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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER __________
MYPOINTS.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-3255692
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
100 CALIFORNIA STREET, 11TH FLOOR
SAN FRANCISCO, CA 94111 (415) 676-3700
(ADDRESS OF PRINCIPAL EXECUTIVE (REGISTRANT'S TELEPHONE NUMBER,
OFFICES INCLUDING ZIP CODE) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant (based on the closing price for the Common Stock on the Nasdaq
National Market on March 24, 2000) was approximately $909,853,000. As of March
24, 2000, 28,711,503 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN SECTIONS OF THE PROXY STATEMENT TO BE FILED IN CONNECTION WITH THE
2000 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
OF THIS FORM 10-K REPORT WHERE INDICATED.
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INDEX
TABLE OF CONTENTS
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ITEM PAGE
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PART I
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1. Business........................................................................
2. Properties......................................................................
3. Legal Proceedings...............................................................
4. Submission of Matters to a Vote of Security Holders.............................
PART II
5. Market for Registrant's Common Equity and Related Stock Matters.................
6. Selected Financial Data.........................................................
7. Management's Discussion and Analysis of Financial Condition and Results
from Operations...............................................................
7A. Quantitative and Qualitative Disclosures about Market Risk......................
8. Financial Statements and Supplementary Data.....................................
9. Changes in and Disagreements with accountants on Accounting and Financial
Disclosure....................................................................
PART III
10. Directors and Executive Officers of the Registrant..............................
11. Executive Compensation..........................................................
12. Security Ownership of Certain Beneficial Owners and Management..................
13. Certain Relationships and Related Transactions..................................
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................
Signatures......................................................................
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PART I
ITEM 1. BUSINESS
All statements in this discussion that are not historical are
Forward-Looking Statements within the meaning of Section 21e of the Securities
Exchange Act, including statements regarding the Company's "Expectations",
"Beliefs", "Hopes", "Intentions", "Strategies", or the like. Such statements are
based on management's current expectations and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the Forward-Looking Statements. The Company cautions
investors that there can be no assurance that actual results or business
conditions will not differ materially from those projected or suggested in such
Forward-Looking Statement as a result of various factors, including, but not
limited to, the risk factors discussed in this Annual Report on Form 10-K.
MyPoints.com expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any Forward-Looking Statements contained
herein to reflect any change in MyPoints.com's expectations with regard thereto
or any change in events, conditions, or circumstances on which any such
statements are based.
MyPoints.com is a leading provider of internet direct marketing services
and customer loyalty infrastructure. Our database-driven direct marketing
service, MyPoints, offers direct marketers an approach to internet advertising
that integrates targeted email and web-based offers with incentives to respond
to those offers. Our rewards-based shopping channel, MyPoints Shopping!,
provides web users with the ability to earn points for every dollar spent at
select retail internet sites. Points earned in the MyPoints program may be
redeemed for a wide variety of products and services, such as gift certificates,
travel awards and prepaid phone cards. Our approach to direct marketing provides
internet consumers with the opportunity to earn rewards by responding to direct
offers and by shopping, and provides businesses with an integrated set of online
customer acquisition and retention tools. In addition, we build and manage
co-branded and private label online customer loyalty programs for our loyalty
partners.
According to PC Data, a leading web rating service, the MyPoints.com web
site, www.mypoints.com, was the internet's fifth most popular shopping site in
December 1999.
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. The internet allows 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.
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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;
- 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, a leading internet research firm, projects internet advertising
expenditures in the U.S. to increase from $2.8 billion in 1999 to $22.2 billion
in 2004. Forrester estimates that direct marketing will account for 53% of total
online advertising expenditures in the U.S. in 2004, up from 15% in 1999.
Online Loyalty Programs
Membership-based loyalty programs have long been a standard part of
companies' customer relationship management programs. Consumer loyalty programs
now operating in the United States serve businesses as diverse as supermarkets,
telecommunication companies, airlines, credit cards and music and book sellers.
As the numbers of internet users and web sites increase, the importance of
customer retention to online businesses 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.
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, integrated
direct marketing and loyalty solutions to the online market.
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THE MYPOINTS.COM SOLUTION
MyPoints.com is a leading provider of internet direct marketing services
and loyalty infrastructure. In the internet marketing sector, we believe that we
are the first to combine targeted email and web-based direct marketing offers
with a rewards program, called MyPoints. We provide our advertisers and loyalty
partners with online customer acquisition channels and retention tools.
By building our direct marketing service around the MyPoints program, we
believe we have overcome key barriers to effective direct marketing on the
internet. These barriers include inundation (the amount of email people
receive), spam (unsolicited commercial email) and anonymity (the difficulty of
matching a user's email address to a demographic profile). Our members opt into
the MyPoints program and we award them points for giving us personal
information. We inform our members that we will use the information to tailor
email offers to their interests and that they can earn additional points by
responding to those offers.
Consumers benefit from our direct marketing and loyalty programs through
the ability to earn and redeem points by interacting with our advertisers and
loyalty partners online. Advertisers and loyalty partners benefit from the
ability to acquire and retain customers on the internet cost- effectively.
Consumer Benefits
We have designed the MyPoints program to offer the following benefits to
members:
- Relevant Offers. The depth of our member database enables us to
accurately target advertisements to our members. 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 BMG Entertainment, Cooking.com, MotherNature.com and Sprint.
- Wide Variety of Rewards. We have designed our rewards programs to be
broad. 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, travel awards, prepaid phone cards and credits in other
popular rewards programs.
- - 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.
- Engaging Member Experience. We have designed our web site to be highly
personalized and easy-to-use, featuring one-click purchase and
redemption capability. We provide personalized web and email interfaces
that feature the member's name and current point balance. Our members
also have the option to receive our email offers in rich-media format,
such as HTML.
- - 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
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allowing them to set their own daily message levels, screen out unwanted
advertisement or award categories or opt out of the MyPoints program.
Business Benefits
MyPoints.com provides both our advertising clients, for whom we deliver
direct marketing messages, and our loyalty partners, for whom we build and
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
first 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. The most 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 members provide us with
demographic, behavioral and transactional information. We use these
detailed member profiles to target offers, allowing our advertising
clients to reach the most relevant audience for their promotions and
increase consumer response rates.
- Detailed Real Time Reporting. Online direct marketing campaigns
generally 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.
- Rewards-Based Shopping Channel. We offer web retailers the ability to
take advantage of our traffic and our customer loyalty infrastructure by
joining MyPoints Shopping!, our rewarded shopping channel. Through
MyPoints Shopping!, retailers can join a select group of web businesses
that offer points for every dollar our members spend on their sites.
- 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. These programs
enable our loyalty partners to reward their users for a variety of
relationship-building activities, such as registering for a service or
customizing a home page. Additionally, 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
operate or have agreed to operate loyalty programs on behalf of the
following companies: About.com, Excite@Home, FasTV, Food.com,
Garden.com, GTE, MyWay.com, NextCard, OurHouse.com, Prodigy, Providian
Financial, Talk City, USA.net, XOOM.com and ZDNet.
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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. Key elements of our strategy to
achieve this objective are to:
Expand Our Membership and Deepen Our Proprietary Database
We seek to continually expand the size of our membership base and deepen
our proprietary database to provide a large audience to our advertisers and the
ability to more accurately target messages to our members. 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 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 as our
members respond to direct offers and make purchases through our rewarded
shopping channel, MyPoints Shopping!. We will also continue to use 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 expertise 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 use our tools and technology to assist
merchants in targeting members for specific marketing promotions based on a
variety of targeting criteria, including demographic profile and past-purchase
behavior. As we implement campaigns, we will continue to accumulate additional
data and improve our targeting capabilities and technologies. Additionally, we
will continue to provide our advertisers with support services, including the
design and production of rich-media email and web-based offers and the graphical
interfaces for our partners' loyalty programs.
Increase Awareness of Our Brand
We seek to increase awareness of the MyPoints brand through consumer and
trade advertising campaigns and through partnerships with high-profile internet
brands. We also extend our brand presence through our association with the
strong brands of our rewards providers, advertisers and network of co-brand
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, a leading web audience measurement firm, as "the percentage of
projected individuals within a designated demographic or market break category
that accessed the web content of specific site or category among the total
number of projected individuals using the web during the month." According to
Media Metrix, in November 1999 the MyPoints program and the MyPoints Network of
co-branded loyalty partnerships, fully implemented, would have had a combined,
unduplicated reach of 36.2% of the internet. We are still in the process of
implementing some of these partnerships.
Pursue "Clicks and Mortar" Opportunities
We define "clicks and mortar" as using online marketing activities to
motivate offline purchases. Forrester estimates that 70 million shoppers
researched products and services on the web in 1999, leading to
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more than $100 billion in offline purchases. By 2003, Forrester predicts that
online purchases will reach $108 billion, and that online marketing will
influence approximately $500 billion in purchases at offline stores.
We believe the challenge for many merchants in the years to come will be to
effectively establish consumer relationships online and then to attract
consumers to an offline store for the final purchase. We are implementing a
number of initiatives to build out a "clicks and mortar" business to take
advantage of this large market. On behalf of some of our advertisers, we give
our members the opportunity to sign up for services online, but to earn points
for their offline purchases. For example, through our relationship with Sprint,
we reward members to sign up for Sprint long distance through our web site and
for every time they use Sprint long distance, an offline activity.
Maintain Our Technology Leadership
The MyPoints Digital Loyalty Engine, which underlies our rewards programs,
is a highly scalable software platform designed to serve the needs of our
members and business partners. The system currently supports more than six
million member accounts in proprietary, co-branded and private label loyalty
environments. We plan to continue developing and improving our technology to
meet the needs of a growing online marketplace. We also intend to continue to
leverage the technology and experience of Experian, a leading information
services and database management company and the parent of our largest
stockholder.
