessageMedia, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Denver, Colorado February 4, 2000 35 37 MESSAGEMEDIA, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 37,920,277 $ 4,659,375 Accounts receivable, net.................................. 4,277,677 680,927 Prepaid expenses and other................................ 749,537 429,963 ------------ ------------ Total current assets.............................. 42,947,491 5,770,265 Furniture, equipment and software, net...................... 4,727,839 1,475,720 Patent and other costs, net................................. -- 50,835 Intangible assets, net...................................... 75,162,221 23,894,715 Deposits and other.......................................... 353,694 29,446 ------------ ------------ Total assets...................................... $123,191,245 $ 31,220,981 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,481,785 $ 1,383,197 Accrued compensation and related liabilities.............. 1,912,345 148,419 Accrued interest.......................................... -- 15,226 Deferred revenue.......................................... 324,376 36,000 Amount due to stockholders, current portion............... -- 395,000 Note payable and capital lease obligations, current portion................................................ 25,422 108,990 Other accrued liabilities................................. 1,021,386 583,770 ------------ ------------ Total current liabilities......................... 5,765,314 2,670,602 Note payable and capital lease obligations.................. 35,808 53,786 Deferred rent............................................... -- 13,083 ------------ ------------ Total long term liabilities....................... 35,808 66,869 Stockholders' equity: Preferred stock, 5,000,000 shares authorized, none outstanding on December 31, 1999 and 1998, respectively... -- -- Common stock, $0.001 par value; 100,000,000 shares authorized, 54,920,498 and 40,121,048 shares issued and outstanding on December 31, 1999 and 1998, respectively... 54,920 40,121 Additional paid-in capital................................ 208,343,236 70,963,655 Warrants.................................................. 321,072 1,865,487 Deferred compensation..................................... (1,331,811) (657,720) Accumulated deficit....................................... (89,997,294) (43,728,033) ------------ ------------ Total stockholders' equity........................... 117,390,123 28,483,510 ------------ ------------ Total liabilities and stockholders' equity........ $123,191,245 $ 31,220,981 ============ ============
See accompanying notes. 36 38 MESSAGEMEDIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Revenues: Services......................................... $ 9,001,161 $ 1,287,790 $ 1,450,598 Software Licenses................................ 1,020,383 -- -- ------------ ------------ ------------ Total Revenues..................................... 10,021,544 1,287,790 1,450,598 Cost of revenues................................... 4,589,358 97,553 270,416 ------------ ------------ ------------ Gross profit....................................... 5,432,186 1,190,237 1,180,182 Operating expenses: Marketing and sales.............................. 9,704,452 1,934,486 5,424,110 Research, development and engineering............ 4,935,931 4,828,277 6,687,177 General and administrative....................... 7,677,527 3,810,073 4,377,688 Restructuring expenses........................... 1,025,000 812,166 -- Write-off of in-process technology............... -- 1,300,000 -- Depreciation and amortization.................... 28,923,515 2,470,917 1,097,716 ------------ ------------ ------------ Total operating expenses........................... 52,266,425 15,155,919 17,586,691 ------------ ------------ ------------ Loss from operations............................... (46,834,239) (13,965,682) (16,406,509) Interest income.................................... 654,041 217,551 554,587 Interest expense................................... (89,063) (83,892) (95,360) ------------ ------------ ------------ Net loss........................................... (46,269,261) (13,832,023) (15,947,282) Dividends imputed on preferred stock............... -- (153,126) (1,250,000) ------------ ------------ ------------ Net loss applicable to common shares............... $(46,269,261) $(13,985,149) $(17,197,282) ============ ============ ============ Net loss per share, basic and diluted.............. $ (1.00) $ (0.63) $ (1.94) Shares used in per share computation, basic and diluted.......................................... 46,367,195 22,304,902 8,842,367
See accompanying notes. 37 39 MESSAGEMEDIA, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED --------------- -------------------- PAID-IN COMPENSA- SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS TION ------ ------ ---------- ------- ------------ ----------- ----------- Balance at December 31, 1996....... -- $-- 8,794,812 $8,795 $ 25,758,015 $ 3,017,115 $ (44,305) Deferred compensation and related amortization..................... -- -- -- -- 128,888 -- (110,930) Acceleration of stock options...... -- -- -- -- 52,137 -- -- Extension of warrants.............. -- -- -- -- 50,000 -- -- Issuance of Series A preferred stock, net of issuance cost...... 250 1 -- -- 1,137,999 -- -- Employee stock purchase plan....... -- -- 22,160 22 74,958 -- -- Issuance of common stock for services rendered................ -- -- 1,193 1 8,052 -- -- Issuance of common stock for exercise of stock option......... -- -- 85,690 86 27,679 -- -- Dividend imputed on Series A convertible preferred stock, classified outside if stockholders' equity (net capital deficiency)...................... -- -- -- -- (937,500) -- -- Net loss........................... -- -- -- -- -- -- -- ---- --- ---------- ------- ------------ ----------- ----------- Balance at December 31, 1997....... 250 1 8,903,855 8,904 26,300,228 3,017,115 (155,235) Issuance of stock dividends to Series A preferred stockholders..................... -- -- 108,125 108 153,020 -- -- Issuance of common stock for the exercise of warrants............. -- -- 947,495 947 1,604,426 (1,501,628) -- Issuance of common stock for exercise of stock options........ -- -- 659,637 660 270,648 -- -- Conversion of Series A preferred stock............................ (250) (1) 1,752,141 1,752 473,249 -- -- Issuance of common stock for services rendered................ -- -- 59,009 59 87,049 -- -- Charge associated with extending option terms..................... -- -- -- -- 405,718 -- -- Deferred compensation and related amortization..................... -- -- -- -- 165,779 -- 119,221 Common stock issued to SOFTBANK and affiliates....................... -- -- 20,784,883 20,785 15,338,039 -- -- Dividend imputed on Series A convertible preferred stock, cancelled upon buyout of Series A convertible preferred by SOFTBANK......................... -- -- -- -- 937,500 -- -- Employee stock purchase plan....... -- -- 17,907 18 43,949 -- -- Common stock issued for Email Publishing, Inc. acquisition..... -- -- 5,582,676 5,583 20,257,720 -- (583,101) Common stock and warrants issued for Distributed Bits, L.L.C. acquisition...................... -- -- 1,305,320 1,305 4,926,330 350,000 (38,605) Net loss........................... -- -- -- -- -- -- -- ---- --- ---------- ------- ------------ ----------- ----------- Balance at December 31, 1998....... -- -- 40,121,048 40,121 70,963,655 1,865,487 (657,720) Issuance of common stock for exercise of stock options........ -- -- 1,700,049 1,700 3,286,825 -- -- Issuance of common stock for the exercise of warrants............. -- -- 1,280,074 1,280 2,581,969 (1,544,415) -- Deferred compensation and related amortization..................... -- -- -- -- 29,565 -- (674,091) Acceleration of stock options...... -- -- -- -- 916,007 -- -- Common stock issued for Revnet acquisition...................... -- -- 3,262,120 3,262 41,031,639 -- -- Common stock issued for Decisive acquisition...................... -- -- 2,054,498 2,055 39,158,901 -- -- Common stock issued for Private Offerings........................ -- -- 6,448,066 6,448 49,956,618 -- -- Employee stock purchase plan....... -- -- 47,348 47 271,960 -- -- Issuance of common stock for forgiveness of stockholder debt............................. -- -- 7,295 7 146,097 -- -- Net loss........................... -- -- -- -- -- -- -- ---- --- ---------- ------- ------------ ----------- ----------- Balance at December 31, 1999....... -- $-- 54,920,498 $54,920 $208,343,236 $ 321,072 $(1,331,811) ==== === ========== ======= ============ =========== =========== TOTAL STOCKHOLDERS' EQUITY ACCUMULATED (NET CAPITAL DEFICIT DEFICIENCY) ------------ ------------- Balance at December 31, 1996....... $(13,795,600) $ 14,944,020 Deferred compensation and related amortization..................... -- 17,958 Acceleration of stock options...... -- 52,137 Extension of warrants.............. -- 50,000 Issuance of Series A preferred stock, net of issuance cost...... -- 1,138,000 Employee stock purchase plan....... -- 74,980 Issuance of common stock for services rendered................ -- 8,053 Issuance of common stock for exercise of stock option......... -- 27,765 Dividend imputed on Series A convertible preferred stock, classified outside if stockholders' equity (net capital deficiency)...................... -- (937,500) Net loss........................... (15,947,282) (15,947,282) ------------ ------------ Balance at December 31, 1997....... (29,742,882) (571,869) Issuance of stock dividends to Series A preferred stockholders..................... (153,128) -- Issuance of common stock for the exercise of warrants............. -- 103,745 Issuance of common stock for exercise of stock options........ -- 271,308 Conversion of Series A preferred stock............................ -- 475,000 Issuance of common stock for services rendered................ -- 87,108 Charge associated with extending option terms..................... -- 405,718 Deferred compensation and related amortization..................... -- 285,000 Common stock issued to SOFTBANK and affiliates....................... -- 15,358,824 Dividend imputed on Series A convertible preferred stock, cancelled upon buyout of Series A convertible preferred by SOFTBANK......................... -- 937,500 Employee stock purchase plan....... -- 43,967 Common stock issued for Email Publishing, Inc. acquisition..... -- 19,680,202 Common stock and warrants issued for Distributed Bits, L.L.C. acquisition...................... -- 5,239,030 Net loss........................... (13,832,023) (13,832,023) ------------ ------------ Balance at December 31, 1998....... (43,728,033) 28,483,510 Issuance of common stock for exercise of stock options........ -- 3,288,525 Issuance of common stock for the exercise of warrants............. -- 1,038,834 Deferred compensation and related amortization..................... -- (644,526) Acceleration of stock options...... -- 916,007 Common stock issued for Revnet acquisition...................... -- 41,034,901 Common stock issued for Decisive acquisition...................... -- 39,160,956 Common stock issued for Private Offerings........................ -- 49,963,066 Employee stock purchase plan....... -- 272,007 Issuance of common stock for forgiveness of stockholder debt............................. -- 146,104 Net loss........................... (46,269,261) (46,269,261) ------------ ------------ Balance at December 31, 1999....... $(89,997,294) $117,390,123 ============ ============
See accompanying notes. 38 40 MESSAGEMEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ OPERATING ACTIVITIES Net loss.................................................... $(46,269,261) $(13,832,023) $(15,947,282) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 28,923,515 2,185,917 1,079,758 Amortization of Deferred Compensation..................... 430,864 285,000 17,958 In-process technology charge.............................. -- 1,300,000 -- Loss on disposal of assets................................ -- 33,943 11,249 Common stock issued for services.......................... -- 87,108 8,053 Compensation expense for stock options.................... 916,007 405,718 52,137 Changes in operating assets and liabilities: Accounts receivable..................................... (3,144,845) (132,555) (119,707) Prepaid expenses and other.............................. (316,549) 23,145 (334,775) Deposits and other...................................... (267,144) 115,983 (71,098) Accounts payable........................................ 385,063 (371,721) (185,974) Accrued compensation and related liabilities............ 1,476,634 (262,261) (1,998) Deferred revenue........................................ (51,224) (537,790) 473,107 Accrued interest........................................ (15,226) (274,677) 93,564 Deferred Rent........................................... (13,083) -- -- Amount due to stockholders.............................. -- (97,500) (220,000) Other accrued liabilities............................... (1,062,726) (833,077) 25,223 ------------ ------------ ------------ Net cash flows used in operating Activities................. (19,007,975) (11,904,790) (15,119,785) INVESTING ACTIVITIES Additions to furniture, equipment and software.............. (3,775,019) (436,474) (929,641) Proceeds from sales of fixed assets......................... -- 14,733 11,769 Cash and cash equivalents acquired with acquisitions........ 2,053,541 -- -- Maturity of short term investment........................... -- -- 200,000 ------------ ------------ ------------ Net cash flows used in investing activities................. (1,721,478) (421,741) (717,872) FINANCING ACTIVITIES Proceeds from issuance of redeemable preferred stock, net of issuance costs............................................ -- -- 4,888,000 Proceeds from issuance of common stock, net of issuance costs..................................................... 50,235,073 8,908,444 74,980 Proceeds from issuance/extension of warrants................ 1,038,834 103,745 50,000 Proceeds from borrowings from stockholders and bank......... -- 1,411,578 -- Proceeds from exercise of stock options..................... 3,288,525 271,308 27,765 Repayment of amount due to stockholders..................... (395,000) -- -- Repayment of loan from Bank................................. (91,509) -- -- Repayment of capital lease obligations...................... (85,568) (40,228) -- ------------ ------------ ------------ Net cash flows provided by financing activities............. 53,990,355 10,654,847 5,040,745 ------------ ------------ ------------ Net increase/(decrease) in cash and cash equivalents........ 33,260,902 (1,671,684) (10,796,912) Cash and cash equivalents at the beginning of year.......... 4,659,375 6,331,059 17,127,971 ------------ ------------ ------------ Cash and cash equivalents at the end of year................ $ 37,920,277 $ 4,659,375 $ 6,331,059 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid............................................. $ 89,063 $ 83,892 $ 95,360 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock for forgiveness of stockholder debt...................................................... $ 146,104 $ 1,533,764 $ -- ============ ============ ============ Conversion of Series A redeemable convertible preferred stock..................................................... $ -- $ 3,233,730 $ -- ============ ============ ============ Issuance of common stock for forgiveness of SOFTBANK loan... $ -- $ 1,411,578 $ -- ============ ============ ============
