<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 2000
REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------
GIFTCERTIFICATES.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 13-3986622
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
-----------------------------------
470 SEVENTH AVENUE, 6TH FLOOR
NEW YORK, NY 10018
(212) 465-2112
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
-----------------------------------
MICHAEL D. STEPHENSON
CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT
470 SEVENTH AVENUE, 6TH FLOOR
NEW YORK, NY 10018
(212) 465-2112
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------------------
COPIES TO:
VALERIE FORD JACOB, ESQ. LEE MEYERSON, ESQ.
STUART GELFOND, ESQ. SIMPSON THACHER & BARTLETT
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON 425 LEXINGTON AVENUE
ONE NEW YORK PLAZA NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10004 (212) 455-2000
(212) 859-8000
-----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value per share............................. $50,000,000 $13,200
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
-----------------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
SUBJECT TO COMPLETION -- June 13, 2000
Prospectus
, 2000
[GiftCertificates.com, Inc. Logo]
SHARES OF COMMON STOCK
GIFTCERTIFICATES.COM, INC.:
- We are a leading Internet marketplace for gift certificates and a provider
of related technologies and services.
- GiftCertificates.com, Inc. 470 Seventh Avenue, 6th Floor New York, NY 10018
(212) 465-2112
SYMBOL & MARKET:
- GCRT/Nasdaq National Market
THE OFFERING:
- GiftCertificates.com, Inc. is offering shares.
- The underwriters have an option to purchase an additional shares from
us to cover over-allotments.
- This is our initial public offering, and no public market currently exists
for our shares.
- Closing: , 2000
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PER SHARE TOTAL
--------------------------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees: $ $
Proceeds to GiftCertificates.com, Inc.: $ $
--------------------------------------------------------------------------------
</TABLE>
This investment involves risks. See "Risk Factors" beginning on Page 9.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
ROBERTSON STEPHENS
E*OFFERING
<PAGE> 3
We will amend and complete the information in this prospectus. Although we are
permitted by U.S. Federal securities law to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities has been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
<PAGE> 4
DESCRIPTION OF INSIDE COVER
Inside front cover
The top two thirds of the page is taken up by excerpts from two screenshots of
different parts of the GiftCertificates.com website. Over the screenshots is the
text "company overview" in which the word "company" is pale green and "overview"
is light blue. The screenshots are directly next to each other with one slightly
lower than the other. The first screenshot is of the GiftCertificates.com home
page, which is predominantly different shades of green. The second screenshot is
of the corporate client portion of our website, which is predominantly shades of
purple. Below the screenshots is the following text and bullets:
GiftCertificates.com is a leading Internet marketplace for physical and
emailable gift certificates.
- Products and services for employee incentives, customer loyalty
programs, marketing promotions and consumer gifts
- Gift certificates from over 500 merchants representing over 600
well-known brands
- Technology and infrastructure to enable merchants to offer gift
certificates on their own websites
The text starts in a large font size and gradually decreases until the first
bullet, after which a constant font size is maintained. The text is in blue.
Fold-out pages
Across the top of the entire fold-out is a pale green arc. Directly below the
arc, contained in a pale green rectangle with rounded corners is the text "The
GiftCertificates.com Marketplace", an arrow pointing to the right, and the text
"A Self-Reinforcing Network". This title box also extends across both pages of
the fold-out.
There are four boxes arrayed across the fold-out. Three of the boxes are joined
in a circle formed by pale green arrows. Within the center of this circle is the
fourth box. Associated with each of the three boxes included in the circle is a
picture.
On the left hand page of the fold-out, about two-thirds of the way to the top of
the page and roughly centered, is a box with the title "Corporate Sales". The
box contains two bullets, which read:
- We offer merchant gift certificates and our own SuperCertificate(TM)
for incentive, loyalty and promotional programs
- Corporate gifts are distributed widely, introducing many individuals
to our website, product selection and service
The bullets are written in a darker blue against a pale blue background.
Overlapping the lower left hand corner of the box is a picture of business
people walking. Below the lower right hand corner of the box are two arrows in
pale green, one pointing up, the other point down. A picture of a
SuperCertificate(TM), our own branded gift certificate, overlaps with the arrow
which points down. The arrow pointing down leads to a box with the title
"Consumer Sales". This box, which is in different shades of purple, contains the
bullets:
- We provide one stop shopping with the choice and variety provided by
over 600 quality brands
- Consumer brand builds awareness among potential corporate and merchant
enablement clients
A picture of shoppers overlaps the right hand side of the "Consumer Sales" box.
To the right of the picture are two arrows in pale green, one pointing towards
the picture, the other pointing right, towards a box entitled "Enablement",
which is on the right hand page of the fold-out. The "Enablement" box, which is
in different shades of pale green, contains the bullets:
- We enable merchants to offer gift certificates on their own websites
using our technology and infrastructure
- Enablement clients may join our marketplace, expanding the selection
of merchants available to our customers
<PAGE> 5
Overlapping the lower right hand corner of this box is a picture of two people
exchanging bags. There is an arrow in pale green which points from the upper
left hand corner of the "Enablement" box back across the fold towards the
"Corporate Sales" box, completing the circle.
Contained in the center of the circle is a box in different shades of orange
entitled "Merchants". It contains the text: "Gift certificates from hundreds of
the nation's leading retailers, hotels, Internet companies, spas, theatres and
restaurants."
In the lower left hand corner of the left page of the fold-out is the
GiftCertificates.com logo above three colored bars, one blue, one purple and one
green.
Inside back cover
The title "Merchants", written in blue, is at the top of the page contained
inside an orange rectangle with rounded corners. Below the title are 100
merchants/merchant brands listed in three columns. All of the merchant names are
written in blue. In the lower right hand corner is the text "Plus hundreds
more", written in blue and contained inside an orange rectangle with rounded
corners. The entire page is contained within a blue rectangle with rounded
corners.
<PAGE> 6
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.................................................... 1
RISK FACTORS.......................................................... 9
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS................ 22
USE OF PROCEEDS....................................................... 22
DIVIDEND POLICY....................................................... 22
CAPITALIZATION........................................................ 23
DILUTION.............................................................. 24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................ 25
SELECTED FINANCIAL DATA............................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 33
BUSINESS.............................................................. 42
MANAGEMENT............................................................ 54
RELATED PARTY TRANSACTIONS............................................ 63
PRINCIPAL STOCKHOLDERS................................................ 66
DESCRIPTION OF CAPITAL STOCK.......................................... 70
SHARES ELIGIBLE FOR FUTURE SALE....................................... 76
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS........... 78
UNDERWRITING.......................................................... 82
LEGAL MATTERS......................................................... 85
EXPERTS............................................................... 85
WHERE YOU CAN FIND MORE INFORMATION................................... 85
INDEX TO FINANCIAL STATEMENTS......................................... F-1
APPENDIX: "MEET THE MANAGEMENT" PRESENTATION ........................ A-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR
TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
GIFTCERTIFICATES.COM(TM), SUPERCERTIFICATE(TM) AND GIFT CIRCLE(TM) ARE
TRADEMARKS OF GIFTCERTIFICATES.COM, INC. WE HAVE FILED APPLICATIONS TO REGISTER
THESE TRADEMARKS. THIS PROSPECTUS ALSO INCLUDES TRADEMARKS OWNED BY OTHER
PARTIES.
-i-
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information you should consider before investing in our common stock. You should
read the entire prospectus carefully. The terms we, us, our, our company and
GiftCertificates.com as used in this prospectus refer to GiftCertificates.com,
Inc. and its subsidiaries as a combined entity, giving effect to the
acquisitions of Giftpoint.com, Inc. and GiftSpot.com, Inc., except where the
context requires otherwise. The pro forma financial information used in this
prospectus gives effect to the acquisitions of Giftpoint.com, Inc. and
GiftSpot.com, Inc., the receipt of the net proceeds from this offering and the
conversion of all of our outstanding preferred stock into common stock.
GIFTCERTIFICATES.COM, INC.
OUR BUSINESS
We are a leading Internet marketplace for physical and emailable gift
certificates used for employee incentives, customer loyalty programs, marketing
promotions and consumer gifts. Through our website at www.GiftCertificates.com,
we offer gift certificates from over 500 merchants representing over 600
well-known brands. We also sell a gift certificate to our website, the
SuperCertificate(TM), which is redeemable for nearly all of the merchant gift
certificates we offer. In addition to gift certificates, we offer our corporate
clients a range of related value-added products and services for the
administration of their employee incentive, customer loyalty and marketing
programs. We currently have over 1,000 corporate clients, including over one
quarter of the Fortune 100. We also provide a turnkey solution that allows
merchants to offer emailable and physical gift certificates on their own
websites using our technology and our ordering, fulfillment, security and
customer service infrastructure. Our merchant enablement clients include
well-known national retailers.
We buy gift certificates from our merchant partners at a discount and
sell them at face value. We also generate revenues by supplying technologies and
services to our merchants and corporate clients and through the sale of
ancillary products. Our pro forma revenues were $13.9 million in 1999 and $6.8
million for first quarter 2000. Our pro forma cash receipts were $18.3 million
in 1999 and $7.4 million in first quarter 2000 and historically have been
greater than our revenues since we do not recognize revenue on SuperCertificate
sales until redemption. Because of the time differential between the sale and
redemption of our SuperCertificates, we generate significant cash float that we
can reinvest in our business. Our pro forma deferred revenues, representing
SuperCertificates that were sold for cash, but not yet redeemed and therefore
not yet included in revenue, net of deferred fulfillment costs, were $5.0
million as of March 31, 2000.
Gift certificates are well-suited for sale through the Internet since
they do not require in-person physical inspection, experience low return rates,
do not spoil, do not go out of fashion and can be delivered via email. Gift
certificates provide much of the choice and flexibility of cash, while allowing
for a more personalized and tailored gift or corporate incentive. In addition,
our gift certificates are valuable products for merchants since their use
promotes traffic, may result in incremental sales and generates cash float.
OUR STRATEGY
In order to strengthen our position as a leading Internet marketplace
for gift certificates and provider of related technologies and services, we
intend to pursue the following strategies:
- Pursue higher margin and float opportunities: We continue to
add new products and services with a particular focus on those
that earn higher margins and generate additional float
opportunities for us. For example, we are developing variants
of our SuperCertificate product, such as The Dining
SuperCertificate, The Wedding SuperCertificate, The
Entertainment SuperCertificate and The Fashion
SuperCertificate, that will promote our higher margin products
and provide us with additional cash float. Sales of our Super
Certificate products have been growing faster than sales of
our other products. We expect this trend to continue since
SuperCertificates comprise the majority of our corporate
sales, which have been growing faster as a percentage of sales
than our
-1-
<PAGE> 8
consumer sales. As a result, we expect that our float will
also continue to grow. Our merchant enablement business also
offers a significant opportunity to expand higher margin
products and services.
- Build our network and drive sales: We are increasing the
breadth of the merchant brands available on our website in
order to increase the conversion of visitors into customers
and grow sales. Increasing our merchant network enhances our
appeal to individuals, which in turn makes our products and
services more valuable to corporate clients.
- Enhance brand recognition: We continue to build our brand
through a broad-based marketing and advertising campaign
utilizing both online and offline channels. We have acquired
prominent placement in the shopping areas of a number of
leading Internet portals to drive traffic and sales to our
website. We also believe that our primary domain name,
www.GiftCertificates.com, significantly enhances our brand
recognition because it is self-explanatory.
- Build and pursue strategic alliances and acquisition
opportunities: We actively seek additional alliances and
acquisitions that will provide us with increased brand
recognition, revenue growth and margin enhancement
opportunities. Our recent strategic acquisitions of
Giftpoint.com and GiftSpot.com have enhanced our corporate
sales and merchant enablement businesses. We hope to expand
our established relationships through increased provision of
incentives, loyalty programs and other co-marketing
promotional opportunities and distribution partnerships. These
programs provide us with significant marketing exposure and a
lower cost means of accessing new customers.
- Invest in technology and operations: We continue to invest in
technology in order to enhance our product and service
offerings, merchant enablement capabilities, corporate program
management tools, overall customer experience and economies of
scale. We recently acquired GiftSpot.com primarily to expand
our technology offerings. To increase our efficiency and
capacity, we are completing a new customer service and
fulfillment center.
- Expand globally: We are planning a focused international
effort by targeting countries with high Internet, credit card
and gift certificate usage. We believe there may be
significant first mover advantages in these countries and have
already obtained domain names for this purpose.
We believe that our critical mass of merchant partners, growing client
base and the factors described below will continue to facilitate our growth.
- Mutually beneficial economic model: We believe that our
business model provides attractive economic benefits to our
merchant partners and ourselves. Gift certificate use drives
traffic to our merchant partners' stores and websites, and may
result in sales beyond the face value of the gift certificate.
In addition, gift certificates may be redeemed from within one
week to many months after the cash payment has been received
from the sale, allowing the issuer to reinvest the cash float
in its business. These economics enable our merchant partners
to sell their gift certificates to us at a discount. Since a
high percentage of our pro forma cash receipts, 42% for 1999
and 57% in first quarter 2000, are from our own
SuperCertificates, we experience the same economic benefits
from gift certificate sales enjoyed by our merchant partners
but for a greater percentage of our overall business.
- Effects of viral marketing: Since our products are typically
purchased by individual consumers and corporations for
distribution to others, our products and services are promoted
to the final recipient without incremental cost. This effect
is multiplied in the case of our corporate clients who
typically target large numbers of recipients with their
employee incentives, customer loyalty programs and marketing
promotions. In addition, our SuperCertificates, which have
become increasingly popular, provide significant customer
acquisition benefits for us since they are required to be
redeemed at our website.
- Extensive merchant network: Our extensive merchant network
increases our appeal to individual consumers and, as a result,
makes our products and services more valuable to corporate
clients seeking to provide incentives, loyalty programs or
promotions. We believe that our increasing sales also assist
us in retaining existing and recruiting additional merchant
partners. Since gift certificates are brand sensitive products
and merchants
-2-
<PAGE> 9
maintain strict control over their brands, we believe our
established partnerships with over 500 merchants and our
reputation for quality provide us with a competitive
advantage.
On March 6, 2000 we acquired Giftpoint.com, Inc., which significantly
enhanced our corporate sales efforts. Giftpoint.com was formerly our closest
competitor. On April 17, 2000 we acquired GiftSpot.com, Inc., which provided us
with significant technology and developer resources for electronic gift
certificate enablement. The revenues generated as a result of enablement
services consist of transaction, installation, licensing and processing fees. We
also completed a $44 million preferred equity financing in the second quarter of
2000.
Our headquarters are located at 470 Seventh Avenue, 6th Floor, New
York, New York 10018 and our telephone number is (212) 465-2112. The information
on our websites is not a part of this prospectus.
-3-
<PAGE> 10
THE OFFERING
Common stock offered............... shares
Common stock to be outstanding
after this offering............. shares
Use of proceeds.................... We estimate that the net proceeds from
this offering will be approximately
$ million, or $ million if the
underwriters exercise their overallotment
option. We intend to use the net proceeds
for sales and marketing activities,
capital expenditures and general
corporate purposes, including working
capital. We may use proceeds from this
offering for strategic acquisitions and
alliances.
Nasdaq National Market symbol...... GCRT
----------------
The number of shares of common stock to be outstanding after this
offering is estimated based on the number of shares outstanding as of ,
2000 and excludes:
- shares subject to outstanding options at a weighted
average exercise price of per share,
- an aggregate of shares available for future issuance
under our employee stock option plans,
- shares subject to outstanding warrants at a weighted
average exercise price of , and
- shares that may be issued if the underwriters exercise
their over-allotment option in full.
----------------
Unless otherwise indicated or unless the context otherwise requires, the
information in this prospectus assumes:
- no exercise of the underwriters' over-allotment option,
- a for reverse stock split occurring immediately
prior to the completion of this offering,
- the amendment and restatement of our amended and restated
certificate of incorporation,
- the automatic conversion of all outstanding shares of our
preferred stock into an aggregate of shares of common
stock upon completion of this offering which we assume to be
, and
- no adjustment to the conversion price for the Series J
Preferred Stock that would occur in the event the initial
public offering price of the common stock offered by this
prospectus is less than $ per share as adjusted for the
reverse stock split anticipated to occur immediately prior to
completion of this offering. At an assumed public offering
price of less than $ per share but greater than $ per
share, the conversion price for the Series J Preferred Stock
would be adjusted such that an aggregate of up to additional
shares of common stock would be issued upon the conversion of
the Series J Preferred Stock. At an assumed public offering
price of less than $ per share, the conversion price for
the Series J Preferred Stock would be adjusted such that an
aggregate of up to additional shares of common stock
would be issued upon the conversion of the Series J Preferred
Stock.
-4-
<PAGE> 11
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents our summary historical financial data at the
dates and for the periods indicated. You should read the summary financial data
set forth below in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes included in this prospectus. The historical data for the period
from October 16, 1997 (inception) through December 31, 1997 and the years ended
December 31, 1998 and 1999 and the balance sheet data at December 31, 1998 and
1999 are derived from, and are qualified by reference to, the audited financial
statements and related notes included in this prospectus. The balance sheet data
for December 31, 1997 is derived from our audited financial statements and
related notes not included in this prospectus. The statement of operations data
for each of the three-month periods ended March 31, 1999 and 2000 and the
balance sheet data at March 31, 1999 and 2000 are derived from the unaudited
interim financial statements included in this prospectus. Our statement of
operations data for the three months ended March 31, 2000 includes the results
of operations for Giftpoint.com, Inc. for the period from March 6, 2000, the
acquisition date, through March 31, 2000. Our balance sheet data as of March 31,
2000 includes Giftpoint.com, Inc. which was acquired prior to the end of the
period. We prepared the unaudited financial statements on substantially the same
basis as the audited financial statements and, in our opinion, they include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations for the quarters ended March 31,
1999 and 2000. Historical results are not necessarily indicative of results that
may be expected for any future period.
<TABLE>
<CAPTION>
OCTOBER 16,
1997
(INCEPTION)
THROUGH YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ------------------------ -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues, net (1) .................................. $ 179 $ 2,627 $ 9,905 $ 740 $ 4,804
Cost of revenues ................................... 176 2,425 9,568 714 4,691
-------- -------- -------- -------- --------
Gross profit .................................... 3 202 337 26 113
Marketing and sales expenses ....................... 558 737 12,927 341 5,697
Technology and systems development expenses ........ -- -- 1,039 100 407
General and administrative expenses ................ 150 864 4,924 220 2,603
Non-cash consulting and
compensation expense ............................ -- -- 276 40 38
Amortization of goodwill ........................... -- -- -- -- 544
-------- -------- -------- -------- --------
Loss from operations ............................ (705) (1,399) (18,829) (675) (9,176)
Other income (expense) ............................. -- (13) (340) -- 2
-------- -------- -------- -------- --------
Net loss ........................................ $ (705) $ (1,412) $(19,169) $ (675) $ (9,174)
======== ======== ======== ======== ========
Net loss available to common stockholders ....... $ (726) $ (1,569) $(20,398) $ (729) $ (9,924)
======== ======== ======== ======== ========
Basic and diluted net loss per share (2) ........... $ (0.07) $ (0.15) $ (1.68) $ (0.06) $ (0.44)
======== ======== ======== ======== ========
Weighted average common shares outstanding
basic and diluted (2) ........................... 10,555 10,555 12,110 11,786 22,375
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Current assets ..................................... $ 426 $ 509 $ 10,239 $ 138 $ 5,822
Working capital .................................... 318 (176) 2,658 (861) (3,405)
Total assets ....................................... 429 564 13,009 306 42,922
Deferred revenue, net (3) .......................... -- -- 1,986 -- 4,957
Total stockholders' (deficit) equity ............... (699) (2,264) (21,575) (2,890) 1,901
ADDITIONAL OPERATING DATA:
Cash receipts (1) .................................. 179 2,627 12,035 740 5,637
</TABLE>
-----------------------------------
(1) Our cash receipts historically have been greater than our revenues since we
do not recognize revenue on SuperCertificate sales until redemption. Prior to
1999, our cash receipts equaled our revenue since we did not sell
SuperCertificates. The following table reconciles cash receipts to revenues,
net:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- ------------------
<S> <C> <C>
Cash receipts...................... $ 12,035 $ 5,637
SuperCertificates issued........... (3,002) (2,974)
SuperCertificates redeemed......... 872 2,141
-------- --------
Revenues, net...................... $ 9,905 $ 4,804
======== ========
</TABLE>
-5-
<PAGE> 12
30
(2) Basic loss per share is calculated by dividing loss available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is equal to basic loss per share because the
effect of all common equivalent shares is anti-dilutive. The share and per share
information does not reflect the reverse stock split anticipated to occur
immediately prior to this offering.
(3) Giftpoint Certificates contained in the chart below consist of gift
certificates issued by Giftpoint.com, Inc. prior to our acquisition which are
similar to SuperCertificates and were converted to SuperCertificates upon our
acquisition of Giftpoint. Deferred revenue, net represents the value of
unredeemed SuperCertificates at the end of each period as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- ------------------
<S> <C> <C>
Deferred revenue, net
Beginning balance $ 0 $ 1,986
SuperCertificates issued......................... 3,002 2,974
Giftpoint Certificates issued.................... 0 2,245
SuperCertificates redeemed....................... (872) (2,141)
Change in deferred fulfillment costs............. (144) (20)
Giftpoint deferred fulfillment costs acquired.... 0 (87)
------- --------
Ending balance................................... $ 1,986 $ 4,957
======= ========
</TABLE>
-6-
<PAGE> 13
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following table presents our summary unaudited pro forma financial data
at the dates and for the periods indicated. You should read the summary
unaudited pro forma financial data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes and pro forma
financial statements and related notes included in this prospectus. The
unaudited pro forma financial data have been derived from the application of pro
forma adjustments giving effect to the acquisitions of Giftpoint.com, Inc. and
GiftSpot.com, Inc. and this offering, including our receipt of proceeds and the
conversion of our preferred stock, to our historical financial statements. The
unaudited pro forma statement of operations information for the year ended
December 31, 1999 gives effect to these transactions as if they had each
occurred on January 1, 1999 and the unaudited pro forma statement of operations
data for the three-month period ended March 31, 2000 gives effect to these
transactions as if they had each occurred on January 1, 2000. The unaudited pro
forma balance sheet data at March 31, 2000 gives effect to the GiftSpot.com,
Inc. acquisition and this offering as if they had each occurred on March 31,
2000. Each of the acquisitions was accounted for under the purchase method of
accounting. Amortization of goodwill in the table below represents the
amortization of the excess of the purchase price over the net assets acquired of
each of Giftpoint.com, Inc. and GiftSpot.com, Inc. The summary unaudited pro
forma financial data are provided for informational purposes only and do not
purport to be indicative of the results that would have actually been obtained
had the above referenced events been completed on the dates indicated or that
may be expected to occur in the future. You should read the summary unaudited
pro forma financial data set forth below in conjunction with the unaudited pro
forma information included in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1999 MARCH 31, 2000
-------------- --------------
<S> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues, net (1).......................................................... $ 13,941 $ 6,775
Cost of revenues........................................................... 12,979 6,670
-------------- -------------
Gross profit............................................................. 962 105
Marketing and sales expenses............................................... 19,322 6,596
Technology and systems development expenses................................ 2,844 1,102
General and administrative expenses........................................ 6,108 3,223
Non-cash consulting
and compensation expense................................................. 276 38
Amortization of goodwill................................................... 7,713 1,999
-------------- -------------
Loss from operations..................................................... (35,301) (12,853)
Other income (expense)..................................................... (1,238) (861)
-------------- -------------
Net loss................................................................. $ (36,539) $ (13,714)
============== =============
Net loss available to common stockholders................................ $ (37,768) $ (14,464)
============== =============
Basic and diluted net loss per share (2)..................................... $ (0.74) $ (0.28)
============== =============
Weighted average common shares outstanding
basic and diluted (2).................................................... 51,379 52,494
ADDITIONAL OPERATING DATA:
Cash Receipts(1)............................................................. 18,372 7,420
============== =============
BALANCE SHEET DATA (AT END OF PERIOD):
Current assets................................................................................. $
Working capital................................................................................
Total assets...................................................................................
Deferred revenue, net..........................................................................
Total stockholders' equity.....................................................................
</TABLE>
-----------------------------
(1) We do not recognize revenue on SuperCertificates sales until redemption.
Similarly, Giftpoint.com, Inc. did not recognize revenue on Giftpoint
Certificates sales until redemption. As a result, our pro forma cash receipts
would be greater than our pro forma revenues. The following table reconciles
cash receipts to net revenues on a pro forma basis:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- ------------------
<S> <C> <C>
Cash receipts $ 18,372 $ 7,420
SuperCertificates issued (3,002) (2,974)
Giftpoint Certificates issued (4,769) (1,222)
SuperCertificates redeemed 872 2,141
Giftpoint Certificates redeemed 2,468 1,410
-------- --------
Revenues, net $ 13,941 $ 6,775
======== ========
</TABLE>
-7-
<PAGE> 14
(2) Basic loss per share is calculated by dividing loss available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted loss per share is equal to basic loss per share
because the effect of all common equivalent shares is anti-dilutive. The
share and per share information does not reflect the reverse stock split
anticipated to occur immediately prior to this offering.
-8-
<PAGE> 15
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information in this prospectus,
including our financial statements and the related notes, before you purchase
any shares of our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED SIGNIFICANT LOSSES AND EXPECT TO INCUR INCREASING LOSSES IN THE
FUTURE.
We have incurred net losses to date, and at March 31, 2000, on a pro
forma basis, we had an accumulated deficit of $33.4 million. We anticipate that
we will incur substantial net losses for the foreseeable future. The extent of
our losses will depend upon a variety of factors including the growth in our
revenue and the expense levels required to market and sell our products and
services. We expect to have significantly increased marketing and technology
expenditures in 2000 and 2001. There may not be a corresponding increase in
revenues to offset these increased expenses. We may not become profitable in the
future and, if we continue to incur net losses, the value of our common stock
may decline sharply.
WE HAVE A LIMITED OPERATING HISTORY, OUR BUSINESS IS RAPIDLY CHANGING AND OUR
BUSINESS MODEL IS UNPROVEN, SO IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND
PROSPECTS.
Prior to our reorganization as a corporation in October 1997, we had no
material operations. In 1999, we changed our business model from being primarily
a telemarketing company to being an Internet-based ordering and fulfillment
business. With our March 2000 acquisition of Giftpoint.com, Inc., which was
formed in August 1998, and our April 2000 acquisition of GiftSpot.com, Inc.,
which was formed in April 1999, we have sought to expand our business
significantly. We and each of these companies have limited operating histories.
We have only been operating as a combined company since mid-April 2000. Since we
are in an early stage of development and our business model is new and unproven,
our prospects are difficult to predict and may change rapidly. If we fail to
execute our business strategy and achieve our business model, including our
increased focus on corporate sales, our stock price may decrease significantly.
Furthermore, even if our business is successful, we may change our business to
enter into new business areas. Before investing you should evaluate the risks,
expenses and problems frequently encountered by companies such as ours that are
in the early stages of development and that are entering new and rapidly
changing markets such as the Internet. We may not successfully address these
risks and uncertainties.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY,
THAT COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO FLUCTUATE
SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the past
and will likely vary significantly in the future. We believe that
quarter-to-quarter comparisons of our revenue and operating results are not
necessarily meaningful, particularly due to the early stage of our business and
our recent acquisitions, and that such comparisons may not be accurate
indicators of future performance.
We anticipate that the fourth quarter of any fiscal year should
generally contain a higher percentage of annualized sales than any other quarter
due to the generally higher level of gift certificate sales during the holiday
season. Accordingly, if our fourth quarter falls short of our expectations, our
annual results will likely fall short of our expectations. Because of the
increased amount of shopping during the holiday season, awards from corporate
loyalty programs may also increase. At any given time, a limited number of our
corporate clients conducting large corporate programs may account for a large
portion of our revenues. To the extent a large corporate program begins or ends
in a given quarter, our results for that quarter could be disproportionately
affected. Our quarterly results will also be affected by redemption and
expiration patterns and changes in our product and service offerings and pricing
policies that cannot be predicted. In addition, the timing of acquisitions,
ventures, and other alliances may significantly impact our quarterly results. In
the past, the operating results of companies in the electronic commerce industry
have experienced significant quarter-to-quarter fluctuations. To the extent our
revenues and operating results fall below the expectations of investors and
security analysts, the trading price of our common stock may fall significantly.
-9-
<PAGE> 16
IF REDEMPTIONS OF OUR GIFT CERTIFICATE PRODUCTS ARE HIGHER THAN WE ANTICIPATE,
OUR AVAILABLE CASH RESOURCES COULD BE DEPLETED AND OUR OPERATING RESULTS COULD
FLUCTUATE.
A significant element of our business model is based on the effective
management of the potential financial liabilities associated with our
SuperCertificate products. Typically, we receive cash upon the sale of a
SuperCertificate, but we only incur an expense for the gift certificate sold
when the recipient redeems the SuperCertificate for a merchant gift certificate.
We cannot control when the recipient will redeem the SuperCertificate and, as a
result, when we will need to replenish our inventory and incur a cash
expenditure. As a result, over time, as the number of issued and unredeemed
SuperCertificates grows, we will have an increasing liability for which we will
need to maintain adequate inventory and cash balances. We have limited
historical data with respect to recipients' redemption behavior, so we cannot
assure you that SuperCertificates will be redeemed in predictable patterns or
that any patterns will not change rapidly and significantly. If the timing of
redemptions is inconsistent with our expectations, or redemptions exceed our
available inventory and cash resources, our financial condition would be
materially harmed. We also may need to spend additional cash to replenish our
inventory. We do not currently have sources of available borrowings in the form
of lines of credit or otherwise that could be used to fund any shortfall. We
will need to maintain significant liquid assets to control this risk. If we do
not maintain adequate liquid assets, we will be obligated to raise additional
funds on short notice. Funds may not be available on favorable terms or at all.
In addition, because we recognize revenues upon redemption of SuperCertificates,
and SuperCertificates represent a substantial portion of our cash receipts,
unexpected redemption levels could cause fluctuations in our operating results
and cause our stock price to fluctuate.
A SMALL NUMBER OF OUR MERCHANT PARTNERS AND BUSINESS CLIENTS ACCOUNT FOR A
SIGNIFICANT PORTION OF OUR SALES.
Historically, we have derived a significant portion of our revenues
from sales of a limited number of our merchant partners' brands. For the year
ended December 31, 1999, on a pro forma basis, 32.8% of our revenues were
attributable to sales of gift certificate products issued by American Express
and 50.0% were attributable to sales of gift certificates by our top five
merchant partners. For the quarter ended March 31, 2000, on a pro forma basis,
22.0% and 44.8% of our revenues were attributable to sales of gift certificate
products issued by American Express and our top five merchant partners. We
expect that a small number of merchant partners will continue to account for a
high percentage of our sales for at least the next twelve months. In addition,
for the year ended December 31, 1999 and the quarter ended March 31, 2000, on a
pro forma basis, our cash receipts from our corporate client, Integer,
represented approximately 12.5% and 11.8% of our total cash receipts.
IF WE ARE UNABLE TO RETAIN OUR MERCHANT PARTNERS AND ATTRACT ADDITIONAL
MERCHANTS, IT WILL REDUCE OUR ABILITY TO ATTRACT CUSTOMERS AND MAY HARM OUR
BUSINESS MATERIALLY.
Our success depends on maintaining and expanding our network of
merchant partners, expanding our list of corporate clients and the services we
provide to them and attracting individual consumers. Our ability to attract
corporate clients is dependent on our ability to appeal to individual consumers.
This, in turn, is dependent on our ability to retain and expand our merchant
network. Many of the agreements we have with our merchant partners are not
exclusive and may be terminated by the merchant upon 30 days' notice. As a
result, bad publicity, other problems with our website or other factors could
result in our merchant partners terminating their relationships with us on
relatively short notice. Actual or perceived misuse of merchant brands by our
corporate clients could result in the loss of key merchants. As the number of
our corporate clients increases we may be less able to control successfully our
clients' use of our merchants' brands. If we are unable to retain merchant
partners, we may be required to incur significantly higher and more sustained
advertising and promotional expenditures than we currently anticipate to recruit
online customers and corporate clients. As a result, our business may be harmed
materially and we may not be able to achieve profitability when we expect, or at
all.
IF WE ARE NOT SUCCESSFUL IN MAINTAINING AND FURTHER DEVELOPING OUR BRAND, OUR
RESULTS OF OPERATIONS WILL SUFFER.
We believe that establishing and maintaining awareness of our brand
name is critical to attracting and expanding the traffic on our primary website
and merchant and customer acceptance of our Internet marketplace. The importance
of brand identification is crucial to Internet businesses generally because low
barriers to entry continue to result in an increased number of websites. To
promote our brand, we incur significant marketing expenses that will increase
substantially in 2000. We may be
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<PAGE> 17
required to continue to increase our financial commitment to creating and
maintaining brand awareness. We may not generate a corresponding increase in
revenues to justify these costs. Additionally, if Internet users, advertisers
and customers do not perceive our service to be of high quality, or if we
introduce new services or enter into new business ventures that are not
favorably received by these parties, the value of our brand might be diluted.