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 Enhanced
Response Technologies, Inc. and a company 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 investment
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. In addition, in January 2000, we acquired
Alliance Development Group, Inc., a company that operates offline customer
rewards programs. We intend to integrate our technology with ADG's offline
programs to make them more efficient.
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. Currently, we have signed agreements with
international partners including MetaLand, a leading Korean e-commerce site,
StarMedia, a leading Latin American portal, Sweden Post, the Swedish postal
service, TVSN, an Australian television shopping network, and Experian, a
subsidiary of The Great Universal Stores P.L.C. Our program with Sweden Post to
license a localized version of MyPoints BonusMail for the Swedish market has
been operational since May 1999. Sweden Post operates one of Europe's leading
electronic commerce web sites. We expect that we will announce other
international programs in the course of 2000.
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MYPOINTS.COM PRODUCTS AND SERVICES
The following table summarizes our products and services:
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PRODUCT/SERVICE DESCRIPTION SELECTED CLIENTS
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MYPOINTS AND MYPOINTS BONUSMAIL: Direct marketing system integrating targeted - eBay
Internet Direct Marketing Services email and web-based offers with incentive - BMG Entertainment
points to respond to those offers - Intuit
- Macy's
- MotherNature.com
- Sprint
MYPOINTS SHOPPING!: Rewards-based shopping channel featuring select - Avon
Internet Direct Marketing Services online retailers with whom MyPoints members can - Hickory Farms
earn points for dollars spent - JC Penney
- Lands End
- Orvis
MYPOINTS NETWORK: Network of web sites that use a co-branded - About.com
Internet Loyalty Infrastructure and version of our Digital Loyalty Engine - Excite@Home
Direct Marketing Services technology to provide their users with loyalty - Food.com
points to interact with their on-site offerings - Garden.com
- GTE
- MyWay.com
- OurHouse.com
- Providian
Financial
(Aria)
- Talk City
- USA.NET
PRIVATE LABEL LOYALTY PROGRAMS: Private label loyalty programs based on our - NextCard
Internet Loyalty Infrastructure and Digital Loyalty Engine technology - Prodigy
Direct Marketing Services - XOOM.com
- ZDNet
LICENSING: Internet Direct Marketing Licensing of proprietary internet direct - Sweden Post
and Loyalty Infrastructure marketing and loyalty technology
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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 first 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.
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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 electronic gift certificates,
travel awards, prepaid phone cards and points in other loyalty programs. 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 service that
enables our MyPoints members to earn points by shopping online at a network of
internet merchants. We work with our retail partners to increase site traffic
and sales through our rewarded shopping channel, MyPoints Shopping!. The
following merchants are among those participating in the program: Avon, Hickory
Farms, JC Penney, Lands End and Orvis.
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 are co-branded with each partner. 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: About.com,
Excite@Home, Food.com, Garden.com, GTE, MyWay.com, OurHouse.com, Providian
Financial (Aria), Talk City and USA.NET.
We compensate each MyPoints Network partner with points and/or a cash
bounty for each new member the partner brings to the MyPoints program. Our
partner issues points as a loyalty tool to its users. 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 each partner 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.
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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 NextCard Internet VISA (NextCard Rewards), Prodigy (Prodigy Points)
and XOOM.com (XOOMPoints). We also have an agreement with ZDNet to develop and
implement a private label program named ZDNet Points on its behalf in the second
quarter of 2000. Private label loyalty programs operate in a manner similar to
the MyPoints Network programs, except that the points are branded exclusively
for our partners. In most cases, 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 international market opportunities, which typically
require a foreign language web site as well as advertising and points redemption
opportunities relevant to the local market.
SALES AND MARKETING
At December 31, 1999, our advertising sales organization consisted of 46
employees located primarily in San Francisco, New York, Los Angeles and Chicago.
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. This organization is also responsible
for developing 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.
At December 31, 1999, our consumer marketing and business development
organization consisted of 31 employees in San Francisco, New York and Chicago.
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.
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We have a variety of affiliate programs in place, including one with Times
Company Digital, the internet business unit of The New York Times, under which
the MyPoints Program is an integrated feature in The New York Times on the Web's
registration process. Under the agreement, nytimes.com enables visitors to join
the MyPoints Program in the course of their online registration for The New York
Times on the Web.
ADVERTISING CLIENTS AND REWARDS PROVIDERS
Set forth below is a list of our ten largest advertising clients, based on
the amount of revenues we generated during 1999:
Advertising Clients
AnyDay.com BMG Entertainment
drkoop.com Electronic News
Freeshop Garden.com
healthshop.com MotherNature.com
Sprint Zoomerang
Our ten largest rewards providers, based on points redeemed as of December
31, 1999, are as follows:
Rewards Providers
Barnes & Noble Blockbuster Video
Brinker International Darden Restaurants
JCPenney Macy's
Sprint Target
Tower Records Toys 'R' Us
MEMBER CARE
We have established a 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.
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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 is an internet based software
application that 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.
Expandability
To date, we have demonstrated that our architecture is capable of rapid
expansion. Membership in our direct marketing and loyalty programs has grown
from fewer than two million members in January 1999 to more than six million
members in January 2000. 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
centers in Jersey City, New Jersey and Oak Brook, Illinois. The Exodus data
centers provide 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
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of media companies across a wide range of advertising and direct marketing
services. Online direct marketing service companies that we currently compete
with or may in the future compete with include 24/7 Media, DoubleClick, Flycast
Communications, MatchLogic, Netcreations and yesmail.com. In addition, several
other companies offer competitive online products, services and rewards
programs, including Cybergold and Netcentives. We also 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 were the first company to integrate
online direct marketing 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;
- 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
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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
three 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 in May 1999. If this claim
cannot be resolved through a license or similar arrangement, we could become a
party to litigation with Cybergold. Also, in July 1999, we received an
infringement claim from another party, along with an offer to grant a license to
us at a cost that would not be material. To our knowledge, no litigation has
been filed against us based on this claim. We are evaluating the claim and have
not yet begun substantive discussions regarding it. 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.
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 December 31, 1999, we employed 213 people, including 72 in sales and
marketing, 110 in technology and production and 31 in support, administration,
finance, management and human resources. We believe that we maintain good
relations with our employees.
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
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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
RISK FACTORS
All statements in this annual report that do not discuss past results are
forward-looking statements. Forward-looking statements are based on management's
current expectations and are therefore subject to certain risks and
uncertainties. Any of the following risks could seriously harm our business,
financial condition or results of operations. As a result, these risks could
cause the decline of the trading price of our Common Stock. The risks described
below, however, are not the only ones that we face. You should also refer to the
other information set forth in this annual report, including our financial
statements and the related notes.
RISKS ASSOCIATED WITH OUR BUSINESS
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 AT LEAST THROUGH 2001
Our accumulated deficit as of December 31, 1999 was $58.5 million. We have
never operated profitably and, given our planned level of operating expenses, we
expect to continue to incur losses at least through 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,
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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 losses
could continue beyond our present expectations.
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 our members and the costs
associated with these redemptions;
- changes in the mix of our business;
- 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.
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 greater than our expectations,
our growth rate would decline. In this event, the price of our common stock may
fall.
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;
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- 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 Enhanced Response
Technologies, Inc. and a company 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 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.
In January 2000, we acquired Alliance Development Group, Inc., a company
that operates offline customer rewards programs. In connection with this
acquisition, we intend to integrate our technology with ADG's offline programs
to help make them more efficient. If we are unable to do this in a timely
manner, we may be unable to realize the anticipated benefits of this
acquisition. This transaction will be accounted for under the purchase method of
accounting. We expect to allocate $14.8 million of the purchase price to
intangible assets and goodwill, which we intend to amortize over thirty-six to
ninety months.
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 STRAIN OUR
MANAGEMENT SYSTEMS AND RESOURCES
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 213
employees on December 31, 1999. 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 SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND EXPAND AN ACTIVE MEMBERSHIP
BASE
Our success largely depends on our ability to maintain and expand an active
membership base. Our revenues are primarily driven by fees paid by advertisers
and direct marketers based on specific actions taken by our members. If we are
unable to induce existing and new members to actively participate in our
programs, our business, results of operations and financial condition will be
harmed. We generate a significant portion of our revenues based on the activity
of a small percentage of our members, and we cannot assure you that the
percentage of active members will increase. In addition, some of our members
have requested to limit the
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number of emails they receive from us. Although our membership has grown in
prior periods, we cannot be sure that our membership growth will continue at
current rates or increase in the future.
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. We may
not be able to compete effectively, and competitive pressures may result in
price reductions, reduced gross margins and loss of our market share. See
"Business -- Competition."
THE FAILURE TO ESTABLISH THE MYPOINTS BRAND WOULD IMPAIR OUR COMPETITIVE
POSITION
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 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 competitive position would suffer.
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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 cause our stock price to decline and damage
our 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 have a life of three to four
years 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 ACCOUNTS 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 or 1999. Our four largest advertising customers were responsible for
approximately 30% of our revenues during 1998, and our ten largest advertising
customers were responsible for approximately 25% of our revenues during 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 revenues.
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.
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WE DEPEND ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES 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, 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 Executive 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. In addition, Eugene A.
Pierce, our Senior Vice President, Technology, joined us in the fourth quarter
of 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
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.
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 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.
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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, members and advertisers could lose confidence in our
services.