See accompanying notes. 39 41 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and business activity MessageMedia Inc. (the "Company" or "MessageMedia") is a leading provider of permission-based, comprehensive e-messaging solutions. E-messaging is the term used to describe the Company's suite of services that utilize the medium of e-mail to develop and foster permission-based relationships with customers. The Company's suite of services and products, including Internet-based marketing, customer care, survey and information distribution solutions, enable businesses to use e-messaging as a strategic tool to increase sales, improve customer communication and develop long-term customer loyalty. The Company's e-messaging solutions, available either on an outsourced-subscription basis or as packaged software licensed on a hosted or client in-house basis, allow businesses to establish and enhance two-way customer dialogue across the extended enterprise, from marketing to sales to customer service. On December 13, 1996, the Company completed an initial public offering (the "Offering") of 2,000,000 shares of its common stock under the name First Virtual Holdings Incorporated, with an offering price of $9.00 per share, resulting in gross proceeds of $18.0 million and net proceeds (less the underwriters' discount and offering expenses) of approximately $15.0 million. Upon completion of the offering, all of the then outstanding preferred stocks were converted to common stock. On June 23, 1998, at the Company's Annual Meeting of Stockholders, the Company's stockholders approved an investment in the Company by SOFTBANK Holdings Inc., SOFTBANK Technology Ventures IV, L.P. (together "SOFTBANK") and E*Trade Group Inc. SOFTBANK and affiliates purchased approximately 19.2 million shares of the Company's common stock and became a majority stockholder of the Company. On September 10, 1998, SOFTBANK purchased approximately 1.6 million additional shares of the Company's common stock. On December 9, 1998, the Company changed its name to MessageMedia and its Nasdaq National Market symbol to "MAIL" and amended the Company's Certificate of Incorporation increasing the number of authorized shares of the Company's common stock from 40,000,000 to 100,000,000 shares. On March 30, 1999, the Company changed its Nasdaq symbol to "MESG". On December 9, 1998, the Company acquired all of the common stock and all outstanding rights of the common stock of Email Publishing, Inc. ("EPub") in exchange for 5,582,676 shares of MessageMedia common stock and the assumption by MessageMedia of options and warrants to acquire up to approximately 417,324 additional shares of MessageMedia common stock at a weighted average exercise price of $.04 per share. On December 11, 1998, the Company acquired all equity interests, including options, warrants or other purchase rights, if any, in Distributed Bits, L.L.C. ("DBits"), in exchange for 1,305,320 shares of MessageMedia common stock and warrants to purchase an additional 250,000 shares of MessageMedia common stock at an exercise price of $6.00 per share and an additional 250,000 shares of MessageMedia common stock at $8.00 per share. On March 26, 1999, the Company issued 2,352,942 shares of the Company's common stock in a private placement for net proceeds to the Company of $9,902,082. On August 9, 1999, the Company acquired all of the common stock and all outstanding rights to acquire shares of the common stock of Revnet Systems, Inc. in exchange for 3,262,120 shares of MessageMedia common stock and the assumption of options to acquire up to approximately 681,675 additional shares of MessageMedia common stock, at a weighted average exercise price of $1.36 per share. (See Note 3 for details of this acquisition.) 40 42 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On August 16, 1999, the Company acquired all of the common stock and all outstanding rights to acquire shares of the common stock of Decisive Technology Corporation in exchange for 2,054,498 shares of MessageMedia common stock and the assumption of options to acquire up to approximately 466,818 additional shares of MessageMedia common stock, at a weighted average exercise price of $2.69. (See Note 3 for details of this acquisition.) On October 21, 22, and 25, 1999, in three separate closings, the Company completed a private placement of 4,095,124 shares of the Company's common stock for net proceeds to the Company of $40,060,984. Principles of Consolidation The consolidated financial statements include the accounts of MessageMedia and its majority owned subsidiaries in which the Company has a controlling interest. All significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Reclassifications of Prior Year Amounts Certain 1998 and 1997 balances have been reclassified to conform to the 1999 presentation. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of less than three months to be cash equivalents. The Company maintains its cash in bank deposit accounts and commercial paper, which at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not subject to any significant credit risk on cash. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The Company's financial instruments include current assets and liabilities. The carrying amount of the Company's financial instruments reported in the balance sheets approximates their fair value. Off Balance Sheet Risk and Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consists primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents in high quality U.S. financial institutions. The Company extends credit to various customers and establishes an allowance for doubtful accounts for specific customers that it determines to have a significant credit risk. Furniture, Equipment and Software Furniture, equipment and software are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method. Depreciation expense was $1,291,944, $1,116,232, $1,051,590 for the years ended December 31, 1999, 1998 and 1997 respectively. 41 43 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible Assets Intangible assets arose primarily from the acquisition of two entities in December 1998 and two entities in August of 1999. (See Note 3). The excess of cost over the fair value of the net assets acquired has been allocated to goodwill and developed technology. These intangible assets are being amortized over their useful lives of two years. Asset Impairment In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), the Company recognizes impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. To date, the Company has not recorded any impairment losses. Stock-Based Compensation The Company accounts for stock option grants to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations because the Company believes the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", requires the use of option valuation models that were not developed for use in valuing employee stock options. Deferred compensation is recorded only when the fair value of the stock on the date of the option grant exceeds the exercise price of the option. The deferred compensation is amortized over the vesting period of the option. Revenue Recognition The Company derives its revenue from outsourced e-messaging services and licenses of software products and related support services. The company's outsourced e-messaging services include information distribution, e-mail marketing, e-customer care, e-commerce messaging and e-survey. Our software products provide e-messaging and e-survey capabilities for clients desiring their own "in house" solution. Prior to July 1998, the Company derived its revenue from its First Virtual Internet Payment System ("FVIPS") and related consulting services. In the third quarter of 1998, the Company phased out the operations of the FVIPS and launched its e-messaging services. Messaging revenue is recognized as earned in accordance with individual customer contracts, which typically provide for monthly minimums and varying revenue on a per message basis, depending upon monthly message volumes and message complexity. Revenue from e-survey service agreements is typically recognized on a percentage completion basis. Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), was issued in October 1997 and was amended by Statement of Position 98-4 (SOP 98-4). The Company's revenue recognition policies and practices for software license fees are consistent with SOP 97-2 and SOP 98-4. Additionally, the American Institute of Certified Public Accountants (AICPA) issued SOP 98-9 and is effective for transactions entered into beginning January 1, 2000. The pronouncement is not expected to materially impact the Company's revenue recognition practices. Software products and support services revenue is recognized at the time of shipment of the related software products. Typically, no significant post shipment obligations exist after the software sale. A substantial number of our customers that purchase our software products also enter into annual support and maintenance contracts. Revenue attributable to annual support and maintenance contracts is recognized ratably over the term of the respective agreement. 42 44 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FVIPS revenue consists of consumer and merchant registrations, transaction revenue and marketing revenue. Consumer registration fees and merchant registration fees were recognized over a twelve month period. Also, the related direct costs of processing such registrations and renewals were deferred and amortized over a 12-month period. Transaction revenue and marketing revenue were recognized when earned. The operation of the Internet payment system was discontinued in the third quarter of 1998. Net Loss Per Share Basic and diluted earnings per share is calculated in accordance with FASB Statement No. 128, "Earnings Per Share." All earnings per share amounts for all periods, have been represented, and where appropriate, restated to conform to the SFAS 128 requirements. Due to the antidilutive effect, options, warrants, and preferred shares were not included in the calculation of diluted earnings per share. Impact of Recently Issued Accounting Standards In June 1998, the FASB issued Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. 2. BALANCE SHEET DETAILS Accounts Receivable, net consist of the following:
DECEMBER 31, --------------------- 1999 1998 ---------- -------- Trade Accounts Receivable................................... $4,545,228 $647,584 Other receivables........................................... 304,283 33,343 Less allowance for doubtful accounts........................ (571,834) -- ---------- -------- $4,277,677 $680,927 ========== ========
Furniture, equipment and software consist of the following:
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Equipment.................................................. $ 5,689,292 $ 2,942,430 Software................................................... 2,121,497 1,068,635 Furniture.................................................. 223,661 6,922 Less accumulated depreciation.............................. (3,306,611) (2,542,267) ----------- ----------- $ 4,727,839 $ 1,475,720 =========== ===========
43 45 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible assets consist of the following:
DECEMBER 31, -------------------------- 1999 1998 ------------ ----------- Developed technology-EPub................................. $ 900,000 $ 900,000 Goodwill-EPub............................................. 18,200,259 18,200,259 Goodwill-DBits............................................ 5,833,357 5,833,357 Goodwill-Revnet........................................... 39,404,967 -- Goodwill-Decisive......................................... 39,428,361 -- Less accumulated amortization............................. (28,604,723) (1,038,901) ------------ ----------- $ 75,162,221 $23,894,715 ============ ===========
Other accrued liabilities consist of the following:
DECEMBER 31, --------------------- 1999 1998 ---------- -------- Directors and officers insurance payable.................... $ -- $147,187 Accrued Sales Taxes......................................... 390,667 -- Reserve for payment system shutdown (Note 8)................ 65,376 198,410 Other accrued liabilities................................... 565,343 238,173 ---------- -------- $1,021,386 $583,770 ========== ========
3. ACQUISITIONS Acquisition of Email Publishing, Inc. On December 9, 1998, the Company acquired all of the common stock and all outstanding rights of the common stock of Email Publishing, Inc. ("EPub") in exchange for 5,582,676 shares of MessageMedia common stock and the assumption by MessageMedia of options and warrants to acquire up to approximately 417,324 additional shares of MessageMedia common stock at a weighted average exercise price of $0.04 per share. The purchase price was calculated to be $20,763,300 based on the fair market value of $3.38 per share of MessageMedia common stock. The purchase price includes estimated merger costs of $500,000. The transaction was accounted for using the purchase method of accounting and as a result intangible assets of $18,200,259 in goodwill and $900,000 of developed technology was recorded related to this acquisition. Acquisition of Distributed Bits, L.L.C. On December 11, 1998, the Company acquired all equity interests, including options, warrants or other purchase rights, if any, in Distributed Bits, L.L.C. ("DBits"), in exchange for 1,305,320 shares of MessageMedia common stock and warrants to purchase an additional 250,000 shares of MessageMedia common stock at an exercise price of $6.00 per share and an additional 250,000 shares of MessageMedia common stock at $8.00 per share. The purchase price was calculated to be $5,577,635 based on the fair market value of $3.65 per share of MessageMedia common stock. The purchase price includes estimated merger costs of $300,000 and the value of warrants of $350,000. The transaction was accounted for using the purchase method of accounting and as a result intangible assets of $5,833,357 in goodwill was recorded related to this acquisition. Acquisition of Revnet Systems, Inc. On August 9, 1999, MessageMedia acquired all of the common stock and all outstanding rights to acquire shares of the common stock of Revnet Systems, Inc. in exchange for 3,262,120 shares of MessageMedia 44 46 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock and the assumption of options to acquire up to approximately 681,675 additional shares of MessageMedia common stock, at a weighted average exercise price of $1.36. The purchase price was calculated to be $41,834,901 based on the fair market value of $10.64 per share of MessageMedia common stock. The purchase price also includes estimated acquisition costs of $800,000. The transaction was accounted for using the purchase method of accounting. The purchase price has been allocated as follows: Current assets acquired................................ $ 2,279,472 Furniture, equipment and software...................... 175,867 Other long term assets................................. 591 Goodwill............................................... 39,404,967 Liabilities assumed.................................... (1,101,385) Deferred Compensation.................................. 1,075,389 ----------- $41,834,901 ===========
Acquisition of Decisive Technology Corporation On August 16, 1999, MessageMedia acquired all of the common stock and all outstanding rights to acquire shares of the common stock of Decisive Technology Corporation in exchange for 2,054,498 shares of MessageMedia common stock and the assumption of options to acquire up to approximately 466,818 additional shares of MessageMedia common stock, at a weighted average exercise price of $2.69. The transaction was accounted for using the purchase method of accounting and goodwill was recorded. The purchase price was calculated to be $39,635,955 based on the fair market value of $16.03 per share of MessageMedia common stock. The purchase price also includes estimated acquisition costs of $475,000. The transaction was accounted for using the purchase method of accounting. The purchase price has been allocated as follows: Current assets acquired................................ $ 519,671 Furniture, equipment and software...................... 607,500 Other assets........................................... 57,104 Goodwill............................................... 39,428,361 Liabilities assumed.................................... (976,681) ----------- $39,635,955 ===========
On the date of the acquisition, the Company implemented a plan to relocate the Decisive facility to Colorado. The Company estimated the cost of the relocation as approximately $328,000 which includes costs associated with employee relocation or termination costs and other miscellaneous facility closure costs. As of December 31, 1999, approximately $165,000 of termination and relocation costs have been incurred and expensed against this reserve. The accompanying statements of operations reflect the operating results of Revnet and Decisive since the date of their respective acquisitions. The pro forma unaudited results of operations for the years ended December 31, 1999 and 1998, assuming the purchase of Revnet and Decisive had occurred on January 1, of the respective years, are as follows:
1999 1998 ------------ ------------ (UNAUDITED) Net revenues............................................. $ 13,635,029 $ 5,527,825 ============ ============ Net loss attributable to common stockholders............. $(73,831,406) $(59,800,653) ============ ============ Net loss per share attributable to common stockholders, basic and diluted...................................... $ (1.49) $ (2.17) ============ ============
45 47 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. RELATED PARTY TRANSACTIONS In conjunction with the sale of 1,250,000 shares of common stock to a stockholder on September 16, 1994 for $200,000, the Company obtained an unsecured line of credit from the stockholder for borrowings up to $800,000. The Company also had an unsecured line of credit from a stockholder which allowed for maximum borrowings of $400,000. The borrowings plus interest at 8% were due upon the earlier of (i) January 31, 1998 or (ii) the closing of an underwritten public offering (other than the IPO) of the Company's common stock. At December 31, 1997, $1,200,000 had been drawn against these lines of credit. On February 5, 1998, these two stockholders filed civil actions against the Company seeking to recover the principal and interest due. The total amount of principal and interest was approximately $1.5 million which was reflected as current liabilities in the 1997 financial statements. On June 23, 1998, the two stockholders signed a release for this lawsuit and the debt was settled. (See Note 7) On August 20, 1996, the Company entered into an agreement with the Series B stockholder for the waiver of a previous agreement to use the Series B stockholder as an exclusive services provider. In return for the waiver, the Company agreed to pay the Series B stockholder facility fees totaling $500,000 and transaction surcharges of no less than $500,000 during the 40-month period beginning September 1, 1996, dependent upon the number of transactions processed through service providers other than the Series B stockholder. The Company charged the $1,000,000 associated with this agreement to general and administrative expenses during 1996. At December 31, 1998, the Company had an outstanding balance of $395,000 due to this stockholder. As of December 31, 1999 the outstanding balance of the amount due to this stockholder had been paid in full. There was no interest charged on the outstanding balance. The Company's credit card transaction services were provided by Paymentech, Inc., a stockholder. Fees for these services amounted to $151,284 and $58,520 for the years ended December 31, 1997 and 1998, respectively. Fees paid in 1998 are significantly less compared to prior years, due to the Company's decision in December 1997, to focus its efforts on its messaging platform and move away from its payment system operations. The operations of the payment system ceased in the third quarter of 1998. Marketing and Sales expense for the year ended December 31, 1999 includes a one-time charge of approximately $855,000 in compensation expense from acceleration of stock options. This compensation expense relates to an employment agreement with a former officer which included an option vesting acceleration clause that was triggered upon the company obtaining certain sales contracts and/or certain sales levels. 5. NOTE PAYABLE In connection with the acquisition of EPub in December 1998, MessageMedia assumed a note owed to a bank with an interest rate of the bank's prime rate plus 1%, and monthly principal payments of $6,250, due through the note's maturity date of June 2000. The note was secured by certain assets of the Company. As of December 31, 1999, the note has been paid in full. In connection with the note, detachable warrants were issued by EPub. (See Note 7) 6. COMMITMENTS Leases The Company leases its office facilities and certain equipment under non-cancelable operating lease agreements. The facility leases require the Company to pay standard common area maintenance fees and are subject to certain minimum escalation provisions. Rent expense for all operating leases was approximately $885,331, $635,923 and $523,214 for the years ended December 31, 1999, 1998 and 1997, respectively. 46 48 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company acquired certain equipment capital lease obligations when it acquired Decisive in August 1999. Cost and accumulated depreciation of equipment under capital leases were $95,853 and $39,103 respectively at December 31, 1999. Annual future minimum lease payments for operating and capital leases as of December 31, 1999, are as follows:
