<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1999
REGISTRATION NO. 333-75523
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MYPOINTS.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7311 94-3255692
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
MYPOINTS.COM, INC.
565 COMMERCIAL STREET, 4TH FLOOR
SAN FRANCISCO, CA 94111-3031
(415) 676-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN M. MARKOWITZ
CHIEF EXECUTIVE OFFICER
MYPOINTS.COM, INC.
565 COMMERCIAL STREET, 4TH FLOOR
SAN FRANCISCO, CA 94111-3031
(415) 676-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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MARIO M. ROSATI, ESQ. LAIRD H. SIMONS III, ESQ.
CHRISTOPHER D. MITCHELL, ESQ. KATHERINE TALLMAN SCHUDA, ESQ.
ADAM D. LEVY, ESQ. CYNTHIA E. GARABEDIAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI, P.C. FENWICK & WEST LLP
650 PAGE MILL ROAD TWO PALO ALTO SQUARE
PALO ALTO, CA 94304 PALO ALTO, CA 94306
(650) 493-9300 (650) 494-0600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
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Common stock, $0.001 par value.... 5,750,000 shares(2) $12.00 $69,000,000 $19,182.00(3)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Includes 750,000 shares subject to the underwriters' over-allotment option.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement contains two forms of prospectus: (1) one
prospectus to be used in connection with an offering in the United States and
Canada and (2) one prospectus to be used in connection with a concurrent
offering outside of the United States and Canada. The U.S. prospectus and the
international prospectus are identical in all respects except for the front
cover page and the first page of the "Underwriting" section. The front cover
page and the first page of the "Underwriting" section of the international
prospectus are included immediately after the full U.S. prospectus and before
Part II of this registration statement.
<PAGE> 3
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and we are not soliciting offers to buy these securities, in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 29, 1999
LOGO
5,000,000 SHARES
COMMON STOCK
MyPoints.com, Inc. is offering 5,000,000 shares of common stock. This is
MyPoints.com's initial public offering, and no public market currently exists
for our shares. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "MYPT" upon notice of issuance. We anticipate
that the initial public offering price will be between $10.00 and $12.00 per
share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to MyPoints.com, Inc............................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
MyPoints.com has granted the underwriters a 30-day option to purchase up to
an additional 750,000 shares of common stock to cover over-allotments.
-------------------------
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
WIT CAPITAL CORPORATION
The date of this prospectus is , 1999
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"MYPOINTS.COM," "WE," "US" AND "OUR" REFER TO MYPOINTS.COM, INC. AND ITS
SUBSIDIARIES, AND REFERENCES TO "MYPOINTS" REFER TO THE BRAND NAME OF OUR
PRODUCTS AND SERVICES.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------------
TABLE OF CONTENTS
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PAGE
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Summary..................................................... 4
Risk Factors................................................ 7
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Consolidated Financial Data........................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 31
Management.................................................. 44
Transactions with Directors, Executive Officers and
Principal Stockholders.................................... 54
Principal Stockholders...................................... 57
Description of Capital Stock................................ 60
Shares Eligible For Future Sale............................. 63
Underwriting................................................ 65
Legal Matters............................................... 67
Experts..................................................... 68
Where You Can Find Additional Information................... 68
Index to Financial Statements............................... F-1
</TABLE>
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MyPoints, BonusMail and Rew@rds are registered service marks, and
MyPoints.com, the MyPoints logo, the MyPoints BonusMail logo, MyPoints
Shopping!, Digital Loyalty Engine and Intellipost are trademarks, of
MyPoints.com, Inc. Prodigy is a registered trademark, and Prodigy Internet,
Prodigy Points and the Prodigy Internet logo are trademarks, of Prodigy
Communications Corporation. Other service marks, trademarks and trade names
referred to in this prospectus are the property of their respective owners.
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SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully.
MYPOINTS.COM
MyPoints.com is a leading provider of online direct marketing and loyalty
programs. We integrate targeted email and web-based direct marketing offers with
online loyalty programs to create valuable benefits for our advertising clients,
consumer members and loyalty partners. Our approach gives internet consumers the
opportunity to earn rewards by responding to online offers and provides web
businesses with online customer acquisition and retention tools.
When consumers enroll in the MyPoints program, they give us permission to
send them targeted online offers, and they receive rewards points for completing
a survey that provides us with demographic and behavioral information. MyPoints
members earn additional points by responding to direct marketing offers and by
providing us with additional demographic and behavioral data on a secure,
confidential basis. Members may redeem points they earn online for products and
services from our rewards providers. Our member profile database is continuously
enriched with transactional data gathered through members' interactions with
promotional offers, completion of surveys and redemption of points.
We have built a member database containing more than three million consumer
data profiles. We principally earn revenues by delivering online direct
marketing offers to this membership base. We charge advertisers a fee based on
offers delivered, qualified customer prospects generated or online transactions
executed. We have relationships with more than 200 advertisers and rewards
providers, including leading brands such as Barnes & Noble, Disney, eBay,
Egghead.com, GTE, Hilton HHonors, Intuit, Macy's, Microsoft, Sprint and Tower
Records.
MARKET OPPORTUNITY
Businesses engage in various forms of offline and online direct marketing
to generate sales of products or services. Traditional forms of offline direct
marketing include catalog mailings, magazine inserts and telesales. Online
direct marketing takes the form of email and web-based promotional offers.
Online direct marketing allows advertisers to use technology-based tools to give
them rapid feedback on campaigns, which can be used to tailor new messages and
targeted offers.
Advertisers are committing relatively more dollars to online direct
marketing than to other forms of internet advertising, such as brand marketing
using banner advertisements. Forrester Research, a leading internet research
firm, projects internet advertising expenditures in the U.S. to increase from
$1.3 billion in 1998 to $10.4 billion in 2002. Forrester estimates that direct
marketing will account for 60% of total online advertising expenditures in the
U.S. in 2002, up from 15% in 1998.
In addition to the growing use of the internet as a direct marketing
medium, as the number of internet users increases, the relative importance to
businesses of customer retention is also increasing. A recent survey by the web
research firm NFO Interactive found that approximately 53% of online customers
would increase the amount they spend in online transactions if loyalty points
were offered. As a result of these factors, leading online merchants and content
providers are launching and testing programs aimed at retaining their most
valuable customers. The challenges that these businesses face in establishing
online loyalty programs include the costs of implementing and operating the
programs
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<PAGE> 6
and the ability to provide customers with sufficient opportunities to earn and
redeem awards. We believe that these challenges will lead many companies to
outsource this aspect of their customer retention programs to providers capable
of delivering comprehensive loyalty management services.
Because of continuing corporate interest in using the internet to acquire
customers, and because of the need for online businesses to find effective ways
to retain customers once they have attracted them, we believe there is a
significant opportunity for a company that can overcome the barriers to direct
marketing and loyalty on the internet, and bring cost-effective, integrated
direct marketing and loyalty solutions to the online market.
CORPORATE INFORMATION
MyPoints.com was incorporated in Delaware under the name Intellipost
Corporation in November 1996. In March 1999, we changed our name to
MyPoints.com, Inc. Our principal executive offices are located at 565 Commercial
Street, 4th Floor, San Francisco, California 94111-3031. Our telephone number at
this location is (415) 676-3700. Our corporate email address is
[email protected].
------------------------
THE OFFERING
Common stock offered by MyPoints.com......... 5,000,000 shares
Common stock to be outstanding after the
offering..................................... 23,712,319 shares
Use of proceeds.............................. For general corporate purposes,
including working capital,
branding, membership expansion,
advertising, increases in our
sales and marketing operations,
new technology and products,
funding of points liability,
expansion of network
infrastructure and payment of a
license fee. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... MYPT
Common stock to be outstanding after the offering is based on 18,712,319
shares of common stock outstanding as of June 30, 1999. It does not include:
- 3,878,597 shares issuable upon exercise of stock options outstanding as
of June 30, 1999;
- 602,293 shares available for future grant or issuance under our stock
option and stock purchase plans as of June 30, 1999; and
- 1,534,028 shares issuable upon exercise of warrants outstanding as of
June 30, 1999.
Except as otherwise indicated, all of the information in this prospectus:
- reflects the automatic conversion of each outstanding share of preferred
stock into one share of common stock immediately prior to the closing of
this offering; and
- assumes no exercise of the underwriters' over-allotment option.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of weighted average shares used in computing
per share data.
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<CAPTION>
NOVEMBER 7,
1996 THREE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -------------------
1996 1997 1998 1998 1999
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ -- $ 151 $ 1,286 $ 150 $ 1,275
Gross profit..................... -- 73 165 13 397
Total operating expenses......... 68 3,018 8,494 1,106 5,887
Operating loss................... (68) (2,945) (8,329) (1,093) (5,490)
Net loss......................... (67) (2,889) (8,266) (1,070) (5,481)
Net loss attributable to common
stockholders................... $ (67) $(2,889) $(8,266) $(1,070) $(15,281)
Net loss per share:
Basic and diluted.............. $ (0.08) $ (2.68) $ (4.72) $ (0.83) $ (3.00)
Weighted average
shares -- basic and
diluted..................... 891 1,076 1,750 1,287 5,097
</TABLE>
In the pro forma column for the balance sheet data, we have given effect to
the receipt of approximately $10.0 million from the sale of 2,000,000 shares of
Series E preferred stock which were issued pursuant to a stock purchase
agreement entered into in March 1999. The closing of the sale took place in
April 1999. In the pro forma as adjusted column, we have adjusted the pro forma
balance sheet data to give effect to receipt of the net proceeds from the sale
in this offering of 5,000,000 shares of common stock at an assumed initial
public offering price of $11.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 1,868 $ 11,818 $ 61,968
Working capital (deficit)............................... (5,156) 4,794 54,944
Total assets............................................ 15,827 25,777 75,927
Long-term obligations, less current portion............. 2,368 2,368 2,368
Accumulated deficit..................................... (26,503) (26,503) (26,503)
Total stockholders' equity.............................. 4,613 14,563 64,713
</TABLE>
PRELIMINARY SECOND QUARTER 1999 RESULTS OF OPERATIONS
We expect to report revenues for the three months ended June 30, 1999 of
approximately $2.5 million. We anticipate a net loss for the three months ended
June 30, 1999 of between $10.0 million and $13.0 million.
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RISK FACTORS
You should consider the risks described below before making an investment
decision. Our business, results of operations and financial condition could be
materially and adversely affected by any of the following risks. The trading
price of our common stock could decline due to any of the following risks, and
you might lose all or part of your investment.
WE HAVE ONLY A LIMITED OPERATING HISTORY THAT INVESTORS MAY USE TO ASSESS OUR
FUTURE PROSPECTS
We have only a limited operating history upon which you can evaluate our
business. We commenced operations in November 1996 and did not begin to generate
revenues until July 1997. We have not and may never generate sufficient revenues
to achieve profitability. Although we have experienced revenue growth in recent
periods, these growth rates may not be sustainable or indicative of our future
growth. We have limited experience addressing challenges frequently encountered
by early-stage companies in the electronic commerce and direct marketing
industries. We may not be successful in addressing these risks, and our business
strategy may not be successful. In addition, we have never operated during a
general economic downturn in the United States, which typically adversely
affects advertising and marketing expenditures and retail sales. Accordingly,
our limited operating history does not provide investors with a meaningful basis
for evaluating an investment in our common stock.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES TO CONTINUE UNTIL AT LEAST 2001
Our accumulated deficit as of March 31, 1999 was $16.6 million. We have
never operated profitably and, given our planned level of operating expenses, we
expect to continue to incur losses until at least 2001. We plan to increase our
operating expenses as we continue to build infrastructure to support the
expansion of our business. Our losses may increase in the future, and even if we
achieve our revenue targets, we may not be able to sustain or increase
profitability on a quarterly or annual basis. If our revenues grow more slowly
than we anticipate, or if our operating expenses exceed our expectations and
cannot be adjusted accordingly, our business, results of operations and
financial condition will be materially and adversely affected.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING, IF REQUIRED, ARE UNCERTAIN AND
FAILURE TO OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO PURSUE FUTURE
GROWTH
We may need to raise additional funds to develop or enhance our services or
products, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. We cannot assure you that
additional financing will be available on terms favorable to us, or at all. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced and
these securities might have rights, preferences or privileges senior to those of
our current stockholders. If adequate funds are not available on acceptable
terms, our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products, or otherwise respond to
competitive pressures would be significantly limited. Our business, results of
operations and financial condition could be materially adversely affected by
this limitation.
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OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH COULD AFFECT
OUR STOCK PRICE
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, some of which are outside of our control. As
a result, our operating results may be below the expectations of public market
analysts and investors. In this event, the price of our common stock may fall.
The factors most likely to produce varied results include:
- the advertising budget cycles of individual advertisers;
- the number of reward points redeemed by members and the costs associated
with these redemptions;
- changes in marketing and advertising costs that we incur to attract and
retain members;
- changes in our pricing policies, the pricing policies of our competitors
or the pricing policies for internet advertising generally; and
- unexpected costs and delays relating to the expansion of our operations.
Due to these factors, revenues and operating results are difficult to
forecast and you should not rely on period to period comparisons of results of
operations as an indication of our future performance. Any significant shortfall
in revenues in relation to our expenses would have a material adverse effect on
our business, results of operations and financial condition.
OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS THAT COULD IMPACT OUR
GROWTH AND AFFECT OUR STOCK PRICE
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail advertising, which are typically higher
during the fourth calendar quarter. In addition, expenditures by advertisers
tend to be cyclical, reflecting general economic conditions and consumer buying
patterns. The extent of these seasonal fluctuations in any period may be
difficult to predict and, if the fluctuations are higher than our expectations,
they could have a material adverse effect on our business, results of operations
and financial condition.
WE MAY HAVE DIFFICULTIES INTEGRATING RECENT AND FUTURE ACQUISITIONS AND ANY
FAILURE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES WOULD REDUCE OUR ABILITY TO
REALIZE THE ANTICIPATED VALUE OF THE ACQUISITION
We may pursue acquisitions in the future. Based on our experiences with our
first acquisition, we expect to face numerous risks and uncertainties generally
associated with acquisitions, including:
- potentially adverse effects on our reported results of operations from
acquisition-related charges and amortization of goodwill and purchased
technology;
- our ability to maintain customers or the reputation of the acquired
businesses;
- potential dilution to current stockholders from the issuance of
additional equity securities;
- difficulties integrating operations, personnel, technologies, products
and information systems of the acquired businesses;
- diversion of management's attention from other business concerns; and
- potential loss of key employees of acquired businesses.
In November and December 1998, through our acquisition of companies
affiliated with Experian Information Solutions, Inc., we acquired internet and
electronic commerce related assets and technologies to support a web-based
rewards program known as MyPoints. We integrated MyPoints with our BonusMail
email service during March and April 1999. This integration involved the
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combination of two different marketing programs and technology platforms, as
well as operations in San Francisco and Chicago. In connection with this
integration, we incurred substantial costs. During the relaunch of the
integrated MyPoints program, we encountered several unanticipated problems which
resulted in significant periods of system downtime during April 1999. During
these periods of downtime, our web site was not accessible by members. We
believe that we have resolved the problems that caused this downtime; however,
there can be no assurance that we will not encounter additional system-related
problems.
Our ability to meet the challenges associated with integrating acquired
companies has not been established. As a result, we cannot assure you that we
will be successful in generating additional sources of members and revenues from
the recent acquisitions or any future acquisitions.
WE ARE GROWING RAPIDLY, AND THE FAILURE TO MANAGE OUR GROWTH COULD ADVERSELY
AFFECT OUR BUSINESS
As we continue to increase the scope of our operations, we may not have an
effective planning and management process in place to implement our business
plan successfully. We have grown from 24 employees on January 1, 1998 to 123
employees on June 30, 1999. Of these employees, 28 joined us in connection with
our acquisitions in November and December 1998. We are continuing to integrate
these individuals into our organization. We plan to continue the expansion of
our technology, sales, marketing and administrative organizations. This growth
will continue to strain our management systems and resources. We anticipate the
need to continue to improve our financial and managerial controls and our
reporting systems. In addition, we will need to expand, train and manage our
rapidly growing work force. Our business, results of operations and financial
condition will be materially and adversely affected if we are unable to manage
our expanding operations effectively.
OUR BUSINESS WILL SUFFER IF THE ACCEPTANCE OF ONLINE ADVERTISING AND DIRECT
MARKETING DOES NOT CONTINUE
We expect to derive a substantial portion of our revenues from online
advertising and direct marketing, including both email and web-based programs.
If these services do not continue to achieve market acceptance, we cannot assure
you that we will generate business at a sufficient level to support our
continued operations. The internet has not existed long enough as an advertising
medium to demonstrate its effectiveness relative to traditional advertising
media. Advertisers and advertising agencies that have historically relied on
traditional advertising may be reluctant or slow to adopt online advertising.
Many potential advertisers have limited or no experience using email 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, our business, results of operations and
financial condition would be materially and adversely affected.
The market for email advertising in general is vulnerable to the negative
public perception associated with unsolicited email, known as "spam." We do not
send unsolicited email. However, public perception, press reports or
governmental action related to spam could reduce the overall demand for email
advertising in general and our MyPoints BonusMail service in particular.
OUR BUSINESS WILL SUFFER IF ONLINE REWARDS PROGRAMS ARE NOT WIDELY ACCEPTED BY
BUSINESSES AND INTERNET USERS
Our success depends in large part on the continued growth and acceptance of
online rewards programs. If online rewards programs are not widely accepted by
advertisers and embraced by
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internet users, our business will suffer. Although loyalty and rewards programs
have been used extensively in conventional marketing and sales channels, they
have only recently begun to be used online. We cannot assure you that online
programs will continue to be accepted by advertisers and that we can continue to
offer advertisers attractive promotions and satisfied members. The success of
our business model also will depend on our ability to attract and retain
members. We cannot assure you that our marketing efforts and the quality of each
member's experience, including the number and relevance of the direct marketing
offers we provide and the perceived value of the rewards we offer, will generate
sufficient satisfied members. To the extent that our online rewards program does
not achieve market acceptance among members, loyalty partners and rewards
providers, our business would be materially and adversely affected.
WE FACE INTENSE COMPETITION, AND THE FAILURE TO COMPETE EFFECTIVELY COULD
ADVERSELY AFFECT OUR MARKET SHARE AND RESULTS OF OPERATIONS
We face intense competition from both traditional and online advertising
and direct marketing businesses. We expect competition to increase due to the
lack of significant barriers to entry for online business generally. As we
expand the scope of our product and service offerings, we may compete with a
greater number of media companies across a wide range of advertising and direct
marketing services. Our ability to generate significant revenue from advertisers
and loyalty partners will depend on our ability to differentiate ourselves
through the technology and services we provide and to obtain adequate
participation from consumers in our online direct marketing and rewards
programs. Rewards providers are also a critical element of our business. The
attractiveness of our program to current and potential members and loyalty
partners depends in large part on the attractiveness of the rewards and point
redemption opportunities that we offer. Currently, several companies offer
competitive online products or services, including CyberGold and Netcentives. We
also expect to face competition from established online portals and community
web sites that engage in direct marketing and loyalty point programs, as well as
from traditional advertising agencies and direct marketing companies that may
seek to offer online products or services.
Many of our current competitors and potential new competitors have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
These advantages may allow them to respond more quickly to new or emerging
technologies and changes in customer requirements. It may also allow them to
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies, and make more
attractive offers to potential employees, strategic partners and advertisers. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products or services to address the needs of our prospective
advertisers and advertising agency customers. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margins and
loss of our market share. We may not be able to compete successfully, and
competitive pressures may materially and adversely affect our business, results
of operations and financial condition. See "Business -- Competition."
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON OUR ABILITY TO ESTABLISH THE MYPOINTS
BRAND, AND THE FAILURE TO DO SO WOULD HARM OUR BUSINESS
We are highly dependent on establishing and maintaining our brand. Any
event or circumstance that negatively impacts our brand could have a direct and
material adverse effect on our business, results of operations and financial
condition. As competitive pressures in the online direct marketing industry
increase, we believe that brand strength will become increasingly important. The
reputation
10
<PAGE> 12
of the MyPoints brand will depend on our ability to provide a high-quality
member experience. We cannot assure you that we will be successful in delivering
this experience. If members are not satisfied with the quality of their
experience with the MyPoints program, their negative experiences might result in
publicity that could damage our reputation. If we expend additional resources to
build the MyPoints brand and do not generate a corresponding increase in
revenues as a result of our branding efforts, or if we otherwise fail to promote
our brand successfully, our business, results of operations and financial
condition would be materially and adversely affected.
THE FAILURE TO ACCURATELY ESTIMATE LEVELS OF POINT REDEMPTION WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS AND COULD LEAD TO THE RESTATEMENT OF HISTORICAL
FINANCIAL RESULTS
Our historical and forecasted financial statements reflect our assumptions
as to the percentage of rewards points issued by us that will not be redeemed by
members prior to expiration. This percentage of unredeemed points is known as
"breakage." If our assumptions do not prove accurate, our financial statements
may require restating, which could have an adverse effect on our stock price and
reputation. The breakage rates we have used in preparing our financial
statements and forecasts are based primarily on our limited experience with our
own program since its launch in May 1997. We have also reviewed breakage rates
reported by other operators of loyalty and rewards programs, such as airlines.
Although we believe that the breakage rates we have used are reasonable in light
of our analysis and experience, we cannot assure you that our actual breakage
rates will equal or exceed our assumed breakage rates. If our actual breakage
rates are less than our assumed breakage rates, meaning that a greater number of
points are actually redeemed than we had assumed would be redeemed, our results
of operations could be materially and adversely affected. In addition, operators
of loyalty programs have, from time to time, for competitive or other reasons,
extended the expiration dates for points, miles or other rewards currencies. For
example, we extended the expiration date for the points associated with the
email portion of our program when we relaunched our email and web-based
services. If it becomes necessary for us to extend the expiration date of a
significant balance of outstanding points in the future, it is possible that our
actual breakage rates would be lower than our assumed breakage rates, which
could materially and adversely affect our results of operations. In addition,
the timing of members' decisions to redeem points is at the discretion of
members and cannot be controlled by us. Points typically have a four-year life
and can be redeemed by members until their expiration date. To the extent that
members redeem points at a rate that is more rapid than that anticipated by us,
we would experience a need for increased working capital to fund these
redemptions. Accordingly, the timing of points redemptions by members could
materially and adversely affect our results of operations.
A SMALL NUMBER OF OUR ADVERTISING CUSTOMERS ACCOUNT FOR A SIGNIFICANT PORTION OF
OUR REVENUES; THEREFORE THE LOSS OF PRINCIPAL CUSTOMERS COULD ADVERSELY AFFECT
OUR REVENUES
No single advertising customer accounted for more than 10% of our revenue
in 1998. One advertiser accounted for 14% of revenues in the first quarter of
1999. Our four largest advertising customers were responsible for approximately
30% of our revenues during 1998 and 38% of our revenues during the first quarter
of 1999. We do not have long-term contracts with most of our customers, and
customers can generally terminate their relationships with us upon specified
notice and without penalties. Thus, we may not be able to retain our principal
customers. The loss of one or more of our principal customers could have a
material adverse effect on our business, results of operations and financial
condition.
11
<PAGE> 13
WE DEPEND ON THE SERVICES OF OUR EXECUTIVE OFFICERS TO MANAGE OUR GROWTH, AND
THERE IS NO ASSURANCE WE CAN RETAIN THEIR SERVICES
Our future success depends on the continued service of our key senior
management and technical and sales personnel. The loss of any of these persons
could have a material adverse effect on our business. We do not have key-person
insurance on any of our employees. Robert C. Hoyler, our President and Chief
Operating Officer, Virgil Bistriceanu, our Senior Vice President, Technology,
Steven E. Parker, our Senior Vice President, Marketing, and Frank J. Pirri, our
Senior Vice President, Offline Commerce, joined us in December 1998 as the
result of acquisition transactions that took place in the fourth quarter of
1998. Charles H. Berman, our Senior Vice President, Sales, also joined us in
1998. Thomas P. Caldwell, our Senior Vice President, Finance and Chief Financial
Officer, joined us in April 1999. Our recently integrated management team has
limited experience working together.
Our success depends on our ability to attract, retain and motivate highly
skilled employees. Competition for employees in our industry is intense. We may
be unable to retain our key employees or to attract, assimilate and retain other
highly qualified employees in the future. We have experienced difficulty from
time to time in attracting the personnel necessary to support the growth of our
business, and we may experience similar difficulty in the future.
FAILURE TO SAFEGUARD OUR DATABASE AND MEMBER PRIVACY COULD AFFECT OUR REPUTATION
AMONG CONSUMERS AND HARM OUR BUSINESS
An important feature of the MyPoints program is our ability to develop and
maintain individual member profiles. Security and privacy concerns may cause
consumers to resist providing the personal data necessary to support this
profiling capability. As a result of these security and privacy concerns, we may
incur significant costs to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Usage of our MyPoints program could
decline if any well-publicized compromise of security occurred. In addition,
third parties could alter information in our database that would adversely
affect our ability to target direct marketing offers to members. We could also
be subject to legal claims from members. Any public perception that we engaged
in unauthorized release of member information would adversely affect our ability
to attract and retain members. Any of these events could have a material adverse
effect on our business, results of operations and financial condition.
As part of our point redemption services, we maintain a database containing
information on our members' account balances. Our database may be subject to
access by unauthorized users accessing our systems remotely. If we experience a
security breach, the integrity of our points database could be affected. This
breach could lead to financial losses through the unauthorized redemption of
points.
WE ARE VULNERABLE TO SYSTEM FAILURES WHICH COULD CAUSE INTERRUPTIONS OR
DISRUPTIONS IN OUR SERVICE
The hardware infrastructure on which the MyPoints system operates is
located at the Exodus Communications data center in Jersey City, New Jersey. In
April 1999, we completed a transition to Exodus from a combination of internally
maintained systems and systems maintained by another third-party service
provider. We cannot assure you that we will be able to manage this relationship
successfully to mitigate any risks associated with having our hardware
infrastructure maintained by Exodus. Unexpected events such as natural
disasters, power losses and vandalism could damage our systems.
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
12
<PAGE> 14
our systems. Accordingly, we could be required to make capital expenditures in
the event of damage. We do not currently have fully redundant systems or a
formal disaster recovery plan.
Our web site must accommodate a high volume of traffic and deliver
accurate, frequently updated information in a timely manner. Our web site has
experienced in the past and may experience in the future, slower response times
or decreased traffic for a variety of reasons. Periodically we experience
unscheduled system downtime, which results in our web site being inaccessible to
members. In particular, during the relaunch of the integrated MyPoints program
in April 1999, we experienced significant periods of system downtime during
which our web site was inaccessible. Although we did not suffer material losses
during these downtimes, if these problems persist in the future it could
materially and adversely affect our business, results of operations and
financial condition.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL
CHANGES IN OUR INDUSTRY
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions, short development cycles and evolving
industry standards. The recent growth of the internet and intense competition in
our industry exacerbate these market characteristics. Our future success will
depend on our ability to adapt to rapidly changing technologies by maintaining
and improving the performance features and reliability of our services. We may
experience technical difficulties that could delay or prevent the successful
development, introduction or marketing of new products and services. In
addition, any new enhancements to our products and services must meet the
requirements of our current and prospective users. We could incur substantial
costs to modify our services or infrastructure to adapt to rapid technological
change.
CONTINUED DEVELOPMENT AND USE OF THE INTERNET INFRASTRUCTURE IS CRITICAL TO OUR
ABILITY TO OFFER OUR SERVICES
Our members depend on internet service providers for access to our web
site. Internet service providers and web sites have experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. If outages or delays occur
frequently in the future, internet usage, as well as electronic commerce and the
usage of our products and services, could grow more slowly or decline, and this
could have an adverse effect on our business.
A number of factors may inhibit internet usage, including inadequate
network infrastructure, security concerns, inconsistent quality of service, and
lack of availability of cost-effective, high-speed service. If internet usage
grows, the internet infrastructure may not be able to support the demands placed
on it by this growth and its performance and reliability may decline.
OUR BUSINESS DEPENDS ON OUR ABILITY TO COLLECT MEMBER INFORMATION; FUTURE
REGULATION OF THE INTERNET COULD RESTRICT OUR ACCESS TO THIS INFORMATION
Laws and regulations that apply to the internet may become more prevalent
in the future. The laws governing the internet and email services remain largely
unsettled. There is no single governmental body overseeing our industry, and
many state laws that have been enacted in recent years have different and
sometimes inconsistent application to our business. In particular, our business
model could be severely damaged if regulations were enacted that restricted our
ability to collect or use information about our members.
The governments of foreign countries may also attempt to regulate
electronic commerce. New laws could dampen the growth in use of the internet
generally and decrease the acceptance of the
13
<PAGE> 15
internet as a commercial medium. In addition, existing laws such as those
governing intellectual property and privacy may be interpreted to apply to the
internet. In the event that foreign governments, the federal government, state
governments or other governmental authorities adopt or modify laws or
regulations relating to the internet, our business, results of operations and
financial condition could be materially and adversely affected.
In 1998, the United States government enacted a three-year moratorium
prohibiting states and local governments from imposing new taxes on electronic
commerce transactions. Upon expiration of this moratorium, if it is not
extended, states or other governments might levy sales or use taxes on
electronic commerce transactions. An increase in the taxation of electronic
commerce transactions might also make the internet less attractive for consumers
and businesses.
WE FACE RISKS ASSOCIATED WITH THIRD PARTY CLAIMS AND PROTECTION OF OUR
INTELLECTUAL PROPERTY RIGHTS, AND ANY LITIGATION RELATING TO INTELLECTUAL
PROPERTY RIGHTS COULD HARM OUR BUSINESS
Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. We have received
two claims of alleged infringement, one of which has been resolved through a
license agreement. We are currently in the process of negotiating the settlement
of a second claim, which was made by CyberGold, Inc. in May 1999. If this claim
cannot be resolved through a license or similar arrangement, we could become a
party to litigation with CyberGold. Litigation may also be necessary to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. An adverse
determination in any litigation of this type could require us to make
significant changes to the structure and operation of our online rewards
program, attempt to design around a third party's patent, or license alternative
technology from another party. Implementation of any of these alternatives could
be costly and time consuming, and might not be possible. Accordingly, an adverse
determination in any litigation that might ensue between a third party and us
could have a material adverse effect on our business, results of operations and
financial condition. In addition, any intellectual property litigation, even if
successfully defended, would result in substantial costs and diversion of
resources and management attention and could therefore have a material adverse
effect on our business, results of operations and financial condition.
Our success and ability to compete depends on our internally developed
technologies and trademarks, which we seek to protect through a combination of
patent, copyright, trade secret and trademark laws. Despite actions we take to
protect our proprietary rights, it may be possible for third parties to copy or
otherwise obtain and use our proprietary information without authorization or to
develop similar technology independently. In addition, legal standards relating
to the validity, enforceability and scope of protection of proprietary rights in
internet-related businesses are uncertain and still evolving. We cannot give any
assurance regarding the future viability or value of any of our proprietary
rights. In addition, we cannot give any assurance that the steps taken by us
will prevent misappropriation or infringement of our proprietary information.
Any infringement or misappropriation, should it occur, could have a material
adverse effect on our business, results of operations and financial condition.
See "Business -- Intellectual Property and Proprietary Rights."
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD CAUSE SYSTEM OR OPERATIONAL
FAILURES WHICH COULD ADVERSELY AFFECT OUR BUSINESS
The costs we have incurred and expect to incur related to Year 2000
compliance have not been material to our business, results of operations or
financial condition. In the event that our assessment of our Year 2000 readiness
is inaccurate, we could be required to expend substantial resources to remedy
any unanticipated Year 2000 problems. Costs associated with unanticipated Year
2000
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<PAGE> 16
problems and difficulties in remedying these problems by year-end could have a
material adverse effect on our business, results of operations and financial
condition.
The most likely Year 2000 failure scenario attributable to a supplier or
customer is a systemic failure beyond our control or the supplier's or
customer's immediate control, such as a prolonged data communication,
telecommunications or electrical failure. A failure of this sort could prevent
members from accessing our web site and prevent us from operating our business.
The primary business risks in the event of a failure of this type would include
lost advertising revenues, increased operating expenses and loss of members. Any
of these occurrences could have a material adverse effect on our business,
results of operations and financial condition.
SUBSTANTIAL CONTROL WILL REMAIN WITH OUR MANAGEMENT AND MAJOR STOCKHOLDERS AND
THIS COULD DELAY OR PREVENT A CHANGE OF CONTROL
We anticipate that our executive officers, our directors and entities
affiliated with them and our 5% stockholders together will beneficially own
approximately 59% of our outstanding common stock following the completion of
this offering. These stockholders, if they vote together, will retain
substantial control over matters requiring approval by our stockholders, such as
the election of directors and approval of significant corporate transactions.
This concentration of ownership might also have the effect of delaying or
preventing a change in control. See "Principal Stockholders."
PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS COULD DELAY OR PREVENT A CHANGE OF
CONTROL
Various provisions of our Certificate of Incorporation and Bylaws could
have the effect of delaying or preventing a change in control and make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. See "Description of Capital Stock."
