10QSB 1 c58302e10qsb.txt FORM 10-QSB 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 0-23243 -------------------------------------------------------------------------------- POPMAIL.COM, INC. (Exact Name of Small Business Issuer as specified in Its Charter) MINNESOTA 31-1487885 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1333 CORPORATE DRIVE, SUITE 350, IRVING, TX. 75038 (Address of Principal Executive Offices) 972-550-5500 (Issuer's Telephone Number, Including Area Code) (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 1, 2000, there were 4,747,052 shares of common stock, $.01 par value, outstanding. Transitional Small Business Disclosure Format (check One): Yes [ ] No [X] 1 2 FORWARD-LOOKING STATEMENTS Certain of the matters discussed in the following pages constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. Forward-looking statements involve a number of risks and uncertainties, and, in addition to the factors discussed in this Form 10-QSB, other factors that could cause actual results to differ materially are the following: the economic conditions in the new markets into which the Company expands and the possible uncertainties in the customer base in these areas; competitive pressures from other providers of Internet marketing services and other restaurant companies; ability to raise additional capital required to support the Company's operations and enable the Company to pursue its business plan; government regulation of the Internet; business conditions, such as inflation or a recession, and growth in the general economy; changes in monetary and fiscal policies, other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. -------------------------------------------------------------------------------- 2 3 POPMAIL.COM, INC. FORM 10-QSB INDEX OCTOBER 1, 2000 Page ---- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - As of October 1, 2000 and January 2, 2000 4 Condensed Consolidated Statements of Operations - For the thirteen weeks and thirty-nine weeks ended October 1, 2000 and October 3, 1999 5 Condensed Consolidated Statements of Cash Flows - For the thirty-nine weeks ended October 1, 2000 and October 3, 1999 6 Notes to the Condensed Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II OTHER INFORMATION ITEM 1. Legal Proceedings 28 ITEM 2. Changes in Securities and Use of Proceeds 28 ITEM 6. Exhibits and Reports on Form 8-K 29 Signatures 30 3 4 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS POPMAIL.COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 1, 2000 January 2, 2000 ------------------ ------------------ ASSETS CURRENT ASSETS Cash and equivalents $ 322,514 $ 1,136,137 Restricted cash 2,000,000 -- Accounts receivable, net 656,350 270,558 Notes receivable 315,000 -- Inventories 76,602 -- Other current assets 813,097 450,015 ------------------ ------------------ Total current assets 4,183,563 1,856,710 PROPERTY AND EQUIPMENT, net 3,257,435 2,946,584 ASSETS HELD FOR SALE, net 3,000,000 7,549,644 GOODWILL, net 74,796,430 36,277,346 OTHER ASSETS 2,982,695 7,312 ------------------ ------------------ $88,220,123 $ 48,637,596 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 343,952 $ 6,037,518 Convertible promissory notes payable 1,500,000 1,460,417 Accounts payable 2,041,444 1,329,222 Due to affiliates -- 120,000 Accrued expenses 3,362,600 1,111,204 ------------------ ------------------ Total current liabilities 7,247,996 10,058,361 LONG-TERM OBLIGATIONS, less current maturities -- 1,321,643 ------------------ ------------------ Total liabilities 7,247,996 11,380,004 ------------------ ------------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.01 par value, 100,000,000 shares authorized; 46,196,044 and 24,695,872 shares issued and outstanding 461,960 246,958 Series C 8% convertible preferred stock -- 693,000 Series D 8% convertible preferred stock -- 2,288,000 Series E convertible preferred stock 386,366 350,000 Series F preferred stock 48,640,477 -- Series G 10% convertible redeemable preferred stock 6,000,000 -- Additional paid-in capital 110,470,734 74,901,160 Less common stock subscribed and notes receivable from affiliates (3,386,000) (2,850,000) Accumulated deficit (81,601,410) (38,371,526) ------------------ ------------------ Total shareholders' equity 80,972,127 37,257,592 ------------------ ------------------ $88,220,123 $ 48,637,596 ================== ==================
The accompanying condensed notes are an integral part of these financial statements. 4 5 POPMAIL.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen weeks ended Thirty-nine weeks ended October 1, 2000 October 3, 1999 October 1, 2000 October 3, 1999 ------------------- -------------------- ------------------- -------------------- REVENUES Internet marketing services, net $ 1,008,831 $ 2,910 $ 2,194,792 $ 2,910 COSTS AND EXPENSES: General, administrative & develop. 5,247,755 1,827,570 12,777,765 2,788,346 Amortization of goodwill 9,788,488 885,844 22,302,813 885,844 ------------------- -------------------- ------------------- -------------------- Total costs and expenses 15,036,243 2,713,414 35,080,578 3,674,190 ------------------- -------------------- ------------------- -------------------- LOSS FROM OPERATIONS (14,027,412) (2,710,504) (32,885,786) (3,671,280) OTHER INCOME (EXPENSE) Interest expense (280,095) (372,165) (1,820,731) (759,497) Interest income -- 1,567 83,355 4,754 Debt guarantee costs -- -- (155,000) -- Financial advisory services (380,215) -- (2,565,359) -- Loss on sale of assets -- -- (761,707) -- ------------------- -------------------- ------------------- -------------------- (660,310) (370,598) (5,219,442) (754,743) ------------------- -------------------- ---------------------------------------- NET LOSS FROM CONTINUING OPERATIONS (14,687,722) (3,081,102) (38,105,228) (4,426,023) DISCONTINUED OPERATIONS Loss from operations of discontinued restaurant division (188,256) (88,674) (816,213) (1,119,457) Loss on disposal of restaurant division including provision of $200,000 for operating losses during Phase-out period (4,058,443) -- (4,058,443) -- ------------------- -------------------- ------------------- -------------------- NET LOSS $ (18,934,421) $(3,169,776) $(42,979,884) $ (5,545,480) PREFERRED STOCK DIVIDENDS AND ACCRETION 150,000 3,146,232 250,000 3,338,461 ------------------- -------------------- ------------------- -------------------- LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (19,084,421) $(6,316,008) $(43,229,884) $ (8,883,941) =================== ==================== =================== ==================== BASIC AND DILUTED LOSS PER COMMON SHARE: Continuing operations $ (0.34) $ (0.25) $ (1.03) $ (0.46) Discontinued operations (0.10) (0.01) (0.13) (0.12) ------------------- -------------------- ------------------- -------------------- Net loss $ (0.44) $ (0.26) $ (1.16) $ (0.58) =================== ==================== =================== ==================== BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER COMMON SHARE $ (0.45) $ (0.51) $ (1.16) $ (0.93) =================== ==================== =================== ==================== BASIC AND DILUTED WEIGHTED AVERAGE OUTSTANDING SHARES 42,736,862 12,423,730 37,206,305 9,601,808 =================== ==================== =================== ====================
The accompanying condensed notes are an integral part of these financial statements. 5 6 POPMAIL.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirty-nine weeks ended October 1, 2000 October 3, 1999 ------------------ ------------------ OPERATING ACTIVITIES: Net cash used in operating activities (11,269,967) (3,182,982) INVESTING ACTIVITIES: Purchases of property and equipment (2,328,206) (4,504,680) FINANCING ACTIVITIES: Proceeds from issuance of stock 10,603,252 -- Proceeds from issuance of preferred stock, net 4,100,000 6,200,000 Proceeds from exercise of options and warrants 7,938,545 262,420 Proceeds from short-term notes payable -- 1,435,000 Proceeds from long-term debt -- 1,000,000 Proceeds from convertible notes payable -- 2,000,000 Tenant allowance collected -- 1,962,500 Advances from shareholder -- (100,000) Cash restricted during the period (2,000,000) -- Payments on advances from shareholders and officers (120,000) -- Payments on convertible notes payable (500,000) -- Payments on short-term notes payable (7,109,291) (4,738,756) Payments on long-term debt (127,956) (127,938) ------------------ ------------------ Net cash provided by financing activities 12,784,550 7,893,226 ------------------ ------------------ INCREASE (DECREASE) IN CASH EQUIVALENTS (813,623) 205,564 CASH AND EQUIVALENTS, Beginning of period 1,136,137 106,247 ------------------ ------------------ CASH AND EQUIVALENTS, end of period $ 322,514 $ 311,811 ================== ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 268,504 $ 380,523
The accompanying condensed notes are an integral part of these financial statements. 6 7 POPMAIL.COM, INC. CONDENSED NOTES TO THE FINANCIAL STATEMENTS OCTOBER 1, 2000 (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared by PopMail.com, inc. ("the Company" or "PopMail"), in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the thirteen weeks and thirty-nine weeks ended October 1, 2000 are not necessarily indicative of the results that may be expected for the year as a whole. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended January 2, 2000. Net Loss Per Common Share Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods presented. The impact of common stock equivalents has been excluded from the computation of weighted average common shares outstanding, as the net effect would be antidilutive. Use of Estimates Preparing financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The Company accounts for income taxes using the liability method to recognize deferred income tax assets and liabilities. Deferred income taxes are provided for differences between the financial reporting and tax bases of the Company's assets and liabilities at currently enacted tax rates. As of October 1, 2000 and January 2, 2000, the Company's deferred taxes consisted primarily of net operating loss carryforwards, pre-opening costs not currently deductible and accelerated methods of depreciation. The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related benefits. Restricted Cash Restricted cash represents cash and certificates of deposit maturing within one year that are restricted in use by the Company. As of October 1, 2000, the restricted cash balance represents a deposit reserved to satisfy the Company's obligation in connection with the acquisition of Fan Asylum. See Note H for further discussion regarding Fan Asylum. Other Assets The Company has made investments in other entities through common stock swaps. Since the investments have less than 20% ownership rights in the entities, the Company has recorded these investments at cost in Other Assets on the balance sheet. 