OPERATING LEASES CAPITAL LEASES ---------------- -------------- 2000................................................ 1,086,469 35,977 2001................................................ 635,836 20,693 2002................................................ 574,378 18,525 2003................................................ 523,533 6,175 2004 and thereafter................................. 539,598 -- --------- ------- Total minimum lease payments............................. 3,359,814 81,370 ========= Less amount representing interest........................ (20,140) ------- Present value of future minimum lease payments........... 61,230 Less current portion..................................... (25,422) ------- Long-term portion of obligations under capital leases.... 35,808 =======
7. STOCKHOLDERS' EQUITY Preferred Stock On October 22, 1997, the Company completed a private placement of preferred stock and received net proceeds of $4.9 million. Under the private placement agreement, 1,000 shares of Series A redeemable convertible preferred stock were issued at $5,000 per share. The Series A redeemable convertible preferred stock was convertible into common stock at the option of the investors at a per share conversion price equal to the lesser of $5.50 or 80% of the average closing bid price of the common stock for the prior ten days. At December 31, 1997, the Company recorded imputed dividends on the Series A preferred redeemable convertible stock totaling $1,250,000 for discounted conversion terms. The Series A redeemable convertible preferred stock was redeemable for cash under certain circumstances and carried an annual dividend of 7% payable quarterly, in cash or shares of common stock. The Series A preferred stockholders converted 345 shares into common stock during 1998. In June 1998, the Company issued approximately 9.8 million shares of common stock to SOFTBANK and 833,333 shares of common stock to E*Trade for approximate net proceeds of $6.6 million. In addition, SOFTBANK purchased $5.8 million of the Company's outstanding debt and preferred stock, which were subsequently converted into approximately 8.5 million shares of the Company's common stock. The $5.8 million amount includes a settlement to two stockholders of the Company who, on February 5, 1998 had filed civil actions against the Company seeking to recover the principal and interest due under unsecured lines of credit. The total amount of principal and interest paid out as settlement was approximately $1.5 million. Also included in the transaction was the purchase of the 655 remaining outstanding shares from the Series A redeemable convertible preferred stock. Warrants In connection with the sale of Series B preferred stock in December 1995 to a financial institution, the Company issued warrants to purchase shares of Series A and Series B preferred stock. In April 1996, the Series B preferred stockholder partially exercised this warrant by purchasing 465,000 shares of Series B preferred stock at $3.189 per share. In addition, the Series B preferred stockholder paid the Company $3,017,115 for warrants to purchase 852,272 shares of Series A preferred stock and 475,734 shares of Series B 47 49 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) preferred stock at $0.01 per share. In March 1998, the Series B shareholder exercised their warrant to purchase 852,272 shares of Series A preferred stock, which was immediately converted into shares of the Company's common stock. In December 1999, the warrant for 475,734 series B preferred shares was exercised, and immediately converted into common stock. The Company received net proceeds of approximately $4.4 million in connection with the original transaction. In connection with a consulting agreement, an incentive warrant to purchase 300,000 shares of common stock at $5.63 per share was issued on September 24, 1997 to a third party. The first 100,000 shares of common stock can be exercised when the third party produces $10 million of net sales through the use of technology and services provided by the Company. The second 100,000 shares of common stock can be exercised when the third party produces $25 million of net sales through the use of technology and services provided by the Company and the third 100,000 shares of common stock can be exercised when the third party produces $50 million of net sales through the use of technology and services provided by the Company. These warrants expire on December 20, 2003. As of December 31, 1999 no sales have been attributed to the third party's efforts. Under a certain consulting agreement, dated September 8, 1997, a warrant to purchase 65,000 shares of common stock at $5.63 per share was granted to a third party as payment for consulting services rendered. Under the terms of the September 8, 1997 warrant agreement, 20,000 shares became exercisable upon completion (as defined in the agreement) with the remaining 45,000 shares to be exercisable when the third party delivers to the Company, two catalog merchants who execute agreements with the Company in regards to either licensing of VirtualPINS or interactive messaging services. These warrants expire on December 30, 2002. On September 29, 1997, the warrant to purchase 20,000 of the Company's common stock became exercisable and accordingly, the Company estimated the fair value of the warrant using the Black-Scholes option pricing model. However, no value was allocated to the warrant as the estimated fair value was nominal. This warrant expires on December 30, 2002. In June 1998, the warrant to purchase 45,000 of the Company's common stock expired as the incentive terms of this portion of the agreement were not met. On March 3, 1999, an additional warrant for 10,000 common shares at $5.63 was granted to the third party and are exercisable through December 2002. The Company estimated the fair value of the warrant using the Black-Scholes option pricing model. However, no value was allocated to the warrant as the estimated fair value was nominal. In connection with the sale of Series A redeemable convertible preferred stock in October 1997, warrants to purchase up to 850,000 shares of common stock at $5.75 per share were issued to the Series A preferred stockholders. These warrants will expire on October 15, 2001. In June 1998, the original Series A preferred stockholders were granted a reduction in the exercise price of these warrants from $5.75 per share to $1.00 per share. Such warrants carry restrictions as to their exercisability. As of December 31, 1999, all of these warrants, with the exception of 17,000, have been exercised. In connection with the Company's acquisition of EPub in December 1998, the Company assumed a warrant issued to a financial institution which was convertible into 25,564 shares of the Company's common stock at an exercise price of $0.40 per share. This warrant was exercised in February 1999. In connection with the Company's acquisition of DBits in December 1998, the Company issued warrants to purchase an aggregate of 500,000 shares of the Company's common stock, of which 250,000 may be exercised for $6.00 per share and 250,000 may be exercised for $8.00 per share. These warrants are exercisable immediately with the $6.00 warrants expiring on May 11, 2001 and the $8.00 warrants expiring on May 11, 2002. The Company estimated the fair value of these warrants to be $350,000 using the Black-Scholes option pricing model. 40,340 of the warrants were exercised on April 5, 1999, and 1,000 of the warrants were exercised on June 23, 1999. 48 50 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock Option Plans The Company's 1994 Incentive and Non-Statutory Stock Option Plan ("1994 Plan"), under which options to purchase 482,300 shares of common stock were granted, was replaced with the 1995 Stock Plan ("1995 Plan"). Under the 1995 Plan, the Company is authorized to issue up to 7,000,000 common shares to officers, employees, directors and certain other individuals providing services to the Company. In 1999, a non-officer plan ("1999 Plan") was authorized under which the Company can issue up to 1,158,000 common shares to employees. Options granted under the 1995 and 1999 Plans generally vest over four years and are exercisable for a period of up to ten years from the date of grant. Incentive and non-qualified stock options are granted at prices which approximate the fair value of the shares at the date of grant. In 1998, the Company assumed 391,760 options with the acquisition of EPub, and in 1999, the Company assumed 681,675 options with the acquisition of Revnet and 466,818 with the acquisition of Decisive. The following table summarizes stock option activity, including the options assumed in the EPub, Revnet and Decisive acquisitions:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- -------------- Balance at December 31, 1996................................ 1,743,170 $ 4.82 Options granted........................................... 1,115,600 4.54 Options exercised......................................... (85,690) 0.32 Options canceled.......................................... (504,987) 7.49 ---------- ------ Balance at December 31, 1997................................ 2,268,093 $ 4.14 Options granted........................................... 4,145,919 1.87 Option assumed in acquisitions............................ 391,760 0.02 Options exercised......................................... (659,637) 0.41 Options canceled.......................................... (2,021,348) 4.48 ---------- ------ Balance at December 31, 1998................................ 4,124,787 $ 2.01 Options granted........................................... 4,156,644 10.90 Option assumed in acquisitions............................ 1,148,493 1.90 Options exercised......................................... (1,700,049) 1.96 Options canceled.......................................... (1,444,273) 5.11 ---------- ------ Balance at December 31, 1999................................ 6,285,602 $ 7.07 ========== ======
Other Option Activity Pursuant to the terms of the December 22, 1995 Series B preferred stock Purchase Agreement, on April 11, 1996, the Company's board of directors granted options to purchase 1,000,000 shares of common stock to officers, directors and key employees of the Company at $6.30 per share. All of these options are fully vested and as of December 31, 1999, none have been exercised. In 1999, the Company's board of directors granted additional options to purchase 2,173,000 shares of common stock to officers and directors at a weighted average exercise price of $7.86. As of December 31, 1999, 254,832 of these options were vested. All of these options were granted outside of the Company's stock option plans and therefore, are not included in the table above. On April 29, 1998, the Company offered all employees of record the opportunity to re-price their option grants under the 1995 Stock Option Plan to the fair market value of the stock on that date which was $0.94 per share. The Company cancelled 1,363,876 at a weighted-average exercise price of $4.75 and re-issued the same number of options at $0.94. 49 51 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1999, the 1995 and 1999 Plans, as well as the options assumed under the Revnet and Decisive acquisitions, include 1,515,886 options which are exercisable. There are 820,838 options available for future grant under the 1995 and 1999 Plans. Summary of Outstanding Options Exercise prices and weighted average remaining contractual life for all options outstanding as of December 31, 1999 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE -------------- ----------- ---------------- -------------- ----------- -------------- $ 0.01-0.32 276,717 6.85 $ 0.08 123,729 $ 0.10 $ 0.33-0.99 1,386,607 6.40 $ 0.92 746,092 $ 0.92 $ 1.00-5.00 794,607 7.67 $ 2.81 347,363 $ 2.84 $ 5.01-10.00 3,436,190 8.33 $ 6.42 1,519,078 $ 6.46 $10.01-15.00 3,367,981 9.54 $11.54 34,456 $11.77 $15.01-20.00 196,500 9.84 $17.01 -- $ -- --------- --------- 9,458,602 2,770,718 ========= =========
Prior to the EPub and Revnet acquisitions, these companies had granted stock to certain of their employees at a per share value below the then current fair market value of such shares. As a result, when the company acquired EPub and Revnet, the Company assumed the deferred compensation balances that were recorded on their respective books. Deferred compensation expense amounted to $430,864, $285,000 and $17,958 for the years ended December 31, 1999, 1998 and 1997. Pro forma information regarding net loss is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for the 1999 options was estimated at the date of grant, using the Black-Scholes option pricing model, with the following assumptions: risk-free interest rate of 5.875%; dividend yield of 0%; and a weighted-average expected life of the option of five years with a volatility factor of 1.25. The fair value for the 1998 options was estimated at the date of grant, using the Black-Scholes option pricing model, with the following assumptions: risk-free interest rate of 5.0%; dividend yield of 0%; and a weighted-average expected life of the option of five years with a volatility factor of .75. The fair value for the 1997 options was estimated at the date of grant, using the Black-Scholes option pricing model, with the following assumptions: risk-free interest rate of 5.41%; dividend yield of 0%; and a weighted-average expected life of the option of five years with a volatility factor of .50. The weighted average fair values of the options granted during 1999, 1998 and 1997 were $9.80, $2.17, and $4.66 respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of applying Statement 123 for pro forma disclosure purposes are not 50 52 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) likely to be representative of the effects on pro forma net income (loss) in the future years because they do not take into consideration pro forma compensation expense related to grants made prior to 1995. The Company's pro forma information follows:
DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Pro forma net loss applicable to common shares................................... $(59,609,658) $(16,513,358) $(17,889,405) Pro forma net loss per common share, basic and diluted.............................. $ (1.29) $ (0.74) $ (2.02)
Employee Stock Purchase Plan In 1996, the Company adopted an Employee Stock Purchase Plan (the "ESPP"), whereby employees, at their option, can purchase shares of Company common stock. This is done through a payroll deduction at the lower of 85% of the fair market value on the first day of each ESPP offering period or the end of each period. The ESPP expires at the earlier of December 31, 2006 or the date on which all shares available for issuance have been sold. The Company has reserved 100,000 shares of common stock for issuance under the ESPP. At December 31, 1999 employees have purchased 87,415 shares through the ESPP and 12,585 shares are available for future purchases. Shares Reserved for Future Issuance As of December 31, 1999, the Company has reserved shares of common stock for future issuance as follows: Stock options............................................ 10,279,440 Warrants................................................. 805,660 Employee stock purchase plan............................. 12,585 ---------- 11,097,685 ==========
8. RESTRUCTURE CHARGE In the second quarter 1998, the Company recorded a restructuring charge of $812,166 as a result of the Company's decision to focus its efforts on its messaging platform, initiate efforts to cease operations of its FVIPS and better align its cost structure with expected revenue projections. The restructuring charge included the elimination of job responsibilities company wide, resulting in approximately $545,000 of employee severance pay other related expenses for 21 employees, and approximately $267,000 related to relocating the Company's corporate office and termination fees for cancellation of certain contracts related to FVIPS In the first quarter of 1999, the Company recorded a charge of $1,025,000 as a result of the Company's decision to relocate its corporate headquarters from San Diego, California to a new facility in Boulder Colorado. This decision was made to create efficiencies in the Company's messaging services operations, reduce overhead by centralizing the Company's offices to one facility and eliminate duplication of efforts from similar positions in the separate offices. The merger integration and restructuring activity of MessageMedia, Distributed Bits, L.C.C., and Email Publishing, Inc. included the elimination of job responsibilities company wide, resulting in approximately $632,000 of employee severance pay other related expenses for 17 employees and, approximately $393,000 in moving expenses and costs related to closing our facility. 51 53 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES Significant components of the Company's deferred tax assets as of December 31, 1999 and 1998 are shown below. Valuation allowances of $30,365,000 and $7,620,000 have been recognized for 1999 and 1998, respectively, to offset the net deferred tax assets, as realization of such assets is uncertain.