SYSTEM CAPACITY CONSTRAINTS MAY RESULT IN A LOSS OF REVENUES
A substantial increase in the use of our products and services could strain
the capacity of our systems, which could lead to slower response time or system
failures. System failures or slowdowns adversely affect the speed and
responsiveness of our rewards transaction processing. These would diminish the
experience for our members and reduce the number of transactions, and thus,
could reduce our revenue. Although we have designed and tested our system to
handle several times the highest daily transaction volume we have experienced to
date, the ability of our systems to manage this volume of transactions in a
production environment is unknown. As a result, we face risks related to our
ability to scale up to our expected transaction levels while maintaining
satisfactory performance. If our transaction volume increases significantly, we
will need to purchase additional servers and networking equipment to maintain
adequate data transmission speeds. The availability of these products and
related services may be limited or their cost may be significant.
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
three 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. Also, in July 1999, we received an
infringement claim from another party, along with an offer to grant a license to
us at a cost that would not be material. To our knowledge, no litigation has
been filed against us based on this claim. We are evaluating the claim and have
not yet begun substantive discussions regarding it. 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. In addition, any
intellectual property litigation, even if successfully defended, would result in
substantial costs and diversion of resources and management attention.
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 any competitive advantage incident to our proprietary rights.
See "Business -- Intellectual Property and Proprietary Rights."
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<PAGE> 23
AS WE EXPAND OUR BUSINESS INTERNATIONALLY, WE MAY NEED TO ADAPT OUR PRODUCTS AND
SERVICES AND WE MAY BE SUBJECT TO FOREIGN GOVERNMENT REGULATION AND TAXATION,
CURRENCY ISSUES, DIFFICULTIES IN MANAGING FOREIGN OPERATIONS AND FOREIGN
POLITICAL ECONOMIC INSTABILITY
An element of our growth strategy is to further introduce our services in
international markets. Our participation in international markets will be
subject to our potential inability to adapt, expand or enhance our products and
services to suit foreign markets. In addition, international operations are
generally associated with risks such as foreign government regulations, export
license requirements, tariffs and taxes, fluctuations in currency exchange
rates, introduction of the European Union common currency, difficulties in
managing foreign operations and political and economic instability. To the
extent our potential international members or our international partners are
impacted by currency devaluations, general economic crises or other
macroeconomic events, the ability of our members to utilize our services could
be diminished. In order to help us address some of the risks associated with
introducing our services internationally, we believe it will be necessary to
establish strategic relationships with international partners. We cannot assure
you that electronic commerce will develop successfully in international markets
or that potential members in these foreign markets will utilize incentives-based
marketing programs. Furthermore, we cannot assure you that we will be able to
overcome any legal restrictions related to offering rewards and incentives that
may exist in foreign jurisdictions. Any failure to develop our business
internationally may harm our competitive position and consequently our business.
RISKS ASSOCIATED WITH THE INTERNET INDUSTRY
IF THE ACCEPTANCE OF ONLINE ADVERTISING AND DIRECT MARKETING DOES NOT CONTINUE,
OUR REVENUES WOULD DECLINE
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 revenues would decline.
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.
IF ONLINE REWARDS PROGRAMS ARE NOT WIDELY ACCEPTED BY BUSINESSES AND INTERNET
USERS OUR BUSINESS MODEL WILL NOT SUCCEED
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 internet users, our business model will not succeed.
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
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<PAGE> 24
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 REMAIN COMPETITIVE, WE MUST 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. We must 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.
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 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. The federal government,
state governments or other governmental authorities could also adopt or modify
laws or regulations relating to the internet.
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. In addition, the Federal Trade Commission is
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<PAGE> 25
considering the adoption of regulations regarding the collection and use of
personal information obtained from individuals, especially children, when
accessing web sites. These regulations could restrict our ability to provide
demographic data to our advertising and marketing clients. At the international
level, the European Union has adopted a directive that will impose restrictions
on the collection and use of personal data. This directive could affect U.S.
companies that collect information over the internet from individuals in
European Union member countries and may impose restrictions that are more
stringent than current internet privacy standards in the United States. These
developments could have an adverse effect on our business, results of operations
and financial condition.
OTHER RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
SUBSTANTIAL CONTROL WILL REMAIN WITH OUR MANAGEMENT AND MAJOR STOCKHOLDERS AND
THIS COULD DELAY OR PREVENT A CHANGE OF CONTROL
Our executive officers, our directors and entities affiliated with them and
our 5% stockholders together currently beneficially own approximately 30% of our
outstanding common stock. 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.
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. These provisions, if used by our management, could
negatively affect our stock price.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES TO DECLINE
As a result of an offering of common stock which we completed in February
2000, approximately 13.6 million shares of our common stock are subject to
lock-up agreements between the holders of those shares and the representatives
of the underwriters in the offering, under 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 May 14, 2000, subject to limited exceptions.
FleetBoston Robertson Stephens Inc., one of the managing underwriters in the
offering, may release stockholders from the lockup agreement at any time and
without notice. Following the expiration of this lock-up period, approximately
13.1 million 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. 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
recent market prices of our stock.
OUR STOCK PRICE HAS BEEN VOLATILE, 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 price which they paid for their shares. 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.
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<PAGE> 26
ITEM 2. PROPERTIES
We are currently leasing approximately 40,000 square feet of office space
in San Francisco, California, approximately 23,000 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. The lease for the San Francisco facility expires in November 2006,
with an option to extend the lease for an additional five years. 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.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of stockholders during the fourth
quarter of 1999.
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<PAGE> 27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol of MYPT. The following table sets forth, for the period
indicated, the low and high bid prices per share for the Company's Common Stock
as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
Third Quarter 1999............................. $ 8.00 $26.50
Fourth Quarter 1999............................ $11.50 $97.69
</TABLE>
As of March 24, 2000, there were approximately 232 holders of record of the
Company's Common Stock.
No dividends have been paid on the Common Stock since the Company's
inception and the Company currently intends to retain all future earnings, if
any, for use in its business and does not anticipate paying any cash dividends
in the foreseeable future.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
On August 19, 1999, a Registration Statement on Form S-1 (No. 333-75523)
was declared effective by the Securities and Exchange Commission, pursuant to
which 5,750,000 shares of the Company's Common Stock, $0.001 par value, were
offered and sold for the account of the Company at a price of $8.00 per share,
generating gross offering proceeds of $46.0 million for the account of the
Company. The managing underwriters for the offering were Fleet Boston Robertson
Stephens, Bear Stearns & Co., Inc., Salomon Smith Barney and Wit Capital
Corporation.
From the effective date of the Registration Statement to December 31, 1999,
the Company incurred $3.2 million in underwriting discounts and commissions.
Total expenses incurred in connection with the offering were $1.6 million. The
net proceeds of the offering, after deducting the foregoing expenses, were $41.2
million. No direct or indirect payments were made to directors, officers, or
general partners of the Company or their associates, or to persons owning 10% or
more of any class of equity securities of the Company and its affiliates.
From the effective date of the Registration Statement to December 31, 1999,
the Company estimates that it has used a portion of the net proceeds as follows:
(i) temporary investment in marketable debt securities, $21.8 million; and (ii)
working capital $19.4 million.
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<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical information has been derived from the
audited financial statements of the Company. The financial information as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 are derived from audited financial statements and are included
elsewhere in this Form 10-K. The table should be read in conjunction with Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 8. "Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
NOVEMBER 7,
1996
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------
1996 1997 1998 1999
-------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................................ $ -- $ 151 $ 1,286 $ 24,140
Cost of revenues ................................ -- 78 1,121 7,407
-------- -------- -------- --------
Gross profit ................................. -- 73 165 16,733
Operating expenses:
Technology costs ............................. 16 560 1,520 8,665
Sales and marketing expenses ................. 36 1,669 4,513 30,247
General and administrative expenses .......... 16 712 2,028 9,601
Amortization of intangible assets ............ -- -- 275 3,116
Stock-based compensation ..................... -- 77 158 3,054
-------- -------- -------- --------
Total operating expenses ................ 68 3,018 8,494 54,683
-------- -------- -------- --------
Operating loss .................................. (68) (2,945) (8,329) (37,950)
Interest and other income (expense), net ........ 1 56 63 494
-------- -------- -------- --------
Net loss ..................................... (67) $ (2,889) $ (8,266) $(37,456)
======== ======== ======== ========
Net loss attributable to common stockholders .... (67) $ (2,889) $ (8,266) $(47,256)
======== ======== ======== ========
Net loss per share:
Basic and diluted ............................ $ (0.08) $ (2.56) $ (4.37) $ (3.53)
======== ======== ======== ========
Weighted average shares-- basic and diluted .. 891 1,127 1,890 13,397
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 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 $ 21,792
Working capital (deficit) ....................... 1,099 2,381 (307) 10,948
Total assets .................................... 1,205 3,474 18,306 55,669
Long-term obligations, less current maturities .. -- 47 2,408 1,029
Accumulated deficit ............................. (67) (2,956) (11,222) (58,478)
Total stockholders' equity ...................... 1,412 2,692 9,283 28,853
</TABLE>
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<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
FROM 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 Annual
Report on Form 10-K, 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 events could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including those set forth under "Risk Factors" and
elsewhere in this Annual Report on Form 10-K.
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 Enhanced Response
Technologies, Inc. and a company 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. In August 1999, we completed our initial public offering and in February
2000 we completed an additional public offering of shares of our common stock.
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.
Under new and some existing advertising contracts and partnerships, we sell
points to private label partners and to advertisers for use in their promotional
campaigns. We initially defer revenue and estimated point costs associated with
the sale of points and recognize this revenue upon the expiration or redemption
of the underlying points. Under some new contracts, we may amortize some
associated fees and related costs over the life of these contracts.
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.
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<PAGE> 30
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 recognized revenue under this agreement when the custom
development work that we performed for Sweden Post was completed and accepted by
Sweden Post. In addition, we will recognize royalty revenue as it is received
from Sweden Post. We expect to enter into additional licensing and royalty
arrangements, particularly for international markets. We also expect to derive
revenues from several pending international initiatives.