7 8 NOTE B - NATURE OF THE BUSINESS PopMail is an online fan club marketing company, connecting people with their passions. PopMail accomplishes this by providing official fan clubs and fan club services for recording artists, sports teams, and clients in the broadcast and entertainment industry. These marketing services include access to preferred tickets, merchandise, exclusive news, chat, discussion, permission marketing and vanity web based email, official fan sites and access to discounted products related to the artist, sports team and/or personality. The Company had a working capital deficit of $3,064,433 at October 1, 2000, (net of any assets held for sale) compared to working capital deficit of $8,696,477 on January 2, 2000, prior to any discontinued operation reclassifications. Cash and equivalents were $322,514 at October 1, 2000, representing a decrease of $813,623 from the cash and equivalents of $1,136,137 at January 2, 2000. Our ability to continue our present operations and successfully implement our expansion plans is contingent upon our ability to raise additional capital and increase our revenues and ultimately attain and sustain profitable operations. Without immediate additional financing, the cash generated from our current operations will not be adequate to fund operations and service our indebtedness during the remainder of 2000. There can be no assurance that additional financing will be available on terms acceptable to the Company or on any terms whatsoever. In the event we are unable to fund our operations and our business plan, we will be unable to continue as a going concern. PopMail consists of two divisions, an Internet marketing division and a restaurant division. Our Internet marketing division is in the business of connecting entertainment and media brands with their fans through the use of e-mail and fan club sites. The Internet division consists of three companies. PopMail Network, Inc. ("PopMail Network"), based in Irving, Texas, is a provider of permission and vanity web based e-mail services to broadcast stations, professional sports teams and other brand name clients in the media and entertainment industries. Fan Asylum, Inc. ("Fan Asylum"), based in San Francisco, California, is a provider of official online and offline fan club sites for recording artists in the music industry. IZ.com, Inc. ("IZ"), based in Bellevue, Washington, is a provider of digital publishing services, newsletters and technology for high-end brands. See Note J for further discussion regarding IZ. The restaurant division develops, owns and operates upscale casual restaurants with multiple themed dining rooms. The Company has two "Cafe Odyssey" restaurants, one at the Mall of America in Bloomington, Minnesota, which opened in June 1998 and one at the Denver Pavilions, in Denver, Colorado, which opened in March 1999. The accompanying unaudited condensed consolidated financial statements have been prepared to reflect the restaurant division as a discontinued operation. See Note C for further discussion regarding the Company's announcement to divest its restaurant division. NOTE C - DISCONTINUED OPERATIONS Restaurant Management Agreement On May 31, 2000, the Company entered into an agreement (the "Management Services Agreement") with an officer of the Company (the "Manager") to manage substantially all the operations of the Cafe Odyssey restaurant segment (the "Management Services") under the auspices of an independent management company (the "Management Company"). On May 31, 2000, the Manager resigned from the Company to fulfill his obligation to the Management Company under the Management Services Agreement. In exchange for the Management Services, the Company agreed to pay the Management Company approximately $452,000 per year for the Management Services. On July 1, 2000, a second officer of the Company resigned and became employed by the Management Company, at which point the annual Management Services fee increased to $675,000. The term of the Management Services Agreement is three years, but may be terminated during the term with 30 days advance notice. If terminated by the Company without cause prior to the second anniversary date of the Management Services Agreement, the Company is obligated to pay the Management Company (a) $1,474 per day for each day remaining in the first year of the term and (b) $1,063 per day for each day remaining in the second year of the term. Concurrent with the execution of the Management Services Agreement, the Company entered into a license agreement granting the Management Company certain development and intellectual property rights associated with 8 9 the Cafe Odyssey restaurants (the "License Agreement"). The Company granted the Management Company the right to develop up to four more Cafe Odyssey restaurants and the right to develop an unlimited number of additional Cafe Odyssey restaurants with the Company's approval, which shall not be unreasonably withheld (the "Development Rights"). In conjunction with the Development Rights, the Company agreed to (a) guarantee the leases for the first four Cafe Odyssey restaurants developed by the Management Company, (b) loan the Management Company up to $500,000 for the development of a new Cafe Odyssey restaurant located at a specific location defined in the License Agreement (the "New Location"), and (c) pledge the cash flows of the two Company owned Cafe Odyssey restaurants to secure up to $1.3 million in Management Company loans drawn to develop the New Location. The Company also granted the Management Company a perpetual, nonexclusive right to all intellectual property owned by the Company associated with the Cafe Odyssey restaurants. In September 2000, the Company developed a formal plan for the divestiture of the restaurant division and has executed a letter of intent to sell the net assets to the Management Company's executive team. A definitive purchase agreement has not yet been executed. The Company has made an estimate of the realizable net value, should a sale occur, of approximately $3 million. Pursuant to Accounting Principles Board opinion ("APB") No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the accompanying unaudited condensed consolidated financial statements have been reclassified to reflect the proposed sale of the restaurant division. The net assets of the restaurant division have been reported as Net Assets Held for Sale; the net operating results of the restaurant division have been reported as Loss from operations of discontinued restaurant division; and an estimated loss was recorded in the current period based on the Company's best estimate of the amount expected to be realized on the sale of the division, including a provision for an estimated loss from discontinued operations during the phase-out period. Summarized financial information for the discontinued operations are as follows: At October 1, 2000 At January 2, 2000 Current Assets $ 97,013 $ 150,385 Property and Equipment, net 11,017,513 11,920,218 Other Assets 306,887 336,809 ----------------- ----------------- Total Assets $ 11,421,413 $ 12,407,412 Current Liabilities $ 692,550 $ 645,211 Long-Term Liabilities 3,870,420 4,212,557 ----------------- ----------------- Total Liabilities $ 4,562,970 $ 4,857,768 ----------------- ----------------- Net Assets Held for Sale $ 6,858,443 $ 7,549,644 ----------------- ----------------- Write down of Assets to realizable value $ 3,858,443 $ -- ----------------- -----------------
-------------------------------------------------------------------------------- For the thirteen weeks ended October 1, 2000 October 3, 1999 -------------------------------------------------------------------------------- Restaurant Revenues $ 2,637,747 $ 3,545,782 Total Restaurant Expenses 2,826,003 3,634,456 --------------- ------------- Loss from Discontinued Operations $ (188,256) $ (88,674) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- For the thirty-nine weeks ended October 1, 2000 October 3, 1999 -------------------------------------------------------------------------------- Restaurant Revenues $ 7,439,508 $ 9,439,437 Total Restaurant Expenses 8,255,721 10,558,894 --------------- ------------- Loss from Discontinued Operations $ (816,213) $ (1,119,457) --------------------------------------------------------------------------------
9 10 NOTE D - REVERSE STOCK SPLIT In September 2000, the Company received a notice from The Nasdaq Stock Market indicating that the Company's common stock had failed to maintain a minimum bid price greater than or equal to $1.00 over the preceding thirty consecutive trading days as required under Marketplace Rule 4310(c)(4). Should the Company's common stock fail to achieve and maintain a bid price equal to or greater than $1.00 for a minimum of ten consecutive trading days anytime before December 12, 2000, the Company's common stock will be delisted from the Nasdaq SmallCap Market. On October 12, 2000, the Company implemented a 10-for-1 reverse stock split. As of November 1, 2000, the Company had 4,747,052 post-split shares of common stock, $.01 par value, outstanding. Unless otherwise noted, all references within this 10-QSB refer to the Company's pre-split common stock numbers. NOTE E - NOTES PAYABLE In July 2000, the Company paid the remaining $1,000,000 balance due on a $3,000,000 revolving line of credit with a financial institution collateralized by a leasehold mortgage, security agreement and assignment of rents and income of the Company's Cincinnati restaurant. The Company also converted the remaining balance of a senior convertible promissory note, $1,003,334, plus accrued interest of $21,307, into 1,024,642 shares of the Company's common stock. NOTE F - CONVERTIBLE PROMISSORY NOTE PAYABLE The Company executed a senior convertible note for $2,000,000 in August 1999. The note had an original maturity date of August 2000, and the Company received an extension until October 30, 2000, by making a partial payment of $500,000. The Company has received a letter of intent from the lender with an offer to re-negotiate the note payable. The new terms would allow for monthly principal and interest payments of $100,000 begin January 1, 2001 and continuing through May 2002 at an interest rate of 14%. Under the proposed letter of intent, approximately $35,000 of interest would accrued in the fourth quarter of 2000 and the future maturities would be $1,031,000 and 469,000 for years 2001 and 2002. NOTE G - CONTINGENCIES The Company is involved in various legal actions rising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or the results of its operations. NOTE H - SHAREHOLDERS' EQUITY Preferred Stock Series C - In July 1999, the Company issued 2,000 shares of Series C 8% convertible preferred stock with a stated 10 11 value of $1,000 per share in a private placement. In addition, the Company issued warrants for the purchase of 300,000 shares of common stock at $3.00 per share to the investor. The Series C shares were convertible into the Company's common stock at a price equal to 65% of the market value at the time of conversion. During the quarter ended July 2, 2000, the remaining 30 shares of Series C were converted into 19,032 shares of common stock. Series D - In August 1999, the Company issued 2,200 shares of Series D 8% convertible preferred stock with a stated value of $1,000 per share in a private placement. In addition, the Company issued warrants for the purchase of 300,000 shares of common stock at $3.00 per share to the investor. The Series D shares were convertible into the Company's common stock at a price equal to 65% of the market value at the time of conversion. During the quarter ended April 2, 2000, all 2,200 shares of Series D were converted into 965,647 shares of common stock. Series E - In October 1999, the Company began issuing shares of Series E convertible preferred stock with a stated value of $2.00 per share in a private placement. The Company has completed its issuance and has issued a total of 225,000 Series E shares. For each Series E share issued, a warrant was also issued for the purchase of a share of common stock at $3.00 per share. Each Series E share is convertible into one share of common stock by dividing $2.00 by the lesser of (i) $2.00, or (ii) 70 percent of the average market price per share of our common stock for the ten days preceding the filing of a registration statement covering the resale of the shares issuable upon conversion of the Series E Preferred Shares. Series E shares are not entitled to dividends. During the quarter ended October 1, 2000, 31,817 shares of Series E were converted into 125,000 shares of common stock. Series F - In connection with the IZ.com merger in February 2000, 287,408 shares of Series F convertible preferred stock were issued to the former stockholders of IZ.com, with an additional 130,508 shares issuable upon the