DECEMBER 31, -------------------------- 1999 1998 ------------ ----------- Deferred tax liabilities: Acquired Intangibles...................................... $ (329,000) $ (370,000) ------------ ----------- Total deferred tax liabilities.................... (329,000) (370,000) Deferred tax assets: Net operating losses carryforwards........................ 28,230,000 6,590,000 R & D credit.............................................. 1,329,000 810,000 Other net................................................. 1,135,000 590,000 ------------ ----------- Total deferred tax assets......................... 30,694,000 7,990,000 Valuation allowance for deferred tax assets................. (30,365,000) (7,620,000) ------------ ----------- Net deferred tax assets..................................... $ -- $ -- ============ ===========
At December 31, 1999, approximately $4,000,0000 of the valuation allowance for deferred tax assets relates to stock option deductions which, when recognized, will be allocated directly to paid in capital. At December 31, 1999, the Company has federal, California, and Colorado tax net operating loss carryforwards of approximately $74,700,000, $17,500,000, and $14,200,000. These federal, California and Colorado carryforwards will begin to expire in 2010, 2000, and 2019, respectively, unless previously utilized. The Company also has federal and California state research credit carryforwards of approximately $875,000 and $455,000, respectively, which will begin expiring in 2010, unless previously utilized. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net operating losses and tax credit carryforwards will be limited because of a cumulative change in ownership of more than 50% which occurred during 1999. Such tax net operating losses and credit carryforwards have been reduced, including the related deferred tax assets. 10. 401(k) PROFIT SHARING PLAN The Company maintains a 401(k) profit sharing plan which allows substantially all employees to contribute up to 15% of their salary, subject to annual limitations and requirements set by the Company. The Board of Directors may, at its sole discretion, approve Company contributions. To date, there have been no Company contributions under the plan. 11. LEGAL PROCEEDINGS On October 19, 1998, Exactis.com, Inc, filed a complaint against our subsidiary EPub in the Federal District Court of Colorado. The complaint alleged infringement of a patent held by Exactis.com, Inc. and sought injunctive relief and unspecified damages. On October 28, 1998, we filed a complaint in the U.S. District Court for the Southern District of California against Exactis.com, Inc. The complaint alleged infringement of a patent held by us and sought injunctive relief and unspecified damages. On October 13, 1999 both parties agreed to a settlement of theses actions which have subsequently been dismissed by the courts with prejudice. 52 54 MESSAGEMEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SUBSEQUENT EVENTS (UNAUDITED) On October 7, 1999, the Company entered into a non-binding agreement with @viso, a strategic partnership between Vivendi and SOFTBANK, to create MessageMedia Europe which will be a joint venture between the Company and @viso. On March 13, 2000, the Company completed definitive agreements for the joint venture between the Company and @viso, forming MessageMedia Europe. Under terms of the joint venture agreement, MessageMedia will own 51% and @viso will own 49% of the joint venture. 53 55 SCHEDULE II MESSAGEMEDIA, INC. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT BEGINNING OF CHARGED TO COSTS CHARGED TO END OF DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD - ----------- ------------ ---------------- -------------- ---------- ---------- Reserve for Payment System Shutdown Year ended December 31, 1998...................... $ -- $812,166 $ -- $613,756 $198,410 Year ended December 31, 1999...................... $198,410 $ -- $ -- $133,034 $ 65,376 Allowance for Bad Debt Year ended December 31, 1999...................... $ -- $462,163 $153,187 $ 43,516 $571,834
54 56 INDEX TO EXHIBITS
NUMBER EXHIBIT TITLE ------ ------------- 2.1.1***** -- Agreement and Plan of Merger and Reorganization dated July 22, 1999 among the Registrant, Revnet Systems Inc. and MM1 Acquisition Corporation. 2.1.2***** -- Agreement and Plan of Merger and Reorganization dated July 22, 1999 among the Registrant, Decisive Technology Corporation and MM2 Acquisition Corporation. 3.1* -- Amended and Restated Certificate of Incorporation of the Company. 3.2* -- Bylaws of the Company. 10.1* -- Form of Indemnification Agreement entered into between Company and its officers and directors. 10.2* -- The Company's 1994 Incentive and Non-Statutory Stock Option Plan. 10.3* -- The Company's 1995 Stock Plan. 10.4* -- The Company's Employee Stock Purchase Plan. 10.7* -- Marshall T. Rose Employment Agreement. 10.9* -- Series A Preferred Stock Purchase Agreement dated as of May 22, 1995 between the Company and the purchasers named therein. 10.10* -- Series B Preferred Stock Purchase Agreement dated as of December 22, 1995 between the Company and First USA Merchant Services, Inc.. 10.11* -- Securities Purchase Agreement between the Company and General Electric Capital Corporation, dated July 3, 1996. 10.12* -- Warrant to Purchase 47,619 shares of Common Stock, issued to General Electric Capital Corporation as of July 3, 1996. 10.13* -- Series D Preferred Stock Purchase Agreement between the Company and First Data Corporation, dated August 26, 1996. 10.14* -- Amended and Restated Shareholder Rights Agreement dated August 26, 1996 between the Company and First Data Corporation. 10.16* -- Warrant to purchase 475,734 shares of Series B Preferred Stock, issued to First USA Paymentech. 10.25* -- Master Lease Agreement dated as of October 24, 1996 between the Company and ComDisco, Inc. 10.32***** -- David Ehrenthal employment agreement 10.33***** -- Purchase Agreement dated April 30, 1998 among the Company, SOFTBANK Holdings and SOFTBANK Technology Ventures IV, LP 10.34***** -- Loan Agreement dated April 30, 1998 among the Company and SOFTBANK Holdings, Inc. 10.35***** -- Form of Convertible Promissory Note issued to SOFTBANK Holdings, Inc. 10.36***** -- Bert C. Klein employment agreement 10.37***** -- Philip Bane Severance Agreement 10.38***** -- Nathaniel Borenstein Severance Agreement 10.39***** -- John Stachowiak Severance Agreement 10.40***** -- Carolyn Turbyfill Severance Agreement 10.41** -- Dennis J. Cagan Employment Agreement 10.42** -- A. Laurence Jones Employment Agreement 10.43*** -- Robin Green Employment Agreement
57
NUMBER EXHIBIT TITLE ------ ------------- 10.44*** -- Mary Beth Loesch Employment Agreement 10.45*** -- Elizabeth Wallace Employment Agreement 10.46*** -- Sue Morse Employment Agreement 10.47*** -- Bert Klein Employment Agreement 10.48**** -- Stuart Obermann Employment Agreement 10.49**** -- Randy Bachmeyer Employment Agreement 10.50**** -- Kelly Wood Employment Agreement 10.51 -- Martin T. Johnson Employment Agreement 10.52 -- Denis Cagan Separation Agreement 21.1 -- List of Subsidiaries 23.1 -- Consent of Ernst & Young, LLP, Independent Auditors 27.1 -- Financial Data Schedule.
- --------------- * Previously filed as exhibits to the Company's Registration Statement on Form S-1 (SEC File #333-14573). ** Previously filed as exhibit to the Company's Form 10-Q, March 31, 1999 (SEC File #000-21751). *** Previously filed as exhibit to the Company's Form 10-Q, June 30, 1999 (SEC File #000-21751). **** Previously filed as exhibit to the Company's Form 10-Q, September 30, 1999 (SEC File #000-21751). ***** Previously filed. EX-10.51 2 MARTIN T. JOHNSON EMPLOYMENT AGREEMENT 1 EXHIBIT 10.51 [MESSAGEMEDIA LOGO] VIA FACSIMILE September 30, 1999 Martin T. Johnson 1815 North Howe Street #F Chicago, Illinois 60614 Dear Tork: MessageMedia, Inc. ("MessageMedia" or the "Company") is pleased to offer you employment on the terms and conditions stated in this letter, contingent upon satisfactory reference checks. MessageMedia is offering you the position of Vice President and Chief Financial Officer. You will work at our facility located at 6060 Spine Road, Boulder, Colorado 80301. You will report to Larry Jones, President & CEO. Of course, MessageMedia may change your position, duties, and work location from time to time as it deems necessary. Your employment shall begin on the date on which you execute this Agreement. Your rate of compensation will be $190,000 per year, less payroll deductions and all required withholdings. MessageMedia agrees that your base salary will not be reduced below $190,000 per year, unless the base salaries of other senior executives are also subject to reductions. You will receive annual performance reviews and annual consideration for salary increases. Your salary will be paid in periodic installments in accordance with MessageMedia's customary practices (as they may be changed by MessageMedia from time to time in its sole discretion). At present, MessageMedia pays employees semi-monthly. You will be eligible for all fringe benefits presently offered to senior executives. Details about such benefits are available for your review. In addition to your base salary, you will be eligible to earn an annual performance bonus of up to 50% of your base salary, less applicable taxes, based upon performance targets to be defined by the CEO. Bonuses, if any, will be paid after the close of each fiscal year. The Company further agrees that you will receive an annual performance bonus of $23,750 for the period through December 31, 1999, less applicable taxes and all required withholdings ("1999 Bonus"), and an annual performance bonus of at least $47,500 for the period January 1, 2000 through December 31, 2000, less applicable taxes and all required withholdings ("2000 Bonus").. You will not be eligible to receive the 1999 Bonus if you voluntarily resign from the Company, or are terminated by the Company for Cause, as defined below, on or before December 31, 1999. You will not be eligible to receive the 2000 Bonus if you voluntarily resign from the Company, or are terminated by the Company for Cause, on or before December 31, 2000. If the company terminates your employment for a reason other than Cause (as defined below) before December 31, 1999, you Page 1 of 4 Initial 2 will be eligible to receive a pro rata share of the 1999 Bonus but no portion of the 2000 Bonus. If the Company terminates your employment for a reason other than Cause (as defined below) between January 1, 2000 and December 31, 2000, you will be eligible to receive a pro rata share of the 2000 Bonus. For your first eighteen (18) months of employment, the Company will also pay you a monthly housing allowance of $4,000 per month and a travel allowance of $1,300, less payroll deductions and all required withholdings. The travel allowance covers personal, non-business related travel between Chicago and Boulder for either yourself or your spouse. Any payments for a housing allowance or travel allowance shall end on the earlier of eighteen months after execution of this agreement or the date of termination of your employment, whether you resign or are terminated with or without cause. You will be entitled to four weeks of paid vacation during your first year of service, which shall begin accruing monthly upon commencement of employment. You will be entitled to use two weeks of paid vacation during your first six months of service. Thereafter, vacation will be accrued in accordance with the provisions of the MessageMedia Employee Handbook. You are eligible to receive an option to purchase 300,000 shares of the Company's Common Stock (the "Option"), with an exercise price per share equal to the fair market value of the Company's Common Stock on the date on which you begin your employment with MessageMedia ("Vesting Commencement Date"). To the maximum extent possible, the Option shall be an incentive stock option as such term is defined in Section 422 of the Internal Revenue Code of 1986, as amended. To the extent that any portion of the Option does not qualify as incentive stock options under Section 422 of the code, that the portion of the Option shall be treated as a nonstatutory stock option. This option will be issued in accordance with and subject to the terms and conditions of MessageMedia's 1995 Stock Option Plan. The Option shall vest in accordance with the Company's standard form of option agreement under MessageMedia's 1995 Stock Option Plan, as amended, which, among other terms, conditions, and limitations, provides that 25% of the shares subject to the Option shall vest and become exercisable on the first anniversary of the Vesting Commencement Date, and an additional 1/48th of the shares subject to the option at the end of each one-month period thereafter shall vest and become exercisable, during the period in which you remain an employee and/or consultant of the Company. Your employment is at-will and may be terminated at any time, with or without notice, with or without cause, by either you or the Company. If the Company terminates your employment without Cause, upon your furnishing to the Company (1) an executed waiver and release form, releasing the Company from any claims you may have against it, including a release of any and all claims under the Federal Age discrimination in Employment Act of 1967, as amended, and (2) a recognition of your continuing obligations under the Proprietary Information and Inventions Agreement, attached hereto as Exhibit A, then the Company will pay you an amount equal to twelve months of your then-current base salary, subject to standard payroll deductions and required withholdings ("Severance Benefit"). For purposes of this Agreement, "Cause" for termination will mean: That MessageMedia, acting in good faith based upon the information then known to MessageMedia, determines that you have engaged in (embezzlement, fraud, theft, misappropriation of corporate funds, or other acts of dishonesty; (2) serious misconduct in the performance of your job duties which is materially Page 2 of 4 Initial 3 harmful to MessageMedia (including but not limited to sexual or other forms of harassment, and discrimination); (3) conduct which is likely to materially harm or materially harms MessageMedia's reputation in the community; (4) refusal to perform or substantially disregard of your assigned duties (including, but not limited to, refusal to travel, refusal to work the requested hours, failure to adequately perform job duties); (5) any material violation of any statutory, contractual, or common law duty to MessageMedia (including but not limited to fiduciary duties and the duty of loyalty), or (6) any material breach of any term of this Agreement, including the Proprietary Information and Inventions Agreement. In the event you are terminated for Cause, you will not be entitled to any Severance Benefit, but you will be entitled to all compensation, benefits and unreimbursed expenses (in accordance with MessageMedia's policy regarding expense reimbursement ) accrued through the date of termination. This definition of Cause is not intended and does not apply to any aspect of the relationship between MessageMedia and you, beyond determining your eligibility for receiving the Severance Benefit following termination by the Company. If you terminated for Cause, you agree and acknowledge that you will continue to be bound by the obligation set forth in Exhibit A, the Proprietary Information and Inventions Agreement. You also will be eligible to receive the Severance Benefit if you render your resignation to MessageMedia, after notice to the Company, and within thirty days after the occurrence of one of the following, if such events occur at the Company's direction and without your consent: (1) you no longer report to the person acting as Chief Executive Officer of MessageMedia; (2) your base salary is decreased below $190,000 per year, unless the base salaries of other senior executives are also subject to reductions; (3) your duties are materially and permanently reduced, such that you no longer have the duties of a Chief Financial Officer; (4) you no longer have the title "Chief Financial Officer"; or (5) you are required to relocate your primary residence out of the metropolitan Chicago, Illinois area. Mr. Johnson may not assign any rights or obligation arising under this Agreement. MessageMedia may assign any right or obligation arising under this Agreement. This Agreement shall bind the heirs, personal representatives, successors, executors, and administrators of each party, and insure to the benefit of each party, its heirs, and successors, MessageMedia shall take appropriate steps to ensure that its obligations under this letter