10-Q/A 1 d91191ae10-qa.txt AMENDMENT NO. 1 TO FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q/A AMENDMENT NO. 1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 [ ] 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 incorporation or organization) Identification Number) 371 CENTENNIAL PARKWAY LOUISVILLE, COLORADO 80027 (Address, including zip code, of principal executive offices) (303) 440-7550 (Registrant's telephone number, including area code) 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 Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes No Applicable Only to Corporate Issuers Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $0.001 Par Value - 68,642,801 shares as of May 4, 2001. 1 MESSAGEMEDIA, INC. INDEX

2 This amended Quarterly Report on Form 10-Q/A amends and restates in its entirety MessageMedia's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 as of the date of filing the original Form 10-Q, May 7, 2001, except for the "Liquidity and Capital Resources" section of Part I, Item 2, which is amended and restated as of the date of filing this Form 10-Q/A, and paragraphs three and four of Note 1 to Financial Statements, which are amended and restated as of September 28, 2001. Except for the "Liquidity and Capital Resources" section and Note 1, this amended Quarterly Report on Form 10-Q/A speaks as of the end of the quarter ended March 31, 2001 or as of the date of filing the original Form 10-Q, as required by Form 10-Q, and does not update any of the statements contained therein. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MESSAGEMEDIA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data)

See accompanying notes to the condensed consolidated financial statements. 3 MESSAGEMEDIA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data) (Unaudited)

See accompanying notes to the condensed consolidated financial statements. 4 MESSAGEMEDIA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)

See accompanying notes to the condensed consolidated financial statements. 5 MESSAGEMEDIA, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in MessageMedia, Inc.'s ("MessageMedia" or the "Company") Form 10-K/A for the year ended December 31, 2000. During 2001, we have continued to focus on reducing expenses in order to reduce cash burn. The continuing weakness in the economy, which was further aggravated by the recent World Trade Center attacks, has resulted in a decline in revenues as customers continue to reduce their marketing expenditures. Accordingly, we have reduced our revenues forecast for the third and fourth quarters of 2001. The decline in forecasted revenues is accompanied by reductions in forecasted expenses as we continue to manage spending. The result is a decline in forecasted cash balances for the remainder of 2001. We entered into a merger agreement with DoubleClick Inc. The merger is expected to close in the fourth quarter of 2001. If this merger does not occur, we plan to seek alternative sources of funding or another merger partner. Additionally, if this merger does not occur, we currently forecast that we will not have sufficient unrestricted cash throughout November 2001 to satisfy the terms of our $3.0 million bank loan from Wells Fargo. Specifically, a financial covenant of the loan agreement requires that we maintain an unrestricted cash balance of at least $2.0 million. A breach of this covenant would constitute a default under the loan and entitle Wells Fargo to require its immediate repayment. If Wells Fargo exercises this right, unless we could secure alternative sources of funding, we would have insufficient working capital to maintain our operations through December 31, 2001. Net Loss Per Share Basic and diluted earnings per share are 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 and warrants were not included in the calculation of diluted earnings per share. The antidilutive securities consist of the following:

For further information, refer to the consolidated financial statements and footnotes thereto included in MessageMedia, Inc's ("MessageMedia" or the "Company") Form 10-K/A for the year ended December 31, 2000. 2. JOINT VENTURE On March 13, 2000, we entered into a definitive agreement with @viso Limited ("@viso"), a strategic partnership between Vivendi and SOFTBANK Corp. ("SOFTBANK"), to create MessageMedia Europe B.V., Inc., a joint venture between MessageMedia and @viso. Under terms of the joint venture agreement, we own 51% and @viso owns 49% of MessageMedia Europe. The initial capitalization of the joint venture was funded with $14.8 million during the second quarter of 2000. The financial results of MessageMedia Europe are consolidated into our financial statements. For the three months ended March 31, 2001, MessageMedia Europe recorded revenue of approximately $841,000 and a loss after minority interest of approximately $1.4 million. Our March 31, 2001 condensed consolidated balance sheet includes total assets, including cash, of $10.1 million for MessageMedia Europe. Recently, MessageMedia and @viso initiated an evaluation of the strategic direction of MessageMedia Europe and are considering potential alternatives to its current business plan. Because we are only in the preliminary stages of evaluating options, any potential change to the business of MessageMedia Europe cannot presently be assessed, and there can be no assurance that the ultimate decision of @viso and MessageMedia will not have a material adverse affect upon our business. 3. OTHER COMPREHENSIVE INCOME Other comprehensive income as of March 31, 2001 and March 31, 2000 consists of a foreign currency translation income related to MessageMedia Europe of $182,000 and $5,000, respectively. Therefore, the comprehensive loss for the three months ending March 31, 2001 and March 31, 2000 is as follows (in thousands): 6