exercise of IZ.com options assumed by PopMail. The Series F shares are convertible into shares of the Company's common stock at a rate of 25.66 shares for each share of Series F preferred stock. The Series F preferred stock (including shares issuable upon exercise of IZ.com options) will convert into approximately 10,725,000 shares of the Company's common stock and carries a liquidation preference of $28 million until the Company's market capitalization reaches $100 million or the Series F shareholders convert their shares to common stock. Series G - In May 2000, the Company raised gross proceeds of $4 million from the private placement of Series G 10% convertible preferred stock with an aggregate stated value of $6 million. The purchaser of the Series G stock also received a warrant to purchase up to 500,000 shares of our common stock at an exercise price of $2.51 per share for no additional consideration. The Series G stock may not be converted before October 9, 2000. From October 10, 2000 to November 9, 2000, the conversion price will be equal to 97% of the adjusted market price of the common stock; from November 10, 2000 to January 7, 2001 the conversion price will be equal to 94% of the adjusted market price of the common stock; after January 8, 2001, the conversion price will be equal to 91% of the adjusted market price of the common stock; and if the common stock is delisted from Nasdaq, the conversion price will be equal to 75% of the adjusted market price of the common stock. The number of shares of common stock issuable upon conversion of the Series G stock is limited to approximately 7.2 million shares. The Company will redeem for cash, at 105 percent of stated value, any Series G stock that is not convertible into shares of common stock as a result of the foregoing limitation. As of October 1, 2000, no Series G have been converted. Private Placements During the quarter ended April 2, 2000, the Company completed a private placement offering of 2,350,000 units priced at $1.00 per unit. Each unit consisted of one share of the Company's common stock and one five-year warrant to purchase one share of the Company's common stock with an exercise price of $2.00. Also during the quarter ended April 2, 2000, the Company completed a second private placement offering of 2,666,667 units priced at $2.25 per unit. Each unit consisted of one share of the Company's common stock and one five-year warrant to purchase one share of the Company's common stock with an exercise price of $3.00. The proceeds from these private placements were used to repay the Company's obligations to affiliates and all but $1,000,000 of the Company's $6,037,518 notes payable outstanding at January 2, 2000. Such proceeds were also used to fund the continuing operating needs of the Company. 11 12 During the quarter ended July 2, 2000, the Company completed a private placement offering of 1,000,000 shares of common stock at a purchase price of $3.00 per share to private investors, resulting in net proceeds to the Company of approximately $2.7 million. At the time of the closing, the investors received (a) five-year warrants to purchase 300,000 shares of common stock at an exercise price of $1.00 per share and (b) warrants to purchase additional shares of common stock (the Adjustable Warrants) at a nominal exercise price (one-thousandth of a cent per share). The Adjustable Warrants are intended to allow the investors to receive additional shares of common stock in future periods to bring the effective price per share of the investment to a percentage of the market value of the common stock on the date of adjustment. In general, the Adjustable Warrants (a) become exercisable during certain periods beginning October, 2000, (b) are exercisable only if the Company's common stock is below $4.00 per share during the exercise period, (c) and are issuable in an amount sufficient to adjust the effective purchase price for the investment to a level equal to 75% of the average market price during the period. Related Party Transaction In April 2000, the Company entered into a promissory note receivable of $245,000 with a partnership controlled by a significant shareholder, director and executive officer of the Company. The principal plus interest of 5.74% is due to the Company in March 2002. The Partnership has pledged 122,500 shares of the Company's common stock as security for the note. Proceeds of this note were used to purchase additional shares of the Company's stock issued in connection with the ROI acquisition. Accordingly, this note is classified as a reduction of shareholders' equity in the accompanying financial statements. On August 24, 2000, the Company purchased a $240,000 demand promissory note, the maker of whom is a significant shareholder, director and executive officer from an unaffiliated party, in exchange for 240,000 shares of the Company's common stock. The demand promissory note, dated February 14, 2000, bears an interest rate of 6.21% per year, with principal and accrued interest payable the earlier of (1) the third anniversary of the date of the note, or (2) within 30 days of written demand for repayment by the lender. Re-negotiation of Fan Asylum Acquisition The Company re-negotiated some of the terms pertaining to its acquisition of Fan Asylum. On June 14, 2000, the Company purchased 100% of the common stock of Fan Asylum from its sole shareholder ("the Seller") in exchange for up to 3.6 million shares of the Company's common stock ("the Purchase Price Shares"), valued at $9,000,000 per the agreement, subject to adjustments based on certain earn out and reset provisions. The Purchase Price Shares were divided into 800,000 fully vested initial shares and 2.8 million earn-out shares. At closing, the initial shares were delivered into an escrow account for the possible use to satisfy any indemnification obligations of the Seller. Under the terms of the acquisition, the earn-out shares were to vest with the Seller according to the number of artists with which Fan Asylum executes a fan club management agreement prior to July 14, 2001. Also, the initial shares are subject to a put right pursuant to which Seller has a one-time right to "put" the initial shares to the Company during the period between January 2, 2001 and January 31, 2001 at a price per share equal to the greater of $1.0625, or (ii) the average closing price of the Company's common stock over the five business days prior to the notice of exercise of the put. Pursuant to the terms of the acquisition, the Company has secured its ability to fulfill the put obligation with a $2 million cash deposit, which is recorded as restricted cash on the accompanying October 1, 2000 balance sheet. In September 2000, the Company renegotiated the terms of the Fan Asylum acquisition and agreed to (i) accelerate the time period in which the Seller could put the initial shares to the Company, (ii) remove the earn-out provisions as a condition of Seller receiving the earn-out shares, and (iii) immediately retire a $200,000 debt obligation that was assumed in conjunction with the Fan Asylum acquisition. In consideration of the forgoing, the Seller agreed to complete a $400,000 private common stock placement with the Company at $0.46 per share, resulting in net proceeds to the Company, in October 2000, of approximately $186,000 after the aforementioned $200,000 retirement of debt was completed. As a result of the release of the Seller from the earn-out provisions, the Company's $7 million earn-out liability was released and is accounted for as additional paid in capital in the accompanying balance sheet as of October 1, 2000. 12 13 In conjunction with the Fan Asylum acquisition, the Company had also originally agreed to grant up to 4 million options to purchase common stock (the "Artist Options") to the music artists with which Fan Asylum executes fan club agreements subsequent to June 14, 2000. With the agreement to accelerate the put of the initial shares, the Company and the Seller have agreed to reduce the Artist Options from 4 million options down to 500,000 options (before the 10-for-1 reverse stock split). As of October 1, 2000, no Artist Options have been issued. The Company expects to grant most if not all of the Artist Options over the next 8 months. NOTE I - BUSINESS SEGMENTS The Company operates in two reportable segments, Internet marketing services and restaurant operations. The Internet marketing services segment began in the third quarter of 1999. Beginning in the third quarter of 2000, the Company's restaurant operations have been reported as discontinued operations. See Note C for further discussion of the restaurant segment. NOTE J - SUBSEQUENT EVENTS IZ.com, Inc. On October 31, 2000, PopMail announced its intent to explore several divestiture options for its digital publishing company IZ.com. The Company stated that IZ.com does not fit its business model and that it will no longer support business opportunities that are still in development. The Company will be considering all offers including an offer from the current management team of IZ.com. Providing suitable terms are negotiated, the Company anticipates it will accelerate amortization of all remaining goodwill related to IZ.com during the fourth quarter of fiscal 2000. Secured Promissory Note On October 6, 2000, the Company entered into a secured promissory note payable for $600,000. The Company received net proceeds of $450,000 after discount and finders fees. The note is payable within 30 days and is collateralized by specific computer equipment located in Dallas, Texas. In connection with the loan the Company issued a 200,000 share five-year warrant with an exercise price of $0.375 to the lender. As of November 13, 2000, the Company is in payment default and may be required to pay an additional fee of $60,000, plus $3,000 for each complete day thereafter commencing 10 days after the default. The Company is re-negotiating the terms of this note, and no assurance can be given that any reductions will be attained. 13 14 ITEM 2. POPMAIL.COM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations should be read in connection with the accompanying unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and the audited financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal year ended January 2, 2000. (All share numbers are pre-split values and do not take into account the 10-for-1 reverse stock split.) OVERVIEW PopMail.com, inc. ("the Company" or "PopMail") is an online fan club marketing company, connecting people with their passions. PopMail accomplishes this by providing official fan clubs and fan club services for recording artists, sports teams, and clients in the broadcast and entertainment industry. These marketing services include access to preferred tickets, merchandise, exclusive news, chat, discussion, permission marketing and vanity web based email, official fan sites and access to discounted products related to the artist, sport team and/or personality. PopMail consists of two divisions, the Internet marketing services division and the restaurant division. Our Internet division is in the business of connecting entertainment and media brands with their fans through the use of e-mail and fan club sites. The Internet division consists of three companies: PopMail Network, Inc. ("PopMail Network"), based in Irving, Texas, is a provider of permission and vanity web based e-mail services to broadcast stations, professional sports teams and other brand name clients in the media and entertainment industries. Fan Asylum, Inc. ("Fan Asylum"), based in San Francisco, California, is a provider of official online and offline fan club sites for recording artists in the music industry. IZ.com, Inc. ("IZ"), based in Bellevue, Washington, is a provider of digital publishing services, newsletters and technology for high-end brands. See the accompanying notes to the