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES TO DECLINE
Upon completion of this offering, we will have 23,712,319 shares of common
stock outstanding. Of these shares, 5,000,000 will be transferable without
restriction or registration under the Securities Act of 1933, or pursuant to the
volume and other limitations of Rule 144 promulgated under the Securities Act.
Following this offering, resales of a substantial number of shares of our common
stock into the public market could cause its price to decline. This is
particularly the case because a substantial portion of our outstanding shares of
common stock are held by persons who purchased their shares at prices below the
initial public offering price.
Approximately 17,730,959 shares of common stock are subject to lock-up
agreements between the holders of those shares and the representatives of the
underwriters and/or us, under to which the holders have agreed not to offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
their common stock until 180 days after the date of this prospectus, subject to
limited exceptions. BancBoston Robertson Stephens, in some instances together
with MyPoints.com, may release stockholders from the lockup agreement at any
time and without notice. Following the expiration of this 180-day period,
10,308,309 shares subject to the lock-up agreements will become available for
immediate resale in the public market subject, in some instances, to the volume
and other limitations of Rule 144. See "Shares Eligible for Future Sale."
15
<PAGE> 17
OUR SECURITIES HAVE NO PRIOR MARKET, AND WE CANNOT ASSURE YOU THAT AN ACTIVE
PUBLIC MARKET FOR OUR COMMON STOCK WILL DEVELOP
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our common stock will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be indicative
of prices that will prevail in the trading market. See "Underwriting."
OUR STOCK PRICE COULD BE VOLATILE FOLLOWING THIS OFFERING AND YOU MAY NOT BE
ABLE TO SELL YOUR SHARES AT A PROFIT
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly internet-related
companies, have been highly volatile. Investors may not be able to resell their
shares at or above the initial public offering price. In addition, our results
of operations during future fiscal periods might fail to meet the expectations
of stock market analysts and investors. This failure could lead the market price
of our common stock to decline and cause us to become the subject of securities
class action lawsuits.
YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF
YOUR INVESTMENT
The initial public offering price of our common stock is substantially
higher than what the net tangible book value per share of the common stock will
be immediately after this offering. If you purchase our common stock in this
offering, you will incur immediate dilution of approximately $8.67 in the net
tangible book value per share of our common stock from the price you pay for our
common stock based upon an assumed initial public offering price of $11.00 per
share and after deducting estimated underwriting discounts and commissions and
offering expenses. The exercise of outstanding options and warrants may result
in further dilution. See "Dilution."
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THIS
OFFERING, AND WE CANNOT ASSURE YOU THAT WE WILL EFFECTIVELY EXPEND THE PROCEEDS
We intend to use the net proceeds from the sale of the common stock for
general corporate purposes including working capital, branding, membership
expansion, advertising, increases in our sales and marketing operations, new
technology and products, funding of points liability, expansion of network
infrastructure and payment of a license fee. We have allocated approximately
$2.6 million of the net proceeds to the license fee payment to Experian, but
have not determined how the remaining proceeds will be allocated among the other
anticipated uses. Accordingly, our management will have significant flexibility
and broad discretion in applying the net proceeds of this offering. The failure
of management to apply these funds effectively could have a material adverse
effect on our business, results of operations and financial condition. See "Use
of Proceeds."
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use the words "anticipates," "believes," "plans," "expects,"
"future" and "intends" and similar expressions to identify forward-looking
statements. This prospectus also contains forward-looking statements attributed
to certain third parties relating to their estimates regarding the growth of
direct marketing and online loyalty programs. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us described in "Risk Factors" and
elsewhere in this prospectus.
16
<PAGE> 18
USE OF PROCEEDS
Our proceeds from the sale of the 5,000,000 shares of common stock we are
offering are estimated to be $50.2 million ($57.8 million if the underwriters'
over-allotment option is exercised in full) assuming an initial public offering
price of $11.00 per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses.
We intend to use approximately $2.6 million of the proceeds of the offering
to complete the purchase of technology used in operating our loyalty and rewards
program. We plan to use the remainder of the proceeds for general corporate
purposes, including working capital, branding, membership expansion,
advertising, increases in our sales and marketing operations, new technology and
products, funding of points liability and expansion of network infrastructure.
We may also use some of the proceeds to acquire other companies, technologies or
products that complement our business, although we are not currently planning
any of these transactions. Pending these uses, we will invest the net proceeds
of this offering in short-term, investment-grade, interest-bearing securities.
We are making the $2.6 million payment under a license agreement entered
into in November 1998 in connection with our acquisition of internet and
electronic commerce related assets from companies affiliated with Experian. For
additional information regarding these transactions, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Acquisition Transactions" and "Transactions with Directors, Executive Officers
and Principal Stockholders." Under the license agreement, the amount of the
payment is based on the present value of a specified royalty amount discounted
using a discount rate equal to the prime rate plus 2.0%. The $2.6 million
estimate set forth above assumes this payment will be made in August 1999. The
actual amount of this payment could vary depending upon the timing of the
payment and fluctuations in interest rates. Once this license payment has been
made, our rights under the license will be fully paid and we will not have any
future royalty or other financial obligations under the license.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock, to facilitate our future access
to public equity markets and to provide increased visibility and credibility in
a marketplace where many of our current and potential competitors are or are
likely to become publicly held companies.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Covenants in our capital lease and equipment financing
agreements prohibit the payment of cash dividends.
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<PAGE> 19
CAPITALIZATION
The following table sets forth:
- the actual capitalization of MyPoints.com at March 31, 1999;
- the pro forma capitalization of MyPoints.com after giving effect to:
- the receipt in April 1999 of approximately $10.0 million from the sale
of 2,000,000 shares of Series E preferred stock that were issued
pursuant to a stock purchase agreement entered into in March 1999, and
- the conversion of all outstanding shares of preferred stock into
12,388,315 shares of common stock immediately prior to the completion
of this offering; and
- the pro forma as adjusted capitalization, which gives effect to the sale
in this offering of 5,000,000 shares of common stock at an estimated
initial public offering price of $11.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current portion............. $ 2,368 $ 2,368 $ 2,368
Stockholders' equity:
Preferred stock, $0.001 par value; 15,500,000 shares
authorized, shares issued and outstanding:
Actual: 12,388,315 shares
Pro forma: 0 shares
Pro forma as adjusted: 0 shares.................... 12 -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized, shares issued and outstanding:
Actual: 6,076,239 shares
Pro forma: 18,464,554 shares
Pro forma as adjusted: 23,464,554 shares........... 7 19 24
Additional paid-in capital............................ 49,871 49,871 100,016
Stock subscription receivable......................... (9,950) -- --
Deferred compensation................................. (8,824) (8,824) (8,824)
Accumulated deficit................................... (26,503) (26,503) (26,503)
-------- -------- --------
Total stockholders' equity......................... 4,613 14,563 64,713
-------- -------- --------
Total capitalization.......................... $ 6,981 $ 16,931 $ 67,081
======== ======== ========
</TABLE>
This table excludes the following shares:
- shares issuable upon exercise of stock options outstanding as of March
31, 1999;
- shares available for future grant or issuance under our stock option and
stock purchase plans as of March 31, 1999; and
- shares issuable upon exercise of warrants outstanding as of March 31,
1999.
See Note 8 of Notes to Consolidated Financial Statements.
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<PAGE> 20
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was
approximately $4.5 million, or approximately $0.24 per share of common stock.
Pro forma net tangible book value per share represents the amount of tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding, assuming the conversion of all outstanding shares of preferred
stock into common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the pro forma net tangible book value per share of our common
stock immediately after the offering. After giving effect to our sale of
5,000,000 shares of common stock in this offering at an assumed initial public
offering price of $11.00 per share and after deduction of the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of March 31, 1999 would have
been approximately $54.7 million, or $2.33 per share. This represents an
immediate increase in pro forma net tangible book value of $2.09 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $8.67 per share to purchasers of common stock in this offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share before
offering............................................... $0.24
Increase per share attributable to new investors.......... 2.09
-----
Pro forma net tangible book value per share after
offering.................................................. 2.33
------
Net tangible book value dilution per share to new
investors................................................. $ 8.67
======
</TABLE>
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See Note 8 of Notes to Consolidated Financial
Statements. The exercise of outstanding options and warrants having an exercise
price less than the offering price would increase the dilutive effect to new
investors.
The following table sets forth as of March 31, 1999 the total consideration
paid and the average price per share paid by our existing stockholders and by
new investors, before deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by MyPoints.com at an assumed initial
public offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 18,464,554 78.7% $30,423,297 35.6% $ 1.65
New investors.............. 5,000,000 21.3 55,000,000 64.4 11.00
---------- ----- ----------- -----
Total............ 23,464,554 100.0% $85,423,297 100.0%
========== ===== =========== =====
</TABLE>
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<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for the period from November 7, 1996 (inception) to December 31, 1996, and
the years ended December 31, 1997 and 1998 and the balance sheet data as of
December 31, 1997 and 1998 are derived from our consolidated financial
statements that have been audited by PricewaterhouseCoopers LLP, independent
accountants, and are included elsewhere in this prospectus. The statement of
operations data for the three months ended March 31, 1998 and 1999 and the
balance sheet data as of March 31, 1999 are derived from unaudited financial
statements included elsewhere in this prospectus. The balance sheet data as of
December 31, 1996 are derived from unaudited financial statements that are not
included in this prospectus. The unaudited financial statements include all
adjustments, consisting of only normal recurring adjustments, which we consider
necessary for a fair presentation of our financial position and results of
operations for these periods. The results of operations for the three months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the entire year. The pro forma net loss per share data assume
conversion of all outstanding shares of preferred stock into common stock. See
Note 3 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
NOVEMBER 7, 1996 DECEMBER 31, MARCH 31,
(INCEPTION) TO ------------------ -------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ -- $ 151 $ 1,286 $ 150 $ 1,275
Cost of revenues.......................... -- 78 1,121 137 878
------ ------- ------- ------- --------
Gross profit............................ -- 73 165 13 397
Operating expenses:
Technology costs........................ 16 560 1,520 204 968
Sales expenses.......................... -- 204 1,355 224 802
Marketing expenses...................... 36 1,465 3,158 163 1,762
General and administrative expenses..... 16 712 2,029 452 1,074
Amortization of intangible assets....... -- -- 275 -- 832
Stock-based compensation................ -- 77 157 63 449
------ ------- ------- ------- --------
Total operating expenses.............. 68 3,018 8,494 1,106 5,887
------ ------- ------- ------- --------
Operating loss............................ (68) (2,945) (8,329) (1,093) (5,490)
Interest and other income (expense),
net..................................... 1 56 63 23 9
------ ------- ------- ------- --------
Net loss................................ $ (67) $(2,889) $(8,266) $(1,070) $ (5,481)
====== ======= ======= ======= ========
Net loss attributable to common
stockholders............................ $ (67) $(2,889) $(8,266) $(1,070) $(15,281)
====== ======= ======= ======= ========
Net loss per share:
Basic and diluted....................... $(0.08) $ (2.68) $ (4.72) $ (0.83) $ (3.00)
====== ======= ======= ======= ========
Weighted average shares -- basic and
diluted............................... 891 1,076 1,750 1,287 5,097
====== ======= ======= ======= ========
Pro forma net loss per share:
Basic and diluted....................... $ (0.98)
=======
Weighted average shares -- basic and
diluted............................... 8,463
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1996 1997 1998 1999
------ ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,118 $ 2,948 $ 5,089 $ 1,868
Working capital (deficit)................................... 1,099 2,381 (307) (5,156)
Total assets................................................ 1,205 3,474 18,306 15,827
Long-term obligations, less current portion................. -- 47 2,408 2,368
Accumulated deficit......................................... (67) (2,956) (11,222) (26,503)
Total stockholders' equity.................................. 1,412 2,692 9,283 4,613
</TABLE>
20
<PAGE> 22
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 contains forward-looking statements based upon current
expectations that involve risks and uncertainties. When used in this prospectus,
the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and
similar expressions are included to identify forward-looking statements. Our
actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
MyPoints.com was founded as Intellipost Corporation in November 1996. In
May 1997, we launched our email direct marketing and rewards program. In
November and December 1998, through our acquisition of companies affiliated with
Experian, we acquired internet and electronic commerce related assets and
technologies through a series of related transactions. Through these
transactions, we acquired a technology license for the operation of a web-based
rewards program. In early March 1999, we changed our corporate name to
MyPoints.com, Inc. in order to unify our corporate and brand identities. During
March and April 1999, we integrated our email and web-based direct marketing and
rewards programs under the MyPoints brand.
We generate substantially all of our revenues by delivering email and
web-based direct marketing offers for our advertising customers. In exchange for
these services, we receive fees from our advertisers based on any or all of the
following:
- the number of offers delivered to members;
- the number of qualified responses generated; and
- the number of qualified purchases made.
For direct marketing services, we recognize revenues when an offer is delivered,
when a qualified response is received or when a product or service is purchased,
depending upon the pricing arrangement used. Pricing of our direct marketing
services is not based on the issuance of points to our members.
Our revenues depend on a number of factors. These include the number of
advertisers engaging us to send direct marketing offers to our membership base,
the size of our membership base, and the responsiveness of our members to these
direct marketing offers. We believe that our revenues will be subject to
seasonal fluctuations as a result of general patterns of retail advertising,
which are typically higher during the fourth calendar quarter. In addition,
expenditures by advertisers tend to be cyclical, reflecting overall economic
conditions and consumer buying patterns.
We also offer technology licensing arrangements to customers seeking to
develop email or web-based direct marketing and loyalty programs. We entered
into our first license agreement in December 1998 with Sweden Post, the Swedish
postal service. Sweden Post is establishing a version of the MyPoints BonusMail
program for the Swedish market. This license agreement provides for a licensing
fee, technical support fees and royalties based on a percentage of revenues from
the program site. We will initially recognize revenue under this agreement when
the custom development work that we are performing is completed and accepted by
Sweden Post. Once the program is operational, we will recognize royalty revenue
as it is received from Sweden Post. We expect to enter into additional licensing
arrangements, particularly for international markets.
We incurred a net loss of $8.3 million in 1998, and $5.5 million in the
quarter ended March 31, 1999. We expect to incur a net loss of approximately
$10.0 million to $13.0 million in the quarter
21
<PAGE> 23
ended June 30, 1999. We intend to implement our strategies by spending
substantial amounts on member acquisition and retention, brand development, new
product offerings, sales and marketing strategic relationships, and technology
and operating infrastructure development. As a result, we expect increases in
our net losses and negative cash flows for the next several quarters. We expect
to incur net losses at least through 2001. Our limited operating history makes
it difficult to forecast future operating results. Although we have experienced
revenue growth in recent quarters, we cannot be certain that revenues will
increase at a rate sufficient to achieve and maintain profitability. Even if we
were to achieve profitability in any period, we might fail to sustain or
increase that profitability on a quarterly or annual basis.
QUARTERLY RESULTS OF OPERATIONS
We completed the acquisitions of internet and electronic commerce related
assets from affiliates of Experian during November and December 1998.
Accordingly, actual results of operations for the quarter ended March 31, 1999
include results for the acquired businesses and actual results for the quarter
ended March 31, 1998 do not include results for the acquired businesses.
Revenues
Revenues for the quarter ended March 31, 1999 were $1.3 million compared to
$150,000 during the same period last year. Similar to the same period last year,
direct marketing services represented substantially all of our revenues.
Revenues from email direct marketing offers increased by 645% from the same
period of last year. The increase was a direct result of an increase in the
number of email offers delivered to our members. We delivered nearly 11 million
emails during the first quarter of 1999 compared to 1.3 million during the same
period last year. The large growth in our membership base and the increase in
advertisers using our email service were the primary reasons for the increase in
email offers delivered.
We completed the acquisition transactions with affiliates of Experian at
the end of the fourth quarter of 1998. All of our web offer revenues in the
first quarter of 1999 were generated by the acquired businesses.
Gross Profit
Gross profit equals revenues less cost of revenues. Cost of revenues
represents the cost of points awarded to our members for receiving, responding
to and purchasing based on our direct marketing offers. Gross profit as a
percentage of revenues for the quarter ended March 31, 1999 was 31% compared to
9% during the same period last year. The increase in gross profit was due to an
increase in the percentage of direct marketing offers that were responded to by
our members. Moreover, the addition of web offers, which generated higher gross
profit as a percentage of revenues than email offers, to our services increased
the gross profit as a percentage of revenues.
Technology Costs
Our technology expenses primarily consist of compensation for technology
personnel, fees for outside technology consultants, and an allocation of fixed
costs. We expense technology costs as they are incurred. Technology costs for
the quarter ended March 31, 1999 were $968,000 compared to $204,000 for the same
period last year. Technology employee salaries and fees for outside consultants
were 59% of the increase, while computer hosting at third party locations was
16% of the increase.
22
<PAGE> 24
We expect technology costs to increase during the next several quarters, as we
continue to improve and enhance our email and web-based membership program. In
addition, we are continuing to deliver technical support for our internal
initiatives with Sweden Post.
Sales Expenses
Our sales expenses primarily represent compensation for sales and
sales-related employee expenses for trade shows and other advertising and
promotions directed toward the direct marketing advertising community and an
allocation of fixed costs. Sales expenses increased from $224,000 in the first
quarter of 1998 to $802,000 during the same period in 1999. Sales and sales
employee payroll expenses represented 31% of the increase, while commission,
travel and entertainment, and outside consultant fee expenses represented 17%,
16% and 12% of the increase, respectively. We expect our sales expense to
increase over the next several quarters as we continue to hire additional sales
employees to increase our advertising sales capabilities.
Marketing Expenses
Our marketing expenses primarily consist of member acquisition expenses,
compensation for marketing personnel and an allocation of fixed costs. Member
acquisition expenses consist primarily of online advertising and promotion costs
to attract members to our email and web-based programs. Also included in member
acquisition expenses was the cost of the points awarded to members for signing
up and completing demographic and behavioral enrollment forms. The marketing
expenses for quarter ended March 31, 1999 were $1.8 million compared to $163,000
during the same period last year. The increase in member acquisition expenses
represented 59% of the increase. Increased consulting and employee payroll
expenses represented 15% and 11% of the increase, respectively. We expect
significant increases in marketing expenses during the next several quarters as
we continue to increase our spending on member acquisition and launch a new
branding campaign.
General and Administrative Expenses
Our general and administrative expenses include compensation for
administrative personnel, fees for outside professional advisors and an
allocation of fixed costs. As a percentage of revenues, general and
administrative expenses decreased from the quarter ended March 31, 1999 compared
to the same period last year. The absolute dollar increase in general and
administrative expenses for the quarter ended March 31, 1999 was due primarily
to increased professional fees. Increases in administrative personnel and
recruiting/human resource activities also contributed to the increase.
Income Taxes
We recorded a net loss of $5.5 million for the quarter ended March 31,
1999. Accordingly, no provision for income taxes was recorded in this quarter
and no tax benefit has been recognized due to the uncertainty of realizing a
future tax deduction for this loss.
ANNUAL RESULTS OF OPERATIONS
We completed the acquisitions of internet and electronic commerce related
assets from affiliates of Experian during November and December 1998.
Accordingly, approximately one month of operations of the acquired businesses is
included in our actual results of operations for the year ended December 31,
1998. The discussion below is based on the Statement of Operations Data set
forth under "Selected Consolidated Financial Data."
23
<PAGE> 25
Revenues
Our revenues increased to $1.3 million in 1998 from $151,000 in 1997. We
had no revenues and no material expenditures in 1996. Our email direct marketing
and rewards program was launched in May 1997 and began generating revenues in
July 1997. Our direct marketing program produced substantially all of our
revenues in 1997 and 1998. The increase in revenues from 1997 to 1998 was due
primarily to an increase in the number of direct marketing offers delivered to
our members for advertisers, as well as to an increase in the size of our
membership base.
Gross Profit
Gross profit increased to $165,000 in 1998 from $73,000 in 1997. This
increase was due primarily to an increase in the number of revenue-generating
responses and purchases by members. In addition, during 1998, based on our
experience with members who became inactive in the points program, we recognized
an allowance for estimated points that are likely to expire prior to their
redemption. This allowance was credited to cost of revenues during 1998.
Technology Costs
Our technology costs increased to $1.5 million in 1998 from $560,000 in
1997. This increase was primarily due to increased hiring of technical employees
and consultants during 1998.
Sales Expenses
Our sales expenses increased to $1.4 million in 1998 from $204,000 in 1997.
An increase in the number of sales and sales support employees led to higher
payroll expenses. Increases in revenues led to higher sales commissions and,
therefore, higher sales expenses. Also contributing to the increase in sales
expenses were increases in travel, advertising and promotions, and other
sales-related expenses.
Marketing Expenses
Our marketing expenses increased to $3.2 million in 1998 from $1.5 million
in 1997. This increase was primarily due to a large increase in member
acquisition expenses, including online advertising and promotion expenditures as
well as the cost of points awarded to members for enrollments and related
activities. Marketing payroll expense also increased in 1998 as we hired
additional marketing staff, including management staff.
General and Administrative Expenses
Our general and administrative expenses increased to $2.0 million in 1998
from $712,000 in 1997. The increase resulted from higher professional fees and,
to a lesser extent, occupancy costs relating to opening of sales offices and an
increase in the size of our San Francisco headquarters facility. Payroll
expenses associated with hiring administrative personnel also contributed to the
increase.
Income Taxes
We recorded a net loss of $2.9 million in 1997 and $8.3 million in 1998.
Accordingly, no provision for income taxes was recorded in these years, and no
tax benefit has been recognized due to the uncertainty of realizing future tax
deductions for these losses.
24
<PAGE> 26
As of December 31, 1997 and 1998, we had net operating loss carryforwards
of approximately $1.4 million and $7.8 million for federal and state income tax
purposes. The federal and state net operating loss carryforwards begin to expire
in the years 2011 and 2004, respectively. Our ability to utilize our net
operating loss carryforwards to offset any future taxable income may be
restricted as a result of equity transactions that give rise to changes in
ownership under applicable federal and state income tax laws.
STOCK-BASED COMPENSATION
As of December 31, 1998, we recorded aggregate deferred compensation
totaling $2.2 million in connection with the grant of stock options to employees
and consultants prior to December 31, 1998. This charge is being amortized over
the vesting period of the options, which ranges from three to four years. In
addition, during the quarter ended March 31, 1999, we recorded an additional
unearned compensation charge of approximately $7.3 million relating to options
granted during this quarter. This charge will also be amortized over the vesting
period of the options granted.
Stock-based compensation of $63,000, $19,000, $43,000, $33,000 and $449,000
was recognized in the quarters ended March 31, June 30, September 30, December
31, 1998 and March 31, 1999. We expect amortization of approximately $1.3
million for the remainder of 1999 and annual amortization of approximately $2.1
million in 2000, $2.1 million in 2001, $1.9 million in 2002 and $1.4 million in
2003 relating to these options. See Note 8 of Notes to Consolidated Financial
Statements.
25
<PAGE> 27
HISTORICAL QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited statement of operations
data. The financial statements from which these data have been derived were
prepared on substantially the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments, that
we considered necessary for a fair presentation of our pro forma results of
operations for each quarter. The quarterly statement of operations data include
the same adjustments that are reflected in the financial statements included in
this prospectus. Our results of operations for any quarter are not necessarily
indicative of the results of operations to be expected in any future period but
are presented to provide a historical perspective of the combined businesses.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
--------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 150 $ 156 $ 268 $ 712 $ 1,275
Cost of revenues....................... 137 108 255 621 878
------- ------- ------- ------- --------
Gross profit...................... 13 48 13 91 397
------- ------- ------- ------- --------
Operating expenses:
Technology costs..................... 204 328 402 586 968
Sales expenses....................... 224 366 320 445 802
Marketing expenses................... 163 494 1,175 1,326 1,762
General and administrative
expenses.......................... 452 301 467 808 1,074
Amortization of intangibles.......... -- -- -- 275 832
Stock-based compensation............. 63 19 43 33 449
------- ------- ------- ------- --------
Total operating expenses.......... 1,106 1,508 2,407 3,473 5,887
------- ------- ------- ------- --------
Operating loss......................... (1,093) (1,460) (2,394) (3,382) (5,490)
Interest and other expense, net...... 23 22 -- 18 9
------- ------- ------- ------- --------
Net loss............................... $(1,070) $(1,438) $(2,394) $(3,364) $ (5,481)
======= ======= ======= ======= ========
Net loss attributable to common
stockholders......................... $(1,070) $(1,438) $(2,394) $(3,364) $(15,281)
======= ======= ======= ======= ========
</TABLE>
Revenues
Revenues increased sequentially in each of the last four quarters. These
increases were a direct result of the growth in our membership base during 1998
and the first quarter of 1999 and an increase in the number of direct marketing
offers delivered to our members. Email direct marketing offers generated 100% of
the revenues in each quarter of 1998 and approximately 78% in the first quarter
of 1999.
Gross Profit
Gross profit as a percentage of revenues increased from the first quarter
to the second quarter, decreased from the second to the third quarter, increased
from the third to the fourth quarter and increased from the fourth quarter of
1998 to the first quarter of 1999. The increase in gross profit in the last two
quarters was due to a higher number of revenue generating responses to the
direct marketing offers.
26
<PAGE> 28
Technology Costs
Technology costs increased from the first to the second quarter, increased
from the second to the third quarter, remained relatively constant from the
third to the fourth quarter and increased from the fourth quarter of 1998 to the
first quarter of 1999. The significant increase in the technology cost over the
last five quarters is a result of increased hiring of technical employees and
consultants.
Sales Expenses
Sales expenses increased from the first to the second quarter of 1998,
remained relatively constant from the second quarter to the fourth quarter of
1998 and increased significantly in the first quarter of 1999. The significant
increase in sales expense was the result of an increase in sales commissions,
sales personnel, travel, advertising and promotional expenses during the first
quarter of 1999.
Marketing Expenses
Marketing expenses increased in the second and third quarters of 1998,
remained relatively constant during the fourth quarter of 1998 and increased
during the first quarter of 1999. Online advertising and promotion expenditures
and the cost of points awarded to members for signing up and completing
enrollment forms increased significantly. These expenditures contributed to the
significant growth of membership.
General and Administrative Expenses
As a percentage of revenues, general and administrative expenses decreased
during each quarter of 1998 and increased during the first quarter of 1999. The
absolute dollar increase in the second half of 1998 and the first quarter of
1999 was due to higher fees for professional services and an increase in the
number of administrative personnel.
ACQUISITION TRANSACTIONS
In November and December 1998, we entered into a series of transactions to
acquire internet and electronic commerce related assets from companies
affiliated with Experian. These transactions were accounted for using the
purchase method. The aggregate purchase price was $13.6 million, consisting of
$9.1 million in stock and cash, and $4.5 million in liabilities assumed. The
purchase price has been allocated to acquired tangible and intangible assets
based on their estimated respective fair values as of the date of acquisition.
Estimated fair values were determined using a combination of methods, including
replacement cost estimates for acquired membership base and customer base, and a
risk-adjusted income and cash flow approach for trademark and tradename and the
acquired technology license agreement. The purchase price allocation and the
schedule over which the value attributable to each acquired asset will be
amortized are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
AMOUNT PERIOD
-------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Tangible assets................................. $ 2,400 3 years
Trademark and tradename......................... 1,800 5 years
Technology license agreement.................... 7,300 4 years
Membership base................................. 800 0.5 to 2.5 years
Customer base................................... 500 0.5 to 3 years
Employee workforce.............................. 800 2 years
-------
Total................................. $13,600
=======
</TABLE>
The amortization periods are based on our estimates of the useful lives of
each acquired asset, as it existed at the time of the acquisition. Upon
completion of the public offering of our capital stock
27
<PAGE> 29
we are obligated to purchase the licensed technology for a payment equivalent to
the then present value of the future minimum royalty payments. We expect to pay
approximately $2.6 million upon completion of the public offering, representing
the net present value of the $4.2 million royalty obligation. See "Use of
Proceeds."
LIQUIDITY AND CAPITAL RESOURCES
Since incorporation, we have financed our operations primarily from the
sale of equity securities to venture capital firms and other individual,
institutional and strategic investors. We have also borrowed funds under
long-term capital lease and equipment financing facilities.
Net cash used in operating activities was $2.3 million in 1997, $5.5
million in 1998 and $2.5 million for the quarter ended March 31, 1999. This
increase in cash used in operating activities was due to our expanded operations
and primarily resulted from an increase in technology costs, sales, marketing,
and general and administrative expenses. In 1997, the net cash used by our $2.9
million net loss was partially offset by a $519,000 increase in points
redemption liability, a $52,000 increase in accounts payable and other accrued
liabilities, and non-cash charges of $70,000 for depreciation and amortization
and $77,000 in stock-based compensation. In 1998, the net cash used by our $8.3
million net loss was partially offset by a $1.7 million increase in points
redemption liability, an $878,000 increase in accounts payable and other accrued
liabilities, and non-cash charges of $158,000 in stock-based compensation. For
the quarter ended March 31, 1999, the net cash used by our $5.5 million net loss
was partially offset by a $1.1 million increase in points redemption liability,
non-cash charges of $964,000 for depreciation and amortization, and $449,000 in
stock-based compensation.
Our working capital decreased from $2.4 million at December 31, 1997 to a
deficit of $307,000 at December 31, 1998 and a deficit of $5.2 million at March
31, 1999. This decrease directly resulted from a substantial increase in points
redemption liability. The points redemption liability is the estimated cost
associated with our obligation to redeem points distributed to our member base.
The total number of outstanding points issued to members as of December 31,
1997 and 1998 and March 31, 1999 was 324.4 million, 1,407.4 million and 2,097.3
million, respectively. In addition, we assumed outstanding point balances of
120.3 million as of December 31, 1998 and 110.1 million as of March 31, 1999 in
connection with our acquisition of the Experian-affiliated companies. The
outstanding points issued by us and acquired with the Experian transactions
represented a points redemption liability of $519,000 at December 31, 1997, $2.7
million at December 31, 1998 and $3.8 million at March 31, 1999. This liability
was calculated based on an assumption that 100% of outstanding points would be
redeemed in 1997 and that 80% of points would be redeemed in 1998 and in the
first quarter of 1999. The total number of points issued by us redeemed by
members was none in 1997, 22.5 million in 1998 and 22.6 million in the first
quarter of 1999. In addition, the total number of points issued by the Experian
companies redeemed by members was 4.7 million in 1998 and 4.5 million in the
first quarter of 1999.
Points issued by us typically have a life of four years. Members may redeem
points in their discretion at any time prior to the expiration of the points. We
fund point redemptions through our working capital resources. Because we cannot
control the timing of members' decisions to redeem points, should the rate of
redemption of points exceed our estimates, it could be necessary for us to
obtain additional working capital and our results of operations could be
materially and adversely affected.
Net cash used in investing activities was $353,000 in 1997, all of which
was used to acquire property and equipment, primarily computer equipment and
software. Net cash provided by investing activities was $1.4 million in 1998,
most of which was provided by an affiliate of Experian in connection with the
acquisition transactions. The net cash used in investing activities for the
quarter
28
<PAGE> 30
ended March 31, 1999 was $1.1 million, all of which was used to acquire
property, equipment, leasehold improvements, primarily computer equipment and
software.
Net cash provided by financing activities was $4.2 million in 1997, $6.2
million in 1998 and $308,000 in the quarter ended March 31, 1999. These amounts
included net proceeds of equity financings of $4.1 million in 1997 and $6.1
million in 1998, a $100,000 equipment term loan established in 1997 and a
$400,000 equipment term loan established in 1998. The loans have floating
interest rates of prime plus 1.5% for the 1997 loan and prime plus 0.5% for the
1998 loan. Both loans are secured by a pledge of our assets and require us to
comply with certain financial covenants. During 1997 and 1998, we were in
compliance with these covenants or were operating under appropriate waivers. Our
current payment obligations under these loans total $16,500 per month.
In addition, in 1997 and 1998, we entered into various non-cancelable
capital lease agreements for certain types of capital expenditures. As a result
of these capital lease agreements, we have an outstanding lease payment
obligation of $286,000 as of March 31, 1999. These capital lease agreements have
terms ranging three to five years with interest rates ranging from 7.2% to
18.0%. Our current payment obligations under these leases total $7,800 per
month.
At December 31, 1998 and March 31, 1999, we had cash and cash equivalents
of $5.1 million and $1.9 million, respectively. In April 1999, we completed the
sale of 2,000,000 shares of Series E preferred stock under a stock purchase
agreement entered into in March 1999 raising approximately $10.0 million. Upon
the completion of this offering, we will be obligated to make a payment of $2.6
million to acquire licensed technology from Experian. For additional information
regarding this payment, see "Use of Proceeds." We estimate that we will make
capital expenditures of approximately $4.0 million during the next 12 months.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements through the end of 2000. We
may need to raise additional funds, however, to fund more rapid expansion, to
develop new or enhance existing services or products, to respond to competitive
pressures or to acquire complementary products, businesses or technologies. If
adequate funds are not available on acceptable terms, our business, results of
operations and financial condition could be materially adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by SFAS No. 131 are effective for the year
ended December 31, 1998. We have determined that we do not have any separately
reportable business segments as of December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Software for Internal Use, which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. We do not expect that the
adoption of SOP No. 98-1 will have a material impact on our consolidated
financial statements.