Many of our upscale merchant partners and corporate clients might cancel their
relationships with us if our brand value were diluted.
WE MUST BE ABLE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH OPERATORS OF
WEBSITES TO ATTRACT NEW CUSTOMERS.
We advertise on third party websites using banner advertisements and
sponsorships to attract potential new customers. We have also acquired prominent
placement in the shopping areas of a number of leading Internet portals. A
significant number of our new customers were referred to, or learned about, our
website through these methods. Competition for placement on the highest traffic
websites is intense and we may not be able to enter into new or continue
existing relationships on commercially reasonable terms, or at all. Moreover, we
have in the past, and likely will in the future, have to pay significant fees to
establish these relationships. Even if we enter into or maintain these
relationships, these websites may not attract sufficient customers to our
website to justify our investments. Some key websites may develop competitive
products or enter into relationships with our competitors or may otherwise be
reluctant to enter into relationships with us.
RETAINING AND INTEGRATING OUR MANAGEMENT TEAM IS CRITICAL TO OUR BUSINESS; OUR
MANAGEMENT TEAM IS RELATIVELY NEW AND WITHOUT PUBLIC COMPANY MANAGEMENT
EXPERIENCE.
Our continued success is highly dependent on the retention of our
existing management. The loss of any member of our executive management team
could impede substantially our ability to execute our business plan. If we were
forced to search for a key executive replacement, relationships with existing
customers and prospective clients could be seriously jeopardized and day-to-day
operations could be delayed. All of the members of our management team are
at-will employees. We do not currently maintain key person life insurance
policies for any of our executive officers. In addition, our management team is
relatively new, has never operated a public company and is comprised of some
members who have joined us through our recent acquisitions. Our success depends
on our management team's ability to work together.
IF WE ARE UNABLE TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES COST-EFFECTIVELY, WE
MAY NOT BE ABLE TO GROW OUR BUSINESS OR SUCCESSFULLY EXECUTE OUR STRATEGY.
Our success depends on identifying, hiring, training and retaining
experienced and knowledgeable employees. In particular, we rely on our sales
force, merchant development team, technical personnel and programming
department. Competition for qualified experienced personnel is intense. As a
result, compensation is increasing and the industry turnover rate is high.
Acquiring and adequately compensating new employees might create expenditures
that could materially adversely affect our operating margins. The Internet
industry currently faces a shortage of qualified personnel, which is expected to
continue, particularly in the areas of technical support and design. If a
significant number of our current employees leave or we are unable to recruit
additional permanent and seasonal employees, we may be unable to grow our
business and execute our business strategy. In addition, former employees may
compete with us.
Even if we are able to expand our employee base, the expense and
resources required to attract and retain employees might materially adversely
affect our operating margins. Competitors and others may attempt to recruit our
employees by, among other things, offering larger cash or equity compensation
packages. We may need to increase the number of options we provide to employees
which could be significantly dilutive to equity holders. In addition, some
companies have adopted a strategy of suing or threatening to sue former
employees and their new employers for breach of confidentiality or non-compete
agreements. Any future litigation against us or our employees, regardless of the
outcome, may result in substantial costs and expenses to us and may divert
management's attention away from the operation of our business.
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<PAGE> 18
IF WE FAIL TO PROVIDE TIMELY AND ACCURATE ORDER FULFILLMENT, OUR BUSINESS COULD
BE SERIOUSLY HARMED.
Our success is highly dependent on our ability to provide timely and
accurate order fulfillment. This could become increasingly difficult as we
increase our sales. We strive to deliver our gift certificates to each recipient
within a specified, short period of time. We currently purchase all of our
merchant gift certificates for our own inventory and must manage our inventory
levels to be able to fulfill orders timely without expending too much of our
funds in working capital to purchase this inventory. The effectiveness of the
employee incentives, corporate loyalty programs and marketing promotions we
provide to our corporate clients could be harmed significantly by our failure to
provide timely and accurate delivery. Since many of our consumer sales are gifts
related to a specific occasion, a failure to timely or accurately deliver could
materially harm our reputation and, as a result, our business. In addition, we
sell gift certificates of many high quality merchants and our failure to
properly fulfill customer orders could result in a loss of these merchants,
which could substantially and permanently harm our business.
WE FACE GROWING COMPETITION IN THE MARKET FOR SELLING GIFT CERTIFICATES AND FOR
OUR OTHER PRODUCT AND SERVICE OFFERINGS; OUR FAILURE TO COMPETE SUCCESSFULLY
COULD DECREASE OUR REVENUES.
The market for selling gift certificates is highly competitive. Since
gift certificates are sold at face value, competition in the industry has been
primarily based on convenience, service and brand recognition. Coupons and other
promotional incentives have been offered in the sale of gift certificates. The
amount of this activity could increase. The market for selling products and
services over the Internet is rapidly evolving and intensely competitive.
Existing offline and new competitors can launch websites selling gift
certificates at comparatively low cost. Some of our competitors have longer
operating histories, larger customer bases, stronger brand names and
significantly greater financial, technical, marketing and other resources than
we have. New competitors continue to enter our markets.
We compete with traditional sellers and online gift certificate and
technology providers, including retailers and consumer service providers,
Internet gift certificate marketplaces and/or technology providers, offline gift
certificate companies, such as Gift Certificate Center Co., which has entered
into a definitive agreement to be acquired by Hallmark Cards, Inc., The Gift
Certificate Company (a subsidiary of Neighborhood Box Office, Inc.) and
WebCertificates. We also may compete with our merchant enablement customers as
their own gift certificate businesses expand and other gift certificate
technology and service providers. We also compete with traditional and online
companies that provide employee incentives, customer loyalty programs or
marketing promotions, such as BI Performance Services, Carlson Marketing Group
and Maritz Marketing Research. In addition, we compete for a portion of the
corporate budget with in-house programs and programs that utilize other kinds of
products as well as alternatives to these kinds of programs, such as direct
marketing and advertising. We also compete with programs operated by or for
portals and other large e-commerce sites, stand-alone programs and promotional
tools developed by and/or for e-commerce sites. In addition, the customized
solutions that we provide to clients may be competitive with our website. In
addition, we compete with providers of proprietary stored value products that
may be used as alternatives to some of our products and services, such as
American Express, which is a significant supplier of ours, Cybersource and
Flooz, as well as online communities that offer gift certificate products,
printers of gift certificates and gift cards, specialized transaction processors
of gift cards and other vendors.
We expect competition to intensify as more competitors enter our
business and as traditional offline providers of these services establish online
capabilities. In addition, many companies may have existing relationships with
our merchant partners and potential customers and may be able to respond to
changes in market dynamics and technology faster than we can. As participants in
the industry consolidate, even stronger competitors may be created. We may not
be able to compete successfully against current and future competitors, and
competitive pressures may result in reduced margins and fees that could
materially impact our revenues.
OUR SUCCESS IS HIGHLY DEPENDENT ON GENERAL ECONOMIC CONDITIONS SINCE CONSUMER
GIFTS ARE HIGHLY DISCRETIONARY.
Our business is subject to changes in general economic conditions.
Because the purchase of gift certificates is discretionary, purchases of gift
certificates may decline significantly more than other products during
recessionary periods. If there is significant inflation, gift certificate
purchasers may be required to purchase gift certificates in greater
denominations to achieve the desired effect or to have the same flexibility in
creating a gift experience for the recipient. This may discourage use
-12-
<PAGE> 19
of gift certificates. Uncertainties regarding future economic prospects could
affect consumer spending habits. As a result of these factors, we may not be
able to maintain our historical rate of growth in revenues, or become profitable
in the future.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE.
We currently anticipate that the net proceeds of this offering,
together with available funds and cash flows, will be sufficient to conduct our
business plan for the foreseeable future. In the past, we have incurred negative
cash flows and sustained net losses and a net capital deficiency. We may need to
raise more funds than are budgeted in our capital plan. These funds may be
required in order to fund a more rapid expansion plan, as a result of
acquisitions, alliances, international expansion, failure to meet our budgets or
otherwise, respond to competitive pressures or changes in the business plan and
develop new products and services. In addition, if we experience redemptions of
significant amounts of SuperCertificates sooner than anticipated or are required
to retain higher than anticipated cash levels or are otherwise unable to manage
our cash flows adequately, we may need additional operating funds. We may not be
able to obtain such financing on terms favorable to us, or at all. Any
additional capital raised through the sale of equity or convertible debt
securities will dilute your ownership percentage. Any additional capital raised
through debt financing will result in interest expense and may subject us to
negative and financial covenants that restrict our ability to operate our
business or require us to deliver equity securities to the lender which would
dilute your ownership percentage. If financing is not available when required or
is not available on acceptable terms, we may be unable to develop or enhance our
current product line, marketing efforts or operational infrastructure. In
addition, we may be unable to take advantage of business opportunities or to
respond to competitive pressures. Any of these events would harm our business
and financial condition.
IF WE FAIL TO ACHIEVE ANTICIPATED REVENUES, OUR FIXED OPERATING EXPENSES COULD
CAUSE US TO HAVE SUBSTANTIAL ADDITIONAL OPERATING LOSSES.
As with other companies in our industry, our operating expenses, which
include marketing and sales, technology and systems development and general and
administrative expenses, are based on our expectations of future revenue growth
and are relatively fixed for the short term. We intend to increase spending
significantly in the near future. If our revenue for a quarter falls below our
expectations and we are not able to quickly reduce, or choose not to reduce, our
spending in response, our operating margins for that quarter would be harmed
significantly. Our limited operating history makes it difficult for us to
identify accurately all the possible factors that could affect our operating
results and plan accordingly.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD BE HARMED
SIGNIFICANTLY.
We have grown rapidly and expect to continue to grow rapidly through
expanded product and service offerings and operations, by serving new clients
and geographic markets and through acquisitions. Our total revenues increased
from $2.6 million for the year ended December 31, 1998 to $9.9 million, or $13.9
million on a pro forma basis, for the year ended December 31, 1999. Our total
revenues increased from $740,000 for the first three months of 1999, to $4.8
million, or $6.8 million on a pro forma basis for the same period in 2000. Our
cash receipts increased from $2.6 million in 1998 to $12.0 million, or $18.3
million on a pro forma basis, for the year ended December 31, 1999. Our cash
receipts for the first three months of 2000 were $5.6 million, or $7.4 million
on a pro forma basis, compared to $740,000 for the same period in 1999. Our
rapid growth has placed, and will continue to place, a significant strain on our
management, personnel and our operating and financial systems, procedures and
controls. We will need to improve our financial and management controls and
reporting and operating systems. While historically we have operated our
business in one facility, we are currently operating out of several facilities
which makes coordinating our operations more difficult. If we are unable to
manage our growth and operations effectively, the quality of our products and
services, our ability to retain key personnel, our reputation and our business,
financial condition and results of operations may be materially adversely
affected.
-13-
<PAGE> 20
OUR FAILURE TO SUCCESSFULLY INTEGRATE GIFTPOINT.COM, INC. AND GIFTSPOT.COM, INC.
AND ANY FUTURE ACQUISITIONS COULD HAVE A NEGATIVE IMPACT ON OUR OPERATIONS.
FUTURE ACQUISITIONS COULD BE DILUTIVE TO STOCKHOLDERS.
Acquisitions, including the acquisitions of Giftpoint.com, Inc. and
GiftSpot.com, Inc. and any potential future acquisitions, involve a number of
risks and present financial, managerial and operational challenges, including:
- adverse effects on our reported operating results due to the
amortization of goodwill associated with acquisitions;
- diversion of management attention from running our existing
business;
- difficulty with integration of personnel, financial and other
systems;
- increased difficulty in projecting redemption patterns;
- increased expenses, including compensation expenses resulting
from newly-hired employees; and
- potential disputes with the sellers of acquired businesses,
technologies, services or products.
We are currently in the process of integrating our operations and
technology with those of Giftpoint.com, Inc. and GiftSpot.com, Inc. Our
integration effort may result in substantial costs and unanticipated system
downtime. We had some downtime when the Giftpoint.com website was integrated
into our website. We may not be able to integrate successfully the technology,
operations and personnel of any acquired business. Client dissatisfaction or
performance problems with an acquired business, technology, service or product
could also have a material adverse effect on our reputation and business. In
addition, any acquired business, technology, service or product could
underperform significantly relative to our expectations. We could also
experience financial or other setbacks if any of the businesses that we have
acquired or may acquire in the future have problems of which we are not aware.
In addition, as a result of future acquisitions, we may increase our debt or, if
we issue equity securities to pay for the acquisitions, dilute our existing
stockholders.
We regularly engage in negotiations with respect to potential
acquisitions and joint ventures, some of which may be material. We cannot assure
you that we will be able to consummate any transactions under negotiation or
identify, acquire or make investments in any promising acquisition candidates on
acceptable terms. Competition for acquisition or investment targets could result
in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment.
WE FACE THE RISK OF SYSTEMS INTERRUPTIONS AND CAPACITY CONSTRAINTS, POSSIBLY
RESULTING IN ADVERSE PUBLICITY, REVENUE LOSS AND EROSION OF CUSTOMER TRUST.
The satisfactory performance, reliability and availability of our
Internet marketplace, transaction processing systems and network infrastructure
are critical to our reputation and our ability to attract and retain merchants
and customers and to maintain adequate customer service levels. This is
particularly true for our merchant enablement clients who would be unable to
sell or redeem electronic gift certificates if our servers were down. Any future
systems interruption that results in the unavailability of our Internet
marketplace or in reduced order fulfillment performance could result in negative
publicity and reduce the volume of product sales and the attractiveness of our
Internet marketplace, which would negatively affect our revenues. We have in the
past and may in the future experience temporary system interruptions for a
variety of reasons, including power failures and software bugs. In the future,
we may experience interruptions due to these and other factors such as an
overwhelming number of visitors trying to reach our Internet marketplace during
sales or other promotions. We may not be able to correct a problem in a timely
manner. Because we are dependent in part on outside consultants for the
implementation of certain aspects of our system and because some of the reasons
for a systems interruption may be outside of our control, it is possible that we
will not be able to remedy the problem quickly or at all.
Any inability to scale our systems may cause unanticipated system
disruptions, slower response times, degradation in levels of customer service,
impaired quality and speed of order fulfillment, or delays in reporting accurate
financial information.
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<PAGE> 21
We are not certain that we will be able to project the rate or timing of
increases, if any, in the use of our Internet marketplace accurately or in a
timely manner to permit us to upgrade and expand our transaction processing
systems effectively or to integrate smoothly any newly developed or purchased
modules with our existing systems.
WE DEPEND ON THIRD PARTIES FOR WEB SERVICES.
In the third quarter of 1999, we moved our principal servers to the
Globix facility in New York City. Frontier Global Crossing houses the servers
for Giftpoint.com, Inc. and Exodus Communications houses the servers for
GiftSpot.com, Inc. Globix, Frontier Global Crossing and Exodus Communications
provide comprehensive facilities and management services, including human and
technical monitoring of all production servers 24 hours-per-day, seven
days-per-week. Globix, Frontier Global Crossing and Exodus Communications do not
guarantee that our Internet access will be uninterrupted, error-free or secure.
Our operations depend on the ability to protect our systems against damage from
unexpected events, including fire, power loss, water damage, telecommunications
failures, online or physical sabotage and vandalism, as well as human error. Any
disruption in our Internet access could have a material adverse effect on us.
Our reputation and our brand could be materially and adversely affected by any
problems with our Internet marketplace. Our insurance policies may not
adequately compensate us for any losses, including loss in revenue, that may
occur due to any failures or interruptions in our systems. We do not presently
have any secondary off-site systems or a formal disaster recovery plan.
IF WE ARE NOT ABLE TO PROTECT OUR INTERNET DOMAIN NAMES, WHICH ARE ESSENTIAL TO
OUR BUSINESS, AND OUR OTHER INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
Internet domain names are critical to our brand recognition and our
overall success. We currently hold approximately 200 domain names relating to
our brands and this number may increase. If we are unable to protect these
domain names, our competitors could capitalize on our brand recognition. The
regulation of domain names in the United States and in foreign countries has
changed in the recent past and there continues to be discussion of further
change in the near future. As a result, we may be unable to acquire or maintain
relevant domain names in the United States and in other countries where we
conduct business. This could materially impact our competitive position.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to protect our own domain names or prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our domain names, trademarks and other intellectual property
rights.
We currently rely on a combination of copyright, trademark, patent and
trade secret law and contractual restrictions to establish and protect our
technology and proprietary rights and information. Although these rights are
currently not material, we anticipate that they may become material to us in the
future. Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and still evolving. We cannot give any assurance as to the future viability or
value of any of our proprietary rights. In addition, we may not be able to deter
misappropriation of our proprietary information and materials due to risks of
nonrecognition or inadequate protection of our proprietary rights in certain
foreign countries, undetected misappropriation of our proprietary information or
materials, and unenforceability of confidentiality agreements entered into by
our employees and consultants. In addition, enforcement of trademark rights
against unauthorized use, particularly over the Internet and in other countries,
may be impractical or impossible and could generate confusion and diminish the
value of the trademark. 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 our business partners, they may take actions that could materially and
adversely affect the value of our proprietary rights or reputation. Litigation
may be necessary to enforce our intellectual property rights, to protect our
trade secrets and to determine the validity and scope of the proprietary rights
of others. Any litigation could result in substantial costs and diversion of our
resources and could seriously harm our business and operating results. In
addition, our inability to protect our intellectual property may harm our
business and financial prospects.
We also seek to limit access to our proprietary information and our
third-party licensors' proprietary information. If we are unable to protect our
trademarks and other proprietary rights against unauthorized use by others, our
reputation and brand name would be damaged and our competitive position would be
significantly harmed.
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<PAGE> 22
IF THIRD PARTIES SUCCESSFULLY CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL
PROPERTY, OUR ABILITY TO USE CERTAIN TECHNOLOGIES, PRODUCTS, AND BRAND NAMES
COULD BE LIMITED AND WE MAY INCUR SIGNIFICANT COSTS TO RESOLVE THESE CLAIMS.
Litigation regarding intellectual property rights is common in the
Internet and software industries. There have been an increasing number of patent
claims and threatened patent claims regarding the Internet, some of which relate
to e-commerce processes. We have been contacted regarding some patents but do
not believe that any of these patent issues will be material. We expect that
third-party infringement claims involving Internet technologies and software
products and services may continue to increase. If an infringement claim is
filed against us, we may be prevented from using certain technologies and may
incur significant costs to resolve the claim. We may from time to time encounter
disputes over rights and obligations concerning intellectual property. We have
agreed and may agree in the future to indemnify certain of our business partners
against claims that our products infringe upon the intellectual property rights
of others. We could incur substantial costs in defending ourselves and our
customers against infringement claims. In the event of a claim of infringement,
we and our customers may be required to obtain one or more licenses from third
parties. We cannot assure you that we or our customers could obtain necessary
licenses from third parties at a reasonable cost or at all.
We are currently in litigation with 1-800-Gift Certificate, one of our
competitors, with respect to the use of certain domain names, including
1-800-giftcertificates.com, 1-800-giftcertificate.com, 800giftcertificates.com
and other similar domain names that we own. Although 1-800-Gift Certificate does
not hold a registered trademark to 1-800-Gift Certificate or the other domain
names in question, it is suing GiftCertificates.com, Jonas Lee, our chief
executive officer, and other affiliated individuals for use of these domain
names, claiming, among other causes of action, unfair trade practices and
trademark infringement. In March 2000, we filed a motion for summary judgment in
this matter. If we are unsuccessful in this motion or ultimately in this
litigation or unable to resolve this matter otherwise, we could be required to
relinquish our ownership of the aforementioned domain names which may enhance
1-800-Gift Certificate's competitive position. We also may be required to pay
monetary damages. We do not expect that any monetary damages would be material.
Any litigation could subject us to significant liability for damages or
invalidation of our proprietary rights. Lawsuits, regardless of their success,
would likely be time consuming and expensive to resolve and would divert
management's time and attention from our business. The resolution of any
litigation could be costly and time consuming, and may not be possible.
Accordingly, an adverse determination in any litigation that we are a party to
could have a material adverse effect on our business, results of operations and
financial condition.
Although we believe that our intellectual property rights are
sufficient to allow us to market our existing products without incurring
liability to third parties, we cannot assure you that our products and services
may not infringe on the intellectual property rights of third parties.
OUR OPERATING RESULTS COULD BE IMPAIRED AS A RESULT OF GOVERNMENT REGULATIONS
AND LEGAL UNCERTAINTIES.
Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, including with respect to:
- user privacy;
- consumer protection;
- pricing, usage fees and taxes;
- distribution;
- characteristics and quality of products and services; and
- online advertising and marketing.
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<PAGE> 23
The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. The application of laws and regulations from jurisdictions whose laws
do not currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services, could also materially
harm our business. One or more states may seek to impose additional income taxes
or sales and use tax collection obligations on out-of-state companies such as
ours that engage in or facilitate Internet-based commerce. Imposition of sales
and use taxes could affect our ancillary product revenues significantly. The
applicability of existing laws to the Internet is uncertain with regard to many
important issues, including property ownership, sales and other taxes,
intellectual property, export of encryption technology, libel and personal
privacy. If we were alleged to have violated federal, state or foreign civil
and/or criminal law, even if we could successfully defend such claims, it could
occupy significant amounts of management's time, harm our business reputation
and negatively affect our operating results and financial condition.
The escheat, abandoned or unclaimed property laws of the various states
generally contain provisions that may require all or some portion of unused gift
certificates to be turned over if unredeemed for a period of time. If unclaimed
property laws applicable to our SuperCertificate products change, we may be
required to turn over the unredeemed amounts sooner than currently projected or
to remit a higher percentage of the outstanding unredeemed amount, either of
which could materially and adversely affect our business.
We are also subject to other laws and regulations that may affect our
business. For example, to the extent we offer products subject to regulation
under the money services business laws of the various states we would be
required to comply with applicable state laws, including compliance with
licensing requirements, net worth and bonding requirements and change of control
provisions as well as maintenance of adequate reserves in specified permitted
investments with respect to the products subject to these laws. Changes in these
laws or regulations or the interpretation of existing laws or regulations to
apply to our business could materially affect our business, increase our costs
of doing business or limit the services or products we offer.
DIFFICULTIES PRESENTED BY INTERNATIONAL ECONOMIC, POLITICAL, LEGAL, ACCOUNTING
AND BUSINESS FACTORS COULD NEGATIVELY AFFECT OUR INTERNATIONAL BUSINESS EFFORT.
Our business strategy includes seeking to grow our international sales.
We may expand our presence in international markets either through joint
ventures or our own operations. The following risks, among others, are inherent
in doing business internationally:
- costs of complying with a wide variety of foreign laws and
regulations and unexpected changes in regulatory requirements,
which laws may place significant operating restrictions on our
business;
- technology export and import restrictions or prohibitions and
tariffs and other trade barriers;
- difficulties in staffing and managing international
operations;
- international currency issues, including fluctuations in
currency exchange rates, long payment cycles and problems in
collecting accounts receivable;
- political and economic instability;
- cultural and language differences;
- seasonal reductions in business activity, especially during
the summer months in Europe and some other parts of the world;
- international escheat laws may be more onerous than domestic
laws; and
- potentially adverse tax consequences.
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<PAGE> 24
In addition, as we expand internationally, we will become subject to
the laws and court systems of multiple jurisdictions. We may become subject to
claims in foreign jurisdictions for violations of their laws. International
litigation is often expensive, time-consuming and distracting and could have a
material adverse effect on our business, financial condition and results of
operations.
RISKS RELATED TO THE INTERNET
OUR SUCCESS DEPENDS ON THE INCREASED USE OF THE INTERNET AS A MEANS FOR
COMMERCE.
Our future success depends heavily on the continued and increasing use
of the Internet as a means for commerce by corporations, merchants and
individual consumers. If commerce on the Internet does not continue to grow, or
grows more slowly than expected, our revenue growth will not meet expectations.
Many of our current or potential customers do not have experience with the
Internet and may determine that the Internet is not an effective method for
expanding their businesses. The Internet may not be used by merchants or our
potential corporate or individual customers for a variety of reasons, including:
- investment by merchants in existing distribution channels,
investment by corporations in alternate forms of incentives,
loyalty and promotional programs and comfort of individuals
with offline solutions;
- reluctance by corporations, merchants and individuals to
purchase the technology and equipment to engage in online
transactions;
- inadequate infrastructure, unavailability of low cost access,
and delays in the development of Internet enabling
technologies and performance improvements, such as high speed
modems and high speed communication lines;
- failure of companies to meet their customers' expectations in
delivering goods and services over the Internet; and
- concerns with the security, confidentiality and reliability of
e-commerce.
A BREACH OF OUR ELECTRONIC SECURITY MEASURES COULD REDUCE DEMAND FOR OUR
PRODUCTS AND SERVICES.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. Our individual consumers
authorize us to bill their credit cards directly for orders placed via our
website. We utilize outside services to process our credit card transactions
from orders placed on our website. If any compromise of the security provided in
processing credit card orders were to occur, our reputation and business could
be materially adversely affected. This could also severely impact our merchant
enablement business that relies on our ability to limit fraud. Anyone who
circumvents our security measures could misappropriate proprietary information
or cause interruptions in our services or operations. Experienced programmers or
"hackers" have made attempts to penetrate our system and we expect these
attempts will continue to occur from time to time. Our business may be subject
to greater risks of fraud attempts than other Internet businesses since our
products are closer to cash than most. We assume the risk of fraud in our
business and any increase in successful fraud attempts could materially
adversely affect our business and financial condition. In the past, computer
viruses, software programs that disable or impair computers, have been
distributed and have rapidly spread over the Internet. Computer viruses could be
introduced into our buying communities and could have an adverse effect on such
communities' operations. We may be required to expend significant capital and
other resources to protect against the threat of security breaches or to
alleviate problems caused by breaches. Remedies for any breaches may not be
timely. To the extent that our activities may involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could expose us to a risk of loss or litigation and possible liability.
Our security measures may be inadequate to prevent security breaches, and our
reputation and our business would be harmed if we do not prevent them. Our
insurance policies may not be adequate to reimburse us for losses caused by
security breaches.
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<PAGE> 25
WE MUST BE ABLE TO ADAPT TO THE RAPID CHANGES IN TECHNOLOGY OR WE MAY NOT BE
ABLE TO SUCCESSFULLY COMPETE.
E-commerce businesses, including our gift certificate business, are
characterized by rapidly changing technology, evolving industry standards, and
changing customer demands. Our future success will depend on our ability to
adapt to changing technologies and to continually improve the performance,
features and reliability of our website and our technology products and services
in response to changing demands of the marketplace. The success of our business
will depend upon the continued development and maintenance of the Web
infrastructure as a reliable network with the necessary speed, capacity and
security for providing reliable Web access and services. Because online commerce
is new and evolving, it is difficult to predict whether the Web will prove to be
a viable commercial marketplace in the long term. To the extent that the Web
continues to experience an increase in number and frequency of users, there can
be no assurance that the Web infrastructure will continue to be able to support
the demands placed on it by this continued growth.
WE MAY BE SUBJECT TO CLAIMS AS A RESULT OF OUR DATABASE MARKETING EFFORTS THAT
COULD RESULT IN A LOSS OF CUSTOMERS AND REVENUES.
A component of our strategy is to utilize our database marketing
technologies. We have designed our technology infrastructure and services to
allow us to aggregate data regarding specific customer behavior. We have a
strict privacy policy that governs how we use information about our customers.
Although we may provide our merchant partners with information regarding the
purchasers or recipients of products issued by the merchant partner, we
currently do not otherwise sell this information to third parties. Furthermore,
our communications are not sent to customers who have declined to be contacted.
However, we cannot assure you that persons who receive promotional materials
from us will not be dissatisfied with being contacted. There has been
substantial publicity regarding privacy issues surrounding the Internet, and to
the extent that our database marketing efforts may conflict with any privacy
protection laws or initiatives, or if any private information is inadvertently
made public, we may be subject to legal claims. If customers become dissatisfied
as a result of our database marketing efforts, or if we become the subject of
legal proceedings in this regard, our business and results of operations would
suffer.
RISKS RELATED TO THIS OFFERING
OUR PRINCIPAL STOCKHOLDERS WILL RETAIN A CONTROLLING INFLUENCE OVER OUR BUSINESS
AND AFFAIRS AFTER THIS OFFERING.
Immediately following this offering, Gotham Partners, L.P. and its
affiliates may be deemed to beneficially own approximately % of the
outstanding shares of our common stock and our executive officers and current
directors also may be deemed to beneficially own % of the outstanding shares
of our common stock (excluding the shares held by Gotham Partners, L.P. and its
affiliates). As a result, these stockholders will be able to control matters
requiring stockholder approval, including the election of directors, amendment
of our amended and restated certificate of incorporation and approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of our company,
which might otherwise be beneficial to stockholders.
WE MAY HAVE POTENTIAL CONFLICTS OF INTEREST WITH OUR PRINCIPAL STOCKHOLDERS THAT
COULD BE RESOLVED IN A MANNER THAT IS INCONSISTENT WITH OTHER STOCKHOLDERS'
INTERESTS.
Conflicts of interest may arise between us and our principal
stockholders in a number of areas relating to our present and ongoing
relationships that could be resolved in a manner inconsistent with our other
stockholders' interests. Conflicts of interests that may arise include:
- potential competitive business activities;
- potential acquisitions or financing transactions; and
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<PAGE> 26
- sales or other dispositions by these principal stockholders of
shares of our common stock, including through the exercise of
their registration rights.
We have not established any formal policy for resolving potential
conflicts of interest and intend to address any such issues on a case by case
basis.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.
Our current securityholders hold a substantial number of shares of our
common stock that they will be able to sell in the public market in the future.
Sales of a substantial number of shares of our common stock after this offering
could cause our stock price to fall. In addition, the sale of these shares or
the perception that these sales could occur could impair our ability to raise
capital through the sale of additional stock. Substantially all of our existing
stockholders have registration rights for their shares. You should read "Shares
Eligible for Future Sale" for a full discussion of shares that may be sold in
the public market in the future.
OUR STOCK PRICE MAY BE VOLATILE, WHICH MAY LEAD TO LOSSES BY INVESTORS.
Prior to this offering, there has not been a public market for our
common stock and we cannot assure you that an active trading market will develop
or be sustained after this offering. The initial public offering price for our
shares will be determined by negotiations between us and the representatives of
the underwriters and may not be indicative of prices that will prevail in the
trading market. The trading prices of many Internet-related companies have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of many comparable technology companies' stocks are substantially above
historic levels and may not be sustained. Broad market and industry factors may
seriously impact the market price of our common stock, regardless of our actual
operating performance.
WE COULD BE SUBJECT TO SECURITIES CLASS ACTION LITIGATION IF OUR STOCK PRICE IS
VOLATILE THAT COULD BE COSTLY AND TIME-CONSUMING TO DEFEND AND COULD DAMAGE OUR
REPUTATION.
In the past, there have been class action lawsuits filed against
companies after periods of fluctuations in the market price of their securities.
If we were subject to this type of litigation, it would be a strain on our
personnel and financial resources and divert management's attention from running
our company and could negatively affect our public image and reputation.
WE HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING AND MAY
SPEND THE PROCEEDS IN WAYS WITH WHICH OUR STOCKHOLDERS DISAGREE.
Our management has broad discretion on the allocation of the proceeds
we receive in this offering. We cannot assure you that such uses will not vary
substantially from our current intentions. Stockholders may not agree with the
uses we have chosen. We may fail to maximize our return on the proceeds from
this offering.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
If you purchase common stock in this offering, you will pay more for
your shares than the amounts paid by existing stockholders for their shares. As
a result you will experience immediate and substantial dilution of approximately
$ per share, representing the difference between our net tangible book
value per share as of March 31, 2000, after giving effect to this offering, and
the assumed public offering price of $ per share. In addition, you may
experience further dilution to the extent that shares of our common stock are
issued upon the exercise of stock options or warrants. Our outstanding options
and warrants were issued at a purchase price less than the public offering price
per share in this offering.
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<PAGE> 27
OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE US AND DISCOURAGE A TAKEOVER.
Our certificate of incorporation and bylaws are designed to make it
difficult for a third party to acquire control of our company, even if a change
in control could be deemed to be beneficial by some of our stockholders. For
example, our amended and restated certificate of incorporation will, subject to
appropriate corporate action, authorize our board of directors to issue up to
shares of preferred stock without previously designated rights and
privileges. Without stockholder approval, the board of directors has the
authority to attach special rights, including voting and dividend rights, to
this preferred stock. With these rights, the board of directors could implement
a stockholder rights plan or otherwise make it more difficult for a third party
to acquire our company, including takeover attempts that might result in a
premium over the market price for shares of our common stock.