4. BUSINESS SEGMENTS Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision makers of an enterprise. Under this definition, beginning in the third quarter of 2000, we have operated under two segments: messaging and related services, and software licenses and services. The factors used by management to identify reportable segments are differences in products and services and the management organization. Services included in the messaging and related services segment are principally outsourced e-mail communication and campaign management in a full service bureau model. Products and services included in the software licenses and services segment include a software product that is sold as both boxed software or as a hosted service. Separate financial information by segment for total assets is not available and is not evaluated by the chief operating decision makers of MessageMedia. We do not have intersegment revenue, and the chief decision makers of MessageMedia evaluate segment performance based on revenue. The revenue by segment is as follows (in thousands):

5. RESTRUCTURE CHARGE In the fourth quarter of the year 2000, we recorded a charge of $7.0 million as a result of our decision to eliminate certain business development efforts, including e-service, an online customer care solution, our wireless messaging research product and our secure e-mail delivery product. These product lines had not yet contributed to revenue, and a decision was made to reduce operating expense and conserve cash in future periods. The eliminations and reductions in manpower supporting these product lines resulted in the elimination of 125 positions. All of these product lines were discontinued and positions were eliminated during December 2000, although severance payments have been made throughout 2001. In addition to the cost of eliminating these positions, the discontinuance of these development efforts resulted in the recognition of restructuring charges for contractual obligations and software investments incurred to support these product lines. Finally, this charge also provided for a reduction in occupancy costs in Colorado as well as in our Chicago and San Francisco sales offices. The $7.0 million charge included $1.5 million for severance cost, $1.1 million for terminations of contracts for services and software planned to be included in the eventual product offerings, $1 million for facility rent expense for the six months following the December 2000 business restructuring, $500,000 for the estimated differential between sublease income and rent expense, $400,000 for broker fees associated with subleases of the facilities, $100,000 for incidental expenses of the subleasing process, $900,000 for a write-off of the book value of software purchased in conjunction with product lines that were eliminated in the December 2000 business restructuring, $1.2 million for the write-off of the remaining unamortized leasehold improvements in vacated facilities and $300,000 for the write-off of undepreciated furniture and fixtures within vacated facilities. These assets provided no further value to our continuing operations. Under the 2000 restructure plan, we have made total payments and disposals as follows (in thousands):

We estimate that most of the future cash expenditures related to this plan will be made by December 31, 2001. The objective of this restructuring was to reduce costs by over $16 million annually. With the savings relating to a reduction in outside engineering and marketing expenditures, facility costs and manpower, we expect to achieve savings of approximately $3.5 million in cost of revenues, $4.2 million in marketing and sales expenses, $1.8 million in research and engineering expenses and $6.6 million in general and administrative expenses. 6. CHANGES IN CAPITAL STRUCTURE On February 22, 2001, we sold 11,267,606 shares of our common stock to seven accredited investors, including affiliates of SOFTBANK Venture Capital, Pequot Capital Management, Inc. and REBAR, LLC, for an aggregate purchase price of approximately $8,000,000. The sale of the common stock was not registered under the Securities Act of 1933, as amended, in reliance on Section 4(2) and/or Regulation D promulgated thereunder. The securities were not offered or sold by any form of general solicitation and the purchasers represented their intention to acquire the 7 securities for investment purposes only and not with a view toward the distribution thereof. No earlier than May 23, 2001, we will file a Registration Statement on Form S-3 covering the resale of such securities if requested by the purchasers. 