agreement are binding on any successors and assigns of MessageMedia. Should you accept this offer, your employment with MessageMedia will not be for a specified term and may be terminated with or without cause and with or without notice by you or by the Company at any time, for any reason or no reason. Any contrary representations or agreements which may have been made to you are superseded by this offer. The offer of employment described in this letter and your acceptance of such terms shall constitute the entire Agreement between you and MessageMedia concerning the nature and duration of your employment. The fact that the rate of your salary is stated in units of years or months, that any other payments (including housing allowance and travel allowance) are stated in units of years or months and that your vacation accrues annually does not alter the at-will nature of the employment, and does not mean and should not be interpreted to mean that you are guaranteed employment to the end of any period of time or for any period time. The "at will" term of your employment with MessageMedia can only be changed in a Writing signed by you and the President of the Company. Page 3 of 4 Initial 4 One of the conditions of your employment with MessageMedia is the maintenance of the confidentiality of MessageMedia's proprietary and confidential information. You will be required, prior to or on your start date, to execute the Company's Employee Proprietary Information and Inventions Agreement, attached hereto as Exhibit A. In your work for the Company, you will be expected not to use or disclose any confidential information, including trade secrets, of any former employer or other person to whom you have an obligation of confidentiality. You agree that you will not bring onto Company premises any unpublished documents or property belonging to any former employer or other person to whom you have an obligation of confidentiality. In the performance of your duties for the Company, you will be expected to use only that information which is generally known and used by persons with training and experience comparable to your own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. By joining MessageMedia, you are agreeing to abide by all laws and regulations, all Company policies and procedures, to acknowledge in writing that you have read and are bound by the Company's Employee Handbook, when a copy is provided to you, and that you are bound by the terms and conditions of the Company's Proprietary Information and Inventions Agreement. Violations of these policies may lead to immediate termination of employment. As required by law, this offer is subject to satisfactory proof of your right to work in the United States. Mr. Johnson agrees to be responsible for the payment of any taxes due from him as a result of any and all compensation provided MessageMedia, including but not limited to, any taxes arising from compensation, housing and travel allowances, benefits, incentive stock options, and nonstatutory stock options. We are looking forward to having you join MessageMedia, Inc. If you wish to accept this offer, please sign below and return the fully executed letter prior to the expiration date of October 1, 1999. You should keep one copy of this letter for your own records. Very truly yours, MESSAGEMEDIA, INC. - --------------------------------- ------------------------------ Susan L. Morse Date VP of Human Resources Acceptance: - --------------------------------- ------------------------------ Martin T. Johnson Date CC: Larry Jones Page 4 of 4 Initial 5 EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT COLORADO This Employee Proprietary Information and Inventions Agreement ("Agreement") is made in consideration for my employment or continued employment by MESSAGEMEDIA, INCORPORATED (the "Company"), and the compensation now and hereafter paid to me. I hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "PROPRIETARY INFORMATION" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with their work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "PROPRIETARY RIGHTS" Shall mean all trade secret, patent, copyright, mask work and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To 6 preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. I recognize that, in the event of a specifically applicable state law, regulation, rule, or public policy ("Specific Inventions Law"), this Agreement will not be deemed to require assignment of any invention which qualifies fully for protection under a Specific Inventions Law by virtue of the fact that any such invention was, for example, developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. In the absence of a Specific Inventions Law, the preceding sentence will not apply. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six months after the last day of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection under the provisions of a Specific Inventions Law; and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that qualify fully for protection under a Specific Inventions Law. I will preserve the confidentiality of any Invention that does not fully qualify for protection under a Specific Inventions Law. 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a 2 7 witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company. 3. NO CONFLICTS OR SOLICITATION. I acknowledge that during my employment I will have access to and knowledge of Proprietary Information. To protect the Company's Proprietary Information, I agree that during the period of my employment by the Company I will not, without the Company's express written consent, engage in any other employment or business activity directly related to the business in which the Company is now involved or becomes involved, nor will I engage in any other activities which conflict with my obligations to the Company. For the period of my employment by the Company and continuing until twelve months after my last day of employment with the Company, I will not (a) directly or indirectly induce any employee of the Company to terminate or negatively alter his or her relationship with the Company or (b) solicit the business of any client or customer of the Company (other than on behalf of the Company) or (c) induce any supplier, vendor, consultant or independent contractor of the Company to terminate or negatively alter his, her or its relationship with the Company. If any restriction set forth in this Section is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 4. COVENANT NOT TO COMPETE. I acknowledge that during my employment I will have access to and knowledge of Proprietary Information. To protect the Company's Proprietary Information, I agree that during my employment with the Company whether full-time or half-time and for a period of twelve months after my last day of employment with the Company, I will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation or business that engages in a "Restricted Business" in a "Restricted Territory" (as defined below). It is agreed that ownership of (i) no more than one percent (1%) of the outstanding voting stock of a publicly traded corporation, or (ii) any stock I presently own shall not constitute a violation of this provision. 4.1 REASONABLE. I agree and acknowledge that the time limitation on the restrictions in this paragraph, combined with the geographic scope, is reasonable. I also acknowledge and agree that this paragraph is reasonably necessary for the protection of Company's Proprietary Information as defined in paragraph 1.2 herein, that through my employment I shall receive adequate consideration for any loss of opportunity associated with the provisions herein, and that these provisions provide a reasonable way of protecting Company's business value which will be imparted to me. If any restriction set forth in this paragraph 4 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 4.2 As used herein, the terms: (i) "Restricted Business" shall mean the design, development, marketing or sales of e-mail based customer relationship management and direct marketing services or any computer program, product, process, system or service marketed, sold or under development by the Company at any time 3 8 during my employment with the Company. "Restricted Business" does not include consulting businesses which design and develop customer relationship management systems which include e-mail as one of many channels through which customers communicate. (ii) "Restricted Territory" shall mean the countries and territories in which the Company conducts business, and counties, cities, territories and states of the United States. 5. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 6. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by the Company I will not, without the Company's express written consent, engage in any employment or business activity which is competitive with, or would otherwise conflict with, my employment by the Company. 7. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 8. RETURN OF COMPANY MATERIALS. When I leave the employ of the Company, I will deliver to the Company any and all drawings, notes, memoranda, specifications, devices, formulas, and documents, together with all copies thereof, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. 9. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. 10. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three days after the date of mailing. 11. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 12. GENERAL PROVISIONS. 12.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION AND EXCLUSIVE FORUM. This Agreement will be governed by and construed according to the laws of the State of Colorado as such laws are applied to agreements entered into and to be performed entirely within Colorado between Colorado residents. I hereby expressly understand and consent that my employment is a transaction of business in the State of Colorado and constitutes the minimum contacts necessary to make me subject to the personal jurisdiction of the federal courts located in the State of Colorado, and the state courts located in the County of Boulder, Colorado, for any lawsuit filed against me by Company arising from or related to this Agreement. I agree and acknowledge that any controversy arising out of or relating to this Agreement or the breach thereof, or any claim or action to enforce this Agreement or portion thereof, or any controversy or claim requiring interpretation of this Agreement must be brought in a forum located within the State of Colorado. No such action may be brought in any forum outside the State of Colorado. Any action brought in contravention of this paragraph by one party is subject to dismissal at any time and at any stage of the proceedings by the other, and no action taken by the other in defending, counter claiming or appealing shall be construed as a waiver of this right to immediate dismissal. A party bringing 4 9 an action in contravention of this paragraph shall be liable to the other party for the costs, expenses and attorney's fees incurred in successfully dismissing the action or successfully transferring the action to the federal courts located in the State of Colorado, or the state courts located in the County of Boulder, Colorado. 12.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 12.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 12.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 12.5 EMPLOYMENT. I agree and understand that my employment is at-will which means I or the company each have the right to terminate my employment at will, with or without advanced notice and with or without cause. I further agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 12.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 12.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 through 4 and Sections 6 and 7 (including all subparts) of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement This Agreement shall be effective as of the first day of my employment with the Company, namely: _______________, 1999. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: ---------------------- - ----------------------------- Signature - ----------------------------- Printed Name ACCEPTED AND AGREED TO: - ----------------------------- 5 10 EXHIBIT A TO: MESSAGEMEDIA, INCORPORATED FROM: ------------------- DATE: ------------------- SUBJECT: PREVIOUS INVENTIONS 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by MESSAGEMEDIA, INCORPORATED that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company: [ ] No inventions or improvements. [ ] See below: -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- [ ] Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I woe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ----------------------- ------------------- ------------------- 2. ----------------------- ------------------- ------------------- 3. ----------------------- ------------------- -------------------
[ ] Additional sheets attached. A-1 EX-10.52 3 DENNIS J. CAGAN SEPARATION AGREEMENT 1 EXHIBIT 10.52 RELEASE AGREEMENT This RELEASE AGREEMENT (the "Agreement") is made and entered into by and between MESSAGEMEDIA, INC. ("MessageMedia") and DENNIS CAGAN ("Mr. Cagan") and CAGANCO, INC. ("CaganCo") (together "Cagan Parties") as of the Execution Date of this Agreement defined in paragraph 26 below. I. RECITALS WHEREAS, effective as of October 31, 1999 ("Resignation Date"), Mr. Cagan tendered his resignation from any and all prior positions as an employee, consultant, and officer he may have held with MessageMedia or any of its affiliates or subsidiaries; and WHEREAS, Mr. Cagan tendered his resignation voluntarily and at his sole election and discretion; and WHEREAS, MessageMedia has accepted the resignation tendered by Mr. Cagan; WHEREAS, the parties wish to make the resignation from full-time employment amicable but conclusive on the terms and conditions set forth herein; WHEREAS, MessageMedia has offered and Mr. Cagan has accepted a temporary, part-time position with MessageMedia; WHEREAS, this Agreement does not alter or in any way affect Mr. Cagan's status as a member of MessageMedia's Board of Directors; WHEREAS, the parties intend that this Agreement, including the attached exhibit hereto, constitute the full, final, and entire agreement with regard to MessageMedia's obligations to Mr. Cagan from the Resignation Date forward; WHEREAS, Mr. Cagan accepts the benefits of this Agreement with the acknowledgment that by its terms he has been fully and satisfactorily compensated; WHEREAS, CaganCo and MessageMedia entered into an agreement whereby CaganCo was to provide certain services to MessageMedia; WHEREAS, CaganCo and MessageMedia desire to terminate any and all agreements, whether written or oral, that CaganCo and MessageMedia may have entered into from time to time; WHEREAS, CaganCo acknowledges that it has received valuable consideration in exchange for termination of its obligations to MessageMedia. 2 II. COVENANTS NOW THEREFORE, in consideration of the above set forth recitals which are incorporated herein by reference and the mutual promises and covenants contained in this Agreement, it is hereby agreed by and between the parties hereto as follows: 1. RESIGNATION. Mr. Cagan has tendered, and MessageMedia has accepted, Mr. Cagan's resignation from any and all prior positions Mr. Cagan may have held with MessageMedia, effective as of October 31, 1999 ("Resignation Date"). This Agreement does not alter or in any way affect Mr. Cagan's status as a member of MessageMedia's Board of Directors. 