FACTORS AFFECTING OPERATING RESULTS
Our results of operations have varied widely in the past and we expect that
they will continue to vary significantly in the future due to number of factors,
including those set forth under "Risk
29
<PAGE> 31
Factors." You should read the "Risk Factors" section of this prospectus
carefully. Due to these factors, we believe that quarter-to-quarter or
year-to-year comparisons of our results of operations are not a good indication
of our future performance. Our results of operations in some future quarter may
be below the expectations of public market analysts and investors. In this
event, the price of our common stock is likely to decline.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, computer systems and
software products used by many companies may need to be upgraded to comply with
these year 2000 requirements.
We designed the software underlying our email and web-based programs as
well as our web site and related technology infrastructure to be year 2000
compliant. However, we rely on third-party hardware and software in the
operation of our business. We believe we have identified all of the major
information systems used in our internal operations and have substantially
completed all modifications, upgrades or replacements to minimize the
possibility of a material disruption of our business. The expenditures that we
have incurred to date and the expenditures we expect to incur in this regard
have not been and are not expected to be material to our business, results of
operations and financial condition.
We have also contacted the vendors of third-party hardware and software we
use in order to gauge their year 2000 compliance. Based on these vendors'
representations and the activities we have conducted, we believe that the
third-party hardware and software we use are year 2000 compliant. We cannot
assure you, however, that we will not experience unanticipated negative
consequences, including material costs caused by undetected errors or defects in
the technology used in our internal systems. If, in the future, it comes to our
attention that the software underlying our email or web-based programs requires
modification, or that any of our third-party hardware and software are not year
2000 compliant, then we will seek to make modifications to our systems. In this
case, we expect these modifications to be made on a timely basis and we do not
anticipate that the cost of these modifications will have a material effect on
our results of operations. There can be no assurance, however, that we will be
able to modify these systems in a timely and successful manner to comply with
the year 2000 requirements. Any failure to do so could have a material adverse
effect on our business, results of operations and financial condition.
We are also vulnerable to prolonged data communications, telecommunications
or electrical failures resulting from year 2000 problems. Failures of this type
could prevent members from accessing our web site or prevent us from operating
our business. As a result, we could experience lost advertising revenues,
increased operating expenses and loss of members. These types of systemic and
infrastructure failures that could prevent people from accessing our web site
and prevent us from operating our business represent our worst case year 2000
scenario. We have not developed contingency plans for operation of our business
in the event of major systemic or infrastructure failures nor do we believe that
it is feasible for us to do so. Accordingly, the occurrence of major systemic
and infrastructure failures due to year 2000 problems could have a material
adverse effect on our business, results of operations and financial condition.
MARKET RISK
Our exposure to market risk for changes in interest rates is limited to the
exposure related to our debt instruments which are tied to market rates. We do
not plan to use derivative financial instruments in our investment portfolio. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risks, market risk and reinvestment risk. We plan to invest in
high-credit quality securities.
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BUSINESS
MyPoints.com is a leading provider of online direct marketing and loyalty
programs. We integrate targeted email and web-based direct marketing offers with
online loyalty programs to create valuable benefits for both our consumer
members and our business partners. Our approach gives consumers the opportunity
to earn rewards by responding to online offers and provides businesses with
online customer acquisition and retention tools. According to Media Metrix, a
web rating service, MyPoints.com was the seventh most popular shopping site on
the internet in May 1999. PC Data, another web rating service, reported that
MyPoints.com was the eighteenth most popular site on the internet overall in the
same period.
INDUSTRY BACKGROUND
Growth of the Internet and Electronic Commerce
The internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation (IDC), a leading technology research
organization, estimates that the number of web users will grow from
approximately 97 million worldwide at the end of 1998 to approximately 320
million worldwide by the end of 2002.
The growing use of the web represents a significant opportunity for
businesses to conduct commerce over the internet. According to IDC, transactions
on the internet are expected to increase from approximately $32 billion
worldwide at the end of 1998 to approximately $426 billion worldwide by the end
of 2002. Businesses typically use the internet to offer products and services,
such as software, books, home loans and airline tickets, that do not require the
customer's physical presence to make a purchase decision. The internet allows
these businesses to develop one-to-one relationships with customers worldwide
without making significant investments in traditional infrastructure such as
retail outlets, distribution networks and sales personnel.
Online Direct Marketing
Businesses operating in the electronic commerce marketplace engage in
various forms of online direct marketing to generate sales of products or
services. Direct marketing is advertising that is intended to generate a
specific response or action from a targeted group of consumers. Examples of
traditional forms of direct marketing include catalog mailings, magazine inserts
and telesales. According to the Direct Marketing Association, 1998 direct
marketing advertising commitments totaled $163 billion in the United States.
Online direct marketing can take the form of email or web-based promotional
offers. Online direct marketing is particularly attractive because advertisers
can use tools that are not available in traditional media, such as measurement
of "click-through" rates and one-click response to email offers. These tools
give advertisers rapid feedback on their marketing campaigns. This feedback can
be used to tailor new messages and targeted offers.
According to Jupiter Communications, a leading internet market research
firm, online direct marketing programs offer other unique advantages to
businesses, including:
- an interactive advertising format that enables consumers to respond and
purchase online, without the need for telephone calls or store visits;
- high rates of response to direct marketing offers of between 5% and 15%,
compared to the click-through rates of traditional internet
advertising -- consisting of "banners" on web sites -- which have
reportedly declined from 2.0% to 0.5% over the past two years;
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- low cost per email message of between $0.01 and $0.25, compared to $1.00
and $2.00 per piece of direct marketing material sent via postal mail;
and
- short campaign life cycles of between 48 and 72 hours, compared to six to
eight weeks offline.
Because of these advantages, advertisers are committing relatively more
dollars to online direct marketing campaigns than to other forms of internet
advertising, such as brand marketing using banner advertisements. Forrester
Research projects internet advertising expenditures in the U.S. to increase from
$1.3 billion in 1998 to $10.4 billion in 2002. Forrester estimates that direct
marketing will account for 60% of total online advertising expenditures in the
U.S. in 2002, up from 15% in 1998.
Despite this trend, significant barriers to online direct marketing remain:
- Inundation. According to Jupiter, the quantity of email messages per user
sent in the United States will surpass the volume of pieces of postal
mail per household in 1999. The sheer number of email messages leads to
competition for the attention of consumers. According to Jupiter, 16% of
email recipients immediately delete email from commercial sources, and
another 17% delete email unless it is from a familiar source.
- Spam. Unsolicited commercial email -- commonly known as "spam" -- is not
an acceptable medium for major brands that value consumer opinion.
Current and pending state and federal legislation places significant
restrictions on the use of unsolicited commercial email.
- Anonymity. Email addresses are largely anonymous. There is no easy way to
correlate email addresses with users' demographic and behavioral data
without their input. Effective targeting of messages online is difficult
without this input.
Online Loyalty Programs
Membership-based loyalty programs have long been a standard part of the
retail product and service landscape. Consumer loyalty programs now operating in
the United States serve businesses as diverse as supermarkets, telecommunication
companies, airlines, and music and book sellers. As the number of internet users
increases, the relative importance to online businesses of customer retention
will also increase. As a result, leading online merchants and content providers
are increasingly launching and testing programs aimed at retaining their most
valuable customers. The challenges that their businesses face in establishing
online loyalty programs include the cost of implementing and operating the
program and the ability to provide consumers with sufficient opportunities to
earn and redeem awards.
Market Opportunity
Because of continuing corporate interest in using the internet to acquire
customers, and because of the need for online businesses to find effective ways
to retain customers once they have attracted them, we believe there is a
significant opportunity for a company that can overcome the barriers to direct
marketing and loyalty on the internet, and bring cost-effective, intergrated
direct marketing and loyalty solutions to the online market.
THE MYPOINTS.COM SOLUTION
MyPoints.com is a leading provider of online direct marketing and loyalty
programs. In the internet marketing space, we believe that we are the first to
combine targeted email and web-based direct marketing offers with a rewards
program, called MyPoints, to provide our advertisers with an
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online customer acquisition channel. By building our direct marketing service
around the MyPoints program, we believe we have overcome the key
barriers -- inundation, spam and anonymity -- to effective direct marketing on
the internet. Our members opt into MyPoints and are willing to give us personal
information because we reward them for doing so. They know we will use the
information to tailor email offers to their interests, and they know they can
earn additional points by reading and responding to those offers.
We use our internet rewards technology and marketing expertise to create
online customer retention programs for our loyalty partners. Consumers benefit
from our direct marketing and loyalty programs through the ability to earn
points by interacting with our advertisers and loyalty partners online.
Consumer Benefits
The MyPoints program offers the following benefits to members:
- Relevant Offers. The depth of our member database enables us to target
advertisements to our members with a high degree of accuracy. This helps
us to direct only the most relevant offers to each member and increases
the likelihood that the member will view and respond to a given message.
- Leading Brands. We increase the attractiveness of our program by
providing our members with direct marketing offers from name brands such
as Disney, eBay, Egghead.com, GTE, Intuit, Macy's, NextCard, Sprint and
The Wall Street Journal.
- Wide Variety of Rewards. We have designed our rewards programs to be
broad-based. Rather than focusing on one particular type of consumer
award, such as frequent flyer miles, we provide a range of redemption
opportunities, including electronic gift certificates from name-brand
retailers, credits in other popular rewards programs, long distance
minutes and travel awards. A recent NFO Interactive survey found that
only 18% of online consumers prefer to earn points in the form of airline
miles. By contrast, 44% of online consumers prefer points redeemable for
product or gift certificates.
- Easily Attainable Rewards. Many of our reward opportunities are at point
levels that are low enough to be earned in a matter of weeks by a typical
active member. These easily attainable rewards include $10 gift
certificates for major retailers such as Barnes & Noble and for
restaurant chains such as The Olive Garden. We offer our members a
variety of point earning opportunities that do not require a purchase, as
well as the ability to earn points for offline activities including
credit card and long distance telephone usage.
- Attractive Member Experience. Our highly personalized, easy-to-use
interface features one-click purchase and redemption capability. We
provide personalized web interfaces that feature the member's name and
current point balance. We also deliver email offers in rich-media
(HTML-enhanced) format.
- Privacy and Control. We assure members that we will not sell personal
information to third parties without permission. We also give members a
significant amount of control over their experience by allowing them to
set their own daily message levels, screen out unwanted advertisement or
award categories, or opt out of the MyPoints program.
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Business Benefits
MyPoints.com provides both our advertising clients, for whom we deliver
direct marketing messages, and our loyalty partners, for whom we manage
co-branded and private label online point programs, with a competitive advantage
in the acquisition of new customers and the retention of existing customers:
- Integrated Approach to Online Direct Marketing. We believe we are the
only direct marketing provider that has integrated online direct
marketing with an online rewards program. This enables our advertisers to
increase consumer response rates by rewarding consumers who take
advantage of their targeted offers. A recent survey by NFO Interactive
found that approximately 53% of online customers would increase the
amount they spend in online transactions if loyalty points were offered.
- Access to Our Proprietary Member Database. Our member database consists
of extensive demographic, behavioral and transactional information
provided to us by consumers enrolled in our programs. We use these
detailed member profiles to target offers, allowing our advertising
clients to reach the most suitable audience for their promotions and
increase consumer response rates.
- Detailed Real-Time Reporting. Online direct marketing campaigns begin to
generate results in two or three days compared to several weeks in
offline campaigns. We employ sophisticated marketing analytics and
real-time reporting technology to evaluate the initial results of a
campaign and use that information to improve the overall results of the
current and future campaigns of our advertisers.
- High Return on Advertising Investment. We offer direct marketers the
ability to target and reward consumers with online offers for
approximately one-tenth the cost of typical offline direct marketing
promotions. As a consequence of improved testing, targeting and rewarding
capabilities, we expect online direct marketing response rates to be
higher than other online and offline media. This combination of lower
delivery costs and higher response rates generates returns on advertising
investment that are higher than those achieved by competing direct
response media.
- Customized Loyalty Solutions. We offer a variety of cost-effective and
customized solutions to our loyalty partners, including co-branded and
private label versions of our MyPoints rewards program. The ability to
reward consumers enrolled in co-branded or private label loyalty programs
for responding to targeted email from our advertisers enables our loyalty
partners to provide consumers with substantial earning opportunities
while controlling the overall cost of the program. Our proprietary
Digital Loyalty Engine technology enables our business partners to design
and manage innovative and flexible online loyalty programs. We currently
have agreements in place to provide loyalty solutions to the following
companies: Excite@Home, Food.com, GTE, NextCard, Prodigy, Talk City,
USA.NET and XOOM.com.
STRATEGY
Our objective is to build leading online consumer membership services and
to enable our advertising clients and loyalty partners to more easily and
effectively acquire and retain customers online. Key elements of our strategy to
achieve this objective are to:
Expand Our Proprietary Database
To increase the size of our membership base, we plan to use a variety of
approaches, including online advertising, referrals, and co-branded and private
label loyalty partnerships. We increase the
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depth of our database by rewarding consumers for joining our MyPoints program
and for completing detailed surveys from which we collect demographic and
behavioral data. We also increase the depth of our database by tracking the
transaction activity of our members in the MyPoints program. We will continue to
use our proprietary and third-party data sources to build more detailed profiles
of our members.
Leverage Our Direct Marketing and Loyalty Program Expertise
We will continue to use our experience in managing direct marketing and
loyalty membership programs on the internet on behalf of our advertising clients
and loyalty partners, to enable them to maximize response rates to their offers
and increase customer retention. We have developed an in-house expertise in
database marketing and provide our advertisers with needed support services,
including the design and delivery of rich-media email and web-based offers.
Increase Awareness of Our Brand
We seek to increase awareness of the MyPoints brand through extensive
consumer and trade advertising campaigns, including national print and broadcast
placements and strategic industry sponsorships. We have unified our corporate
and consumer brand names to strengthen the MyPoints brand identity. We also plan
to establish partnerships with high-profile internet brands. We will seek to
further associate our brand with the strong brands of our advertisers and
loyalty partners.
We will also seek to leverage our loyalty partnerships to increase the
reach of our direct marketing services across the internet. Reach is defined by
Media Metrix as "the actual number of total users who visited a reported web
site or online property at least once in the given month. All unique visitors
are unduplicated (only counted once)." According to the May 1999 statistics from
Media Metrix, the MyPoints program and the MyPoints Network partnerships, fully
implemented, would have had a combined, unduplicated reach of 38.9% of the
internet. We are still in the process of implementing some of these
partnerships.
Maintain Our Technology Leadership
The MyPoints Digital Loyalty Engine, which underlies our rewards programs,
is a highly scalable platform designed to serve the needs of our members and
business partners. The system currently supports more than three million member
accounts working in proprietary, co-branded and private label loyalty
environments, and serves more than one million email and web-based direct
marketing offers daily. We plan to continue developing and improving our
technology to meet the needs of a growing online marketplace. We also intend to
leverage the technology and experience of Experian, a leading information
services and database management company.
Pursue Strategic Acquisitions and Alliances
We have made several acquisitions, license arrangements and strategic
alliances to build our membership base and improve our level of services. In our
principal acquisition transaction, we acquired internet and electronic commerce
assets and technologies to support web-based rewards programs from companies
affiliated with Experian. This acquisition enabled us to integrate email and
web-based direct marketing and loyalty programs under the MyPoints name. Through
this acquisition, we believe we have become a key element of Experian's
long-term internet strategy. We intend to pursue additional strategic alliances
and acquisitions aggressively to increase membership through co-branded and
private label programs, offer new products and services, access new geographic
markets and obtain proprietary technologies.
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Expand Internationally
We believe the anticipated international growth of internet usage has the
potential to generate significant additional revenue opportunities for us.
According to IDC, the number of web users outside the United States is projected
to increase from approximately 46 million at the end of 1998 to approximately
184 million by the end of 2002. We currently have one international agreement in
place with Sweden Post, the Swedish postal service, to license a localized
version of MyPoints BonusMail for the Swedish market. Sweden Post operates one
of Europe's leading electronic commerce web sites. Although we currently only
have a single international arrangement in place, we are committed to pursuing
opportunities for additional international strategic transactions.
MYPOINTS.COM PRODUCTS AND SERVICES
MyPoints and MyPoints BonusMail
The MyPoints program serves two primary constituencies, our members and our
advertising clients. Members enroll to earn rewards by responding to targeted
offers on the web at the MyPoints web site and to targeted offers by email
through MyPoints BonusMail. Advertising clients use MyPoints to reach a selected
group of members with targeted offers and incentives. We believe that MyPoints
is the internet's only direct marketing program that integrates electronic
commerce by email and web-based offers with the infrastructure to reward
consumers with points to respond to these offers.
The MyPoints program begins with enrollment, where consumers receive
rewards points for providing key demographic and behavioral information. This
enrollment information is supplemented with transactional data gathered as our
members interact with our services. Once enrolled, MyPoints members receive
points for responding to targeted, personalized offers. Members may also earn
points by filling out additional online surveys. After earning a sufficient
number of points, MyPoints members may redeem their points online for products
and services from our rewards partners, including long distance minutes, travel
awards, points in other loyalty programs and electronic gift certificates.
Members may also spend their points at participating catalog sites where
merchandise prices are denominated in points for MyPoints members. Our rewards
providers benefit from the MyPoints program through increased revenue and
additional customers.
The list of web-based point-earning opportunities presented to the member
on the MyPoints "earn page" depends on the profile of the visiting member. Some
of the information that determines the point-earning opportunities directed to a
member include geographic location, leisure time interests, financial
information and investment interests. The MyPoints program features a
sophisticated online account maintenance area, where members may change their
preferences and other personal information, access their earning history and
account balance, contact a member care representative, and redeem points.
We also place a high degree of importance on our commitment to maintaining
the security of member information. We are members of both TRUSTe and the Online
Better Business Bureau, and we adhere to the principles of these organizations.
MyPoints Shopping!
In July 1999, we launched MyPoints Shopping!, a shopping network service
that enables our MyPoints members to earn points by shopping online at a network
of internet merchants. As of July 29, 1999, the following merchants were among
those participating in the program: Cyberian Outpost, Hickory Farms, JC Penney
and K-Tel.
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MyPoints Network
The MyPoints Network is a system of participating web sites which offer our
members the opportunity to earn points at locations on the internet other than
the MyPoints web site. We provide participating web sites with a supply of
rewards points to distribute to their visitors as a loyalty and incentive tool
in exchange for the opportunity to enroll their visitors in our service. These
partnerships can be co-branded in cases where the partners commit to bring us a
certain number of new members. In these partnerships, the currency always
retains the MyPoints brand and we retain direct marketing rights to the members
generated by the service. We currently have agreements with the following
companies to participate in the MyPoints Network: Excite@Home, Food.com, GTE,
Talk City, USA.NET and Wall Street Sports.
We compensate loyalty partners with points for each new member the partner
brings to the MyPoints program. We either manage the program externally or
enable our partner to set point-earning opportunities without our direct
involvement using our Digital Loyalty Engine. The Digital Loyalty Engine enables
our partners to reward any action that requires a click on the site, such as
clicking on a banner, registering for a service or purchasing a product. We also
provide each partner with a supply of rewards points based on prospective
membership growth, internal promotion to MyPoints members, and, in some cases,
cooperative advertising to launch the new web site.
Network partnerships create cost-effective membership growth. They also
increase our brand awareness among new affinity groups. Our network partnership
marketing group focuses on current rewards partners, electronic commerce
alliances, major electronic commerce and entertainment sites, web-based email
providers, and online community sites and portals.
Private Label Loyalty Programs
We also build and operate fully customized, private label point programs
based on the MyPoints technology. We currently operate private label programs on
behalf of Prodigy (Prodigy Points) and NextCard Internet VISA (NextCard
Rewards). We also have an agreement with XOOM.com to develop and implement a
private label program, named XOOMPoints, on its behalf in the third quarter of
1999. Private label loyalty programs operate in a manner similar to the MyPoints
Network program, except that the points are branded exclusively for our
partners. We may still market to our partners' members; however, the marketing
material we use is branded for our partners and the points issued as a response
incentive are in the form of our partners' branded currencies. Our private label
redemption options can also be adjusted to maximize support for our partners'
brands. For instance, we may include a partner's own product line in the rewards
chart, providing a set of redemption options highly relevant to the partner's
own consumer base. At all levels, a private label loyalty program reinforces and
builds loyalty to our partners' brands, while at the same time expanding our
direct marketing membership base.
Licensing Programs
We offer our technology for license to customers seeking to develop email
or web-based direct marketing and loyalty programs. As part of our license
agreement, we may receive a set-up fee and royalties based on a percentage of
revenues derived from the licensed site. We currently have one licensing
agreement in place with Sweden Post. This agreement establishes a version of the
MyPoints BonusMail program for the Swedish market. Licensing is an attractive
way for us to address most international market opportunities, which typically
require a foreign language web site as well as advertising and points redemption
opportunities relevant to the local market.
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SALES AND MARKETING
Our advertising sales organization consisted of 38 employees located in San
Francisco, New York, Los Angeles and Chicago as of June 30, 1999. This
organization is dedicated to developing and maintaining relationships with
leading advertisers and advertising agencies nationwide. We also seek to enter
into relationships with third-party advertising sales representatives to augment
the efforts of our direct sales personnel. For example, we recently entered into
an agreement with a telesales firm specializing in email advertising sales.
Our consumer marketing and business development organization consisted of
16 employees in San Francisco, New York and Chicago as of June 30, 1999. This
organization is dedicated to acquiring members for our online direct marketing
program. MyPoints consumer marketing group uses a variety of member acquisition
strategies, including referrals by current members, banner bars and other online
media placements, and affiliate programs. Affiliate programs include
relationships in which partners bring new members to MyPoints by introducing the
service to their own user bases in exchange for exposure of their own services
to the MyPoints membership or a cash payment per member. We have a wide variety
of affiliate programs in place, including one with Microsoft under which
MyPoints BonusMail is listed as a preferred product in the download area for
Microsoft's email product, Outlook Express. These products are complementary in
that Outlook Express enables the user to read rich-media email and MyPoints
BonusMail can deliver email in this format. The business development group uses
loyalty partnerships to acquire members for our online direct marketing program.
These partnerships can take various forms, including membership in the MyPoints
Network and private label loyalty programs.
ADVERTISING CLIENTS AND REWARDS PROVIDERS
Set forth below is a list of our largest advertising clients in the
specified industries since January 1998, based on the amount of revenues we
generated through March 31, 1999:
Advertising Clients
<TABLE>
<S> <C> <C>
Automotive -- Clarion, Nissan
Entertainment -- BMG Entertainment, Disney
Financial Services -- 20th Century Insurance
Health -- OnHealth, Acumin
Internet -- eBay
Membership Services -- Cendant, The Signature Group
Publishing -- Ziff-Davis, International Masters Publishers
Retail -- Macy's, The Gap
Software -- Intuit, Brainplay
Telecommunications -- Sprint, Working Assets
</TABLE>
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MyPoints largest rewards providers, based on frequency of points
redemption, are as follows: Rewards Providers
<TABLE>
<S> <C>
American Red Cross Artistic Greetings
Barnes & Noble Blockbuster Video
Boston Market Brinker International
Darden Restaurant GAP
Macy's Magazine Mall
REI Spree.com
Sprint Target
Tower Records Toys R Us
</TABLE>
MEMBER CARE
We have established a measurable member care process that is designed to
provide superior service to all program participants.
Automated Inquiry System
We have developed automated online support services for our members, such
as online access to account information and transaction histories. Our new
member inquiry interface is designed to answer member questions automatically.
Through this member inquiry system, customers contact us via a web form that
generates an email containing relevant customer account information for
efficient handling by our member care staff.
24-hour/7-day Support
We employ an internal staff dedicated to member care and a specialized
customer support vendor, Brigade Solutions, to maximize coverage and minimize
cost and turnaround time. Through this combination, we are able to provide
24-hour, 7-day coverage with immediate automated responses for all online
inquiries and a turnaround time of less than 24 hours for more than 95% of basic
member inquiries. We intend to continue to enhance our member care services
through increased availability of online member self-support and improved
customer reporting systems.
TECHNOLOGY AND INFRASTRUCTURE
We have developed an expandable, secure and reliable technology
infrastructure to support our online direct marketing and loyalty rewards
programs. The principal element of our proprietary technology is our Digital
Loyalty Engine. The Digital Loyalty Engine enables our loyalty partners to set
the parameters of point-earning transactions without our direct involvement.
Customizable elements include the number of times in a given period an award may
be earned, the number of points per transaction, the maximum number of
transactions per member and the maximum aggregate numbers of points that can be
awarded in a given campaign. Partners can use the Digital Loyalty Engine to take
advantage of market opportunities on a real-time basis by establishing new
point-earning opportunities or altering the parameters of existing
opportunities.
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Expandability
Our technology is designed to support tens of millions of users. To date,
we have demonstrated that our architecture is capable of rapid expansion as more
than three million consumers have enrolled in our direct marketing and loyalty
programs. Our systems are also designed to capture a large amount of data from
our members, which is critical to the creation of a successful online loyalty
rewards program. In addition, our systems can be integrated with our partners'
own databases, thereby enhancing data exchange and data mining for marketing
purposes.
Security
We incorporate a variety of encryption techniques meant to protect the
privacy of consumer information and the integrity of client transactions. We
also employ a variety of automated fraud detection procedures to identify
patterns of abuse and potential fraudulent use of the system. Our fraud
detection systems can automatically disable accounts in which fraud is
suspected. The data center where our system is located provides 24-hour/7-day
security management.
Reliability
Our software system architecture uses industry standard technologies to
maximize reliability. We use Secure Socket Layer for secure transactions, Oracle
databases, the UNIX operating system and the Netscape web server within our
infrastructure. All of these platforms have demonstrated a high degree of
reliability. Our databases are also distributed among clients and among
functions. In particular, each Digital Loyalty Engine, where transactions are
recorded, is separate from the main database of account records. As a result, a
database failure would typically affect only a particular client or function and
would not adversely impact our entire system. We back up our Oracle databases to
long-term tape storage on a daily basis.
Our network servers are housed separately at Exodus Communications' data
center in Jersey City, New Jersey. The Exodus data center provides redundant
network connections, redundant connections to power grids, diesel generators for
emergency power, air conditioning and 24-hour/ 7-day engineering support. Our
infrastructure is built to maximize reliability through the use of multiple
central processor units and redundant power supplies, networking and
input/output controllers.
COMPETITION
We face intense competition from both traditional and online advertising
and direct marketing businesses. We expect competition to increase due to the
lack of significant barriers to entry in the online advertising market. As we
expand the scope of our product and service offerings, we may compete with a
greater number of media companies across a wide range of advertising and direct
marketing services. Currently, several companies offer competitive online
products or services, including CyberGold and Netcentives. We also expect to
face competition from established online portals and community web sites that
engage in direct marketing, as well as from traditional advertising agencies and
direct marketing companies that may seek to offer online products or services.
Therefore, although we believe we are the only company that currently offers
online direct marketing integrated with an online rewards program, we may face
additional competition from companies engaged in online direct marketing that
introduce rewards programs and from online rewards program providers that begin
offering direct marketing services.
Our ability to compete depends upon many factors, including:
- the timing and market acceptance of new products and services developed
either by us or our competitors;
- our ability to demonstrate the effectiveness of our service to
advertisers;
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- our ability to increase the number of members who participate in our
online programs;
- our ability to increase the depth of information in our database
regarding our members by capturing demographic, behavioral and
transactional data;
- our ability to increase awareness of our brand;
- the capacity of our technology infrastructure to meet the needs of our
members, advertisers and loyalty partners; and
- sales and marketing efforts by us or our competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
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 patent, copyright, trade secret and trademark laws. We
have filed three patent applications in the United States. For some of these
applications, we also plan to file corresponding international patent
applications. We have entered into confidentiality or license agreements with
our employees and consultants, and corporate and strategic partners and
generally seek to control access to and distribution of our documentation and
other proprietary information. Despite these precautions, it may be possible for
third parties to copy or otherwise obtain and use our proprietary information
without authorization or to develop similar technology independently. We pursue
the registration of our trade and service marks in the United States and
internationally. We have registered trademarks for "MyPoints," "BonusMail" and
"Rew@rds" in the United States. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are distributed or made available through the internet, and policing
unauthorized use of our proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in internet-related businesses are uncertain
and still evolving. We cannot give any assurance as to the future viability or
value of any of our proprietary rights. In addition, we cannot give any
assurance as to the future viability or value, if any, of our proprietary
rights. In addition, we cannot give any assurance that the steps taken by us
will prevent misappropriation or infringement of our proprietary information.
Any infringement or misappropriation, should it occur, could have a material
adverse effect on our business, results of operations and financial condition.
Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. We have received
two claims of alleged infringement, one of which has been resolved through a
license agreement. We are currently in the process of negotiating a settlement
of the second claim, which was made by CyberGold, Inc. in May 1999. If this
claim cannot be resolved through a license or similar arrangement, we could
become a party to litigation with CyberGold. Litigation may also be necessary to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. An adverse
determination in any litigation of this type could require us to make
significant changes to the structure and operation of our online rewards
program, attempt to design around a third party's patent, or license alternative
technology from another party. Implementation of any of these alternatives could
be costly and time consuming, and might not be possible. Accordingly, an adverse
determination in any litigation that might ensue between a third party and us
could have a material adverse effect on our business, results of operations and
financial condition. In addition, any intellectual property litigation, even if
successfully defended, would result in substantial costs and diversion of
resources and management attention and could therefore have a material adverse
effect on our business, results of operations and financial condition.
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We have licensed, and may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. While
we attempt to ensure that the quality of our brand is maintained by these
business partners, they may take actions that could materially and adversely
affect the value of our proprietary rights or reputation.
PRODUCT AND SERVICE WARRANTIES
When members purchase products in response to direct marketing offers that
we send them or redeem points for products and services, we pass on to these
members the warranties made by the manufacturers of products or providers of
services. We do not provide separate additional warranties.
EMPLOYEES
As of June 30, 1999, we employed 123 people, including 54 in sales and
marketing, 52 in technology and production and 17 in support, administration,
finance, management and human resources. We believe that we maintain good
relations with our employees.
FACILITIES
We are currently leasing approximately 7,878 square feet of office space in
San Francisco, California, approximately 11,000 square feet of office space in
Schaumburg, Illinois and approximately 4,500 square feet of office space in New
York, New York. Our sales, marketing, finance and administration functions are
based in San Francisco. Our technology and production groups are based in
Schaumburg. We have also expanded our Schaumburg facility to approximately
18,750 square feet through a lease of new space in the same office complex as
our current space. We also currently plan to increase our office space in San
Francisco during 1999. We do not have any commitments for this additional space,
but we believe we can obtain additional space on commercially reasonable terms.
We believe that our Schaumburg space and the additional space we intend to lease
in San Francisco will meet our space requirements for the next several years.
The lease for the San Francisco facility expires in November 1999, with an
option to extend the lease for one additional three-year term. The Schaumburg
facility is currently leased under a lease which expires in March 2001 and two
month-to-month leases. These leases will automatically convert into a 60-month
lease upon completion of improvements to our new Schaumburg facility.
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DIRECT MARKETING BOARD OF ADVISORS
We have assembled a board of advisors with significant experience in the
direct marketing industry. Our board of advisors consists of:
Steve Carbone
President, Grey Direct e.marketing
G. Steven Dapper
Chief Executive Officer of Hawkeye Media
Former Chairman and Chief Executive Officer, Rapp Collins Worldwide
Rashi Glazer
Editor-in-Chief, Interactive Marketing Journal
Professor of Marketing, Haas School of Business, University of
California at Berkeley
Worthington Linen
Chairman and Chief Executive Officer, The Signature Group
Former President and Chief Executive Officer, BMG Direct
George S. Wiedemann
Chairman and Chief Executive Officer, Grey Direct Marketing Group
Chairman of the Direct Marketing Association
Lester Wunderman
Founder and former Chairman, Wunderman Cato Johnson
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, as of June 30, 1999, certain information
concerning our executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven M. Markowitz.................. 28 Chief Executive Officer and Chairman of the Board
Robert C. Hoyler..................... 48 President, Chief Operating Officer and Director
Thomas P. Caldwell................... 40 Senior Vice President, Finance and Chief Financial
Officer
Charles H. Berman.................... 47 Executive Vice President, Sales
Virgil Bistriceanu................... 40 Senior Vice President, Technology
Steven E. Parker..................... 36 Senior Vice President, Marketing
Frank J. Pirri....................... 58 Senior Vice President, Offline Commerce
Layton S. Han........................ 33 Vice President, Business Development
Howard L. Morgan..................... 53 Director
Thomas Newkirk....................... 53 Director
Lawrence E. Phillips................. 33 Director
Mario M. Rosati...................... 52 Director
Lester Wunderman..................... 79 Director
</TABLE>
Steven M. Markowitz is a founder of MyPoints.com and has served as our
Chief Executive Officer and Chairman of the Board since November 1996. Mr.
Markowitz also served as our President from November 1996 until December 1998.
From May 1995 to August 1996, Mr. Markowitz was a securities analyst with
Fidelity Management & Research (Far East), a unit of Fidelity Investments. Mr.