7. SUBSEQUENT EVENT As part of our continuing focus on cost containment, in April 2001, we reduced our domestic headcount. This reduction in force of 56, or approximately 20% of the United States workforce, is expected to reduce our United States quarterly operating expenses during the third quarter of 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This amended Report on Form 10-Q/A contains forward-looking statements, including statements regarding our strategy, financial performance and revenue sources that involve risks and uncertainties. Our actual results may differ significantly from the results discussed 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 10. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of certain risks and factors that may affect our business. The following discussion should be read in conjunction with our financial statements and notes thereto. COMPANY OVERVIEW We are a leader in permission-based e-mail marketing and messaging solutions. We use advanced technology, tools and applications to help our customers fully utilize the Internet to increase sales, improve customer communications and develop long-term customer loyalty and customer dialogue. Our outsourced services provide customers with: o a comprehensive set of e-messaging solutions for businesses that seek to increase sales, improve customer communications and develop long-term customer loyalty; o permission-based e-messaging to create an immediate two-way dialogue with customers; o tools to track, review and refine e-messaging campaigns by leveraging our expertise and proprietary technology; o rapidly deployable, cost-effective outsourced solutions that eliminate the need to invest in the technology, hardware and human resources necessary to implement and manage a comprehensive set of e-messaging and e-intelligence solutions; and o the ability to manage large volumes of simple or complex customer communications and easily integrate more advanced e-messaging and e-survey and database applications. Our software solutions provide customers with: o a complete solution for e-mail marketing and e-mail communications that integrates with relational databases such as Oracle or SQL Server; o functions such as targeted e-mail, including both filtering and data segmentation, personalized e-mail, dynamic content editing and trackable URLs and campaign sequencing; and o typical e-mail list server functions such as reliable high throughput e-mail delivery, bounce management, discussion lists, announcement lists and easy unsubscribes. In December 1998, we acquired Distributed Bits LLC, also known as Dbits, and Email Publishing Inc., also known as Epub. DBits was a development stage company developing customer e-mail management systems and solutions and Epub was a leading provider of outsourced e-mail message delivery services. In August 1999, we acquired Revnet Systems, Inc., also known as Revnet, and Decisive Technology Corporation, also known as Decisive. Revnet was a leading developer and supplier of software solutions providing businesses and organizations with "in-house" e-mail message delivery capability and outsourced e-mail message delivery services. Decisive was a leading provider of online e-intelligence solutions such as surveys. In March 2000, MessageMedia Europe began operations. We have incurred net operating losses in each quarter since inception. As of March 31, 2001, we had an accumulated deficit of approximately $191.7 million. There can be no assurance that our future revenues will increase or not decrease. We expect to continue to incur significant operating losses for the foreseeable future. RESULTS OF OPERATIONS Revenues For the three months ended March 31, 2001, revenues increased to approximately $8.7 million compared to approximately $7.0 million for the three months ended March 31, 2000. This increase is primarily attributable to an increase in the number of customers using our software products and services in the United States and an increase in messaging and software services generated by MessageMedia Europe. 8 Costs and Operating Expenses In the fourth quarter of 2000, we discontinued investment in some product lines, reduced marketing expenditures, consolidated and closed facilities and eliminated 125 employees. The objective of this restructuring was to reduce costs by over $16 million annually. With the savings relating to a reduction in outside engineering and marketing expenditures, facility costs and manpower, we expect to achieve savings of approximately $3.4 million in cost of revenues, $4.2 million in marketing and sales expense, $1.8 million in research and engineering expenses and $6.6 million in general and administrative expenses. Cost of revenues. The cost of revenues for the messaging and software service businesses consists of salaries, benefits, consulting fees and operational costs related to providing our services and software. For the three months ended March 31, 2001, the cost of revenues increased to approximately $3.8 million compared to approximately $2.9 million for the three months ended March 31, 2000. This increase is primarily attributable to increased headcount required to service our growing customer base, the related growth in the number of mailings and e-messaging volume and the incremental increase in cost of revenues as a result of the startup of MessageMedia Europe. Marketing and sales expenses. Marketing and sales expenses, which include salaries, wages, consulting fees, advertising, trade shows, travel and other marketing expenses, decreased to approximately $3.0 million for the three months ended March 31, 2001, compared