Our charter documents will, subject to appropriate corporate action,
divide our board of directors into three classes with three-year staggered
terms, impose advance notice requirements for stockholder action, eliminate the
right of stockholders to call a special meeting of stockholders and eliminate
the ability of stockholders to take action by written consent. As a Delaware
corporation, we are also subject to the Delaware anti-takeover statute contained
in Section 203 of the Delaware General Corporation Law. See "Description of
Capital Stock -- Delaware Anti-Takeover Law and Certain Charter and Bylaw
Provisions" for a more complete description of Section 203 of the Delaware
General Corporation Law.
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<PAGE> 28
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of the federal securities laws that relate to our strategy, expectations for our
industry, our capital requirements, budgets, plans and objectives of management,
future events, our future financial performance and other statements that are
not historical facts. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans",
"anticipates," "believes," "estimates," "predicts," "intends," "potential" or
"continue" or the negative of such terms or other comparable terminology. These
statements include, but are not limited to, statements under the captions
"Business," "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These statements are only
predications. We cannot guarantee future results, levels of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. You should
carefully review the information under "Risk Factors" and "Business" for a
discussion of factors that may cause our results to differ from such
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus or to conform these
statements to actual results.
USE OF PROCEEDS
We will receive net proceeds of approximately $ million, or
approximately $ million if the underwriters' over-allotment option is
exercised in full, from the sale of the shares of common stock offered by this
prospectus, at an assumed initial public offering price of $ per share and
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
As of the date of this prospectus, we have not made any specific plans
with respect to the proceeds of this offering. We will retain broad discretion
in the allocation of the net proceeds of this offering. We intend to use the net
proceeds to be received upon completion of this offering for sales and marketing
activities, capital expenditures and general corporate purposes, including
working capital needs. We may also use a portion of the net proceeds to acquire
or invest in complementary businesses, products and technologies or establish
joint ventures that we believe will complement our business. We regularly engage
in negotiations with respect to potential acquisitions and joint ventures.
Our expenditures of the net proceeds will vary depending on a number of
factors, including the amount of cash generated by our operations, competitive
and technological developments and the rate of growth, if any, of our business.
The actual uses may vary from our current intentions. See "Risk Factors - We
have broad discretion over the use of proceeds from this offering and may spend
the proceeds in ways with which our stockholders disagree" for a discussion of
this risk. Pending these uses, we intend to invest the net proceeds from this
offering in U.S. government securities or other investment grade
interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid a cash dividend on our common stock and
do not anticipate declaring or paying any cash dividends on shares of our common
stock in the foreseeable future. We currently intend to retain any earnings to
finance the expansion and development of our business. Any determination to
declare and pay dividends will be made by our board of directors based on
conditions then existing, including our earnings, financial condition and
capital requirements, contractual and other legal restrictions and such economic
and other conditions as the board of directors may deem relevant. In addition,
the payment of dividends may be limited or prohibited by financing agreements
that we may enter into in the future.
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<PAGE> 29
CAPITALIZATION
The following table should be read in conjunction with our financial
statements and related notes included elsewhere in this prospectus. The share
information does not reflect the reverse stock split anticipated to occur prior
to this offering. The table below sets forth the following information as of
March 31, 2000:
- our actual capitalization as of March 31, 2000;
- our pro forma capitalization assuming the acquisition of
GiftSpot.com, Inc. had occurred on March 31, 2000; and
- our pro forma capitalization also assuming the issuance of
Series J Preferred Stock had occurred on March 31, 2000; and
- our pro forma capitalization as of March 31, 2000 as adjusted
to reflect the sale of shares of common stock in this
offering at an assumed initial public offering price of per
share, less underwriting discounts and commissions and
estimated offering expenses, and the conversion of all of our
outstanding shares of preferred stock into common stock upon
consummation of this offering.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
--------------------
PRO FORMA
PRO FORMA FOR FOR SERIES J PRO FORMA
ACTUAL ACQUISITION FINANCING AS ADJUSTED
------ ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 101 $ 156 $ 40,660 $
========== ========= ========= =========
Long-term liabilities (including capital leases)(1) $ 3,810 $ 4,173 $ 1,173 $
Mandatorily redeemable preferred stock (2)..... 27,984 27,984 71,488 --
Stockholders' deficit:
Common stock (3)............................. 49 54 54
Additional paid-in capital................... 35,384 42,924 42,924
Deferred compensation........................ (914) (914) (914)
Accumulated deficit ......................... (32,618) (33,412) (33,412)
---------- --------- --------- ---------
Total stockholders' equity............ 1,901 8,652 8,652
---------- --------- --------- ---------
Total capitalization.............. $ 33,695 $ 40,809 $ 81,313 $
========== ========= ========= =========
</TABLE>
(1) Long-term liabilities as of March 31, 2000 are comprised of
the following:
Bridge financing (subsequently exchanged
for Series J convertible preferred stock) $ 3,000
Equipment financing...................... 810
----------
$ 3,810
==========
(2) 60,000,000 shares authorized, 29,177,175 shares issued and
outstanding on March 31, 2000; pro forma as adjusted reflects
no shares issued and outstanding after giving effect to the
conversion of the preferred stock immediately prior to the
consummation of this offering.
(3) 215,000,000 shares authorized, 49,413,182 shares outstanding,
shares on a pro forma basis reflecting shares
issued in connection with the acquisition of GiftSpot.com,
Inc.; the issuance of Series J Preferred Stock; and shares
as adjusted for the conversion of the preferred stock
immediately prior to consummation of this offering.
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<PAGE> 30
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was
approximately $ million, or $ per share. Net tangible book value per share
is equal to our total tangible assets minus our total liabilities divided by the
number of shares of our common stock outstanding after giving effect to the
conversion of all outstanding shares of preferred stock into shares of common
stock upon completion of this offering. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of our common stock in this offering and the net tangible book value
per share of our common stock immediately following this offering. Assuming we
had sold the shares of common stock offered by this prospectus at an initial
public offering price of $ per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, our net
tangible value at March 31, 2000 would have been approximately $ million, or
$ per share. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................................. $
Pro forma net tangible book value as of March 31, 2000............................ $
Increase attributable to new investors............................................ --------
Pro forma net tangible book value after this offering................................. --------
Dilution per share to new investors................................................... $
========
</TABLE>
The following table summarizes, on the pro forma basis described above,
as of March 31, 2000 the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by existing
stockholders and by new investors at an assumed offering price of $ per share
and without giving effect to the underwriting discount and assumed offering
expenses:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK TOTAL CASH AVERAGE PRICE
PURCHASED CONSIDERATION PER SHARE
--------- ------------- ---------
NUMBER PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... % $ % $
New investors...........................
--------- -------- -------- --------
Total................................... 100% $ 100 %
========= ======== ======== =========
</TABLE>
If the underwriters exercise their over-allotment option in full, the
net tangible book value per share of common stock as of March 31, 2000 would
have been $ per share, which would result in dilution to the new investors of
$ per share, and the number of shares held by the new investors will increase
to , or % of the total number of shares to be outstanding after this
offering, and the number of shares held by the existing stockholders will be
shares, or % of the total number of shares to be outstanding after this
offering.
The foregoing tables assume no exercise of any outstanding stock
options or warrants to purchase common stock. As of March 31, 2000, there were
outstanding options to purchase an aggregate of shares of common stock at a
weighted average exercise price of $ per share and outstanding warrants to
purchase an aggregate of shares of common stock at a weighted average
exercise price of $ per share. After March 31, 2000, we issued options to
purchase shares of common stock at a weighted average exercise price of $
per share and warrants to purchase shares of common stock at a weighted
average exercise price of $ per share. If all of these options had been
exercised on March 31, 2000, our net tangible book value on March 31, 2000 would
have been $ , or $ per share, the increase in net tangible book value
attributable to new investors would have been $ per share and the dilution
in net tangible book value to new investors would have been $ per share. To
the extent that these outstanding options and warrants are exercised, there will
be further dilution to new investors.
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<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information has been
derived from the application of pro forma adjustments to our historical
financial statements for the year ended December 31, 1999 and as of and for the
quarter ended March 31, 2000.
The unaudited consolidated pro forma statement of operations for the
year ended December 31, 1999 gives effect to the following transactions as if
they had occurred on January 1, 1999 and the unaudited consolidated pro forma
statement of operations for the quarter ended March 31, 2000 gives effect to the
following transactions as if they had occurred on January 1, 2000:
- the acquisition of Giftpoint.com, Inc., which occurred on
March 6, 2000;
- the acquisition of GiftSpot.com, Inc., which occurred on April
17, 2000; and
- the issuance and sale of shares of common stock in this
offering at an estimated initial public offering price of
$ per share, including the receipt of the net
proceeds from this offering and the conversion of all series
of our preferred stock into shares of common stock that
will occur immediately prior to consummation of this offering.
The unaudited pro forma consolidated balance sheet gives effect to
following transactions as if they had occurred on March 31, 2000:
- the acquisition of GiftSpot.com, Inc. which occurred on April
17, 2000; and
- the issuance and sale of shares of common stock in this
offering at an estimated initial public offering price of
$ per share, including the receipt of the net
proceeds from this offering and the conversion of all series
of our preferred stock into shares of common stock that
will occur immediately prior to consummation of this offering.
The unaudited pro forma consolidated financial information does not
necessarily reflect what our actual financial results would have been had these
transactions been completed on the dates indicated, nor does it purport to be
indicative of future results.
The acquisitions of Giftpoint.com, Inc. and GiftSpot.com, Inc. have
been accounted for using the purchase method of accounting. The purchase method
of accounting allocates the aggregate purchase price to the assets acquired and
liabilities assumed based upon their respective fair values. The excess of the
purchase price over the fair value of the net assets acquired is approximately
$40.7 million.
-25-
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF
GIFTCERTIFICATES.COM, INC.
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
GIFTPOINT.COM
TWO MONTHS ENDED ACQUISITION
GIFTCERTIFICATES.COM FEBRUARY 29, 2000(a) GIFTSPOT.COM ADJUSTMENTS
-------------------- -------------------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues, net (b) ............ $ 4,804 $ 1,969 $ 2
Cost of revenues ............. 4,691 1,970 9
-------- -------- -------- --------
Gross profit .............. 113 (1) (7)
Marketing and sales expenses . 5,697 679 220
Technology and systems
development expenses ...... 407 115 580
General and administrative
expenses .................... 2,603 436 184
Non-cash consulting and
compensation expense ...... 38 -- --
Amortization of goodwill ..... 544 -- -- 1,455(c)
-------- -------- -------- --------
Loss from operations ...... (9,176) (1,231) (991) (1,455)
Other income (expense) ....... 2 16 (85) (794)(e)
-------- -------- -------- --------
Net loss .................. $ (9,174) $ (1,215) $ (1,076) $ (2,249)
======== ======== ======== ========
Net loss available to
common stockholders .... $ (9,924) $ (1,215) $ (1,076) $ (2,249)
======== ======== ======== ========
Basic and diluted net
loss per share (h) ....... $ (0.44)
========
Weighted average
common shares
outstanding basic
and diluted (h) ........... 22,375
========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA FOR OFFERING
ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues, net (b) ............ $ 6,775
Cost of revenues ............. 6,670
--------
Gross profit .............. 105
Marketing and sales expenses . 6,596
Technology and systems
development expenses ...... 1,102
General and administrative
expenses .................... 3,223
Non-cash consulting and
compensation expense ...... 38
Amortization of goodwill ..... 1,999
--------
Loss from operations ...... (12,853)
Other income (expense) ....... (861)
--------
Net loss .................. $(13,714)
========
Net loss available to
common stockholders .... $(14,464)
========
Basic and diluted net
loss per share (h) ....... $ (0.28)
========
Weighted average
common shares
outstanding basic
and diluted (h) ........... 52,494
========
</TABLE>
-26-
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF
GIFTCERTIFICATES.COM, INC.
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
GIFTSPOT.COM
PERIOD FROM
INCEPTION
(APRIL 21, 1999)
THROUGH
GIFTCERTIFICATES.COM GIFTPOINT.COM DECEMBER 31, 1999
-------------------- ------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues, net (b) ...................... $ 9,905 $ 4,035 $ 1
Cost of revenues ....................... 9,568 3,403 8
-------- -------- --------
Gross profit ........................ 337 632 (7)
Marketing and sales
expenses .............................. 12,927 4,524 1,871
Technology and systems
development expenses ................ 1,039 327 1,478
General and administrative expenses ... 4,924 647 537
Non-cash consulting and compensation
expense ............................. 276 -- --
Amortization of goodwill ............... -- -- --
-------- -------- --------
Loss from operations ................. (18,829) (4,866) (3,893)
Other income (expense) ................. (340) 48 (152)
-------- -------- --------
Net loss ............................ $(19,169) $ (4,818) $ (4,045)
======== ======== ========
Net loss available to common
stockholders ........................ $(20,398) $ (4,818) $ (4,045)
======== ======== ========
Basic and diluted net loss per
share (h) ........................... $ (1.68)
========
Weighted average common
shares outstanding basic
and diluted (h) ..................... 12,110
========
</TABLE>
<TABLE>
<CAPTION>
ACQUISITION PRO FORMA FOR OFFERING
ADJUSTMENTS ACQUISITIONS ADJUSTMENTS PRO FORMA
----------- ------------ ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues, net (b) ...................... $ $ 13,941
Cost of revenues ....................... 12,979
-------- --------
Gross profit ........................ 962
Marketing and sales
expenses .............................. 19,322
Technology and systems
development expenses ................ 2,844
General and administrative expenses ... 6,108
Non-cash consulting and compensation
expense ............................. 276
Amortization of goodwill ............... 7,713(c) 7,713
-------- --------
Loss from operations ................. (7,713) (35,301)
Other income (expense) ................. (794)(e) (1,238)
-------- --------
Net loss ............................ $ (8,507) $(36,539)
======== ========
Net loss available to common
stockholders ........................ $ (8,507) $(37,768)
======== ========
Basic and diluted net loss per
share (h) ........................... $ (0.74)
======== ========
Weighted average common
shares outstanding basic
and diluted (h) ..................... 51,379
======== ========
</TABLE>
-27-
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF GIFTCERTIFICATES.COM, INC.
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
ACQUISITION
GIFTCERTIFICATES.COM GIFTSPOT.COM ADJUSTMENTS
-------------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash
equivalents ............ $ 101 $ 55 $
Marketable securities .. -- 259
Accounts receivable .... 2,048 --
Inventory .............. 2,765 19
Prepaid expenses ....... 753 27
Other current assets ... 155 0
-------- -------- --------
Total current assets 5,822 360
Fixed assets, net ...... 3,040 456
Capitalized software,
net..................... 975 --
Goodwill, net .......... 32,234 -- 8,224(d)
Other assets ........... 851 48
-------- -------- --------
Total assets ........ $ 42,922 $ 864 $ 8,224
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' DEFICIT EQUITY
Accounts payable ........ $ 2,847 $ 1,602 $ 250(g)
Accrued expenses ........ 1,423 70
Note payable ............ -- 363
Deferred revenue ........ 4,957 52
-------- -------- --------
Total current
liabilities ....... 9,227 2,087 250
Long term liabilities ... 3,810 2,817 (2,817)(f)
Redeemable preferred
stock ................... 27,984 --
Common stock ............ 49 6 (1)(e)
Preferred stock ......... -- 1,076 (1,076)(e)
Additional paid-in
capital ................. 35,384 69 7,471(e)
Other comprehensive
income .................. -- 9 (9)(e)
Deferred compensation ... (914) --
Treasury stock .......... -- (75) 75(e)
Stock subscription
receivable .............. -- (4) 4(e)
Accumulated deficit ..... (32,618) (5,121) 4,327(e)
-------- -------- --------
Total stockholders'
(deficit) equity ..... 1,901 (4,040) 10,791
-------- -------- --------
Total liabilities and
stockholders'
(deficit) equity ..... $ 42,922 $ 864 $ 8,224
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA FOR OFFERING
ACQUISITION ADJUSTMENTS PRO FORMA
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash
equivalents ............ $ 156
Marketable securities .. 259
Accounts receivable .... 2,048
Inventory .............. 2,784
Prepaid expenses ....... 780
Other current assets ... 155
-------- -------- --------
Total current assets 6,182
Fixed assets, net ...... 3,496
Capitalized software,
net..................... 975
Goodwill, net .......... 40,458
Other assets ........... 899
-------- -------- --------
Total assets ........ $ 52,010
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' DEFICIT EQUITY
Accounts payable ........ $ 4,699
Accrued expenses ........ 1,493
Note payable ............ 363
Deferred revenue ........ 5,009
-------- -------- --------
Total current
liabilities ....... 11,564
Long term liabilities ... 3,810
Redeemable preferred
stock ................... 27,984
Common stock ............ 54
Preferred stock ......... --
Additional paid-in
capital ................. 42,924
Other comprehensive
income .................. 0
Deferred compensation ... (914)
Treasury stock .......... --
Stock subscription
receivable .............. --
Accumulated deficit ..... (33,412)
-------- -------- --------
Total stockholders'
(deficit) equity ..... 8,652
-------- -------- --------
Total liabilities and
stockholders'
(deficit) equity ..... $ 52,010
======== ======== ========
</TABLE>
-28-
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS)
(a) Giftpoint.com, Inc. was acquired on March 6, 2000. The period from March 1
through March 6, 2000 would not have a material effect on the Unaudited Pro
Forma Consolidated Statement of Operations presented above.
(b) We do not recognize revenue on SuperCertificates sales until redemption.
Similarly, Giftpoint.com, Inc. did not recognize revenue on Giftpoint
Certificates sales until redemption. As a result, our pro forma cash
receipts would be greater than our pro forma revenues. The following table
recognizes cash receipts to net revenues on a pro forma basis:
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- --------------
Cash receipts $ 18,372 $ 7,420
SuperCertificates issued (3,002) (2,974)
Giftpoint Certificates
issued (4,769) (1,222)
SuperCertificates redeemed 872 2,141
Giftpoint Certificates
redeemed 2,468 1,410
-------- --------
Revenues, net $ 13,941 $ 6,775
======== ========
(c) With respect to the Unaudited Pro Forma Consolidated Statement of
Operations of GiftCertificates.com, Inc. for the three months ended
March 31, 2000, the adjustments represent the amortization of the
excess of the purchase price over the net assets of Giftpoint.com, Inc.
acquired for the period from January 1 to February 29, 2000 which was
$1,093 and the amortization of the excess of the purchase price over
the net assets of GiftSpot.com, Inc. acquired for the three month
period ended March 31, 2000, which was $362. With respect to the
Unaudited Pro Forma Consolidated Statement of Operations of
GiftCertificates.com, Inc. for the year ended December 31, 1999, the
adjustments represent the amortization of the excess of the purchase
price over the net assets of Giftpoint.com, Inc. acquired for the year
ended December 31, 1999 which was $6,313 and the amortization of the
excess of the purchase price over the net assets of GiftSpot.com, Inc.
acquired for the year ended December 31, 1999, which was $1,400.
(d) Represents the preliminary estimates of the excess purchase price over the
net assets acquired for the GiftSpot.com acquisition as follows:
<TABLE>
<S> <C>
Purchase price (including professional fees) ..................... $7,001
Net tangible assets acquired...................................... (1,223)
------
Excess of purchase price over net tangible assets acquired........ $8,224
======
</TABLE>
We believe that all significant assets and liabilities have been
identified and, accordingly, that the final determination of the allocation of
GiftSpot.com, Inc. purchase price should not vary materially from the
preliminary estimate. We anticipate finalizing the purchase price allocation
upon completing the preparation and review of the April 17, 2000 (acquisition
date) financial statements of GiftSpot.com, Inc.
The identifiable assets are being amortized over their estimated useful
lives. Intangible assets resulting from the excess of the purchase price over
the fair value of the net assets acquired are being amortized over a period of 5
years.
We are reviewing the carrying values assigned to the intangible assets
to determine whether later events or circumstances have occurred that indicate
that the balance of the intangible assets may be impaired. Our principal
considerations in determining the impairment of the intangible assets will
include the strategic benefit to us of the particular business as measured by
expected undiscounted future cash flows.
(e) Reflects the adjustments to stockholders' equity attributable to the
acquisition of GiftSpot.com as follows:
<TABLE>
<S> <C>
Common Stock:
Elimination of GiftSpot.com, Inc. common stock.......... $(6)
Issuance of common stock................................ $5
Preferred Stock:
</TABLE>
-29-
<PAGE> 36
<TABLE>
<S> <C>
Elimination of GiftSpot.com, Inc. preferred stock................... $(1,076)
Additional paid-in capital:
Elimination of GiftSpot.com, Inc. additional paid-in capital........ $(69)
Additional paid-in capital in connection with issuance of
common stock........................................................ $6,746
Amortization of debt discount created by fair value of warrants
issued immediately prior to acquisition............................. $794
Elimination of other comprehensive income of GiftSpot.com, Inc........ $(9)
Elimination of GiftSpot.com, Inc. treasury stock...................... $75
Elimination of stock-subscription receivable.......................... $4
Retained earnings:
Elimination of GiftSpot.com, Inc. accumulated deficit............... $5,121
Amortization of debt discount created by fair value of warrants
issued immediately prior to acquisition............................. $(794)
</TABLE>
(f) Conversion of long-term debt to equity upon acquisition $2,817
(g) Reflects estimated professional fees incurred to complete
the transaction $250
(h) The basic and diluted share and per share information does not reflect the
reverse stock split anticipated to occur immediately prior to this
offering.
-30-
<PAGE> 37
SELECTED FINANCIAL DATA
The following table presents our summary historical financial data at
the dates and for the periods indicated. You should read the summary financial
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and related notes included in this prospectus. The historical data for the
period from October 16, 1997 (inception) through December 31, 1997 and the years
ended December 31, 1998 and 1999 and the selected balance sheet data at December
31, 1998 and 1999 are derived from, and are qualified by reference to, the
audited financial statements and related notes included in this prospectus. The
balance sheet data for December 31, 1997 is derived from our audited financial
statements and related notes not included in this prospectus. The statement of
operations data for each of the three-month periods ended March 31, 1999 and
2000 and the balance sheet data at March 31, 1999 and 2000 are derived from the
unaudited interim financial statements included in this prospectus. Our
statement of operations data for the three months ended March 31, 2000 includes
the results of operations for Giftpoint.com, Inc. for the period from March 6,
2000, the acquisition date, through March 31, 2000. Our balance sheet data as of
March 31, 2000 includes Giftpoint.com, Inc. which was acquired prior to the end
of the period. We prepared the unaudited financial statements on substantially
the same basis as the audited financial statements and, in our opinion, they
include all adjustments consisting only of normal recurring adjustments,
necessary for a fair presentation of our results of operations for the quarters
ended March 31, 1999 and 2000. Historical results are not necessarily indicative
of results that may be expected for any future period.
<TABLE>
<CAPTION>
OCTOBER 16,
1997 (INCEPTION)
THROUGH
DECEMBER 31,
---------------- YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- ---------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues, net (1)......................... $179 $2,627 $9,905 $740 $4,804
Cost of revenues.......................... 176 2,425 9,568 714 4,691
--- ----- ----- --- -----
Gross profit........................... 3 202 337 26 113
Marketing and sales expenses.............. 558 737 12,927 341 5,697
Technology and systems development expenses - - 1,039 100 407
General and administrative expenses....... 150 864 4,924 220 2,603
Non-cash consulting and
compensation expense................... - - 276 40 38
Amortization of goodwill.................. - - - - 544
------ -------- --------- ------ --------
Loss from operations................... (705) (1,399) (18,829) (675) (9,176)
Other income (expense).................... - (13) (340) - 2
------ -------- --------- ------ --------
Net loss............................... $(705) $(1,412) $(19,169) $(675) $(9,174)
====== ======== ========= ====== ========
Net loss available to common stockholders $(726) $(1,569) $(20,398) $(729) $(9,924)
====== ======== ========= ====== ========
Basic and diluted net loss per share (2).. $(0.07) $(0.15) $(1.68) $(0.06) $(0.44)
====== ====== ====== ====== ======
Weighted average common shares outstanding
basic and diluted (2).................. 10,555 10,555 12,110 11,786 22,375
====== ====== ====== ====== ======
BALANCE SHEET DATA (AT END OF PERIOD):
Current assets............................ $426 $509 $10,239 $138 $5,822
Working capital........................... 318 (176) 2,658 (861) (3,405)
Total assets.............................. 429 564 13,009 306 42,922
Deferred revenue, net (3)................. - - 1,986 - 4,957
Total stockholders' (deficit) equity...... (699) (2,264) (21,575) (2,890) 1,901
ADDITIONAL OPERATING DATA:
Cash receipts (1)......................... 179 2,627 12,035 740 5,637
</TABLE>
-----------------------------
(1) Our cash receipts historically have been greater than our revenues since we
do not recognize revenue on SuperCertificate sales until redemption. Prior to
1999, our cash receipts equaled our revenue since we did not sell
SuperCertificates. The following reconciles cash receipts to revenues, net:
-31-
<PAGE> 38
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
Cash receipts.......................................... $12,035 $5,637
SuperCertificates issued............................... (3,002) (2,974)
SuperCertificates redeemed............................. 872 2,141
----------------- -------------------
Revenues, net.......................................... $9,905 $4,804
================= ===================
</TABLE>
(2) Basic loss per share is calculated by dividing loss available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is equal to basic loss per share because the
effect of all common equivalent shares is anti-dilutive. The share and per share
information does not reflect the reverse stock split anticipated to occur
immediately prior to this offering.
(3) Giftpoint Certificates contained in the chart below consist of gift
certificates issued by Giftpoint.com, Inc. prior to our acquisition which are
similar to SuperCertificates and were converted to SuperCertificates upon our
acquisition of Giftpoint. Deferred revenue, net represents the value of
unredeemed SuperCertificates at the end of each period as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
Deferred revenue, net
Beginning balance $ 0 $ 1,986
SuperCertificates issued......................... 3,002 2,974
Giftpoint Certificates issued.................... 0 2,245
SuperCertificates redeemed....................... (872) (2,141)
Change in deferred fulfillment costs............. (144) (20)
Giftpoint deferred fulfillment costs acquired.... 0 (87)
----------------- -------------------
Ending balance................................... $1,986 $ 4,957
================= ===================
</TABLE>
-32-
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis along with the
selected financial data, financial statements and related notes included in this
prospectus.
OVERVIEW
We are a leading Internet marketplace for physical and emailable gift
certificates used for employee incentives, customer loyalty programs, marketing
promotions and consumer gifts. In addition to gift certificates, we offer our
corporate clients a range of related value-added products and services for the
administration of their employee incentive, customer loyalty and marketing
programs. We also provide a turnkey solution that allows merchants to offer
physical and emailable gift certificates on their own websites using our
technology and our ordering, fulfillment, security and customer service
infrastructure.
We had no material operations prior to October 1997 when we were
reorganized as a corporation. After October 1997, we operated as a telemarketing
company under the name 1-800-PRESENT, with telemarketing, customer service and
fulfillment functions outsourced to third party providers. We changed our
business model in 1999, from primarily a telemarketing company to an
Internet-based ordering and fulfillment business. Operating under the name
GiftCertificates.com, we established our primary website in January 1999.
Shortly thereafter, we began performing telemarketing, customer service and
fulfillment activities in house.
We have incurred significant losses since our inception and our cost of
revenues and operating expenses have increased dramatically. This trend reflects
the costs associated with the formation of our company, as well as our increased
efforts to promote the GiftCertificates.com brand, build market awareness,
attract new customers, recruit personnel, build operating infrastructure, and
develop and expand our primary website and related transaction processing
systems. We intend to continue to invest heavily in marketing and promotion,
website development, and technology and operating infrastructure development. We
believe that we will continue to incur substantial operating losses for the
foreseeable future.
We have historically derived gross margin by purchasing branded gift
certificates and related products from our merchant partners at a discount and
then selling them to our customers at face value. Since the fourth quarter of
1999, sales of our higher margin merchant certificates have been growing at a
faster pace than sales of lower margin products.
We pursue a number of strategies to increase our gross and operating
margins:
- We intend to use our SuperCertificate product to direct
traffic to our higher margin products. To augment this
strategy, we are developing a range of SuperCertificate
products, such as The Dining SuperCertificate, The Wedding
SuperCertificate and The Entertainment SuperCertificate, which
will both increase the appeal of the SuperCertificate category
and direct recipients to higher margin redemptions.
- As our business grows, we intend to use purchasing economies
to seek reductions in our credit card processing fees,
shipping charges, packaging costs and other purchasing
expenses.
- We intend to increase the percentage of fee revenues generated
through the provision of value-added services to our corporate
and consumer client base.
- To drive traffic to our website and build sales during the
fourth quarter of 1999 and the first quarter of 2000, we ran a
number of promotions that had a negative impact on our
margins. We intend to reduce the relative percentage of such
promotions in our future promotional activity.
- We are making significant investments in our new customer
service and fulfillment center. We believe that our
investments in automation equipment, the streamlining of order
fulfillment processes, and computerized customer service
technologies will result in improved gross and operating
margins.
-33-
<PAGE> 40
- We acquired Giftpoint.com in March 2000. Giftpoint.com focuses
on corporate sales which have higher margins than consumer
sales.
- We acquired GiftSpot.com in April 2000. We believe that the
GiftSpot.com technology will help us increase revenues from
higher gross-margin merchant enablement services.
- Over time our strategy is to increase the percentage of our
gift certificates delivered via email. This would have a
positive effect on our cost of revenues because the delivery
cost for emailable gift certificates is substantially below
that for physical gift certificates.
In addition, we expect to benefit from the effects of increased volume.
Certain agreements with merchants provide for increasing discounts from face
value as our purchasing volumes exceed targeted levels. Because many of our
operating expenses are relatively fixed, such as occupancy-related costs and
depreciation on investments in our customer service and fulfillment center, our
website, and enablement technologies, we expect that as sales of our gift
certificates increase, our operating expenses as a percentage of sales will
decrease. In addition, we expect to see improvements in our margins over time as
SuperCertificate redemptions increase. There is an inherent lag in the
recognition of the margin earned on SuperCertificate sales, because
SuperCertificate sales cannot be recognized as revenue until the
SuperCertificate is redeemed.
Although we expect our gross and operating margins to increase over
time, we cannot guarantee that these increases will occur. To achieve our sales
targets, we may have to spend more on marketing activities than we currently
anticipate. Such additional marketing expenditures may not result in the
increases in revenue necessary to achieve our operating margin goals. We may
also be unsuccessful at implementing some or all of the strategies described
above. Our margins may also be subject to competitive pressures that could
result in increased discounting or other expenditures or concessions that could
reduce margins. Additionally, our investments in our new customer service and
fulfillment center and other automation equipment described above may lower our
margins unless our sales increase sufficiently to justify our investment.
ACQUISITIONS
On March 6, 2000, we acquired Giftpoint.com, Inc., an Internet marketer
and seller of gift certificates and other related services that focused on
corporate sales. We have integrated the Giftpoint website with our own. Because
of the complementary nature of the two organizations, there was little overlap
in job functions. The acquisition was accounted for using purchase accounting.
Giftpoint.com, Inc. began its initial sales on its website in late November
1998. Under the terms of the merger, the former securityholders of
Giftpoint.com, Inc. received in the aggregate securities representing 38,685,500
shares of our common stock constituting approximately 21% ownership of our fully
diluted shares immediately following the merger. Some former executive officers
and members of senior management of Giftpoint.com were granted bonuses in the
form of our common stock and options to acquire our common stock in connection
with the merger. The aggregate number of common shares issued was 460,542 and
the aggregate number of options granted to all Giftpoint.com employees was
255,742. In addition, former Giftpoint.com, Inc. stockholders will be entitled
to receive additional shares of our common stock when and if we issue additional
shares of preferred stock to our preferred stockholders as "pay-in-kind"
dividends until the time our preferred stock converts into common stock upon
closing of this offering.
On April 17, 2000, we acquired GiftSpot.com, Inc., an online
gift-giving company and provider of private label electronic gift certificate
and promotional technology services for merchants. By completing this
acquisition we have accelerated the timeframe in which we can provide electronic
gift certificate enabling services to merchants. The acquisition was accounted
for using purchase accounting. GiftSpot.com, Inc. began initial sales on its
website in October 1999. Under the terms of the merger, the former
securityholders of GiftSpot.com, Inc. received in the aggregate securities
representing 6,399,997 shares of our common stock constituting approximately
3.3% ownership of our fully diluted shares as of the merger date.
We regularly engage in negotiations with respect to potential
acquisitions and joint ventures, some of which may be material.
REVENUES AND EXPENSES
We primarily generate revenues from the sale of two distinct types of
gift certificate products
-34-
<PAGE> 41
- Merchant-issued Gift Certificates - gift certificates, gift
cards and similar products issued by our merchant partners
that are redeemable for their goods and/or services, and
- SuperCertificates - a gift certificate to our website that can
be exchanged for the recipient's choice of a range of merchant
issued gift certificates.