condensed consolidated financial statements for further discussion regarding the Company's announcement to divest IZ.com. The restaurant division develops, owns and operates upscale casual restaurants with multiple themed dining rooms. The Company has two "Cafe Odyssey" restaurants, one at the Mall of America in Bloomington, Minnesota, which opened in June 1998 and one at the Denver Pavilions, in Denver, Colorado, which opened in March 1999. See the accompanying notes to the condensed consolidated financial statements for further discussion regarding the Company's announcement to divest its restaurant division and the classification of the restaurant division as a discontinued operation in the accompanying financial statements. The Company closed its first restaurant operation, which was located in Cincinnati, Ohio, in August 1999. The Company finalized the sale of this property during the second quarter of 2000. The Company continues to have some associated expenses for this location in 2000 and such expenses are recorded with all restaurant expenses as discontinued operations. Management's primary focus is to place all resources behind its fan club marketing business, consolidate its Internet platforms across the business and develop its fan club marketing business by exploring additional revenue sources and complementary services through marketing initiatives, partnerships and joint ventures. The Company targets four main vertical markets: music, sports, broadcast and entertainment. The Company is exploring other markets that are conducive to fan club marketing. The Company will continue to look for and explore business acquisitions for the Internet marketing division. However, no assurance can be given that other partnerships or acquisitions will be completed and or desired results achieved. Future revenue and profits, if any, will depend upon various factors, including the rapidly changing marketing and e-commerce community of the Internet and general economic conditions. Currently, the Company's primary source of 14 15 revenue results from preferred ticket and merchandise sales through Fan Asylum and annual license and hosting fees through its email division in Irving, Texas. There can be no assurances the Company will successfully implement its expansion plans of the Internet marketing services, in which case, it will continue to be dependent on debt and equity financing alternatives. The Company also faces all of the risks, expenses and difficulties frequently encountered in connection with the expansion and development of a new and expanding business. With the growth of the Internet marketing services division, the Company will continue to hire senior management to operate that division. There can be no assurance of the Company's capacity to achieve and sustain profitable operations, and without additional financing (of which there can be no assurance), the Company may not have sufficient funds to support its operations, retire its indebtedness in the ordinary course of business and pursue its business plan. The Company has adopted a 52-53-week year ending on the Sunday nearest December 31 of each year. RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999 Net Revenues Net revenues for the Internet marketing division, which was launched with the Company's first acquisition on August 19, 1999, were $1,008,831 and $2,910 for the thirteen weeks ended October 1, 2000 and October 3, 1999. This represents sales generated primarily by set-up, hosting, and license fees of PopMail Network, subscription, ticket and retail sales of Fan Asylum, and outsourced publishing fees of IZ.com. The Company's sales for the Internet marketing division for the thirty-nine weeks ended October 1, 2000 and October 3, 1999 were $2,194,792 and $2,910. Our ability to continue our present operations and successfully implement our expansion plans is contingent upon our ability to increase our revenues and ultimately attain and sustain profitable operations. Without additional financing, the cash generated from our current operations will not be adequate to fund operations and service our indebtedness during 2000 and 2001. Costs and Expenses The Company had general, administrative and development expenses for the thirteen weeks ended October 1, 2000, of $5,247,755 compared to $1,827,570 for the thirteen weeks ended October 3, 1999, an increase of $3,420,185. The Company's general, administrative and development expenses for the thirty-nine weeks ended October 1, 2000, were $12,777,765 compared to $2,788,346 for the thirty-nine weeks ended October 3, 1999, an increase of $9,989,419. These increases reflect the results of the acquisitions of popmail.com, inc, ROI Interactive, LLC, IZ.com and Fan Asylum, and the related additions of the sales, publishing and development expenses related to those operations. The Company has had to address the numerous executive and administrative staffing requirements from its mergers and acquisitions, shareowner relationships and development costs associated with the build-out of the Internet marketing software. The Company will be seeking additional senior management personnel as well as support staff, which will also have an associated impact on future earnings. The Company expects to continue to incur operating losses throughout 2000. Goodwill amortization expense for the thirteen weeks ended October 1, 2000, was $9,788,488 compared to $885,844 for the thirteen weeks ended October 3, 1999, an increase of $8,902,644. Goodwill amortization expense for the thirty-nine weeks ended October 1, 2000, was $22,302,813 compared to $885,844 for the thirty-nine weeks ended October 3, 1999, an increase of $21,416,969. This represents the excess of the purchase price and related costs over the fair value of the net assets the Company acquired through its mergers and acquisitions. The Company amortizes goodwill on a straight-line basis over a three-year period. The Company's other income and expense consists primarily of interest expense and financial advisory services. The interest expense for thirteen weeks ended October 1, 2000 was $280,095 as compared to 15 16 $372,165 for thirteen weeks ended October 3, 1999, a decrease of $92,070. The interest expense for the thirty-nine weeks ended October 1, 2000 amounted to $1,820,731 compared to $759,497 for the thirty-nine weeks ended October 3, 1999, an increase of $1,061,234. The increase for the thirty-nine week period ended October 1, 2000 over the complementary period in 1999 relates primarily to the increased levels of debt outstanding during 2000 and the amortization of financing fees capitalized in raising debt. Of the $280,095 of interest expense reported for the thirteen weeks ended October 1, 2000 and the $1,820,731 of interest expense reported for the thirty-nine week period ended October 1, 2000, $58,176 and $268,504, respectively, was paid in cash. The Company's continuing business focus is to concentrate on only those portions of its business that generate positive cash flow. The Company's financial advisory services are costs associated with services provided by third party financial advisors for the thirteen and thirty-nine weeks ended October 1, 2000, the Company recorded $380,215 and $2,565,359, of financial advisory service fees. These costs were paid with cash and through the issuance of new common stock and warrants. The loss on the sale of assets of $761,707 recorded during the thirty-nine weeks ended October 1, 2000 represents the loss on the sale of the assets of its Cincinnati, Ohio restaurant during the second quarter. Liquidity and Capital Resources The Company had a working capital deficit of $3,064,433 at October 1, 2000, (net of any assets held for sale) compared to working capital deficit of $8,696,477 on January 2, 2000, prior to any discontinued operation reclassifications. Cash and equivalents were $322,514 at October 1, 2000, representing a decrease of $813,623 from the cash and equivalents of $1,136,137 at January 2, 2000. Our ability to continue our present operations and successfully implement our expansion plans is contingent upon our ability to raise additional capital and increase our revenues and ultimately attain and sustain profitable operations. Without immediate additional financing, the cash generated from our current operations will not be adequate to fund operations and service our indebtedness during the remainder of 2000. There can be no assurance that additional financing will be available on terms acceptable to the Company or on any terms whatsoever. In the event we are unable to fund our operations and our business plan, we will be unable to continue as a going concern. During the twenty-six week period ended July 2, 2000, the Company completed four private placements of equity instruments resulting in cash proceeds to the Company of approximately $10,600,000. The proceeds from these private placements were primarily used to (a) pay various acquisition related costs, including amounts owed to affiliates, of approximately $2,500,000, (b) repay approximately $5,000,000 of notes payable outstanding at January 2, 2000, (c) invest approximately $2,500,000 in hardware and software related infrastructure, and (d) fund the continuing operating needs of the Company. During the quarter ended October 1, 2000, the Company completed the following financial arrangements: In July 2000, the Company completed a factoring agreement, in which specific accounts receivables were assigned to an investor. The Company assigned the principal sum of $223,000 in exchange for $200,000 in cash. In addition, the investor received a five-year warrant to purchase 25,000 shares of the Company's common stock, par value $.01 per share, at an exercise price of $0.75 per share. This receivable assignment was re-paid in August 2000. In August 2000, the Company completed a second factoring agreement, in which specific accounts receivables were assigned to the same investor. The Company assigned the principal sum of $334,000 in exchange for $250,000 in cash. The Investor has full recourse towards the Company for the entire principal sum. In addition, the investor received another five-year warrant to purchase 25,000 shares of the Company's common stock, par value $.01 per share, at an exercise price of $0.75 per share. This receivable assignment had a balance of approximately $152,000 still due the investor as of October 1, 2000. In the thirteen week period ended October 1, 2000, the Company raised cash proceeds of approximately $1,833,000 16 17 from the exercise of 2,866,639 warrants. In order to induce the warrant holders to exercise their warrants, the Company amended their warrants (originally with exercisable prices generally ranging from $2.00 to $3.00 per share) by re-pricing the warrant to exercise prices ranging from $0.625 to $0.75 per share and generally issuing a replacement warrant with an exercise price of $0.625 to $1.00 per share for each original warrant exercised, provided that the investor completed the transaction within a specified time frame determined by the Company. One of the investors immediately exercised 400,000 of the replacement warrants for additional proceeds of $250,000. The Company intends to fund the operations of the Internet marketing services division through equity and debt transactions, such as proceeds available from the exercise of stock options and warrants, and/or additional equity and debt financing for the Company or its subsidiaries. However, there can be no assurance such financing will be available on acceptable terms. If adequate financing is not available, the Company may consider modifying its operations or selling selected assets to reduce operating costs, increase efficiencies or raise cash. RISK FACTORS An investment in our common stock is very risky. You may lose the entire amount of your investment. Prior to making an investment decision, you