We incurred a net loss of $8.3 million in 1998, and $37.5 million in 1999.
We intend to implement our strategies by spending substantial amounts on member
acquisition and retention, new product offerings, sales and marketing strategic
relationships, brand development 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.
RESULTS OF OPERATIONS FOR 1998 AND 1999
We completed the acquisitions of internet and electronic commerce related
assets from ERT and a company affiliated with Experian during November and
December 1998. Accordingly, actual results of operations for the years ended
December 31, 1998 and 1999 include results for the acquired businesses from the
dates of acquisition.
Revenues
For 1999, total revenues increased to $24.1 million from $1.3 million in
1998. The increase in revenues for 1999 as compared to 1998 was primarily
attributable to the following: (i) an increase in the number of direct marketing
offers to our members, (ii) an increase in our advertising customer base, and
(iii) an increase in average spending per advertiser. Additionally, we
recognized license revenues of $614,000 in 1999 attributable to our license
arrangement with Sweden Post.
Cost of Revenues
Cost of revenues represents the costs of points awarded to our members for
receiving and responding to advertisements and related purchasing activities
associated with our direct marketing offers as well as personnel costs
associated with creating, delivering and monitoring email campaigns. For 1999,
cost of revenues increased to $7.4 million from $1.1 million in 1998. As a
percentage of revenues, these costs decreased to 31% in 1999 from 87% in 1998.
The decrease in the cost of revenues as a percentage of revenues in 1999 as
compared to 1998 is primarily attributable to a higher number of
revenue-generating responses to direct marketing offers, as well as the
elimination of points cost associated with members' receipt of email direct
marketing offers. We eliminated this points cost because we discontinued our
practice of providing points to members for simply receiving our email direct
marketing offers. We discontinued this practice in April 1999. We now require
members to respond to email offers to earn points.
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<PAGE> 31
Technology Costs
Technology costs primarily consist of compensation for personnel associated
with the development of our technology and the maintenance of our proprietary
database. We expense technology costs as incurred. For 1999, technology costs
increased to $8.7 million from $1.5 million in 1998. This increase was primarily
due to increased number of personnel and related expenses used to enhance and
support our proprietary database and products. We expect our technology costs to
increase in future periods as we continue to improve and enhance our direct
marketing technology and expand our membership database.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of payroll, sales
commissions and related expenses for personnel engaged in sales, marketing and
customer support, as well as advertising and promotional expenditures including
member acquisition costs. Member acquisition costs consist primarily of online
advertising, promotional costs and payments to partners, which may be in the
form of cash or points, to attract members to our email and web-based programs.
For 1999, sales and marketing expenses increased to $30.2 million from $4.5
million in 1998. This increase was primarily attributable to increased number of
personnel and related expenses required to implement our sales and marketing
strategy as well as increased promotional and advertising expenses. We expect
increases in sales and marketing expenses to continue in future periods as we
continue to hire additional marketing and sales employees, and continue to spend
more on member acquisition and promotions.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and
related costs for general corporate functions, including finance, accounting,
business development, human resources, investor relations, facilities and
administration, as well as legal fees, insurance, bad debt and fees for
professional services. General and administrative expenses increased to $9.6
million in 1999 from $2.0 million in 1998. This increase was primarily due to
the expansion of our corporate infrastructure, including the addition of finance
and administrative personnel. We expect general and administrative expenses to
increase in absolute dollars in future periods as we expand our administrative
staff to support the growth of our operations.
Amortization of Intangible Assets
As part of the acquisition of assets from ERT and a company affiliated with
Experian, in the fourth quarter of 1998, we recorded intangible assets related
to the acquired assets in the amount of $11.2 million. These intangible assets
include core technology, purchased trademark, assembled workforce and other
intangibles. These intangibles are being amortized over their estimated useful
lives of six months to five years. We recorded amortization of intangible assets
of $3.1 million in 1999 as compared to $275,000 in 1998. Amortization charges in
1998 were attributable to the acquisition of ERT and a company affiliated with
Experian, which was completed in the fourth quarter of 1998.
Stock-Based Compensation
As of December 31, 1999, we recorded aggregate deferred compensation
totaling $12.7 million in connection with the grant of stock options to
employees and consultants. This charge is being amortized over the vesting
periods of the options, which generally range from three to four years.
Stock-based compensation increased to $3.1 million during 1999 from $158,000
during 1998.
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<PAGE> 32
Interest Income
Interest income increased to $633,000 in 1999 from $87,000 in 1998. This
increase is primarily due to interest earned on higher average cash and
investment balances resulting from proceeds received from our initial public
offering which was completed in August 1999.
Income Taxes
We recorded a net loss of $37.5 million for 1999. Accordingly, no provision
for income taxes was recorded in the year and no tax benefit has been recognized
due to the uncertainty of realizing a future tax deduction for these losses.
RESULTS OF OPERATIONS FOR 1997 AND 1998
We completed the acquisitions of internet and electronic commerce related
assets from ERT and a company affiliated with 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."
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 and Marketing Expenses
Our sales and marketing expenses increased to $4.5 million in 1998 from
$1.7 million 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. The marketing expense portion of
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
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<PAGE> 33
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 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.
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.
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.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................... $ 150 $ 156 $ 268 $ 712 $ 1,275 $ 2,663 $ 6,955 $ 13,247
Cost of revenues ................... 137 108 255 621 878 999 2,153 3,377
------- ------- ------- ------- -------- -------- -------- --------
Gross profit ................. 13 48 13 91 397 1,664 4,802 9,870
------- ------- ------- ------- -------- -------- -------- --------
Operating expenses:
Technology costs ................ 204 328 402 586 968 1,423 2,658 3,616
Sales and marketing expenses .... 387 860 1,495 1,771 2,564 7,321 7,486 12,876
General and administrative
expenses ..................... 452 301 467 808 1,074 1,671 3,144 3,712
Amortization of intangibles ..... -- -- -- 275 832 802 733 749
Stock-based compensation ........ 63 19 43 33 449 710 800 1,095
------- ------- ------- ------- -------- -------- -------- --------
Total operating expenses ..... 1,106 1,508 2,407 3,473 5,887 11,927 14,821 22,048
------- ------- ------- ------- -------- -------- -------- --------
Operating loss ..................... (1,093) (1,460) (2,394) (3,382) (5,490) (10,263) (10,019) (12,178)
Interest and other income
(expense), net ............... 23 22 -- 18 9 (41) 181 345
------- ------- ------- ------- -------- -------- -------- --------
Net loss ........................... $(1,070) $(1,438) $(2,394) $(3,364) $ (5,481) $(10,304) $ (9,838) $(11,833)
======= ======= ======= ======= ======== ======== ======== ========
Net loss attributable to
common stockholders ............. $(1,070) $(1,438) $(2,394) $(3,364) $(15,281) $(10,304) $ (9,838) $(11,833)
======= ======= ======= ======= ======== ======== ======== ========
</TABLE>
-31-
<PAGE> 34
Revenues
Revenues increased sequentially in each of the last seven quarters. These
increases were a direct result of the increase in the number of direct marketing
offers delivered to our members base during 1998 and 1999. Direct marketing
offers generated nearly all of the revenues in each quarter of 1998 and 1999.
Gross Profit
Gross profit as a percentage of revenues increased from the first quarter
to the second quarter of 1998, decreased from the second to the third quarter,
increased from the third to the fourth quarter and increased sequentially from
the fourth quarter of 1998 through the fourth quarter of 1999. The increase in
gross profit in the last four quarters was due to a higher number of revenue
generating responses to the direct marketing offers. In addition, beginning in
the second quarter of 1999, we discontinued awarding points for receipt of email
direct marketing offers. The corresponding reduction in points cost increased
our gross profit in the second, third and fourth quarters of 1999.
Technology Costs
Technology costs increased each quarter from the first quarter of 1998
through the fourth quarter of 1999. The significant increase in the technology
costs over the last seven quarters is a result of increased hiring of technical
employees and consultants.
Sales and Marketing Expenses
Sales and marketing expenses increased in the second and third quarters of
1998, remained relatively constant during the fourth quarter of 1998 and
increased during each 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. Sales expenses increased
due to an increase in sales commissions, sales personnel, travel, advertising
and promotional expenses during 1999.
General and Administrative Expenses
As a percentage of revenues, general and administrative expenses decreased
during each quarter of 1998 and 1999. The absolute dollar increase in the second
half of 1998 and all 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 ERT and a company
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:
-32-
<PAGE> 35
<TABLE>
<CAPTION>
AMOUNT AMORTIZATION 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 our initial public offering in August 1999, we purchased the
licensed technology for a payment of $2.6 million, which was equivalent to the
present value of the future minimum royalty payments at that time.
In January 2000, we acquired Alliance Development Group, Inc. a company
that operates offline customer rewards programs. We issued an aggregate of
270,000 shares of our common stock in this transaction. Based on the value of
our common stock on the date this acquisition closed, the aggregate purchase
price in the transaction was $16.7 million. We expect to account for this
transaction under the purchase method of accounting. As a result, we expect to
allocate $14.8 million of the purchase price to intangible assets and goodwill,
which we intend to amortize over thirty-six to ninety months.
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 as well as our initial public offering in
August 1999 and our follow-on public offering in February 2000. 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 $24.9 million in 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 and $555,000 for
depreciation and amortization. In 1999, the net cash used by our $37.5 million
net loss and an increase of accounts and unbilled receivables of $13.0 million
was partially offset by a $6.9 million increase in points redemption liability,
non-cash charges of $4.9 million for depreciation and amortization and $3.1
million in stock-based compensation and a $9.7 million increase in accounts
payable and other liabilities.