We also generate revenue from transaction and service fees and the sale
of specialty greeting cards, custom boxes and other ancillary products. The
transaction and service fees relating to our corporate programs consist of
program management fees and technical and creative fees. In addition, we
generate revenues from co-marketing promotional arrangements and distribution
partnerships. Our enablement fees are generated from the oversight and
management of merchants' gift certificate programs. The revenues generated as a
result of enablement services consist of transaction, installation, licensing
and monthly processing fees. Although GiftCertificates.com, Inc.'s historical
enablement revenues have not been significant, through our acquisition of
GiftSpot.com, Inc. and its technology and developer resources, we expect to
increase this revenue source.
We recognize revenue from the sale of merchant gift certificates upon
shipment of the gift certificate to the customer. Revenue is recorded at the
face value of the gift certificate sold plus earned service fees and shipping
and handling charges, net of any promotional discounts. The revenue generated
from the sale of SuperCertificates is deferred until the redemption of the
SuperCertificate by the customer. At the time of a SuperCertificate purchase,
the direct costs associated with its fulfillment, namely credit card fees,
packaging costs and shipping charges, are deferred. Labor associated with
fulfillment is expensed as incurred. At the time of redemption of a
SuperCertificate, we recognize revenue and expense the associated non-labor
costs. The time differential between the sale and redemption of
SuperCertificates generates cash float that we can use in our business, subject
to liquidity needs. In addition, we anticipate that some of our
SuperCertificates may never be redeemed. Although nonredemption provides
substantial float to support working capital, we may not be able to recognize
revenue on a substantial portion of nonredeemed SuperCertificates.
In an effort to increase our customer base and brand awareness, we have
developed promotions and offered coupons and/or discounts to customers, which
result in a decrease in gross margin on sale. The portion of the cost of the
promotion that exceeds the cash received from the customer is classified as
marketing and sales expense. Additionally, any referral fee offered in
connection with customer acquisition arrangements is reflected as marketing and
sales expense.
RESULTS OF OPERATIONS
In view of the rapidly evolving nature of our business and our limited
operating history and recent acquisitions, we believe that period-to-period
comparisons of our operating results, including our gross profit margin and
operating expenses as a percentage or our net revenues, should not be relied
upon as an indication of our future performance. The following table sets forth
statement of operations data expressed as a percentage of net revenues for the
periods indicated:
<TABLE>
<CAPTION>
OCTOBER 16, 1997
(INCEPTION) THROUGH YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
-------------------- ------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues, net............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................... 98.3 92.3 96.6 96.5 97.6
----- ----- ------ ---- ----
Gross profit.......................... 1.7 7.7 3.4 3.5 2.4
Marketing and sales expenses............. 311.7 28.1 130.5 46.1 118.6
Technology and systems development
expenses.............................. - - 10.5 13.5 8.5
General and administrative expenses...... 83.8 32.9 49.7 29.7 54.2
Non-cash consulting and compensation
expense............................... - - 2.8 5.4 0.8
Amortization of goodwill................. - - - - 11.3
- - - - ----
------ ----- ------- ----- -------
Loss from operations.................. (393.8) (53.3) (190.1)) (91.2) (191.0)
------ ----- ------- ----- -------
Other income (expense)................... - (0.5) (3.4) - -
Net loss.............................. (393.8)% (53.8)% (193.5)% (91.2)% (191.0)%
====== ===== ====== ===== ======
</TABLE>
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<PAGE> 42
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues, net. Revenues increased for the three month period ended
March 31, 2000 to $4.8 million as compared to $0.7 million for the three month
period ended March 31, 1999. The increase can be attributed to the increased
brand awareness resulting from increases in our marketing and advertising
expenditure that commenced in the fourth quarter of 1999 and continued in the
first quarter of 2000. Additionally, the introduction to our website of the
SuperCertificate product, which did not occur until the fourth quarter of 1999,
increased consumer awareness of our brand and website. Revenues attributable to
corporate customers significantly increased in the first quarter of 2000 as a
result of the acquisition of Giftpoint.com, Inc. which occurred in March of
2000. We also acquired new customers through the development of reward and
promotional programs with other businesses during the second half of 1999 and
into the first quarter of 2000. During the three month period ended March 31,
2000, 39.5% of total revenues was attributable to corporate customers as
compared to none in the first quarter of 1999. During 2000, we anticipate the
percentage of total revenue attributable to corporate customers should continue
to increase due to the acquisition of Giftpoint.com, Inc. and our own corporate
sales efforts.
Cost of Revenues. Cost of revenues consists of the cost of gift
certificates and the specialty greeting cards, customer boxes and other
ancillary products, outbound shipping charges and credit card processing fees.
Cost of revenues increased to $4.7 million, or 97.6% of net revenues, for the
three month period ended March 31, 2000 as compared to $0.7 million, or 96.5% of
net revenues, for the three month period ended March 31, 1999. This increase was
largely due to our efforts to acquire new customers through the use of
promotional programs that were implemented in the second half of 1999 and into
2000.
Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of advertising, public relations and promotional expenditures, as well
as payroll and related costs associated with personnel engaged in marketing,
selling, customer service and fulfillment activities. Marketing and sales
expenses increased to $5.7 million , or 118.6% of net revenues, for the three
month period ended March 31, 2000 as compared with $0.3 million, or 46.1% of net
revenues, for the three month period ended March 31, 1999. This increase was
largely attributable to our efforts to increase consumer awareness of our brand
and primary website. We incurred significant expenses during the three month
period ended March 31, 2000 related to the development of online advertising
programs and print and radio media campaigns. The increase in marketing and
sales expenses was also due to increased personnel and related expenses required
to implement our marketing strategy and fulfill customer demand. We expect
marketing and sales expenses to increase significantly in 2000, including
expenditures of $30 - $35 million in offline and online media and direct
marketing. However, we continually assess our customer acquisition costs to
optimize the effectiveness of our marketing programs and may reallocate funds
budgeted for media expenditures if we deem it prudent.
Technology and Systems Development Expenses. Technology and systems
development expenses consist principally of payroll and related expenses for
design, development and network operations personnel, primary website, systems
and telecommunications infrastructure, and amortization of capitalized software.
We maintain proprietary software for the fulfillment and service of customer
orders. We incurred $0.4 million, or 8.5% of net revenues, of technology and
systems development expenses during the three month period ended March 31, 2000
as compared to $0.1 million, or 13.5% of net revenues, during the three month
period ended March 31, 1999. The technology and systems development expenses
incurred in 2000 were primarily attributable to the hiring of dedicated
personnel and associated costs related to developing the features, content and
functionality of our primary website and transaction processing systems, as well
as investments in systems and telecommunications infrastructure, none of which
occurred prior to the second half of 1999.
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<PAGE> 43
General and Administrative Expenses. General and administrative
expenses consist of payroll and related expenses for executive, finance and
administrative personnel, recruiting, professional fees, depreciation and
amortization, excluding amortization of goodwill, occupancy-related costs and
other corporate expenses. General and administrative expenses increased to $2.6
million, or 54.2% of net revenues, for the three month period ended March 31,
2000 as compared to $0.2 million, or 29.7% of net revenues, for the three month
period ended March 31, 1999. The increase in general and administrative expenses
was primarily due to increased salaries and related expenses associated with the
hiring of additional personnel as well as increases in recruiting, professional
fees and travel expenditures.
Non-Cash Consulting and Compensation Expense. Non-cash consulting and
compensation expense relates to stock options granted to consultants and
employees with exercise prices which were less than the fair market value of the
underlying shares of common stock at the date of grant. Non-cash consulting and
compensation expense decreased to $37,945, or 0.8% of net revenues, for the
three month period ended March 31, 2000 as compared to $40,148, or 5.4% of net
revenues for the three month period March 31, 1999.
Net Loss. We reported a net loss of $9.2 million for the three month
period ended March 31, 2000 as compared with a net loss of $0.7 million for the
three month period ended March 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues, net. Revenues increased in 1999 to $9.9 million from $2.6
million in 1998. In January 1999, we established our primary website that
enables consumers to easily select and purchase gift certificates, gift cards
and gift checks over the Internet, transitioning our company from a telemarketer
of gift certificates to an e-commerce provider of branded gift certificates and
related products and services. We also expanded the number of merchants
represented on our website thereby increasing consumer selection. We increased
brand awareness through an increase in marketing and advertising expenditure
during the fourth quarter of 1999. During the second half of 1999, we
established our corporate sales business. For the year ended December 31, 1999,
11.6% of total revenues was attributable to corporate customers as compared to
none in 1998.
Cost of Revenues. Cost of revenues increased to $9.6 million, or 96.6%
of net revenues, in 1999 from $2.4 million, or 92.3% of net revenues, in 1998.
This increase was due to the development of promotional programs that were
implemented in the second half of 1999.
Marketing and Sales Expenses. Marketing and sales expenses increased to
$12.9 million , or 130.5% of net revenues, in 1999 compared with $0.7 million,
or 28.1% of net revenues, in 1998. We incurred significant expenses in the
fourth quarter of 1999 related to the development of advertising programs and
media campaigns, and the signing of Sophia Loren as our spokesperson. The
increase in marketing and sales expenses also was due in part to increased
personnel and related expenses. Furthermore, we incurred customer service and
fulfillment labor costs associated with the orders for our SuperCertificates, in
the fourth quarter of 1999, although the related revenue is deferred on these
orders until redemption.
Technology and Systems Development Expenses. We incurred $1.0 million,
or 10.5% of net revenues, of technology and systems development expenses in
1999. We did not incur similar expenses in 1998. The technology and systems
development expenses incurred in 1999 were primarily attributable to the hiring
of dedicated personnel and associated costs as described above.
General and Administrative Expenses. General and administrative
expenses increased to $4.9 million, or 49.7% of net revenues, in 1999 as
compared to $0.9 million, or 32.9% of net revenues, in 1998. The increase in
general and administrative expenses was primarily due to increased salaries and
related expenses associated with the hiring of additional personnel as well as
increases in recruiting, professional fees and travel expenditures.
Non-Cash Consulting and Compensation Expense. Non-cash consulting and
compensation expense was $0.3 million, or 2.8% of net revenues, in 1999. We did
not incur similar charges in 1998.
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<PAGE> 44
Net Loss. We reported a net loss of $19.2 million in 1999 compared with
a net loss of $1.4 million in 1998.
PERIOD FROM OCTOBER 16, 1997 (INCEPTION) TO DECEMBER 31, 1997 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
We were formed in October 1997, operating under the name 1-800-PRESENT,
and operated as a telemarketer, through our toll-free number. During this
period, our telemarketing, customer service and fulfillment functions were
outsourced to third parties. As a result, our results of operation for the
period ended December 31, 1997 do not bear any significant relationship to our
operating results for the year ended December 31, 1998. The significant changes
in operating results for the year ended December 31, 1998 as compared to the
period ended December 31, 1997 were primarily attributable to the difference in
the duration and extent of our operations in those periods.
Our revenues were $178,807 for the period ended December 31, 1997. Cost
of revenues were $176,309, or 98.3% of net revenues. In total, operating
expenses for the period ended December 31, 1997 amounted to $707,904 and
consisted largely of marketing and sales expense of $557,678 and general and
administrative expense of $150,226.
QUARTERLY RESULTS OF OPERATIONS
The table below sets forth our quarterly results of operations in
dollars for our last eight quarters. This data has been prepared on the same
basis as our annual audited financial statements and, in our opinion, includes
all adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation of this information. These unaudited quarterly
results should be read in conjunction with the annual audited financial
statements and related notes included elsewhere in this prospectus. Because of
our limited operating history, our recent acquisitions of Giftpoint.com, Inc.
and GiftSpot.com, Inc. and the rapidly evolving nature of our business, we
believe that quarterly period comparisons are not meaningful and should not be
relied upon as an indication of future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues, net ............................... $ 189 $ 160 $ 2,211 $ 740 $ 859 $ 955 $ 7,351 $ 4,804
Costs of revenues ........................... 175 148 2,041 714 829 686 7,339 4,691
----- ------ -------- ----- ----- ----- ------- -------
Gross profit ............................. 14 12 170 26 30 269 12 113
Marketing and sales expenses ................ 29 199 363 341 605 4,386 7,595 5,697
Technology and systems development expenses . -- -- -- 100 142 555 242 407
General and administrative expenses ......... 346 49 88 220 560 939 3,205 2,603
Non-cash consulting and compensation
expense................................... -- -- -- 40 50 78 108 38
Amortization of goodwill .................... -- -- -- -- -- -- -- 544
----- ------ ------ ----- -------- ------- -------- ------
Loss from operations ..................... (361) (236) (281) (675) (1,327) (5,689) (11,138) (9,176)
----- ------ ------ ----- -------- ------ -------- -------
Other income (expense) ...................... -- -- (13) -- 8 (27) (321) 2
Net loss ................................. $(361) $(236) $ (294) $(675) $(1,319) $(5,716) $(11,459) $(9,174)
===== ===== ======= ===== ======== ======= ========= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations since inception primarily through the
private placement of preferred equity securities, through which aggregate net
proceeds of approximately $69 million have been raised to date. Historically,
Giftpoint.com, Inc. and GiftSpot.com, Inc. had also been funded through equity
financings, with aggregate net proceeds of $6.5 million and $3.8 million,
respectively.
We had $100,855 of cash and cash equivalents at March 31, 2000. Working
capital was $(3.4) million at March 31, 2000.
Net cash used in operating activities was $1.3 million in 1998, $15.3
million in 1999 and $9.8 million for the three month period ended March 31,
2000. Net cash used in operating activities for the three month period ended
March 31, 2000 was
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attributable to a net loss of $9.2 million and increases in accounts receivable,
prepaid expenses and other assets and decreases in accounts payable and accrued
expenses that were partially offset by decreases in inventory and deferred
revenue resulting from the sale of SuperCertificates, and non-cash charges
relating to depreciation and amortization and consulting and compensation
expense. Net cash used in operating activities in 1999 was attributable to a net
loss of $19.2 million and increases in accounts receivable prepaid expenses and
inventory that were partially offset by increases in accounts payable and
accrued expenses, deferred revenue, and non-cash charges, primarily depreciation
and amortization and consulting and compensation expense. For 1998, net cash
used in operating activities resulted from a net loss of $1.4 million and
increases in inventory, prepaid expenses and other assets, partially offset
against an increase in accounts payable and accrued expenses.
Net cash used in investing activities was $3.1 million in 1999 and $0.5
million for the three month period ended March 31, 2000. Cash used in investing
activities for the three month period ended March 31, 2000 primarily related to
the purchase of property and equipment and payments made to design and develop
our primary website, partially offset by the cash acquired in connection with
the acquisition of Giftpoint.com, Inc. The cash used in investing activities
during 1999 consisted of payments made to design and develop our primary website
as well as to purchase and build network hardware and software and the
telecommunications infrastructure, to acquire domain names, to build-out our
leased facility and to purchase furniture and fixtures. There were no similar
cash expenditures during 1998. We anticipate a substantial increase in capital
expenditures and commitments consistent with the anticipated growth in
operations and infrastructure. We have entered into a lease for a new
fulfillment operations facility in New Jersey. We may finance a portion of these
costs through leasing arrangements.
Net cash provided by financing activities was $1.1 million in 1998,
$23.9 million in 1999 and $4.8 million for the three month period ended March
31, 2000. Cash provided by financing activities for the first quarter included
$3.0 million of bridge financing that was subsequently exchanged for shares of
Series J Preferred Stock. In May 2000, we raised an aggregate of $43.8 million
in financing related to the issuance of shares of Series J Preferred Stock.
Additionally, during the three month period ended March 31, 2000, we established
a $2.0 million line of credit, to be used for the purchase of technology and
other equipment, which would be secured by these assets of which $0.8 million
was outstanding at March 31, 2000 . The interest rate is approximately 8.7%.
This line of credit does not contain significant operating covenants. As a
result, we were able to finance a portion of our computer equipment that had
been purchased during 1999. Net cash provided by financing activities in 1999
and 1998 primarily related to the issuance of several classes of preferred
stock. We had no long-term debt as of December 31, 1999 or 1998.
The revenue generated from SuperCertificates is deferred until
redemption of the SuperCertificate by the recipient. At the time of redemption,
we recognize revenue and expense the associated costs. As a result of this
accounting method, our cash received from customers has historically been
substantially greater than the amount of revenue reported for these periods. The
difference in these amounts is reflected primarily as an increase in the amount
of deferred revenues presented on our balance sheet, which are presented net of
certain deferred fulfillment costs associated with these orders. For the three
month period ended March 31, 2000 the amount of cash received from customers in
excess of the amount of revenues reported was approximately $5.3 million. This
deferred revenue is presented on the accompanying balance sheet net of certain
associated fulfillment costs, which totaled approximately $252,000 as of March
31, 2000. The sale of SuperCertificates provides cash float to the company that
we reinvest in our business and expect will significantly support the working
capital required to operate our business. Pending reinvestment in our business
we intend to invest the cash float in interest bearing investments. We intend to
review our investment practices over time. We expect that as sales of
SuperCertificates grow, in association with the expansion of our corporate
business, the float will also continue to grow. Generally, corporations purchase
SuperCertificates in bulk and distribute them over a period of time. We cannot
predict or control if, when or for what merchant product the end recipient will
redeem the reward. In addition, we anticipate that some of our SuperCertificates
may never be redeemed. Although nonredemption provides substantial float to
support working capital, we may not be able to recognize revenue on a
substantial portion of nonredeemed SuperCertificates.
In connection with our acquisition of GiftSpot.com, we assumed a line
of credit for approximately $350,000 and other short-term liabilities of
approximately $1.5 million.
Our capital expenditures were approximately $3.1 million in 1999 and
$1.3 million for the three month period ended March 31, 2000. We had no capital
expenditures in 1998. We estimate our 2000 capital expenditures to be
approximately $20 million which will be used primarily for additional
investments in merchant enabling technologies, website technology, automation
equipment, the completion of our fulfillment center in New Jersey, enhancements
to information systems and internal
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<PAGE> 46
payroll costs associated with the development of software used for operations.
As of March 31, 2000, none of this capital expenditure has been incurred.
Our future liquidity and capital requirements will depend on numerous
factors. For example, the pace of expansion will affect future capital
requirements, as may the decision to acquire or invest in complementary
businesses and technologies. We believe that the net proceeds from this
offering, together with available funds and cash flows, will be sufficient to
conduct our business plan for the foreseeable future. However, any projections
of future cash needs and cash flows are subject to substantial uncertainty and
we may need to raise more funds than are budgeted in our capital plan in order
to fund a more rapid expansion plan, as a result of acquisitions, alliances,
international expansion or otherwise, to respond to competitive pressures,
regulatory changes or changes in the business plan and to develop new products
and services. In addition, if we experience redemptions of significant amounts
of SuperCertificates sooner than anticipated or are otherwise unable to
adequately manage our cash flows, we may need additional operating funds if we
do not have available cash. If additional funds are required, we may not be able
to obtain such financing on terms favorable to us, or at all. We may need to
enter into lines of credit in the future to be able to finance unanticipated
redemptions on relatively short notice. Any additional capital raised through
the sale of equity or convertible debt securities would dilute your ownership
percentage. Any additional capital raised through debt financing will result in
interest expense and may subject us to negative and financial covenants that
restrict our ability to operate our business or require us to deliver equity
securities to the lender which would dilute your ownership percentage. If
financing is not available when required or is not available on acceptable
terms, we may be unable to develop or enhance our current product line,
marketing efforts or operational infrastructure. In addition, we may be unable
to take advantage of business opportunities or to respond to competitive
pressures. Any of these events could harm our business and financial condition.
See "Risk Factors -- We may need to raise additional capital which may not be
available."
SEASONALITY
There has historically been a concentration of revenue generated from
consumer purchases of gift certificates in the fourth quarter. We expect that
this trend will continue. This is largely due to the increased purchasing of
gift certificates by individuals during the holiday season. The development and
expansion of our corporate business may reduce the seasonality of our business
as corporate customers tend to purchase gift certificates more evenly throughout
the year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 (as
amended by SFAS No. 137) is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. We have not entered into derivative
instruments or engaged in hedging activities as defined in SFAS No. 133. As
such, management has determined that the adoption of this standard will have no
impact on our financial statements.
During December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
We have concluded that the implementation of this SAB will not have a material
impact on our financial position or results of operations.
During March 2000, the FASB issued interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," which clarifies the
application of Accounting Principles Board (APB) Opinion No. 25, regarding (a)
the definition of an employee for purposes of applying APB Opinion No. 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Interpretation No. 44 is
effective on July 1, 2000. Some events as defined by Interpretation No. 44, may
require earlier consideration if they occurred after December 15, 1998 or
January 12, 2000, depending on the event, although no financial statement effect
would be recognized until July 1, 2000. The effects of applying Interpretation
No. 44 are recognized prospectively. Management has
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<PAGE> 47
reviewed its stock compensation events and determined that none qualify as those
covered by Interpretation No. 44, which would require early consideration.
Various authoritative bodies as well as the SEC continue to promulgate
new accounting and disclosure requirements addressing the accounting and
reporting for e-commerce and internet related businesses primarily as it relates
to the amount and timing of revenue recognition. We believe that our financial
statements comply with current guidance from the appropriate authoritative
bodies, however, guidance on matters under current or future consideration by
such authoritative bodies or changes within our business model or product or
service offerings may impact the timing and measurement of the reporting of
future operating results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, we had cash and cash equivalents of $100,855
consisting of cash and short-term investments. Our exposure to interest rate
changes has been immaterial. We typically reinvest our available cash in our
business and, therefore, have not maintained significant cash balances to date.
We intend to invest the net proceeds from this offering in U.S.
government securities or other interest-bearing instruments pending other uses.
In addition, pending reinvestment in our business, we intend to invest the cash
float from the sale of SuperCertificates in interest bearing instruments. We
intend to review our investment practices over time. Our investments will be
subject to market risk and may decline. Our outstanding credit line is indexed
to a LIBOR rate and, therefore, we have some interest rate risk. Our capital
lease obligations, once executed, will all be at fixed rates.
We have operated primarily in the United States and all sales to date
have been made in United States dollars. Accordingly, we have not had any
material exposure to foreign currency rate fluctuations.
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<PAGE> 48
BUSINESS
OVERVIEW
We are a leading Internet marketplace for physical and emailable gift
certificates used for employee incentives, customer loyalty programs, marketing
promotions and consumer gifts. Through our website at www.GiftCertificates.com,
we offer gift certificates from over 500 merchants representing over 600
well-known brands. We also sell a gift certificate to our website, the
SuperCertificate(TM), which is redeemable for nearly all of the merchant gift
certificates we offer. In addition to gift certificates, we offer our corporate
clients a range of related value-added products and services for the
administration of their employee incentive, customer loyalty and marketing
programs. We currently have over 1,000 corporate clients, including over one
quarter of the Fortune 100. We also provide a turnkey solution that allows
merchants to offer emailable and physical gift certificates on their own
websites using our technology and our ordering, fulfillment, security and
customer service infrastructure. Our merchant enablement clients include
well-known national retailers.
We buy gift certificates from our merchant partners at a discount and
sell them at face value. We also generate revenues by supplying technologies and
services to our merchants and corporate clients and through the sale of
ancillary products. Our cash receipts historically have been greater than our
revenues since we do not recognize revenue on SuperCertificate sales until
redemption. Because of the time differential between the sale and redemption of
our SuperCertificates, we generate significant cash float that we can reinvest
in our business.
INDUSTRY BACKGROUND
GROWTH OF INTERNET USAGE AND E-COMMERCE
The Internet has emerged as a global communications medium to deliver
and share information and conduct business electronically. IDC estimates that
there were approximately 261 million Internet users worldwide at the end of
1999, a number that IDC expects will increase to approximately 623 million users
by 2003. In addition, rapid acceptance of the Internet as a communications
platform by both businesses and consumers has created the foundation for
significant growth in electronic commerce. IDC estimates that business to
business e-commerce will grow from approximately $97 billion in 1999 to
approximately $1.4 trillion in 2003. It also estimates that the total value of
goods and services purchased annually over the Internet will increase from
approximately $131 billion in 1999 to approximately $1.6 trillion in 2003.
MARKET OPPORTUNITY
Gift certificates are well-suited for sale through the Internet since
they do not require in-person physical inspection, experience low return rates,
do not spoil, do not go out of fashion and can be delivered via email.
Corporations. Gift certificates are ideal products for corporate gift,
incentive, loyalty and promotions programs, because they provide the recipient
with much of the choice and flexibility of cash, while allowing the corporation
to personalize and tailor their programs. According to industry sources, the
global market for corporate incentives, customer loyalty programs and some
elements of marketing promotions, was estimated to be $26 billion in 1999.
The effectiveness of many internally administered corporate programs
may be impaired by either the high cost of establishing an appealing variety of
vendor relationships or, alternatively, the limited ability to provide diverse
product offerings. As more businesses offer loyalty programs, other businesses
may be required to adopt similar programs to remain competitive.
We believe that, other than cash, gift certificates are the gift most
highly valued by many recipients. Gift certificate programs are perceived by
many marketers as preferable to cash-based incentive and other reward programs
because recipients tend to associate gift certificate incentives with the
emotional and tangible qualities of the gift item ultimately purchased. By
comparison, we believe that the small payments that are typical of most
cash-based incentive programs are associated by the consumer more with
discounting or coupon programs than the ultimate gift selection and do not
typically offer the same positive emotional effects as gift certificates.
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<PAGE> 49
Individuals. Over $18 billion in gift certificates and prepaid gift
cards were sold in the United States in 1998. We estimate that consumer gift
spending in the U.S. in 1999 was approximately $125 billion and in 2000 will be
approximately $134 billion, based on statistics from the U.S. Department of
Labor and the U.S. Census Bureau. Individuals purchase gift certificates for a
variety of reasons, but primarily because they are a convenient gift to give and
because they allow the recipient to get exactly what they want. Most gift giving
is occasion-based, with the holiday season, birthdays and weddings being the
primary drivers.
Merchants. Gift certificates are valuable products for merchants since
their use drives traffic, may result in incremental sales and creates cash
float. Since the purchase of a gift certificate ultimately leads to the purchase
of a gift item, growth in gift certificates and related products do not displace
the purchase of actual gift items. We believe that gift certificates have been
an under-promoted product category in the U.S. compared to the gift certificate
industry in the United Kingdom, Japan, France and Germany. We believe there is a
large market of merchants for whom high quality online gift certificate
solutions cannot be practically developed internally because of insufficient
economies of scale, lack of expertise or available technology. We also believe
that merchants are concerned with outsourcing these programs since they
generally maintain strict control over usage of their brands and gift
certificates are one of their most brand sensitive products.
THE GIFTCERTIFICATES.COM SOLUTION
We supply an array of products and services for corporate incentives,
loyalty and promotions programs and enable merchants to offer their own gift
certificates online without significant fixed costs. Our leading Internet
marketplace and technology and service offerings provide the following benefits
to our merchants, corporate clients, and individual consumers.
BENEFITS TO CORPORATE CLIENTS
Appealing choice and variety of products for corporate programs: With
over 600 brands and our SuperCertificate products, we provide corporations with
a broad selection of gifts that cross geographic and demographic ranges. The
SuperCertificate allows a corporation to avoid the difficulty of selecting
specific gifts that meet the needs of each recipient. The SuperCertificate also
saves the corporation the expense and difficulty of developing relationships
with large numbers of vendors.
More effective customer loyalty and promotional programs: Our products
and services enable corporations to offer customer loyalty programs and
marketing promotions that facilitate customer retention and new customer
acquisition, without having to discount the corporation's own products and
services and potentially dilute the value of its brand. For example, our
corporate client may offer SuperCertificates as a reward to frequent buyers or
as an inducement to consumers to make a purchase. Our extensive merchant network
increases our appeal to individual consumers, and, as a result, makes our
products and services more valuable to corporate clients seeking to reach large
numbers of current and potential customers.
Outsourced program tools and fulfillment: We provide ready to use tools
to corporations for their program management and fulfillment. Our offerings
include tools for reporting and tracking of programs, electronic delivery of
rewards and promotions, physical fulfillment, personalization and packaging of
products, dedicated customer service and other customized services that a
corporation may desire. Our choice of products, technological capabilities and
commitment to customer service allow corporations to administer their programs
through us at a lower cost and with greater convenience, efficiency and quality
than if they were to undertake these functions themselves.
BENEFITS TO INDIVIDUALS
One-stop shopping with quality leading brands: We offer consumers
one-stop shopping for their gift giving needs with the choice and variety
provided by over 600 quality brands. Consumers can purchase physical and
emailable gift certificates for a broad range of products and services to be
redeemed at many of the nation's leading retailers, hotels, Internet companies,
spas, theaters and restaurants. We also offer our own SuperCertificates which
recipients can redeem for the gift certificates of nearly all of the merchants
on our website. We are developing additional types of SuperCertificates with
specialized redemption options, including The Dining SuperCertificate, The
Wedding SuperCertificate, The Entertainment SuperCertificate and The Fashion
SuperCertificate, which will enable the purchaser to provide a more personalized
gift. In addition, future products may be tailored to meet an individual gift
giver's preferences by providing restricted uses, such as gift certificates
redeemable only at merchants suitable for children.
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Convenience and timely fulfillment services: Purchasers of our products
can easily buy and send gift certificates online without any need for in-person
physical inspection. If a purchaser opts for electronic delivery of a gift
certificate, fulfillment is made by e-mail. We also provide a choice of physical
delivery channels, including overnight or regular mail delivery. Orders received
before 6 pm (Eastern time) are generally shipped the day they are received.
Through our acquisition of GiftSpot.com, Inc., we acquired technologies that
will provide our individual customers with additional conveniences, such as the
ability to send multiple certificates to a group of recipients as well as
allowing a group of customers to contribute to one gift certificate. We intend
to integrate these technologies into the service offerings on our primary
website.
Superior shopping experience and customer service: Our goal is to
provide a superior shopping experience for the purchasers and recipients of our
products. We provide toll-free telephone and e-mail support 24 hours a day seven
days a week from well-trained customer service representatives. In addition, our
primary website provides our customers with a number of additional services
designed to enhance their overall shopping experience, including gift
recommendations, geographical search capability, merchant partner location,
delivery information and a range of packaging and shipping options. We also
maintain our own frequent buyer reward program.
BENEFITS TO MERCHANTS
New marketing and distribution channel for gift certificate sales:
Participation in our marketplace provides our merchant partners with a new
marketing and distribution channel for the sale of physical and emailable gift
certificates to large numbers of corporate clients and individual consumers.
Gift certificates are particularly attractive products for merchants to sell
given the significant float and incremental sales they may generate. The
attractive economics of gift certificates encourages merchants to partner with
us. Due to the large number of merchants whose gift certificates are available
on our website, we believe there are competitive pressures on merchants to
participate in our website.
Turnkey solutions for private label gift certificates: While gift
certificates are economically attractive products for merchants, they can be
difficult to develop and fulfill. We provide enabling technology and fulfillment
services to merchants that allow them to outsource their physical and emailable
gift certificate fulfillment requirements.
BUSINESS STRATEGY
In order to strengthen our position as a leading Internet marketplace
for gift certificates and provider of related technologies and services, we
intend to pursue the following strategies:
Pursue higher margin and float opportunities. We continue to add new
products and services for our corporate clients, merchant clients and consumers
with a particular focus on those that earn higher margins and create additional
float for us. We plan to add new products and services to expand our customized
solutions for corporations and merchants. Our merchant enablement business
offers a significant opportunity to expand higher margin products and services.
In addition, we are developing variants of our SuperCertificate product such as
The Dining SuperCertificate, The Wedding SuperCertificate, The Entertainment
SuperCertificate and The Fashion SuperCertificate, that will promote higher
margin products and provide us with additional cash float. Sales of our
SuperCertificate products have been growing faster than sales of our other
products. We expect this trend to continue since SuperCertificates comprise the
majority of our corporate sales, which have been growing faster as a percentage
of sales than our consumer sales. As a result, we expect that our float will
also continue to grow. Our merchant enablement business also offers a
significant opportunity to expand higher margin products and services.
Build our network and drive sales. In order to increase the conversion
of visitors into customers and grow sales, we seek to increase the breadth of
merchant brands available on our website. By increasing our merchant network we
enhance our appeal to individual customers, which in turn makes our products and
services more valuable to corporate clients offering employee incentives,
customer loyalty programs or marketing promotions. Corporate orders generally
create many new potential customers since each order is typically distributed
among a large number of individual recipients. Larger numbers of customers and
increased sales will help us attract new merchant partners. This virtuous cycle
provides a lower cost method of new customer acquisition. In addition, an
increasing number of merchants enhances the range of redemption opportunities
for our own branded certificates and, as a result, makes them more desirable
products.