should carefully review the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this report, the audited financial statements and notes included in the Company's Form 10-KSB for the fiscal year ended January 2, 2000, and consider the following risk factors (all share amounts are pre-split values and do not account for the 10-for-1 reverse stock split): WE HAVE INCURRED LOSSES TO DATE AND WILL NEED ADDITIONAL FINANCING IN ORDER TO CONTINUE OPERATIONS AND PURSUE OUR BUSINESS PLAN. We incurred net losses of approximately $43.2 million in the first nine months of 2000, $24.2 million in 1999, $6.7 million in 1998 and $4.0 million in 1997 and had a working capital deficit of approximately $3.1 million as of October 1, 2000. Our ability to continue our present operations and successfully implement our expansion plans is contingent upon our ability to increase our revenues and ultimately attain and sustain profitable operations. Without additional financing, the cash generated from our current operations will not be adequate to fund operations and service our indebtedness during 2000. There can be no assurance that additional financing will be available on terms acceptable to the Company or on any terms whatsoever. In the event that we are unable to fund our operations and our business plan, we will be unable to continue as a going concern. OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH DELISTING COULD HINDER YOUR ABILITY TO OBTAIN ACCURATE QUOTATIONS AS TO THE PRICE OF OUR COMMON STOCK, OR DISPOSE OF OUR COMMON STOCK IN THE SECONDARY MARKET. Although our common stock is currently listed on the Nasdaq SmallCap Market, we cannot guarantee that an active public market for our common stock will continue to exist. In September 2000, the Company received a notice from The Nasdaq Stock Market indicating that the Company's common stock had failed to maintain a minimum bid price greater than or equal to $1.00 over the preceding thirty consecutive trading days as required under Marketplace Rule 4310(c)(4). Should the Company's common stock fail to achieve and maintain a bid price equal to or greater than $1.00 for a minimum of ten consecutive trading days anytime before December 12, 2000, the Company's common stock will be delisted from the Nasdaq SmallCap Market. To satisfy this objective, the Company chose to implement a reverse stock split. In such event, there is a risk that the Company's stock price will not rise fully in proportion to the reverse split, resulting in a material loss in market value for the Company's shareholders. In addition, we have responded to numerous inquiries from Nasdaq expressing concern over various matters, including but not limited to a "going concern" qualification expressed by our former independent auditors as of January 3, 1999. Accordingly, our securities may be delisted from the Nasdaq SmallCap Market or be required to reapply for listing meeting the Nasdaq initial listing requirements, which are generally more stringent than the requirements currently governing the Company's listing. Additional factors giving rise to such delisting could include, but are not be limited to: (1) a reduction of our net tangible assets to below $2,000,000, (2) a reduction to one active market maker, (3) a reduction in the market value of the public float of our securities to less than $1,000,000, (4) a reduction of the trading price of our Common Stock to less than $1.00 per share or (5) the discretion of the Nasdaq SmallCap Market. 17 18 In the event our securities are delisted from the Nasdaq SmallCap Market, trading, if any, in our common stock would thereafter be conducted in the over-the-counter markets in the so-called "pink sheets" or the National Association of Securities Dealer's "Electronic Bulletin Board." Consequently, the liquidity of our common stock would likely be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, reduction in the coverage of our securities by security analysts and the news media, and lower prices for our securities than might otherwise prevail. In addition, our common stock would become subject to certain rules of the Securities and Exchange Commission relating to "penny stocks." These rules require broker-dealers to make special suitability determinations for purchasers other than established customers and certain institutional investors and to receive the purchasers' prior written consent for a purchase transaction prior to sale. Consequently, these "penny stock rules" may adversely affect the ability of broker-dealers to sell our common stock and may adversely affect your ability to sell shares of our common stock in the secondary market. WE ARE DEPENDENT ON THE ONGOING SERVICES OF CERTAIN OF OUR EXECUTIVES, THE LOSS OF WHICH COULD HAVE A DETRIMENTAL EFFECT ON OUR PROFITABILITY AND THE MARKET PRICE OF OUR STOCK. Our plan of business development and our day-to-day operations rely heavily on the experience of Gary Schneider, our Chief Executive Officer and Stephen Spohn, our Chief Financial Officer. The loss of any of them could adversely affect the success of our operations and strategic plans and, consequently, have a detrimental effect on the market price of our stock. WE MAY BE UNABLE TO HIRE QUALIFIED EMPLOYEES TO HELP IMPLEMENT AND MANAGE OUR EXPANSION PLANS, WHICH INABILITY COULD BE DETRIMENTAL TO THE VALUE OF YOUR INVESTMENT. Our success will depend in large part upon our ability to supplement our existing management team. We will need to hire additional corporate level and management employees to help implement and operate our plans for expansion of our Internet marketing services division. The demand for individuals with management skills is high and many other businesses, most of which have greater name recognition and resources than the Company, compete for their services. Any inability or delay in obtaining additional key employees could have a material adverse effect on our expansion plans and, consequently, the market value of our stock. DUE TO OUR LIMITED OPERATING HISTORY, YOU MAY FIND IT DIFFICULT TO ASSESS OUR ABILITY TO OPERATE PROFITABLY. On September 1, 1999, we completed a merger with popmail.com, inc. ("Old Popmail"). Old Popmail was a provider of Internet email services to radio stations across the country. On December 3, 1999, we acquired ROI Interactive, LLC ("ROI"). ROI is a provider of permission and affinity based e-mail services to broadcast stations, professional sports teams and other brand name clients in the media and entertainment industries. On February 9, 2000, we acquired IZ.com Incorporated ("IZ.com"). IZ.com is a provider of digital publishing services, newsletters and technology for high-end brands. On June 15, 2000, we acquired Fan Asylum, Inc. ("Fan Asylum"). Fan Asylum is a provider of official online and offline fan club sites for recording artists in the music industry. Consequently, we face the added risks, expenses and difficulties related to developing and operating a new business enterprise. Given our lack of significant operating history, investors may have difficulty assessing the many factors which will determine our ability to generate future profits. ONE INDIVIDUAL CONTROLS A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND MAY INFLUENCE OUR AFFAIRS. Following our merger with Old Popmail on September 1, 1999, James L. Anderson was elected to our Board of Directors and served as its Chairman until his resignation on January 24, 2000. Effective February 1, 2000, Mr. Anderson resigned from our Board. Based upon a Schedule 13D filed with the Securities and Exchange Commission 18 19 on September 13, 1999, Mr. Anderson controlled indirectly or directly, as of that date, approximately 59.6 percent of our outstanding common stock. As of October 1, 2000, Mr. Anderson indirectly or directly controlled approximately 21.5 percent of our outstanding common stock. Accordingly, he may have the ability to determine the election of members of the Board of Directors and determine the approval of corporate transactions and other matters requiring shareholder approval. Unless and until Mr. Anderson substantially decreases his percentage beneficial ownership in our common stock, he will continue to have significant influence over our affairs. DUE TO THE LARGE NUMBER OF OUTSTANDING OPTIONS AND WARRANTS, OUR SHAREHOLDERS FACE A RISK OF SUBSTANTIAL FUTURE DILUTION AND DOWNWARD PRESSURE ON THE TRADING PRICE OF OUR COMMON STOCK. As of October 1, 2000, we have a total of 40,653,594 shares of our common stock reserved for issuance pursuant to our stock options plans, outstanding preferred stock and common purchase warrants. Most of these shares have either been registered for resale or are subject to agreements providing for their registration for resale under certain circumstances. Accordingly, our existing shareholders face a substantial risk of dilution and the trading price of our common stock may decrease as these convertible securities are exercised or converted into shares of common stock and subsequently offered for sale through the Nasdaq SmallCap Market. THERE IS A RISK THAT DUE TO THE LIMITATIONS PLACED ON THE CONVERSION OF THE SERIES G PREFERRED SHARES, THE PREFERRED SHAREHOLDER'S INVESTMENT MAY NOT BE CONVERTED INTO COMMON STOCK AND WOULD HAVE TO BE REDEEMED IN CASH. The total number of shares of Common Stock issuable upon conversion of the Series G Preferred Stock and upon exercise of the Series G Warrant cannot exceed 20 percent of the number of shares of Common Stock of the Company issued and outstanding on May 2, 2000. In the event the holders of the Series G Preferred Stock and Warrant are unable to convert preferred shares into common stock because these limitations have been reached, we would be required to redeem the Series G Preferred Shares in cash at 105 percent of the stated value plus any accrued and unpaid dividends. It is possible that in such case we may not have sufficient cash and cash equivalents necessary to redeem the Series G Preferred Shares in cash. WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS AND OTHER PROPRIETARY INFORMATION; FAILURE TO PROTECT AND MAINTAIN THESE RIGHTS AND INFORMATION COULD PREVENT US FROM COMPETING EFFECTIVELY. Our success and ability to compete are substantially dependent on our internally developed technologies and trademarks, which we seek to protect through a combination of trade secret and trademark law, as well as confidentiality or license agreements with our employees, consultants, and corporate and strategic partners. If we are unable to prevent the unauthorized use of our proprietary information or if our competitors are able to develop similar technologies independently, the competitive benefits of our technologies, intellectual property rights and proprietary information will be diminished. WE MAY NOT PAY DIVIDENDS ON OUR COMMON STOCK, IN WHICH EVENT YOUR ONLY RETURN ON INVESTMENT, IF ANY, WILL OCCUR ON THE SALE OF OUR STOCK. To date, we have not paid any cash dividends on our common stock, and we do not intend to do so in the foreseeable future. Rather, we intend to use any future earnings to fund our operations and the growth of our business. Accordingly, the only return on an investment in our common stock will occur upon its sale. PURSUANT TO ITS AUTHORITY TO DESIGNATE AND ISSUE SHARES OF OUR STOCK AS IT DEEMS APPROPRIATE, OUR BOARD OF DIRECTORS MAY ASSIGN RIGHTS AND PRIVILEGES TO CURRENTLY UNDESIGNATED SHARES WHICH COULD ADVERSELY AFFECT YOUR RIGHTS AS A COMMON SHAREHOLDER. Our authorized capital consists of 100,000,000 shares of capital stock. Our Board of Directors, without any action by 19 20 the shareholders, may designate and issue shares in such classes or series (including classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. As of October 11, 2000, we have 47,470,871 shares of common stock issued and outstanding, 193,183 shares of Series E Convertible Preferred Stock, 287,408 