Markowitz is also the founder of a specialty catalog for the Japanese software
market and has acted as an advisor to that company since 1992. From 1992 to
1994, Mr. Markowitz was a Tokyo-based correspondent for Dow Jones & Co., Inc., a
business and financial news publishing company. Mr. Markowitz holds an A.B. from
the University of California at Berkeley and an M.B.A. from the Haas School of
Business, University of California at Berkeley.
Robert C. Hoyler has served as our President and Chief Operating Officer
since December 1998 and has served as one of our directors since January 1999.
Prior to joining MyPoints.com, Mr. Hoyler had served as Chief Executive Officer
of MotivationNet since July 1996. From July 1993 to March 1996, Mr. Hoyler
served as Senior Vice President of Diversified Businesses at Keebler, a leading
consumer products company, where he was responsible for sales, marketing and
manufacturing for Keebler's Diversified Businesses unit. Mr. Hoyler holds a B.A.
from Loyola University and a Master of Management from J.L. Kellogg Graduate
School of Management, Northwestern University.
Thomas P. Caldwell joined us as our Senior Vice President, Finance and
Chief Financial Officer in April 1999. Prior to joining MyPoints.com, Mr.
Caldwell served as Senior Vice President, Finance and Administration, Chief
Financial Officer and Secretary of Dynamic Circuits, Inc., a printed circuit
board manufacturer, since November 1996. In July 1998, Dynamic Circuits, Inc.
was acquired by Dynamic Details, Inc., and at that time Mr. Caldwell was also
appointed to the position of Vice President, Strategic Development of Dynamic
Details, Inc. From May 1996 to November 1996, Mr. Caldwell served as Director,
Corporate Finance in the San Francisco office of Coopers & Lybrand L.L.P., an
accounting firm, where he provided financial consulting services. From February
1993 to May 1996, Mr. Caldwell served as a Vice President of Houlihan, Lokey,
Howard & Zukin, Inc., an investment banking firm. Mr. Caldwell holds a B.S. from
Santa Clara University and an M.B.A. from the University of Chicago, Graduate
School of Business.
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<PAGE> 46
Charles H. Berman has served as our Executive Vice President, Sales since
October 1998. From September 1998 to October 1998, Mr. Berman served as our
Director of Business Development. From February 1998 to September 1998, Mr.
Berman served as our Director of Consumer Marketing, where he was responsible
for all membership acquisition. From July 1994 to December 1997, Mr. Berman
served as President of Goodstuffs, a gourmet food and wine company. From 1988 to
June 1994, Mr. Berman served as President of WineWrights, a wine membership
organization company, where he managed the company from inception. Mr. Berman
holds a B.A. from Case Western Reserve University and an M.B.A. from San
Francisco State University.
Virgil Bistriceanu has served as our Senior Vice President, Technology
since November 1998. Since August 1994, Mr. Bistriceanu has also been an
instructor in the Computer Science Department of the Illinois Institute of
Technology. From May 1997 to November 1998, Mr. Bistriceanu served as Chief
Technology Officer of MotivationNet, where he designed the architecture and
managed implementation of its rewards program. Mr. Bistriceanu holds an M.S. in
Electrical Engineering from the Polytechnic Institute of Bucharest, Romania.
Steven E. Parker has served as our Senior Vice President, Marketing since
July 1999. From November 1998 to July 1999, Mr. Parker served as our Vice
President, Product and Trade Marketing. From September 1997 to November 1998,
Mr. Parker served as Vice President, Marketing, for MotivationNet. From December
1995 to September 1997, Mr. Parker served as President of Select Brands, Inc.
From May 1990 to December 1995, Mr. Parker held several positions with Keebler
Company, most recently Director of Category Management and New Product
Development in Keebler's Diversified Businesses unit. Mr. Parker holds an M.B.A.
from Loyola University and a B.S. in Commerce from the McIntire School at the
University of Virginia.
Frank J. Pirri has served as our Senior Vice President, Offline Commerce
since December 1998. From May 1997 to November 1998, Mr. Pirri served as
Executive Vice President of MotivationNet. From January 1994 to May 1997, Mr.
Pirri served as the President and Chief Executive Officer of Life Facts, Inc., a
medical information products company. From January 1993 to January 1994, Mr.
Pirri served as the Vice Chairman of S&H Citadel, Inc., an incentives marketing
services company, following its merger with S&H Motivation and Citadel
Motivation. From 1987 to January 1993, Mr. Pirri served as President and Chief
Executive Officer of S&H Motivation, a consumer and business-to-business
performance improvement company. Prior to S&H Motivation, Mr. Pirri held
numerous positions over a 24-year period at The Sperry & Hutchinson Company (S&H
Green Stamps). Mr. Pirri holds a B.B.A. from Pace University and a Master of
Management from J.L. Kellogg Graduate School of Management, Northwestern
University.
Layton S. Han has served as our Vice President, Business Development since
April 1999. From November 1996 to April 1999, Mr. Han served as our Vice
President, Finance and Chief Financial Officer. From May 1996 to August 1996,
Mr. Han served with the strategy and business development group of US West Media
Group, a telecommunication company. From 1989 to January 1996, Mr. Han served as
an Account Executive of Travelers Insurance Company where he underwrote
insurance and risk financing products for corporate clients. Mr. Han holds a
B.S. from the University of California, Davis and an M.B.A. from the Haas School
of Business, University of California at Berkeley.
Howard L. Morgan has served as one of our directors since November 1996.
Since 1989, Dr. Morgan has been President of the Arca Group, Inc., a consulting
and investment management firm specializing in the areas of computer and
communications technologies. Dr. Morgan has also served as a General Partner of
Idealab! Corporation, an incubator of internet and e-commerce companies, since
January 1999. In addition, Dr. Morgan served as Chief Executive Officer of
Franklin Electronic Publishers, Inc. in early 1998. Dr. Morgan was Professor of
Decision Sciences at
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<PAGE> 47
the Wharton School of Business of the University of Pennsylvania from 1972
through 1986. Dr. Morgan serves as director for a number of public companies,
including Cylink Corp., Franklin Electronic Publishers, Inc., Infonautics
Corporation, Kentek Information Systems, Inc., MetaCreations Corporation, Segue
Software, Inc. and Unitronix Corp. Dr. Morgan holds a B.S. from City College of
New York and a Ph.D. from Cornell University.
Thomas Newkirk has served as one of our directors since January 1999. Mr.
Newkirk has served as the Chairman of Experian Marketing Solutions, a subsidiary
of the information services company Experian, since 1998. Mr. Newkirk founded
Direct Marketing Technology, a wholly-owned subsidiary of Experian, in 1981 and
has served as its Chairman since 1990. Mr. Newkirk holds a B.S. from
Massachusetts Institute of Technology.
Lawrence E. Phillips has served as one of our directors since December
1998. In April 1998, Mr. Phillips formed and presently serves as Managing
Director of Primedia Ventures, a venture capital fund of Primedia, a media and
publishing company, where he directs investing activities in early-stage
internet software, commerce and advertising companies. From February 1995 to
April 1998, Mr. Phillips founded and managed an internet division for Primedia's
Magazine Group, where he had general management responsibilities for the launch
and operation of several web sites. From September 1992 to February 1995, Mr.
Phillips was a Vice President at Unterberg Harris, an investment banking firm.
Mr. Phillips holds an A.B. from Cornell University and an M.B.A. from Harvard
Business School.
Mario M. Rosati has served as one of our directors since November 1996. Mr.
Rosati has been with the Palo Alto, California law firm of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, since 1971, first as an associate
and then as a member since 1975. Mr. Rosati also serves as a director of Sanmina
Corporation, Ross Systems, Inc., Vivus, Inc., Meridian Data, Inc., Genus, Inc.
and Aehr Test Systems. Mr. Rosati holds a B.A. from the University of
California, Los Angeles and a J.D. from the University of California at
Berkeley, Boalt Hall School of Law.
Lester Wunderman has served as one of our directors since January 1999 and
is also a member of our board of advisors. Through December 1998, Mr. Wunderman
served as Chairman of Wunderman Cato Johnson, a world-wide direct marketing
agency, which he founded in 1958. Mr. Wunderman is also Visiting Professor of
Direct Marketing at the School for Continuing Education of New York University.
He has served as Chairman of the Executive Committee of the Center for Direct
Marketing at New York University and is a Trustee of the Children's Television
Workshop. Mr. Wunderman serves as a director of Infonautics Corporation. Mr.
Wunderman holds an honorary doctorate from City University of New York.
BOARD COMPOSITION
Our bylaws currently authorize seven directors. Our certificate of
incorporation and bylaws that become effective upon the completion of this
offering provide that our board will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. The
Class I directors, Messrs. Markowitz, Morgan and Rosati, will stand for
reelection at the 2000 annual meeting of stockholders. The Class II directors,
Messrs. Hoyler and Phillips, will stand for reelection at the 2001 annual
meeting of stockholders. The Class III directors, Messrs. Newkirk and Wunderman,
will stand for reelection at the 2002 annual meeting of stockholders. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This staggered classification
of the board of directors may have the effect of delaying or preventing changes
in control or management. There are no family relationships among any of our
directors, officers or key employees.
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<PAGE> 48
BOARD COMMITTEES
The board of directors has a compensation committee and an audit committee.
Our compensation committee consists of Messrs. Morgan, Newkirk and
Phillips. The compensation committee makes recommendations regarding our various
incentive compensation and benefit plans and determines salaries for our
executive officers and incentive compensation for our employees and consultants.
Our audit committee consists of Messrs. Phillips and Wunderman. The audit
committee makes recommendations to the board of directors regarding the
selection of our independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors and reviews and
evaluates our control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee was, at any time since
our formation, an officer or employee of MyPoints.com. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of our
board of directors or compensation committee. See "Transactions with Directors,
Executive Officers and Principal Stockholders" for a description of transactions
between MyPoints.com and entities affiliated with members of our compensation
committee.
DIRECTOR COMPENSATION
We do not currently pay any cash compensation to our directors for their
services as members of the board of directors, although we reimburse them for
reasonable expenses in connection with attending our board and committee
meetings. We do not provide additional compensation for committee participation
or special assignments of the board of directors. From time to time, we have
granted our outside directors options to purchase shares of our common stock
under the 1996 stock plan or the 1999 stock plan. In January 1997, we granted
Mr. Morgan an option to purchase 133,333 shares at a per share exercise price of
$0.05. In September 1997, we granted Mr. Rosati an option to purchase 113,333
shares at a per share exercise price of $0.10. In February 1998, we granted Mr.
Rosati an option to purchase 20,000 shares at a per share exercise price of
$0.10 and Mr. Wunderman, then in his capacity as a member of our board of
advisors, an option to purchase 10,000 shares at a per share exercise price of
$0.05. In January 1999, we granted Mr. Newkirk an option to purchase 25,000
shares, Mr. Phillips an option to purchase 25,000 shares and Mr. Wunderman an
option to purchase 50,000 shares, all at a per share exercise price of $1.00.
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<PAGE> 49
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during 1998 to
our Chief Executive Officer and our other executive officers who received salary
compensation of more than $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY($) OPTIONS(#)
---------------------------- ------------ ------------
<S> <C> <C>
Steven M. Markowitz......................................... $100,000 --
Chief Executive Officer and Chairman of the Board of
Directors
Robert C. Hoyler............................................ 139,682 --
President and Chief Operating Officer
Virgil Bistriceanu.......................................... 108,184 96,675
Senior Vice President, Technology
Frank J. Pirri.............................................. 109,384 --
Senior Vice President, Offline Commerce
</TABLE>
Messrs. Hoyler's, Bistriceanu's and Pirri's salaries include amounts earned
at MotivationNet before its acquisition by MyPoints.com. Thomas P. Caldwell
joined MyPoints.com in April 1999 at an annual salary of $150,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information relating to stock options
granted during 1998 to our Chief Executive Officer and our other executive
officers who received salary compensation of more than $100,000. All of these
options were awarded under our 1996 stock plan or our 1999 stock plan and have a
term of ten years from the date of grant.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED FOR OPTION TERM
OPTIONS IN FISCAL EXERCISE EXPIRATION -----------------
NAME GRANTED(#) 1998 PRICE($/SH.) DATE 5%($) 10%($)
---- ------------- ------------- --------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Markowitz............. -- -- -- -- -- --
Robert C. Hoyler................ -- -- -- -- -- --
Virgil Bistriceanu.............. 96,675 9.0% $0.26 12/23/2008 $15,808 $40,060
Frank J. Pirri.................. -- -- -- -- -- --
</TABLE>
In 1998, we granted options to purchase an aggregate of 1,079,562 shares of
common stock to our employees, directors and consultants. Generally, we grant
options at an exercise price equal to the fair market value of the underlying
common stock on the date of grant, as determined by our board of directors, and
the options vest over four years from the date of grant. In determining the fair
market value of our common stock, our board of directors considers valuations of
comparable companies, valuations at which we have issued preferred stock,
valuation reports and analyses
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<PAGE> 50
prepared by third parties, the relative rights and preferences of our preferred
stock as compared to our common stock, and the lack of liquidity of our
securities. Once we become a publicly-held company, the fair market value of our
stock will equal its trading market price. Mr. Bistriceanu's option vests over
three years beginning on May 1, 1997.
In accordance with the rules of the Securities and Exchange Commission, the
above table sets forth the potential realizable value over the ten-year period
from the grant date to the expiration date, assuming rates of stock appreciation
of 5% and 10%, compounded annually. These amounts do not represent our estimate
of future stock price performance. Actual realizable values, if any, of stock
options will depend on the future performance of our common stock.
In addition, in January 1999, we granted Mr. Markowitz an option to
purchase 350,000 shares, Mr. Hoyler an option to purchase 250,000 shares and Mr.
Bistriceanu options to purchase 138,595 shares of common stock. These options
were granted under our 1999 stock plan with an exercise price of $1.00 per
share.
In April 1999, we granted Messrs. Markowitz, Hoyler, Bistriceanu and Pirri
each an option to purchase 90,000 shares of common stock in connection with our
senior management incentive plan. Additionally, in May 1999, we granted Mr.
Caldwell options to purchase an aggregate of 220,000 shares of common stock. All
of these options were granted under our 1999 stock plan with an exercise price
of $8.00 per share. In connection with the option grant to Mr. Caldwell, we have
agreed to accelerate the vesting of 40,000 of the options in the event the price
of our common stock 30 days after the effective date of this offering is greater
than $12.00 per share.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information for our Chief Executive Officer
and our other executive officers who received salary compensation of more than
$100,000 in 1998, relating to the number and value of securities underlying
exercisable and unexercisable options held at December 31, 1998. These executive
officers did not exercise any options during 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1998(#) DECEMBER 31, 1998($)
------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven M. Markowitz.............. -- -- -- --
Robert C. Hoyler................. -- -- -- --
Virgil Bistriceanu............... 62,435 34,240 -- --
Frank J. Pirri................... -- -- -- --
</TABLE>
The value of unexercised in-the-money options at December 31, 1998 above is
based on a value of $0.26 per share, the fair market value of our common stock
as of December 23, 1998, as determined by our board of directors, less the per
share exercise price, multiplied by the number of shares issuable upon exercise
of the option. All options were granted under our 1996 stock plan or our 1999
stock plan.
STOCK PLANS
1999 Stock Plan. Our 1999 stock plan was adopted by the board of directors
in November 1998. In March 1999, our board of directors amended the 1999 stock
plan to increase the number of shares reserved for issuance to a total of
2,966,962 shares. As of June 30, 1999, options to purchase an aggregate of
3,310,752 shares were outstanding, 79,321 shares of common stock had been
purchased
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<PAGE> 51
pursuant to exercises of stock options and stock purchase rights, and 359,927
shares were available for future grant. In May 1999, our board of directors
amended the 1999 stock plan to increase the number of shares reserved for
issuance to a total of 3,750,000 shares. In July 1999, our Board of Directors
approved an amendment to the 1999 stock plan to increase the number of shares of
common stock reserved for issuance thereunder by 1,250,000 shares for a new
total of 5,000,000 shares. This amendment will be submitted to our stockholders
for their approval.
The 1999 stock plan provides for the grant of incentive stock options, as
defined in Section 422 of the Internal Revenue Code, to employees and
nonstatutory stock options, stock purchase rights and stock bonus rights to
employees, directors and consultants. The 1999 stock plan may be administered by
different committees authorizing grants to different groups of service
providers. Options granted as performance-based compensation within the meaning
of Section 162(m) are administered by a committee of two or more outside
directors. Option administration committees may make final and binding
determinations regarding the terms and conditions of the awards granted,
including the exercise prices, the numbers of shares subject to the awards and
the exercisability of the awards, forms of agreement for use under the plan and
interpretations of plan terms.
The exercise price of incentive stock options granted under the 1999 stock
plan must be at least equal to the fair market value of our common stock on the
date of grant. However, for any employee holding more than 10% of the voting
power of all classes of our stock, including the stock of any parent or
subsidiary of MyPoints.com, the exercise price must be no less than 110% of the
fair market value and, for any service provider, the exercise price must be no
less than 85% of the fair market value. The exercise price of nonstatutory stock
options is set by the administrator of the 1999 stock plan. The maximum term of
options granted under the 1999 stock plan is ten years. The maximum term of
options granted to holders of at least 10% of our stock is five years.
An optionee whose relationship with us or any related corporation ceases
for any reason, other than death or total and permanent disability, may exercise
options in the three-month period following this cessation, or any other period
of time determined by the administrator, unless these options terminate or
expire sooner or, for nonstatutory stock options, later, by their terms. The
three-month period is extended to 12 months for terminations due to death or
total and permanent disability. In the event of a merger, sale or reorganization
of MyPoints.com into another corporation that results in a change of control of
us, options that would have become vested within 18 months after the closing
date of the merger transaction will accelerate and become fully vested upon the
closing of the transaction. In the event of a change of control transaction,
either outstanding options that are not accelerated would be assumed by the
successor company or an equivalent option would be substituted by the successor
company. If any of these options are not assumed or substituted, they would
terminate.
None of our employees may be granted options to purchase more than 500,000
shares in any fiscal year. The 1999 stock plan will terminate in November 2008,
unless sooner terminated by the board of directors.
The board of directors may also grant stock purchase rights to employees,
directors and consultants under the 1999 stock plan. These grants would be made
pursuant to restricted stock purchase agreements, and the price to be paid for
the shares granted is determined by the administrator. We are generally granted
a repurchase option exercisable on the voluntary or involuntary termination of
the purchaser's employment with us for any reason, including death or
disability. The repurchase price must be the original purchase price paid by the
purchaser. The repurchase option lapses at a rate determined by the
administrator. Once the stock purchase right has been exercised, the purchaser
will have rights equivalent to those of a stockholder.
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1996 Stock Plan. Our 1996 stock plan was adopted by the board of directors
in November 1996. In November 1998, the 1996 stock plan was amended to decrease
the number of shares of common stock reserved for issuance to 935,833 shares. As
of June 30, 1999, options to purchase an aggregate of 567,845 shares were
outstanding, 325,622 shares of common stock had been purchased pursuant to
exercises of stock options and stock purchase rights and 42,366 shares were
available for future grant.
The 1996 stock plan provides for the grant of incentive stock options, as
defined in Section 422 of the Internal Revenue Code, to employees and
nonstatutory stock options, stock purchase rights and stock bonus rights to
employees, directors and consultants. The 1996 stock plan may be administered by
the board of directors or a committee appointed by the board. The option
administration committee may make final and binding determinations regarding the
terms and conditions of the awards granted, including the exercise prices, the
numbers of shares subject to the awards and the exercisability of the awards,
forms of agreement for use under the plan and interpretations of plan terms.
The exercise price of incentive stock options granted under the 1996 stock
plan must be at least equal to the fair market value of our common stock on the
date of grant. However, for any employee holding more than 10% of the voting
power of all classes of our stock, the exercise price must be no less than 110%
of the fair market value. The exercise price of nonstatutory stock options is as
follows: for any person holding more than 10% of the voting power of all classes
of our stock including the stock of any parent or subsidiary of MyPoints.com,
the exercise price must be no less than 110% of the fair market value and, for
any service provider, the exercise price must be no less than 85% of the fair
market value. The maximum term of options granted under the 1996 stock plan is
generally ten years. The maximum term of options granted to holders of at least
10% of our stock is five years.
An optionee whose relationship with us or any related corporation ceases
for any reason, other than death or total and permanent disability, may exercise
options in the three-month period following this cessation, or any other period
of time determined by the administrator, unless these options terminate or
expire sooner or, for nonstatutory stock options, later, by their terms. The
three-month period is extended to 12 months for terminations due to death or
total and permanent disability. In the event of a merger, sale or reorganization
of MyPoints.com into another corporation that results in a change of control of
us, options that would have become vested within 18 months after the closing
date of the merger transaction will accelerate and become fully vested upon the
closing of the transaction. In the event of a change of control transaction,
either outstanding options that are not accelerated would be assumed by the
successor company or an equivalent option would be substituted by the successor
company. If any these options are not assumed or substituted, they would
terminate. The 1996 stock plan will terminate in November 2006, unless sooner
terminated by the board of directors.
The board of directors may also grant stock purchase rights to employees,
directors and consultants under the 1996 stock plan. These grants are made
pursuant to restricted stock purchase agreements, and the price to be paid for
the shares granted is determined by the administrator. We are generally granted
a repurchase option exercisable on the voluntary or involuntary termination of
the purchaser's employment with us for any reason, including death or
disability. The repurchase price must be the original purchase price paid by the
purchaser. The repurchase option lapses at a rate determined by the
administrator. Once the stock purchase right has been exercised, the purchaser
will have rights equivalent to those of a stockholder.
1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan
provides employees of MyPoints.com with an opportunity to purchase our common
stock through accumulated payroll deductions. A total of 200,000 shares of
common stock has been reserved for issuance under the purchase plan, none of
which has been issued. The purchase plan will be administered by our board of
directors or by a committee appointed by the board. The purchase plan permits
eligible
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<PAGE> 53
employees to purchase common stock through payroll deductions of up to 15.0% of
an employee's compensation, up to a maximum of $25,000, determined by the fair
market value of the shares at the time the stock is purchased, for all purchases
ending within the same calendar year. Employees are eligible to participate if
they are customarily employed by us for at least 20 hours per week and more than
five months in any calendar year. Unless the board of directors or its committee
determines otherwise, each offering period will run for six months. The first
offering period will commence on the date of this prospectus and will terminate
on December 31, 1999. Thereafter, new six-month offering periods will begin on
January 1 and July 1 of each year. In the event of an acquisition of
MyPoints.com, the offering period then in progress will be shortened and all
rights automatically exercised if the purchase rights are not assumed or
substituted by the successor corporation. The price at which common stock will
be purchased under the purchase plan is equal to 85.0% of the fair market value
of the common stock on the first day of the offering period or the last day of
the offering period, whichever is lower. Employees may end their participation
in an offering period at any time, and participation automatically ends on
termination of employment. The board may amend, modify or terminate the purchase
plan at any time as long as the amendment, modification or termination does not
impair vesting rights of plan participants. The purchase plan will terminate in
March 2009, unless terminated earlier in accordance with its provisions.
Senior Management Incentive Plan. In 1999, we adopted a senior management
incentive plan under which our executive officers may receive grants of options
upon our achievement of various revenue and cash flow targets. The plan sets
quarterly, semi-annual and annual targets.
401(k) PLAN
In February 1997, we adopted a 401(k) plan covering our full-time employees
located in the United States. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code, so that contributions to the 401(k)
plan by employees or by us, and the investment earnings thereon, are not taxable
to employees until withdrawn from the 401(k) plan, and so that we can deduct our
contributions, if any, when made. Pursuant to the 401(k) plan, employees may
elect to reduce their current compensation by up to the statutorily prescribed
annual limit ($10,000 in 1999) and to have the amount of the reduction
contributed to the 401(k) plan. The 401(k) plan permits, but does not require,
that we provide additional matching contributions to the 40l(k) plan on behalf
of all participants in the 401(k) plan. To date, we have not made any
contributions to the 401(k) plan.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
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Our bylaws provide that we must indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in this capacity, regardless of whether the bylaws would
permit indemnification. We have purchased directors and officers liability
insurance, which provides coverage against specified liabilities.
We have entered into indemnification agreements with our directors and
executive officers that provide for indemnification beyond what is provided for
in our bylaws. These agreements, among other things, indemnify our directors and
executive officers for certain expenses, including attorneys' fees, judgments,
fines and settlement amounts incurred by them in any action or proceeding,
including any action by us arising out of their services as directors or
executive officers of MyPoints.com, any of our subsidiaries or any other company
or enterprise to which the person provides services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
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TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS
AND PRINCIPAL STOCKHOLDERS
MYPOINTS.COM TRANSACTIONS WITH EXPERIAN AND RELATED ENTITIES
In November 1998 and December 1998, we entered into a series of
transactions to acquire internet and electronic commerce related assets from
companies affiliated with Experian. As part of these transactions, Experian
acquired shares of our common stock equal to 19.9% of our then outstanding
shares of common stock. These transactions involved the following principal
elements:
- The merger of a subsidiary of MyPoints.com with and into Enhanced
Response Technologies, Inc., an affiliate of Experian, where the
outstanding shares and options of Enhanced Response Technologies were
exchanged for 1,435,946 shares of our common stock and options to
purchase 402,818 shares of our common stock;
- The acquisition from two subsidiaries of Experian of all of the
outstanding ownership interests of MotivationNet, LLC in exchange for
1,213,592 shares of our Series D preferred stock and 2,164,535 shares of
our common stock;
- The acquisition from Metromail Corporation, an affiliate of Experian, of
certain assets relating to the "Direct Value to You" internet sponsorship
product, a targeted, web-based coupon program with a complementary
membership base, for $400,000 in cash, payable over 30 months;
- A services agreement between Direct Marketing Technology, Inc., a
wholly-owned subsidiary of Experian, and MyPoints.com in which Direct
Marketing Technology agreed to continue to provide demographic data and
other list processing services that are required for MyPoints.com to
operate and administer its programs; and
- A license agreement between Direct Marketing Technology, Inc. and
MyPoints.com that grants us the right to use certain intellectual
property rights associated with the MyPoints program, in exchange for
royalties specified in the license agreement.
The license agreement provides for an aggregate royalty payment of $4.2
million, payable in monthly installments equal to the greater of $35,000 or 3.0%
of our monthly revenues generated through the operation of the MyPoints program.
The license agreement also provides that, in the event of our initial public
offering, we must prepay the royalty by making a payment equal to the present
value of the $4.2 million royalty amount, less any monthly royalties previously
paid, discounted using a rate equal to the prime rate, as published in The Wall
Street Journal, plus 2.0%. MyPoints estimates that this prepayment will equal
approximately $2.6 million upon the completion of this offering. This estimate
assumes this payment will be made in June 1999. The actual amount of this
payment could vary depending upon the timing of the payment and fluctuations in
interest rates. Once we have made this license payment, our obligations under
the license will be fully satisfied and we will have no future royalty or other
financial obligations under the license.
OUR FORMATION
In connection with our incorporation in November 1996, we issued 843,775
shares of common stock to Steven M. Markowitz, 593,750 shares to Mark S. Smith,
593,750 shares to Noah J. Doyle, 250,000 shares to Layton S. Han and 150,000
shares to Daniel K. Kihanya, at a purchase price of $.001 per share, paid in
cash. These founders' shares are subject to a right of repurchase by us at the
original purchase of $.001 per share. This repurchase right lapsed as to
one-third of the shares upon issuance and lapses as to the remaining shares on a
cumulative monthly basis over a period of 48 months from the date of issuance of
the shares.
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PREFERRED STOCK FINANCINGS
In November and December 1996, MyPoints.com issued to various investors a
total of 3,000,000 shares of Series A preferred stock at a purchase price of
$0.50 per share. In several transactions from October 1997 through April 1998,
MyPoints.com issued to various investors a total of 2,926,666 shares of Series C
preferred stock at a purchase price of $1.50 per share. In November 1998, we
issued to various investors a total of 3,961,649 shares of Series D preferred
stock and warrants to purchase 1,374,028 additional shares of Series D preferred
stock at a purchase price of $2.06 per share. In March 1999, we issued to
various investors a total of 2,000,000 shares of Series E preferred stock at a
purchase price of $5.00 per share.
All shares shown below for Direct Marketing Technology represent shares
issued in exchange for the acquisition of MotivationNet, L.L.C. The shares of
Series D preferred stock shown below include shares issuable upon exercise of
warrants as follows:
- S-7 Associates, L.L.C., 133,495 shares;
- Primedia Ventures, 388,350 shares;
- Auber Investments Limited, 145,631 shares;
- Applewood Associates, L.P., 145,631 shares;
- Howard L. Morgan, 12,136 shares; and
- Lester Wunderman, 12,136 shares.
Investors in our preferred stock include, among others, the following
directors and holders of more than 5% of our outstanding stock:
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------------------------------------
PREFERRED STOCKHOLDER SERIES A SERIES C SERIES D SERIES E
--------------------- --------- -------- --------- -----------
<S> <C> <C> <C> <C>
HOLDERS OF MORE THAN 5%:
Direct Marketing Technology, Inc., a
wholly owned subsidiary of
Experian............................. -- -- 1,213,592 296,229
S-7 Associates, L.L.C................... 866,667 300,000 400,485 160,447
Long Island Venture Fund, L.P........... 1,000,000 333,333 -- --
Harold M. Brierley...................... 1,000,000 200,000 -- --
Primedia Ventures....................... -- -- 1,165,049 68,109
Auber Investments Limited............... -- 666,667 436,893 132,622
Applewood Associates, L.P............... -- 666,666 436,893 84,001
DIRECTORS:
Thomas Newkirk.......................... -- -- 1,213,592 296,229
Lawrence E. Phillips.................... -- -- 1,165,049 68,109
Howard L. Morgan........................ 133,333 33,333 36,408 16,743
Lester Wunderman........................ -- 16,667 36,408 4,986
</TABLE>
Thomas Newkirk is chairman of Direct Marketing Technology, a wholly-owned
subsidiary of Experian.
Holders of our preferred stock are entitled to registration rights with
respect to the shares of common stock that they will hold following this
offering. See "Description of Capital Stock -- Registration Rights."
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OTHER TRANSACTIONS
Harold M. Brierley, a former member of our board of directors and a holder
of more than 5% of our stock, founded Targeted Marketing Systems, Inc., a
service provider that we engaged for creative services to assist in the
development of our marketing program and web site. We made total payments to
Targeted Marketing Systems of $223,000 in 1997 and none in 1996 or 1998. As of
December 31, 1997 and 1998, we owed no amounts to Targeted Marketing Systems.
While a member of our board, Mr. Brierley received an option to purchase 75,000
shares of our common stock. On June 4, 1998, Mr. Brierley exercised this option.
Mario M. Rosati, one of our directors, is also a member of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, which has served as our outside
corporate counsel since our formation. From our inception through March 31,
1999, we have accrued a total of $329,000 in fees to Mr. Rosati's law firm.
POLICY REGARDING TRANSACTIONS WITH AFFILIATES
It is our policy that future transactions with affiliates, including any
loans we make to our officers, directors, principal stockholders or other
affiliates will be on terms no less favorable to us than we could have obtained
from unaffiliated third parties. These transactions will be approved by a
majority of our board of directors, including a majority of the independent and
disinterested members or, if required by law, a majority of our disinterested
stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock, as of June 30, 1999, by the following individuals
or groups:
- each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
- each of our executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o MyPoints.com, Inc., 565 Commercial Street, 4th Floor, San Francisco,
California 94111. Except as otherwise noted, and subject to applicable community
property laws, to the best of our knowledge, the persons named in this table
have sole voting and investing power for all of the shares of common stock held
by them.
This table lists applicable percentage ownership based on 18,712,319 shares
of common stock outstanding as of June 30, 1999, as adjusted to reflect the
conversion of all outstanding shares of preferred stock upon the closing of this
offering, and also lists applicable percentage ownership based on 23,712,319
shares of common stock outstanding after completion of this offering. Options
and warrants to purchase shares of our common stock that are exercisable within
60 days of June 30, 1999 are deemed to be beneficially owned by the persons
holding these options or warrants for the purpose of computing percentage
ownership of that person, but are not treated as outstanding for the purpose of
computing any other person's ownership percentage.
The shares shown below include shares issuable upon the exercise of
warrants to purchase our stock as follows:
- S-7 Associates, L.L.C., 133,495 shares;
- Primedia Ventures, 388,350 shares;
- Auber Investments Limited, 145,631 shares;
- Applewood Associates, L.P., 145,631 shares;
- Mr. Morgan, 12,136 shares;
- Mr. Wunderman, 12,136 shares; and
- all executive officers and directors as a group, 412,622 shares.
The shares shown below for executive officers include shares issuable upon
the exercise of options to purchase our stock as follows:
- Mr. Markowitz, 146,250 shares;
- Mr. Hoyler, 108,750 shares;
- Mr. Han, 33,750 shares;
- Mr. Bistriceanu, 121,673 shares;
- Mr. Parker 16,692 shares;
- Mr. Pirri, 15,000 shares; and
- Mr. Berman, 7,427 shares.
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The shares shown below for directors include shares issuable upon the
exercise of options as follows:
- Mr. Morgan, 119,444 shares;
- Mr. Rosati, 5,556 shares; and
- Mr. Wunderman, 6,042 shares.