to approximately $5.5 million for the three months ended March 31, 2000. This decrease is primarily due to a reassessment of marketing needs and a corresponding reduction in marketing activities for the fiscal year 2001. Research, development and engineering expenses. Research, development and engineering expenses, which include salaries, wages and consulting fees to support the development, enhancement and maintenance of our products and services, increased to approximately $1.4 million for the three months ended March 31, 2001, compared to approximately $1.3 million for the three months ended March 31, 2000. This increase is primarily due to expenses incurred in relation to the ongoing engineering efforts related to the development of a more robust messaging platform. General and administrative expenses. General and administrative expenses consist primarily of salaries, wages, professional and consulting fees, facility costs and other expenses associated with the general management and administration of our company. General and administrative expenses increased to approximately $3.8 million for the three months ended March 31, 2001, compared to $3.5 million for the three months ended March 31, 2000. This increase is primarily due to additional facility costs associated with the relocation of the corporate function and messaging business unit within Colorado. These general and administrative expenses include facility costs of $1.0 million for the three months ended March 31, 2001, compared to $0.3 million for the three months ended March 31, 2000. Depreciation and amortization expenses. Depreciation and amortization expense decreased to $11.5 million for the three months ended March 31, 2001, compared to approximately $13.7 million for the three months ended March 31, 2000. The most significant reason for the decrease was that amortization of goodwill, associated with the acquisitions of EPub and DBits, had been fully expensed in 2000. Goodwill resulting from acquisitions is amortized over two years. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, we had $14.0 million in cash and cash equivalents, including $4.5 million in restricted cash. Of the $14.0 million, $12.3 million was held by us and $1.7 million was held by MessageMedia Europe. On December 29, 2000, we received a $3.0 million bank loan from Wells Fargo, and on February 22, 2001, we raised $8.0 million in funding from a private placement of our common stock to SOFTBANK Venture Capital, Pequot Capital Management, Inc., and REBAR, LLC. Historically, we have experienced recurring losses and have been unable to generate sufficient working capital needed to meet our cash needs. During 2000, we began restructuring our organization to reduce our expenditures on infrastructure, including rent, salaries and other service expenses. During 2001, we have continued to focus on reducing expenses in order to reduce cash burn. The continuing weakness in the economy, which was further aggravated by the recent World Trade Center attacks, has resulted in a decline in our revenues as customers continue to reduce their marketing expenditures. Accordingly, we have reduced our revenues forecast for the fourth quarter of 2001. The decline in forecasted revenues is accompanied by reductions in forecasted expenses as we continue to manage spending. The result is a decline in forecasted cash balances for the remainder of 2001. We entered into an amended and restated merger agreement with DoubleClick Inc. The merger is expected to close in December 2001. If this merger does not occur, we plan to seek alternative sources of funding or another merger partner. In connection with the amended and restated merger agreement, DoubleClick agreed to lend us up to $1.5 million for operating requirements that arise in the ordinary course of business, subject to conditions set forth in a note purchase agreement and an escrow agreement. DoubleClick loaned us $1.0 million of this amount on October 29, 2001. The note purchase agreement, together with the escrow agreement, provides that, if the Securities and Exchange Commission, or the SEC, has not declared the registration statement on Form S-4 relating to the merger effective by November 12, 2001, and there are no outstanding comments from the SEC that relates to us as that time, and we certify that we are in compliance with all of our obligations under the amended and restated merger agreement, which shall not have been terminated, and the note purchase agreement as of November 12, 2001, DoubleClick will loan us an additional $500,000. We currently have a bank loan from Wells Fargo Equipment Finance, or Wells Fargo. A financial covenant of the loan agreement requires that we maintain an unrestricted cash balance of at least $2.0 million. We currently forecast that we will have sufficient unrestricted cash to prevent triggering Wells Fargo's right to require immediate repayment of the bank loan prior to the closing of the merger with DoubleClick. If the loan from DoubleClick becomes due and payable prior to December 1, 2001, however, we currently forecast that we will not have sufficient unrestricted cash to comply with the Wells Fargo loan and that Wells Fargo will have the right to require repayment during December 2001. Additionally, if the merger is not consummated pursuant to the terms of the amended and restated