2. CONSIDERATION. Although MessageMedia has no policy or procedure requiring payment of any severance benefits, MessageMedia agrees to the following as consideration for this Agreement: (a) AGREEMENT FOR TEMPORARY PART-TIME EMPLOYMENT. As consideration for executing this Agreement, MessageMedia agrees to enter into the Agreement for Temporary Part-time Employment, attached hereto as Exhibit A. Mr. Cagan's status as a temporary, part-time employee shall commence immediately upon Mr. Cagan executing this Agreement and the attached Exhibit A and shall be effective as of the Resignation Date, as defined above. MessageMedia's obligations under this paragraph or the Agreement for Temporary Part-time Employment, if any, shall terminate immediately if Mr. Cagan, at any time, violates any obligation to MessageMedia under said agreements. (b) INSURANCE. MessageMedia agrees to provide Mr. Cagan with a COBRA notification form setting forth his rights and responsibilities with regard to COBRA coverage within ten days after the Execution Date. Should Mr. Cagan timely elect to continue coverage pursuant to COBRA, MessageMedia agrees to reimburse Mr. Cagan on a monthly basis for a period beginning November 1, 1999 and concluding January 31, 2000 ("COBRA Reimbursement Period"), unless this obligation is terminated earlier as set forth in this Agreement, for the COBRA premiums Mr. Cagan pays in order to maintain health insurance coverage during the COBRA Reimbursement Period that is substantially equivalent to that which Mr. Cagan received immediately prior to the Resignation Date. Any reimbursement by MessageMedia during the COBRA Reimbursement Period is contingent upon Mr. Cagan providing MessageMedia documentation establishing that Mr. Cagan paid the COBRA premium and reflecting the extent of the coverage. Failure by Mr. Cagan to present sufficient documentation relieves MessageMedia of any obligation under this paragraph 2(b). Any reimbursements due under this paragraph 2(b) shall be made by MessageMedia within 30 days after presentation by Mr. Cagan of such sufficient documentation. Should Mr. Cagan obtain employment with an another employer who provides medical benefits during the COBRA Reimbursement Period, MessageMedia's obligation under this paragraph shall forever cease upon the expiration of the waiting period (if any) for entitlement to insurance coverage through Mr. Cagan's new employer. Mr. Cagan agrees to notify MessageMedia in writing in the event that Mr. Cagan obtains employment before the end of the COBRA Reimbursement Period. In any event, and notwithstanding any provision to the contrary in this paragraph, MessageMedia's obligations 2 3 under this paragraph shall forever cease no later than by the end of the COBRA Reimbursement Period. The parties agree that any payments made under this paragraph 2(b) is provided solely in consideration for Mr. Cagan's executing and not revoking the ADEA waiver and release set forth in paragraph 14. 3. OTHER CONSIDERATION. Except as expressly provided herein or in the Agreement for Temporary Part-time Employment attached hereto as Exhibit A, the Cagan Parties acknowledge and agree that the Cagan Parties will not receive (nor are the Cagan Parties entitled to receive) any additional consideration, payments, reimbursements, incentive payments, stock, equity interests or benefits of any kind. Mr. Cagan further acknowledges and agrees that on or before the Resignation Date MessageMedia paid to Mr. Cagan in full any and all wages, salary, accrued but unused vacation, floating holiday accrued but not taken, personal time off, commissions, bonuses, stock options, incentive payments and compensation due and owing, if any, as of the Resignation Date. 4. DENIAL OF LIABILITY. The parties acknowledge that any payment by MessageMedia and any release by Mr. Cagan and CaganCo pursuant to this Agreement are made to ensure that Mr. Cagan's resignation from full-time employment and the termination of all agreements with CaganCo is amicable, that in making any such payment or release, MessageMedia and the Cagan Parties in no way admit any liability to each other and that they expressly deny any such liability. 5. NONDISPARAGEMENT. The Cagan Parties and MessageMedia agree that neither party will at any time disparage the other to third parties in any manner likely to be harmful to the other party, their business reputation, or the personal or business reputation of its directors, shareholders and/or employees. Notwithstanding the prohibition in the preceding sentence, each party shall respond accurately and fully to any question, inquiry, or request for information when required by legal process. 6. MESSAGEMEDIA PROPERTY. Prior to the Resignation Date, Mr. Cagan agrees to return to MessageMedia all MessageMedia documents (and all copies thereof) and any and all other MessageMedia property in Mr. Cagan's possession, custody or control, including, but not limited to, financial information, customer information, customer lists, employee lists, MessageMedia files, notes, cellular telephones, contracts, drawings, records, business plans and forecasts, financial information, specifications, computer-recorded information, software, tangible property, credit cards, entry cards, identification badges and keys, and any materials of any kind which contain or embody any proprietary or confidential material of MessageMedia (and all reproductions thereof), except as necessary to fulfill Mr. Cagan's duties as a member of MessageMedia's Board of Directors or as an employee under the Agreement for Temporary Part-time Employment. 7. CONFIDENTIALITY. The provisions of this Agreement shall be held in strictest confidence by the Cagan Parties and MessageMedia and shall not be publicized or disclosed in any manner whatsoever. Notwithstanding the representations and prohibitions in this paragraph: (a) the parties may disclose this Agreement in confidence to their respective attorneys, accountants, auditors, tax preparers, and financial advisors; (b) MessageMedia may disclose this 3 4 Agreement as necessary to fulfill standard or legally required corporate reporting or disclosure requirements; (c) MessageMedia may disclose this Agreement upon request from any government entity; and (d) the parties may disclose this Agreement insofar as such disclosure may be necessary to enforce its terms or as otherwise required by law. 8. BUSINESS EXPENSE REIMBURSEMENT. MessageMedia agrees to reimburse Mr. Cagan for those reasonable business expenses he necessarily incurred in his capacity as a MessageMedia employee or consultant up to and including the Resignation Date, to the extent that such reimbursement is consistent with MessageMedia's policies in this regard. Mr. Cagan must submit the necessary documentation establishing the amount, date and reason for expenses he incurred and for which he seeks reimbursement no later than 15 days after the Execution Date. 9. REFERENCES. To coordinate MessageMedia's response to any inquiries from prospective employers seeking employment references concerning Mr. Cagan, Mr. Cagan agrees to direct such prospective employers exclusively to the MessageMedia Vice President of Human Resources. Should the Vice President of Human Resources receive an inquiry, the Vice President (or an authorized agent acting on behalf of the Vice President) shall confirm Mr. Cagan's period of employment with MessageMedia, the position he held, and the latest salary that he received as an employee. 10. NON-DISCLOSURE OF PROPRIETARY INFORMATION. Mr. Cagan acknowledges and agrees that he is obligated to keep in the strictest of confidence, and not to use or to disclose to any person, firm or corporation any trade secrets, confidential knowledge, data or other proprietary information of MessageMedia. By way of illustration only, this shall include information relating to products, processes, know-how, designs, formulas, methods, samples, developmental or experimental work, improvements, discoveries, plans for research and new products, plans for marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers, and information regarding the skills, knowledge, background, performance, salary, compensation or benefits of any MessageMedia employee other than Mr. Cagan himself ("Confidential Information"). Mr. Cagan further acknowledges that MessageMedia received confidential or proprietary information from third parties subject to a duty on MessageMedia to maintain the confidentiality of such information and/or to use the information only for certain limited purposes. Mr. Cagan agrees to keep in the strictest of confidence, and not to use or to disclose to any person, firm or corporation any trade secrets, confidential knowledge, data or other proprietary information of such third parties. Nothing in this paragraph does, is intended to, nor should be construed to, narrow the obligations of Mr. Cagan imposed by any other provision herein, any other agreement, law or other source. 11. ENFORCEMENT OF PROPRIETARY RIGHTS. Mr. Cagan agrees to assist MessageMedia in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, mask work and other intellectual property rights throughout the world, relating to MessageMedia Inventions, defined below, in any and all countries. Mr. Cagan further agrees to execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as MessageMedia may reasonably request for use in applying for, obtaining, 4 5 perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, Mr. Cagan agrees to execute, verify and deliver assignments of such Proprietary Rights to MessageMedia or its designee. Mr. Cagan's obligation to assist MessageMedia with respect to Proprietary Rights relating to such MessageMedia Inventions in any and all countries shall continue beyond the Resignation Date, but, if MessageMedia's CEO requests Mr. Cagan's services in writing, MessageMedia will compensate Mr. Cagan at a reasonable rate after the Resignation Date for the time actually spent by Mr. Cagan rendering such assistance. In the event MessageMedia is unable for any reason, after reasonable effort, to secure Mr. Cagan's signature on any document needed to execute, verify, or deliver any document assigning any trade secret, patent, copyright, mask work or intellectual property right throughout the world relating to MessageMedia Inventions, Mr. Cagan hereby irrevocably designates and appoints MessageMedia and its duly authorized officers and agents as his agent and attorney in fact, which appointment is coupled with an interest, to act for and in Mr. Cagan's behalf to execute, verify and file any such documents and to do all of his lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by Mr. Cagan. By way of illustration but not limitation, "MessageMedia Inventions" includes trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques, any patents, patent applications, copyrights, trademarks, and pending copyrights or trademarks. Nothing in this paragraph does, is intended to, nor should be construed to narrow the obligations of Mr. Cagan imposed by any other provision herein, any other agreement, law or other source. 12. NONCOMPETITION AND NONSOLICITATION. Mr. Cagan acknowledges that while he was employed with MessageMedia, he acted as Interim Chief Executive Officer, was a member of executive and management personnel at MessageMedia, and was privy to extremely sensitive, confidential and valuable commercial information, and trade secrets belonging to MessageMedia, the disclosure of which information and secrets would greatly harm MessageMedia. In addition, Mr. Cagan acknowledges that the consideration received as an employee of MessageMedia, as well as a portion of the consideration received in the mutual provisions and covenants as part of this Agreement, are in return for his covenants to preserve the good will of MessageMedia. As a reasonable measure to protect MessageMedia from the harm of such disclosure and use of its information and trade secrets against it, and as a reasonable measure to preserve the trade secrets of MessageMedia, the parties agree to the following as part of this Agreement: (a) NON-COMPETITION COVENANT. Mr. Cagan agrees and acknowledges that for a period of six (6) months following after the Termination Date as defined in paragraph 10 of the Agreement for Temporary Part-time Employment, attached as Exhibit A, he will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director, officer or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation, partnership, joint venture or other business entity that engages in the marketing or sale of e-mail based customer relationship management and direct marketing services or any computer program, product, process, system, or service marketed, sold or under development by MessageMedia. The parties agree that no more than 1% of the outstanding voting stock of a publicly traded company or any stock owned 5 6 by Mr. Cagan as of the Resignation Date shall not constitute a violation of this paragraph. Mr. Cagan further agrees and acknowledges that because of the nature and type of business that MessageMedia engages in, the geographic scope of the non-compete shall include all counties, cities, and states of the United States and that such a geographic scope is reasonable. Nothing in this paragraph should be construed to narrow the obligations of Mr. Cagan imposed by any other provision herein, any other agreement, law or other source. (b) NON-SOLICITATION COVENANT. Mr. Cagan acknowledges that he was privy to highly sensitive personnel information, including (without limitation) information concerning the skills, knowledge, and background of MessageMedia employees, performance evaluations of employees by MessageMedia, salary, compensation and benefits paid by MessageMedia to its employees and other confidential, private and commercially valuable information. Mr. Cagan acknowledges that disclosure of such information to others would be detrimental to MessageMedia, and could lead to the loss of employees and knowledge critical to the business of MessageMedia. Mr. Cagan also acknowledges that he was privy to valuable and confidential information and trade secrets concerning relationships between MessageMedia and customers, vendors, investors, consultants, independent contractors and other business entities, and that severance or alteration of such relationships would be highly detrimental to MessageMedia. Accordingly, as a part of this Agreement and for the period during the Employment Agreement, and six months after the Termination Date under the Agreement for Temporary Part-time Employment, Mr. Cagan agrees not to solicit, either directly or indirectly, any employee or director of MessageMedia to terminate or alter his or her relationship with MessageMedia. Mr. Cagan further agrees that for the period during the Employment Agreement, and six months after the Termination Date, he will not, either directly or indirectly, solicit or attempt to solicit any customer, client, supplier, investor, vendor, consultant or independent contractor of MessageMedia to terminate, reduce or negatively alter his, her or its relationship with MessageMedia. Mr. Cagan further agrees and acknowledges that because of the nature and type of business that MessageMedia engages in, the geographic scope of the non-compete shall include all counties, cities, and states of the United States and that such a geographic scope is reasonable. Nothing in this paragraph 12 or its subparagraphs should be construed to narrow the obligations of Mr. Cagan imposed by any other provision herein, any other agreement, law or other source. (c) REASONABLE. Mr. Cagan agrees and acknowledges that the time limitation on the restrictions in this paragraph 12 and its subparagraphs are reasonable. Mr. Cagan also acknowledges and agrees that the limitation in this paragraph 12 and its subparagraphs is reasonably necessary for the protection of MessageMedia, that through this Agreement he shall receive adequate consideration for any loss of opportunity associated with the provisions herein, and that these provisions provide a reasonable way of protecting MessageMedia's business value which was imparted to him. Mr. Cagan further agrees that these restrictions are necessary because it is inevitable that he will disclose Confidential Information without such restrictions. If any restriction set forth in this paragraph 12 and its subparagraphs is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time, it shall be interpreted to extend only over the maximum period of time as to which it may be enforceable. Mr. Cagan acknowledges and agrees that the provisions in this paragraph 12 and its subparagraphs are essential and material to this Agreement, and that upon breach of this 6 7 paragraph 12 and its subparagraphs by Mr. Cagan, MessageMedia is entitled to recover any payments or other consideration made pursuant to this Agreement, to withhold providing additional payments or consideration, to equitable relief to prevent continued breach, to recover damages and to seek any other remedies available to MessageMedia. 