Our working capital decreased from $2.4 million at December 31, 1997 to a
deficit of $307,000 at December 31, 1998 and increased to $10.9 million at
December 31, 1999. The decrease in 1998 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 increase in 1999 is a result of $51.5 million in proceeds
received from the sale of common and preferred stock as well as from an increase
in accounts receivable.
-33-
<PAGE> 36
The total number of outstanding points issued to members as of December 31,
1997 and 1998 was 259.7 million and 1,407.4 million, respectively. In addition,
we assumed outstanding point balances of 120.3 million as of December 31, 1998
in connection with our acquisition of ERT and a company affiliated with
Experian. The outstanding points issued by us and acquired with the acquisition
transactions represented a points redemption liability of $519,000 at December
31, 1997 and $2.7 million at December 31, 1998. In April 1999, we consolidated
our program with the program run by the acquired companies. Our program points
were converted 5 to 1 (five old program points for one new program point) into
the new consolidated program points. Moreover, the points in the acquired
companies' program were converted 1 to 1 into the new program points.
Accordingly, the total number of outstanding points issued to members for which
we have a recognized liability as of December 31, 1999 was approximately 1.1
billion points with a redemption liability of $9.6 million. This liability was
calculated based on an assumption that 100% of points issued in 1997 and 80% of
points issued in 1998 and 1999 would be redeemed in the future. We use
historical redemption activity and individual member account activity to
determine our estimated redemption liability. The factors that are considered in
our estimated redemption liability include points held by terminated and
inactive members, as well as those members we believe will not respond to our
direct marketing offers. This information is updated on a quarterly basis. The
total number of points issued by us and redeemed by members was none in 1997,
22.5 million in 1998 and 227.0 million in 1999.
Points issued by us have a life of three to four years. Our current policy
is that unredeemed points will expire on December 31 of the third calendar year
following the calendar year in which such points are first deemed earned.
Although we do not anticipate making changes to our current policy we reserve
the right to alter point expiration terms at anytime. In the past, we have both
extended as well as reduced expiration terms of points. 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 in 1999 was
$9.4 million, which was used primarily to acquire property, leasehold
improvements, computer equipment and software.
Net cash provided by financing activities was $4.2 million in 1997, $6.2
million in 1998 and $51.0 million in 1999. These amounts included net proceeds
of $41.2 million from our initial public offering in August 1999, net proceeds
of private equity financings of $4.1 million in 1997, $6.1 million in 1998 and
approximately $10.0 million in 1999, 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. In
addition, in 1997, 1998 and 1999, we entered into various non-cancelable capital
lease agreements including a capital equipment lease line for certain types of
capital expenditures. 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 notes, leases and capital lease lines are approximately
$45,000 per month.
At December 31, 1998 and 1999, we had cash and cash equivalents of $5.1
million and $21.8 million, respectively.
-34-
<PAGE> 37
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, we may need to raise
additional funds 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 and adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for transactions entered into after March 31, 2000 and requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and the type of hedge transaction. The
ineffective portion of all hedges will be recognized in earnings. We are
currently assessing the impact of this statement.
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 Factors" in Item 1 of this report. You
should read the "Risk Factors" section of this report 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
-35-
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MYPOINTS.COM, INC.-- CONSOLIDATED FINANCIAL STATEMENTS
Report of PricewaterhouseCoopers LLP, Independent Accountants..............................
Consolidated Balance Sheets..................................................................
Consolidated Statements of Operations........................................................
Consolidated Statements of Stockholders' Equity..............................................
Consolidated Statements of Cash Flows........................................................
Notes to Consolidated Financial Statements...................................................
MYPOINTS.COM, INC.-- PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview...................................................................................
Pro Forma Consolidated Statement of Operations...............................................
Notes to Pro Forma Consolidated Statement of Operations......................................
ENHANCED RESPONSE TECHNOLOGIES, INC. COMBINED --
FINANCIAL STATEMENTS Report of PricewaterhouseCoopers LLP, Independent Accountants.........
Combined Balance Sheets......................................................................
Combined Statements of Operations............................................................
Combined Statements of Shareholders' Deficiency..............................................
Combined Statements of Cash Flows............................................................
Notes to Combined Financial Statements.......................................................
Financial Statement Schedules:
II -- Valuation and Qualifying Accounts for each of the two years in the period
ended December 31, 1999
All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
</TABLE>
-36-
<PAGE> 39
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, 1998 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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
January 26, 2000
San Francisco, California
-37-
<PAGE> 40
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 5,089 $ 21,792
Accounts receivable, net ........................................... 586 12,500
Unbilled receivables, net .......................................... 413 257
Deposits and prepaid expenses ...................................... 220 1,702
Other current assets ............................................... -- 484
-------- --------
Total current assets ............................................ 6,308 36,735
Intangible assets ..................................................... 10,888 7,757
Restricted cash ....................................................... -- 2,208
Property and equipment, net ........................................... 1,041 8,891
Other assets .......................................................... 69 78
-------- --------
Total assets .................................................... $ 18,306 $ 55,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 1,702 $ 13,842
Notes payable, current portion ..................................... 143 327
Obligations under capital leases, current portion .................. 91 105
Other current liabilities .......................................... 479 --
Deferred revenue ................................................... 631 1,873
Software license liability, current portion ........................ 842 --
Points redemption liability ........................................ 2,727 9,640
-------- --------
Total current liabilities ....................................... 6,615 25,787
Notes payable, less current portion ................................... 179 932
Long-term debt ........................................................ 240 --
Obligations under capital leases, less current portion ................ 207 97
Software license liability, less current portion ...................... 1,782 --
-------- --------
9,023 26,816
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $0.001 par value; 0 and 10,000,000 shares
authorized at December 31, 1998 and 1999, respectively;
none issued and outstanding at December 31, 1998 and 1999 ....... -- --
Convertible preferred stock, $0.001 par value; 15,500,000 and
0 shares authorized at December 31, 1998 and 1999 respectively;
10,388,315 and 0 shares issued and outstanding at December 31,
1998 and 1999 respectively ...................................... 10 --
Common stock, $0.001 par value; 100,000,000 shares authorized;
6,015,727 and 25,924,533 shares issued and outstanding at
December 31, 1998 and December 31, 1999, respectively ........... 6 26
Additional paid-in capital ......................................... 22,851 96,711
Stock subscription receivable ...................................... (350) --
Deferred stock-based compensation .................................. (2,012) (9,406)
Accumulated deficit ................................................ (11,222) (58,478)
-------- --------
Total stockholders' equity ...................................... 9,283 28,853
-------- --------
Total liabilities and stockholders' equity .................... $ 18,306 $ 55,669
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-38-
<PAGE> 41
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Advertising ........................................................ $ 151 $ 1,286 $ 23,526
License ............................................................ -- -- 614
-------- -------- --------
Total revenue ................................................... 151 1,286 24,140
-------- -------- --------
Cost of revenue:
Advertising ........................................................ 78 1,121 7,212
License ............................................................ -- -- 195
-------- -------- --------
Total cost of revenue ........................................... 78 1,121 7,407
-------- -------- --------
Gross profit ....................................................... 73 165 16,733
-------- -------- --------
Operating expenses:
Technology costs ................................................... 560 1,520 8,665
Sales and marketing expenses ....................................... 1,669 4,513 30,247
General and administrative expenses ................................ 712 2,028 9,601
Amortization of intangible assets .................................. -- 275 3,116
Stock-based compensation ........................................... 77 158 3,054
-------- -------- --------
Total operating expenses ........................................ 3,018 8,494 54,683
-------- -------- --------
Operating loss ........................................................ (2,945) (8,329) (37,950)
Interest income ....................................................... 64 87 633
Interest expense and other, net ....................................... (8) (24) (139)
-------- -------- --------
Net loss ........................................................ (2,889) (8,266) (37,456)
Dividend related to beneficial conversion feature of preferred stock .. -- -- (9,800)
-------- -------- --------
Net loss attributable to common stockholders .................... $ (2,889) $ (8,266) $(47,256)
======== ======== ========
Net loss per share:
Basic and diluted .................................................. $ (2.56) $ (4.37) $ (3.53)
======== ======== ========
Weighted average shares-- basic and diluted ........................ 1,127 1,890 13,397
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-39-
<PAGE> 42
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
(In thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED
STOCK CONVERTIBLE COMMON STOCK ADDITIONAL
------------------- ---------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ..................................................... 3,000 $ 3 2,500 $ 3 $ 1,475
Issuance of Series B preferred stock for cash, net of issuance costs of $4 ... 500 1 496
Receipt of subscription receivable from common stock .........................
Issuance of Series C preferred stock for cash, net of issuance costs of $7 ... 2,400 2 3,591
Deferred stock-based compensation ............................................ 465
Net loss .....................................................................
------- ------- ------ --- -------
BALANCE, DECEMBER 31, 1997 ................................................... 5,900 6 2,500 3 6,027
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
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 stock-based compensation ............................................ 1,782
Net loss .....................................................................
Repurchase of common stock ................................................... (181)
------- ------- ------ --- -------
BALANCE, DECEMBER 31, 1998 ................................................... 10,389 10 6,015 6 22,851
Issuance of common stock for cash, net of issuance costs of $1,575 ........... 5,811 6 41,199
Receipt of subscription receivable from Series D preferred stock .............
Issuance of Series E preferred stock for cash, net of issuance costs of $50 .. 2,000 2 9,948
Issuance of warrants ......................................................... 807
Receipt of subscriptions receivable from Series E preferred stock ............