merger agreement, we currently forecast that we will not have sufficient unrestricted cash to comply with the Wells Fargo loan and that Wells Fargo will have the right to require its repayment during January 2002. If Wells Fargo exercises its right to require immediate repayment at any time, unless we have previously secured alternative sources of funding, we would have insufficient working capital to remain solvent. Net cash used in operating activities was approximately $8.9 million and $8.6 million for the three months ended March 31, 2001 and 2000, respectively. Net operating cash flows for the three months ended March 31, 2001 were primarily attributable to net losses, increases in minority interest, settlement of accounts payable and payment of restructuring charges offset by non-cash charges for depreciation and amortization. Net operating cash flows for the three months ended March 31, 2000 were primarily attributable to net losses offset by non-cash charges for depreciation and amortization, as well as increases in accounts receivable and prepaid expenses. Net cash used in investing activities was approximately $733,000 and $4.5 million for the three months ended March 31, 2001 and 2000, respectively. Investing activities related to additions of furniture, computer equipment and software. Net cash provided by financing activities was approximately $7.6 million and $3.4 million for the three months ended March 31, 2001 and 2000, respectively. Net cash provided by financing activities for the three months ended March 31, 2001 related primarily to proceeds from the February 22, 2001 private placement of our common stock to SOFTBANK Venture Capital, Pequot Capital Management, Inc., and REBAR, LLC. Net cash provided by financing activities for the three months ended March 31, 2000 related primarily to proceeds received from the exercise of stock options. 9 FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK You should consider carefully the risks described below before deciding to purchase our common stock. 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 harmed. 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 an accumulated deficit of approximately $191.7 million as of March 31, 2001. We have not achieved profitability and expect to continue to incur operating losses at least through the end of 2001. We intend to continue to invest in research and development and strategic marketing activities. Accordingly, we expect to continue to incur significant operating expenditures and, as a result, will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve sufficient revenues 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 revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we likely will incur future operating losses. WE ANTICIPATE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO FALL. We expect that our future operating results will fluctuate significantly, both in absolute terms and relative to analyst and investor expectations, which could cause our stock price to fall. 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: o fluctuating market demand for our e-messaging solutions; o difficulties in the integration of existing technologies and the development or deployment of new products or services; o seasonal and cyclical spending patterns in our industry; o the mix of the products and services that we provide; and o the cost of compliance with applicable government regulations, including privacy legislation. Our revenue for the foreseeable future will remain dependent on sales of our e-messaging solutions, the fees that we charge for our services and license fees for our software products. These future revenues may fluctuate due to the factors listed above and therefore are difficult to forecast. As a result, we may be unable to adjust our internal operating expenses 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 financial condition would be materially and adversely affected. This could affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance. Due to these risks, 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. OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN THE FUTURE DUE TO REASONS OTHER THAN OUR OPERATING RESULTS. Our common stock has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to operating performance. The trading price of our common stock has in the past and could in the future fluctuate in response to factors such as: o changes in recommendations of securities analysts; o announcements of technological innovations or of new services or products by us or our competitors; o publicity regarding actual or potential results with respect to technologies, services or products under development by us or our competitors; and o limited investment analyst coverage. In addition, the stock market has experienced extreme price and volume fluctuations. The market prices of securities of Internet-related companies have been especially volatile. If such volatility continues, our stock price may fluctuate greatly regardless of our operating results. WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK PRICE VOLATILITY, WHICH COULD NEGATIVELY IMPACT OUR BUSINESS. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may in the future be the target of similar litigation. Securities litigation could harm our reputation, result in substantial costs and divert our management's attention and resources, regardless of the merits or outcome of the case. OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET, RESULTING IN A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. Our common stock is currently listed on the NASDAQ National Market. If we fail to maintain the qualification for our common stock to trade on The NASDAQ National Market, including the requirement that our common stock maintain a $1.00 minimum per share bid price, our common stock could be subject to delisting. We currently do not comply with The NASDAQ National Market's continued listing requirements because our common stock has failed to maintain a $1.00 minimum per share bid price, but we have a probationary period in which we can achieve compliance before we are delisted from The NASDAQ National Market. There can be, however, no assurance that we will be able to achieve the continued listing requirements and maintain them for the necessary period for continued listing on The NASDAQ National Market. 10 If our common stock is delisted from The Nasdaq National Market, trading, if any, would be conducted in the over-the-counter market in the so-called 'pink sheets' or the OTC Bulletin Board, which was established for securities that do not meet the listing requirements of The Nasdaq National Market. Consequently, selling our common stock would be more difficult because smaller quantities of shares could be bought and sold, transactions could be delayed and security analysts' and news media's coverage of us may be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of our common stock. In addition, if our common stock is delisted from The Nasdaq National Market, our common stock may become subject to the 'penny stock' regulations, including Rule 15g-9 under the Securities Exchange Act of 1934. That rule imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. In the event that our common stock becomes subject to the penny stock rules, the market liquidity for the shares would be adversely affected. WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO SUPPORT OUR CAPITAL NEEDS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS. It may be necessary for us to raise additional capital in the future in order to execute our business plan, develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures. Any required additional financing might not be available on terms acceptable to us, or at all. If our common stock is delisted from The Nasdaq National Market, our ability to raise capital through debt or equity financing could be impaired greatly. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our operations or repay our outstanding obligations. SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR LARGE STOCKHOLDERS COULD CAUSE OUR STOCK PRICE TO FALL. A small 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. A private placement transaction completed by us in February 2001 increased both the number of our securities that will become available for resale to the public and the number of our securities held by several of our larger stockholders. In this instance, we issued 7,746,479 shares of our common stock to affiliates of SOFTBANK Venture Capital, who together constitute our largest stockholder, 704,225 shares to affiliates of Pequot Capital Management, Inc., and 2,816,902 shares to REBAR, LLC. Not earlier than May 23, 2001, these investors may demand that we effect the registration of these shares, after which they may be sold in the public markets without restriction. OUR FAILURE TO ENHANCE OUR EXISTING PRODUCTS AND SERVICES OR INTRODUCE NEW PRODUCTS AND SERVICES ON A TIMELY BASIS COULD CAUSE OUR REVENUES TO FALL. We continually strive to develop significant enhancements to our products and services and introduce new products and services. We may not be able to develop the underlying core technologies necessary to create new enhancements or new products and services and may not be able to license those technologies from third parties, on a timely basis or at all. Any delay or difficulty associated with the introduction of these enhancements, new products or new services by us could cause our customers to use the products and services of our competitors. This could cause our revenues to decline. IF WE FAIL TO EFFECTIVELY MANAGE CHANGES TO OUR OPERATIONS, OUR BUSINESS COULD SUFFER. We continue to adjust the scope of our operations and manage adjustments to the size of our workforce. Rapid changes to our business have placed and may 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. Our business, results of operations and financial condition will be harmed if we are unable to effectively manage these changes to our operations. WE DEPEND ON THIRD-PARTY INTERNET AND TELECOMMUNICATIONS PROVIDERS TO OPERATE OUR BUSINESS. INTERRUPTIONS IN THE SERVICES THESE COMPANIES PROVIDE COULD HAVE AN ADVERSE EFFECT ON OUR REVENUE. We depend heavily on several third-party providers of Internet and related telecommunication services, including hosting and co-location companies, in operating our business. These companies may not continue to provide services to us without disruptions in service or within the time frame required by us, at the current cost or at all. These disruptions in or loss of services could cause a loss of revenue and customers. 