13. RELEASE OF CLAIMS BY MR. CAGAN AND CAGANCO. In exchange for the consideration set forth in this Agreement and the mutual covenants of MessageMedia and the Cagan Parties, the Cagan Parties hereby release, acquit and forever discharge MessageMedia, its affiliated corporations and entities, its and their officers, directors, agents, representatives, servants, attorneys, employees, shareholders, successors and assigns of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known or unknown, suspected and unsuspected, disclosed and undisclosed, liquidated or contingent, arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the Execution Date, including but not limited to: any and all such claims and demands directly or indirectly arising out of or in any way connected with Mr. Cagan's employment with MessageMedia or any prior consulting relationship between Mr. Cagan or CaganCo and MessageMedia, change of status in employment, or the conclusion of that employment; claims or demands related to salary, bonuses, commissions, stock, stock options, or any ownership interests in MessageMedia, vacation pay, personal time off, fringe benefits, expense reimbursements, sabbatical benefits, severance benefits, or any other form of compensation; claims pursuant to any federal, any state or any local law, statute, common law, regulation or cause of action including, but not limited to, the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA") under the terms set forth in paragraph 14 below, the federal Civil Rights Act of 1964, as amended; claims for attorney's fees, costs and other expenses under Title VII of the federal Civil Rights Act of 1964, as amended, or any other statute, agreement or source of law; the federal Americans with Disabilities Act of 1990; the Family and Medical Leave Act; the Employee Retirement Income Security Act; the Colorado Fair Employment and Housing Act; Colorado Labor Code; tort law; contract law; wrongful discharge; discrimination; harassment; fraud; defamation; libel; emotional distress; breach of contract and breach of the implied covenant of good faith and fair dealing. The Cagan Parties agree that in the event either brings a claim covered by this release in which he seeks damages against MessageMedia or in the event he seeks to recover against MessageMedia in any claim brought by a governmental agency on his behalf, this Agreement shall serve as a complete defense to such claims. 14. ADEA WAIVER AND RELEASE BY MR. CAGAN. Mr. Cagan acknowledges that Mr. Cagan is knowingly and voluntarily waiving and releasing any rights Mr. Cagan may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA Waiver and Release"). Mr. Cagan acknowledges that the consideration given for this ADEA Waiver and Release, provided for in paragraph 2(a), is in addition to anything of value to which Mr. Cagan was already entitled. The parties agree and acknowledge that Mr. Cagan has been advised by this writing, as required by the ADEA that: (a) this ADEA Waiver and Release does not apply to any claims under ADEA that may arise after the date that Mr. Cagan signs this Agreement; (b) Mr. Cagan has the right to and is advised to consult with an attorney prior to executing this Agreement; (c) Mr. Cagan has twenty-one days within which to consider this ADEA Waiver and Release (although Mr. Cagan may choose to voluntarily execute this ADEA Waiver and Release 7 8 earlier); and (d) Mr. Cagan has seven days following the execution of this Agreement to revoke Mr. Cagan's ADEA Waiver and Release by sending, via certified United States mail, written notice of revocation to the attention of MessageMedia, Inc., Attention: Sue Morse, 6060 Spine Road Boulder, CO 80301. This ADEA waiver shall not be effective until the date upon which the Revocation Period has expired, which shall be deemed by the parties to be the eighth (8th) day after this Agreement is signed by Mr. Cagan (this date is hereinafter referred to as the "ADEA Effective Date"). The parties acknowledge and agree that revocation by Mr. Cagan of the ADEA Waiver and Release is not effective to revoke Mr. Cagan's waiver or release of any other claims pursuant to this Agreement. The parties further agree that revocation by Mr. Cagan of the ADEA Waiver and Release shall entitle MessageMedia to recover any and all consideration of any form given by MessageMedia in consideration for Mr. Cagan executing and not revoking the ADEA Waiver and Release, and to recover the costs, expenses and attorney's fees incurred in attempting to recover such payments. 15. TAX CONSEQUENCES. The Cagan Parties expressly acknowledges that MessageMedia has not made, nor herein makes, any representation about the tax consequences of any consideration provided by MessageMedia to Mr. Cagan pursuant to this Agreement. Mr. Cagan agrees to identify and hold MessageMedia harmless for any and all claims or penalties asserted against MessageMedia for failure to pay taxes due on any consideration provided by MessageMedia pursuant to this Agreement. 16. COOPERATION. Mr. Cagan agrees to fully cooperate with MessageMedia in connection with any MessageMedia defense, prosecution, or investigation by MessageMedia regarding any actual or potential litigation, administrative proceeding, or other such procedures, in which MessageMedia may be involved as a party or non-party from time to time. 17. NO THIRD PARTY RIGHTS. The parties agree that by making this Agreement they do not intend to confer any benefits privileges or rights to others. The Agreement is strictly between the parties hereto, subject to the terms of paragraph 21 below, and that it shall not be construed to vest in any other the status of third-party beneficiary. 18. VOLUNTARY AND KNOWINGLY. Mr. Cagan and CaganCo acknowledge that, before executing this Agreement, they have been advised and given the opportunity to consult with counsel and has in fact sought and received advice from counsel of her own choosing, and was fully advised of his rights under law. Mr. Cagan and CaganCo further acknowledges that they have reviewed this Agreement in its entirety, understands it, and voluntarily executes it. 19. DUTY TO EFFECTUATE. The parties agree to perform any lawful additional acts, including the execution of additional agreements, as are reasonably necessary to effectuate the purpose of this Agreement. 20. ENTIRE AGREEMENT. Except for those agreements expressly referenced herein, this Agreement, including Exhibit A hereto, constitutes the complete, final and exclusive embodiment of the entire agreement between Mr. Cagan, CaganCo, and MessageMedia with regard to the subject matter hereof. The parties intend that any prior agreement, whether written or oral, with regard to any employment or consulting relationship between Mr. Cagan and 8 9 MessageMedia and CaganCo and MessageMedia shall forever terminate, and this Agreement shall define any further obligations that MessageMedia has to Mr. Cagan and CaganCo. This Agreement is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein. It may not be modified except in a writing signed by Mr. Cagan and CaganCo and a duly authorized officer of MessageMedia. 21. SUCCESSORS AND ASSIGNS. This Agreement, including Exhibit A hereto, shall bind the heirs, personal representatives, successors, assigns, executors and administrators of each party, and insure to the benefit of each party, its heirs, successors and assigns. 22. APPLICABLE LAW. The parties agree and intend that this Agreement be construed and enforced in accordance with the laws of the State of Colorado. 23. FORUM. This Agreement will be governed by and construed according to the laws of the State of Colorado as such laws are applied to agreements entered into and to be performed entirely within Colorado between Colorado residents. The Cagan Parties hereby expressly understands and consents that this Agreement is a transaction of business in the State of Colorado and in the City and County of Boulder, Colorado, and constitutes the minimum contacts necessary to make Mr. Cagan subject to the personal jurisdiction and venue of the federal courts located in the State of Colorado, and the state courts located in the County of Boulder, Colorado. Mr. Cagan agrees and acknowledges that any controversy arising out of or relating to this Agreement or the breach thereof, or any claim or action to enforce this Agreement or portion thereof, or any controversy or claim requiring interpretation of this Agreement must be brought in federal court within the State of Colorado or a state court located in the City and County of Boulder, Colorado. No such action may be brought in any forum outside the State of Colorado. Any action brought in contravention of this paragraph by one party is subject to dismissal at any time and at any stage of the proceedings by the other, and no action taken by the other in defending, counter claiming or appealing shall be construed as a waiver of this right to immediate dismissal. A party bringing an action in contravention of this paragraph shall be liable to the other party for the costs, expenses and attorney's fees incurred in successfully dismissing the action or successfully transferring the action to the federal courts located in the State of Colorado, or the state courts located in the County of Boulder, Colorado. 24. SEVERABLE. If any provision of this Agreement is determined to be invalid, void or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement, and the provision in question shall be modified so as to be rendered enforceable. 25. ENFORCE ACCORDING TO TERMS. The parties intend this Agreement to be enforced according to their terms. 26. EXECUTION DATE. This Agreement is effective on the later of the dates that each party signed this Agreement ("Execution Date"). 27. COUNTERPARTS. This Agreement may be executed in one or more counterparts, any of which need not contain the signatures of more than one party but all signed counterparts taken together will constitute one and the same argument. 9 10 28. SECTION HEADINGS. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 29. EXPIRATION. Unless otherwise agreed to by MessageMedia in writing signed by an authorized MessageMedia representative, this agreement must be executed by Mr. Cagan and delivered to MessageMedia no later than January 4, 2000 to be effective or binding on MessageMedia. IN WITNESS WHEREOF, the parties have duly authorized and caused this Agreement to be executed as follows: DENNIS CAGAN MESSAGEMEDIA, INC., An individual A Delaware corporation By: - ----------------------------- -------------------------------- Dennis Cagan Its: ------------------------------- Date: , 1999 Date: , 1999 ------------------------ ------------------------ CAGANCO, INC., A corporation By: -------------------------- Dennis Cagan, President Date: , 1999 ------------------------ EXHIBIT A: AGREEMENT FOR TEMPORARY PART-TIME EMPLOYMENT 10 11 EXHIBIT A AGREEMENT FOR TEMPORARY, PART-TIME EMPLOYMENT BETWEEN MESSAGEMEDIA, INC AND DENNIS CAGAN This Agreement for Temporary, Part-time Employment ("Employment Agreement") is entered into by and between MESSAGEMEDIA, INC. ("MessageMedia" or the "Company") and DENNIS CAGAN ("Mr. Cagan") (collectively, "Parties"), as consideration for the terms, provisions and covenants in the Release Agreement between MessageMedia and Mr. Cagan, attached hereto and incorporated herein by reference ("Release Agreement"), effective as of the same day as the Resignation Date, as defined in the Release Agreement. I. RECITALS WHEREAS, as of the Execution Date of this Employment Agreement, Mr. Cagan currently is an employee of MessageMedia; WHEREAS, the Parties have entered into the Release Agreement, by which all past and future duties, rights, and obligations of the Parties are released; WHEREAS, in consideration for the provisions and covenants in the Release Agreement, MessageMedia and Mr. Cagan desire that Mr. Cagan's employment with MessageMedia continue without interruption in accordance with the terms and conditions set forth herein; WHEREAS, in accordance with the terms and conditions of the provisions of this Employment Agreement, MessageMedia wishes to compensate Mr. Cagan for part-time work for MessageMedia; WHEREAS, MessageMedia desires to employ Mr. Cagan and to assure itself of the availability of the services of Mr. Cagan beginning the day after the Resignation Date, as defined in paragraph 1 of the Release Agreement ("Resignation Date"); WHEREAS, Mr. Cagan desires to be employed by MessageMedia under the terms and conditions contained herein. II. COVENANTS NOW, THEREFORE, in consideration of the above set forth recitals which are incorporated herein by reference, the terms, provisions, and covenants of the Release Agreement, and the mutual promises and covenants set forth in this Employment Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows: 1. EMPLOYMENT. MessageMedia hereby agrees to employ Mr. Cagan, and Mr. Cagan hereby accepts such employment under the terms set forth herein. The Parties acknowledge that Mr. Cagan's employment with MessageMedia continues uninterrupted in accordance with the terms and conditions contained herein. 2. TERM OF EMPLOYMENT. MessageMedia agrees to employ Mr. Cagan on a part-time and temporary basis and for a period beginning on the same day as the Resignation Date, as defined in the Release Agreement and ending on the Termination Date, as defined in paragraph 10 below. 3. DUTIES. Mr. Cagan shall render part-time services to MessageMedia at MessageMedia's Boulder, Colorado, office. Mr. Cagan's services shall consist of his providing advice and assistance relating to strategic leadership and consulting. Mr. Cagan also shall provide assistance on other related projects. Mr. Cagan shall report directly to MessageMedia's Chief Executive Officer, who is, at the present time, Larry Jones. Mr. Cagan's responsibilities, title, working conditions, duties, and/or any other aspect of Mr. Cagan's employment may be changed, added to or eliminated during his employment at the sole discretion of MessageMedia. 4. PART-TIME. The Parties agree and acknowledge that Mr. Cagan's employment is temporary and part-time. The Parties anticipate that Mr. Cagan shall perform his duties within a time commitment of ten to twenty hours per month. Because Mr. Cagan's position is classified as exempt, Mr. Cagan will not be eligible for overtime premiums. 12 5. SALARY. Mr. Cagan acknowledges and agrees that he will be compensated for work requested and performed at a rate of $1,000 per eight hour day, less payroll deductions and all required withholdings, to be paid in periodic installments in accordance with MessageMedia's customary practices (as they may be changed by MessageMedia from time to time in its sole discretion). Mr. Cagan shall not be compensated any amounts for days on which he does not perform services at the request of MessageMedia for at least eight hours. 6. STOCK OPTIONS. MessageMedia has previously granted to Mr. Cagan three stock options, consisting of the "Nonstatutory Option" (as defined in the Employment Agreement between MessageMedia and Mr. Cagan effective as of January 11, 1999 (the "January Agreement")) to purchase 125,000 shares of MessageMedia common stock ("Stock"), the "Option" (as defined in the January Agreement) to purchase 15,000 shares of Stock and the "Supplemental Option" (as defined in the January Agreement) to purchase 135,000 shares of Stock (collectively, the "Cagan Options"). a. THE NONSTATUTORY OPTION. MessageMedia and Mr. Cagan acknowledge and agree that the vesting of all otherwise unvested shares of Stock subject to the Nonstatutory Option has previously been accelerated and that the Nonstatutory Option has been exercised in full by Mr. Cagan. Accordingly, no shares of Stock remain available for purchase under the Nonstatutory Option. b. THE OPTION AND THE SUPPLEMENTAL OPTION (THE "REMAINING OPTION"). Inasmuch as Mr. Cagan is continuing his employment with MessageMedia and has not terminated his Continuous Status as an Employee or Consultant (within the meaning applicable under the Option and the Supplemental Option), such Remaining Options shall continue in effect, in accordance with and subject to their respective terms and conditions, during the period of Mr. Cagan's employment under this Employment Agreement. MessageMedia and Mr. Cagan acknowledge that, as of October 1, 1999, the Remaining Options are fully vested and exercisable as to all shares of Stock subject to the Remaining Options, according to the applicable provisions thereof. c. NO OTHER STOCK RIGHTS. Mr. Cagan hereby acknowledges and agrees that (i) neither he nor any party related to or affiliated with him (each a "Cagan Party," as defined in the Release Agreement) has been granted stock options, stock purchase rights or any other rights or awards with respect to the acquisition or receipt of Stock ("Stock Rights"), except for the Cagan Options as described in this paragraph 6, and (ii) the Remaining Options constitute the only outstanding Stock Rights held by any Cagan Party as of the date of execution of this Employment Agreement. 7. MESSAGEMEDIA BENEFITS, SICK LEAVE, HOLIDAYS AND REIMBURSEMENT. Mr. Cagan and MessageMedia agree that Mr. Cagan shall not be eligible to receive MessageMedia benefits, health insurance coverage, life insurance coverage, any other insurance coverage, vacations, sick leave, holidays, or fringe benefits. MessageMedia will reimburse Mr. Cagan in accordance with MessageMedia reimbursement policies in effect from time to time for all reasonable and customary business expenses incurred during Mr. Cagan's employment, provided that Mr. Cagan promptly furnish to MessageMedia adequate records and documentary evidence of such expense. 