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Enhance brand recognition. We believe strong brand equity, recognition
and visibility is important in building our business. We continue to build our
brand through a broad-based marketing and advertising campaign utilizing both
online and offline channels. We have acquired prominent placements in the
shopping areas of a number of leading Internet portals that drive significant
amounts of traffic and sales to our website. We also believe that our primary
domain name, www.GiftCertificates.com, significantly enhances our brand
recognition because it is self-explanatory.
We are actively seeking alliances that will provide us with increased
brand recognition, revenue growth and margin enhancement opportunities. Our
recent strategic acquisitions of Giftpoint.com and GiftSpot.com enhanced our
corporate sales and merchant enablement businesses. We may also, from time to
time, make additional strategic acquisitions or enter into joint ventures or
other alliances. We have established relationships that we hope to expand
through increased provision of incentive and loyalty programs and other
co-marketing promotional opportunities and distribution partnerships. These
programs provide significant marketing exposure and a lower cost means of
accessing new customers.
Invest in technology. We continue to invest in technology in order to
enhance our product and service offerings, enablement capabilities for our
merchants, program management tools for our corporate clients, the overall
experience for our customers and our economies of scale. We recently acquired
GiftSpot.com, Inc. primarily to expand our merchant enablement technology
offerings. We are in the process of completing a new customer service and
fulfillment center and automating the fulfillment and management of physical
gift certificates, thereby increasing our efficiency and capacity. In addition,
we will continue to focus resources on fraud control and the development of new
applications to improve the overall customer experience.
Expand globally. We are planning a focused international effort by
targeting countries with high Internet, credit card and gift certificate usage.
We will evaluate, on a case-by-base basis, individual countries in order to
determine the appropriate entry method and may enter into joint ventures where
we believe it is appropriate. We believe there may be significant first mover
advantages in these countries and have already obtained domain names for this
purpose.
PRODUCTS AND SERVICES
Merchant-issued Branded Gift Certificates. The merchant-issued gift
certificates we carry are issued by many of the nation's leading retailers,
hotels, Internet companies, spas, theaters, restaurants and other consumer
marketers. Our clients can select from a wide variety of merchants in order to
give a gift certificate that reflects the interests of the recipient. Most of
the merchants on our website currently offer only physical gift certificates,
though an increasing number are introducing emailable gift certificates.
Our site at www.GiftCertificates.com organizes our merchant brands into
14 main categories. For the first three months of 2000, the best selling brands
within each category, sold were:
Apparel & Accessories: Banana Republic, Bloomingdale's, Eddie
Bauer(R), Gap (includes babyGap, GapKids),
J.Crew, Macy's, Neiman Marcus, Old Navy,
Saks Fifth Avenue, Spiegel(R)
Beauty & Spa: Barneys New York, Bath & Body Works,
Bloomingdale's, Chanel, ibeauty.com, Macy's,
Neiman Marcus, Saks Fifth Avenue,
SpaWish.com, Spiegel(R)
Books, CD's, & Videos: Barnes & Noble (includes B. Dalton),
BLOCKBUSTER(R), eToys, Everything Wireless,
iCanBuy.com, Musicland (includes Media Play,
On Cue, Sam Goody and Suncoast Motion
Picture Company)
Children: Barnes & Noble (includes B. Dalton),
BLOCKBUSTER(R), Gap (consists of babyGap,
GapKids), KBToys, Macy's, Musicland
(consists of Sam Goody), Old Navy, Saks
Fifth Avenue, Spiegel(R)
Digital (email delivery): Eve.com, iCanBuy.com, wine.com
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Dining: Benihana, Bertucci's, Damon's, Darden
Restaurants (consists of Bahama Breeze,
Olive Garden and Red Lobster), Legal Sea
Foods, Lettuce Entertain You Enterprises,
Longhorn Steakhouse, Pizzeria Uno,
Rainforest Cafe, T.G.I. Friday's
Entertainment: BLOCKBUSTER(R), Clearview Cinemas, General
Cinema Theaters, Loews Cineplex
Entertainment (includes Cineplex Odeon
Theatres, Loews Cineplex Imax Theatres, Sony
Imax Theatres, Sony Theatres, Star Theatres,
Magic Johnson Theatres), Madison Square
Garden, Universal Amusement Tickets
Home: Banana Republic, Bath & Body Works (includes
White Barn Candle Co.), Bed Bath &
Beyond(R), Bloomingdale's, Crate & Barrel,
Eddie Bauer(R), Macy's, Saks Fifth Avenue,
Spiegel(R), The Sharper Image
Hotels & Travel: American Airlines(R), AT&T PrePaid Card,
Hyatt Hotels & Resorts(R), Marriott Hotels
and Resorts (includes all other Marriott
brands and Renaissance Hotels and Resorts),
The Mansion on Turtle Creek
Jewelry & China: Barneys New York, Bloomingdale's, Chanel,
Fortunoff, Macy's, Neiman Marcus, Saks Fifth
Avenue, Spiegel(R), Sunglass Hut (consists
of Watch Station), Zales
Luxury: Bailey Banks & Biddle, Banana Republic,
Barneys New York, Brooks Brothers, Chanel,
Dean & DeLuca, Neiman Marcus, SpaWish.com,
Saks Fifth Avenue, The World of Golf
Specialty: America Online, American Express(R) Gift
Cheques, AT&T PrePaid Card, Harbor Freight
Tools, Olan Mills Portrait Studios, PETsMART
Sports Plus: Brookstone(R), chipshot.com, Eddie Bauer(R),
Fogdog Sports, Orvis, Madison Square Garden,
Patagonia, Spiegel(R), The World of Golf,
Universal Golf Tickets
Teen: Barnes & Noble, Bath & Body Works,
Bloomingdale's, Gap, iCanBuy.com, J.Crew,
Loews Cineplex Entertainment (consists of
Loews Cineplex Imax Theatres), Musicland
(consists of Media Play, On Cue, Sam Goody),
Old Navy, Sunglass Hut (consists of Watch
Station)
SuperCertificates. We also provide our own gift certificate product,
the SuperCertificate, in both emailable and physical form. SuperCertificates may
be redeemed on our website for the recipient's choice of gift certificates from
nearly all of our merchant partners. The SuperCertificate enables corporations
to provide a wide range of choices in their promotions, rewards and incentives
programs, thereby appealing to a significantly diverse audience. In addition,
many individual consumers purchase SuperCertificates when they are looking for a
highly flexible gift.
New SuperCertificate products currently in development include The
Dining SuperCertificate, The Wedding SuperCertificate and The Entertainment
SuperCertificate. These products will promote tailored subsets of our merchant
brands. SuperCertificates represented approximately 42% of our pro forma cash
receipts in 1999 and 57% of our pro forma cash receipts in first quarter 2000.
Corporate Incentive, Loyalty and Promotional Gift Certificate Programs.
For over 1,000 corporate clients, we provide a variety of gift certificate
related services in connection with their incentive, customer loyalty and
marketing programs, including custom design, reporting, advisory, fulfillment
and other services. We are developing several tools that will greatly assist
corporate award and incentive program managers with program administration. For
example, we are developing a reporting tool that program managers can use to
track what gifts were given, when they were given, and to whom they were given,
via a simple Web interface. Other more sophisticated tools for tracking and
controlling discretionary business gift
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accounts are under development. We seek to expand our corporate relationships
through the provision of additional products and services.
Enabling Technologies and Related Services. While gift certificates are
an economically attractive product for merchants, they are difficult to
administer and fulfill. We provide enabling technology and related services so
that merchants can establish gift certificate programs without the expense and
difficulty of developing these capabilities independently.
The technology required to create emailable gift certificates is
complex, requiring significant investment and personnel. By making a relatively
simple connection to our systems, our merchant clients can quickly acquire the
capability to offer emailable gift certificates to their customers without
significant up-front costs. To offer physical gift certificates, merchants need
to have the operational capability of accepting orders over a website, screening
for internet fraud, managing a customer service center, and billing and
fulfilling individual orders. Many merchants do not have this capability, but
can acquire the functionality by outsourcing their gift certificate operations
to us via a link from their website.
Through our acquisition of GiftSpot.com, Inc. in April 2000, we
acquired the technology and related administrative tools to enable merchants to
sell and redeem private label emailable gift certificates through their own
websites, powered by our servers. The GiftSpot technologies include features
such as:
- emailable gift certificates,
- personal messages, electronic card options, address books,
reminders and the ability to maintain customer accounts,
- the ability for corporations to send large volumes of
low-denomination private label promotional gift certificates,
- Gift Circle technology (related patent pending), which allows
several people to contribute to the purchase of a gift
certificate, enabling family members, friends and co-workers
to electronically "pass the hat" for gift giving occasions,
- technologies that enable merchants to issue their own branded
certificates as part of customer loyalty programs or
promotions, and
- merchant administrative capabilities that provide a merchant's
customer service and management team real-time access to the
activity of their emailable gift certificates.
We are currently integrating many of the GiftSpot technology features
into our primary website. We also intend to develop additional applications for
these technologies as we expand our product and service offerings.
Other Products and Services. We provide various ancillary products,
such as specialty greeting cards, priority shipping, custom boxes and other
seasonal and holiday promotions. We also promote our merchant brands with
featured and suggested merchant listings on our primary website.
CORPORATE CLIENTS AND MERCHANTS
We provide services to over 1,000 corporate clients relating to their
employee incentives, customer loyalty programs and marketing promotions. As our
clients offer these programs year-round, we expect these relationships to
contribute to revenue throughout the year. Our corporate clients include over
one quarter of the Fortune 100.
We have over 500 merchant partners whose branded gift certificates are
offered through our primary website. Since the purchase of a gift certificate
ultimately leads to the purchase of a gift item, and as a result, is only an
intermediate step between a recipient and the ultimate gift purchase, growth in
gift certificates and related products do not displace the purchase of actual
gift items. This characteristic of our sales facilitates our ability to partner
with merchants. We also provide a turnkey solution that allows merchants to
offer emailable and physical gift certificates on their own websites using our
technology and our ordering,
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fulfillment, security and customer service infrastructure. Our merchant
enablement clients include well-known national retailers.
TECHNOLOGY AND OPERATIONS
GiftCertificates.com has built a scaleable network infrastructure,
which includes redundant hardware for critical components that we believe can
survive the failure of several servers with relatively little downtime. Our Web
systems have sustained more than 100,000 unique multi-page view user sessions in
an hour. We believe this is below our capacity. We also believe we can quickly
and easily obtain additional capacity without significant additional system
development.
We have three separate systems: the primary GiftCertificates.com
website permits corporate clients and consumers to make orders and check order
status; our custom-developed back-office system, GiftSoft, supports order
fulfillment and customer service; and our proprietary server provides emailable
gift certificate functionality for merchants. Security is achieved via the use
of multiple firewalls, Secure Sockets Layer, which is a secure way of
transferring information between two computers on the Internet using encryption,
and password protected systems and databases within the context of an overall
security conscious design.
We host and administer our primary website using our own equipment at
Globix, a leading hosting facility. To further improve our website's performance
and redundancy, we plan to have in place prior to the 2000 holiday season two
data centers operating in tandem that provide geographic load balancing during
normal operations and are designed to be capable of handling the entire national
load in the event of a single data center failure.
Transactions completed on the website are passed to our custom
developed back-office system, GiftSoft, for order confirmation and all other
aspects of order tracking and management. The GiftSoft application is not
directly accessible from the Internet and runs on a Microsoft SQL Server
database that is distinct from the website's. Before an order is confirmed, it
is passed through an automated fraud test. All orders that do not pass the
automated fraud screening are transferred to our fraud prevention department for
further research. As a result, the order confirmation process is nearly real
time and ensures that we maintain high-quality fraud checks on all orders.
The GiftSoft application is also the primary interface to our
fulfillment process. At this time fulfillment is primarily a manual process with
automated support tools. Prior to the 2000 holiday season, we plan to purchase
and install automation equipment for high-quality card printing, order
association and inventory counting and entry. This technology should allow us to
improve our fulfillment process while reducing our per unit fulfillment cost. As
part of the installation process we will develop the programming interfaces
necessary to link the GiftSoft application to the automation equipment.
Our proprietary technology, acquired as part of the GiftSpot
transaction, enables merchant systems to communicate securely with our system
using industry standard encryption, while a flexible integration method provides
a customized user experience. New merchants are integrated quickly and easily
with the assistance of a dedicated technical support team. The network
architecture uses Windows-based technologies to distribute user load across
multiple servers and handle server failures. In the future we plan to use our
proprietary server to power our own SuperCertificate products.
We plan to make significant investments in new hardware, software and
automation technology in 2000 using a portion of the proceeds from this
offering. We do not expect any significant disruptions of either the operational
or Web systems as a result of the technology upgrades.
SALES AND MARKETING
We market to corporate clients, individual consumers and merchant
clients.
Marketing to Corporate Clients. Our corporate sales accounts are
primarily established through our in-person direct sales, outbound telemarketing
programs and direct mail programs. We are developing technology that will enable
virtually all account management and maintenance to be handled through a
Web-based interface, allowing efficient coverage and account management. While
we have generally targeted companies in the Fortune 1000, the efficiency of the
Internet also allows us to
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serve relatively small accounts cost effectively opening a previously
under-served market segment. We currently have 36 professionals dedicated to our
corporate marketing effort.
Marketing to corporate clients also aids our marketing efforts to
individual consumers because most of our corporate sales are SuperCertificates
that the recipient must redeem at our website.
Marketing to Individuals. Our marketing efforts for individuals extend
across traditional and online media, with the substantial majority in
traditional media to build brand awareness. A strong consumer brand supports all
aspects of our business, including corporate sales. We currently have 20
professionals dedicated to our individual marketing effort.
We are seeking to build a brand identity that is viewed by consumers as
thoughtful, creative and enjoyable through our online and offline advertising,
website design, packaging and customized greeting cards. Marketing effectiveness
is also enhanced by the simplicity of the GiftCertificates.com brand name and
the reputation of our merchant partners. One of our strongest assets to
communicate the personality and tone of the GiftCertificates.com brand is our
spokesperson, Sophia Loren. We believe her personal warmth and style personifies
thoughtful, gracious gift-giving and appeals to many consumer demographics. Ms.
Loren is being featured in new spot national television and radio advertising
that began in late April 2000.
Marketing to Merchants. Our merchant development group, which signs-up
new merchants for our website, also markets enablement services to existing
relationships. We currently have 8 professionals dedicated to our merchant
development effort.
In order to reach the large number of small merchants, we are forming
relationships with companies that are already selling them related services.
These companies include the online and offline information directories, credit
card processing companies, services, and other similar companies.
CUSTOMER SERVICE
We are committed to providing excellent customer service. As gift
giving is typically linked to a special occasion and often a specific date,
satisfaction of our clients' requirements is critical to our business. Orders
received before 6pm (Eastern time) are generally shipped the day they are
received. In addition, customers are notified via e-mail when an order is
received and when it is shipped. We also provide toll-free telephone and e-mail
support 24 hours a day, seven days a week. Our customer service representatives
act as gift counselors, assisting customers in finding products, taking orders
and handling questions about orders. Our customer service effort employs an
auto-answer call management system to assist with telephone calls. We have
approximately 40 dedicated customer service personnel, including managers, shift
supervisors and customer service representatives.
COMPETITION
The market for selling gift certificates is highly competitive. Since
gift certificates are sold at face value, competition in the industry has been
primarily based on convenience, service and brand recognition. Coupons and other
promotional incentives have been offered in the sale of gift certificates. The
amount of this activity could increase. The market for selling products and
services over the Internet is rapidly evolving and intensely competitive.
Existing offline and new competitors can launch websites selling gift
certificates at comparatively low cost. However, in the case of new competitors,
they will need to build relationships with a network of merchants in addition to
developing technological and operational infrastructure to take and fill orders.
Since gift certificates are brand sensitive products and merchants maintain
strict control over their brands, we believe our established partnerships with
over 500 merchants and our reputation for quality provide us with a competitive
advantage.
Some of our competitors have longer operating histories, larger
customer bases, stronger brand names and significantly greater financial,
technical, marketing and other resources than we have. New competitors continue
to enter our markets. Our current competitors include the following kinds of
businesses:
- Traditional sellers and online gift certificate and technology
providers. These are retailers and consumer service providers,
ranging from local merchants to chains and large consumer
product companies and including many of
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our merchant partners, who offer gift certificates at their
stores and on their websites. These also include Internet gift
certificate marketplaces and/or technology providers and
offline gift certificate companies, such as Gift Certificate
Center Co., which has entered into a definitive agreement to
be acquired by Hallmark Cards Inc., The Gift Certificate
Company (a subsidiary of Neighborhood Box Office, Inc.) and
WebCertificates. Our technology and service offerings, if
licensed to third parties as currently contemplated, may
enable merchants to compete with us to a greater extent by
expanding merchants' own gift certificate businesses. Many of
our agreements with merchants are terminable upon 30 days'
notice. Others may also begin to license technology similar to
ours which could increase competition with our technical
support business.
- Corporate program providers and alternatives. These are
traditional and online companies that provide employee
incentives, customer loyalty programs or marketing promotions,
such as BI Performance Services, Carlson Marketing Group, and
Maritz Marketing Research. We also compete for a portion of
the corporate budget with in-house programs and programs that
utilize other kinds of products as well as alternatives to
these kinds of programs, such as direct marketing and
advertising. In addition, we compete with programs operated by
or for portals and other large e-commerce sites, stand-alone
programs and promotional tools developed by and/or for
e-commerce sites. In addition, the customized solutions that
we provide to clients may be competitive with our website.
- Providers of alternative products. These are companies that
provide proprietary products that are accepted for payment by
multiple merchants online and offline and that may be used as
alternatives to some of our products and services, such as
American Express, which is a significant supplier of ours,
Cybersource and Flooz.
- Other vendors. These are vendors that sell the gift
certificates of other merchants on their websites, including
online communities that offer gift certificate products, and
printers of gift certificates and gift cards, as well as
specialized transaction processors of gift cards, which are
competition to the extent they develop emailable gift
certificate processing technology.
Although we compete with these kinds of companies in aspects of our
business, we also may have opportunities to partner with, supply and form
distribution arrangements with them. We expect competition to intensify as more
competitors enter our business and as traditional offline providers of these
services establish online capabilities. In addition, many companies may have
existing relationships with our merchant partners and potential customers and
may be able to respond to changes in market dynamics and technology faster than
we can. As participants in the industry consolidate, even stronger competitors
may be created. We may not be able to compete successfully against current and
future competitors and competitive pressures may result in reduced margins and
fees, which could materially impact our revenues.
We also enter into exclusivity arrangements with respect to selling
gift certificates for specific types of products on our website with various of
our business partners from time to time in the ordinary course of business.
INTELLECTUAL PROPERTY
We currently rely on a combination of trademark (including domain
names), copyright, patent and trade secret law and contractual restrictions to
establish and protect our technology and proprietary rights and information.
Other than our domain names and the related trademarks that are critical to our
brand recognition and overall success, these rights are currently not material.
We anticipate that our other intellectual property may become material to us in
the future.
We own several common law trademarks and approximately 200
registrations for domain names, including giftcertificates.com. We have filed
several federal applications with the United States Patent and Trademark Office
for trademarks and service marks relating to the marketing and sale of
third-party gift certificates. These applications include GIFTCERTIFICATES.COM,
SUPERCERTIFICATES and GIFT CIRCLE. We also have a patent pending which relates
to technology enabling several people to technology contribute to the purchase
of a group gift.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and still evolving. We cannot give any assurance as to the future viability or
value of any of our proprietary rights. In addition, we may not be able to deter
misappropriation of our proprietary information and materials due to
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risks of nonrecognition or inadequate protection of our proprietary rights in
certain foreign countries, undetected misappropriation of our proprietary
information or materials, and unenforceability of confidentiality agreements
entered into by our employees and consultants. Enforcement of trademark rights
against unauthorized use, particularly over the Internet and in other countries,
may be impractical or impossible and could generate confusion and diminish the
value of the trademark. 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. Litigation
may be necessary to enforce our intellectual property rights, to protect our
trade secrets and to determine the validity and scope of the proprietary rights
of others. If we are unable to protect our trademarks and other proprietary
rights against unauthorized use by others, our reputation and brand name would
be damaged and our competitive position would be significantly harmed.
Litigation regarding intellectual property rights is common in the
Internet and software industries. There have been an increasing number of patent
claims and threatened patent claims regarding the Internet, some of which
related to e-commerce processes. We have been contacted regarding some patents
but do not believe any patent issues will be material. We expect that
third-party infringement claims involving Internet technologies and software
products and services may continue to increase. If an infringement claim is
filed against us, we may be prevented from using certain technologies and may
incur significant costs to resolve the claim. We have agreed and may agree in
the future to indemnify certain of our business partners against claims that our
products infringe upon the intellectual property rights of others. We could
incur substantial costs in defending ourselves and our customers against
infringement claims. In the event of a claim of infringement, we and our
customers may be required to obtain one or more licenses from third parties. We
cannot assure you that we or our customers could obtain necessary licenses from
third parties at a reasonable cost or at all.
Any litigation could subject us to significant liability for damages or
invalidation of our proprietary rights. Lawsuits, regardless of their success,
would likely be time consuming and expensive to resolve and would divert
management's time and attention from our business. The resolution of any
litigation could be costly and time consuming, and may not be possible.
Accordingly, an adverse determination in any litigation that we are a party to
could have a material adverse effect on our business, results of operations and
financial condition. See "Business - Legal Proceedings" below.
GOVERNMENTAL REGULATION
ESCHEAT AND UNCLAIMED PROPERTY LAWS
The escheat, abandoned and unclaimed property laws of the various
states, generally contain provisions that will require all or some portion of
unused gift certificates to be turned over to a state if unredeemed for a period
of time, which generally ranges from three to five years. Since we could have
sales in every state, we may be subject to the laws in multiple jurisdictions.
If the unclaimed property laws applicable to our SuperCertificate products
change, we may be required to turn over unredeemed amounts sooner than currently
projected or to remit a higher percentage of the outstanding unredeemed amounts.
Either of those actions would be adverse to our business. We may decide to
restructure our operations, transfer assets to subsidiaries or reincorporate all
or part of our business in another state given these considerations. As we
expand internationally, we will have to review the laws of foreign jurisdictions
as to these matters, which may be more onerous.
INTERNET REGULATION
Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, consumer protection,
pricing, usage fees and taxes, content, copyrights, distribution,
characteristics and quality of products and services, and online advertising and
marketing. Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. The U.S. Congress has enacted
Internet laws regarding online copyright infringement, Internet taxation and
several privacy laws relating to the collection, use, and disclosure of
personally identifiable information. Although not yet enacted, the U.S. Congress
is considering additional laws regarding Internet taxation and privacy. In
addition, the European Union recently enacted new requirements regarding data
protection for European Union residents. These are all recent events and there
is uncertainty regarding their marketplace impact.
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The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. The application of laws and regulations from jurisdictions whose laws
do not currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services, could also materially
harm our business. The applicability of existing laws to the Internet is
uncertain with regard to many important issues, including property ownership,
sales and other taxes, intellectual property, export of encryption technology,
libel and personal privacy. If we were alleged to have violated federal, state
or foreign civil and/or criminal law, even if we could successfully defend such
claims, it could occupy significant amounts of management's time, harm our
business reputation and negatively affect our operating results and financial
condition.
Several telecommunications carriers are supporting regulation of the
Internet by the Federal Communications Commission in the same manner that the
FCC regulates other telecommunications services. Incumbent local exchange
telephone carriers have, in the past, petitioned the FCC to regulate Internet
service providers in a manner similar to long-distance telephone carriers and to
impose interstate access charges on Internet service providers. If either of
these regulatory initiatives were to occur, or if the FCC were to take other
actions responding to telecommunications carrier concerns, the costs of
communicating on the Internet could increase substantially. This, in turn, could
slow the growth and use of the Internet and, as a result, materially harm our
business.
The regulation of domain names in the United States and in foreign
countries has changed and is subject to further change in the near future. We
believe the value of Giftcertificates.com and our other domain names is critical
to our business. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to protect our own domain names or prevent
third parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our domain names, trademarks and other
intellectual property rights. As we expand internationally, we will have to
review the laws of foreign jurisdictions as to these matters, which may be more
onerous.
We are also subject to other laws and regulations that may affect our
business. For example, to the extent we offer products subject to regulation
under the money services business laws of the various states we would be
required to comply with applicable state laws, including compliance with
licensing requirements, net worth and bonding requirements and change of control
provisions as well as maintenance of adequate reserves in specified permitted
investments with respect to the products subject to these laws. We may decide to
structure some or all of our products in a manner that would not require
compliance with these laws. Changes in these laws or regulations or the
interpretation of existing laws or regulations to apply to our business could
materially affect our business, increase our costs of doing business or limit
the services or products we offer.
In November 1999, the Gramm-Leach-Bliley Act was signed into law. This
act provides, among other things, that an entity deemed to be a financial
institution must provide an individual with notice of its privacy policies at
the time the individual enters into a customer relationship with the entity and,
subject to exceptions, prohibits the transfer of specified information regarding
a customer or a consumer to an unaffiliated third party of the entity, unless
the customer or consumer has been given the opportunity to opt out of the
sharing of their information. The Federal Trade Commission issued a rule
implementing provisions of this act that becomes effective on November 13, 2000
and requires full compliance by July 1, 2001. We are evaluating whether aspects
of our current or future operations may be subject to this rule.
LEGAL PROCEEDINGS
We are currently in litigation with 1-800-Gift Certificate, one of our
competitors, with respect to the use of certain domain names, including
1-800-giftcertificates.com, 1-800-giftcertificate.com, 800giftcertificates.com
and other similar domain names that we own. Although 1-800-Gift Certificate does
not hold a registered trademark to 1-800-Gift Certificate or the other domain
names in question, it is suing GiftCertificates.com, Jonas Lee, our chief
executive officer, and other affiliated individuals for use of these domain
names, claiming, among other causes of action, unfair trade practices and
trademark infringement. The case was instituted in the United States District
Court for the Southern District of New York on February 2, 1999. In March 2000,
we filed a motion for summary judgment in this matter. If we are unsuccessful in
this motion or ultimately in this litigation or unable to resolve this matter
otherwise, we could be required to relinquish our ownership of the
aforementioned domain names which may enhance 1-800-GiftCertificate's
competitive position. We also may be required to pay monetary damages. We do not
expect that any monetary damages would be material.
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From time to time, we may become involved in litigation relating to
claims arising out of our ordinary course of business. Except as described
above, we are not presently involved in any material legal proceedings.
EMPLOYEES
As of June 5, 2000, we employed approximately 260 employees. We believe
our employee relations are good. Our employees are not represented by collective
bargaining agreements and we have never experienced a work stoppage.
FACILITIES
Our leased corporate headquarters occupies 13,000 square feet in
Manhattan and we are temporarily leasing an additional 7,373 rentable square
feet of office space in Manhattan. Our Omaha facility occupies 13,600 square
feet and our Seattle facility occupies 7,900 square feet. We have entered into a
lease for a 77,102 gross square foot operations facility in Carlstadt, New
Jersey. We believe our facilities will be sufficient for the next two years.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table provides information with respect to our directors,
executive officers and certain of our key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard C. Marcus (2) 61 Chairman of the Board
Jonas P. Lee (3) 33 Chief Executive Officer, President and Secretary and
Director
Michael E. Ahern (3) 36 Chief Operating Officer
Michael D. Stephenson (3) 36 Chief Financial Officer and Executive Vice President,
Finance and Administration
Douglas S. Nielsen (3) 32 President, Business Solutions and Director
Maxwell E. Bardon (3) 34 Executive Vice President, Merchant Solutions
Robert S. Beck, Jr. (3) 38 Chief Technology Officer and Executive Vice President,
Technology
Louis S. Berman 40 Chief Technology Architect
Bertina Ceccarelli (3) 36 Executive Vice President, Marketing
Leland B. Harden (3) 37 Executive Vice President, Business Development and Strategy
Mark D. Hasebroock (3) 40 Executive Vice President, Mergers and Acquisitions and
International Development
Julie E. Mahloch 31 Executive Vice President, Local Merchant Solutions
Cristian A. Ossa (3) 33 Executive Vice President, Operations & Chief Information Officer
William A. Ackman (2) 34 Director
Howard Berk 35 Director
David P. Berkowitz 38 Director
Paul T. Morrison 33 Director
Gary D. Offner (2) 33 Director
</TABLE>
-------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Executive Officers
Prior to completion of this offering we intend to appoint two
additional independent directors and establish staggered terms for our entire
Board of Directors.
Richard C. Marcus has been our Chairman of the Board since 1999 and has
been a Director since 1997. Since January 1997, Mr. Marcus has served as a
Senior Advisor to Peter J. Solomon Company. He served as President and Chief
Executive Officer of Plaid Clothing Group from December 1994, when he joined to
aid in Plaid Clothing Group's restructuring efforts, to December 1995. In July
1995, Plaid Clothing Group filed a petition of reorganization under Chapter 11.
From 1979 to 1988 he served as Chairman and CEO of Neiman Marcus. He co-founded
InterSolve Group in 1990. He currently serves on the board of directors for Zale
Corporation, Michaels Stores and Fashionmall.com. Mr. Marcus participated in the
Advanced Management Program of the Harvard Business School and received his A.B.
from Harvard College.
Jonas P. Lee is our founder and has been our Chief Executive Officer
and President and a Director since 1997. Prior to starting our company in 1997,
Mr. Lee was General Manager of Integrated Computing Engines, Inc., a firm he
founded, from October 1994 to March 1997. Before founding Integrated Computing
Engines, Inc., Mr. Lee served as a management consultant with Bain & Company
from October 1993 to October 1994. Mr. Lee received his M.B.A. from Harvard
Business School and his A.B. from Brandeis University.
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Michael E. Ahern has been our Chief Operating Officer since May 2000.
Prior to joining our management team in April 2000, Mr. Ahern was the chief
executive officer of GiftSpot.com, Inc., a firm he co-founded in April 1999.
Prior to that, Mr. Ahern was employed by Microsoft Corporation from June 1993 to
April 1999, most recently serving as Group Project Manager for Microsoft
Project. Mr. Ahern received his B.S. from Purdue University.
Michael D. Stephenson has been our Chief Financial Officer and
Executive Vice President of Finance and Administration since August 1999. Prior
to joining us, Mr. Stephenson worked for Merrill Lynch's Investment Banking
Division from 1993 through 1999, most recently serving as a Director of the
Global Industries Group and as a member of the Merrill Lynch Corporate Finance
Committee. Mr. Stephenson received his M.B.A. from Harvard Business School and
his A.B. from Harvard College.
Douglas S. Nielsen has been our President of Business Solutions and a
Director since March 2000. Mr. Nielsen joined our company as part of the
Giftpoint.com, Inc. merger. Mr. Nielsen served as Chief Executive Officer of
Giftpoint.com, Inc., a firm he co-founded, from July 1998 to March 2000. Prior
to that, Mr. Nielsen was President of Market Innovators, Inc., an information
and direct marketing company he founded, from January 1992 to July 1998. Mr.
Nielsen and Ms. Mahloch are siblings. Mr. Nielsen received his B.S. from the
University of Nebraska.
Maxwell E. Bardon has been our Executive Vice President of Merchant
Solutions since January 1999. Prior to joining us, Mr. Bardon was Vice President
of Marketing of Telesensory Corporation from December 1996 to November 1998.
Prior to that, Mr. Bardon was a management consultant for Bain and Company from
September 1993 to October 1996. Mr. Bardon received his M.B.A. from the
University of Chicago and his B.B.A. from the University of Cincinnati.
Robert S. Beck, Jr. has been our Chief Technology Officer and Executive
Vice President of Technology since March 2000. Mr. Beck joined our company as
part of the Giftpoint.com, Inc. acquisition. Mr. Beck served as the Senior Vice
President and Chief Technology Officer of Giftpoint.com, Inc. from October 1999
to March 2000. Before joining Giftpoint.com, Inc., Mr. Beck served as Chief
Technology Officer and Worldwide Year 2000 Program Director for MidAmerican
Energy Holdings Company from April 1996 to October 1999. Prior to that, Mr. Beck
was Director of Technology Enabling Services for Inacom Corporation from April
1993 to April 1996. Mr. Beck received his B.S. from Metropolitan State College.
Louis S. Berman has been our Chief Technology Architect since June
1999. Prior to joining us, Mr. Berman served as the President of Brain Tree
Limited from January 1989 to June 1999. Mr. Berman attended the State University
of New York, Purchase.
Bertina Ceccarelli has been our Executive Vice President of Marketing
since December 1999. Prior to joining us, Ms. Ceccarelli served as Senior Vice
President of Marketing for Snap.com from July 1998 to November 1999. Before
joining Snap.com, Ms. Ceccarelli was Vice President of Marketing and Programming
Operations at NBC Interactive from May 1996 to June 1998. Prior to that, she was
marketing manager for Hearst Corporation from September 1995 to April 1996. Ms.