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. COMPETITION IN OUR INDUSTRY IS INTENSE AND LIKELY WILL CONTINUE TO INTENSIFY, WHICH COULD CAUSE A LOSS OF MARKET SHARE AND REVENUE. The market for our products and services is intensely competitive. Our principal competitors are in the e-messaging services arena, but we also 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. There are no substantial barriers to entry into our business and we expect that established and new entities, such as Internet service providers, will enter the market for e-messaging solutions. We also expect that competition within our market may increase as a result of industry consolidation. Potential competitors may choose to enter the market for e-messaging solutions 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 customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. 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 11 current or potential competitors have broad distribution channels that may result in better access to end-users or purchasers. Increased competition as a result of any of the above factors may result in price reductions, reduced revenues and loss of market share, any of which would harm our business, results of operations and financial condition. TECHNICAL STANDARDS UPON WHICH OUR PRODUCTS AND SERVICES ARE BASED ARE RAPIDLY CHANGING, WHICH COULD CAUSE REVENUES TO DECLINE. The e-messaging market is characterized by rapidly changing technical standards. 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, which would make it more difficult for us to generate future revenues. OUR COMPETITORS MAY DEVELOP PRODUCTS OR SERVICES THAT RENDER OUR PRODUCTS AND SERVICES UNCOMPETITIVE, WHICH COULD CAUSE A DECREASE IN REVENUES. New market entrants have introduced or are developing products and services for use on the Internet that compete with our products. The products, services or technologies developed by others may render our products and services uncompetitive or obsolete. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies, enhance existing solutions and develop and introduce a variety of new solutions to address 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 to new or existing solutions must meet the requirements of our current and prospective customers. Material delays in introducing new solutions and enhancements may cause customers to forego purchases of our solutions and purchase those of our competitors, which would negatively impact our revenues. E-MAIL MARKETING MAY NOT GAIN MARKET ACCEPTANCE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. The degree to which our e-messaging platform is accepted and used in the marketplace depends 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, also will be important. Businesses that already have invested substantial resources in traditional or other methods of marketing may be reluctant to adopt new commercial methods or strategies, such as e-mail marketing. In addition, individuals with established patterns of purchasing goods and services based on traditional marketing methods may be reluctant to alter those patterns. As a result of the factors listed above, e-mail marketing may not be accepted by the marketplace, which would have a material adverse effect on our business. WE FACE RISKS OF DEFECTS AND DEVELOPMENT DELAYS IN OUR PRODUCTS AND SERVICES, WHICH COULD HARM OUR REPUTATION AND REVENUE GROWTH. Products and services based on sophisticated software and computing systems often encounter defects and development delays. Our underlying software may contain hidden errors and failures when introduced or when usage increases. We may experience delays in the development of the software and computing systems underlying our services. We may not locate these errors if they occur. These occurrences could harm our reputation and revenue growth. 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. Our systems are dependent in part upon our ability to protect our operating systems against physical damage from fire, floods, earthquakes, power loss, telecommunications failures and similar events. We do not currently have redundant, multiple site capacity in the event of any such occurrence. Our systems also are potentially vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. To the extent that we do not effectively address any system failures, our business, results of operations and financial condition would be materially and adversely affected. WE FACE SECURITY RISKS AND POTENTIAL LIABILITY ASSOCIATED WITH MISAPPROPRIATION OF CONFIDENTIAL INFORMATION, WHICH COULD HARM OUR BUSINESS. 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 access to and use of this database server. Any unauthorized access to or use of 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. Our use of disclaimers and limitation of warranty provisions in our customer agreements in an attempt to limit our liability to our customers may not be effective in limiting our exposure to damage claims. IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR PROPRIETARY RIGHTS, OUR COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, WHICH COULD IMPAIR OUR COMPETITIVENESS OR CAUSE OUR EXISTING PRODUCTS AND SERVICES TO BECOME OBSOLETE. 