The shares shown below for all executive officers and directors as a group
include 580,584 shares issuable upon exercise of options to purchase our stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------------
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
---------------- --------- -------------- -------------
<S> <C> <C> <C>
Direct Marketing Technology, Inc..................... 3,674,356 19.6% 15.5%
505 City Parkway West, 10th Floor
Orange, CA 92868
S-7 Associates, L.L.C................................ 1,727,599 9.2 7.2
800 Third Avenue, 33rd Floor
New York, NY 10022
Long Island Venture Fund, L.P. ...................... 1,333,333 7.1 5.6
145 Hofstra University, Suite 213
Business Development Center
Hempstead, NY 11550-1090
Harold M. Brierley(1)................................ 1,275,000 6.8 5.4
1201 Main Street, Suite 2500
Dallas, TX 75202
Primedia Ventures.................................... 1,233,158 6.5 5.1
745 Fifth Avenue, 24th Floor
New York, NY 10022
Auber Investments Limited............................ 1,236,182 6.6 5.2
505 Park Avenue
New York, NY 10022
Applewood Associates, L.P............................ 1,187,560 6.3 5.0
767 Fifth Avenue
45th Floor
New York, NY 10153
Steven M. Markowitz.................................. 990,025 5.2 4.1
Robert C. Hoyler..................................... 547,492 2.9 2.3
Layton S. Han........................................ 283,750 1.5 1.2
Virgil Bistriceanu................................... 140,476 * *
Frank J. Pirri....................................... 127,819 * *
Steve Parker......................................... 34,738 * *
Charles H. Berman.................................... 13,862 * *
Thomas P. Caldwell................................... -- * *
Thomas Newkirk(2).................................... 3,674,356 19.6 15.5
Lawrence E. Phillips(3).............................. 1,233,158 6.5 5.1
Howard L. Morgan..................................... 339,261 1.8 1.4
Mario M. Rosati(4)................................... 138,610 * *
Lester Wunderman..................................... 64,103 * *
All directors and executive officers as a group (13
persons) .......................................... 7,552,912 38.3% 30.6%
</TABLE>
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- -------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 200,000 shares held by Targeted Marketing Systems, Inc. Mr.
Brierley, President of Targeted Marketing Systems, disclaims beneficial
ownership of the shares held by that entity, except to the extent of his
proportionate pecuniary interest therein based upon his beneficial ownership
of the capital stock of Targeted Marketing Systems.
(2) Represents 3,674,356 shares held by Direct Marketing Technology. Mr.
Newkirk, the Chairman of Direct Marketing Technology, disclaims beneficial
ownership of the shares held by that entity, except to the extent of his
proportionate pecuniary interest therein based upon his beneficial ownership
of the capital stock of Direct Marketing Technology. Mr. Newkirk is a member
of our board of directors.
(3) Represents 844,808 shares held by Primedia Ventures and 388,350 shares
issuable pursuant to a warrant held by Primedia Ventures exercisable within
60 days of June 30, 1999. Mr. Phillips, Managing Director of Primedia,
disclaims beneficial ownership of the shares and warrant held by Primedia,
except to the extent of his proportionate pecuniary interest therein. Mr.
Phillips is a member of our board of directors.
(4) Includes 22,500 shares held by WS Investment Company 96B, 87,125 shares held
by WS Investment Company 97B and 10,124 shares held by WS Investment Company
98A. Mr. Rosati is a general partner of each of these entities and disclaims
beneficial ownership of the shares held by those entities, except to the
extent of his proportionate partnership interest therein. Mr. Rosati is a
member of our board of directors.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of 100,000,000 shares of common stock,
$.001 par value, and authorizes the issuance of 10,000,000 shares of
undesignated preferred stock, no par value. From time to time, our board of
directors may establish the rights and preferences of the preferred stock. As of
June 30, 1999, 18,712,319 shares of common stock were issued and outstanding and
held by 99 stockholders, options to purchase 3,878,597 shares of common stock
were issued and outstanding and held by 128 optionholders, and warrants to
purchase 1,534,028 shares of common stock were issued and outstanding and held
by 25 warrantholders.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably the
dividends, if any, that are declared from time to time by the board of directors
out of funds legally available for that purpose. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of MyPoints.com, the holders
of common stock are entitled to share in our assets remaining after the payment
of liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any series
of preferred stock that we may designate in the future.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of this preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of MyPoints.com without
further action by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and MyPoints.com has no present plans to issue any shares of
preferred stock.
WARRANTS AND OTHER OBLIGATIONS TO ISSUE CAPITAL STOCK
As of June 30, 1999, we had outstanding warrants to purchase an aggregate
of 1,374,028 shares of Series D preferred stock at an exercise price of $2.06
per share. These warrants are currently exercisable in full and will expire in
2003. We also had outstanding a warrant to purchase
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10,000 shares of Series C preferred stock at an exercise price of $1.50 per
share. This warrant is currently exercisable in full and will expire in 2008.
Upon the closing of this offering, all of these warrants will become exercisable
for a like number of shares of common stock. As of June 30, 1999, we also had
outstanding two warrants to purchase an aggregate of 150,000 shares of common
stock. One of these warrants is for the purchase of 50,000 shares at an exercise
price equal to the initial public offering price of our stock. The other warrant
is for the purchase of 100,000 shares at an exercise price equal to the lower of
$8.00 per share or the initial public offering price of our stock. These
warrants are currently exercisable and will expire in 2000.
REGISTRATION RIGHTS
After this offering, holders of 15,418,432 shares of common stock and
1,384,028 shares of common stock issuable upon exercise of outstanding warrants
(the "registrable securities") or their transferees will have rights to request
the registration of their shares under the Securities Act. These rights are
provided under the terms of an agreement between MyPoints.com and the holders of
the registrable securities. Beginning 180 days after the date of this
prospectus, holders of at least 20% of the registrable securities may require,
on two occasions, that we use our best efforts to register the registrable
securities for public resale. MyPoints.com is obligated to register these shares
only if the outstanding registrable securities have an anticipated public
offering price of at least $5,000,000. Also, holders of 10.0% of the registrable
securities may require, no more than once during any six-month period, that
MyPoints.com register their shares for public resale on Form S-3 or a similar
short-form registration if the value of the securities to be registered is at
least $500,000. Furthermore, in the event MyPoints.com elects to register any of
its shares of common stock for purposes of effecting any public offering, the
holders of registrable securities are entitled to include their shares of common
stock in the registration, but MyPoints.com may reduce the number of shares
proposed to be registered in view of market conditions. These registration
rights have been waived with respect to this offering. MyPoints.com will bear
all expenses in connection with any registration, other than underwriting
discounts and commissions. All registration rights will terminate five years
following the consummation of this offering or, for each individual holder of
registrable securities, at any time the holder is able to sell all of its shares
in a 90-day period under Rule 144 of the Securities Act.
ANTITAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the following more difficult:
- the acquisition of MyPoints.com by means of a tender offer;
- the acquisition of MyPoints.com by means of a proxy contest or otherwise;
or
- the removal of MyPoints.com's incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of
MyPoints.com to negotiate first with MyPoints.com's board. MyPoints.com believes
that the benefits of increased protection of its potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure MyPoints.com outweigh the disadvantages of discouraging these
proposals because negotiation of any proposals of this type could result in an
improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
with MyPoints.com's stockholders electing one class each year. See
"Management -- Board Composition." This system of electing and removing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to
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obtain control of MyPoints.com, because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board or the president may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures for stockholder
proposals and for the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee of the board.
Delaware Antitakeover Law. MyPoints.com is subject to Section 203 of the
Delaware General Corporation Law, an antitakeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years following
the date the person became an interested stockholder, unless the business
combination or the transaction in which the person became an interested
stockholder is approved in the manner specified in Section 203. Generally, a
business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an interested stockholder is a person who, together with affiliates
and associates, owns or within three years prior to the determination of
interested stockholder status did own 15% or more of a corporation's voting
stock. The existence of this provision may have an antitakeover effect by
discouraging takeover attempts not approved in advance by the board of
directors, that might result in a premium over the market price for the shares
of common stock held by stockholders.
Elimination of Stockholder Action by Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
No Cumulative Voting. Our certificate of incorporation and bylaws do not
provide for cumulative voting in the election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of MyPoints.com. These and other provisions may have
the effect of deferring hostile takeovers or delaying changes in control or
management of MyPoints.com.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66.7% of the
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A.
LISTING
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "MYPT" upon notice of issuance.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock, including shares issued upon exercise of outstanding options
and warrants, in the public market following this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through sale of our equity securities. As described below, no
shares currently outstanding will be available for sale immediately after this
offering because of contractual resale restrictions contained in agreements
between us and our stockholders.
Upon completion of this offering, we will have outstanding 23,712,319
shares of common stock based upon shares outstanding as of June 30, 1999,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants prior to completion of this offering. Of
these shares, the 5,000,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act, except for any shares purchased by
our "affiliates" as defined in Rule 144 under the Securities Act. Of the
remaining 18,712,319 shares of common stock, 17,730,959 shares held by existing
stockholders are subject to lock-up agreements with the underwriters and/or us
providing that the stockholder will not offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any rights to, any shares of
common stock or any securities that are convertible into common stock, owned as
of the date of this prospectus or subsequently acquired, for a period of 180
days after the date of this prospectus without the prior written consent of
BancBoston Robertson Stephens. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701 under the Securities Act, none of these shares will be
resellable until 181 days after the date of this prospectus. BancBoston
Robertson Stephens, in some instances together with MyPoints.com, may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to lock-up agreements.
Beginning 181 days after the date of this prospectus, approximately
10,308,309 shares will be eligible for sale in the public market. All of these
shares will be subject to volume limitations under Rule 144, except 6,249,805
shares eligible for sale under Rule 144(k) and 185,784 shares eligible for sale
under Rule 701. In some cases, these shares are subject to repurchase rights of
MyPoints.com.
In addition, as of June 30, 1999, there were outstanding warrants to
purchase 1,384,028 shares of preferred stock convertible into a like number of
shares of common stock, some of which may be exercised prior to this offering.
All of the shares issuable pursuant to these warrants are subject to lock-up
agreements. There were also outstanding warrants to purchase 150,000 shares of
common stock.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year including the holding period of any prior owner
except an affiliate would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1.0% of the number of shares of common stock then outstanding, which will
equal approximately 237,123 shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about MyPoints.com. Under Rule 144(k), a person who is not deemed to have been
an affiliate of MyPoints.com at any time
63
<PAGE> 65
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years including the holding period
of any prior owner except an affiliate, is entitled to sell those shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of or
consultant to MyPoints.com who purchased shares pursuant to a written
compensatory plan or contact may be entitled to rely on the resale provisions of
Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule
144 without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell their Rule 701 shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling their Rule 701 shares. However, all Rule 701 shares
are subject to lock-up agreements and will only become eligible for sale at the
earlier of the expiration of the 180-day lock-up agreements or the receipt of
the written consent of BancBoston Robertson Stephens more than 90 days after the
date of this prospectus.
After this offering, we intend to file a registration statement on Form S-8
registering shares of common stock subject to outstanding options or reserved
for future issuance under our employee benefit plans. As of June 30, 1999,
options to purchase a total of 3,878,597 shares were outstanding, 402,293 shares
were reserved for future issuance under our stock plans and 200,000 were
reserved for issuance under our employee stock purchase plan. Common stock
issued upon exercise of outstanding vested options or issued pursuant to our
employee stock purchase plan, other than common stock issued to our affiliates,
will be available for immediate resale in the open market following expiration
of the 180-day lock-up agreements.
Also beginning six months after the date of this offering, holders of
15,418,432 restricted shares and holders of warrants to purchase preferred stock
convertible into 1,384,028 shares of common stock will be entitled to
registration rights on these shares for sale in the public market. See
"Description of Capital Stock -- Registration Rights." Registration of these
shares under the Securities Act would result in their becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of the registration.
64
<PAGE> 66
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., Salomon Smith
Barney Inc. and Wit Capital Corporation, have each separately agreed with
MyPoints.com, subject to the terms and conditions of the underwriting agreement,
to purchase from MyPoints.com the number of shares of common stock set forth
opposite their names below. The underwriters are committed to purchase and pay
for these shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
BancBoston Robertson Stephens Inc...........................
Bear, Stearns & Co. Inc.....................................
Salomon Smith Barney Inc....................................
Wit Capital Corporation.....................................
--------
Total..................................................... 5,000,000
========
</TABLE>
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus and to
dealers at this price less a concession of not in excess of $ per share, of
which $ may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the representatives. No reduction of this type will change the
amount of proceeds to be received by us as set forth on the cover page of this
prospectus. The common stock is offered by the underwriters as stated in this
prospectus, subject to receipt and acceptance by them and subject to their right
to reject any order in whole or in part. BancBoston Robertson Stephens Inc.
expects to deliver the shares of common stock to purchasers on ,
1999.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Internet Distribution. The underwriters, at the request of MyPoints.com,
have reserved for sale at the initial public offering price up to 300,000 shares
of common stock to members and visitors to Wit Capital's services or web site
who express an interest in purchasing these shares. Of these shares, up to
200,000 shares will be reserved for sale to MyPoints members who express an
interest in purchasing shares in this offering. The sale of these shares will be
made by Wit Capital. Purchases of the reserved shares will be made through an
account at Wit Capital in accordance with Wit Capital's procedures for opening
an account and transacting in securities. Any of these reserved shares not
purchased by visitors to and users of Wit Capital's services or web site or
MyPoints members will be offered by the underwriters to the public on the same
terms as the other shares.
65
<PAGE> 67
Internet Prospectus. A prospectus in electronic format is being made
available on a web site maintained by Wit Capital. In addition, pursuant to an
e-Dealer Agreement, all dealers purchasing shares from Wit Capital in the
offering, the e-Dealers, similarly have agreed to make a prospectus in
electronic format available on the web sites that they maintain.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 750,000 additional shares of common stock at the same price per
share as we will receive for the 5,000,000 shares that the underwriters have
agreed to purchase from us. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of these additional shares that the number of
shares of common stock to be purchased by the underwriter shown in the table
above bears to the total number of the shares shown in the table above. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the 5,000,000 shares are being sold. We will be
obligated, under the terms of the option, to sell shares to the extent the
option is exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the shares of common stock
in this offering. If the option is exercised in full, the total public offering
price will be $63,250,000, the total underwriting discounts and commissions will
be $4,427,500 and the total proceeds to us will be $58,822,500. The expenses of
this offering are estimated at $1,000,000 and are payable entirely by
MyPoints.com.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and MyPoints.com against civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. All of our executive officers and directors, and a
substantial number of our stockholders, optionholders and warrantholders have
agreed, for a period of 180 days after the date of this prospectus, not to offer
to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant
any rights to, any shares of common stock, any options or warrants to purchase
any shares of common stock or any securities convertible into or exchangeable
for shares of common stock owned as of the date of this prospectus or
subsequently acquired directly by the holders or to which they have or
subsequently acquire the power of disposition, without the prior written consent
of BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens
Inc., in some instances together with MyPoints.com, may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the period of
180 days after the date of this prospectus.
Future Sales. In addition, we have agreed that during the period of 180
days after the date of this prospectus, we will not, without the prior written
consent of BancBoston Robertson Stephens Inc., issue, sell, contract to sell or
otherwise dispose of any shares of common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock, other than our sale
of shares in this offering, the issuance of shares of common stock upon the
exercise of outstanding options or warrants and the grant of options to purchase
shares of common stock under existing employee stock option or stock purchase
plans. See "Shares Eligible For Future Sale."
Reserved Shares. The underwriters intend to reserve for sale, at the
initial public offering price, a number of shares of common stock (not to exceed
5.0% of the total number of shares offered in this offering) for our customers,
partners and business associates. In addition, the underwriters may reserve, at
the initial public offering price, up to $3.0 million of common stock offered in
this offering for entities affiliated with Technology Crossover Ventures, all of
which are existing stockholders. As a result, the number of shares of common
stock available for sale to the general public in the offering
66
<PAGE> 68
will be reduced to the extent these individuals and entities purchase the
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
Share Purchase. In March 1999, Bayview Investors Ltd., an affiliate of
BancBoston Robertson Stephens Inc., purchased 50,000 shares of Series E
preferred stock at a price of $5.00 per share. If the purchase of these shares
is deemed by the National Association of Securities Dealers, Inc., to constitute
underwriting compensation in connection with this offering, these shares cannot
be sold, transferred, assigned, pledged or hypothecated by any person for a
period of one year after the effective date of this prospectus, except to
officers or partners of the underwriters or members of the selling group and
their officers or partners.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price for
the common stock sold in this offering will be determined through negotiations
between us and the representatives. Among the factors to be considered in these
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Exchange Act, certain persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of our common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is a bid for or the purchase of
the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid" is
an arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by that underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that transactions of these types may
be effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California will pass upon the validity of the common stock sold in this offering
for MyPoints.com. Fenwick & West LLP, Palo Alto, California will pass upon
certain legal matters in connection with this offering for the underwriters. As
of June 30, 1999, investment partnerships and a member of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially owned an aggregate of
138,610 shares of common stock of MyPoints.com. Mario M. Rosati, one of our
directors and our secretary, is a member of Wilson Sonsini Goodrich & Rosati. Of
these shares, 5,556 are issuable upon exercise of options held by Mr. Rosati,
which options have an exercise price of $0.10 per share. From our inception
through March 31, 1999, MyPoints.com, Inc. has accrued a total of $329,000 in
fees to Wilson Sonsini Goodrich & Rosati.
67
<PAGE> 69
EXPERTS
The consolidated financial statements of MyPoints.com, Inc. at December 31,
1997 and 1998, and for the period from November 7, 1996 (inception) to December
31, 1996, and for each of the two years in the period ended December 31, 1998
appearing in this prospectus and registration statement have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of Enhanced Response Technologies, Inc.
at December 31, 1997, and for the period from June 25, 1996 (inception) to
December 31, 1996 and the year ended December 31, 1997, appearing in this
prospectus and registration statement have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report thereon, appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
MyPoints.com has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act for the common stock
sold in this offering. This prospectus does not contain all of the information
set forth in the registration statement and the accompanying exhibits and
schedule. For further information about MyPoints.com and our common stock, we
refer you to the registration statement and the accompanying exhibits and
schedule. Statements contained in this prospectus regarding the contents of any
contract or any other document to which we refer are not necessarily complete.
In each instance, reference is made to the copy of the contract or document
filed as an exhibit to the registration statement, and each statement is
qualified in all respects by that reference. Copies of the registration
statement and the accompanying exhibits and schedule, may be inspected without
charge at the Securities and Exchange Commission's principal office in
Washington, D.C., or obtained at prescribed rates from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Securities and Exchange Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
68
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MYPOINTS.COM, INC. -- CONSOLIDATED FINANCIAL STATEMENTS
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
MYPOINTS.COM, INC. -- PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION
Overview.................................................... F-23
Pro Forma Consolidated Statement of Operations.............. F-24
Notes to Pro Forma Consolidated Statements of Operations.... F-25
ENHANCED RESPONSE TECHNOLOGIES, INC. COMBINED -- FINANCIAL
STATEMENTS
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-26
Combined Balance Sheets..................................... F-27
Combined Statements of Operations........................... F-28
Combined Statements of Shareholders' Deficiency............. F-29
Combined Statements of Cash Flows........................... F-30
Notes to Combined Financial Statements...................... F-31
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MyPoints.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
MyPoints.com, Inc. (formerly Intellipost Corporation) at December 31, 1997 and
1998, and the results of its operations and its cash flows for the period from
November 7, 1996 (inception) to December 31, 1996, and the years ended December
31, 1997 and 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
March 26, 1999, except for Note 13
as to which the date is March 30, 1999
San Francisco, California
F-2
<PAGE> 72
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999
------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 2,948 $ 5,089 $ 1,868
Accounts receivable, net............................. 116 586 844
Unbilled receivables, net............................ -- 413 439
Deposits and prepaid expenses........................ 52 220 539
------- -------- --------
Total current assets.............................. 3,116 6,308 3,690
Intangible assets...................................... -- 10,888 10,055
Property and equipment, net............................ 345 1,041 1,987
Other assets........................................... 13 69 95
------- -------- --------
Total assets...................................... $ 3,474 $ 18,306 $ 15,827
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 106 $ 1,702 $ 2,654
Bank overdraft....................................... 54 -- --
Notes payable, current portion....................... 50 143 129
Obligations under capital leases, current portion.... 6 91 91
Other current liabilities............................ -- 852 437
Deferred revenue..................................... -- 258 853
Software license liability, current portion.......... -- 842 842
Points redemption liability.......................... 519 2,727 3,840
------- -------- --------
Total current liabilities......................... 735 6,615 8,846
Notes payable, less current portion.................... 32 179 151
Long-term debt......................................... -- 240 240
Obligations under capital leases, less current
portion.............................................. 15 207 195
Software license liability, less current portion....... -- 1,782 1,782
------- -------- --------
782 9,023 11,214
------- -------- --------
Commitments and contingencies (Note 10)
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
15,500,000 shares authorized; 5,900,000,
10,388,315 and 12,388,315 shares issued and
outstanding at December 31, 1997 and 1998 and
March 31, 1999, respectively, aggregate
liquidation preference $14,552.................... 6 10 12 --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 2,500,000, 6,015,727 and 6,076,239
(unaudited) shares issued and outstanding at
December 31, 1997 and 1998 and March 31, 1999,
respectively...................................... 3 6 7 19
Additional paid-in capital........................... 6,027 22,851 49,871 49,871
Stock subscription receivable........................ -- (350) (9,950) (9,950)
Deferred compensation................................ (388) (2,012) (8,824) (8,824)
Accumulated deficit.................................. (2,956) (11,222) (26,503) (26,503)
------- -------- -------- --------
Total stockholders' equity........................ 2,692 9,283 $ 4,613 $ 4,613
------- -------- ======== ========
Total liabilities and stockholders' equity... $ 3,474 $ 18,306 $ 15,827
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 73
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
NOVEMBER 7, 1996 DECEMBER 31, MARCH 31,
(INCEPTION) TO ----------------- -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
-------------------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ -- $ 151 $ 1,286 $ 150 $ 1,275
Cost of revenues................ -- 78 1,121 137 878
------ ------- ------- ------- --------
Gross profit.................. -- 73 165 13 397
------ ------- ------- ------- --------
Operating expenses:
Technology costs.............. 16 560 1,520 204 968
Sales expenses................ -- 204 1,355 224 802
Marketing expenses............ 36 1,465 3,158 163 1,762
General and administrative
expenses................... 16 712 2,028 452 1,074
Amortization of intangible
assets..................... -- -- 275 -- 832
Stock-based compensation...... -- 77 158 63 449
------ ------- ------- ------- --------
Total operating expenses... 68 3,018 8,494 1,106 5,887
------ ------- ------- ------- --------
Operating loss.................. (68) (2,945) (8,329) (1,093) (5,490)
Interest income................. 1 64 87 28 9
Interest expense................ -- (7) (31) -- --
Other (expense) income.......... -- (1) 7 (5) --
------ ------- ------- ------- --------
Net loss................... (67) (2,889) (8,266) (1,070) (5,481)
Dividend related to beneficial
conversion feature of
preferred stock............... -- -- -- -- (9,800)
------ ------- ------- ------- --------
Net loss attributable to
common stockholders...... $ (67) $(2,889) $(8,266) $(1,070) $(15,281)
====== ======= ======= ======= ========
Net loss per share:
Basic and diluted............. $(0.08) $ (2.68) $ (4.72) $ (0.83) $ (3.00)
====== ======= ======= ======= ========
Weighted average
shares -- basic and
diluted.................... 891 1,076 1,750 1,287 5,097
====== ======= ======= ======= ========
Pro forma net loss per share
(unaudited):
Basic and diluted............. $ (0.98) $ (0.15) $ (0.35)
======= ======= ========
Weighted average
shares -- basic and
diluted.................... 8,463 7,283 15,485
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 7, 1996 (INCEPTION) TO
DECEMBER 31, 1996, AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
CONVERTIBLE COMMON STOCK ADDITIONAL STOCK
---------------- ---------------- PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
------ ------- ------ ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders........ -- $ -- 2,500 $ 3 $ -- $ (2) $ --
Issuance of Series A preferred stock for
cash, net of issuance costs of $21........ 3,000 3 1,475
Net loss....................................
------ ------- ----- ------- -------- ------- -------
BALANCE, DECEMBER 31, 1996.................. 3,000 3 2,500 3 1,475 (2) --
Issuance of Series B preferred stock for
cash, net of issuance costs of $4......... 500 1 496
Receipt of subscription receivable from
common stock.............................. 2
Issuance of Series C preferred stock for
cash, net of issuance costs of $7......... 2,400 2 3,591
Deferred compensation....................... 465 (388)
Net loss....................................
------ ------- ----- ------- -------- ------- -------
BALANCE, DECEMBER 31, 1997.................. 5,900 6 2,500 3 6,027 -- (388)
Issuance of Series C preferred stock for
cash, net of issuance costs of $6......... 527 784
Issuance of common stock upon exercise of
stock options............................. 96 9
Issuance of stock options to
non-employees for services................ 13
Issuance of warrants to non-employees....... 12
Issuance of Series D preferred stock for
cash, net of issuance costs of $12........ 2,748 3 5,646 (350)
Issuance of Series D preferred stock, net of
issuance costs of $28, pursuant to an
acquisition............................... 1,214 1 2,939
Issuance of common stock pursuant to an
acquisition............................... 3,600 3 5,375
Issuance of stock options pursuant to an
acquisition............................... 264
Deferred compensation....................... 1,782 (1,624)
Net loss....................................
Repurchase of common stock.................. (181)
------ ------- ----- ------- -------- ------- -------
BALANCE, DECEMBER 31, 1998.................. 10,389 10 6,015 6 22,851 (350) (2,012)
Receipt of subscription receivable from
Series D.................................. 350
Issuance of Series E preferred stock, net of
issuance costs of $50..................... 2,000 2 9,948 (9,950)
Beneficial conversion feature related to
issuance of preferred stock............... (9,800) 9,800
Dividend related to beneficial conversion
feature of preferred stock................ 9,800
Issuance of common stock upon exercise of
stock options............................. 61 1 11
Deferred compensation....................... 7,261 (6,812)
Net loss....................................
------ ------- ----- ------- -------- ------- -------
BALANCE, MARCH 31, 1999 (UNAUDITED)......... 12,389 $ 12 6,076 $ 7 $ 49,871 $(9,950) $(8,824)
====== ======= ===== ======= ======== ======= =======
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -------
<S> <C> <C>
Issuance of common stock to founders........ $ -- $ 1
Issuance of Series A preferred stock for
cash, net of issuance costs of $21........ 1,478
Net loss.................................... (67) (67)
-------- -------
BALANCE, DECEMBER 31, 1996.................. (67) 1,412
Issuance of Series B preferred stock for
cash, net of issuance costs of $4......... 497
Receipt of subscription receivable from
common stock.............................. 2
Issuance of Series C preferred stock for
cash, net of issuance costs of $7......... 3,593
Deferred compensation....................... 77
Net loss.................................... (2,889) (2,889)
-------- -------
BALANCE, DECEMBER 31, 1997.................. (2,956) 2,692
Issuance of Series C preferred stock for
cash, net of issuance costs of $6......... 784
Issuance of common stock upon exercise of
stock options............................. 9
Issuance of stock options to
non-employees for services................ 13
Issuance of warrants to non-employees....... 12
Issuance of Series D preferred stock for
cash, net of issuance costs of $12........ 5,299
Issuance of Series D preferred stock, net of
issuance costs of $28, pursuant to an
acquisition............................... 2,940
Issuance of common stock pursuant to an
acquisition............................... 5,378
Issuance of stock options pursuant to an
acquisition............................... 264
Deferred compensation....................... 158
Net loss.................................... (8,266) (8,266)
Repurchase of common stock.................. --
-------- -------
BALANCE, DECEMBER 31, 1998.................. (11,222) 9,283
Receipt of subscription receivable from
Series D.................................. 350
Issuance of Series E preferred stock, net of
issuance costs of $50..................... --
Beneficial conversion feature related to
issuance of preferred stock...............
Dividend related to beneficial conversion
feature of preferred stock................ (9,800)
Issuance of common stock upon exercise of
stock options............................. 12
Deferred compensation....................... 449
Net loss.................................... (5,481) (5,481)
-------- -------
BALANCE, MARCH 31, 1999 (UNAUDITED)......... $(26,503) $ 4,613
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 75
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
NOVEMBER 7, 1996 YEARS ENDED ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------ -------------------------
1996 1997 1998 1998 1999
---------------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (67) $(2,889) $(8,266) $(1,070) (5,481)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 1 70 555 32 964
Provision for bad debts...................... -- -- 60 26 185
Points redemption liability.................. -- 519 1,732 234 1,113
Barter revenues, net......................... -- (20) (59) -- 67
Issuance of stock options to non-employees
for services............................... -- -- 15 15
Stock-based compensation..................... -- 77 158 63 449
Changes in operating assets and liabilities:
Accounts receivable and unbilled
receivables............................. (1) (116) (639) (62) (469)
Deposits and prepaid expenses.............. (33) 2 (138) (9) (386)
Other assets............................... -- -- (28) (8) (26)
Accounts payable and accrued liabilities... 54 52 878 1 534
Deferred revenue........................... -- -- 258 -- 597
------ ------- ------- ------- -------
Net cash used in operating activities... (46) (2,305) (5,474) (778) (2,453)
------ ------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment............. (40) (353) (358) (159) (1,076)
Organization costs............................. (14) -- -- -- --
Proceeds received pursuant to acquisition...... -- -- 1,747 -- --
------ ------- ------- ------- -------
Net cash (used in) provided by investing
activities............................ (54) (353) 1,389 (159) (1,076)
------ ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net
of issuance costs............................ 1,478 4,090 6,084 653 --
Proceeds from issuance of common stock......... -- 2 -- -- --
Bank overdraft................................. -- 54 (54) (54) --
Borrowings under line of credit................ -- 100 400 -- --
Repayments of borrowings under line of
credit....................................... -- (18) (160) (9) (42)
Principal payments under capital lease
obligations.................................. -- -- (53) (1) (12)
Exercise of stock options...................... -- -- 9 -- 12
Receipt of subscription receivable............. -- -- -- -- 350
------ ------- ------- ------- -------
Net cash provided by financing
activities............................ 1,478 4,228 6,226 589 308
------ ------- ------- ------- -------
Net increase in cash and cash
equivalents........................... 1,378 1,570 2,141 (348) (3,221)
Cash and cash equivalents, beginning of period... -- 1,378 2,948 2,948 5,089
------ ------- ------- ------- -------
Cash and cash equivalents, end of period......... $1,378 $ 2,948 $ 5,089 $ 2,600 $ 1,868
====== ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....... $ -- $ 12 $ 34 $ 10 $ 11
====== ======= ======= ======= =======
Noncash transactions:
Equipment acquired under capital leases........ $ -- $ 22 $ 329 $ -- $ --
====== ======= ======= ======= =======
Exchange of advertising services............... $ -- $ 20 $ 128 $ -- $ --
====== ======= ======= ======= =======
Issuance of capital stock for business
acquisition.................................. $ -- $ -- $(8,582) $ -- $ --
====== ======= ======= ======= =======
Stock subscription receivable.................. $ -- $ -- $ 350 $ -- $ --
====== ======= ======= ======= =======
Stock options issued to non-employees.......... $ -- $ -- $ 277 -- --
====== ======= ======= ======= =======
Warrants issued to non-employeees.............. $ -- $ -- $ 12 $ 12 $ --
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 76
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
MyPoints.com, Inc. (formerly Intellipost Corporation) and its wholly owned
subsidiaries (together, the "Company") was founded in November 1996. The Company
offers advertisers the ability to target internet users enrolled as members of
its direct marketing and loyalty programs. The Company's programs award enrolled
members reward points for responding to advertisements. Rewards points may be
redeemed by members for promotional awards provided by the Company.
2. LIQUIDITY
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to establish
profitable operations or to obtain additional funding through public or private
equity financing, collaborative or other arrangements with corporate sources, or
other sources. Management is seeking to increase revenues through continued
marketing of its services while controlling costs to meet working capital needs;
however, additional financing will be required (see Note 12 -- Subsequent Events
for Series E financing commitments obtained in 1999).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements as of December 31, 1998 and for the year then
ended are consolidated and include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated in the consolidation process.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim consolidated financial statements as of March 31,
1998 and 1999 and the three months then ended together with the related notes
are unaudited but include all adjustments, consisting of only normal recurring
adjustments, which management considers necessary to present fairly, in all
material respects, the consolidated financial position, and consolidated results
of operations and cash flows for the three month periods ended March 31, 1998
and 1999. Results for the three months ended March 31, 1999 are not necessarily
indicative of results for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Such estimates include the levels of valuation allowances for doubtful accounts
receivable, deferred taxes, points redemption liability and the value of the
Company's capital stock. Actual results could differ from those estimates, and
such differences could be material.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over their respective estimated useful lives, which range
from three to five years. Maintenance and repairs
F-7
<PAGE> 77
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are charged to expense as incurred, and improvements and betterments are
capitalized. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is reflected in the consolidated statement of operations
for the period in which it is realized.