shares of Series F Convertible Preferred Stock outstanding and 600,000 shares of Series G 10% Convertible Preferred Stock. As of October 1, 2000, a further 40,653,594 shares of common stock have been reserved as follows: a maximum of 792,849 shares of common stock reserved for issuance upon exercise of the Series E Preferred Shares, 193,183 shares of which are currently outstanding; a maximum of 7,375,000 shares of common stock reserved for issuance upon conversion of Series F Convertible Preferred Stock; a maximum of 6,724,282 shares of common stock reserved for issuance in connection with the Series G 10% Convertible Preferred Stock and upon exercise of certain warrants issued in connection with the Series G Preferred Stock; 3,348,895 shares of common stock issuable upon exercise of options granted under the IZ.com Incorporated stock option plan assumed by the Company; 2,600,000 shares issuable upon the exercise of the Class A Warrants issued as part of our initial public offering and the partial exercise of the underwriter's over-allotment; 16,062,568 shares issuable upon the exercise of outstanding warrants (excluding the warrants issued in connection with the sale of the Series G Preferred Stock); 3,000,000 shares reserved for issuance under our 1997 Stock Option and Compensation Plan, of which options reverting to 2,627,660 shares are currently outstanding; 750,000 shares for issuance under our 1998 Director Stock Option Plan, of which options relating to 398,333 shares are currently outstanding. The rights of holders of preferred stock and other classes of common stock that may be issued could be superior to the rights granted to holders of the Units issued in our initial public offering. Our Board's ability to designate and issue such undesignated shares could impede or deter an unsolicited tender offer or takeover proposal. Further, the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of common stock. MINNESOTA LAW MAY INHIBIT OR DISCOURAGE TAKEOVERS, WHICH COULD REDUCE THE MARKET VALUE OF OUR STOCK. As a corporation organized under Minnesota law, we are subject to certain Minnesota statutes which regulate business combinations and restrict the voting rights of certain persons acquiring shares of its stock. By impeding a merger, consolidation, takeover or other business combination involving the Company or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company, these regulations could adversely affect the market value of our stock. THE LIMITATIONS ON DIRECTOR LIABILITY CONTAINED IN OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DISCOURAGE SUITS AGAINST DIRECTORS FOR BREACH OF FIDUCIARY DUTY. As permitted by Minnesota law, our Amended and Restated Articles of Incorporation provide that members of our Board of Directors are not personally liable to you or the Company for monetary damages resulting from a breach of their fiduciary duties. These limitations on director liability may discourage shareholders from suing directors for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought against a director by 20 21 shareholders on the Company's behalf. Furthermore, our Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Minnesota law. All of these provisions limit the extent to which the threat of legal action against our directors for any breach of their fiduciary duties will prevent such breach from occurring in the first instance. PURSUING AND COMPLETING POTENTIAL ACQUISITIONS COULD DIVERT MANAGEMENT ATTENTION AND FINANCIAL RESOURCES AND MAY NOT PRODUCE THE DESIRED BUSINESS RESULTS. We do not have specific personnel dedicated solely to pursuing and completing acquisitions. As a result, if we pursue any acquisition, our management, in addition to fulfilling their operational responsibilities, could spend significant time, management resources and financial resources to pursue and complete the acquisition and integrate the acquired business with our existing business. To finance any acquisition, we may use capital stock or cash or a combination of both. Alternatively, we may borrow money from a bank or other lender. If we use capital stock, our shareholders may experience dilution. If we use cash or debt financing, our financial liquidity would be reduced. In addition, acquisitions may result in nonrecurring charges or the amortization of significant goodwill that could adversely affect our ability to achieve and maintain profitability. Despite the investment of these management and financial resources and completion of due diligence with respect to these efforts, an acquisition may fail to produce the expected revenues, earnings or business and an acquired service or technology may not perform as expected for a variety of reasons, including: Difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company; Risks of entering markets in which we have no or limited prior experience; Expenses of any undisclosed or potential legal liabilities of the acquired company; The applicability of rules and regulations that might restrict our ability to operate; and The potential loss of key employees of the acquired company. If we make acquisitions in the future and the acquired businesses fail to perform as expected, our business operating results and financial condition may be materially adversely affected. FAILURE TO MANAGE OUR GROWTH MAY ADVERSELY AFFECT OUR BUSINESS. We have grown rapidly and expect to continue the growth both by hiring new employees and serving new business and markets. Our growth has placed, and will continue to place, a significant strain on our management and our operating and financial systems. Our personnel, systems, procedures and controls may be inadequate to support our future operations. In order to accommodate the increased size of our operations, we will need to hire, train and retain the appropriate personnel to manage our operations. We will also need to improve our financial and management controls, reporting systems and operating systems, all of which will require significant ongoing investments of the efforts of key personnel. IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY FALL SIGNIFICANTLY. The market price of publicly traded securities generally reflects, to a large degree, the expectations of industry analysts and significant investors with respect to the short and long-term operating results of the issuers. When 21 22 issuers fail to meet such expectations, the market price of their publicly traded securities usually decreases, sometimes significantly, and may not recover. There can be no assurance that we will be able to satisfy the expectations of market analysts and investors to avoid a precipitous drop in the market price of our common stock. Internet Division WE HAVE ENTERED INTO NEW BUSINESS VENTURES IN AN EVOLVING INDUSTRY IN WHICH THERE REMAIN UNPROVEN BUSINESS AND REVENUE MODELS. The Internet, music and e-mail industry is rapidly evolving, extremely competitive, and the market place for internet-related shares has been very volatile. Furthermore, the music and e-mail business continues to indicate changing revenue models in the market place. Consequently, there can be no assurance that sufficient revenues will be generated to support our current operations and other capital requirements. IN LIGHT OF RECENT CONSOLIDATION IN THE BROADCAST INDUSTRY AND RECENT DEVELOPMENTS IN THE MUSIC INDUSTRY, THE LOSS OF ANY SIGNIFICANT AFFILIATE OR ARTIST CONTRACTS WOULD NEGATIVELY IMPACT OUR OPERATIONS. The last few years have brought substantial concentration of power among a few players in the broadcast industry. Consequently, significant portions of the industry are controlled by relatively few organizations. We currently have over 400 clients. As consolidation increases, these contracts may be merged or lost due to the landscape of the industry. In light of such consolidation, however, the loss of any of these significant affiliation contracts or our inability to enter into contracts with other clients in the broadcast industry would negatively impact our operations. The reduction of artists touring and releasing new recording can significantly impact the level of activity on the fan club sites, membership and potential advertising associated with such. OUR E-MAIL BASED PRODUCTS AND FAN CLUB SERVICES ARE DEPENDENT UPON THE INTERNET. The success of our services and products will depend in large part upon the continued development and expansion of the Internet. The Internet has experienced, and is expected to continue to experience, significant and geometric growth in the number of users and the amount of traffic. There can be no assurance that the Internet infrastructure will continue to be able to support the demands placed on it by this continued growth. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols (for example, the next-generation Internet Protocol) to handle increased levels of Internet activity, or due to increased governmental regulation. There can be no assurance that the infrastructure or complementary services necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace for services and products such as those we offer. If the necessary infrastructure or complementary services or facilities are not developed, or if the Internet does not become a viable commercial marketplace, our business, results of operations, and financial condition will be materially adversely affected. OUR FUTURE SUCCESS WILL DEPEND ON INCREASED ACCEPTANCE OF THE INTERNET AS A MEDIUM OF COMMERCE. The market for Internet e-mail, fan club sites, private label newsletters and other services is relatively new and evolving rapidly. Our future success will depend, in part, upon our ability to provide services that are accepted by our existing and future clients as an integral part of their business model in providing content and information to their fans and viewers. The level of demand for Internet e-mail, fan club sites, private label newsletters and other services will depend upon a number of factors, including the following: the growth in consumer access to, and acceptance of, new interactive technologies such as the Internet; the adoption of Internet-based business models; 22 23 the development of technologies that facilitate two-way communications between companies and target audiences; and acquiring members to the brands services. Significant issues concerning the commercial use of Internet technologies, including security, reliability, privacy, cost, ease of use and quality of service, may inhibit the growth of services that use these technologies. Our future success will depend, in part, on our ability to meet these challenges, which must be met in a timely and cost-effective manner. We cannot be sure that we will succeed in effectively meeting these challenges, and our failure to do so could materially and adversely affect our business. Industry analysts and others have made many predictions concerning the growth of the Internet as a business medium. Many of these historical predictions have overstated the growth of the Internet. These predictions should not be relied upon as conclusive. The market for our Internet e-mail and fan club services may not continue to grow, our services may not be adopted and individual personal computer users in business or at home may not use the Internet or other interactive media for commerce, interaction and communication. If the market for Internet e-mail, fan club sites and other services fails to sustain growth, or develops more slowly than expected, or if our services do not achieve market acceptance, our business would be materially and adversely affected. INTERNET STOCKS ARE SUBJECT TO MARKET VOLATILITY. The stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These fluctuations may adversely affect our stock price. If Internet usage does not continue to grow or its infrastructure fails, our business will suffer. If the Internet does not gain increased acceptance for