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. These legal protections, however, may be inadequate to safeguard the proprietary software underlying our products and services, and we may not have adequate remedies for any breach. In addition, we have applied for various patents and trademarks, including trademarks for 'MessageMedia' and 'UnityMail,' and cannot assure you that any of these applications will be approved. Our competitors also may be able to develop e-messaging technologies that are functionally equivalent to ours without infringing any of our proprietary rights. Parties may also 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. 12 Any failure by us to adequately protect our proprietary rights may allow our competitors to gain access to our technology. This may result in our competitors developing functionally equivalent or superior e-messaging technologies, which may impair our competitiveness or render our existing products and services obsolete. WE MAY BECOME SUBJECT TO INCREASED GOVERNMENT REGULATION, WHICH COULD MAKE OUR BUSINESS MORE COSTLY TO OPERATE OR DECREASE THE DEMAND FOR OUR PRODUCTS AND SERVICES. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. We believe that we currently are not subject to direct regulation by any governmental agency in the United States, other than regulations that are generally applicable to all businesses, newly enacted laws prohibiting the sending of 'spam' and 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 hinder 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 United States and international laws governing issues such as property ownership, copyright, trade secret, libel, taxation and personal privacy is uncertain and developing. Any new application or interpretation of existing laws could have a material adverse effect on our business. FACTORS RELATING TO INTERNATIONAL EXPANSION COULD IMPAIR OUR BUSINESS. On March 13, 2000, we signed a definitive agreement with @viso to create MessageMedia B.V., our European joint venture. Since this date, this joint venture developed its service platform and commenced the sale of its services. Recently, the two shareholders of the joint venture, @viso and MessageMedia, initiated an evaluation of the strategic direction of the joint venture and are evaluating potential alternatives to the current business plan of the joint venture. Because we are only in the preliminary stages of evaluating options, any potential change to the business cannot presently be assessed, and there can be no assurance that the ultimate decision of the shareholders will not have a material adverse affect upon our business. 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 filing of our original Quarterly Report on Form 10-Q, May 7, 2001. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MessageMedia's interest income is sensitive to changes in the general level of United States interest rates and, as of December 31, 2000, to European interest rates. Because all of MessageMedia's investments are in short-term investments with maturities of less than three months, however, MessageMedia has concluded there is no material interest rate risk exposure for these investments. MessageMedia also faces interest rate risk because MessageMedia has fixed rate debt. As of December 31, 2000, MessageMedia also faced exposure to movements in foreign currency exchange rates because MessageMedia had foreign currency denominated debt. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On February 22, 2001, we sold 11,267,606 shares of our common stock to seven accredited investors, including affiliates of SOFTBANK Venture Capital, Pequot Capital Management, Inc. and REBAR, LLC, for an aggregate purchase price of approximately $8,000,000. The sale of the common stock was not registered under the Securities Act of 1933, as amended, in reliance on Section 4(2) and/or Regulation D promulgated thereunder. The securities were not offered or sold by any form of general solicitation and the purchasers represented their intention to acquire the securities for investment purposes only and not with a view toward the distribution thereof. No earlier than May 23, 2001, we will file a Registration Statement on Form S-3 covering the resale of such securities if requested by the purchasers. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 13 ITEM 5. OTHER INFORMATION The management of the Company is not aware of any events required to be reported hereunder. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 10.1* - Master Loan and Security Agreement, dated as of December 29, 2000, between MessageMedia, Inc. and Well Fargo Equipment Finance, Inc. 10.2* - Prabhuling Patel Employment Agreement, dated as of June 1, 2000, between MessageMedia, Inc. and Prabhuling Patel 10.3* - William E. Buchholz Employment Agreement, dated as of February 25, 2001, between MessageMedia, Inc. and William Buchholz (B) Reports on Form 8-K None * Previously filed as exhibits to our Form 10-Q for the fiscal quarter ended March 31, 2001, filed on May 7, 2001. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MESSAGEMEDIA, INC. Date: November 8, 2001 By: /s/ A. Laurence Jones ----------------------------- A. Laurence Jones President, Chief Executive Officer and Director (Duly Authorized Officer) By: /s/ William E. Buchholz ------------------------------ William E. Buchholz Senior Vice President, Finance and Administration, Chief Financial Officer and Secretary (Principal Financial Officer) 15

MESSAGEMEDIA INC 10-Q/A