INTANGIBLE ASSETS
Intangible assets resulting from the acquisition of Enhanced Response
Technologies, Inc. ("ERT") and MotivationNet LLC ("MNet") were estimated by
management to be primarily associated with the acquired trademark and trade
name, customer base, membership base, technology license agreement and other
intangible assets. Intangible assets are amortized on a straight-line basis over
the estimated periods of benefit which, because of the rapid technological
changes occurring in the internet industry and the intense competition for
qualified internet professionals, range from six to 60 months (see Note
4 -- Acquisition).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets and liabilities are determined based on
temporary differences between the financial statement and tax bases of assets
and liabilities and net operating loss and credit carryforwards using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. A provision for income tax
expense is recognized for income taxes payable for the current period, plus the
net changes in deferred tax amounts.
POINTS REDEMPTION LIABILITY
Points redemption liability represents the estimated costs associated with
the Company's obligation to redeem outstanding points, less an allowance for
points expected to expire prior to redemption, which may be converted by
enrolled members into various third party gift certificates, airline frequent
flyer miles, coupons and other items. Points are awarded to members when they
receive and read direct marketing offers delivered by the Company, or purchase
goods from the advertisers. The Company is liable for purchasing the rewards
provided to members. The cost of points is determined by the weighted average
cost of gift and awards that may be redeemed. Under the current program, points
are valid for two or more years from the date they are awarded to a member and
may be redeemed at any time prior to expiration. The Company bases its estimate
of points that will not be redeemed on an analysis of historical redemption
activity and individual member accounts. This analysis is updated quarterly. At
December 31, 1997, 1998 and March 31, 1999, the allowance for unredeemed points
was $0, $563,000 and $839,000 (unaudited), respectively. As of March 31, 1999
the unaudited gross points redemption liability is $4,679,000.
Membership development costs include the cost of points awarded to members
upon initial enrollment and subsequently for responding to surveys conducted by
the Company. Costs are charged to marketing expense as incurred, and amounted to
$442,000, $764,000 and $345,000 (unaudited) for the periods ended December 31,
1997, 1998 and March 31, 1999.
REVENUE RECOGNITION
The Company earns revenues from corporate advertisers by charging fees for
sending targeted email to its members. Under the terms of advertising contracts,
the Company earns revenues generally based on three components: (1) transmission
of email advertisements to enrolled members,
F-8
<PAGE> 78
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) receipt of qualified responses to email sent and (3) actual purchases of
goods by members over the internet. It is the Company's policy to recognize
revenues when email are transmitted to members, when responses are received and
when the Company is notified of purchases. Each of these activities are
discrete, independent activities, which generally are specified in the
advertising sales agreement entered into with the customer. As the earning
activities take place, activity measurement data e.g., number of e-mails sent,
and number of responses received is accumulated and the related revenues and
unbilled receivables are recorded. Thus, unbilled receivables are recorded as
the earning activities for a campaign are being performed.
Under certain advertising contracts entered into by the Company's
subsidiary prior to acquisition, the Company sold points to advertisers for use
in the advertisers' web-based campaigns. The Company is responsible for
redeeming points upon request by the recipients of points. Revenues under these
contracts are deferred until the time points are redeemed and an award is
provided by the Company. The Company expects that sales of points will likely
represent a decreasing percentage of its business in the future but expects to
continue to participate in the sale of points business.
On December 23, 1998, the Company entered into a license agreement to grant
a third party a limited exclusivity license to use certain software technology
developed by the Company. Under the agreement the Company is required to perform
significant customization of the software. If the Company has not delivered the
software by the stipulated delivery date, or the Company is unable to provide
corrections for errors uncovered during the testing phase, then the third party
may be entitled to recover a portion of the contract price.
The Company accounts for the entire agreement under Accounting Research
Bulletin No. 45, Long Term Construction-Type Contracts, using the
completed-contract method. Income is recognized upon the third party's
acceptance of the software, and all costs and related revenue are reported as
deferred items in the balance sheet until that time. For the year ended December
31, 1998 and the three months ended March 31, 1999 (unaudited), no revenues have
been recognized by the Company under this agreement.
BARTER TRANSACTIONS
The Company trades advertisements on its web sites for advertisements on
the web sites of other companies. Barter revenues and expenses are recorded at
the fair market value of the services provided or received, whichever is more
determinable in the circumstances. Revenues from barter transactions are
recognized as income when the Company delivers advertisements for other
companies on its web site. Barter expense is recognized when the Company's
advertisements are delivered on the web sites of other companies, which is
typically in the same period as that when the barter revenues are recognized.
Advertising barter revenues were approximately $0, $20,000 and $128,000 for the
period ended December 31, 1996 and the years ended December 31, 1997 and 1998,
respectively. There were no barter revenues for the period ended March 31, 1999.
The Company expects that barter revenues will represent a smaller percentage of
its revenues in the future.
TECHNOLOGY COSTS
Product development costs and costs of enhancing existing products are
charged to technology costs as incurred. Software development costs are required
to be capitalized beginning when a product's technological feasibility has been
established by completion of a working model of the product, and ending when the
product is available for general release to customers. To date, completion of a
working model of the Company's products and general release have substantially
F-9
<PAGE> 79
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
coincided. As a result, the Company has not capitalized any software development
costs since these costs have not been significant.
BUSINESS RISK AND CONCENTRATION OF CREDIT RISK
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by companies in
new and rapidly evolving markets for internet products and services. These risks
include the failure to develop and extend the Company's online service brands,
the rejection of the Company's services by web consumers and/or advertisers and
the inability of the Company to maintain and increase the levels of traffic on
its online services, as well as other risks and uncertainties. Failure to
address these risks successfully may have a material adverse impact on the
Company's operations and financial position.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments,
including money market mutual fund accounts, and accounts receivable. The
Company deposits its temporary cash investments with two financial institutions
and these deposits exceed insured amounts. The Company does not require
collateral for accounts receivable, but does evaluate customer creditworthiness
and establish allowances as necessary based on management estimates of
collectibility.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, compensation expense is based on the difference, if any, on the date of
the grant, between the estimated fair value of the Company's stock and the
exercise price of options to purchase that stock.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic net income per share is
computed by dividing the net income available to common stockholders for the
period by the weighted average number of vested common shares outstanding during
the period. Diluted net income per share is computed by dividing the net income
for the period by the weighted average number of vested common and common
equivalent shares outstanding during the period. However, as the Company
generated net losses in all periods presented, common equivalent shares,
composed of incremental common shares issuable upon the exercise of stock
options and warrants and upon conversion of Series A, Series B, Series C and
Series D convertible preferred stock, are not included in diluted net loss per
share because such shares are anti-dilutive.
F-10
<PAGE> 80
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
NOVEMBER 7, 1996 YEARS ENDED THREE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- -------------------------
1996 1997 1998 1998 1999
---------------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss........................... $ (67) $(2,889) $(8,266) $(1,070) $ (5,481)
------ ------- ------- ------- --------
Net loss available to common
stockholders.................... $ (67) $(2,889) $(8,266) $(1,070) $(15,281)
====== ======= ======= ======= ========
Denominator:
Weighted average shares............ 2,500 2,500 2,856 2,500 6,039
Weighted average unvested common
shares subject to repurchase
agreements...................... (1,609) (1,424) (1,106) (1,213) (942)
------ ------- ------- ------- --------
Denominator for basic
calculation..................... 891 1,076 1,750 1,287 5,097
Weighted average effect of dilutive
securities:
Net effect of dilutive stock
options....................... -- -- -- -- --
Net effect of dilutive stock
warrants...................... -- -- -- -- --
------ ------- ------- ------- --------
Denominator for diluted
calculation..................... 891 1,076 1,750 1,287 5,097
====== ======= ======= ======= ========
Net loss per share:
Basic.............................. $(0.08) $ (2.68) $ (4.72) $ (0.83) $ (3.00)
====== ======= ======= ======= ========
Diluted............................ $(0.08) $ (2.68) $ (4.72) $ (0.83) $ (3.00)
====== ======= ======= ======= ========
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1998 and the
three months ended March 31, 1999 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, Series B, Series C and Series D preferred
stock into shares of the Company's common stock effective upon the closing of
the Company's initial public offering (see Note 12 -- Subsequent Events) as if
such conversion occurred on January 1, 1998, or at the date of original
issuance, if later. The resulting pro forma adjustment results in an increase in
the weighted average shares used to compute basic and diluted net loss per share
of 6,713,000 shares for the year ended December 31, 1998. Pro forma common
equivalent shares, composed of unvested restricted common stock and incremental
common shares issuable upon the exercise of stock options and warrants, are not
included in pro forma diluted net loss per share because they would be
anti-dilutive.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of the Company's initial public offering, the
outstanding shares of Series A, Series B, Series C and Series D preferred stock
will automatically convert into 3,000,000, 500,000, 2,926,667 and 3,961,649
shares of common stock, respectively. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro forma
consolidated balance sheet at March 31, 1999 (see Note 13 -- Subsequent Events).
F-11
<PAGE> 81
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by SFAS No. 131 are effective for the year
ended December 31, 1998. The Company has determined that it does not have any
separately reportable business segments as of December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Software for Internal Use, which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company does not expect
that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.
4. ACQUISITION
Effective November 30, 1998, the Company agreed to acquire all the
outstanding shares of MotivationNet, LLC, and Enhanced Response Technologies,
Inc., two companies operating as affiliates under common management. The
acquisition has been accounted for using the purchase method of accounting and
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
relative fair values on the acquisition date. The fair value of intangible
assets was determined using a combination of the income approach and the cost
approach.
The total purchase price of approximately $13.6 million consisted of
3,600,481 shares of the Company's common stock with an estimated fair value of
approximately $5.4 million, 1,213,592 shares of the Company's Series D preferred
stock with an estimated fair value of approximately $3.0 million, 189,115 vested
and 213,703 unvested shares of the Company's stock options, the vested options
having an estimated fair value of approximately $264,000, $400,000 in cash and
$4.5 million of assumed liabilities. The fair value of the common and preferred
stock was estimated by referring to (i) market capitalization ratios of
companies with comparable operations and (ii) the most recent independent sales
of the Company's stock. All vested common stock options of the acquired
companies were exchanged for 189,115 vested common stock options of the Company
and have been included in the purchase price based on their fair value. The fair
value of the vested common stock options was estimated using the Black-Scholes
model with the following weighted average assumptions, deemed fair value of the
underlying common stock of $1.49, risk-free interest rate of 4.59%, expected
life of 5 years, expected dividend rate of 0%, and volatility rate of 109%. The
213,703 unvested shares of common stock options were included in the Company's
1999 Stock Plan and accounted for in accordance with APB No. 25 and related
interpretations. Of the total purchase price, $2.4 million was allocated to
tangible assets and $11.2 million to intangible assets, including a
F-12
<PAGE> 82
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
technology license agreement of $7.3 million, purchased trademark and trade name
of $1.8 million, membership base of $0.8 million, customer base of $0.5 million
and workforce of $0.8 million. The intangible assets will be amortized over
their estimated useful lives of six to 60 months.
Among the liabilities assumed in the acquisition is an obligation under a
software license agreement. According to the terms of the agreement, the Company
is to pay the licensor a royalty, payable in monthly installments of the greater
of 3.0% of monthly revenues, or $35,000, up to a maximum cumulative royalty of
$4.2 million. The Company has recorded the obligation at its estimated fair
value as determined by estimated future cash payments, discounted at a market
interest rate. The Company has an option to purchase the licensed software at
the conclusion of the ten-year license term. Under the agreement, upon the
completion of an initial public offering of the Company's stock, the Company is
obligated to purchase the rights to the software. The purchase price in this
event would be the then existing present value of future required minimum
payments.
Certain portions of the acquisition were structured as a tax-free exchange
of stock. Therefore, the differences between the recognized fair values of
certain acquired assets, including tangible assets, and their historical tax
bases are not deductible for tax purposes.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1997 and
1998, as if the acquisition had occurred on January 1, 1997, after giving effect
to purchase accounting adjustments. These pro forma results have been prepared
for comparative purposes only, do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on January 1,
1997, and may not be indicative of future operating results (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues....................................... $ 151 $ 1,316
Operating loss................................. (6,899) (17,824)
Net loss....................................... (6,968) (17,968)
Net loss per share:
Basic and diluted............................ $ (1.49) $ (3.56)
Weighted average shares - basic and
diluted................................... 4,677 5,044
</TABLE>
5. RELATED PARTY TRANSACTIONS
A former member of the Company's Board of Directors founded Targeted
Marketing Systems, Inc., a service provider that the Company engaged for
creative services to assist in the development of the Company's marketing
program and web site. Total payments made to Targeted Marketing Systems amounted
to $223,000 in 1997 and none in 1996 or 1998. As of December 31, 1997 and 1998
and March 31, 1999, there were no amounts due to Targeted Marketing Systems.
One of the Company's directors is also a member of the law firm that has
served as the Company's corporate counsel since its inception. From inception
through December 31, 1998 and March 31, 1999 the Company had accrued a total of
$227,737 and $328,737 (unaudited), respectively, in fees to the law firm.
The Company has entered into a two-year services agreement with Direct
Marketing Technology, Inc., a wholly owned subsidiary of Experian, a stockholder
of the Company, in which Direct Marketing Technology agreed to provide
demographic data and other market research services
F-13
<PAGE> 83
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for the Company. Through December 31, 1998, no expenses have been incurred under
this agreement.
During the year ended December 31, 1998, the Company repurchased 181,420
shares of common stock at $0.001 per share from one of its founders as a result
of his resignation.
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- -----------
1997 1998 1999
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software............ $359 $1,493 $2,581
Furniture and fixtures..................... 24 152 146
Leasehold improvements..................... 15 22 17
---- ------ ------
398 1,667 2,744
Accumulated depreciation................... (53) (626) (757)
---- ------ ------
$345 $1,041 $1,987
==== ====== ======
</TABLE>
Depreciation expense amounted to $632, $49,000, $265,000 and $130,000
(unaudited) for the period ended December 31, 1996 the years ended December 31,
1997 and 1998 and three months ended March 31, 1999, respectively.
7. NOTES PAYABLE
On January 27, 1997, the Company entered into a promissory note with a bank
to borrow $100,000 at an interest rate of prime plus 1.5% (initial rate of
9.75%). The Company was required to make monthly payments of accrued interest
beginning in February 1997 and principal payments in 24 equal installments
beginning on July 31, 1997. The loan agreement contains certain negative
covenants including financial covenants related to minimum liquidity coverage
ratios. The loan is collateralized by all of the assets and property of the
Company.
On December 19, 1997, the Company entered into a promissory note with a
bank to borrow $400,000 at an interest rate of prime plus 0.5% (initial rate of
8.50%). The Company was required to make 36 equal payments from July 31, 1998
through June 30, 2001. The agreement contains certain negative covenants
including financial covenants related to a minimum liquidity coverage ratio and
monthly minimum points redemption liability. During 1998, the Company was in
default on the monthly minimum points redemption liability balance and the
liquidity covenant contained in the agreement. The Company obtained waivers of
the earlier violations and was in compliance with these covenants as of March
31, 1999 (unaudited).
Annual maturities of notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999............................................. $143
2000............................................. 115
2001............................................. 64
----
$322
====
</TABLE>
F-14
<PAGE> 84
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL STRUCTURE
The Company is authorized to issue 40,000,000 shares of $0.001 par value
common stock and 15,500,000 shares of $0.001 par value preferred stock. The
Board of Directors has the authority to issue the undesignated preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
PREFERRED STOCK
The Company is authorized to issue 15,500,000 shares of preferred stock of
which 4,000,000 are designated as Series A preferred stock, 1,000,000 are
designated as Series B preferred stock, 3,000,000 are designated as Series C
preferred stock, 5,500,000 are designated as Series D preferred stock, and
2,000,000 are designated as Series E preferred stock.
DIVIDENDS
The holders of Series E preferred stock are entitled to receive dividends
in preference to any dividend on common stock or other series of preferred
stock, at an annual rate of 6.0% of the original issue price, whenever funds are
legally available and when and if declared by the Company's Board of Directors.
The holders of all other series of preferred stock are entitled to receive
annual dividends, in preference to any dividends issued on common stock, at a
rate of 6.0% or 7.0% of the original issuance price, whenever funds are legally
available and when and if declared by the Company's Board of Directors. The
right to dividends is not cumulative except in the event of liquidation. No
dividends have been declared or paid to date.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company
either voluntary or involuntary, the holders of Series E preferred stock will be
entitled to receive, in preference to the holders of common stock or other
series of preferred stock, an amount equal to the original issue price of the
Series E preferred stock plus any declared and unpaid dividends. Thereafter, the
holders of the other series of preferred stock will be entitled to receive, in
preference to the holders of common stock, an amount equal to the original issue
price of their respective series of preferred stock, plus any declared and
unpaid dividends. Holders of Series D preferred stock are entitled to receive a
cumulative dividend, only in the event of liquidation, accrued at an annual rate
of 7.0%. Series A, B, C and E preferred stock are entitled to receive a
cumulative dividend, only in the event of liquidation, accrued at an annual rate
of 6.0%. Thereafter, holders of common stock are entitled to receive on a
pro-rata basis assets and funds of the Company in proportion to the number of
shares held by them.
CONVERSION RIGHTS
Each share of preferred stock is convertible at the option of the holder,
at any time, into shares of common stock. The number of shares of common stock
into which each share of preferred stock may be converted is equal to the
original purchase price of the preferred stock divided by the conversion price
of $0.50, $1.00, $1.50, $2.06 and $5.00 for Series A, Series B, Series C, Series
D and Series E preferred stock, respectively, subject to certain adjustments as
provided in the Company's Restated Certificate of Incorporation. Preferred stock
will automatically convert into common stock, at the then applicable conversion
rate, (i) in the event of the closing of an underwritten public offering of the
Company's common stock pursuant to the Securities Act of 1933 where the public
offering price is $5.00 per share or more and the proceeds are at least
$20,000,000,
F-15
<PAGE> 85
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
or (ii) upon the election of the holders of at least a majority of the
outstanding shares of Series A, Series B, Series C, and Series D preferred
stock, or (iii) upon the election of the holders of at least 75% of the
outstanding shares of Series E preferred stock. The preferred stock also has
provisions that protect the holders of these securities from dilution caused by
capital reorganizations, stock splits or other similar capital changes.
VOTING RIGHTS
The holders of preferred stock are entitled to vote on all matters and are
entitled to a number of votes equal to the number of shares of common stock into
which their preferred stock could be converted pursuant to the conversion
rights. Except as otherwise required by law, the holders of preferred stock have
voting rights equal to those of the common stock holders. The holders of the
preferred stock are entitled to directly elect two of the Company's directors.
This right terminates upon the closing of the Company's initial public offering.
WARRANTS
During the year ended December 31, 1998, the Company issued a warrant to
purchase 10,000 shares of Series C preferred stock with an exercise price of
$1.50 to an equipment leasing company in connection with an equipment lease. The
warrant is exercisable until the later of ten years from its issuance date or
five years from the initial public offering of the Company's common stock. The
fair value of the warrant of $9,500 was estimated using the Black-Scholes model
with the following weighted average assumptions, risk-free interest rate of
4.59%, expected life of 5 years, expected dividend rate of 0%, and volatility
rate of 109%. The estimated fair value of the warrant is accounted for as a
deferred asset and is amortized over the lease term of 42 months. In connection
with the issuance of Series D preferred stock, the Company issued warrants to
the holders of Series D preferred stock to purchase 1,374,028 additional shares
of Series D preferred stock with an exercise price of $2.06 per share. The
warrants became exercisable three months from the closing date of the Stock
Purchase Warrant Agreement and are exercisable for a period up to five years.
The Company determined that the fair value of the warrants approximated $1.5
million on the date of grant. The fair value of the warrants was estimated using
the Black-Scholes model with the following weighted average assumptions,
risk-free interest rate of 4.59%, expected life of 5 years, expected dividend
rate of 0%, and volatility rate of 109%. The estimated fair value of the
warrants of $1.5 million is included in additional paid-in capital.
COMMON STOCK OPTIONS
On November 7, 1996, the Company adopted the 1996 Stock Plan and on
November 13, 1998, the Company adopted the 1999 Stock Plan (together, the
"Plans"). The Plans provide for the grant of incentive stock options and
nonstatutory stock options to employees and consultants of the Company.
The Company has reserved 3,902,795 shares of common stock for issuance
under the Plans as of March 31, 1999. The Company has granted incentive stock
options with vesting equal to either 25.0% at the first anniversary date and
1/48th per month thereafter or 25.0% immediately with the remainder vesting
1/48th per month thereafter. These options are exercisable for a period of no
more than ten years from the date of grant.
The Company accounts for the Plans in accordance with APB No. 25 and
related Interpretations. In connection with certain stock option grants during
the years ended December 31,
F-16
<PAGE> 86
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 and 1998 and the three months ended March 31, 1999, the Company recognized
unearned compensation that is being amortized over the four-year vesting periods
of the related options. Amortization expense recognized during the years ended
December 31, 1997 and 1998 totaled $77,000 and $158,000, respectively and
$311,000 (unaudited) during the three months ended March 31, 1999.
Following is a summary of incentive stock option activity for the years
ended December 31, 1997, 1998, and three months ended March 31, 1999. There was
no activity in the Plans prior to January 1, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
SHARES PRICE
----------- --------
<S> <C> <C>
Outstanding as of January 1, 1997......................... -- --
Granted................................................. 687,166 $0.074
Exercised............................................... -- --
Canceled................................................ (2,500) 0.100
---------
Outstanding as of December 31, 1997....................... 684,666 0.074
Granted................................................. 1,079,562 0.210
Exercised............................................... (96,174) 0.063
Canceled................................................ (310,696) 0.114
---------
Outstanding as of December 31, 1998....................... 1,357,358 0.173
Granted................................................. 1,359,437 1.457
Exercised............................................... (60,512) 0.186
Canceled................................................ (40,102) 0.907
---------
Outstanding as of March 31, 1999 (unaudited).............. 2,616,181 0.806
---------
Options vested as of March 31, 1999 (unaudited)........... 445,418 $0.381
=========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
--------------------------------------- ---------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
------------------------ ----------- ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$0.05 - $0.15.................. 577,166 8.24 $0.084 214,214 $0.081
$0.20 - $0.26.................. 780,192 9.11 0.240 40,371 0.219
--------- -------
1,357,358 8.74 $0.174 254,585 $0.103
========= =======
</TABLE>
F-17
<PAGE> 87
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE AT
AT MARCH 31, 1999 (UNAUDITED) MARCH 31, 1999 (UNAUDITED)
--------------------------------------- ---------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
- ------------------------ ----------- ------------ -------- --------- ----------
<S> <C> <C> <C> <C> <C>
$0.05 - $0.15............ 510,062 7.96 $0.082 260,109 $0.079
$0.20 - $0.26............ 752,682 8.48 0.231 92,395 0.191
$1.00 - $5.00............ 1,353,437 9.54 1.294 92,914 1.328
--------- -------
2,616,181 9.15 $0.821 445,418 $0.381
========= =======
</TABLE>
The Company has determined that the fair value of its common stock exceeded
the option exercise price at the date options were granted. The Company
recognized this difference as deferred compensation and is amortizing these
amounts over the vesting period.
The following disclosures are provided in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation. The weighted average fair values of
options granted in 1997 and 1998 were $0.53 and $2.27, respectively.
Had compensation cost for the Plans been determined based on fair value at
the grant date consistent with the method prescribed by SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts below (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
NOVEMBER 7, 1996 DECEMBER 31,
(INCEPTION) TO ------------------
DECEMBER 31, 1996 1997 1998
----------------- ------- -------
<S> <C> <C> <C>
Net loss as reported...................... $(67) $(2,889) $(8,266)
Net loss pro forma........................ -- (2,890) (8,291)
</TABLE>
The fair value of employee stock option grants has been estimated on the
date of grant using the minimum value model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 1998
---- ------- -------
<S> <C> <C> <C>
Risk-free interest rate............................... -- 5.72% 4.59%
Expected life......................................... -- 5 years 5 years
Dividends............................................. -- -- --
</TABLE>
OTHER
A portion of the common stock issued to the Company's founders at inception
is subject to restricted stock purchase agreements which provide that one-third
of the Company's repurchase right lapses on the vesting start date and 1/48th of
the Company's remaining repurchase right lapses at the end of the each month
thereafter. Upon a merger or sale of the Company, one-half of the remaining
shares subject to the Company's right of repurchase will become vested.
9. 401(K) SAVINGS PLAN
In February 1997, the Company established a 401(k) Savings Plan (the
"401(k) Plan") that covers substantially all employees. Under the 401(k) Plan,
employees are permitted to contribute a portion of gross compensation not to
exceed standard limitations provided by the Internal Revenue
F-18
<PAGE> 88
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Service. Discretionary contributions may be made by the Company; however, no
contributions have been made to date.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and equipment under capital and
noncancelable operating leases with various expiration dates through the year
2001. Rent expense amounted to $5,000, $57,000, $180,000 and 109,000 (unaudited)
for the period ended December 31, 1996, the years ended December 31, 1997 and
1998, and the three months ended March 31, 1999, respectively.
Future minimum lease payments under noncancelable capital leases and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1999........................................................ $ 113 $146
2000........................................................ 125 --
2001........................................................ 98 --
------- ----
Total minimum lease payments................................ 336 $146
====
Less amount representing interest........................... 38
-------
Present value of capital lease obligations.................. 298
Less current portion........................................ 91
-------
Long-term portion........................................... $ 207
=======
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
------------- ------- ---------
<S> <C> <C>
1999........................................................ $ 113 $105
2000........................................................ 125
2001........................................................ 80
------- ----
Total minimum lease payments................................ 318 $105
====
Less amount representing interest........................... 32
Present value of capital lease obligations.................. 286
Less current portion........................................ 91
-------
Long-term portion........................................... $ 195
=======
</TABLE>
LEGAL
In the normal course of business, the Company is at times subject to
pending and threatened legal actions and proceedings. After reviewing pending
and threatened actions and proceedings with counsel, management believes that
the outcome of such actions or proceedings is not expected to have a material
adverse effect on the financial position or results of operations of the
Company.
OTHER
The Company is obligated to pay commissions to certain third parties for
the referral of members to the Company. Commissions are determined based on
revenues derived from these
F-19
<PAGE> 89
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
members over the first two years of membership. For the year ended December 31,
1998 the referral commissions amounted to $26,000. None were incurred during the
quarter ended March 31, 1999.
11. INCOME TAXES
As of December 31, 1997, December 31, 1998 and March 31, 1999 (unaudited),
the Company had net operating loss carryforwards of approximately $1,360,000,
$7,810,000 and $7,810,000 for federal income tax purposes, and $1,380,000,
$7,820,000 and $7,820,000 for state income tax purposes, respectively. The
federal and state net operating loss carryforwards begin to expire in the years
2011 and 2004, respectively. As of March 31, 1999, the Company had research and
experimentation credit carryforwards of approximately $26,000 for federal and
$11,000 for state income taxes purposes. The federal and state research and
experimentation credit carryforwards expire in the year 2001.
The Company's ability to utilize its net operating loss carryforwards to
offset any future taxable income may be restricted as a result of equity
transactions that give rise to changes in ownership as defined in the Tax Reform
Act of 1986. These restrictions may limit, on an annual basis, the Company's
future use of its net operating loss carryforwards and research and
experimentation credit carryforwards.
A reconciliation of the provision for income taxes to the federal statutory
rate of 34% is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax at statutory rate....................... 34% 34% 34% 34% 34%
State taxes, net of federal benefit......... 6% 6% 6% 6% 6%
Permanent differences....................... -- (2)% (1)% (1)% (1)%
Valuation allowance......................... (40)% (38)% (39)% (39)% (39)%
----- ----- ----- ----- -----
-- -- -- -- --
===== ===== ===== ===== =====
</TABLE>
The estimated tax effects of significant temporary differences and
carryforwards that give rise to deferred income tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------ -----------
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Non-deducted start-up costs..................... $ 369 $ 303 $ 216
Net operating loss carryforwards................ 545 3,177 3,177
Non-deducted research and experimental costs.... 0 1,328 1,180
Points redemption liability..................... 259 1,185 3,086
Accrued liabilities and other................... 53 106 157
Non-deducted intangible assets.................. -- (834) (542)
------- ------- -------
Gross deferred tax assets....................... 1,226 5,265 7,274
Valuation allowance............................. (1,226) (5,265) (7,274)
------- ------- -------
Net deferred tax assets......................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The Company has recorded a valuation allowance against gross deferred tax
assets due to uncertainties surrounding their realization.
F-20
<PAGE> 90
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. POINTS REDEMPTION LIABILITY
Following is a summary of points redemption liability activity for the
years ended December 31, 1997 and 1998, and the three months ended March 31,
1999. There was no activity prior to January 1, 1997:
<TABLE>
<S> <C>
Outstanding as of January 1, 1997........................... $ --
Accrual for new points redemption liability................. 519
Allowance for unredeemed points............................. --
Points redemption........................................... --
------
Outstanding as of December 31, 1997......................... 519
Accrual for new points redemption liability................. 2,825
Allowance for unredeemed points............................. (563)
Points redemption........................................... (54)
------
Outstanding as of December 31, 1998......................... 2,727
Accrual for new points redemption liability................. 2,006
Allowance for unredeemed points............................. (839)
Points redemption........................................... (54)
------
Outstanding as of March 31, 1999 (unaudited)................ $3,840
======
</TABLE>
13. SUBSEQUENT EVENTS
In January 1999, the Company's Board of Directors authorized the Company to
file a registration statement with the Securities and Exchange Commission for
the purpose of an initial public offering of the Company's common stock. Upon
the completion of this offering, if requirements set forth in its Certificate of
Incorporation are met, the Company's preferred stock will be converted into
12,388,315 shares of common stock, and all outstanding shares of preferred stock
will be cancelled and retired. Upon the conversion of the preferred stock, all
rights to accrued and unpaid dividends will be waived.
The Company has received two claims of alleged infringement. In October
1998, the Company was notified by an online incentives company that it believes
the Company was infringing its patent rights. The Company has entered into a
settlement agreement with the third party, which provides for an upfront payment
of approximately $65,000 plus ongoing royalties based on a percentage of the
value of points issued to members. The second claim was made in May 1999. The
Company is currently in the process of negotiating the settlement of this claim.
If the claim cannot be resolved through a license or similar arrangement, the
Company could become party to litigation.
During March 1999, the Company entered into a binding commitment to sell,
and the investors entered into a binding commitment to purchase, 2,000,000
shares of Series E preferred stock at $5.00 per share for gross proceeds of
$10.0 million. The difference between the offering price and the deemed fair
value of the common stock on the date of the transaction resulted in a
beneficial conversion feature in the amount of $9.8 million. The beneficial
conversion feature is reflected as a preferred dividend in the statement of
operations in the first quarter of fiscal year 1999. The holders of Series E
preferred stock have rights and preferences substantially the same as those of
the Series D preferred stock.
F-21
<PAGE> 91
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Subsequent to December 31, 1998, the Company issued to employees options to
purchase 3,318,986 shares of the Company's common stock at an exercise price
ranging from $1.00 to $8.00 per share.
In March 1999, the Company adopted an employee stock purchase plan
effective on the date of the prospectus for the Company's initial public
offering. A total of 200,000 shares is reserved for issuance under the plan.
In April 1999, the Company adopted the senior management incentive plan.
The terms of this plan apply to discretionary option grants to executive
officers under the 1999 Stock Plan. In 1999, options to purchase a total of
690,000 shares with exercise prices of $8.00 per share were granted under this
senior management incentive plan.
F-22
<PAGE> 92
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
Effective November 30, 1998, the Company agreed to acquire all the
outstanding shares of MotivationNet, LLC, and Enhanced Response Technologies,
Inc. (the acquired companies). The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the acquisition date. The fair
value of intangible assets was determined using the income approach and the cost
approach.
The total purchase price of approximately $13.6 million consisted of
3,600,481 shares of the Company's common stock with an estimated fair value of
approximately $5.4 million, 1,213,592 shares of the Company's Series D preferred
stock with an estimated fair value of approximately $3.0 million, 189,115 vested
and 213,703 unvested shares of the Company's stock options, the vested options
having an estimated fair value of approximately $264,000, $400,000 in cash and
$4.5 million of assumed liabilities. The fair value of the common and preferred
stock was estimated using a market capitalization approach. All vested common
stock options of the acquired companies were exchanged for 189,115 vested common
stock options of the Company and have been included in the purchase price based
on their fair value. The fair value of the vested common stock options was
estimated using the Black-Scholes model with the following weighted average
assumptions, risk-free interest rate of 4.59%, expected life of 5 years,
expected dividend rate of 0%, and volatility rate of 109%. Of the total purchase
price, $2.4 million was allocated to tangible assets and $11.2 million to
intangible assets, including a technology license agreement of $7.3 million,
purchased trademark and trade name of $1.8 million, membership base of $0.8
million, customer base of $0.5 million and workforce of $0.8 million. The
intangible assets will be amortized over their estimated useful lives of six to
60 months.