Ceccarelli received her M.B.A. from Harvard Business School and her B.S. from
the University of California, Berkeley.
Leland B. Harden has been our Executive Vice President of Business
Development and Strategy since March 1999. Prior to joining us, Mr. Harden was a
Partner in U.S. Web's Audience Development practice from August 1997 to March
1999. Prior to that, he served as Senior Vice President, Business Development,
at Cybernautics, Inc. from August 1994 to August 1997. Mr. Harden received his
B.B.A. from Hardin-Simmons University.
Mark D. Hasebroock has been our Executive Vice President of Mergers and
Acquisitions and International Development since March 2000. Mr. Hasebroock
joined our company as part of the Giftpoint.com, Inc. merger. Mr. Hasebroock was
the Chief Operating Officer of Giftpoint.com, Inc. from December 1999 to March
2000. Before joining Giftpoint.com, Inc., Mr. Hasebroock served as the Vice
President of Strategic Planning at PKS Information Services from June 1998 to
December 1999. Prior to that, he was the Managing Director at McCarthy & Co.
from June 1986 to June 1998. Mr. Hasebroock received his M.B.A. from Creighton
University and his B.S. from the University of Nebraska.
Julie E. Mahloch is our Executive Vice President of Local Merchant
Solutions since March 2000. Ms. Mahloch joined our company as part of the
Giftpoint.com, Inc. merger. Ms. Mahloch served as the Executive Vice President
of Sales of Giftpoint.com, Inc., a company she co-founded, from August 1998 to
March 2000. Prior to that, she served as Vice President of
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Market Innovators, a company she co-founded, from July 1991 until August 1998.
Ms. Mahloch and Mr. Nielsen are siblings. Ms. Mahloch received her B.A. from the
University of Nebraska.
Cristian A. Ossa has been the Executive Vice President of Operations &
Chief Information Officer since March 2000. Prior to joining us, Mr. Ossa worked
with us as a consultant through his former employer, Rosetta Technology Group,
by which he was employed from December 1998 to March 2000. Prior to that, Mr.
Ossa worked for Insight Consulting Group from November 1992 to November 1998 in
various capacities, including serving as Chief Operating Officer. Mr. Ossa
received his M.B.A. from the University of Massachusetts, Amherst and his B.A.
from the University of Massachusetts, Amherst.
William A. Ackman has been a Director since 1999. Mr. Ackman, through a
company he owns, has served as co-investment manager of Gotham LP, Gotham III LP
and Gotham Partners International, Limited since January 1993. Mr. Ackman is
Chairman of the Board of Directors of Imperial Parking Corporation and Chairman
of the Board of Trustees of First Union Real Estate Equity and Mortgage
Investments. Mr. Ackman received his M.B.A. from Harvard Business School and his
A.B. from Harvard College.
Howard Berk has been a Director since 1999. Mr. Berk has been Managing
Director of The Trump Group since September 1998 and of its affiliate
Transatlantic since October 1999. Transatlantic is indirectly wholly owned by
The Carmel Trust, a trust governed by the laws of Canada. From January 1998 to
September 1998, Mr. Berk served as Vice President of EXOR America. From August
1995 to January 1998 he was Senior Vice President of Millicom International
Cellular. Prior to that, Mr. Berk was a Vice President of Goldman Sachs in the
Principal Investment Area. Mr. Berk received his M.B.A. from Harvard Business
School and his B.B.A. from The University of Texas.
David P. Berkowitz has been a Director since 1997. Mr. Berkowitz,
through a company he owns, has served as a co-investment manager of Gotham LP,
Gotham III LP and Gotham Partners International, Limited since January 1993. Mr.
Berkowitz also served as a co-investment manager of Gotham II LP from January
1993 to October 1998. Mr. Berkowitz is a trustee of First Union Real Estate
Equity and Mortgage Investments. Mr. Berkowitz received his M.B.A. from Harvard
Business School, and his S.M. and S.B. from Massachusetts Institute of
Technology.
Paul T. Morrison has been a Director since 2000. Mr. Morrison is a
Principal at Mellon Ventures, Inc., which he joined in July 1998. Previously, he
was the CEO of Aardwulf Apparel, Inc., an internet retailer of branded men's
apparel products which he founded in 1995. Previously, Mr. Morrison was a
corporate finance officer at SkopBank New York Branch and worked in the middle
market corporate finance group of Chase Manhattan Bank. He holds a bachelor's
degree from Middlebury College and a M.B.A. from the Amos Tuck School at
Dartmouth College.
Gary D. Offner has been a Director since 1999. Mr. Offner has worked
for SCP Private Equity Partners, L.P. since August 1996, most recently serving
as a vice president since 1999. Mr. Offner has been a Director of Tech-Online
since September 1999. Prior to joining SCP Private Equity Partners, Mr. Offner
was an associate at Safeguard Scientifics, Inc. Prior to that Mr. Offner was an
associate in the corporate finance department of Charterhouse Bank Ltd. Mr.
Offner received his M.B.A. from Columbia Business School and his B.A. from
Columbia College.
COMMITTEES OF THE BOARD
Our Board of Directors currently has a compensation committee and plans
to establish an audit committee.
The current members of the compensation committee are Messrs. Marcus,
Ackman and Offner. We intend to appoint a compensation committee of three
independent directors, including Mr. Marcus, prior to completion of this
offering. The compensation committee reviews and approves salaries, benefits and
bonuses for all executive officers. It reviews matters and makes recommendations
to the Board of Directors on matters relating to employee compensation and
benefit plans. The compensation committee also administers our equity incentive
plans.
We intend to appoint an audit committee of three independent directors,
including Mr. Marcus, prior to completion of this offering. The audit committee
will recommend the appointment of independent public accountants for the annual
audit of our financial statements to the Board of Directors and review the scope
of the annual audit and other services the auditors are
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asked to perform. The audit committee will also review the report on our
financial statements prepared by the auditors following the audit, and our
accounting and financial policies in general. The audit committee will also
review management's procedures and policies with respect to our internal
accounting controls.
DIRECTOR COMPENSATION
Directors receive no cash remuneration for serving on the Board of
Directors or any Board committee. Pursuant to our Bylaws, Directors may be
reimbursed for all reasonable expenses incurred by them in attending Board and
committee meetings. Generally, we have a policy of not reimbursing Directors for
such expenses although this policy may change when we appoint our additional
outside directors. However, we have agreed to pay all reasonable expenses
incurred by Mr. Nielsen in attending meetings of our Board of Directors.
Except for Mr. Marcus, we have not granted any stock options to our
Directors in their capacity as our Directors. We have not yet determined the
amount and terms of the stock options, if any, that will be granted to our
additional outside directors.
Pursuant to the GiftCertificates.com, Inc. Equity Incentive Plan, we
have granted an option to Mr. Marcus to purchase 250,000 shares of common stock
of GiftCertificates.com, Inc. for a price of $.40 per share. The option was
granted as inducement for Mr. Marcus' services as a director or consultant to us
or our affiliates. The option is non-qualified and vests over a four-year period
at a rate of 12.5% every six months. Each portion of the option becomes
exercisable when it vests. Generally, if Mr. Marcus is terminated for cause, the
option (whether or not vested in whole or in part) will terminate as of the date
of such termination. Upon termination by reason other than death, disability,
retirement or cause, Mr. Marcus will forfeit any unvested portions of the
option, and the vested portion of such option will generally terminate unless
exercised within 30 days after Mr. Marcus' termination. We also granted Mr.
Marcus an option to acquire 100,000 shares of our common stock at a price of
$.10 per share when he joined our Board. These options vested immediately.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
The following table summarizes the compensation earned by or awarded to
our Chief Executive Officer and our other most highly compensated executive
officer who received compensation in excess of $100,000 for the year ended
December 31, 1999. The option and share information included in this section
does not reflect the reverse stock split anticipated to occur immediately prior
to the consummation of this offering.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS
------
SALARY($) SECURITIES UNDERLYING OPTIONS (#)
--------- ---------------------------------
NAME AND PRINCIPAL POSITION
<S> <C> <C>
Jonas P. Lee,............................................ 175,921 --
Chief Executive Officer
Maxwell E. Bardon,........................................ 144,231 1,862,098
Executive Vice President, Merchant Solutions (1)
</TABLE>
-----------------------
(1) In 1999, Mr. Bardon relocated from Illinois to New York at an expense
of $16,194.06. We reimbursed Mr. Bardon this amount in 2000.
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OPTION GRANTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
The following table sets forth information regarding stock options granted
during the fiscal year ended December 31, 1999 to our chief executive officer
and our other named executive officer.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN 1999
---------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT
SECURITIES OPTIONS EXERCISE MARKET ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO OR BASE PRICE ON STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES PRICE DATE OF EXPIRATION FOR OPTION TERM $ (1)
NAME GRANTED IN 1999 PER SHARE $ GRANT $ DATE 5% 10%
---- ---------- ---------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Jonas P. Lee (2)................ -- -- -- -- -- -- --
Maxwell E. Bardon .............. 992,098 8.1% .19 .225 8/1/09 238,600 258,938
870,000 7.1% .10 .10 1/11/09 287,535 305,370
</TABLE>
-----------------------
(1) The SEC rules mandate these 5% and 10% assumed annual rates of
stock price appreciation. These rates do not represent our
estimate or projection of future prices of our common stock.
(2) Mr. Lee did not receive equity-based compensation of any type
during 1999. However, Mr. Lee does own shares of the company.
(See "Principal Stockholders" below.)
AGGREGATE OPTION EXERCISES FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value
realized upon the exercise of stock options during the fiscal year-ended
December 31, 1999 by our chief executive officer and our other named executive
officer, and the value of any unexercised in-the-money options held by these
individuals as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES ACQUIRED UNDERLYING UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE DECEMBER 31, 1999 DECEMBER 31, 1999 ($) (1)
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
($)
<S> <C> <C> <C> <C> <C> <C>
Jonas P. Lee ................... -- -- -- -- -- --
Maxwell E. Bardon............... 0 0 1,862,098 0 487,962 0
</TABLE>
------------------------
(1) We calculated these amounts based on the fair market value of
the common stock underlying the options on December 31, 1999
($.41 per share) minus the aggregate exercise price of the
options.
GIFTPOINT.COM, INC. MANAGEMENT GRANTS
In connection with our acquisition of Giftpoint.com, Inc., we agreed to
issue to certain former members of Giftpoint.com, Inc. management an aggregate
number of shares of our common stock equal to 1/4 of 1% of the shares of our
common stock outstanding immediately following the acquisition on a fully
diluted basis (which equalled 460,542 shares on that date). In addition, we
agreed to issue to certain holders of Giftpoint.com, Inc. options, now
GiftCertificates.com, Inc. options, additional options to acquire 255,742 shares
of our common stock, subject to vesting in four annual installments beginning on
the first anniversary of the acquisition. Such options will be allocated to
individuals in such amounts as determined by Jonas P. Lee, our Chief Executive
Officer, and Douglas S. Nielsen, the former Chief Executive Officer of
Giftpoint.com, Inc. and now President of Business Solutions of
GiftCertificates.com, Inc.
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EMPLOYEE ARRANGEMENTS
All of our employees are at-will employees. As of the date of hire,
each employee is expected to sign a non-disclosure and intellectual property
agreement prohibiting the employee from disclosing any confidential information
during the term of the employee's service and thereafter and providing that all
inventions developed during the employee's term of service become our
intellectual property. In addition, all employees are expected to sign a
non-competition and non-solicitation agreement that prohibits the employee from
competing with the company for a period of one year and from soliciting other
employees for a period of two years, after the termination of the employee's
service with us. Certain of our executive officers, but neither of our named
executive officers, hold employment letters that promise them six months of
severance pay in the event that we terminate them involuntarily during the
18-month period following the completion of the Giftpoint.com, Inc. acquisition.
In addition, in connection with the Giftpoint.com, Inc. acquisition, we
agreed that, under the circumstances described below, we would vest certain of
their officers in a percentage of the unvested portion of the stock options they
hold. The events under which this acceleration would occur consist of:
- involuntary termination of their employment other than for
cause,
- with certain exceptions, a material reduction in their annual
base salary or a material diminution in their duties and
responsibilities, or
- the requirement that they relocate to a workplace outside of a
50-mile radius of Omaha, Nebraska.
If one of these events occurs within the first anniversary of the
Giftpoint.com, Inc. acquisition, 60% of the unvested portion of the affected
employee's options will become vested. If one of these events occurs after the
first anniversary but before the second anniversary of the Giftpoint.com, Inc.
acquisition, 35% of the unvested portion of the affected employee's options will
become vested.
In addition, Mr. Bardon has an agreement under which the vesting of his
stock options may be accelerated. Under his arrangement, all options will vest
immediately upon a change in control (by acquisition or otherwise) of
GiftCertificates.com, Inc. In addition, Mr. Bardon's options will vest
immediately if he is terminated without cause.
Upon joining the company, Mr. Stephenson was granted a bonus of stock
options to purchase 428,587 shares of common stock at $0.10 per share
immediately upon closure of a public offering, if the offering is in excess of a
targeted valuation.
Mr. Nielsen and Ms. Mahloch have entered into indemnification
agreements with Giftpoint.com, Inc. (See "Limitation on Liability and
Indemnification Matters" below.)
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law, our directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as directors. Under the Delaware General Corporation Law, our
directors have fiduciary duties to us that are not eliminated by this provision
of the certificate of incorporation and, in appropriate circumstances, equitable
remedies including injunctive or other forms of nonmonetary relief will remain
available. In addition, each director will continue to be subject to liability
under the Delaware law for:
- breach of the director's duty of loyalty;
- acts or omissions that are found by a court of competent
jurisdiction to be not in good faith or that involve
intentional misconduct, or knowing violations of law;
- actions leading to improper personal benefit to the director;
and
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- payment of dividends or approval of stock repurchases or
redemptions that are prohibited by Delaware law.
This provision also does not affect a director's responsibilities under
any other laws, including the federal securities law or state or federal
environmental laws. We have obtained liability insurance for our officers and
directors.
Section 145 of the Delaware General Corporation law empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers, provided that the provision will not eliminate or limit the
liability of a director for:
- any breach of the director's duty of loyalty to the
corporation or its stockholders;
- acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
- payment of dividends or approvals of stock repurchases or
redemptions that are unlawful under Delaware law; or
- any transaction from which the director derived an improper
personal benefit.
The Delaware law provides further that the indemnification permitted
thereunder will not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The certificate of incorporation
provides that we will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that the person is or was a director or
officer, or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in the action, suit or
proceeding.
Giftpoint.com, Inc. has entered into indemnity agreements with Mr.
Nielsen and Ms. Mahloch that indemnify them to the maximum extent permitted
under Delaware law for any and all claims, causes of action, liabilities and
judgments that may be made against them. However, the agreements provide that
Giftpoint.com, Inc. is not obligated to indemnify Mr. Nielsen or Ms. Mahloch:
- for acts that cannot be indemnified under applicable law;
- with respect to certain claims initiated or brought
voluntarily by them;
- for expenses relating to a proceeding instituted by them to
enforce or interpret the indemnification agreement, if the
court determines that the proceeding was not made in good
faith or was frivolous; or
- for claims under Section 16(b) of the Securities Exchange Act
of 1933 or any similar statute.
Giftpoint.com, Inc. will advance reasonable costs and expenses to Mr.
Nielsen or Ms. Mahloch subject to a right to recover such costs and expenses
should it be determined that indemnification is not permitted under Delaware
law.
We plan in the future to enter into indemnification agreements with our
directors and our executive officers containing provisions that may require us,
among other things, to indemnify our directors and officers against liabilities
that may arise by reason of their status or service as directors or officers
other than liabilities arising from willful misconduct of a culpable nature, to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified, and to obtain directors and officers' liability
insurance if maintained for other directors or officers.
Except as described in "Business-Legal Proceedings," at present, there
is no pending litigation or proceeding involving any director, officer, employee
or agent as to which indemnification will be required or permitted and we are
not aware of any threatened litigation or proceeding that may result in a claim
for indemnification.
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OPTION PLANS
We currently maintain three stock option plans. We maintained the
GiftCertificates.com Equity Incentive Plan prior to the Giftpoint.com, Inc. and
GiftSpot.com, Inc. acquisitions and continue to do so at present. We assumed the
Giftpoint.com, Inc. Incentive Stock Option Plan and the GiftSpot.com, Inc.
Amended and Restated 1999 Stock Option Plan, in connection with the Giftpoint
and GiftSpot acquisitions. We do not anticipate making any additional grants of
options under either the Giftpoint.com, Inc. plan or GiftSpot.com, Inc. plan. As
of June 5, 2000, 30,904,603 options to purchase GiftCertificates.com, Inc. stock
had been authorized under the three plans, and 29,182,375 of these authorized
options have been granted. Of these granted options, 4,600,377 have been
exercised and 24,581,998 remain unexercised. Of these unexercised options,
10,619,489 were fully exercisable and 13,962,509 were not exercisable. The
weighted average exercise price of options granted under the
GiftCertficiates.com, Inc. plan is $.44, under the Giftpoint.com, Inc. plan is
$.41, and under the GiftSpot.com, Inc. plan is $.48. As of June 5, 2000,
1,722,228 shares of our common stock remain available to be the subject of
options under the GiftCertificates.com, Inc. plan. We may subsequently cease
making grants under this plan. We may also establish a new option plan prior to
the consummation of this offering. The following is a summary description of the
material terms of the existing plans.
Overview. The plans provide us with the opportunity for key individuals
to purchase our common stock through the grant of stock options. The purpose of
the plans is to attract and promote our long-term success by providing
performance incentives to these individuals.
Administration. In connection with our acquisitions of Giftpoint.com,
Inc. and GiftSpot.com, Inc., we agreed to assume the obligations of these
companies under their respective stock option plans. As a result, a committee
appointed by the board of directors of GiftCertificates.com, Inc. administers
all three plans. In general, the committee has broad discretion and authority to
select option recipients, to interpret and administer the plans and to make
determinations under the plans. The committee's actions will be conclusive and
binding on all persons.
Eligible Individuals. Any of our employees are eligible to receive
options under the plans. In addition, non-employee directors and consultants are
eligible to receive options under the GiftCertificates.com, Inc. and
GiftSpot.com, Inc. plans. As of June 5, 2000, 260 of the employees of our
company hold options granted under the plans, and seven individuals who are not
employees of our company hold options granted under the GiftCertificates.com,
Inc. and GiftSpot.com, Inc. plans.
Option Terms Generally. Each option outstanding under the plans is the
subject of a stock option agreement. This agreement sets forth the number of
shares subject to the option, the per share exercise price and the other rights
and features of the option. The three plans provide for a maximum option term of
ten years. The GiftCertificates.com, Inc. and GiftSpot.com, Inc. plans permit
the grant of incentive stock options (within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended) and options not intended to qualify
as incentive stock options, and the Giftpoint.com, Inc. plan only permits the
grant of incentive stock options (within the meaning of section 422 of the
Internal Revenue Code of 1986, as amended). Of the 29,182,375 options
outstanding under the plans as of June 5, 2000, 5,718,683 are intended to be
incentive stock options and 23,463,692 are not incentive stock options.
Vesting. Any option granted under the GiftCertificates.com, Inc. Equity
Incentive Plan vests in accordance with the terms and conditions determined by
the committee that administers the plan and specified in the grant agreement.
The committee may accelerate the vesting of an option in connection with an
optionee's termination of employment. Options granted under this plan are
exercisable immediately on the date of grant into shares of
GiftCertificates.com, Inc. common stock. However, if the option holder exercises
the option before the fourth anniversary of the date of the option grant, we may
repurchase the shares acquired upon exercise if the holder terminates employment
for any reason before the fourth anniversary of the date of the option grant. In
the event we repurchase the shares, the price per share for the repurchase will
be equal to the exercise price per share of the underlying option. Our right of
repurchase lapses at a rate of 25% per year from the date of the option grant
through the fourth anniversary of the date of option grant, at which time our
right of repurchase fully lapses.
An option granted under the Giftpoint.com, Inc. Incentive Stock Option
Plan vests pursuant to the terms and conditions established by the board of
directors at the time that the option is granted. Unless otherwise provided in
the grant agreement,
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each option is not exercisable before the optionee completes one year of
continuous service following the grant date of the option. For each year of
continuous service completed, an option is exercisable according to the
following schedule:
<TABLE>
<CAPTION>
Completed Years of % of Option Which
Continuous Service May Be Exercised
------------------ -----------------
<S> <C>
One but less than 2 25%
Two but less than 3 50%
Three but less than 4 75%
Four but less than 5 100%
</TABLE>
An option granted under the GiftSpot.com, Inc. Amended and Restated
1999 Stock Option Plan may be subject to vesting requirements as determined by
the committee that administers the plan and reflected in the grant agreement.
Upon our acquisition of GiftSpot.com, Inc., the vesting of any unvested portions
of options (as determined at the consummation of such acquisition) were
accelerated by 25%. The remaining unvested portions of the options will
automatically and fully vest if we terminate the holder's employment within one
year of the acquisition.
Termination of Employment or Services. As a general rule, option holders
have a period of time to exercise options that they hold when they leave our
company. The length of this period currently ranges from one month to one year,
depending on the circumstances of the termination. In the event of a termination
of employment or services of an option holder for cause under the
GiftCertificates.com, Inc. and Giftpoint.com, Inc. plans, all options held by
the individual are immediately forfeited. Options held by Mr. Bardon will vest
immediately if he is terminated without cause. (See "Employee Arrangements"
above.)
Adjustment upon Changes in Capitalization. In the event of a change in
capitalization of GiftCertificates.com, Inc., the committee that administers the
plan will adjust the terms of the plans and the options outstanding under the
plans to take into account the change in capitalization.
Restrictions on Transfer; Repurchase and Redemption Rights. The three plans
contain restrictions that relate to the shares purchased upon exercise of
options. Under the GiftCertificates.com, Inc. plan, these restrictions include
transfer restrictions, call rights upon termination of employment, drag-along
rights in the event of sales of common stock by principal stockholders and
rights of first refusal. (See "Vesting" above.) Under the Giftpoint.com, Inc.
and GiftSpot.com, Inc. plans, these restrictions include transfer restrictions,
repurchase rights and rights of first refusal.
Amendment and Termination. The three plans provide that they may, at any
time, be amended, altered, suspended, terminated or discontinued, but none of
these actions may materially impair the rights of an option holder under
outstanding awards without the holder's consent.
Change of Control and Other Matters. Under Mr. Bardon's arrangement, all
options will vest immediately upon a change in control of GiftCertificates.com,
Inc. In addition, one other employee of GiftCertificates.com, Inc. has received
an employment letter similar to Mr. Bardon's employment letter reflecting an
option to purchase 171,000 shares of GiftCertificates.com, Inc. common stock
which will vest upon a change in control. Pursuant to Mr. Stephenson's
employment letter, in the event of a merger or change in control of
GiftCertificates.com, Inc. and a termination of Mr. Stephenson for any reason
other than gross negligence or willful misconduct, stock options held by Mr.
Stephenson with respect to 1,071,466 shares of Giftcertificates.com, Inc. common
stock will immediately and fully vest. The vesting of options granted under the
GiftSpot.com, Inc, Amended and Restated 1999 Stock Option Plan (which were
rolled over into options to purchase 1,007,637 shares of GiftCertificates.com,
Inc.) accelerated by 25% upon our acquisition of GiftSpot.com, Inc. and such
options will become fully vested if we terminate the holder within one year of
the acquisition. (See "Vesting" above.) Upon joining the company, Mr. Stephenson
was granted a bonus of stock options to purchase 428,587 shares of common stock
at $0.10 per share immediately upon closure of a public offering, if the
offering is in excess of a targeted valuation.
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RELATED PARTY TRANSACTIONS
The information in this section does not reflect the reverse stock
split anticipated to occur immediately prior to consummation of this offering.
In connection with our reorganization as a corporation on October 16,
1997, we issued Jonas P. Lee, our chief executive officer and a director,
8,358,410 shares of our common stock, Wai T. Chan, his spouse, 218,410 shares of
our common stock, and Wei L. Chan, his brother-in-law, 327,616 shares of our
common stock, for their interests in J.P.L. Associates, L.L.C.
On October 10, 1997, Gotham Partners, L.P., currently a beneficial
owner of more than 5% of our voting stock, loaned us approximately $100,000.
This loan accrued interest at a rate of 6%. This loan was repaid on October 16,
1997, when we sold Gotham Partners, L.P. and a related entity an aggregate of
1,000,000 shares of Series A Preferred Stock for aggregate consideration of
$1,000,000.
On December 19, 1997, Gotham Partners, L.P. loaned us $250,000. This
loan was repaid as of March 17, 1998, when we sold Gotham Partners, L.P. and a
related entity an aggregate of 250,000 shares of Series C Preferred Stock, for
aggregate consideration of $250,000.
On December 19, 1997, Jonas P. Lee loaned us $250,000. The loan was
repaid as of March 17, 1998, when we sold Jonas P. Lee 250,000 shares of Series
C Preferred Stock aggregate consideration of $250,000.
On March 10, 1998, Gotham Partners, L.P. loaned us $300,000. This loan
accrued interest at a rate of 6%. The loan was repaid as of August 31, 1998,
when we issued Gotham Partners, L.P. and a related entity an aggregate of
300,000 shares of Series D Preferred Stock.
On June 5, 1998, Jonas P. Lee loaned us $120,000 and on September 10,
1998, Jonas P. Lee loaned us $75,000. These loans accrued interest at a rate of
6%. These loans were repaid on or prior to December 1998, when we sold Jonas P.
Lee 175,967 shares of Series D Preferred Stock for $175,967.
On January 25, 1999 we purchased a domain name from Gift Certificate
Clearing House, a sole proprietorship of Leland B. Harden, currently our
Executive Vice President, Business Development, in exchange for 953,600 shares
of our common stock. In connection with that transaction, we entered into a
consulting agreement with Mr. Harden which was terminated when he became an
employee.
On January 29, 1999, Jonas P. Lee loaned us $73,750. This loan accrued
interest at a rate of 9%. This loan was repaid on April 13, 1999, when we sold
Jonas P. Lee 73,760 shares of Series E Preferred Stock for $73,760.
On January 29, 1999, Gotham Partners, L.P. loaned us $52,250. This loan
accrued interest at a rate of 9%. This loan was repaid on April 13, 1999, when
we sold Gotham Partners, L.P. and a related entity an aggregate of 56,250 shares
of Series F Preferred Stock for aggregate consideration of $56,250. We also
issued Gotham Partners, L.P. and a related entity warrants to purchase an
aggregate of 1,500,000 shares of common stock for $.001 per share.
On April 14, 1999, we sold to an entity related to Gotham Partners,
L.P. 200,000 shares of Series G Preferred Stock for $200,000.
On June 25, 1999, Gotham Partners, L.P. and a related entity loaned us
$250,000 pursuant to a demand promissory note. This loan accrued interest at an
annual rate of 10% per annum. This loan was repaid in July 1999. On July 8,
1999, Gotham Partners, L.P. and a related entity loaned us $250,000 pursuant to
a demand promissory note. This note accrued interest at a rate of 10% per annum.
The note was repaid in July 1999. On July 16, 1999, we sold Gotham Partners,
L.P. and related entities an aggregate of 3,000,000 shares of Series H Preferred
Stock for $3,000,000.
On July 16, 1999, we sold Glencarron Investment Co., which is
indirectly wholly owned by Carmel, currently a beneficial owner of more than
five percent of our voting stock, 1,500,000 shares of Series H Preferred Stock
for $1,500,000.
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<PAGE> 70
On July 16, 1999, we sold an entity affiliated with Transatlantic,
which is indirectly wholly owned by Carmel, 500,000 shares of Series H Preferred
Stock for $500,000.
On October 19, 1999, Gotham Partners, L.P. and related entities loaned
us $2,050,000. This loan accrued interest at a rate of 12% per annum. The loan
was repaid in November 1999, when we sold an aggregate of 9,249,517 shares of
Series I Preferred Stock to Gotham Partners, L.P. and related entities for an
aggregate of $9,249,517. In connection with the original loan, we issued
warrants to purchase 1,063,657 shares of our common stock at $0.385463 per share
to Gotham Partners, L.P. and related entities.
On October 19, 1999, an entity affiliated with Transatlantic loaned us
$2,950,000. This note accrued interest at a rate of 12% per annum. The note was
repaid in November 1999, when we sold the entity 1,720,650 shares of Series I
Preferred Stock for $1,720,650. In connection with the original loan, we issued
warrants to purchase 1,530,629 shares of our common stock at $0.385463 per share
to the entity.
On November 9, 1999, we sold SCP Private Equity Partners, L.P.,
currently a beneficial owner of more than five percent of our voting stock,
5,000,000 shares of Series I Preferred Stock for $5,000,000.
On November 9, 1999, we sold Glencarron 1,250,000 shares of Series I
Preferred Stock for $1,250,000.
On February 16, 2000, we made a recourse loan to Mr. Bardon in the
amount of $323,815 to cover the exercise price and tax obligations relating to
an option exercise. The interest on the loan is payable semi-annually at a rate
of 7% per year and the loan matures on February 17, 2003, subject to
acceleration in specified events. The loan is secured by a pledge of the common
stock Mr. Bardon received upon exercise of the option.
On March 13, 2000, March 24, 2000 and April 6, 2000, Gotham Partners,
L.P. and related entities loaned us $1,000,000, $2,000,000 and $2,000,000,
respectively. These loans accrued interest at a rate of 12%. On April 7, 2000,
Gotham Partners, L.P. and related entities converted these loans into our bridge
financing. The bridge financing accrued interest at a rate of 12% per annum.
This loan was repaid on May 4, 2000, when we issued Gotham Partners, L.P. and
related entities an aggregate of 6,111,177 shares of Series J Preferred Stock
for aggregate consideration of $6,111,177. In connection with the bridge
financing, we issued Gotham Partners, L.P. and related entities warrants that
are exercisable into 1,000,000 shares of Series J Preferred Stock.
On April 7, 2000, Transatlantic loaned us $1,000,000 as part of a
bridge financing. This loan accrued interest at a rate of 12% per annum. This
loan was repaid on May 4, 2000, when we issued Transatlantic 1,009,000 shares of
Series J Preferred Stock for $1,009,000. In connection with the bridge
financing, we issued Transatlantic warrants that are exercisable into 200,000
shares of Series J Preferred Stock.
On April 7, 2000, SCP Private Equity Partners, L.P., a beneficial owner
of more than five percent of our voting stock, loaned us $5,000,000 as part of a
bridge financing. This loan accrued interest at a rate of 12% per annum. This
loan was repaid on May 4, 2000, when we issued SCP Private Equity Partners, L.P.
5,045,000 shares of Series J Preferred Stock for $5,045,000. In connection with
the bridge financing, we issued SCP Private Equity Partners, L.P. warrants that
are exercisable into 1,000,000 shares of Series J Preferred Stock.
On May 4, 2000, we issued Michael D. Stephenson, an executive officer
of our company, 100,000 shares of Series J Preferred Stock for $100,000.
On May 4, 2000, we issued J.S.H. Capital, L.P., a partnership related
to Mark D. Hasebroock, an executive officer of our company, 250,000 shares of
Series J Preferred Stock for $250,000.
On May 4, 2000, we made a recourse loan to Jonas P. Lee in the amount
of $1,047,843. This loan has a term of one year and accrues interest at a rate
of 10%.
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<PAGE> 71
Subsequent to May 4, 2000, we issued to an entity related to Gotham
Partners, L.P. an aggregate of 3,286,000 shares of Series J Preferred Stock for
aggregate consideration of $3,286,000.
Cristian A. Ossa, an Executive Vice President of GiftCertificates.com,
is an equity holder in Rosetta Technology Group, which provides certain Internet
consulting services to GiftCertificates.com. In 1999, Rosetta Technology Group
performed work for GiftCertificates.com for a total consideration of $1,250,000
and options to purchase 415,000 shares of our common stock at $0.10 per share.
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<PAGE> 72
PRINCIPAL STOCKHOLDERS
The following table presents information as of June 12, 2000 regarding
the beneficial ownership of our common stock, historical and as adjusted to
reflect the sale of the shares of common stock in this offering, by
- each person who is known to us to beneficially own more than
5% of the outstanding shares of common stock;
- each of our directors and named executive officers; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC, subject to applicable community property law, and generally includes voting
or investment power with respect to securities. We believe based on information
provided to us that all persons listed below have sole voting and investment
power with respect to their shares of common stock, except as otherwise
indicated or to the extent authority is shared by spouses under applicable law.
A person is deemed to be the beneficial owner of securities that can be acquired
within 60 days after June 12, 2000 through the exercise of any option, warrant
or right. Shares of common stock subject to options, warrants or rights that are
currently exercisable or exercisable within 60 days are deemed outstanding for
computing the ownership percentage of the person holding such options, warrants
or rights, but are not deemed outstanding for computing the ownership percentage
of any other person. Our preferred stock is calculated on an as converted basis.