business-to-consumer electronic commerce, our business will not grow or become profitable. We cannot be certain that the infrastructure or complementary services necessary to maintain the Internet as a useful and easy means of transferring documents and data will continue to develop. The Internet infrastructure may not support the demands that growth may place on it and the performance and reliability of the Internet may decline. INCREASED COMPETITION RESULTING FROM AN INCREASE IN THE NUMBER OF E-MAIL FAN CLUB AND BRANDED LABEL NEWSLETTERS PROVIDERS MAY HAVE AN ADVERSE EFFECT ON POPMAIL'S FUTURE BUSINESS OPERATIONS. Currently there are a growing number of e-mail providers, artist web sites, newsletters providers and competitors to our business. To the extent we can execute our plan and are successful within the current target vertical markets in which we compete (i.e., broadcast, sports, music and entertainment), we anticipate continued growth of clients and members to our e-mail services, newsletters and artist fan club sites. Others currently are competing and will attempt to compete in these Affinity vertical markets, which may have an adverse affect on our future business operations. THERE IS A RISK THAT GOVERNMENT REGULATION OF THE INTERNET COULD BECOME MORE EXTENSIVE. There are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing, characteristics, and quality of products and service. The Telecommunications Reform Act of 1996 imposes criminal penalties on anyone who distributes obscene, indecent, or patently offensive communications on the Internet. Other nations, including Germany, have taken actions to restrict the free flow of material deemed to be objectionable on the Internet. The adoption of any additional laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our services and products, and increase our cost of doing business or otherwise have an adverse effect on our business, results of operations and financial condition. Moreover, the applicability to the Internet of existing 23 24 laws in various jurisdictions governing issues such as property ownership, libel, and personal privacy is uncertain and will take years to resolve. Any such new legislation or regulation could have a material adverse effect on our business, results of operations, and financial condition. WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE IF THE ACCEPTANCE OF ONLINE ADVERTISING, WHICH IS NEW AND UNPREDICTABLE, DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE. We plan to derive a substantial portion of our future revenues from online advertising and direct marketing in our branded e-mail, fan club newsletters, artist web sites and Web-based programs. If these services do not continue to achieve market acceptance, we may not generate sufficient revenue to support our continued operations. The Internet has not existed long enough as an advertising medium to demonstrate its effectiveness relative to traditional advertising. Advertisers and advertising agencies that have historically relied on traditional advertising remain slow to adopt online advertising. Many potential advertisers have limited or no experience using e-mail or the Web as an advertising medium. They may have allocated only a limited portion of their advertising budgets to online advertising, or may find online advertising to be less effective for promoting their products and services than traditional advertising media. If the market for online advertising fails to develop or develops more slowly than we expect, we may not sustain revenue growth or achieve or sustain profitability. The market for e-mail advertising in general is vulnerable to the negative public perception associated with unsolicited e-mail, known as "spam." Public perception, press reports or governmental action related to spam could reduce the overall demand for e-mail advertising in general, which could reduce our revenue and prevent us from achieving or sustaining profitability. IF WE DO NOT MAINTAIN AND EXPAND OUR CLIENT AND MEMBER BASE WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY FOR ADVERTISERS. Our revenue has been derived primarily from the licensing of our e-mail services, set up and hosting fees through PopMail Network, creating content through IZ.com for specific brands and from management fees, ticket fees, commerce fees and artist travel packages through Fan Asylum. All three companies are seeking to provide timely and relevant information to their clients customers, fans and viewers with personalized content and information that is of most interest to the opt-in member or fan, through targeted e-mail, personalized newsletters and fan club sites. If we are unable to maintain and expand our affinity brand member base and add clients to our "affinity brand network," advertisers could find our audience less attractive and effective for promoting their products and services and we could experience difficulty retaining our existing advertisers and attracting additional advertisers. To date, we have relied on referral-based marketing activities to attract a portion of our members and will continue to do so for the foreseeable future. This type of marketing is largely outside of our control and there can be no assurance that it will generate rates of growth in our member base comparable to what we have experienced to date. We would also be unable to grow our member base if a significant number of our current members and clients stopped using our service. Members may discontinue using our service if they object to having their online activities tracked or they do not find our content useful. In addition, our service allows our members to easily unsubscribe at any time by clicking through a link appearing at the bottom of our e-mail messages and selecting the particular categories from which they want to unsubscribe. OUR BUSINESS DEPENDS ON OUR ABILITY TO PROVIDE SERVICES THAT CREATE, DELIVER AND DISTRIBUTE RELEVANT AND APPEALING CONTENT FROM AND FOR OUR CLIENTS THROUGH OUR AFFINITY E-MAIL SERVICES, PUBLISHING TOOLS AND FAN CLUB SITES; IF WE ARE NOT ABLE TO CONTINUE TO DELIVER SUCH CONTENT OR TO PROVIDE SUCH SERVICES, WE MAY BE NOT ABLE TO MAINTAIN AND EXPAND OUR MEMBER AND FAN BASE, WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO RETAIN AND ATTRACT THE ADVERTISERS WE NEED TO GENERATE ADDITIONAL REVENUES. 24 25 Through IZ.com and Fan Asylum, we have relied on our editorial staff to identify and develop substantially all of our content utilizing content derived from other parties and from our clients. Because our members' preferences are constantly evolving, our editorial staff may be unable to accurately and effectively identify and develop content that is relevant and appealing to our members. As a result, we may have difficulty maintaining and expanding our member base, which could negatively affect our ability to retain and attract advertisers. If we are unable to retain and attract advertisers our revenue will decrease. Additionally, we license a small percentage of our content from third parties. The loss, or increase in cost, of our licensed content may impair our ability to assimilate and maintain consistent, appealing content in our e-mail messages or maintain and improve the services we offer to consumers. We intend to continue to strategically license a portion of our content for our e-mails from third parties, including content that is integrated with internally developed content. These third-party content licenses may be unavailable to us on commercially reasonable terms, and we may be unable to integrate third-party content successfully. The inability to obtain any of these licenses could result in delays in product development or services until equivalent content can be identified, licensed and integrated. Any delays in product development or services could negatively affect our ability to maintain and expand our member base. IF WE DO NOT RESPOND TO OUR COMPETITION EFFECTIVELY, WE MAY LOSE CURRENT CLIENTS AND MEMBERS AND FAIL TO ATTRACT NEW ADVERTISERS, REDUCING OUR REVENUES AND HARMING OUR FINANCIAL RESULTS. We face intense competition from both traditional and online advertising and direct marketing businesses. If we do not respond to this competition effectively, we may not be able to retain current advertisers or attract new advertisers, which would reduce our revenue and harm our financial results. Currently, several companies offer competitive e-mail direct marketing services, such as coolsavings.com, MyPoints.com, NetCreations, YesMail.com, Digital Impact and Exactis. We also expect to face competition from online content providers, list aggregators as well as established online portals and community Web sites that engage in direct marketing programs. Additionally, we may face competition from traditional advertising agencies and direct marketing companies that may seek to offer online products or services. We also compete in high profile industries where our e-mail services, publishing tools and fan club site offerings must meet the demands of our fans and clients. It is imperative that we continue to make enhancements to the e-mail services, publishing tool and fan club site offerings if we are to continue growing our client and member base. Failure to make service and product enhancements could significantly impact our financial results. WE DEPEND HEAVILY ON OUR NETWORK INFRASTRUCTURE AND IF THIS FAILS IT COULD RESULT IN UNANTICIPATED EXPENSES AND PREVENT OUR MEMBERS FROM EFFECTIVELY UTILIZING OUR SERVICES, WHICH COULD NEGATIVELY IMPACT OUR ABILITY TO ATTRACT AND RETAIN MEMBERS AND ADVERTISERS. Our ability to successfully create and deliver our e-mail messages and private label newsletters and to keep fan club sites current depends in large part on the capacity, reliability and security of our networking hardware, software and telecommunications infrastructure. Failures within our network infrastructure could result in unanticipated expenses to address such failures and could prevent our members from effectively utilizing our services, which could prevent us from retaining and attracting members and advertisers. While our technology platform is considered state of the art, we do not currently have fully redundant systems or a formal disaster recovery plan in place for all companies. Our system is susceptible to natural and man-made disasters, including earthquakes, fires, floods, power loss and vandalism. Further, telecommunications failures, computer viruses, electronic break-ins or other similar disruptive problems could adversely affect the operation of our systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any damages or interruptions in our systems. Accordingly, we could be required to make capital expenditures in the event of unanticipated damage. In addition, our members depend on Internet service providers, or ISPs, for access to our Web site. Due to the rapid growth of the Internet, ISPs and Websites have experienced significant system failures and could experience outages, delays and other difficulties due to system failures unrelated to our systems. These problems could harm our business by preventing our members from effectively utilizing our services. 