The acquisition of Enhanced Response Technologies, Inc. has been structured
as a tax free exchange of stock; therefore, the differences between the
recognized fair values of the acquired assets, including tangible assets, and
their historical tax bases are not deductible for tax purposes. The acquisition
of MotivationNet, LLC, was made under an agreement to purchase the outstanding
units of the limited liability corporation.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the year ended December 31, 1998, as if
the acquisition had occurred on January 1, 1998, after giving effect to purchase
accounting adjustments. These pro forma results have been prepared for
comparative purposes only, do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on January 1,
1998, and may not be indicative of future operating results.
F-23
<PAGE> 93
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------- THREE MONTHS
ACQUIRED PRO ENDED
MYPOINTS.COM, INC. COMPANIES ADJUSTMENTS FORMA MARCH 31, 1999
------------------ --------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
Revenues................... $ 1,234 $ 82 $ -- $ 1,316 $ 1,275
Cost of revenues........... 1,078 42 1,120 878
------- ------- -------- -------- --------
Gross profit............. 156 40 196 397
------- ------- -------- -------- --------
Operating expenses:
Technology costs......... 1,325 2,588 3,913 968
Sales expenses........... 1,269 792 2,061 802
Marketing expenses....... 2,947 2,152 5,099 1,762
General and
administrative
expenses.............. 1,984 778 264(1) 3,026 1,074
Amortization of
intangible assets..... 3,300(1) 3,300 832
Stock-based
compensation.......... 157 464 621 449
------- ------- -------- -------- --------
Total operating
expenses............ 7,682 6,774 3,564 18,020 5,887
------- ------- -------- -------- --------
Operating loss............. (7,526) (6,734) (3,564) (17,824) (5,490)
Interest income............ 87 87 9
Interest expense........... (31) (230) (261)
Other income............... 30 30
------- ------- -------- -------- --------
Net loss................... $(7,470) $(6,934) $ (3,564) $(17,968) ($ 5,481)
======= ======= ======== ======== ========
Dividend related to
beneficial conversion
feature of preferred
stock.................... -- -- -- -- (9,800)
Net loss attributable to
common stockholders...... $(7,470) $(6,934) $(3,564) $(17,968) $(15,281)
======= ======= ======== ======== ========
Net loss per share:
Basic and diluted........ $ (5.17) $ (3.11) $ (3.00)
======= ======= ========
Weighted average shares--
basic and diluted..... 1,444 2,232 5,097
======= ======= ========
Pro forma net loss per
share:
Basic and diluted........ $ (3.56)
========
Weighted average shares--
basic and diluted..... 5,044
========
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
F-24
<PAGE> 94
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
1. PRO FORMA ADJUSTMENTS
The following adjustments were applied to the Company's historical
financial statements and those of the acquired companies to arrive at the pro
forma consolidated financial information.
- To record amortization of a technology license agreement and related
intangibles totaling $7.3 million on a straight-line basis over the
estimated period of benefit of 48 months.
- To record amortization of acquired customer base totaling $500,000 on a
straight-line basis over the estimated period of benefit of 6 to 36
months, and acquired membership base totaling $800,000 on a straight-line
basis over the estimated period of benefit of 6 to 30 months.
- To record amortization of acquired employee workforce totaling $800,000
on a straight-line basis for employees of ERT subsequently retained by
the Company over the estimated period of benefit of 24 months.
- To record amortization of acquired trademark and trade name totaling $1.8
million on a straight-line basis over the estimated period of benefit of
60 months.
A summary of these pro forma adjustments relating to acquired intangible
assets is as follows (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION
------------
<S> <C>
Technology license agreement and intangible assets.......... $1,835
Customer base............................................... 296
Membership base............................................. 493
Employee workforce.......................................... 340
Trademark................................................... 336
------
$3,300
======
</TABLE>
In addition, the Company's historical financial statements, and those of
the acquired companies, reflect a pro forma adjustment to record annual
depreciation expense of $264,000. This represents depreciation of acquired fixed
assets depreciated on a straight-line basis over their estimated remaining life
of three years.
2. NET LOSS PER SHARE
Basic net loss per share for the year ended December 31, 1998 is computed
using the weighted average number of common shares outstanding during the year.
Diluted net loss per share is computed excluding the weighted average number of
common equivalent shares outstanding because such common equivalents are
anti-dilutive. Differences between historical weighted average shares
outstanding and pro forma weighted average shares outstanding used to compute
net loss per share result from the inclusion of shares issued in conjunction
with the acquisition as if such shares were outstanding from January 1, 1998.
F-25
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Enhanced Response Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of shareholders' deficiency and of cash flows present fairly, in
all material respects, the financial position of Enhanced Response Technologies,
Inc., formerly MotivationNet, Inc. (the Company), as of December 31, 1997, and
the results of its operations and its cash flows for the period from June 25,
1996 (date of inception) to December 31, 1996, and the year ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
March 26, 1999
Chicago, Illinois
F-26
<PAGE> 96
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 32 $ 42
Accounts receivable....................................... 40 183
Deposits and prepaid expenses............................. 87 51
------- ------
Total current assets................................... 159 276
Property and equipment, net................................. 567 473
Other assets................................................ 5 45
------- ------
Total assets........................................... $ 731 $ 794
======= ======
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Notes payable............................................. $ 4,117 $2,808
Accounts payable.......................................... 324 408
Accrued expenses.......................................... 258 444
Points redemption liability............................... 17 400
Deferred compensation..................................... 100 100
Deferred revenue.......................................... 83 387
------- ------
Total current liabilities.............................. 4,899 4,547
------- ------
Commitments and contingencies (Note 9 and Note 11)
Shareholders' deficiency:
Common stock, no par value; 6,000,000 shares authorized;
2,048,000 and 2,228,000 shares outstanding as of
December 31, 1997 and September 30, 1998,
respectively........................................... 119 131
Additional paid-in capital................................ 17 5,398
Accumulated deficit....................................... (4,291) (9,282)
Unearned compensation..................................... (13) --
------- ------
Total shareholders' deficiency......................... (4,168) (3,753)
------- ------
Total liabilities and shareholders' deficiency......... $ 731 $ 794
======= ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE> 97
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD YEAR NINE MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................ $ -- $ -- $ -- $ 30
Cost of revenues.................... -- -- -- 6
----- ------- ------- -------
Gross profit...................... -- -- -- 24
----- ------- ------- -------
Operating expenses:
Technology costs.................. -- 3,213 1,979 1,979
Sales expenses.................... -- 146 54 596
Marketing......................... 35 417 -- 1,484
General and administrative
expenses....................... 177 178 13 784
----- ------- ------- -------
Total operating expenses....... 212 3,954 2,046 4,843
----- ------- ------- -------
Operating loss...................... (212) (3,954) (2,046) (4,819)
Interest expense.................... -- (116) (41) (196)
Other, net.......................... -- (9) 24
----- ------- ------- -------
Net loss....................... $(212) $(4,079) $(2,087) $(4,991)
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-28
<PAGE> 98
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE PERIOD FROM JUNE 25, 1996 (DATE OF INCEPTION) TO
DECEMBER 31, 1996, AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------ ---------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders for cash.............. 1,000 $104 $ -- $ -- $ -- $ 104
Net loss......................... (212) (212)
--------- ---- ------ ------- ---- -------
BALANCE, DECEMBER 31, 1996....... 1,000 104 (212) (108)
Stock option award............... 17 (17)
Amortization of unearned
compensation................... 4 4
Stock issued for services........ 24 15 15
Stock split -- 2000 for 1........ 2,046,976
Net loss......................... -- -- -- (4,079) -- (4,079)
--------- ---- ------ ------- ---- -------
BALANCE, DECEMBER 31, 1997....... 2,048,000 119 17 (4,291) (13) (4,168)
(UNAUDITED)
Conversion of notes payable and
accrued interest to capital in
MNet........................... 5,230 5,230
Exercise of stock options........ 180,000 12 151 13 176
Net loss......................... (4,991) (4,991)
--------- ---- ------ ------- ---- -------
BALANCE, SEPTEMBER 30, 1998...... 2,228,000 $131 $5,398 $(9,282) $ -- $(3,753)
========= ==== ====== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-29
<PAGE> 99
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD YEAR NINE MONTHS ENDED
ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------
1996 1997 1997 1998
------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(212) $(4,079) $(2,087) $(4,991)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 2 94 40 173
Stock-based compensation............................ -- 4 -- 164
Stock issued for services........................... -- 15 15 --
Changes in operating assets and liabilities:
Accounts receivable.............................. -- (41) (142) (144)
Deposits and prepaid expenses.................... (2) (85) (5) 37
Accounts payable................................. 27 297 204 84
Accrued expenses................................. 16 242 167 416
Point redemption liability....................... -- 18 -- 382
Deferred compensation............................ 51 49 49 --
Deferred revenue................................. -- 83 -- 304
----- ------- ------- -------
Net cash used in operating activities............ (118) (3,403) (1,759) (3,575)
----- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment.................... (13) (649) (593) (79)
Other................................................. -- (6) -- (40)
----- ------- ------- -------
Net cash used in investing activities............ (13) (655) (593) (119)
----- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 104 -- -- --
Proceeds from note payable............................ -- 4,057 2,332 3,752
Proceeds from officer notes payable................... 30 30 30 --
Repayments of officer notes payable................... -- -- -- (60)
Exercise of stock options............................. -- -- -- 12
----- ------- ------- -------
Net cash provided by financing activities........ 134 4,087 2,362 3,704
----- ------- ------- -------
Net increase in cash and cash equivalents........ 3 29 10 10
Cash and cash equivalents, beginning of period.......... -- 3 3 32
----- ------- ------- -------
Cash and cash equivalents, end of period................ $ 3 $ 32 $ 13 $ 42
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE> 100
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
Enhanced Response Technologies, Inc., formerly known as MotivationNet, Inc.
(the "Company"), was founded in June 1996. The Company offers advertisers the
ability to target internet users enrolled as members of its "MyPoints" incentive
program. The Company's MyPoints program awards points to enrolled members for
receiving and responding to email communications, accessing and responding to
advertisers' and MyPoints's internet web page offers, purchasing advertisers'
products, and completing of surveys to obtain demographic information. MyPoints
points may be redeemed by members for a variety of goods and services.
NOTE 2 -- BASIS OF PRESENTATION (UNAUDITED)
The Company's primary source of funding for the development of the
technology supporting the MyPoints program was obtained from Direct Marketing
Technology, Inc. ("DMT") through a note payable. In early 1998, DMT informed the
Company that it wanted to convert the note payable to an equity interest. On
March 31, 1998, the Company and DMT entered into an agreement whereby the
Company transferred its MyPoints technology, which was carried at zero net book
value, a $5,209,600 note payable to DMT and certain other assets and liabilities
to MotivationNet, LLC ("MNet"), with $5,000,000 of the note payable to DMT and
related accrued interest being converted by DMT to a capital interest in MNet.
Upon the formation of MNet, the Company's and DMT's interest in MNet were 34.0%
and 66.0%, respectively. To avoid confusion with MotivationNet, LLC, the Company
changed its name from MotivationNet, Inc. to Enhanced Response Technologies,
Inc. Also, on March 31, 1998, the Company established a wholly-owned subsidiary,
MyPoints.Com, LLC ("MyPoints.Com"), to which the Company contributed the
MyPoints operations.
In connection with its formation, MNet licensed the MyPoints technology
back to the Company. Beginning in April 1998, the MyPoints program was operated
on MNet's computer systems for which MNet began charging MyPoints.Com for use of
the computer system and technical support. In addition, MNet provided
fulfillment services related to the redemption of MyPoints points for goods and
services for which MNet charged MyPoints.Com based on the face value of the
points redeemed, $.01 per point.
Pursuant to the agreement to establish MNet, DMT agreed to provide MNet
additional financing through a note payable to fund the operations of MNet, as
well as to allow MNet to provide financing to the Company through a note payable
to fund the Company's operations, including the operations of MyPoint.Com.
In the fourth quarter of 1998, the Company and MNet were acquired by
Intellipost Corporation (subsequently renamed "MyPoints.com, Inc.").
The financial statements for periods prior to March 31, 1998 reflect the
operations of the Company as a stand-alone entity. The financial statements for
periods subsequent to March 31, 1998 reflect the operations of the Company and
MNet on a combined basis as (a) the companies have common management, (b) both
companies were acquired by Intellipost Corporation and (c) the presentation is
considered most meaningful. All intercompany transactions have been eliminated.
NOTE 3 -- LIQUIDITY
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to establish
profitable operations or to obtain additional funding through public or private
equity financing, collaborative or other arrangements with corporate sources, or
other
F-31
<PAGE> 101
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
sources. Management is seeking to increase revenues through continued marketing
of its services while controlling costs to meet working capital needs; however,
additional financing will be required.
To support its working capital requirements in 1998, the Company received
additional funding from DMT through MNet. Since the merger with Intellipost
Corporation in late 1998, Intellipost Corporation has been funding the Company's
operations. Intellipost has committed to fund the Company's working capital
needs through at least December 31, 1999.
NOTE 4 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL DATA (UNAUDITED)
The financial statements as of September 30, 1998 and for the nine-month
periods ended September 30, 1997 and 1998 are unaudited. In the opinion of
management, these financial statements reflect all adjustments necessary for a
fair presentation of the financial statements for such periods. These
adjustments consist of normal, recurring items. The results of operation for the
nine-month period ended September 30, 1998 are not necessarily indicative of the
results of operations that may be expected for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Such estimates include the levels of valuation allowances for accounts
receivable and deferred taxes. Actual results could differ from those estimates
and such differences could be material.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less when purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over their respective estimated useful lives, generally
three years. Maintenance and repairs are charged to expense as incurred, and
improvements and betterments are capitalized. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the accounts and any resulting gain or loss is reflected in the
statement of operations for the period realized.
INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are determined based on temporary
differences between the financial statement and tax bases of assets and
liabilities and net operating loss and credit carryforwards using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
F-32
<PAGE> 102
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
POINTS REDEMPTION LIABILITY
Points redemption liability represent the estimated costs associated with
the accumulation of MyPoints points earned by MyPoints members in conjunction
with the Company's internal marketing activities. These MyPoints may be
converted by members into various third party goods and services. The Company is
liable for purchasing the goods and services redeemed by members.
REVENUE RECOGNITION
The Company earns revenues from the sale of MyPoints points to corporate
advertisers that use these points for internet-based promotional campaigns which
award members for certain actions desired by corporate advertisers. In
connection with the sale of the MyPoints points, the Company is responsible for
redeeming the points upon the member's request. The Company recognizes revenues
when the MyPoints points are redeemed by the MyPoints members.
TECHNOLOGY COSTS
Product development costs and enhancements to existing products are charged
to operations as incurred. Software development costs are required to be
capitalized when a product's technological feasibility has been established by
completion of a working model of the product and ending when a product is
available for general release to customers. To date, completion of a working
model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software development
costs since such costs have not been significant. Product development costs,
along with other technology related costs, are reported as technology costs in
the Company's statements of operations.
BUSINESS RISK AND CONCENTRATION OF CREDIT RISK
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for internet products and services. These
risks include the failure to develop and extend the Company's online service
brands, the rejection of the Company's services by web consumers and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its online services, as well as other risks and uncertainties.
Failure to successfully address these risks may have a material adverse impact
on the Company's operations and financial position.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and accounts receivable. The Company deposits its cash with one major financial
institution and such deposits do not exceed insured amounts. The Company's
customers range from large corporations to relatively small organizations. The
Company does not require collateral for accounts receivable. The Company
evaluates each customer's credit worthiness and establishes allowances as
necessary.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense
is based on the difference, if any, on the date of the grant, between the fair
value of the Company's stock and the exercise price of options to purchase that
stock.
F-33
<PAGE> 103
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by SFAS No. 131 are effective for year
ended December 31, 1998. The Company has determined that it does not have any
separately reportable business segments as of December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Software for Internal Use, which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company does not expect
that the adoption of SOP No. 98-1 will have a material impact on its financial
statements.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Computer equipment.......................................... $321
Furniture and fixtures...................................... 7
Computer software........................................... 335
----
663
Accumulated depreciation and amortization................... (96)
----
$567
====
</TABLE>
NOTE 6 -- NOTES PAYABLE
During 1997, DMT provided funding to the Company of approximately
$4,056,000 through a non-interest bearing note payable. The Company recognized
imputed interest expense on the note payable based on the prime rate plus 1.0%
(9.5% as of December 31, 1997). The note payable and related accrued interest
were transferred to MNet as of March 31, 1998 in connection with its formation.
Upon the formation of MNet, $5,000,000 of the note payable balance then
outstanding and the related accrued interest of $229,550 were transferred to
MNet and converted by DMT to a capital interest in MNet (see Note 2).
The Company had notes payable to an officer of $60,000 as of December 31,
1997. Borrowings under the notes payable bore interest at 7.0% and were repaid
in April 1998.
Interest expense was $0 and $116,400 in 1996 and 1997, respectively.
F-34
<PAGE> 104
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- CAPITAL STRUCTURE
COMMON STOCK
Upon formation in June 1996, the Company was authorized to issue 1,000,000
shares of no par value common stock. The Company issued 1,000 shares of common
stock in connection with its initial capitalization. Pursuant to the unanimous
consent of the stockholders on June 17, 1997, the authorized shares of common
stock were increased to 6,000,000 and the Company declared a 2000-for-one stock
split effective July 1, 1997.
COMMON STOCK OPTIONS
On November 17, 1997, the Company adopted the MotivationNet, Inc. 1997
Incentive Stock Option Plan (the "Plan"). As of December 31, 1997, the Company
had reserved 200,000 shares of common stock for issuance under the Plan.
Effective August 12, 1998 the Board of Directors increased the common stock
reserved for the Plan from 200,000 shares to 650,000 shares. Pursuant to the
Plan provisions, grant prices of options issued under the Plan can be no less
than the fair market value of the Company's common stock as of the date of
grant, the options vest at a rate of no less than 20% per year and the term of
the options can be no more than seven years from the date of grant. During 1997,
the Company granted 140,100 shares under the Plan, with one-third of the options
originally vesting as of January 1, 1998, 1999 and 2000. In connection with the
formation of MNet (see Note 2), these options became fully vested.
Pursuant to an employment agreement, an executive of the Company was
granted options to purchase 0.5% of the shares outstanding as each of the
following dates: May 7, 1997, December 31, 1997, June 30, 1998 and December 31,
1998. The aggregate option price for such shares was fixed at $12,500. The
employment agreement was amended in August 1998 to the allow executive to
purchase 180,000 shares for the $12,500, upon which the executive exercised such
options.
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for employee stock options is
measured as the excess, if any, of the fair market value the Company's common
stock at the date of grant over the amount the employee must pay to acquired. In
connection with certain stock option grants during the year ended December 31,
1997, the Company recognized unearned compensation, which is being amortized
over the service period for which the options were granted. The unearned
compensation as of December 31, 1997 is reported as component of shareholders'
deficiency.
F-35
<PAGE> 105
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Following is a summary of incentive stock option activity for the year
ended December 31, 1997. There was no activity in the Plan prior to January 1,
1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
SHARES PRICE
----------- --------
<S> <C> <C>
Outstanding as of December 31, 1996....................... -- --
Granted................................................. 140,100 $1.00
Exercised............................................... -- --
Canceled................................................ (15,000) 1.00
------- -----
Outstanding as of December 31, 1997....................... 125,100 $1.00
======= =====
Options vested as of December 31, 1997.................... -- --
======= =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT DECEMBER 31, 1997 AT DECEMBER 31, 1997
------------------------------------------ ---------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDINGS LIFE (YEARS) PRICE VESTED PRICE
-------------- ------------ ------------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
$1.00 125,100 6.83 $1.00 -- --
------- ---- ----- -- --
</TABLE>
The weighted average fair value of options granted in 1997 was $0.73.
Had compensation cost for the Company's Plan been determined based on fair
value at the grant date consistent with the method prescribed by SFAS 123, the
impact on the Company's net loss would have been increased to the pro forma
amounts below (in thousands):
<TABLE>
<CAPTION>
1996 1997
----- -------
<S> <C> <C>
Net loss as reported.................................. $(212) $(4,079)
Net loss -- pro forma................................. -- $(4,087)
</TABLE>
The fair value of employee stock option grants has been estimated on the
date of grant using the minimum value model with the following weighted average
assumptions used for grants in 1997:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Risk-free interest rate..................................... 5.72%
Expected life............................................... 5 years
Dividends................................................... --
</TABLE>
NOTE 8 -- SAVINGS PLAN
In November 1997 the Company established the MotivationNet, Inc. 401-K Plan
(the "Savings Plan"), which covers substantially all employees. Under the
Savings Plan, employees are permitted to contribute up to 15.0% of their gross
compensation, subject to limitations of the Internal Revenue Code. The Company
does not make matching contributions to the Savings Plan.
F-36
<PAGE> 106
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- LEASES
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through 1999. Under the terms of office
space lease, the Company is responsible for certain real estate taxes and other
operating costs. The Company's rent expense was $16,000 and $46,000 in 1996 and
1997, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1998........................................................ $65
1999........................................................ 24
---
Total minimum lease payments...................... $89
===
</TABLE>
NOTE 10 -- INCOME TAXES
As of December 31, 1997, the Company has net operating loss carryforwards
of approximately $161,000 for federal income tax reporting purposes. The net
operating loss carryforwards expire in 2011.
The difference between the income tax benefit at the federal statutory rate
and the Company's effective tax rate is due primarily to recognition of a full
valuation allowance to offset the net deferred tax assets.
The estimated tax effect of significant temporary differences and
carryforwards that give rise to deferred income tax assets as of December 31,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Net operating loss carryforwards............................ $ 64
Non-deducted research and experimentation costs............. 1,475
Accrued expenses............................................ 110
Deferred compensation....................................... 39
Non-deducted start-up costs................................. 20
-------
Gross deferred tax assets................................... 1,708
Valuation allowance......................................... (1,708)
-------
Net deferred tax asset...................................... $ --
=======
</TABLE>
The Company has recorded a valuation allowance against the net deferred tax
assets due the Company operating at a net loss since inception and due to
uncertainties surrounding their realization.
NOTE 11 -- CONTINGENCIES
The Company is the subject of various claims and actions in the ordinary
course of its business. All such matters are subject to uncertainties that are
not predictable with assurance. However, it is management's opinion that the
disposition of such matters will not have a material impact on the Company's
financial position, results of operations or cash flows.
NOTE 12 -- SUBSEQUENT EVENTS
On November 30, 1998, the shareholders of the Company reached an agreement
to sell the Company to MyPoints.com, Inc. (formerly Intellipost Corporation).
F-37
<PAGE> 107
DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER:
Rewards providers logos above two half-circle flow charts surrounding the
MyPoints logo that illustrate the MyPoints Online Loyalty Solutions and Online
Direct Marketing Solutions.
FRONT COVER GATEFOLD:
MyPoints logo with flow chart of our web pages illustrating aspects of
member interaction including joining the program, and opportunities to monitor,
earn and redeem points.
INSIDE BACK COVER
MyPoints logo with web pages representative of co-branding of the MyPoints
rewards program.
<PAGE> 108
LOGO
<PAGE> 109
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and we are not soliciting offers to buy these securities, in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 29, 1999
LOGO
5,000,000 SHARES
COMMON STOCK
MyPoints.com, Inc. is offering 5,000,000 shares of common stock. This is
MyPoints.com's initial public offering, and no public market currently exists
for our shares. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "MYPT" upon notice of issuance. We anticipate
that the initial public offering price will be between $10.00 and $12.00 per
share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to MyPoints.com, Inc............................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
MyPoints.com has granted the underwriters a 30-day option to purchase up to
an additional 750,000 shares of common stock to cover over-allotments.
-------------------------
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
SALOMON SMITH BARNEY INTERNATIONAL
The date of this prospectus is , 1999
<PAGE> 110
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., Salomon Smith
Barney Inc. and Wit Capital Corporation, have each separately agreed with
MyPoints.com, subject to the terms and conditions of the underwriting agreement,
to purchase from MyPoints.com the number of shares of common stock set forth
opposite their names below. The underwriters are committed to purchase and pay
for these shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc...........................
Bear, Stearns & Co. Inc.....................................
Salomon Smith Barney Inc....................................
Wit Capital Corporation.....................................
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITERS
--------------------------
<S> <C>
BancBoston Robertson Stephens International Limited ........
Bear, Stearns International Limited.........................
Salomon Brothers International Limited......................
----------
Total..................................................... 5,000,000
==========
</TABLE>
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus and to
dealers at this price less a concession of not in excess of $ per share, of
which $ may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the representatives. No reduction of this type will change the
amount of proceeds to be received by us as set forth on the cover page of this
prospectus. The common stock is offered by the underwriters as stated in this
prospectus, subject to receipt and acceptance by them and subject to their right
to reject any order in whole or in part. BancBoston Robertson Stephens Inc.
expects to deliver the shares of common stock to purchasers on ,
1999.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Internet Distribution. The underwriters, at the request of MyPoints.com,
have reserved for sale at the initial public offering price up to 300,000 shares
of common stock to members and visitors to Wit Capital's services or web site
who express an interest in purchasing these shares. Of these shares, up to
200,000 shares will be reserved for sale to MyPoints members who express an
interest in purchasing shares in this offering. The sale of these shares will be
made by Wit Capital. Purchases of the reserved shares will be made through an
account at Wit Capital in accordance with Wit Capital's procedures for opening
an account and transacting in securities. Any of these reserved shares not
purchased by visitors to and users of Wit Capital's services or web site or
MyPoints members will be offered by the underwriters to the public on the same
terms as the other shares.
65
<PAGE> 111
Internet Prospectus. A U.S. prospectus in electronic format is being made
available to U.S. investors only on a web site maintained by Wit Capital. In
addition, pursuant to an e-Dealer Agreement, all dealers purchasing shares from
Wit Capital in the offering, the e-Dealers, similarly have agreed to make a U.S.
prospectus in electronic format available on the web sites that they maintain.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 750,000 additional shares of common stock at the same price per
share as we will receive for the 5,000,000 shares that the underwriters have
agreed to purchase from us. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of these additional shares that the number of
shares of common stock to be purchased by the underwriter shown in the table
above bears to the total number of the shares shown in the table above. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the 5,000,000 shares are being sold. We will be
obligated, under the terms of the option, to sell shares to the extent the
option is exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the shares of common stock
in this offering. If the option is exercised in full, the total public offering
price will be $63,250,000, the total underwriting discounts and commissions will
be $4,427,500 and the total proceeds to us will be $58,822,500. The expenses of
this offering are estimated at $1,000,000 and are payable entirely by
MyPoints.com.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and MyPoints.com against civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. All of our executive officers and directors, and a
substantial number of our stockholders, optionholders and warrantholders have
agreed, for a period of 180 days after the date of this prospectus, not to offer
to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant
any rights to, any shares of common stock, any options or warrants to purchase
any shares of common stock or any securities convertible into or exchangeable
for shares of common stock owned as of the date of this prospectus or
subsequently acquired directly by the holders or to which they have or
subsequently acquire the power of disposition, without the prior written consent
of BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens
Inc., in some instances together with MyPoints.com, may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the period of
180 days after the date of this prospectus.
Future Sales. In addition, we have agreed that during the period of 180
days after the date of this prospectus, we will not, without the prior written
consent of BancBoston Robertson Stephens Inc., issue, sell, contract to sell or
otherwise dispose of any shares of common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock, other than our sale
of shares in this offering, the issuance of shares of common stock upon the
exercise of outstanding options or warrants and the grant of options to purchase
shares of common stock under existing employee stock option or stock purchase
plans. See "Shares Eligible For Future Sale."
Reserved Shares. The underwriters intend to reserve for sale, at the
initial public offering price, a number of shares of common stock (not to exceed
5.0% of the total number of shares offered in this offering) for our customers,
partners and business associates. In addition, the underwriters may reserve, at
the initial public offering price, up to $3.0 million of common stock offered in
this offering for entities affiliated with Technology Crossover Ventures, all of
which are existing stockholders. As a result, the number of shares of common
stock available for sale to the general public in the offering
66
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses payable by
MyPoints.com in connection with the registration of the common stock hereunder.
All of the amounts shown are estimates except for the SEC registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
-------------
<S> <C>
SEC Registration Fee........................................ $ 19,182.00
NASD Filing Fee............................................. 7,400.00
Nasdaq National Market Listing Fee.......................... 95,000.00
Printing and Engraving Expenses............................. 200,000.00
Legal Fees and Expenses..................................... 300,000.00
Accounting Fees and Expenses................................ 250,000.00
Transfer Agent and Registrar Fees and Expenses.............. 25,000.00
Blue Sky fees and expenses.................................. 10,000.00
Miscellaneous Expenses...................................... 93,418.00
-------------
Total............................................. $1,000,000.00
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General Corporation
Law. We have also entered into agreements with our directors and executive
officers that require MyPoints.com, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors and executive officers to the fullest extent permitted by Delaware
law. We have also purchased directors and officers liability insurance, which
provides coverage against certain liabilities including liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since our formation in November 1996, and through June 30, 1999, we
have issued and sold the following unregistered securities:
(1) In November 1996, we issued and sold an aggregate of 2,500,000
shares of common stock to the founding officers and directors of
MyPoints.com and to certain other individuals for an aggregate purchase
price of $2,500.00.
(2) Since our inception, we have granted options to purchase 5,317,502
shares of common stock to employees, directors and consultants under our
1996 and 1999 stock plans at exercise prices ranging from $0.05 to $8.00
per share. Of the 5,317,502 shares granted, 3,878,597 remain outstanding,
404,943 shares of common stock have been purchased pursuant to exercises of
stock options and 1,033,962 shares have been canceled and returned to the
1996 and 1999 stock plans.
(3) In November and December 1996, we sold an aggregate of 3,000,000
shares of Series A preferred stock at a price of $0.50 per share to a total
of four investors.
(4) In March of 1998, we sold an aggregate of 500,000 shares of Series
B preferred stock at a price of $1.00 per share to one institutional
investor.
II-1
<PAGE> 113
(5) Between October 1997 and April 1998, we sold an aggregate of
2,926,666 shares of Series C preferred stock at a price of $1.50 per share
to a total of 19 investors. On May 1, 1998, in conjunction with entering an
equipment lease, we issued a warrant for the purchase of 10,000 shares of
Series C preferred stock at an exercise price of $1.50 per share.
(6) In November 1998, we issued 3,600,481 shares of common stock
pursuant to our acquisition transactions with Experian.
(7) In November 1998, we sold an aggregate of 3,961,649 shares of
Series D preferred stock at a price of $2.06 per share and warrants for the
purchase of 1,374,028 shares of Series D preferred stock with an exercise
price of $2.06 per share to a total of 23 investors.
(8) In March 1999, we sold an aggregate of 2,000,000 shares of Series
E preferred stock at a price of $5.00 per share to a total of 41 investors.
All of these investors qualified as "accredited investors" under Securities
and Exchange Commission Rule 501.
(9) In May 1999, we issued a warrant for the purchase of 50,000 shares
of common stock at an exercise price equal to the initial public offering
price of our stock.
(10) In June 1999, we issued a warrant for the purchase of 100,000
shares of common stock at an exercise price of the lower of $8.00 per share
or the initial public offering price of our stock.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving any public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with MyPoints.com, to
information about us.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1(a)* Amended and Restated Certificate of Incorporation, as
currently in effect
3.1(b)* Certificate of Incorporation to be filed upon completion of
the offering
3.2(a)* Bylaws of the registrant as currently in effect
3.2(b)* Bylaws of the registrant as in effect upon completion of the
offering
4.1* Form of Lock-Up Agreements
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Amended and Restated Investors Rights Agreement dated March
30, 1999
10.2* 1996 Stock Plan and forms of agreements thereunder
10.3* 1999 Stock Plan and forms of agreements thereunder
10.4* 1999 Employee Stock Purchase Plan
10.5* Form of Director and Executive Officer Indemnification
Agreement
</TABLE>
II-2
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.6* Representative form of Stock Purchase Warrant
10.7* Lease between the registrant and Louis N. Haas dated
November 15, 1996 for office space located at 565 Commercial
Street, San Francisco, California, and addenda thereto
10.8* Lease dated March 18, 1999 between registrant and
TA/Western, L.L.C. for office space located at 1375 E.
Woodfield Road, Suite 520, Schaumburg, Illinois
10.9* Lease dated January 22, 1998 between MotivationNet, Inc. and
The Mutual Life Insurance Company of New York for office
space located at 1375 E. Woodfield Road, Suite 540,
Schaumburg, Illinois
10.10* Agreement and Plan of Merger dated November 30, 1998 among
the registrant, IPOST Acquisition Subsidiary, Inc. and
Enhanced Response Technologies, Inc.
10.11* Interest Purchase Agreement dated November 30, 1998 among
registrant, Direct Marketing Technology, Inc. and Brigar
Computer Services, Inc.
10.12* Asset Purchase Agreement dated November 30, 1998 between
registrant and Metromail Corporation
10.13* License Agreement dated November 30, 1998 between registrant
and Direct Marketing Technologies, Inc.
10.14* Services Agreement dated November 30, 1998 between
registrant and Direct Marketing Technologies, Inc.