8. POLICIES AND PROCEDURES. As an employee of MessageMedia, Mr. Cagan agrees that he is subject to and will comply with the policies and procedures of MessageMedia, as such policies and procedures may be modified, added to or eliminated from time to time at the sole discretion of MessageMedia, except to the extent any such policy or procedure specifically conflicts with the express terms of this Employment Agreement or the Release Agreement. Mr. Cagan further agrees and acknowledges that any written or oral policies and procedures of MessageMedia do not constitute contracts between MessageMedia and Mr. Cagan. 9. PROPRIETARY INFORMATION AND INVENTIONS AND OTHER OBLIGATIONS. Mr. Cagan agrees that his employment under this Agreement is contingent upon his execution of MessageMedia's Employee Proprietary Information and Inventions Agreement, attached hereto as Exhibit 1, which is incorporated herein by reference. Mr. Cagan agrees that he will sign and return the MessageMedia's Employee Proprietary Information and Inventions Agreement. 10. TERMINATION OF EMPLOYMENT. It is understood and agreed by MessageMedia and Mr. Cagan that this Employment Agreement does not contain any promise or representation concerning the duration of Mr. Cagan's employment with MessageMedia. Mr. Cagan specifically acknowledges that his part-time employment with MessageMedia is at-will and may be altered or terminated by either Mr. Cagan or MessageMedia at any time, with or without cause. The nature, terms or conditions of Mr. Cagan's employment with MessageMedia cannot be changed by any oral representation, custom, habit or practice, or any other writing. In the event of conflict between this disclaimer and any other statement, oral 2 13 or written, present or future, concerning terms and conditions of employment, the at-will relationship confirmed by this disclaimer shall control. Under the terms below, the last date of Mr. Cagan's employment is the Termination Date. a. TERMINATION BY COMPANY. The Company may terminate this Employment Agreement immediately in its sole discretion upon Mr. Cagan's breach of this Employment Agreement, including Exhibit 1, or breach of the provisions or covenants under the Release Agreement. The Company may terminate this Employment Agreement at any time, with or without cause, upon providing Mr. Cagan 15 days written notice to his last known address. Mr. Cagan is responsible for notifying and updating MessageMedia of his current address. b. TERMINATION BY MR. CAGAN. Mr. Cagan may terminate this Employment Agreement at any time upon fifteen days notice to the Vice President of Human Resources of MessageMedia, 6060 Spine Road, Boulder, CO 80301. c. TERMINATION BY DEATH. If Mr. Cagan shall die during the terms of this Agreement, this Agreement shall terminate immediately upon Mr. Cagan's death. 11. NONCOMPETITION AND NONSOLICITATION. Mr. Cagan acknowledges that during his prior employment with MessageMedia, he acted as Interim Chief Executive Officer, was a member of executive and management personnel at MessageMedia, and was privy to extremely sensitive, confidential, and valuable commercial information, and trade secrets belonging to MessageMedia, the disclosure of which information and secrets would greatly harm MessageMedia. In addition, Mr. Cagan acknowledges that the consideration received as both a full-time and a part-time employee of MessageMedia, as well as a portion of the consideration received in the mutual provisions and covenants as part of this Employment Agreement, are in return for his covenants to preserve the good will of MessageMedia. As a reasonable measure to protect MessageMedia from the harm of such disclosure and use of its information and trade secrets against it, and as a reasonable measure to preserve the trade secrets of MessageMedia, the parties agree to the following as part of this Agreement: a. NON-COMPETITION COVENANT. Mr. Cagan agrees and acknowledges that during his part-time employment and for a period of six (6) months following the termination of this Employment Agreement under Section 10, he will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director, officer or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation, partnership, joint venture or other business entity that engages in the marketing or sale of e-mail based customer relationship management and direct marketing services or any computer program, product, process, system, or service marketed, sold or under development by MessageMedia. The parties agree that no more than 1% of the outstanding voting stock of a publicly traded company or any stock owned by Mr. Cagan as of the Resignation Date shall not constitute a violation of this paragraph. Nothing in this paragraph should be construed to narrow the obligations of Mr. Cagan imposed by any other provision herein, any other agreement, law or other source. b. NON-SOLICITATION COVENANT. Mr. Cagan acknowledges that he has been and will be privy to highly sensitive personnel information, including (without limitation) information concerning the skills, knowledge, and background of MessageMedia employees, performance evaluations of employees by MessageMedia, salary, compensation and benefits paid by MessageMedia to its employees and other confidential, private and commercially valuable information. Mr. Cagan acknowledges that disclosure of such information to others would be detrimental to MessageMedia and could lead to the loss of employees and knowledge critical to the business of MessageMedia. Mr. Cagan also acknowledges that he was and will be privy to valuable and confidential information and trade secrets concerning relationships between MessageMedia and customers, vendors, investors, consultants, independent contractors and other business entities, and that severance or alteration of such relationships would be highly detrimental to MessageMedia. Accordingly, as a part of this Employment Agreement, Mr. Cagan agrees not to solicit, either directly or indirectly, any employee or director of MessageMedia to terminate or alter his or her relationship with MessageMedia during this Employment Agreement or for six months after the termination of this Employment Agreement under Section 10. Mr. Cagan further agrees that for the period of this Employment Agreement and for six months after the termination of this Employment Agreement under Section 10, he will not, either directly or indirectly, solicit or attempt to solicit any customer, client, supplier, investor, vendor, consultant or independent contractor of MessageMedia to terminate, reduce or negatively alter his, her or its relationship with MessageMedia. Mr. Cagan further agrees and acknowledges that because of the nature and type of business that MessageMedia engages in, the geographic scope of the covenant not to compete shall include all counties, cities, and states of the United States and that such a geographic scope is reasonable. Nothing in this paragraph 11 or its 3 14 subparagraphs should be construed to narrow the obligations of Mr. Cagan imposed by any other provision herein, any other agreement, law or other source. c. REASONABLE. Mr. Cagan agrees and acknowledges that the time limitation on the restrictions in this paragraph 11 and its subparagraphs are reasonable. Mr. Cagan also acknowledges and agrees that the limitation in this paragraph 11 and its subparagraphs is reasonably necessary for the protection of MessageMedia, that through this Agreement he shall receive adequate consideration for any loss of opportunity associated with the provisions herein, and that these provisions provide a reasonable way of protecting MessageMedia's business value which was imparted to him. Further, Mr. Cagan agrees that the restrictions contained herein are necessary because it is inevitable that Mr. Cagan will disclose Confidential Information, as defined in Exhibit 1, without such restriction. If any restriction set forth in this paragraph 11 and its subparagraphs is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time, it shall be interpreted to extend only over the maximum period of time as to which it may be enforceable. Mr. Cagan acknowledges and agrees that the provisions in this paragraph 11 and its subparagraphs are essential and material to this Agreement, and that upon breach of this paragraph 12 and its subparagraphs by Mr. Cagan, MessageMedia is entitled to recover any payments or other consideration made pursuant to this Agreement, to withhold providing additional payments or consideration, to equitable relief to prevent continued breach, to recover damages and to seek any other remedies available to MessageMedia. 12. NO CONFLICT OF INTEREST. Mr. Cagan agrees during the term of this Employment Agreement not to accept work or enter into a contract or accept an obligation, inconsistent or incompatible with Mr. Cagan's obligations under this Employment Agreement or the scope of services rendered for MessageMedia. Mr. Cagan warrants that to the best of his knowledge, there is no other existing contract or duty on Mr. Cagan's part inconsistent with this Employment Agreement, unless a copy of such contract or a description of such duty is attached to the Company's Employee Proprietary Information, and Inventions Agreement as Exhibit 1 thereto. Mr. Cagan further agrees not to disclose to the MessageMedia, or bring onto MessageMedia premises, or induce MessageMedia to use any confidential information that belongs to anyone other than MessageMedia or Mr. Cagan. 13. SURVIVAL. Mr. Cagan acknowledges and agrees that he remains bound by the provisions and covenants contained in paragraphs 8, 9, and 11, and the Employee Proprietary Information and Inventions Agreement, the Release Agreement after the termination of his employment, without regard for what reason this Employment Agreement is terminated. 14. TAX CONSEQUENCES. Mr. Cagan agrees to be responsible for the payment of any taxes due on any and all compensation provided to him by MessageMedia pursuant to paragraphs 5 and 6 of this Employment Agreement. Mr. Cagan agrees to indemnify MessageMedia and hold MessageMedia harmless from any and all claims or penalties asserted against MessageMedia for any failure to pay taxes due on any compensation provided by MessageMedia pursuant to paragraphs 5 and 6 of this Employment Agreement. Mr. Cagan expressly acknowledges that MessageMedia has not made, nor herein makes, any representation about the tax consequences of any consideration provided by MessageMedia to Mr. Cagan pursuant to this Employment Agreement. 15. SUCCESSORS AND ASSIGNS. Mr. Cagan may not assign any right or obligation arising under this Employment Agreement. MessageMedia may assign any right or obligation arising under this Employment Agreement. This Employment Agreement shall bind the heirs, personal representatives, successors, executors and administrators of each party, and insure to the benefit of each party, its heirs, and successors. 16. GOVERNING LAW. The parties agree that this Employment Agreement and all disputes relating to or requiring interpretation of this Agreement or relating to Mr. Cagan's employment with MessageMedia shall be governed by and construed according to the laws of the State of Colorado as such laws are applied to agreements entered into and to be performed entirely within Colorado between Colorado residents. 17. CONSENT TO PERSONAL JURISDICTION AND EXCLUSIVE FORUM. This Employment Agreement will be governed by and construed according to the laws of the State of Colorado as such laws are applied to agreements entered into and to be performed entirely within Colorado between Colorado residents. Mr. Cagan hereby expressly understands and consents that this Employment Agreement is a transaction of business in the State of Colorado and in the City and County of Boulder, Colorado, and constitutes the minimum contacts necessary to make Mr. Cagan subject to the personal jurisdiction and venue of the federal courts located in the State of Colorado and the state courts located in the County of Boulder, Colorado. Mr. Cagan agrees and acknowledges that any controversy arising out of or relating to this Employment 4 15 Agreement or the breach thereof, or any claim or action to enforce this Employment Agreement or portion thereof, or any controversy or claim requiring interpretation of this Employment Agreement must be brought in federal court within the State of Colorado or a state court located in the City and County of Boulder, Colorado. No such action may be brought in any forum outside the State of Colorado. Any action brought in contravention of this paragraph by one party is subject to dismissal at any time and at any stage of the proceedings by the other, and no action taken by the other in defending, counter claiming or appealing shall be construed as a waiver of this right to immediate dismissal. A party bringing an action in contravention of this paragraph shall be liable to the other party for the costs, expenses and attorney's fees incurred in successfully dismissing the action or successfully transferring the action to the federal courts located in the State of Colorado, or the state courts located in the City and County of Boulder, Colorado. 18. SEVERABLE. If any provision of this Employment Agreement is determined to be invalid, void or unenforceable, in whole or in part, this determination will not affect any other provision of this Employment Agreement, and the provision in question shall be modified so as to be rendered enforceable. 19. ENFORCE ACCORDING TO TERMS. The parties intend this Employment Agreement to be enforced according to their terms. 20. SECTION HEADINGS. The section and paragraph headings contained in this Employment Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Employment Agreement. 21. COUNTERPARTS. This Employment Agreement may be executed in one or more counterparts, any of which need not contain the signatures of more than one party but all signed counterparts taken together will constitute one and the same argument. 22. ENTIRE AGREEMENT. This Employment Agreement, including Exhibit 1, together with the Release Agreement, supersede all prior agreements, written or oral, between Mr. Cagan and MessageMedia as of the Effective Date regarding Mr. Cagan's employment with MessageMedia except as such agreements are otherwise expressly identified and noted in this Employment Agreement or Release Agreement. No provisions of this Employment Agreement shall be changed or modified in whole or in part except by an agreement in writing by Mr. Cagan and the MessageMedia Chief Executive Officer. Mr. Cagan agrees that waiver by either party of any breach by the other party of any provision of this Employment Agreement shall not be deemed or construed to be a waiver or permission for continued waiver of a later breach of such provision. I have read this Employment Agreement and understand its terms. I have been advised to seek legal counsel before signing this Employment Agreement. Dated this _____ day of December, 1999. MESSAGEMEDIA, INC. DENNIS CAGAN By: By: ------------------------------- ------------------------------- Name: Dennis Cagan ----------------------------- Title: ---------------------------- 5 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 Subsidiaries of the Registrant EPub Holdings, Inc., a Delaware corporation. DBits Acquisition Corporation, an Illinois corporation. Revnet Systems, Inc., an Alabama corporation. Decisive Technology Corporation, a California corporation. EX-23.1 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 333-24789, 333-70831, 333-81089 and 333-86735) pertaining to the 1994 Incentive and Non-Statutory Stock Option Plan, the 1995 Stock Plan, the Employee Stock Purchase Plan, options granted outside of any plan and the Decisive Technology Corporation 1996 Stock Option Plan of MessageMedia, Inc. and in the Registration Statements (Forms S-3 No. 333-42855, 333-70959, 333-42855, 333-70959, 333-81081, 333-86731, and 333-89967) of MessageMedia, Inc. and the related Prospectus of our report dated February 4, 2000 with respect to the consolidated financial statements and schedules of MessageMedia, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1999. ERNST & YOUNG LLP Denver, Colorado March 29, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1 US DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 37,920,277 0 4,849,511 571,834 0 42,947,491 8,034,450 3,306,611 123,191,245 5,765,314 0 0 0 54,920 117,335,203 123,191,245 0 10,021,544 4,589,358 52,266,425 0 0 0 (46,269,261) 0 (46,269,261) 0 0 0 (46,269,261) (1.00) (1.00)
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