Beneficial conversion feature related to issuance of preferred stock ......... (9,800) 9,800
Dividend related to beneficial conversion feature of preferred stock ......... 9,800
Exercise of warrants for cash ................................................ 704 1 1,449
Cashless exercise of warrants ................................................ 503 1
Exercise of stock options for cash ........................................... 478 209
Exercise of stock options for note receivable ................................ 25
Conversion of preferred stock to common stock ................................ (12,389) (12) 12,389 12
Net loss .....................................................................
Deferred stock-based compensation ............................................ 10,448
------- ------- ------ --- -------
BALANCE AT DECEMBER 31, 1999 ................................................. -- $ -- 25,925 $26 $96,711
======= ======= ====== === =======
</TABLE>
<TABLE>
<CAPTION>
STOCK DEFERRED
SUBSCRIPTION STOCK-BASED ACCUMULATED
RECEIVABLE COMPENSATION DEFICIT TOTAL
------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ..................................................... $ (2) $ -- $ (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 2
Issuance of Series C preferred stock for cash, net of issuance costs of $7 ... 3,593
Deferred stock-based compensation ............................................ (388) 77
Net loss ..................................................................... (2,889) (2,889)
------- ------- -------- --------
BALANCE, DECEMBER 31, 1997 ................................................... -- (388) (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 .. (350) 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 stock-based compensation ............................................ (1,624) 158
Net loss ..................................................................... (8,266) (8,266)
Repurchase of common stock ................................................... --
------- ------- -------- --------
BALANCE, DECEMBER 31, 1998 ................................................... (350) (2,012) (11,222) 9,283
Issuance of common stock for cash, net of issuance costs of $1,575 ........... 41,205
Receipt of subscription receivable from Series D preferred stock ............. 350 350
Issuance of Series E preferred stock for cash, net of issuance costs of $50 .. (9,950) --
Issuance of warrants ......................................................... 807
Receipt of subscriptions receivable from Series E preferred stock ............ 9,950 9,950
Beneficial conversion feature related to issuance of preferred stock ......... --
Dividend related to beneficial conversion feature of preferred stock ......... (9,800) --
Exercise of warrants for cash ................................................ 1,450
Cashless exercise of warrants ................................................ 1
Exercise of stock options for cash ........................................... 209
Exercise of stock options for note receivable ................................ --
Conversion of preferred stock to common stock ................................ --
Net loss ..................................................................... (37,456) (37,456)
Deferred stock-based compensation ............................................ (7,394) 3,054
------- ------- -------- --------
BALANCE AT DECEMBER 31, 1999 ................................................. $ -- $(9,406) $(58,478) $ 28,853
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-40-
<PAGE> 43
MYPOINTS.COM, INC.
(FORMERLY INTELLIPOST CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (2,889) $ (8,266) $(37,456)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 70 555 4,901
Provision for bad debts .......................................... -- 60 1,228
Points redemption liability ...................................... 519 1,732 6,913
Barter revenues, net ............................................. (20) (59) 67
Issuance of stock options to non-employees for services .......... -- 15 --
Stock-based compensation ......................................... 77 158 3,054
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables .................. (116) (639) (12,986)
Deposits and prepaid expenses ................................. 2 (138) (1,482)
Other assets .................................................. -- (28) (61)
Accounts payable, accrued and other liabilities ............... 52 878 9,679
Deferred revenue .............................................. -- 258 1,242
-------- -------- --------
Net cash used in operating activities ....................... (2,305) (5,474) (24,901)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment ............................... (353) (358) (7,191)
Proceeds received pursuant to acquisition ........................ -- 1,747 --
Restricted cash .................................................. -- -- (2,208)
-------- -------- --------
Net cash (used in) provided by investing activities ......... (353) 1,389 (9,399)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs . 4,090 6,084 10,300
Proceeds from issuance of common stock ........................... 2 -- 41,205
Bank overdraft ................................................... 54 (54) --
Borrowings under line of credit .................................. 100 400 --
Repayments of borrowings ......................................... (18) (160) (695)
Repayments of software license ................................... -- -- (2,624)
Principal payments under capital lease obligations ............... -- (53) (96)
Borrowings under capital lease line .............................. -- -- 1,254
Exercise of stock options ........................................ -- 9 209
Exercise of warrants ............................................. -- -- 1,450
-------- -------- --------
Net cash provided by financing activities ................... 4,228 6,226 51,003
-------- -------- --------
Net increase in cash and cash equivalents ................... 1,570 2,141 16,703
Cash and cash equivalents, beginning of period ...................... 1,378 2,948 5,089
-------- -------- --------
Cash and cash equivalents, end of period ............................ $ 2,948 $ 5,089 $ 21,792
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ......................... $ 12 $ 34 $ 194
======== ======== ========
Noncash transactions:
Equipment acquired under capital leases .......................... $ 22 $ 329 $ 139
======== ======== ========
Cashless exercise of warrants .................................... $ -- $ -- $ 1,407
======== ======== ========
Conversion of preferred stock to common stock .................... $ -- $ -- $ 12
======== ======== ========
Exercise of stock options for notes receivable ................... $ -- $ -- $ 200
======== ======== ========
Exchange of advertising services ................................. $ 20 $ 128 $ 85
======== ======== ========
Issuance of capital stock for business acquisition ............... $ -- $ (8,582) $ --
======== ======== ========
Stock subscription receivable .................................... $ -- $ 350 $ --
======== ======== ========
Stock options issued to non-employees ............................ $ -- $ 277 $ --
======== ======== ========
Warrants issued to non-employees ................................. $ -- $ 12 $ 807
======== ======== ========
Deferred stock compensation from issuance of options ............. $ 465 $ 1,782 $ 10,448
======== ======== ========
Disposal of fully depreciated assets ............................. $ -- $ -- $ 54
======== ======== ========
Property and equipment included in accounts payable .............. $ -- $ -- $ 1,982
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-41-
<PAGE> 44
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. The Company
has determined that it does not have any separately reportable business segments
as of December 31, 1999.
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements as of December 31, 1998 and 1999 and for the years
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.
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 are charged
-42-
<PAGE> 45
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, frequent travel
programs, 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, if and when such members seek to redeem accumulated points
upon reaching required redemption thresholds. The cost of points is determined
as the weighted average cost of awards that may be redeemed. Under the current
program, points are valid through December 31st of the third calendar year
following 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, 1998 and December
31, 1999, the allowance for unredeemed points was $563,000 and $2.8 million,
respectively. As of December 31, 1999 the gross points redemption liability is
$12.4 million.
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 $2,274,000 for the years ended December 31, 1997, 1998
and 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, (2) receipt of qualified responses
-43-
<PAGE> 46
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 is 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 emails 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 new and certain existing advertising contracts and partnerships, the
Company sells points to private label partners and advertisers for use in such
partners or advertisers' promotional campaigns. The Company is responsible for
redeeming member's points upon the balance reaching required thresholds and
request by the member recipients of points. Revenues and estimated point costs
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 exclusive license to use certain software technology
developed by the Company. Under the agreement the Company was required to
perform significant customization of the software. 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. During the third quarter of 1999, the Company recognized revenue under
this agreement when the custom development work was completed and accepted by
the third party.
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
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.
-44-
<PAGE> 47
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, Series
D and Series E convertible preferred stock, are not included in diluted net loss
per share because such shares are anti-dilutive.
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>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net loss ....................................................... $ (2,889) $ (8,266) $(37,456)
Dividend related to beneficial conversion feature of preferred
stock .......................................................... -- -- (9,800)
-------- -------- --------
Net loss attributable to common stockholders ................... $ (2,889) $ (8,266) $(47,256)
======== ======== ========
Denominator:
Weighted average shares ........................................ 2,500 2,856 13,964
Weighted average unvested common shares subject to repurchase
agreements .................................................. (1,373) (966) (567)
-------- -------- --------
Denominator for basic calculation .............................. 1,127 1,890 13,397
Weighted average effect of dilutive securities:
Net effect of dilutive stock options ........................ -- -- --
Net effect of dilutive stock warrants ....................... -- -- --
-------- -------- --------
Denominator for diluted calculation ............................ 1,127 1,890 13,397
======== ======== ========
Net loss per share:
Basic .......................................................... $ (2.56) $ (4.37) $ (3.53)
======== ======== ========
Diluted ........................................................ $ (2.56) $ (4.37) $ (3.53)
======== ======== ========
</TABLE>
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.
-45-
<PAGE> 48
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000 and requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and the type of hedge
transaction. The ineffective portion of all hedges will be recognized in
earnings. MyPoints.com is currently assessing the impact of this statement.
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 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 are being amortized over their
estimated useful lives of six to 60 months.
Among the liabilities assumed in the acquisition was 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 recorded the obligation at its estimated fair value as
determined by estimated future cash payments, discounted at a market interest
rate. The Company had 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 was
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. In September 1999, the Company paid approximately $2.6 million to the
licensor to complete the purchase of the licensed software.
-46-
<PAGE> 49
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) (17,826)
Net loss ........................................ (6,968) (17,970)
Net loss per share:
Basic and diluted ............................ $ (1.49) $ (3.47)
Weighted average shares--basic and diluted .. 4,677 5,185
</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 1998 or 1999. As of December 31, 1998 and 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 1999, the Company has incurred a total of $227,737
and $875,000, 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 services for the Company. From inception through
December 31, 1998 and December 31, 1999, the Company has incurred a total of $0
and $226,000, respectively, in fees 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.
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<PAGE> 50
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Computer equipment ..................... $1,185 $ 6,852
Computer software ...................... 308 2,948
Furniture and fixtures ................. 152 720
Leasehold improvements ................. 22 405
------ -------
1,667 10,925
Accumulated depreciation ............... (626) (2,034)
------ -------
$1,041 $ 8,891
====== =======
</TABLE>
Depreciation expense amounted to $49,000, $265,000 and $1,462,000 for the
years ended December 31, 1997, 1998 and 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 December
31, 1999.