10.15* Business Loan Agreement dated January 27, 1997 between
registrant and Silicon Valley Bank and related promissory
notes
10.16* Master Equipment Lease Agreement dated May 1, 1998 between
registrant and Phoenix Leasing Incorporated
+10.17* Patent License Agreement dated March 31, 1999 between
registrant and Netcentives, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.3* Consent of Counsel (included in exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* Exhibit previously filed.
+ Confidential treatment has been requested for portions of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
The following schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
Other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification by MyPoints.com for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of MyPoints.com, we have been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a
II-3
<PAGE> 115
claim for indemnification against such liabilities (other than the payment by
MyPoints.com of expenses incurred or paid by a director, officer or controlling
person of MyPoints.com in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
MyPoints.com is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
We hereby undertake that:
(a) We will provide to the underwriters at the closing as specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by MyPoints.com pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
MyPoints.com has duly caused this amendment to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, State of California, on the 28th day
of July, 1999.
MYPOINTS.COM, INC.
By: /s/ STEVEN M. MARKOWITZ
---------------------------------------
Steven M. Markowitz
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEVEN M. MARKOWITZ Chief Executive Officer and Chairman July 28, 1999
- ------------------------------------------------ of the Board (Principal
Steven M. Markowitz Executive Officer)
/s/ THOMAS CALDWELL Senior Vice President, Finance and July 28, 1999
- ------------------------------------------------ Chief Financial Officer (Principal
Thomas Caldwell Financial and Accounting Officer)
/s/ ROBERT C. HOYLER* President and Chief July 28, 1999
- ------------------------------------------------ Operating Officer, Director
Robert C. Hoyler
/s/ HOWARD L. MORGAN* Director July 28, 1999
- ------------------------------------------------
Howard L. Morgan
/s/ THOMAS NEWKIRK* Director July 28, 1999
- ------------------------------------------------
Thomas Newkirk
/s/ LAWRENCE E. PHILLIPS* Director July 28, 1999
- ------------------------------------------------
Lawrence E. Phillips
/s/ MARIO M. ROSATI* Director July 28, 1999
- ------------------------------------------------
Mario M. Rosati
/s/ LESTER WUNDERMAN* Director July 28, 1999
- ------------------------------------------------
Lester Wunderman
*By: /s/ STEVEN M. MARKOWITZ
------------------------------------------
Steven M. Markowitz
Attorney-in-fact
</TABLE>
II-5
<PAGE> 117
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS YEAR
----------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts for the years ended:
December 31, 1997.................................... -- -- -- --
December 31, 1998.................................... -- 60 -- 60
</TABLE>
S-1
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- ------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1(a)* Amended and Restated Certificate of Incorporation, as
currently in effect
3.1(b)* Certificate of Incorporation to be filed upon completion of
the offering
3.2(a)* Bylaws of the registrant as currently in effect
3.2(b)* Bylaws of the registrant as in effect upon completion of the
offering
4.1* Form of Lock-Up Agreements
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Amended and Restated Investors Rights Agreement dated March
30, 1999
10.2* 1996 Stock Plan and forms of agreements thereunder
10.3* 1999 Stock Plan and forms of agreements thereunder
10.4* 1999 Employee Stock Purchase Plan
10.5* Form of Director and Executive Officer Indemnification
Agreement
10.6* Representative form of Stock Purchase Warrant
10.7* Lease between the registrant and Louis N. Haas dated
November 15, 1996 for office space located at 565 Commercial
Street, San Francisco, California, and addenda thereto
10.8* Lease dated March 18, 1999 between registrant and
TA/Western, L.L.C. for office space located at 1375 E.
Woodfield Road, Suite 520, Schaumburg, Illinois
10.9* Lease dated January 22, 1998 between MotivationNet, Inc. and
The Mutual Life Insurance Company of New York for office
space located at 1375 E. Woodfield Road, Suite 540,
Schaumburg, Illinois
10.10* Agreement and Plan of Merger dated November 30, 1998 among
the registrant, IPOST Acquisition Subsidiary, Inc. and
Enhanced Response Technologies, Inc.
10.11* Interest Purchase Agreement dated November 30, 1998 among
registrant, Direct Marketing Technology, Inc. and Brigar
Computer Services, Inc.
10.12* Asset Purchase Agreement dated November 30, 1998 between
registrant and Metromail Corporation
10.13* License Agreement dated November 30, 1998 between registrant
and Direct Marketing Technologies, Inc.
10.14* Services Agreement dated November 30, 1998 between
registrant and Direct Marketing Technologies, Inc.
10.15* Business Loan Agreement dated January 27, 1997 between
registrant and Silicon Valley Bank and related promissory
notes
10.16* Master Equipment Lease Agreement dated May 1, 1998 between
registrant and Phoenix Leasing Incorporated
+10.17* Patent License Agreement dated March 31, 1999 between
registrant and Netcentives, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.3* Consent of Counsel (included in exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* Exhibit previously filed.
+ Confidential treatment has been requested for portions of this exhibit.
<PAGE> 1
Draft of June __, 1999
UNDERWRITING AGREEMENT
___________, 1999
BancBoston Robertson Stephens Inc.
Bear, Stearns & Co. Inc.
Salomon Smith Barney, Inc.
Wit Capital Corporation
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
INTRODUCTORY. MyPoints.com, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 5,000,000 shares (the "Firm
Shares") of its Common Stock, par value $0.001 per share (the "Common Shares").
In addition, the Company has granted to the Underwriters an option to purchase
up to an additional [___] Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares". BancBoston Robertson
Stephens Inc., Bear, Stearns & Co. Inc., Salomon Smith Barney, Inc. and Wit
Capital Corporation have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Shares.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(File No. 333-75523), which contains a form of prospectus to be used in
connection with the public offering and sale of the Shares. Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including any
information deemed to be a part thereof at the time of effectiveness pursuant to
Rule 430A or Rule 434 under the Securities Act, is called the "Registration
Statement". Any registration statement filed by the Company pursuant to Rule
462(b) under the Securities Act is called the "Rule 462(b) Registration
Statement", and from and after the date and time of filing of the Rule 462(b)
Registration Statement the term "Registration Statement" shall include the Rule
462(b) Registration Statement. Such
<PAGE> 2
prospectus, in the form first used by the Underwriters to confirm sales of the
Shares, is called the "Prospectus"; provided, however, if the Company has, with
the consent of BancBoston Robertson Stephens Inc., elected to rely upon Rule 434
under the Securities Act, the term "Prospectus" shall mean the Company's
prospectus subject to completion (each, a "preliminary prospectus") dated [___]
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters
as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale of
the Shares. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times, complied and will comply in all material
respects with the Securities Act and did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading. The
Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or
2
<PAGE> 3
any post-effective amendment thereto, or the Prospectus, or any amendments or
supplements thereto, made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by the
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement which have not been described or filed as
required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to each of the Representatives one complete conformed copy of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement. The document entitled "Intellipost
Corporation Overview" is a business plan of the Company that was circulated on a
confidential basis to a limited number of persons and entities.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent,
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not in the ordinary course of business nor entered into any material transaction
or agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. PricewaterhouseCoopers LLP, who have
expressed their opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) of the Company and of
Enhanced Response Technologies, Inc. and supporting schedule filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and Enhanced Response Technologies and their respective subsidiaries as
of and at the dates indicated and the results of their operations and cash flows
for the periods specified. The supporting schedule included in the Registration
Statement presents fairly the information required to be stated therein. Such
financial statements and supporting schedule have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary
Financial Data", "Selected Consolidated Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration Statement. The
pro forma consolidated financial information of the Company and its subsidiaries
and the related notes thereto included under the captions "Prospectus
Summary--Summary Financial Data", "Selected Consolidated Financial Data", "Pro
Forma Consolidated Financial Information" and elsewhere in the Prospectus and in
the Registration Statement present fairly the information contained therein,
have been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly presented on
the bases described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein. No other pro forma
financial information is required to be included in the Registration Statement
pursuant to Regulation S-X.
(j) Company's Accounting System. The Company and each of its
subsidiaries maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the
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recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21 to the Registration Statement.
(l) Incorporation and Good Standing of the Company and its Subsidiaries.
Each of the Company and its subsidiaries has been duly organized and is validly
existing as a corporation or limited liability company, as the case may be, in
good standing under the laws of the jurisdiction in which it is organized with
full corporate power and authority to own its properties and conduct its
business as described in the prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification.
(m) Capitalization of the Subsidiaries. All the outstanding shares of
capital stock of each subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiaries
are owned by the Company either directly or through wholly owned subsidiaries
free and clear of any security interests, claims, liens or encumbrances.
(n) No Prohibition on Subsidiaries from Paying Dividends or Making Other
Distributions. No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(o) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Shares (including the Shares) conform in all material
respects to the description thereof contained in the Prospectus. All of the
issued and outstanding Common Shares have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Shares were
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There are
no authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company or any of its subsidiaries other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
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<PAGE> 6
(p) Stock Exchange Listing. The Shares have been approved for inclusion
on the Nasdaq National Market, subject only to official notice of issuance.
(q) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(r) Non-Contravention of Existing Instruments Agreements. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of
its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its or their
properties.
(s) No Defaults or Violations. Neither the Company nor any subsidiary is
in violation or default of (i) any provision of its charter or by-laws, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(t) No Actions, Suits or Proceedings. No action, suit or proceeding by
or before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries or its or their property is
pending or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a Material Adverse Effect on the performance of
this Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to result in a Material Adverse
Effect.
(u) All Necessary Permits, Etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their
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<PAGE> 7
respective businesses, and neither the Company nor any subsidiary has received
any notice of proceedings relating to the revocation or modification of, or
non-compliance with, any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, could result in a Material Adverse Change.
(v) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1 (i) above, in each case free
and clear of any security interests, mortgages, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or
personal property by the Company or such subsidiary.
(w) Tax Law Compliance. The Company and its consolidated subsidiaries
have filed all necessary federal, state and foreign income and franchise tax
returns or have properly requested extensions thereof and have paid all taxes
required to be paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1 (i) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(x) Intellectual Property Rights. Except as disclosed in the Prospectus,
each of the Company and its subsidiaries owns or possesses adequate rights to
use all patents, patent rights or licenses, inventions, collaborative research
agreements, trade secrets, know-how, trademarks, service marks, trade names and
copyrights which are necessary to conduct its businesses as described in the
Registration Statement and Prospectus; the expiration of any patents, patent
rights, trade secrets, trademarks, service marks, trade names or copyrights
would not result in a Material Adverse Change that is not otherwise disclosed in
the Prospectus; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and, except as
disclosed in the Prospectus, the Company has not received any notice of, and has
no knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a Material Adverse Change. Except as disclosed in the Prospectus, there is
no claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The
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<PAGE> 8
Company and its subsidiaries do not in the conduct of their business as now or
proposed to be conducted as described in the Prospectus infringe or conflict
with any right or patent of any third party, or any discovery, invention,
product or process which is the subject of a patent application filed by any
third party, known to the Company or any of its subsidiaries, which such
infringement or conflict is reasonably likely to result in a Material Adverse
Change.
(y) Year 2000 Preparedness. There are no issues related to the
Company's, or any of its subsidiaries', preparedness for the Year 2000 that (i)
are of a character required to be described or referred to in the Registration
Statement or Prospectus by the Securities Act which have not been accurately
described in the Registration Statement or Prospectus or (ii) might reasonably
be expected to result in any Material Adverse Change or that might materially
affect their properties, assets or rights. The Company has inquired of material
vendors as to their preparedness for the Year 2000 and has disclosed in the
Registration Statement or Prospectus any issues that might reasonably be
expected to result in any Material Adverse Change.
(z) No Transfer Taxes or Other Fees. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(aa) Company Not an "Investment Company". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(bb) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and Directors and Officers liability. The Company
has no reason to believe that it or any subsidiary will not be able (i) to renew
its existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.
(cc) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, advertising
clients, co-branded or
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private label partners, redemption partners, or licensees that might be expected
to result in a Material Adverse Change.
(dd) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(ee) Lock-Up Agreements. Substantially all outstanding Common Shares,
and all securities convertible into or exercisable or exchangeable for Common
Shares, are subject to valid, binding and enforceable agreements (collectively,
the "Company Lock-up Agreements") that restrict the holders thereof from
selling, making any short sale of, granting any option for the purchase of, or
otherwise transferring or disposing of, any of such shares of Common Shares, or
any such securities convertible into or exercisable or exchangeable for Common
Shares, for a period of 180 days after the date of the Prospectus without the
prior written consent of the Company. Each officer and director of the Company
and each beneficial owner of one or more percent of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the form
attached hereto as Exhibit A (the "Underwriter Lock-up Agreements" and, together
with the Company Lock-up Agreements, the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancBoston Robertson Stephens Inc.
(ff) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
(gg) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(hh) Environmental Laws. (i) the Company is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, except where the failure to comply
would not result in a Material Adverse Change, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
seq.), or otherwise designated as a contaminated site under applicable state or
local law.
(ii) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are
in compliance in all material respects with
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ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any
member of any group of organizations described in Sections 414(b),(c),(m) or (o)
of the Internal Revenue Code of 1986, as amended, and the regulations and
published interpretations thereunder (the "Code") of which the Company or such
subsidiary is a member. No "reportable event" (as defined under ERISA) has
occurred or is reasonably expected to occur with respect to any "employee
benefit plan" established or maintained by the Company, its subsidiaries or any
of their ERISA Affiliates. No "employee benefit plan" established or maintained
by the Company, its subsidiaries or any of their ERISA Affiliates, if such
"employee benefit plan" were terminated, would have any "amount of unfounded
benefit liabilities" (as defined under ERISA). Neither the Company, its
subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections
412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established
or maintained by the Company, its subsidiaries or any of their ERISA Affiliates
that is intended to be qualified under Section 401(a) of the Code is so
qualified and nothing has occurred, whether by action or failure to act, which
would cause the loss of such qualification.
(jj) The execution and delivery of the Agreement and Plan of Merger
dated as of November 30, 1998 (the "Merger Agreement") among the Company, IPOST
Acquisition Subsidiary, Inc. ("Sub") and Enhanced Response Technologies, Inc.
("ERT"), was duly authorized by all necessary corporate action on the part of
each of the Company, Sub and ERT. Each of the Company, Sub and ERT had all
corporate power and authority to execute and deliver the Merger Agreement, to
file the Merger Agreement and the related Articles of Merger with the Secretary
of State of the State of Illinois and to complete the transactions contemplated
by the Merger Agreement, and the Merger Agreement at the time of execution and
filing constituted a valid and binding obligation of each of the Company, Sub
and ERT.
Any certificate signed by an officer of the Company and delivered
to the Representatives or to counsel for the Underwriters shall be deemed to be
a representation and warranty by the Company to each Underwriter as to the
matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on Schedule A. The purchase price per
Firm Share to be paid by the several Underwriters to the Company shall be $[___]
per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Wilson
Sonsini Goodrich & Rosati, P.C. (or at such other place as may be agreed upon
among the
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Representatives and the Company), (i) on the third (3rd) full business day
following the first day that Shares are traded, (ii) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (iii) at such other time and date not later that seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Option Shares from the Company at the
purchase price per share to be paid by the Underwriters for the Firm Shares. The
option granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Shares.
The option granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on Schedule A opposite the name of such Underwriter bears to the total number of
Firm Shares. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized,
for their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
BancBoston Robertson Stephens Inc., individually and not as the Representative
of the Underwriters, may (but
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shall not be obligated to) make payment for any Shares to be purchased by any
Underwriter whose funds shall not have been received by the Representatives by
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00
noon on the second business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
SECTION 3. COVENANTS OF THE COMPANY.
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the
Representatives promptly (i) when the Registration Statement or any
post-effective
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amendment thereto shall have become effective, (ii) of receipt of any comments
from the Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. The Company will comply with the Securities Act and the Exchange
Act, and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Representatives or counsel for the Underwriters, it becomes
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances existing at the time the Prospectus
is delivered to a purchaser, not misleading, or, if it is necessary at any time
to amend or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission, and furnish at its own
expense to the Underwriters and to dealers, an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $___ million which shall apply to
the offering contemplated hereby.
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(g) Notice of Subsequent Events. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it substantially in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending [___] that satisfies the provisions of Section 11(a) of the Securities
Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company
will not, without the prior written consent of BancBoston Robertson Stephens
Inc., for a period of 180 days following the date of the Prospectus, offer, sell
or contract to sell, or otherwise dispose of or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus.
(m) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to each of the Representatives as soon
as available,
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copies of any report or communication of the Company mailed generally to holders
of its capital stock.
(n) The Company will place a restrictive legend on any Common Shares
acquired pursuant to the exercise, after the date hereof and prior to the
expiration of the Lock-Up period, of any option granted, or the issuance of any
Common Shares, under any employee benefit plan or other equity incentive
arrangement, which legend shall restrict the transfer of such shares prior to
the expiration of the Lock-Up period. In addition, the Company agrees that,
without the prior written consent of BancBoston Robertson Stephens Inc., it
will not release any stockholder or option holder from the Company's Lock-up
Agreement earlier than 180 days after the date of the initial public offering
of the Firm Shares.
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No
Objection from the National Association of Securities Dealers, LLC. The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel; and the National Association
of Securities Dealers, LLC shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be, there shall not have been any Material Adverse Change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Wilson Sonsini Goodrich & Rosati, P.C., counsel for the Company substantially
in the form of Exhibit B attached hereto, dated the First Closing Date, or the
Second Closing Date, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters.
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Counsel rendering the opinion contained in Exhibit B may rely as to
questions of law not involving the laws of the United States or the State of
California and State of Delaware upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of the
Company and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.
(e) Opinion of Patent Counsel for the Company. You shall have received
on the First Closing Date, or the Second Closing Date, as the case may be, an
opinion of Pillsbury, Madison & Sutro LLP, patent counsel for the Company
substantially in the form of Exhibit C attached hereto.
(f) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Fenwick & West LLP, substantially in the form of Exhibit D hereto.
The Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(g) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
PricewaterhouseCoopers LLC addressed to the Underwriters, dated the First
Closing Date or the Second Closing Date, as the case may be, confirming that
they are independent certified public accountants with respect to the Company
within the meaning of the Act and the applicable published Rules and Regulations
and based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the "Original
Letter"), but carried out to a date not more than four (4) business days prior
to the First Closing Date or the Second Closing Date, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the First Closing Date or the Second
Closing Date, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information. The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from PricewaterhouseCoopers LLC shall be addressed to or for the
use of the Underwriters in form and substance satisfactory to the Underwriters
and shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations, (ii) set forth their opinion
with respect to their examination of the consolidated balance sheets of the
Company as of December 31, 1997 and 1998 and related consolidated statements of
operations, stockholders' equity, and cash flows for the period from November 7,
1996 (inception) to December 31, 1996 and for the years ended December 31, 1997
and 1998, (iii) set forth their opinion with
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<PAGE> 17
respect to their examination of the combined balance sheet of Enhanced Response
Technologies, Inc. as of December 31, 1997 and related combined statements of
operations, shareholders' deficiency, and cash flows for the period ended
December 31, 1996 and the year ended December 31, 1997, (iv) state that nothing
has come to their attention that caused them to believe that the unaudited pro
forma consolidated financial information included in the Registration Statement
does not comply as to form in all material respects with the applicable
accounting requirements of Regulation S-X or that the pro forma adjustments have
not been properly applied to the historical amounts in the compilation of those
statements, (v) state that PricewaterhouseCoopers LLC has performed the
procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim financial information and providing the report of
PricewaterhouseCoopers LLC as described in SAS 71 on the pro forma financial
statements for each of the quarters in the ____-quarter period ended
________________, 1999 (the "Quarterly Financial Statements"), (vi) state that
in the course of such review, nothing came to their attention that leads them to
believe that any material modifications need to be made to any of the Quarterly
Financial Statements in order for them to be in compliance with generally
accepted accounting principles consistently applied across the periods
presented, and address other matters agreed upon by PricewaterhouseCoopers LLC
and you. In addition, you shall have received from PricewaterhouseCoopers LLC a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of December 31, 1997 and 1998 and of Enhanced Response Technologies, Inc.'s
financial statements as of December 31, 1997, did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(h) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the First Closing Date
or the Second Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto contained all material information required to be
included therein by the Securities Act and in all material respects
conformed to the requirements of the Securities Act; the Registration
Statement and the Prospectus, and any amendments or supplements
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thereto, did not and do not include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and, since the
effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented Prospectus
which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and
its subsidiaries considered as one enterprise, (b) any transaction that
is material to the Company and its subsidiaries considered as one
enterprise, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material to
the Company and its subsidiaries considered as one enterprise, incurred
by the Company or its subsidiaries, except obligations incurred in the
ordinary course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one
enterprise, (e) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company or any of its subsidiaries,
or (f) any loss or damage (whether or not insured) to the property of
the Company or any of its subsidiaries which has been sustained or will
have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise.
(i) Underwriter Lock-up Agreement from Certain Stockholders of the
Company. The Company shall have obtained and delivered to you an agreement
substantially in the form of Exhibit A attached hereto from each officer and
director of the Company and each beneficial owner of one or more percent of the
outstanding issued share capital of the Company. The Underwriter Lock-up
Agreements between the Underwriters and the stockholders, officers and
directors of the Company relating to sales and certain other dispositions of
Common Shares or certain other securities, delivered to you on or before the
date hereof, shall be in full force and effect on each of the First Closing Date
and the Second Closing Date.
(j) Stock Exchange Listing. The Shares shall have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(k) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(b) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(l) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representatives and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the
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Option Shares, at any time prior to the Second Closing Date, which termination
shall be without liability on the part of any party to any other party, except
that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters'
Expenses), Section 7 (Indemnification and Contribution) and Section 10
(Representations and Indemnities to Survive Delivery) shall at all times be
effective and shall survive such termination.
SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representatives,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the National Association of Securities Dealers,
LLC review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
including the Common Shares on the Nasdaq National Market, (ix) all costs and
expenses incident to the preparation and undertaking of "road show" preparations
to be made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 4, Section 7, Section 8 or
Section 9, or if the sale to the Underwriters of the Shares on the First Closing
Date is not consummated because of any refusal, inability or failure on the part
of the Company to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representatives and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Shares, including but not limited to fees and
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disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification of the Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each person,
if any, who controls any Underwriter within the meaning of the Securities Act
and the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any matter
covered by clause (i), (ii), (iii) or (iv) above, provided that the Company
shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct; and to reimburse each Underwriter and each
such controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any
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Underwriter from whom the person asserting any loss, claim, damage, liability or
expense purchased Shares, or any person controlling such Underwriter, if copies
of the Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by law so
to have been delivered, at or prior to the written confirmation of the sale of
the Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage, liability
or expense. The indemnity agreement set forth in this Section 7(a) shall be in
addition to any liabilities that the Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph and the second and [_]
paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against
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an indemnifying party under this Section 7, notify the indemnifying party in
writing of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party for contribution or otherwise than under the indemnity
agreement contained in this Section 7 or to the extent it is not prejudiced as a
proximate result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek indemnity
from an indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it shall elect, jointly with all other
indemnifying parties similarly notified, by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if the defendants in
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that a conflict may
arise between the positions of the indemnifying party and the indemnified party
in conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 7 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (BancBoston Robertson Stephens Inc. in the case of Section 7(b) and
Section 8), representing the indemnified parties who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying
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party shall, without the prior written consent of the indemnified party, effect
any settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(f) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations
23
<PAGE> 24
in this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(g) Survival. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(h) Acknowledgments of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Common Shares
set forth opposite their respective names on Schedule A bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this
24
<PAGE> 25
Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 6 and Section 7 shall at all times be
effective and shall survive such termination. In any such case either the
Representative or the Company shall have the right to postpone the First Closing
Date or the Second Closing Date, as the case may be, but in no event for longer
than seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
As used in this Agreement, the term "Underwriter" shall be deemed
to include any person substituted for a defaulting Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date, this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representatives there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representatives may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured. Any termination pursuant to this Section 9 shall be
without liability on the part of (a) the Company to any Underwriter, except that
the Company shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to
the Company, or (c) of any party hereto to any other party except that the
provisions of Section 7 shall at all times be effective and shall survive such
termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and
25
<PAGE> 26
will survive delivery of and payment for the Shares sold hereunder and any
termination of this Agreement.
SECTION 11. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representative:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
MyPoints.com, Inc.
565 Commercial Street
San Francisco, California 94111-3031
Facsimile: (415) 676-2054
Attention: Steven M. Markowitz, Chief Executive Officer
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 8 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and personal representatives, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
26
<PAGE> 27
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
[The remainder of this page has been intentionally left blank.]
27
<PAGE> 28
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
MYPOINTS.COM, INC.
By:__________________________
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY, INC.
WIT CAPITAL CORPORATION
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
BY BANCBOSTON ROBERTSON STEPHENS INC.
By:_________________________________
Authorized Signatory
28
<PAGE> 29
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Common Shares
Underwriters To be Purchased
<S> <C>
BANCBOSTON ROBERTSON STEPHENS INC............... [___]
BEAR STEARNS & CO. INC.......................... [___]
SALOMON SMITH BARNEY, INC....................... [___]
WIT CAPTIAL CORPORATION......................... [___]
Total................................... [___]
</TABLE>
S-B
<PAGE> 30
EXHIBIT A
LOCK-UP AGREEMENT
BancBoston Robertson Stephens Inc.
Bear Stearns & Co. Inc.
Salomon Smith Barney, Inc.
Wit Capital Corporation
As Representatives of the Several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
Ladies & Gentlemen:
The undersigned understands that you, as Representatives of the several
underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") with MyPoints.com, Inc. (the
"Company"), providing for the initial public offering (the "Public Offering") by
the Underwriters, including yourselves, of shares of the Common Stock, par value
$0.001, of the Company (the "Common Stock") pursuant to the Company's
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission on or about March 31, 1999 (the "Registration Statement").
In consideration of the Underwriters' agreement to purchase and make the
Public Offering of the Common Stock, and for other good and valuable
consideration, receipt of which is hereby acknowledged, the undersigned hereby
agrees, for a period of 180 days after the effective date of the Registration
Statement (the "Lock-Up Period"), not to offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities"),
now owned or hereafter acquired directly by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree to be bound by this Lock-Up Agreement, (ii) as a distribution to
limited partners or shareholders of the undersigned, provided that the
distributees thereof agree in writing to be bound by the terms of this Lock-Up
Agreement or (iii) with the prior written consent of BancBoston Robertson
Stephens. The foregoing restriction is expressly agreed to preclude the holder
of the Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-Up Period even if such Securities would be disposed
of by someone other than the undersigned. Such prohibited hedging or other
transactions would include without limitation any short sale (whether or not
against the box) or any
A-1
<PAGE> 31
purchase, sale or grant of any right (including without limitation any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities.
Furthermore, the undersigned hereby agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by the undersigned except in compliance with
this Lock-Up Agreement. In the event that the Registration Statement shall not
have been declared effective on or before July 15, 1999 this Lock-Up Agreement
shall be of no further force or effect.
Very truly yours,
___________________________________
(signature)
Name:
___________________________________
Address:
___________________________________
___________________________________
A-2
<PAGE> 32
EXHIBIT B
MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL
(i) The Company and each Significant Subsidiary (as that term is defined
in Regulation S-X of the Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the corporate power
and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a Material Adverse Effect. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any
corporation, association or other entity other than [list subsidiaries];
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein, the issued and outstanding shares of
capital stock of the Company have been duly and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, will not
have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right;
(v) All issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, have not been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor
in accordance with the terms hereof, will be duly and validly issued and
fully paid and nonassessable, and will not have been issued in violation
of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right;
(vii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
B-1
<PAGE> 33
(viii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
(ix) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or threatened under the
Securities Act;
(x) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm
Shares or the Option Shares have been validly registered under the
Securities Act and the Rules and Regulations of the Exchange Act and the
applicable rules and regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which
such counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and
Regulations;
(xii) The information in the Prospectus under the caption "Description
of Capital Stock," to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and is a fair
summary of such matters and conclusions; and the forms of certificates
evidencing the Common Stock and filed as exhibits to the Registration
Statement comply with Delaware law;
(xiii) The description in the Registration Statement and the Prospectus
of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the
Securities Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which are not described or referred to therein or filed as required;
B-2
<PAGE> 34
(xv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
Company's charter or bylaws or (b) to such counsel's knowledge, result
in a material breach or violation of any of the terms and provisions of,
or constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or
instrument known to such counsel to which the Company is a party or by
which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court, government or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries, or
over any of their properties or operations;
(xvi) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except (i) such as have been obtained under the Securities Act, (ii)
such as may be required under state or other securities or Blue Sky laws
in connection with the purchase and the distribution of the Shares by
the Underwriters, (iii) such as may be required by the National
Association of Securities Dealers, LLC and (iv) such as may be required
under the federal or provincial laws of Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Securities Act, other than those
described therein;
(xviii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective
charter or bylaws, or (b) in material breach of any applicable statute,
rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or governmental agency
or body having jurisdiction over the Company or any of its subsidiaries,
or over any of their properties or operations;
(xix) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Company Shares or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of
Company Shares or other securities, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent
to file the Registration
B-3
<PAGE> 35
Statement or have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such rights; and
(xx) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-4
<PAGE> 36
EXHIBIT C
MATTERS TO BE COVERED IN THE OPINION OF
PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with the technology used by the Company
in its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) The Company is listed in the records of the United States Patent and
Trademark Office as the holder of record of the patents listed on a
schedule to such opinion (the "Patents") and each of the applications
listed on a schedule to such opinion (the "Applications"). To the
knowledge of such counsel, there are no claims of third parties to any
ownership interest or lien with respect to any of the Patents or
Applications. Such counsel is not aware of any material defect in form
in the preparation or filing of the Applications on behalf of the
Company. To the knowledge of such counsel, the Applications are being
pursued by the Company. To the knowledge of such counsel, the Company
owns as its sole property the Patents and pending Applications;
(ii) The Company is listed in the records of the appropriate foreign
offices as the sole holder of record of the foreign patents listed on a
schedule to such opinion (the "Foreign Patents") and each of the
applications listed on a schedule to such opinion (the "Foreign
Applications"). Such counsel knows of no claims of third parties to any
ownership interest or lien with respect to the Foreign Patents or
Foreign Applications. Such counsel is not aware of any material defect
of form in the preparation or filing of the Foreign Applications on
behalf of the Company. To the knowledge of such counsel, the Foreign
Applications are being pursued by the Company. To the knowledge of such
counsel, the Company owns as its sole property the Foreign Patents and
pending Foreign Applications;
(iii) Such counsel knows of no reason why the Patents or Foreign Patents
are not valid as issued. Such counsel has no knowledge of any reason why
any patent to be issued as a result of any Application or Foreign
Application would not be valid or would not afford the Company useful
patent protection with respect thereto;
(iv) As to the statements under the captions "Risk Factors - We face
risks associated with third party claims and protection of our
intellectual property rights" and "Business - Intellectual Property and
Proprietary Rights," nothing has come to the attention of such counsel
which caused them to believe that the above-mentioned sections of the
Registration Statement, at the time the Registration Statement became
effective and at all times subsequent thereto up
C-1
<PAGE> 37
to and on the Closing Date and on any later date on which Option Stock
are to be purchased the Registration Statement and any amendment or
supplement thereto made available and reviewed by such counsel contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or any later date on
which the Option Stock are to be purchased, as the case may be, the
above-mentioned sections of the Registration Statement, Prospectus and
any amendment or supplement thereto made available and reviewed by such
counsel contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading; and
(v) Such counsel knows of no material action, suit, claim or proceeding
relating to patents, patent rights or licenses, trademarks or trademark
rights, copyrights, collaborative research, licenses or royalty
arrangements or agreements or trade secrets, know-how or proprietary
techniques, including processes and substances, owned by or affecting
the business or operations of the Company which are pending or
threatened against the Company or any of its officers or directors.
C-2
<PAGE> 38
EXHIBIT D
MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL
(i) The Shares to be issued by the Company have been duly authorized
and, upon issuance and delivery and payment therefor in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully
paid and non-assessable;
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement
has become effective under the Act and, to such counsel's knowledge, no
stop order proceedings with respect thereto have been instituted or
threatened or are pending under the Act;
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm
Shares or the Option Shares have been validly registered under the
Securities Act and the Exchange Act and the applicable rules and
regulations of the Commission thereunder; and
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Wilson Sonsini Goodrich & Rosati, P.C.,
and Pillsbury, Madison & Sutro LLP, each dated the date hereof, and furnished to
you in accordance with the provisions of the Underwriting Agreement. Such
opinions appear on their face to be appropriately responsive to the requirements
of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Representatives, counsel to the Company and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
<PAGE> 1
23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement on Form S-1
(File No. 333-75523) of our report dated March 26, 1999, except for Note 13 as
to which the date is March 30, 1999, relating to the consolidated financial
statements of MyPoints.com, Inc. (formerly Intellipost Corporation), which
appear in such registration statement. We also consent to the references to us
under the captions "Experts" and "Selected Financial Data" in such registration
statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
July 28, 1999
<PAGE> 1
23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement on Form S-1
(File No. 333-75523) of our report dated March 26, 1999 relating to the combined
financial statements of Enhanced Response Technologies, Inc. We also consent to
the references to us under the headings "Experts" and "Selected Financial Data"
in such registration statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
July 28, 1999