25 26 OUR FUTURE SUCCESS WILL DEPEND ON INCREASED ACCEPTANCE OF THE INTERNET AS A MEDIUM OF COMMERCE. The market for Internet e-mail and other services is relatively new and evolving rapidly. Our future success will depend, in part, upon our ability to provide services that are accepted by our existing and future members as an integral part of their business model. The level of demand for Internet e-mail and other services will depend upon a number of factors, including the following: the growth in consumer access to, and acceptance of, new interactive technologies such as the Internet; the adoption of Internet-based business models; and the development of technologies that facilitate two-way communication between companies and target audiences. Significant issues concerning the commercial use of Internet technologies, including security, reliability, cost, ease of use and quality of service, remain unresolved and may inhibit the growth of services that use these technologies. Our future success will depend, in part, on our ability to meet these challenges, which must be met in a timely and cost-effective manner. We cannot be sure that we will succeed in effectively meeting these challenges, and our failure to do so could materially and adversely affect our business. Industry analysts and others have made many predictions concerning the growth of the Internet as a business medium. Many of these historical predictions have overstated the growth of the Internet. These predictions should not be relied upon as conclusive. The market for our Internet e-mail services may not develop, our services may not be adopted and individual personal computer users in business or at home may not use the Internet or other interactive media for commerce and communication. If the market for Internet e-mail and other services fails to develop, or develops more slowly than expected, or if our services do not achieve market acceptance, our business would be materially and adversely affected. WE MAY INCUR LIABILITY FOR THE INVASION OF PRIVACY. The Federal Trade Commission has investigated businesses that have used personally identifiable information without permission or in violation of a stated privacy policy. We have established and communicated to our members a privacy policy. In the event that we convey personally identifiable information to our corporate customers without permission or in violation of our stated privacy policy, we may incur liability for the unlawful invasion of privacy. Restaurant Division WE HAVE DEVELOPED A FORMAL PLAN FOR THE DIVESTITURE OF THE RESTAURANT DIVISION AND HAVE RECLASSIFIED THE DIVISION AS DISCONTINUED OPERATIONS. There is no guarantee that the Company will be able to complete the sale of the Restaurants, as contemplated, or upon the terms acceptable to the Company. Accordingly, the Company is still subject to certain risks associated with the Restaurant Division. OUR ABILITY, OR INABILITY, TO RESPOND TO VARIOUS COMPETITIVE FACTORS AFFECTING THE RESTAURANT INDUSTRY MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. The restaurant industry is highly competitive and is affected by changes in consumer preferences, as well as by national, regional and local economic conditions, and demographic trends. Discretionary spending priorities, traffic patterns, tourist travel, weather conditions, employee availability and the type, number and location of competing restaurants, among other factors, will also directly affect the performance of our restaurants. Changes in any of these factors in the markets where we currently operate our restaurants could adversely affect the results of our operations. Furthermore, the restaurant industry in general is highly competitive based on the type, quality and selection of the food offered, price, service, location and other factors and, as a result, has a high failure rate. The themed restaurant industry is relatively young, is particularly dependent on tourism and has seen the emergence of a number of new competitors. We compete with numerous well-established competitors, including national, regional and local restaurant chains, many of which have greater financial, marketing, personnel and other resources and longer operating histories than us. As a result, we may be unable to respond to the various competitive factors affecting the restaurant industry. 26 27 WE HAVE ENTERED INTO NON-CANCELABLE LEASES UNDER WHICH WE ARE OBLIGATED TO MAKE PAYMENTS FOR TERMS OF 12 TO 15 YEARS. We have entered into long-term leases relating to the Kenwood, Mall of America and Denver restaurants. These leases are non-cancelable by us (except in limited circumstances) and range in term from 12 to 15 years. Although we have closed the Kenwood restaurant and assigned the related lease to an unrelated third party who is currently making the required lease payments, we remain the primary obligor under the lease. If we decide to close any of our existing restaurants, we may nonetheless be committed to perform our obligations under the applicable lease, which would include, among other things, payment of the applicable base rent for the balance of the respective lease term. Such continued obligations increase our chances of closing a restaurant without receiving an adequate return on our investment. AMONG OTHER ECONOMIC FACTORS OVER WHICH WE HAVE NO CONTROL, THE SUCCESS OF OUR RESTAURANTS WILL DEPEND ON CONSUMER PREFERENCES AND THE PREVAILING LEVEL OF DISCRETIONARY CONSUMER SPENDING. The success of our restaurant division depends to a significant degree on a number of economic conditions over which we have no control, including: discretionary consumer spending; the overall success of the malls, entertainment centers and other venues where Cafe Odyssey restaurants are or will be located; economic conditions affecting disposable consumer income; and the continued popularity of themed restaurants in general and the Cafe Odyssey concept in particular. Furthermore, most themed restaurants are especially susceptible to shifts in consumer preferences because they open at or near capacity and frequently respond to such shifts by experiencing a decline in revenue growth or of actual revenues. An adverse change in any or all of these conditions would have a negative effect on our operations and the market value of our common stock. OUR RESTAURANT DIVISION IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS. The restaurant industry, and to a lesser extent, the retail merchandising industry, are subject to numerous federal, state, and local government regulations, including those relating to: the preparation and sale of food; building and zoning requirements; environmental protections; minimum wage requirements; overtime; working and safety conditions; the sale of alcoholic beverages; sanitation; relationships with employees; unemployment; workers compensation; and citizenship requirements. Any change in the current status of such regulations, including an increase in employee benefits costs, workers' compensation insurance rates, or other costs associated with employees, could substantially increase our compliance and labor costs. Because we pay many of our restaurant-level personnel rates based on either the federal or the state minimum wage, increases in the minimum wage would lead to increased labor costs. In addition, our operating results would be adversely affected in the event we fail to maintain our food and liquor licenses. Furthermore, restaurant operating costs are affected by increases in unemployment tax rates, sales taxes and similar costs over which we have no control. 27 28 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in routine legal actions in the ordinary course of its business. Although outcomes of any such legal actions cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the financial position or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following table lists recent sales of unregistered securities by the Company: ---------------------------------------------------------------------------------------------------------------------------- TITLE AND CASH OR DESCRIPTION OF AMOUNT OF CONSIDERATION DATE SECURITIES SECURITIES * ISSUED TO RECEIVED ---------------------------------------------------------------------------------------------------------------------------- 6/5/2000 Common Stock 800,000 Shares Tim McQuaid As consideration in a merger transaction 6/13/2000 Common Stock 450,706 Shares CraftClick.com As consideration for an investment 7/19/2000 Warrants to Purchase Warrants to purchase 50,000 Cam Birge In consideration for Common Stock shares at an exercise price of financial services $0.75 7/26/2000 Warrants to Purchase Previously issued Warrants to Maris Kott and In consideration for Common Stock purchase 100,000 shares at an Dara Podber financial services exercise price of $1.625 were repriced to $0.75 per share 7/26/2000 Warrants to Purchase Warrants to purchase 300,000 J.P. Carey In connection with Common Stock shares at an exercise price of Securities, Fiji certain financing $1.00 repriced to purchase Capital, arrangements 200,000 shares at an exercise Metropolitan price of $0.75 Capital Partners, Inc. 7/28/2000 Warrants to Purchase Warrants to purchase 25,000 Andrew Green In connection with Common Stock shares at an exercise price of certain financing $0.75 arrangements 8/2/2000 Common Stock 300,000 Shares Phil Bane Pursuant to a Restricted Stock Purchase Agreement 8/15/2000 Common Stock 60,000 Shares Metropolitan In consideration for Capital Partners, financial services Inc. 8/18/2000 Warrants to Purchase Warrants to purchase an Certain Accredited In connection with Common Stock aggregate of 2,000,000 shares at Investors an agreement to an exercise price of $0.625 immediately exercise previously outstanding warrants 8/25/2000 Common Stock 240,000 Shares Wayne Mills In consideration of purchase of Promissory Note of Officer and Director of the Company ----------------------------------------------------------------------------------------------------------------------------
28 29 ------------------------------------------------------------------------------------------------------------------------- TITLE AND CASH OR DESCRIPTION OF AMOUNT OF CONSIDERATION DATE SECURITIES SECURITIES * ISSUED TO RECEIVED ------------------------------------------------------------------------------------------------------------------------- 08/28/2000 Warrants to Purchase Warrants to purchase 25,000 Andrew Green In connection with Common Stock shares at an exercise price of certain financing $0.75 arrangements 9/14/2000 Warrants to Purchase Warrants to purchase 200,000 Apache Bluff Corp. In consideration for Common Stock shares at an exercise price of financial consulting $0.50 services 9/14 and Warrants to Purchase Warrants to purchase an Certain Accredited In connection with 9/15/2000 Common Stock aggregate of 618,626 shares at Investors an agreement to an exercise price of $1.00 immediately exercise previously outstanding warrants -------------------------------------------------------------------------------------------------------------------------
*All share amounts and exercise prices are pre-split values and do not take into account the 10-for-1 reverse stock split. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 4.1 Form of Warrant to Purchase Shares of Common Stock of the Company issued to Cam Birge. 4.2 Form of Warrant to Purchase Shares of Common Stock of the Company (R Series). 4.3 Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.2. 4.4 Form of Warrant to Purchase Shares of Common Stock of the Company issued to Apache Bluffs. 4.5 Form of Warrant to Purchase Shares of Common Stock of the Company (RW Series). 4.6 Schedule identifying material details of warrants issued by the Company substantially identical to the warrant filed as Exhibit 4.5. 10.1 Amendment to Stock Purchase Agreement dated as of October 11, 2000 by and among PopMail.com, inc., Fan Asylum, Inc. and Tim McQuaid. 10.2 Stock Purchase Agreement dated June 7, 2000 by and among CraftClick.com, Inc. and PopMail.com, inc. 27 Financial Data Schedule (B) REPORTS ON FORM 8-K On September 20, 2000, the Company filed a Current Report on Form 8-K dated September 15, 2000, under Items 5 and 7, announcing that it had signed a letter of intent to sell its Cafe Odyssey restaurant division to the restaurant division's executive management team. 29 30 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POPMAIL.COM, INC. By: /s/ Stephen J. Spohn ------------------------------------- Stephen J. Spohn Chief Financial Officer Date: November 14, 2000 30