The information in this section does not reflect the reverse stock
split anticipated to occur immediately prior to consummation of this offering.
The information included in this section assumes accrual of dividends on our
preferred stock through June 30, 2000.
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<PAGE> 73
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF TOTAL SHARES OF
BENEFICIAL OWNERS BENEFICIALLY OWNED(1)(2) GIFTCERTIFICATES.COM COMMON STOCK
----------------- ------------------------ ---------------------------------
BEFORE OFFERING AFTER OFFERING
--------------- --------------
<S> <C> <C> <C>
Gotham entities (1)......................... 73,552,434 34.1%
SCP Private Equity Partners, L.P. (2)....... 18,851,365 8.9%
The Carmel Trust (3)........................ 19,719,021 9.2%
William A. Ackman (4)....................... 73,552,434 34.1%
Howard Berk (5)............................. 394,234 *
David P. Berkowitz (6)...................... 73,552,434 34.1%
Jonas P. Lee (7)............................ 17,567,665 8.3%
Richard C. Marcus (8)....................... 334,074 *
Paul T. Morrison (9)........................ 0 *
Douglas S. Nielsen (10)..................... 7,198,494 3.4%
Gary D. Offner (11)......................... 80,823 *
Maxwell E. Bardon (12)...................... 1,912,098 *
All directors and executive officers as a
group (16 people)(13)...................... 149,649,344 66.5%
</TABLE>
---------------------------
*Less than 1%.
(1) Includes Gotham Partners, L.P. which beneficially owns 1,291,517 shares
of Series A Preferred Stock, 310,048 shares of Series C Preferred
Stock, 355,618 shares of Series D Preferred Stock, 61,998 shares of
Series F Preferred Stock, 1,852,390 shares of Series H Preferred Stock,
6,521,373 shares of Series I Preferred Stock, 3,043,233 shares of
Series J Preferred Stock and warrants to acquire 3,236,486 shares of
common stock or their preferred stock equivalents; Gotham Partners
International, Limited which beneficially owns 1,463,732 shares of
Series H Preferred Stock, 1,888,985 shares of Series I Preferred Stock,
2,957,147 shares of Series J Preferred Stock and warrants to acquire
228,297 shares of common stock or their preferred stock equivalents;
Gotham Partners III, L.P. which beneficially owns 14,990 shares of
Series A Preferred Stock, 3,417 shares of Series C Preferred Stock,
3,919 shares of Series D Preferred Stock, 684 shares of Series F
Preferred Stock, 60,464 shares of Series H Preferred Stock, 128,061
shares of Series I Preferred Stock, 205,789 shares of Series J
Preferred Stock and warrants to acquire 31,397 shares of common stock
or their preferred stock equivalents; Gotham Ventures I, L.L.C. which
beneficially owns 222,067 shares of Series H Preferred Stock, Gotham
Ventures II, L.L.C. which beneficially owns 1,315,731 shares of Series
I Preferred Stock, and Gotham Ventures IIA, L.L.C. which beneficially
owns 3,313,999 shares of Series J Preferred Stock. All of these shares
are collectively convertible into 73,552,434 shares of our common
stock. Each of these entities may be deemed to beneficially own the
shares held by the other Gotham entities, but each such entity
disclaims beneficial ownership of such shares. The address of each of
these entities is 110 East 42nd Street, New York, New York 10017.
(2) Includes 5,326,846 shares of Series I Preferred Stock and 5,123,419
shares of Series J Preferred Stock. This also includes warrants to
purchase 932,523 shares of common stock or their preferred stock
equivalents. These shares are convertible into 18,851,365 shares of our
common stock. The address of SCP Private Equity Partners, L.P. is
Building 300, 435 Devon Park Drive, Wayne, Pennsylvania 19087.
(3) Carmel holds its shares through Glencarron (1,649,012 shares of Series
H Preferred Stock and 1,331,711 shares of Series I Preferred Stock
which are convertible into 12,185,557 shares of our common stock) and
Transatlantic (549,671 shares of Series H Preferred Stock, 767,758
shares of Series I Preferred Stock and 1,024,684 shares of Series J
Preferred Stock which are convertible into 5,816,330 shares of our
common stock, and warrants to purchase an additional 1,717,134 shares
of our common stock), each of which are indirectly wholly owned by it.
The trustee of Carmel is Chiltern Trustees Limited. The agreement
pursuant to which Carmel was established in 1977 designates certain
"protectors" who must authorize any action taken by the trustee and who
have the authority to discharge the trustee and to appoint substitute
trustees. These protectors are Saul Tobias Bernstein, Gerrit
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<PAGE> 74
Van Riemsdijk and Robert Smith. These individuals are not otherwise
associated with the Company or Carmel. The Carmel agreement provides
that Carmel shall continue until 21 years after the death of the last
survivor of the descendants of certain persons living on the date it
was established. Potential beneficiaries of Carmel include certain
charitable institutions, and under limited circumstances certain
members of the families of Jules Trump and Eddie Trump who are not
citizens or residents of the United States. Members of the Trump
family, who beneficially own an aggregate of 852,295 shares of Series I
Preferred Stock which are convertible into an aggregate of 2,102,582
shares of our common stock, each disclaims beneficial ownership of the
shares shown as owned by Carmel. The address of Carmel is c/o Skadden,
Arps, Slate, Meagher & Flom, 333 West Wacker Drive, Chicago IL, 60606.
(4) Includes shares beneficially owned by Gotham entities. See Note (1).
Mr. Ackman is the President of the Karenina Corporation, a general
partner of Section H Partners. Section H Partners is the sole general
partner of Gotham L.P. and Gotham III L.P. Accordingly, Mr. Ackman,
Karenina Corporation and Section H Partners may be deemed beneficial
owners of the shares owned by Gotham L.P. and Gotham III L.P. Gotham
Partners International, Limited has the power to vote and dispose of
the shares held for the account of Gotham Partners International,
Limited, and accordingly, may be deemed the beneficial owner of such
shares. Mr. Ackman is a senior managing member of and may be deemed the
beneficial owner of shares owned by Gotham Partners International,
Limited. However, Mr. Ackman disclaims beneficial ownership of all of
such shares. The address of Mr. Ackman is c/o Gotham Partners L.P., 110
East 42nd Street, New York, New York 10017.
(5) Includes 159,805 shares of Series I Preferred Stock which are
convertible into 394,234 shares of our common stock. Does not include
549,671 shares of Series H Preferred Stock, 767,758 shares of Series I
Preferred Stock and 1,024,684 shares of Series J Preferred Stock held
by Transatlantic for which he is a managing director but as to which he
disclaims beneficial ownership. These shares are convertible into
5,816,330 shares of our common stock. Also does not include warrants to
acquire 1,717,134 shares of our common stock held by Transatlantic.
(6) Includes shares beneficially owned by Gotham entities. See Note (1).
Mr. Berkowitz is the President of DPB Corporation, a general partner of
Section H Partners. Section H Partners is the sole general partner of
Gotham L.P. and Gotham III L.P. Accordingly, Mr. Berkowitz, DPB
Corporation and Section H may be deemed beneficial owners of shares
owned by Gotham L.P. and Gotham III L.P. Gotham Partners International,
Limited has the power to vote and dispose of the shares held for the
account of Gotham Partners International, Limited, and accordingly, may
be deemed the beneficial owner of such shares. Mr. Berkowitz is a
senior managing member of and may be deemed the beneficial owner of
shares owned by Gotham Partners International, Limited. However, Mr.
Berkowitz disclaims beneficial ownership of such shares. The address of
Mr. Berkowitz is c/o Gotham Partners, L.P., 110 East 42nd Street, New
York, New York 10017.
(7) Includes 8,358,410 shares of common stock, 313,464 shares of Series C
Preferred Stock, 204,040 shares of Series D Preferred Stock and 82,194
shares of Series E Preferred Stock. These shares are convertible into
17,567,665 shares of our common stock. Does not include 218,410 shares
of common stock held by his wife, Wai T. Chan, as to which Mr. Lee
disclaims beneficial ownership. The address of Mr. Lee is c/o
GiftCertificates.com, 470 Seventh Avenue, 6th Floor, New York, New York
10018.
(8) Includes 37,579 shares of Series H Preferred Stock and 131,250 options.
These securities are convertible into 334,074 shares of our common
stock.
(9) Excludes 10,155,440 shares of Series J Preferred Stock held by Mellon
Ventures II, L.P. of which he has a small limited partnership interest
and which is an affiliate of Mellon Ventures Inc. of which he is a
principal. He disclaims beneficial ownership of these shares.
(10) Includes 6,409,853 shares of common stock of which a third party has a
warrant to acquire 816,643 shares of common stock. This also includes
options to purchase 788,641 shares of our common stock. These shares
are convertible into 7,198,494 shares of our common stock.
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(11) Includes 14,975 shares of Series H Preferred Stock which are
convertible into 80,823 shares of our common stock. Mr. Offner is a
Vice President of SCP Private Equity Partners, L.P. Mr. Offner's
ownership does not include the shares held by SCP Private Equity
Partners, L.P. as to which Mr. Offner disclaims beneficial ownership.
(12) Includes 1,172,716 shares of common stock. 444,691 of these shares are
restricted stock which are subject to forfeiture upon termination prior
to vesting. This also includes 739,382 options exercisable within 60
days.
(13) Includes the shares described under footnotes (4) - (12) above. Also
includes 2,801,189 shares of common stock and their preferred stock
equivalents and options to acquire 5,003,953 shares of common stock
held by executive officers not listed above. 443,636 of these shares
are restricted stock which are subject to forfeiture upon termination
prior to vesting.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Following this offering, our authorized capital stock will consist of
shares of common stock, par value $0.001 per share, and shares of
preferred stock, par value $.01 per share.
The following summary of the material provisions of our securities and
various provisions of our Certificate of Incorporation and our By-Laws is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to our Certificate of Incorporation and our By-Laws included
as exhibits to the Registration Statement of which this prospectus is a part.
This information in this section does not reflect the reverse stock split
anticipated to occur immediately prior to consummation of this offering.
COMMON STOCK
At , 2000, there were shares of our common stock outstanding,
which were held of record by shareholders, and shares of preferred stock
outstanding, which were held of record by shareholders. All outstanding shares
of preferred stock will be automatically converted into an aggregate of
shares of our common stock upon the closing of this offering. In addition, as of
, 2000, there were outstanding stock options and warrants for the purchase \
of a total of shares of our common stock. Based upon the number of shares
outstanding as of , 2000 and giving effect to the issuance of the shares of
common stock offered by us hereby and the conversion of our preferred stock into
common stock, there will be shares of our common stock outstanding upon
the closing of this offering (if the underwriters exercise the over-allotment
option in full).
Holders of common stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of shareholders. The
holders of common stock are entitled to receive dividends and other
distributions as may be declared from time to time by our Board of Directors.
However, these dividends are subject to preferences of holders of any
outstanding shares of preferred stock. In the event of our liquidation,
dissolution, winding up of the affairs, or upon mergers or other similar
transactions, the holders of our common stock will be entitled to share ratably
in the distribution of all of our remaining assets remaining available for
distribution after satisfaction of liabilities and payment of any amounts owing
in respect of any outstanding share of our preferred stock as described below.
PREFERRED STOCK
Our Board of Directors has the authority, without further action by the
stockholders, to issue from time to time up to shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions of any such series, including dividend rights, conversion rights,
voting rights, redemption rights, liquidation preferences and the number of
shares constituting any series or the designation of that series. The Board of
Directors is authorized to issue preferred stock with voting, conversion and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of common stock. With respect to matters presented
to our stockholders, other than the election of directors, each share of our
preferred stock is entitled to a number of votes equal to the number of shares
of our common stock into which it is convertible. The issuance of preferred
stock or of rights to purchase preferred stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of our outstanding voting stock.
CONVERSION OF OUTSTANDING PREFERRED STOCK
On , 2000 we had 145,000,000 shares of preferred stock authorized
for issuance, 141,350,000 of such shares have been designated among nine series
of preferred stock (Series A, C, D, E, F, G, H, I and J). The holders of each
series of designated preferred stock are entitled to receive preferential
cumulative pay-in-kind dividends payable quarterly. Holders of shares of
designated preferred stock are also entitled to receive on an as-converted basis
dividends equivalent on a per share basis to any dividends declared, paid,
issued or distributed with respect to shares of our common stock. We may pay
cash dividends
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on the designated preferred stock in lieu of stock dividends, provided that
certain net income and capital expenditure threshold tests are met.
Each share of each series of designated preferred stock automatically
will be converted into shares of our common stock at the conversion price then
in effect for such series immediately prior to the consummation of this offering
stock.
- The conversion rate of the Series A Preferred Stock is
-for-1 as adjusted. The outstanding shares of Series A
Preferred Stock are convertible into an aggregate of
shares of common stock.
- The conversion rate for the Series C Preferred Stock is
approximately -for-1 as adjusted. The outstanding shares
of Series C Preferred Stock are convertible into an aggregate
of shares of common stock.
- The conversion rate for the Series D Preferred Stock is
-for-1 as adjusted. The outstanding shares of Series D
Preferred Stock are convertible into an aggregate of
shares of common stock.
- The conversion rate for the Series E Preferred Stock is
approximately -for-1 as adjusted. The outstanding shares
of Series E Preferred Stock are convertible into an aggregate
of shares of our common stock.
- The conversion rate for the Series F Preferred Stock is
approximately -for-1 as adjusted. The outstanding shares
of Series F Preferred Stock are convertible into an aggregate
of shares of our common stock.
- The conversion rate for the Series G Preferred Stock is
approximately -for-1 as adjusted. There are no
outstanding Series G Preferred Stock.
- The conversion rate for the Series H Preferred Stock is
approximately -for-1 as adjusted. The outstanding shares
of Series H Preferred Stock are convertible into an aggregate
of shares of our common stock.
- The conversion rate for the Series I Preferred Stock is
approximately -for-1 as adjusted. The outstanding shares
of Series I Preferred Stock are convertible into an aggregate
of shares of our common stock.
- The conversion rate for the Series J Preferred Stock is
-for-1 as adjusted. The outstanding shares of Series J
Preferred Stock are convertible into approximately
shares of our common stock. The conversion price for the
Series J Preferred Stock may be adjusted in certain
circumstances. At an assumed public offering price of less
than $ per share but greater than $ per
share, the conversion price for the Series J Preferred Stock
would be adjusted such that an aggregate of up to
additional shares of common stock would be issued upon the
conversion of the Series J Preferred Stock. At an assumed
public offering price of less than $ per
share, the conversion price for the Series J Preferred Stock
would be adjusted such that an aggregate of up to
additional shares of common stock would be issued upon the
conversion of the Series J Preferred Stock.
VOTING AGREEMENTS
Pursuant to a voting agreement, dated November 9, 1999, each holder of
our Series I Preferred Stock has agreed to vote its shares of Series I Preferred
Stock for the election to the Board of Directors two named parties by TG
Investment Limited. These provisions terminate upon the consummation of an
initial public offering that meet specified thresholds such as the offering
contemplated hereby.
Pursuant to the stock purchase agreement to which the Series J
Preferred Stock was issued, the holders of Series J Preferred Stock agreed to
vote their shares to ensure that the Board of Directors is composed of nine
persons, including one individual to be designated by Mellon Ventures II, L.P.
We have agreements with certain of our stockholders regarding the
election of members of our Board of Directors. Pursuant to our certificate of
incorporation, the holders of our preferred stock and our common stock have the
right to elect one director. The holders of our Series A, C, D, E, and F
Preferred Stock have the right to elect four directors. The holders of
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Series I Preferred Stock have the right to elect three directors subject to the
voting agreement described above. However, the largest holders of Series I
Preferred Stock have agreed pursuant to a Stockholders Agreement, dated March 6,
2000, to elect the individual designated by the holders of a majority of the
shares of common stock issued in respect of the Giftpoint.com, Inc. common and
preferred stock to one of such directorships. The holders of our Series J
Preferred Stock have the right to elect one director subject to the voting
agreement described above. These rights terminate upon the consummation of an
initial public offering that meets specified thresholds such as the offering
contemplated hereby.
PREEMPTIVE AND OTHER RIGHTS
As amended, the purchase agreements pursuant to which the Series A, C,
D, E, F, H, I and J Preferred Stock were issued provide the holders with
preemptive rights enabling each such holder to participate in new issuances of
equity securities (including options, warrants and other convertible securities)
to the extent of such holder's pro rata share of ownership of our common stock
on a fully diluted basis. However, a holder is not entitled to preemptive rights
if we issue equity securities (1) upon the conversion or exercise of our
preferred stock or warrants, (2) to the public in a firm commitment underwriting
pursuant to a registration statement filed under the Securities Act, (3)
pursuant to an employee stock option plan, stock bonus plan, stock purchase plan
or other management equity program approved by our Board of Directors, or (4)
for purposes other than principally to raise capital (such as pursuant to a
merger, consolidation or combination of us or any of our subsidiaries with
another entity, or pursuant to an acquisition by us of any securities, business
or assets of another entity). These rights terminate upon the consummation of an
initial pubic offering that meets specified thresholds such as the offering
contemplated hereby.
As partial consideration for certain intellectual property rights and
business assets, we are required to issue to each of Services Unlimited Network,
Inc. and Freud's Toys, Inc., 50,000 shares of our common stock upon an initial
public offering. We also granted to each of these entities the right to purchase
a pro rata portion, based on the fully diluted percentage of the issued and
outstanding shares of our common stock then held by them, of additional shares
of our common stock, or other securities convertible into or exchangeable for
such shares, that we propose to issue.
As partial consideration for consulting services, certain intellectual
property rights and business assets, we granted to Gift Certificate Clearing
House the right to purchase additional shares of our common stock or other
securities issued by us that are convertible into or exchangeable for shares of
our common stock which we propose to issue in an amount such that, after giving
effect to such proposed issuance, Gift Certificate Clearing House would retain
its interest of GiftCertificates.com common stock on a fully diluted basis.
The preemptive rights described in the preceding two paragraphs do not
apply to our common stock or other securities (1) issued or issuable to all of
the holders of our common stock then outstanding on a proportionate basis, (2)
issued or issuable to any of our employees pursuant to any equity compensation
plan, (3) issued for strategic purposes (including in connection with the merger
of GiftCertificates.com or a similar transaction or the acquisition of
securities or assets of any other entity), or (4) issued pursuant to a public
offering by us. These rights terminate upon the consummation of an initial pubic
offering that meets specified thresholds such as the offering contemplated
hereby.
WARRANTS
We have issued warrants to purchase an aggregate of 8,362,569 shares of
our common stock. Of such warrants 356,697 are exercisable at $0.41 per share,
2,594,286 are exercisable at $0.385463 per share, 1,500,000 are exercisable at
$0.001 per share, 345,852 are exercisable at $0.37401 per share, 581,662 are
exercisable at $1.84258 per share, and 2,984,072 are exercisable at $1.07236.
The warrants are all currently exercisable and have varying expiration dates
between November 19, 2004 and October 26, 2006. Each warrant contains standard
provisions for adjustment of the shares into which the warrant is exercisable
upon stock splits, stock dividends and similar events.
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REGISTRATION RIGHTS
Our Amended and Restated Registration Rights Agreement grants the
holders of our Preferred Stock two demand registration rights which may be
exercised by the holders of a majority of the registrable preferred stock. In
addition, the holders of the Series I Preferred Stock have a separate demand
registration right.
Our Amended and Restated Registration Rights Agreement also grants to
each holder of shares of our preferred stock and to each holder of shares of our
common stock issued in connection with the Giftpoint.com, Inc. and GiftSpot.com,
Inc. acquisitions, or upon exercise of the Giftpoint.com, Inc. and GiftSpot.com,
Inc. warrants that we assumed, the right under certain circumstances to include
such shares in registered offerings under the Securities Act covering shares of
our common stock. We can delay any demand in 90 days in any 12 month period if
the board of directors determines that any requested registration would be
materially detrimental to the Company.
In cases in which a registration is in the form of an underwritten
public offering, and the number of shares to be included in the registration is
limited by the underwriters for marketing or other reasons, all stockholders
with registration rights will be cut back on a pro rata basis. If the holders
are exercising their piggyback registration rights for an offering by the
Company of its own stock, any reduction in the number of securities registered
due to marketing purposes will first apply to holders of registration rights and
then to our company. If the holders of our preferred stock are not participating
in the offering, the Giftpoint.com, Inc. stockholders will not be able to
participate. The holders of our preferred stock will not be able to participate
in this offering.
In the event of a registration in the form of an underwritten public
offering, the holders whose shares are to be included in such registration are
required to, together with our stockholders and the other stockholders
distributing their securities through such underwriting, enter into an
underwriting agreement in customary form with the underwriters for such
registration.
The Registration Rights Agreement provides that each party thereto will
not sell or dispose of any of our securities during a 180-day period following
an initial public offering if so requested by us and an underwriter in a
registered offering, so long as all of our officers and directors enter into
similar agreements. We and the underwriters intend to make this request.
All expenses incurred in connection with any registration,
qualification or compliance pursuant to the Registration Rights Agreement shall
be borne by us, and all selling expenses shall be borne by the holders of the
shares so registered pro rata on the basis of the number of their shares so
registered.
The Registration Rights Agreement includes certain indemnification
provisions by both the holders of registrable securities and us and requires the
holders of registrable securities to provide certain information in connection
with a registration statement.
The prior written consent of the holders of at least two-thirds of the
outstanding shares of our preferred stock is required in order to grant
registration rights to any person that are more favorable to such person than
the rights provided for in the Registration Rights Agreement or that conflict
with any of the rights provided for in the Registration Rights Agreement. The
Registration Rights Agreement may be amended only with our written consent and
the holders of two-thirds of then outstanding preferred stock and eighty percent
of our outstanding shares of Series I Preferred Stock. The registration rights
provided for in the Registration Rights Agreement will terminate and no longer
be available to any holder of securities registrable thereunder if all of such
securities then held by such holder could be sold during any 90-day period
pursuant to Rule 144 under the Securities Act.
In addition, several stockholders have piggyback registration rights
pursuant to separate agreements with respect to shares.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The provisions of Delaware law, our certificate of incorporation and
bylaws may have the effect of delaying, deferring or discouraging another person
from acquiring control of our company, including takeover attempts that might
result in a premium over the market price for the shares of common stock.
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DELAWARE LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of 10% or more of the
corporation's assets with any "interested stockholder," meaning a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the date
that the stockholder became an "interested stockholder" unless:
- the transaction is approved by the board of directors prior to
the date the interested stockholder attained that status;
- upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction
commenced; or
- on or subsequent to such date the business combination is
approved by the board and authorized at an annual or special
meeting of stockholders by at least two-thirds of the
outstanding voting stock that is not owned by the interested
stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws will provide, subject to
appropriate corporate action, that:
- a class of preferred stock shall be authorized, the terms of
which will be determined at the sole discretion of the Board;
- following the completion of this offering, stockholders may
not act by written consent without a meeting;
- following completion of this offering, the approval of 80% of
the stockholders will be required to adopt, amend or repeal
our bylaws;
- stockholders may not call special meetings of the
stockholders;
- stockholders must give 90 to 120 days advance notice of
proposals of business to be conducted at stockholder meetings,
including nominations of directors;
- upon completion of this offering, our board of directors will
be divided into three classes, each serving staggered
three-year terms, which means that only one class of directors
will be elected at each annual meeting of stockholders, with
the other classes continuing for the remainder of their
respective terms; and
- stockholders may not increase or decrease the size of the
Board, remove Board members other than for cause, or fill
Board vacancies.
In addition, our certificate of incorporation does not provide for
cumulative voting. We also indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with the takeover
defense measures.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict the timing or amount of future sales of shares, or the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price of the common stock prevailing from
time to time. Sales of substantial amounts of the common stock in the public
market, including shares issuable upon the exercise of stock options, after the
lapse of the restrictions described below, or the perception that such sales may
occur, could materially adversely affect the prevailing market prices for the
common stock and our ability to raise equity capital in the future.
Upon completion of this offering, shares of common stock, or
shares of common stock if the underwriters exercise their over-allotment option
in full, will be outstanding. Of these shares, the shares of common stock
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless held by our "affiliates" as that
term is defined in Rule 144 under the Securities Act. All of the remaining
shares of common stock outstanding prior to this offering were issued and sold
by us in private transactions in reliance upon exemptions from the registration
requirements of the Securities Act and are therefore deemed "restricted
securities," as such term is defined under Rule 144. These restricted securities
may not be sold in the absence of registration under the Securities Act other
than in accordance with Rule 144 or Rule 701 under the Securities Act or another
exemption from registration.
Subject to the lock-up agreements described below,
- immediately following this offering, restricted securities
will be available for immediate sale in the public market
subject to Rule 144,
- 90 days after the date of this prospectus, shares will be
available for immediate sale in the public market pursuant to
Rule 701 and shares may be issued upon exercise of stock
options and will be eligible for sale in reliance upon Rule
701,
- 180 days after the date of this prospectus, restricted
securities will be available for sale in the public market
pursuant to Rule 144, and
- an additional restricted securities will be eligible for
sale under Rule 144 upon the expiration of various one-year
holding periods.
Rule 144. In general, under Rule 144 as currently in effect, if a minimum
of one year has elapsed since the later of the date of acquisition of the
restricted securities from the issuer or from an affiliate of the issuer, a
person (or persons whose shares of common stock are aggregated), including
persons who may be deemed our affiliates, would be entitled to sell within any
three-month period a number of shares of common stock that does not exceed the
greater of
- one percent of the then-outstanding shares of common stock,
which equals approximately shares immediately after this
offering, and
- the average weekly trading volume of the common stock on the
Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with
the SEC.
Sales under Rule 144 are also subject to restrictions as to the manner
of sale, notice requirements and the availability of current public information
about our company.
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Rule 144(k). Under Rule 144(k), if a period of at least two years has
elapsed since the later of the date restricted securities were acquired from us
or our affiliate, a stockholder who is not our affiliate at the time of sale and
who has not been our affiliate for at least three months prior to the sale would
be entitled to sell shares of common stock in the public market immediately
without compliance with the foregoing requirements under Rule 144, unless
otherwise restricted. Rule 144 does not require the same person to have held the
securities for the applicable periods. The foregoing summary of Rule 144 is not
intended to be a complete description.
Rule 701. Any of our employees, directors, officers or consultants who
acquired shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144, and permits our affiliates to sell their Rule 701 shares without
having to comply with the holding period restrictions of Rule 144, in each case,
commencing 90 days after the effective date of the registration statement of
which this prospectus is a part.
Registration Rights. On the date 180 days after the date of this
prospectus, the holders of shares and the holders of warrants exercisable
for up to an aggregate of shares, or their transferees, will be entitled to
rights with respect to the registration of their shares under the Securities
Act. Registration of their shares under the Securities Act would result in the
shares becoming freely tradable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness of
the applicable registration.
Stock Options. As of , 2000, options had been granted under
our option plans, and, of these options, were fully exercisable and
were not exercisable. As of , 2000, shares of our common stock
remained available to be the subject of options under our option plan. We expect
to grant approximately options prior to consummation of this offering.
Shortly after this offering we intend to file a registration statement on Form
S-8 covering shares of common stock issued or reserved for issuance
under our option plans that may make those shares freely tradable. The
registration statement on Form S-8 will become effective immediately upon filing
and, shares covered by that registration statement will upon effectiveness be
eligible for sale in the public markets, subject to the applicable lock-up
agreements and Rule 144 limitations applicable to affiliates.
Warrants. As of , 2000, we had outstanding warrants to purchase
shares of common stock. All the shares issuable upon the exercise of the
warrants will be eligible for sale at various times after the 180-day lock-up
period, subject to the limitations of Rule 144.
Lock-up agreements. In connection with this offering, we and our officers,
directors and substantially all of our securityholders have agreed, except in
limited circumstances, not to sell any shares of common stock for 180 days after
completion of this offering without the consent of Donaldson, Lufkin & Jenrette
Securities Corporation. However, Donaldson, Lufkin & Jenrette Securities
Corporation may release these shares from these restrictions at any time without
public notice.
Potential Share Issuances. We may issue additional securities in connection
with capital raising activities or acquisitions or strategic relationships and
to employees and some of our existing stockholders.
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UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the ownership and disposition of
our common stock by a non-U.S. holder. As used in this discussion, the term
"non-U.S. holder" means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
- an individual who is a citizen or resident of the
United States;
- a corporation or partnership (other than a
partnership treated as foreign under U.S. Treasury
regulations) created or organized in or under the laws of the
United States or of any political subdivision of the United
States;
- an estate whose income is includible in gross income
for U.S. federal income tax purposes regardless of its source;
or
- a trust, in general, if a U.S. court is able to
exercise primary supervision over the administration of the
trust and one or more U.S. persons have authority to control
all substantial decisions of the trust.
An individual may be treated as a resident of the United States in any
calendar year for U.S. federal income tax purposes, instead of a nonresident,
by, among other ways, being present in the United States on at least 31 days in
that calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year. For purposes of this calculation,
you would count all of the days present in the current year, one-third of the
days present in the immediately preceding year and one-sixth of the days present
in the second preceding year. Residents are taxed for U.S. federal income
purposes as if they were U.S. citizens.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant
to a particular non-U.S. holder's tax position, including, if
the non-U.S. holder is a partnership or trust that the U.S.
tax consequences of holding and disposing of our common stock
may be affected by certain determinations made at the partner
or beneficiary level;
- the tax consequences for the shareholders, partners
or beneficiaries of a non-U.S. holder;
- special tax rules that may apply to particular
non-U.S. holders, such as financial institutions, insurance
companies, tax-exempt organizations, U.S. expatriates,
broker-dealers, and traders in securities; or
- special tax rules that may apply to a non-U.S. holder
that holds our common stock as part of a "straddle," "hedge,"
"conversion transaction," "synthetic security" or other
integrated investment.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable U.S. Treasury regulations and
administrative and judicial interpretations, all as in effect on the date of
this prospectus, and all of which are subject to change, retroactively or
prospectively. The following summary assumes that a non-U.S. holder holds our
common stock as a capital asset. EACH NON-U.S. HOLDER SHOULD CONSULT A TAX
ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER
TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON
STOCK.
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DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that we pay
dividends on our common stock, we generally will have to withhold a U.S. federal
withholding tax at a rate of 30%, or a lower rate under an applicable income tax
treaty, from the gross amount of the dividends paid to a non-U.S. holder.
Non-U.S. holders should consult their tax advisors regarding their entitlement
to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's
conduct of a trade or business in the United States and, if an income tax treaty
applies, attributable to a permanent establishment in the United States, are
taxed on a net income basis at the regular graduated rates and in the manner
applicable to U.S. persons. In that case, we will not have to withhold U.S.
federal withholding tax if the non-U.S. holder complies with applicable
certification and disclosure requirements. In addition, a "branch profits tax"
may be imposed at a 30% rate, or a lower rate under an applicable income tax
treaty, on dividends received by a foreign corporation that are effectively
connected with the conduct of a trade or business in the United States.
Dividends paid prior to January 1, 2001 to an address in a foreign
country are presumed, absent actual knowledge to the contrary, to be paid to a
resident of such country for purposes of the withholding discussed above and for
purposes of determining the applicability of a tax treaty rate. For dividends
paid on or after January 1, 2001:
- a non-U.S. holder who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy
applicable certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the
partners of the partnership and the partnership will be
required to provide certain information;
- in the case of common stock held by a foreign trust, the
certification requirement will generally be applied to the
trust or the beneficial owners of the trust depending on
whether the trust is a "foreign complex trust," "foreign
simple trust," or "foreign grantor trust" as defined in the
U.S. Treasury regulations;
- look-through rules will apply for tiered partnerships, foreign
simple trusts and foreign grantor trusts; and
- a non-U.S. holder which is a foreign partnership or foreign
trust is urged to consult its own tax advisor regarding its
status under these U.S. Treasury regulations and the
certification requirements applicable to it.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our common stock unless:
- the gain is effectively connected with the non-U.S. holder's
conduct of a trade or business in the United States and, if an
income tax treaty applies, is attributable to a permanent
establishment maintained by the non-U.S. holder in the United
States; in these cases, the gain will be taxed on a net income
basis at the regular graduated rates and in the manner
applicable to U.S. persons and, if the non-U.S. holder is a
foreign corporation, the "branch profits tax" described above
may also apply;
- the non-U.S. holder is an individual who holds our common
stock as a capital asset, is present in the United States for
more than 182 days in the taxable year of the disposition and
meets other requirements; in this case, an individual non-U.S.
holder will be subject to a flat 30% tax on the gain derived
from the sale, which may be offset by United States source
capital losses (even though the individual is not considered a
resident of the United States); or
- 79 -
<PAGE> 86
- we are or have been a "U.S. real property holding corporation"
for U.S. federal income tax purposes at any time during the
shorter of the five-year period ending on the date of
disposition or the period that the non-U.S. holder held our
common stock.