On March 26, 1999, the Company entered into a senior loan and security
agreement with a financing company. The lender has committed to finance up to
$1.5 million under this capital lease line of which borrowings of $1.1 million
were outstanding as of December 31, 1999. These capital lease agreements have
terms ranging three to five years with interest rates ranging from 7.2% to
18.0%. Borrowings against this line are collateralized by certain fixed assets
of the Company. The agreement contains certain negative covenants including
financial covenants related to minimum liquidity coverage ratios.
Annual maturities of notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000 $ 327
2001 351
2002 327
2003 251
------
$1,259
======
</TABLE>
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<PAGE> 51
8. CAPITAL STRUCTURE
The Company is authorized to issue 100,000,000 shares of $0.001 par value
common stock and 10,000,000 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.
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 five 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.
During May and June 1999, the Company issued warrants in connection with
commercial agreements entered into with two third parties. The warrants were
fully vested at the date of grant, enable the holders to purchase an aggregate
of 150,000 shares of the Company's common stock at a price of $8.00 per share
and are exercisable for a period of one year. The fair value of these warrants,
estimated at approximately $807,000 using the Black-Scholes valuation model,
will be charged to operations over the term of the agreements.
COMMON STOCK OPTIONS
The Company adopted the 1996 Stock Plan on November 7, 1996, the 1999 Stock
Plan on November 13, 1998, and the 1999 Supplemental Stock Plan on December 8,
1999 (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 6,485,833 shares of common stock for issuance
under the Plans as of December 31, 1999. The Company has granted incentive and
nonstatutory 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.
-49-
<PAGE> 52
Following is a summary of stock option activity for the years ended
December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
SHARE 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 .............................. 5,614,630 11.843
Exercised ............................ (503,251) 0.804
Canceled ............................. (1,080,519) 6.441
----------
Outstanding as of December 31, 1999 ..... 5,388,218 11.018
==========
Options vested as of December 31, 1999 .. 1,099,989 $ 4.811
==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
DECEMBER 31, 1998 DECEMBER 31, 1998
--------------------------------------- --------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE NUMBER 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 $0.173 254,585 $0.103
========= =======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------------------- --------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE NUMBER VESTED PRICE
------------------------ ----------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05 -- $ 0.15...................... 290,074 7.52 $ 0.073 265,041 $0.063
$ 0.20 -- $ 0.26...................... 457,259 8.89 0.249 344,912 0.255
$ 1.00 -- $ 5.00...................... 1,267,300 9.09 1.452 78,043 1.041
$ 8.00................................ 2,141,785 9.42 8.000 352,149 8.000
$12.37 -- $88.50...................... 1,231,800 9.90 32.682 59,844 38.250
--------- ---------
5,388,218 $11.018 1,099,989 $4.811
========= =========
</TABLE>
The Company accounts for the Plans in accordance with APB No. 25 and
related Interpretations and complies with the disclosure requirements of SFAS
No. 123, Accounting for Stock-Based Compensation. In connection with certain
stock option grants during the years ended December 31, 1997, 1998 and 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, 1998 and 1999 totaled
$77,000, $158,000, and $3,054,000, respectively.
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<PAGE> 53
In accordance with SFAS No. 123, the fair value of employee stock option
grants has been estimated on the date of grant using the minimum value model for
grants in 1997 and 1998. For grants in 1999, the fair value has been estimated
using the Black-Scholes Option Pricing Model.
The Black-Scholes Option Pricing Model was developed for use in estimating
the fair value of traded options and warrants that have no vesting restrictions
and are fully transferable. In addition, valuation models require the input of
highly subjective assumptions, including the expected stock volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Utilizing the minimum value model, the weighted
average fair value of employee stock options granted during 1997 and 1998 was
$0.53 and $2.27, respectively. Utilizing the Black-Scholes Option Pricing Model,
the weighted average fair value of employee stock options granted during 1999
was $11.59 per share.
The following assumptions were used in determining the fair value of
options granted and warrants issued:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates................... 5.72% 4.59% 5.17%
Expected life.............................. 5 years 5 years 5 years
Dividends.................................. -- -- --
Volatility................................. -- -- 109%
</TABLE>
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 DECEMBER 31,
----------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss as reported.................. $(2,889) $(8,266) $(47,256)
Net loss pro forma.................... $(2,890) $(8,291) $(54,370)
</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. EMPLOYEE BENEFIT PLANS
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 Service.
Discretionary contributions may be made by the Company; however, no
contributions have been made to date.
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.
-51-
<PAGE> 54
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.
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
2004. Rent expense amounted to $57,000, $180,000 and $775,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
Future minimum lease payments under noncancelable capital leases and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------ --------
<S> <C> <C>
2000.................................................. $118 $1,135
2001.................................................. 100 2,127
2002.................................................. -- 2,180
2003.................................................. -- 2,231
2004.................................................. -- 2,067
Thereafter............................................ -- 4,250
---- -------
Total minimum lease payments.......................... 218 $13,990
=======
Less amount representing interest..................... 16
----
Present value of capital lease obligations............ 202
Less current portion.................................. 105
----
Long-term portion..................................... $97
====
</TABLE>
LEGAL
The Company has received three 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. A second claim was made by a third party and
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. Also, in July 1999, the Company
received an infringement claim from a third party, along with an offer to grant
a license to the Company at a cost that would not be material. To the Company's
knowledge, no litigation has been filed based on this claim.
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.
11. INCOME TAXES
As of December 31, 1998 and December 31, 1999, the Company had net
operating loss carryforwards of approximately $7,810,000 and $27,332,000 for
federal income tax purposes, and $7,820,000 and $27,371,000
-52-
<PAGE> 55
for state income tax purposes, respectively. The federal and state net operating
loss carryforwards begin to expire in the years 2011 and 2004, respectively.
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>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate............................ 34% 34% 34%
State taxes, net of federal benefit.............. 6 6 6
Permanent differences............................ (2) (1) (2)
Valuation allowance.............................. (38) (39) (38)
--- --- ---
- - -
=== === ===
</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, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Non-deducted start-up costs .................. $ 303 $ 205
Net operating loss carryforwards ............. 3,177 10,890
Non-deducted research and experimental costs . 1,328 430
Points redemption liability .................. 1,185 4,270
Accrued liabilities and other ................ 106 2,045
Non-deducted intangible assets ............... (834) (1,250)
-------- --------
Gross deferred tax assets .................... 5,265 16,590
Valuation allowance .......................... (5,265) (16,590)
-------- --------
Net deferred tax assets ...................... $ -- $ --
======== ========
</TABLE>
The Company has recorded a valuation allowance against gross deferred tax
assets due to uncertainties surrounding their realization. The change in the
valuation allowance amounted to $4,039,000 and $11,325,000 in 1998 and 1999,
respectively.
12. POINTS REDEMPTION LIABILITY
Following is a summary of points redemption liability activity for the
years ended December 31, 1997, 1998 and 1999:
<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......................... 11,372
Allowance for unredeemed points..................................... (2,212)
Points redemption................................................... (2,247)
-------
Outstanding as of December 31, 1999................................. $ 9,640
=======
</TABLE>
-53-
<PAGE> 56
13. INITIAL PUBLIC OFFERING
On August 19, 1999, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1. Pursuant to this
Registration Statement, the Company completed an initial public offering of
5,750,000 shares of its common stock (including 750,000 shares sold pursuant to
the exercise of the Underwriters' over-allotment option) at an initial public
offering price of $8.00 per share ("the Offering"). The Offering was managed by
BancBoston Robertson Stephens, Bear, Stearns & Co. Inc., Salomon Smith Barney,
and Wit Capital Corporation. Proceeds to the Company, after calculation of the
underwriters discount and commission, from the Offering totaled approximately
$41.2 million, net of offering costs of approximately $1.6 million.
Upon completion of the Offering, the Company's preferred stock was
converted into 12,388,316 shares of common stock, and all outstanding shares of
preferred stock were cancelled and retired. Upon conversion of the preferred
stock, all rights to accrued and unpaid dividends were waived.
14. SUBSEQUENT EVENT
Effective January 13, 2000, the Company acquired all the outstanding shares
of Alliance Development Group, Inc., a company that operates offline customer
rewards programs. The acquisition will be accounted for using the purchase
method of accounting and, accordingly, the purchase price will be allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their relative fair values on the acquisition date.
The total purchase price of $16.7 million included 270,000 shares of the
Company's common stock with an estimated fair value of $16.5 million. Of the
total purchase price, $1.9 million was allocated to tangible assets and $14.8
million was allocated to intangible assets. The Company expects to amortize the
intangible assets over their estimated useful lives of one to eight years.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1998 and
1999, 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, and 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 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenues ........................................ $ 5,035 $ 26,982
Operating loss .................................. (11,180) (40,897)
Net loss ........................................ (11,082) (38,310)
Net loss attributable to common stockholders .... (11,082) (48,110)
Net loss per share:
Basic and diluted ............................ $ (5.13) $ (3.52)
Weighted average shares-- basic and diluted .. 2,160 13,667
</TABLE>
-54-
<PAGE> 57
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 years ended December 31, 1998 and
1999, 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.
-55-
<PAGE> 58
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
----------------------------------------------------------- YEAR ENDED
MYPOINTS.COM, ACQUIRED DECEMBER 31,
INC. COMPANIES ADJUSTMENTS PRO FORMA 1999
------------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 1,286 $ 30 $ -- $ 1,316 $ 24,140
Cost of revenues .......................... 1,121 1 1,122 7,407
-------- -------- -------- -------- --------
Gross profit ........................... 165 29 194 16,733
-------- -------- -------- -------- --------
Operating expenses:
Technology costs ....................... 1,520 2,393 3,913 8,665
Sales and marketing expenses ........... 4,513 2,647 7,160 30,247
General and administrative expenses .... 2,028 756 242 3,026 9,601
Amortization of intangible assets ...... 275 3,025 3,300 3,116
Stock-based compensation ............... 158 463 621 3,054
-------- -------- -------- -------- --------
Total operating expenses ............ 8,494 6,259 3,267 18,020 54,683
-------- -------- -------- -------- --------
Operating loss ............................ (8,329) (6,230) (3,267) (17,826) (37,950)
Interest income ........................... 87 87 633
Interest expense and other, net ........... (24) (207) (231) (139)
-------- -------- -------- -------- --------
Net loss .................................. (8,266) (6,437) (3,267) (17,970) (37,456)
Dividend related to beneficial
conversion feature of preferred stock .. -- -- -- -- (9,800)
-------- -------- -------- -------- --------
Net loss attributable to common
stockholders ........................... $ (8,266) $ (6,437) $ (3,267) $(17,970) $(47,256)
======== ======== ======== ======== ========
Net loss per share:
Basic and diluted ...................... $ (4.37) $ (3.06) $ (3.53)
======== ======== ========
Weighted average shares-- basic and
diluted ............................. 1,890 2,105 13,397
======== ======== ========
Pro forma net loss per share:
Basic and diluted ...................... $ (3.47)
========
Weighted average shares-- basic and
diluted ............................. 5,185
========
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
-56-
<PAGE> 59
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 of $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>
11 MONTH
AMORTIZATION
------------
<S> <C>
Technology license agreement and intangible assets............. $1,682
Customer base.................................................. 271
Membership base................................................ 452
Employee workforce............................................. 312
Trademark...................................................... 308
------
$3,025
======
</TABLE>
In addition, the Company's historical financial statements, and those of
the acquired companies, reflect a pro forma adjustment to record 11 months of
depreciation expense of $242,000. 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.
-57-
<PAGE> 60
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
-58-
<PAGE> 61
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.
-59-
<PAGE> 62
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
RERIOD ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------ ------------ ------------------------
1996 1997 1997 1998
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
(UNAUDITED)
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.
-60-
<PAGE> 63
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.
-61-
<PAGE> 64
ENHANCED RESPONSE TECHNOLOGIES, INC.
(FORMERLY MOTIVATIONNET, INC.)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD ENDED YEAR 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.
-62-
<PAGE> 65
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' 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.
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<PAGE> 66
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 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
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<PAGE> 67
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.
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
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<PAGE> 68
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.
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.
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<PAGE> 69
Interest expense was $0 and $116,400 in 1996 and 1997, respectively.
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.
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>
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<PAGE> 70
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------------------------------- ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING 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.
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>
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<PAGE> 71
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).
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<PAGE> 72
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING AT END
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS OF YEAR
----------- ---------- --------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts for
the years ended:
December 31, 1998.................. $-- $ 60 $-- $ 60
December 31, 1999.................. 60 1,228 -- 1,288
</TABLE>
70
<PAGE> 73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference
from the information under the caption "Election of Directors" contained in the
Company's definitive Proxy Statement, to be filed with the Securities and
Exchange Commission no later than 120 days from the end of the Company's last
fiscal year in connection with the solicitation of proxies for its 2000 Annual
Meeting of Stockholders (the "Proxy Statement"). The information required by
Section 16(a) is incorporated by reference from the information under the
caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934"
in the Proxy Statement.
The principal executive officers of MyPoints.com, Inc. are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven M. Markowitz........... 29 Chief Executive Officer and Chairman of the Board
Robert C. Hoyler.............. 49 President, Chief Operating Officer and Director
Thomas P. Caldwell............ 41 Senior Vice President, Finance and Chief Financial Officer
Charles H. Berman............. 48 Executive Vice President, Sales
Eugene A. Pierce.............. 43 Senior Vice President, Technology
Steven E. Parker.............. 37 Senior Vice President, Marketing
Frank J. Pirri................ 59 Senior Vice President, Offline Commerce
Layton S. Han................. 34 Vice President, Business Development
</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
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<PAGE> 74
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.
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.
Eugene A. Pierce joined us as Senior Vice President, Technology in November
1999. Prior to joining MyPoints.com, Mr. Pierce served as the Chief Technology
Officer of LEXIS-NEXIS since November 1998, where he was responsible for the
system architecture for a database service that fielded more than 800,000
inquiries per day. From February 1997 to November 1998, Mr. Pierce worked as
Vice President of Development for Update Marketing in Vienna, Austria. Prior to
Update Marketing, Mr. Pierce held numerous management positions over a 15-year
period at AT&T GIS, Health Magic Incorporated and NCR Inc. Mr. Pierce holds a
B.S. from Wright State University and a Masters of Computer Science from Wright
State University.
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 a B.S. in
Commerce from the McIntire School at the University of Virginia and an M.B.A.
from Loyola University.
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.
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<PAGE> 75
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Officer Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
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<PAGE> 76
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The financial statements (including the notes thereto) listed in the Index
to Consolidated Financial Statement Schedule (set forth in Item 8 of Part II of
the Form 10-K) are filed as part of this Annual Report on Form 10-K.
(a)2. FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements at Item 8 of Part II of this
Form 10-K.
(a)3. EXHIBITS
Refer to (C) below.
(b) REPORTS ON FORM 8-K
On February 4, 2000, the Company filed a report on Form 8-K relating to its
acquisition of Alliance Development Group, Inc.
(c) EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1(b)* Certificate of Incorporation, as currently in effect
3.2(b)* Bylaws of the registrant, as currently in effect
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
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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.
10.18** Office Lease dated November 16, 1999 between registrant and
WHLNF Real Estate Limited Partnership for facility located at
100 California Street, 11th Floor, San Francisco, California
94111
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ----------
* Exhibit incorporated by reference to the like-numbered exhibit to
Registrant's registration statement on Form S-1 filed with the Securities and
Exchange Commission on April 1, 1999 (File No. 333-75523).
** Exhibit incorporated by reference to the like-numbered exhibit to
Registrant's registration statement on Form S-1 filed with the Securities and
Exchange Commission on January 20, 2000 (File No. 333-95009).
+ Confidential treatment has been granted for portions of this exhibit.
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<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, MyPoints.com has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Francisco, State
of California, on the 30th day of March, 2000.
MYPOINTS.COM, INC.
By: /s/ STEVEN M. MARKOWITZ
-----------------------------------
Steven M. Markowitz
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Steven M. Markowitz and Thomas Caldwell, and each of them, his or her
attorneys-in-fact, each with the power of substitution, for him or her in any
and all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting to said
attorneys-in-fact, or his substitute or substitutes, the power and authority to
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report 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 March 30, 2000
- --------------------------- Chairman of the Board
Steven M. Markowitz (Principal Executive Officer)
/s/ THOMAS CALDWELL Senior Vice President, Finance and
- --------------------------- Chief Financial Officer
Thomas Caldwell (Principal Financial and Accounting Officer) March 30, 2000
/s/ ROBERT C. HOYLER Director March 30, 2000
- ---------------------------
Robert C. Hoyler
/s/ HOWARD L. MORGAN Director March 30, 2000
- ---------------------------
Howard L. Morgan
/s/ THOMAS NEWKIRK Director March 30, 2000
- ---------------------------
Thomas Newkirk Director March 30, 2000
/s/ LAWRENCE E. PHILLIPS Director March 30, 2000
- ---------------------------
Lawrence E. Phillips
/s/ MARIO M. ROSATI Director March 30, 2000
- ---------------------------
Mario M. Rosati
/s/ LESTER WUNDERMAN Director March 30, 2000
- ---------------------------
Lester Wunderman
</TABLE>
-76-
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1(b)* Certificate of Incorporation, as currently in effect
3.2(b)* Bylaws of the registrant, as currently in effect
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.
10.18** Office Lease dated November 16, 1999 between registrant and
WHLNF Real Estate Limited Partnership for facility located at
100 California Street, 11th Floor, San Francisco, California
94111
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ----------
* Exhibit incorporated by reference to the like-numbered exhibit to
Registrant's registration statement on Form S-1 filed with the Securities and
Exchange Commission on April 1, 1999 (File No. 333-75523).
** Exhibit incorporated by reference to the like-numbered exhibit to
Registrant's registration statement on Form S-1 filed with the Securities and
Exchange Commission on January 20, 2000 (File No. 333-95009).
+ Confidential treatment has been granted for portions of this exhibit.
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
Enhanced Response Technologies, Inc. F.K.A. Motivationnet, Inc.
Alliance Development Group, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-91965) of MyPoints.com, Inc. of our reports dated
January 26, 2000, relating to the consolidated financial statements which appear
in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 21,792
<SECURITIES> 0
<RECEIVABLES> 12,757
<ALLOWANCES> 1,288
<INVENTORY> 0
<CURRENT-ASSETS> 36,735
<PP&E> 10,925
<DEPRECIATION> (2,034)
<TOTAL-ASSETS> 55,669
<CURRENT-LIABILITIES> 25,787
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 28,827
<TOTAL-LIABILITY-AND-EQUITY> 55,669
<SALES> 24,140
<TOTAL-REVENUES> 24,140
<CGS> 0
<TOTAL-COSTS> 7,407
<OTHER-EXPENSES> 47,750
<LOSS-PROVISION> 1,228
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> (47,256)
<INCOME-TAX> 0
<INCOME-CONTINUING> (47,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,256)
<EPS-BASIC> (3.53)
<EPS-DILUTED> (3.53)
</TABLE>