Generally, a corporation is a "U.S. real property holding corporation"
if the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe
that we are not currently, and we do not anticipate becoming in the future, a
U.S. real property holding corporation. If we were a U.S. real property holding
corporation, the tax relating to our stock generally would not apply to a
non-U.S. holder whose holdings, direct and indirect, at all times during the
shorter of the five-year period ending on the date of disposition or the period
that the non-U.S. holder held our common stock, constituted 5% or less of our
common stock, provided that our common stock was regularly traded on an
established securities market.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a
non-U.S. holder at the time of death will be included in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax or
other treaty provides otherwise and, therefore, may be subject to U.S. federal
estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the U.S. Internal Revenue Service and to
each non-U.S. holder the amount of dividends paid to that holder and the tax
withheld from those dividends regardless of whether there was any withholding.
Copies of the information returns reporting those dividends and withholding may
also be made available to the tax authorities in the country in which the
non-U.S. holder is a resident under the provisions of an applicable income tax
treaty or agreement.
Under some circumstances, U.S. Treasury regulations require additional
information reporting and backup withholding at a rate of 31% on some payments
on common stock. Under currently applicable law, non-U.S. holders generally will
be exempt from these additional information reporting requirements and from
backup withholding on dividends paid prior to 2001 if we either were required to
withhold a U.S. federal withholding tax from those dividends or we paid those
dividends to an address outside the United States (and had no knowledge that the
payee was a U.S. person). On or after January 1, 2001, however, the gross amount
of dividends paid to a non-U.S. holder that fails to certify its non-U.S. holder
status in accordance with applicable U.S. Treasury regulations generally will be
reduced by backup withholding at a rate of 31%.
The payment of the proceeds of the disposition of common stock by a
non-U.S. holder to or through the U.S. office of a broker or a non-U.S. office
of a U.S. broker generally will be reported to the U.S. Internal Revenue Service
and reduced by backup withholding at a rate of 31% unless the non-U.S. holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption and the broker has no actual knowledge to the
contrary. The payment of the proceeds of the disposition of common stock by a
non-U.S. holder to or through a non-U.S. office of a non-U.S. broker will not be
reduced by backup withholding or reported to the U.S. Internal Revenue Service
unless the non-U.S. broker is a "U.S. related person." In general, the payment
of proceeds from the disposition of common stock by or through a non-U.S. office
of a broker that is a U.S. person or a "U.S. related person" will be reported to
the U.S. Internal Revenue Service and, on or after January 1, 2001, may be
reduced by backup withholding at a rate of 31%, unless the broker receives a
statement from the non-U.S. holder, signed under penalty of perjury, certifying
its non-U.S. status or the broker has documentary evidence in its files that the
holder is a non-U.S. holder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax
purposes;
- a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its
taxable year preceding the payment, or for such part of the
period that the broker has been in existence, is derived from
activities that are effectively connected with the conduct of
a U.S. trade or business; or
- effective on or after January 1, 2001, a foreign partnership
if, at any time during the taxable year, (A) at least 50% of
the capital or profits interest in the partnership is owned by
U.S. persons, or (B) the partnership is engaged in a U.S.
trade or business.
- 80 -
<PAGE> 87
Any amounts withheld under the backup withholding rules from a payment
to a non-U.S. holder will be refunded, or credited against the holder's U.S.
federal income tax liability, if any, provided that the required information is
furnished to the U.S. Internal Revenue Service.
NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
APPLICATION OF THE INFORMATION REPORTING AND BACKUP WITHHOLDING RULES TO THEM,
INCLUDING CHANGES TO THESE RULES THAT WILL BECOME EFFECTIVE ON OR AFTER JANUARY
1, 2001.
- 81 -
<PAGE> 88
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities
Inc., FleetBoston Robertson Stephens Inc. and E*OFFERING Corp. have
severally agreed to purchase from GiftCertificates.com, Inc. the number
of shares of common stock shown opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF
SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..........
Chase Securities Inc.........................................
FleetBoston Robertson Stephens Inc...........................
E*OFFERING Corp.............................................. _________
Total...................................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval by their counsel of legal
matters and other conditions. The underwriters must purchase and accept delivery
of all of the shares of common stock offered by this prospectus, other than
those shares covered by the over-allotment option described below, if any are
purchased.
The underwriters propose initially to offer some of the shares of
common stock directly to the public at the public offering price on the cover
page of this prospectus and some of these shares of common stock to dealers,
including the underwriters, at the public offering price less a concession not
in excess of $ per share. The underwriters may allow, and these dealers may
re-allow, a concession not in excess of $ per share on sales to other
dealers. After the initial offering of the common stock to the public, the
representatives of the underwriters may change the public offering price and
other selling terms.
We have granted to the underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase up to additional shares
of common stock at the initial public offering price less underwriting discounts
and commissions. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with the offering. To the extent
that the underwriters exercise this option, each underwriter will become
obligated, under conditions specified in the underwriting agreement, to purchase
its pro rata portion of the additional shares based on that underwriter's
percentage underwriting commitment as indicated in the preceding table.
The following table shows the underwriting fees to be paid by us in
this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
<S> <C> <C>
Per Share.......................................................... $ $
Total.............................................................. $ $
</TABLE>
Our expenses for the offering are estimated to be $ .
We, our officers and directors and substantially all of our
stockholders, option holders and warrant holders have agreed, for a period of
180 days after the date of this prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, not to:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer
directly or indirectly any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- 82 -
<PAGE> 89
- enter into any swap or other arrangement that transfers all or a
portion of the economic consequences of ownership of the common stock,
whether any such transaction described above is to be settled by
delivery of common stock or other securities, in cash or otherwise.
The underwriting agreement contains limited exceptions to these lock-up
agreements. Donaldson Lufkin & Jenrette Securities Corporation may waive the
lock-up agreements at any time without public notice.
However, holders of shares who have not been employees since the date
of this prospectus may offer, sell or otherwise dispose of:
- 25% of the shares they own on the date of this prospectus if at end of
the 90-days period after the date of this prospectus or the second
trading day following the first public release of our quarterly results
after the date of this prospectus, whichever is later, the reported
last sale price of the common stock on the Nasdaq National Market has
been at least twice the price per share in this offering for 20 of the
30 trading days ending on the last trading day of such 90-day period;
and
- an additional 25% of those shares if at the end of the 135-day period
after the date of this prospectus the reported last sale price of the
common stock of the Nasdaq National Market is at least twice the price
per share in this offering for 20 of the 30 trading days ending on the
last trading day of this 135-day period.
In addition, during this 180-day period, other than our contemplated
S-8 filing covering shares of common stock issued or reserved for
issuance under our option plans, we have also agreed not to file any
registration statement for, and each of our officers, directors and
substantially all of our stockholders option holders and warrant holders have
agreed not to make any demand for, or exercise any right for, the registration
of any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock without the prior written consent Donaldson,
Lufkin & Jenrette Securities.
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make because of these
liabilities.
Prior to the offering, there has been no established trading market for
the common stock. We and the underwriters will negotiate the initial public
offering price for the shares of common stock offered by this prospectus. The
factors to be considered in determining the public offering price include:
- the history of and the prospects for the industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future earnings;
- the recent market prices of securities of generally comparable
companies; and
- the general condition of the securities markets at the time of the
offering.
We intend to apply to list our common stock on the Nasdaq National
Market under the symbol "GCRT."
At our request, certain of the underwriters have reserved for sale at
the initial public offering price up to shares of common stock offered by
this prospectus for sale to our employees, directors and other persons
designated by us. The number of shares available for sale to the general public
will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the same
basis as the other shares offered through this prospectus.
- 83 -
<PAGE> 90
The underwriters do not intend to sell more than 5% of the shares in
the aggregate to accounts over which they exercise discretionary authority.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot the offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover a syndicate short position or
to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed common stock in syndicate covering
transactions, in stabilization transactions or in some other way or if
Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates clients of such syndicate members have "flipped" the common stock.
These activities may stabilize or maintain the market price of the common stock
above independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time without
notice.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements associated with the offer and sale of any of
the shares of common stock offered through this prospectus be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction. You
should inform yourself and observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of common stock offered in this prospectus in any jurisdiction in which an offer
or a solicitation is unlawful.
- 84 -
<PAGE> 91
LEGAL MATTERS
Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus. Selected
legal matters will be passed upon for the underwriters by Simpson Thacher &
Bartlett, New York, New York.
EXPERTS
The consolidated financial statements of GiftCertificates.com, Inc. as
of December 31, 1998 and 1999 and for each of the years ended December 31, 1998
and 1999 and the period since inception ended December 31, 1997, have been
included herein and in the registration statement in reliance upon the reports
of Arthur Andersen LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in giving said
reports.
The financial statements of Giftpoint.com, Inc. as of December 31, 1998
and 1999 and for the year ended December 31, 1999 and the period since inception
ended December 31, 1998 have been included herein and in the registration
statement in reliance upon the reports of Arthur Andersen LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in giving said reports.
The financial statements of GiftSpot.com, Inc. as of December 31, 1999
and for the period since inception ended December 31, 1999 have been included
herein and in the registration statement in reliance upon the reports of Arthur
Andersen LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1,
including exhibits and schedules, with respect to the common stock being offered
by this prospectus. This prospectus does not contain all of the information
included in the registration statement and the exhibits and schedules to the
registration statement. The rules and regulations of the SEC permit us to omit
certain information included in the registration statement from this prospectus.
For further information with respect to GiftCertificates.com, Inc. and the
shares of common stock offered by this prospectus, reference is made to the
registration statement, including its exhibits and schedules. With respect to
references made in this prospectus to any contract or other document, such
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document.
As a result of this offering, we will become subject to the information
and reporting requirements of the Exchange Act and, in accordance with the
Exchange Act, we will file periodic reports, proxy statements and other
information with the SEC. You may review a copy of the registration statement,
including its exhibits and schedules, as well as, the reports, proxy statements
and other information which we file with the SEC, at the SEC's public reference
room, located at 450 Fifth Street, N.W., Washington, D.C. 20549, at the SEC's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York
10048 or on the SEC's Internet website located at http://www.sec.gov. You may
obtain a copy of this registration statement from the SEC's public reference
room upon payment of prescribed fees. Please call the SEC at (800) SEC-0330 for
further information on the operation of the public reference room.
Upon approval of the common stock for listing on Nasdaq, you may also
review our reports, proxy and information statements and other information at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
We also intend to furnish our stockholders with annual reports containing
audited financial statements and make available to our stockholders quarterly
reports for the first three quarters of each year containing unaudited interim
financial information.
- 85 -
<PAGE> 92
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-4
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1998 and 1999 and March
31, 2000 (Unaudited)................................... F-5
Statements of Operations for the Period from Inception
(October 16, 1997) through December 31, 1997 and for
the Years Ended December 31, 1998 and 1999 and for the
Three Months Ended March 31, 1999 and 2000
(Unaudited)............................................ F-6
Statements of Stockholders' (Deficit) Equity for the
Period from Inception (October 16, 1997) through
December 31, 1997 and for the Years Ended December 31,
1998 and 1999 and for the Three Months Ended March 31,
2000 (Unaudited)....................................... F-7
Statements of Cash Flows for the Period from Inception
(October 16, 1997) through December 31, 1997 and for
the Years Ended December 31, 1998 and 1999 and for the
Three Months Ended March 31, 1999 and 2000
(Unaudited)............................................ F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-9
GIFTPOINT.COM, INC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-32
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1998 and 1999........... F-33
Statements of Operations for the Period from Inception
(August 27, 1998) through December 31, 1998 and for the
Year Ended December 31, 1999........................... F-34
Statements of Stockholders' Equity for the Period from
Inception (August 27, 1998) through December 31, 1998
and for Year Ended December 31, 1999................... F-35
Statements of Cash Flows for the Period from Inception
(August 27, 1998) through December 31, 1998 and for the
Year Ended December 31, 1999........................... F-36
NOTES TO FINANCIAL STATEMENTS............................... F-37
GIFTSPOT.COM, INC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-48
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1999 and March 31, 2000
(Unaudited)............................................ F-49
Statements of Operations for the Period from Inception
(April 21, 1999) through December 31, 1999 and for the
Three Months Ended March 31, 2000...................... F-50
Statements of Stockholders' Equity and Comprehensive Loss
for the Period from Inception (April 21, 1999) through
December 31, 1999 and for Three Months Ended March 31,
2000 (Unaudited)....................................... F-51
Statements of Cash Flows for the Period from Inception
(April 21, 1999) through December 31, 1999 and for the
Year Ended December 31, 1999 and for the Three Months
Ended March 31, 2000 (Unaudited)....................... F-52
</TABLE>
F-1
<PAGE> 93
<TABLE>
<CAPTION>
PAGE
<S> <C>
NOTES TO FINANCIAL STATEMENTS............................... F-53
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000... F-64
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2000............................... F-65
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1999................................... F-66
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION....... F-67
</TABLE>
F-2
<PAGE> 94
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997, 1998 AND 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
TOGETHER WITH AUDITORS' REPORT
F-3
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GiftCertificates.com, Inc.:
We have audited the accompanying consolidated balance sheets of
GiftCertificates.com, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' (deficit) equity and cash flows for the period from
Inception (October 16, 1997) through December 31, 1997 and for the years ended
December 31, 1998 and 1999. 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 in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GiftCertificates.com, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the period from Inception (October 16, 1997)
through December 31, 1997 and for the years ended December 31, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
New York, New York
May 4, 2000
F-4
<PAGE> 96
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999 AND MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31 PRO FORMA
--------------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 73,107 $ 5,599,906 $ 100,855
Accounts receivable....................................... 2,355 1,303,123 2,047,934
Inventory................................................. 431,903 3,277,796 2,765,490
Prepaid expenses.......................................... 1,255 58,423 752,373
Other current assets...................................... -- -- 155,000
----------- ------------ ------------
Total current assets................................ 508,620 10,239,248 5,821,652
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$0, $307,213, and $569,679, respectively.................. -- 1,805,440 3,039,672
CAPITALIZED SOFTWARE, net of accumulated amortization of $0,
$126,992 and $267,950, respectively....................... -- 673,935 974,613
GOODWILL, net of accumulated amortization of $0, $0 and
$544,424, respectively.................................... -- -- 32,233,884
OTHER ASSETS, net of accumulated amortization of $0,
$13,580, and $17,125, respectively........................ 55,000 290,068 851,911
----------- ------------ ------------
Total assets........................................ $ 563,620 $ 13,008,691 $ 42,921,732
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 430,310 $ 3,469,906 $ 2,845,880
Accrued expenses.......................................... 73,283 2,125,305 1,423,013
Loan payable--related party (Note 6)...................... 180,680 -- --
Deferred revenue.......................................... -- 1,986,380 4,956,955
----------- ------------ ------------
Total current liabilities........................... 684,273 7,581,591 9,225,848
----------- ------------ ------------
LONG TERM LIABILITIES....................................... -- -- 3,810,107
COMMITMENTS AND CONTINGENCIES (Note 7)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note
8)........................................................ 2,143,374 27,002,389 27,983,801 --
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock; 215,000,000 shares authorized of $0.001 par
value, 10,554,539, 12,268,139 and 49,413,182 shares
issued and outstanding, respectively and 162,086,211
shares issued and outstanding on a pro-forma basis...... 10,554 12,268 49,413 162,086
Additional paid-in capital................................ 20,681 1,684,237 35,384,158 63,255,286
Deferred compensation..................................... -- (578,710) (914,050) (914,050)
Accumulated deficit....................................... (2,295,262) (22,693,084) (32,617,545) (32,617,545)
----------- ------------ ------------ -----------
Total stockholders' (deficit) equity................ (2,264,027) (21,575,289) 1,901,976 29,885,777
----------- ------------ ------------ -----------
Total liabilities and stockholders' (deficit)
equity............................................ $ 563,620 $ 13,008,691 $ 42,921,732
=========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated
balance sheets.
F-5
<PAGE> 97
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 16, 1997)
THROUGH DECEMBER 31, 1997 AND FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
INCEPTION
(OCTOBER 16, FOR THE THREE MONTHS
1997) FOR THE YEARS ENDED ENDED
THROUGH DECEMBER 31 MARCH 31
DECEMBER 31, -------------------------- -------------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
REVENUES, net..................... $ 178,807 $ 2,626,723 $ 9,904,873 $ 739,625 $ 4,803,959
COST OF REVENUES.................. 176,309 2,424,671 9,568,286 713,738 4,690,844
----------- ----------- ------------ ----------- -----------
Gross profit............. 2,498 202,052 336,587 25,887 113,115
----------- ----------- ------------ ----------- -----------
COSTS AND EXPENSES:
Marketing and sales expenses.... 557,678 736,538 12,926,645 341,374 5,697,033
Technology and system
development expenses.......... -- -- 1,038,728 100,000 406,614
General and administrative
expenses...................... 150,226 863,538 4,924,419 220,324 2,603,324
Non-cash consulting and
compensation expense.......... -- -- 275,808 40,148 37,945
Amortization of goodwill........ -- -- -- -- 544,424
----------- ----------- ------------ ----------- -----------
Total costs and
expenses............... 707,904 1,600,076 19,165,600 701,846 9,289,340
----------- ----------- ------------ ----------- -----------
Loss from operations..... (705,406) (1,398,024) (18,829,013) (675,959) (9,176,225)
----------- ----------- ------------ ----------- -----------
OTHER (EXPENSE) INCOME............ -- (13,425) (340,475) -- 2,289
----------- ----------- ------------ ----------- -----------
Net loss................. $ (705,406) $(1,411,449) $(19,169,488) $ (675,959) $(9,173,936)
=========== =========== ============ =========== ===========
PER SHARE INFORMATION:
Net loss per share-
Basic and diluted............. $ (0.07) $ (0.15) $ (1.68) $ (0.06) $ (0.44)
=========== =========== ============ =========== ===========
Weighted average common shares
outstanding-
Basic and diluted............. 10,554,539 10,554,539 12,110,415 11,786,148 22,374,583
=========== =========== ============ =========== ===========
PRO FORMA NET LOSS PER
SHARE -- BASIC AND DILUTED (NOTE
3).............................. $ (0.07)
===========
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING BASIC AND
DILUTED(UNAUDITED) (NOTE 3)..... 133,363,244
===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-6
<PAGE> 98
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE PERIOD FROM INCEPTION (OCTOBER 16, 1997)
THROUGH DECEMBER 31, 1997 AND FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL DEFERRED ACCUMULATED
SHARES CAPITAL PAID-IN CAPITAL COMPENSATION DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 16, 1997................... -- $ -- $ -- $ -- $ -- $ --
Common stock issued in connection with
reorganization.......................... 10,554,539 10,554 144,545 -- -- 155,099
Reorganization of limited liability
company to C corporation................ -- -- (128,385) -- -- (128,385)
Accretion of mandatorily redeemable
convertible preferred stock............. -- -- -- -- (20,779) (20,779)
Net loss.................................. -- -- -- -- (705,406) (705,406)
---------- ------- ----------- --------- ------------ ------------
BALANCE, December 31, 1997.................. 10,554,539 10,554 16,160 -- (726,185) (699,471)
Warrants and options to purchase common
stock issued for services............... -- -- 4,521 -- -- 4,521
Accretion of mandatorily redeemable
convertible preferred stock............. -- -- -- -- (157,628) (157,628)
Net loss.................................. -- -- -- -- (1,411,449) (1,411,449)
---------- ------- ----------- --------- ------------ ------------
BALANCE, December 31, 1998.................. 10,554,539 10,554 20,681 -- (2,295,262) (2,264,027)
Common stock issued for services.......... 200,000 200 7,600 -- -- 7,800
Common stock issued to acquire capitalized
software................................ 1,453,600 1,454 55,237 -- -- 56,691
Warrants and options to purchase common
stock................................... -- -- 204,118 -- -- 204,118
Issuance of warrant to purchase common
stock in connection with Series G....... -- -- 52,655 -- -- 52,655
Warrants to purchase common stock issued
in conjunction with bridge financing and
Series I................................ -- -- 309,128 -- -- 309,128
Issuance of warrants to purchase Series I
convertible preferred stock............. -- -- 384,765 -- -- 384,765
Exercise of stock options................. 60,000 60 7,453 -- -- 7,513
Recognition of deferred compensation...... -- -- 642,600 (642,600) -- --
Noncash compensation expense.............. -- -- -- 63,890 -- 63,890
Amortization of Series G issuance costs
upon exchange to Series H............... -- -- -- -- (329,272) (329,272)
Accretion of mandatorily redeemable
convertible stock....................... -- -- -- -- (899,062) (899,062)
Net loss.................................. -- -- -- -- (19,169,488) (19,169,488)
---------- ------- ----------- --------- ------------ ------------
BALANCE, December 31, 1999.................. 12,268,139 12,268 1,684,237 (578,710) (22,693,084) (21,575,289)
Common stock issued to acquire URL........ 50,000 50 40,950 -- -- 41,000
Common stock issued in connection with
acquisition............................. 32,591,291 32,591 26,692,267 -- -- 26,724,858
Options issued in connection with
acquisition............................. -- -- 5,566,070 -- -- 5,566,070
Warrants issued in connection with
acquisition............................. -- -- 279,405 -- -- 279,405
Exercise of stock options................. 4,503,752 4,504 747,944 -- -- 752,448
Recognition of deferred compensation...... -- -- 373,285 (373,285) -- --
Noncash compensation expense.............. -- -- -- 37,945 -- 37,945
Accretion of mandatorily redeemable
convertible preferred stock............. -- -- -- -- (750,525) (750,525)
Net loss (unaudited)...................... -- -- -- -- ( 9,173,936) (9,173,936)
---------- ------- ----------- --------- ------------ ------------
BALANCE, March 31, 2000 (unaudited)......... 49,413,182 $49,413 $35,384,158 $(914,050) $(32,617,545) $ 1,901,976
========== ======= =========== ========= ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-7
<PAGE> 99
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM INCEPTION (OCTOBER 16,
1997) THROUGH DECEMBER 31, 1997 AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE THREE MONTHS
(OCTOBER 16, FOR THE YEARS ENDED ENDED
1997) THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- -----------------------
1997 1998 1999 1999 2000
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(705,406) $(1,411,449) $(19,169,488) $(675,959) $(9,173,936)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization.......................... -- 6,495 450,785 8,350 937,811
Amortization of debt discount.......................... -- -- 309,129 -- --
Noncash consulting and compensation expense............ -- -- 275,808 40,148 37,945
(Increase) decrease in operating assets--
Accounts receivable.................................... (2,555) 200 (1,300,768) (45,952) (354,105)
Prepaid expenses....................................... -- (1,255) (57,168) -- (656,147)
Inventory.............................................. (124,021) (281,168) (2,845,893) 342,027 1,189,046
Other assets........................................... (3,206) (58,289) -- -- (246,033)
(Increase) decrease in operating liabilities--
Accounts payable and accrued expenses.................. 107,771 400,343 5,091,618 558,866 (2,387,836)
Increase in deferred revenue........................... -- -- 1,986,380 -- 812,346
--------- ----------- ------------ --------- -----------
Net cash (used in) provided by operating
activities......................................... (727,417) (1,345,123) (15,259,597) 227,480 (9,840,909)
--------- ----------- ------------ --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment...................... -- -- (2,115,653) -- (858,404)
Cash acquired through acquisition, net................... -- -- -- -- 849,405
Payments for capitalized website development and acquired
software............................................... -- -- (800,927) (108,649) (441,636)
Payments for acquisition of URLs......................... -- -- (191,957) (11,258) --
--------- ----------- ------------ --------- -----------
Net cash used in investing activities................ -- -- (3,108,537) (119,907) (450,635)
--------- ----------- ------------ --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan from related party..................... -- (300,000) (5,180,680) (180,680) --
Proceeds from related party.............................. -- 480,680 5,500,000 -- 3,000,000
Proceeds from equipment financing........................ -- -- -- -- 810,107
Proceeds from exercise of options........................ -- -- 7,513 -- 752,448
Proceeds from exercise of warrants.......................
Proceeds from issuance of preferred stock................ 1,000,000 964,967 23,568,100 -- 229,938
--------- ----------- ------------ --------- -----------
Net cash provided by (used in) financing
activities......................................... 1,000,000 1,145,647 23,894,933 (180,680) 4,792,493
--------- ----------- ------------ --------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 272,583 (199,476) 5,526,799 (73,107) (5,499,051)
CASH AND CASH EQUIVALENTS, beginning of period............. -- 272,583 73,107 73,107 5,599,906
========= =========== ============ ========= ===========
CASH AND CASH EQUIVALENTS, end of period................... $ 272,583 $ 73,107 $ 5,599,906 $ -- $ 100,855
========= =========== ============ ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest............................................... $ -- $ -- $ -- $ -- $ --
========= =========== ============ ========= ===========
Income taxes........................................... $ -- $ -- $ -- $ -- $ --
========= =========== ============ ========= ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Common stock issued in connection with reorganization.... $ 155,099 $ -- $ -- $ -- $ --
========= =========== ============ ========= ===========
Common stock issued for acquisition of capitalized
software............................................... $ -- $ -- $ 56,691 $ 56,691 $ 41,000
========= =========== ============ ========= ===========
Promissory note repaid in Series H....................... $ -- $ -- $ 500,000 $ -- $ --
========= =========== ============ ========= ===========
Accretion of mandatorily redeemable preferred stock...... $ 20,779 $ 157,630 $ 1,228,334 $ 53,514 $ 750,525
========= =========== ============ ========= ===========
Warrants to purchase common stock issued in conjunction
with issuance of Series F.............................. $ -- $ -- $ 52,655 $ -- $ --
========= =========== ============ ========= ===========
Warrants to purchase common stock issued in conjunction
with issuance of Series I.............................. $ -- $ -- $ 384,765 $ -- $ --
========= =========== ============ ========= ===========
Common stock issued for acquisition...................... $ -- $ -- $ -- $ -- $26,724,858
========= =========== ============ ========= ===========
Options issued for acquisition........................... $ -- $ -- $ -- $ -- $ 5,566,070
========= =========== ============ ========= ===========
Warrants issued for acquisition.......................... $ -- $ -- $ -- $ -- $ 279,405
========= =========== ============ ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-8
<PAGE> 100
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Effective October 16, 1997, J.P.L. Associates, L.L.C. (operating under the
name 1-800-PRESENT) was reorganized and incorporated in Delaware as J.P.L.
Associates, Inc. (the "Company"). The Company engages in the business of
sourcing, marketing and distributing branded gift certificates to the public.
During January 1999, the Company established an Internet website and began
operating under the name GiftCertificates.com. On November 9, 1999 the Company
reincorporated under the name GiftCertificates.com, Inc. The
GiftCertificates.com website provides consumers and corporate buyers with a one-
stop shop for both physical and online gift certificates from a variety of
retail and service merchants.
Activities from the date of Inception (October 16, 1997) through December
31, 1999 have been directed primarily to developing the "GiftCertificates.com"
brand. The success of the Company's future operations will be dependent
primarily upon its ability to develop further awareness and brand loyalty, to
attract, build and retain significant traffic levels on its GiftCertificates.com
website and to provide satisfactory customer service and order fulfillment. The
Company operates in the online retail industry, which is new, rapidly evolving
and intensely competitive. The Company competes primarily with traditional
retail and service merchants and other entities that maintain similar commercial
websites.
During December 1999, the Company formed three Japanese limited liability
companies, Jonas P. Lee and Partners, LLC, J.P.L. and Associates Japan, LLC and
Jonas P. Lee Communications, LLC, as wholly-owned subsidiaries of the Company.
These subsidiaries have had no material operations since their Inception.
Management has determined that it does not have any separately reportable
business segments.
The Company is proposing an initial public offering ("IPO") of its common
stock.
2. GOING CONCERN
Since its inception, the Company has incurred negative cash flows from
operations and sustained net losses totaling approximately $30.5 million and a
net capital deficiency. To date, the Company has been dependent upon equity
financing to fund its operations.
Management's plans include obtaining additional equity financing. This
financing will be used to fund continuing operations of the Company, to support
a significant advertising program that will further establish the
GiftCertificates.com brand and to develop the necessary operating
infrastructure. There is no guarantee that, if the additional equity financing
is obtained, management's plans will be sufficient to sustain the Company as a
going concern.
F-9
<PAGE> 101
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of March 31, 2000, and
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for the three months ended March 31, 1999 and 2000, included herein have
been prepared by the Company and are unaudited. The information furnished in the
unaudited financial statements referred to above includes all adjustments which
are, in the opinion of management, necessary for a fair presentation of such
financial statement. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results to be expected for the
entire fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated upon consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds and other highly liquid
investments with original maturities of three months or less.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's primary sources of revenue are from the sale of its inventory
of gift certificates issued by various retail and service merchants and the sale
of their SuperCertificates over the Internet website. SuperCertificates are the
Company's own branded gift certificates and are exchangeable only at the
Company's Internet website. Revenue from the sale of gift certificates includes
the lower of face value of the gift certificates sold or cash received upon sale
of gift certificates subject to coupons and promotional programs offered by the
Company, plus earned fees and commissions. The Company recognizes revenue when
these gift certificates are shipped to customers. Revenue from SuperCertificates
includes the lower of face value of the SuperCertificates sold or cash received
subject to coupons and promotional programs offered by the Company. The Company
recognizes revenue when the customer redeems the SuperCertifi-
F-10
<PAGE> 102
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
cates with the Company over it's Internet website in exchange for a gift
certificate issued by a retail or service merchant.
Deferred revenue is recorded for unredeemed SuperCertificates sold, net of
accrued shipping and handling costs and credit card fees.
Revenue also includes the sale of specialty greeting cards, customer boxes
and other ancillary products. Revenue for these items is also recognized when
these products are shipped to customers.
COST OF REVENUES
Cost of revenues includes the cost of the gift certificates, specialty
greeting cards, customer boxes and other ancillary products to the Company, as
well as related shipping and handling costs and credit card fees.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided for by
the straight-line method for financial statement reporting and accelerated
methods for income tax return purposes, over the estimated useful lives of three
to ten years.
At December 31, 1999 and March 31, 2000, property and equipment consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
<S> <C> <C>
Computers and equipment...................... 1,674,976 3,133,140
Furniture and fixtures....................... 437,677 476,211
---------- ----------
Total property and equipment................. 2,112,653 3,609,351
Less-Accumulated depreciation................ (307,213) (569,679)
---------- ----------
Property and equipment, net.................. $1,805,440 $3,039,672
========== ==========
</TABLE>
CAPITALIZED SOFTWARE
Capitalized software consists of website development costs and the fair
value of software acquired through the Giftpoint Acquisition (Note 4). Website
development costs consist of amounts paid to consultants to develop the website
and systems infrastructure for tracking gift certificates, customer orders and
business and merchant promotional programs and for fraud prevention. For the
period from Inception (October 16, 1997) to December 31, 1998, all website and
software development costs have been expensed as incurred. In January 1999, the
Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance for determining whether computer software is internal-
F-11
<PAGE> 103
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
use software and on accounting for the costs of computer software originally
developed or obtained for internal-use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use.
In accordance with this policy, the Company expensed all costs incurred in
the preliminary project stage for software developed for internal use. In
addition, the Company capitalizes all external direct costs of materials and
services consumed in developing or obtaining internal-use computer software
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the internal-use computer software project to the extent
of the time spent directly on the project and interest costs incurred when
developing computer software once the development has reached the application
development stage. All costs incurred for upgrades, maintenance and enhancements
that do not result in additional functionality are expensed.
The Company has expensed all costs for the quarter ended March 31, 2000, as
only maintenance and operational costs relating to its web site and previously
developed internal software have been incurred. The Company will capitalize
costs incurred to integrate the internally developed software with the software
acquired through the Giftpoint Acquisition (Note 4) only to the extent such
integration results in increased functionality.
Website development costs include the fair value of options issued to
consultants during the year ended December 31, 1999 of $52,655.
Capitalized software is amortized using the straight-line method over the
estimated useful life of the software of three years. Total amortization expense
was $126,992 for the year ended December 31, 1999. No amortization expense was
recorded during the period from Inception (October 16, 1997) through December
31, 1997 and the year ended December 31, 1998. Total amortization expense was $0
and $140,958 for the three months ended March 31, 1999 and 2000, respectively.
Amortization expense is included in technology and systems development expense
in the accompanying consolidated statements of operations.
OTHER ASSETS
Other assets consists of the cost to acquire URL addresses which are
amortized using the straight line method over their estimated useful lives of
seven years and security deposits. Total amortization expense was $13,580 for
the year ended December 31, 1999. No amortization expense was recorded during
the period from Inception (October 16, 1997) through December 31, 1997 and the
year ended December 31, 1998. Total amortization expense was $0 and $3,545 for
the three months ended March 31, 1999 and 2000, respectively. Amortization
expense is included in general and administrative expense in the accompanying
consolidated statements of operations.
F-12
<PAGE> 104
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of their carrying values has occurred as of December 31,
1999.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in the
period that the tax change occurs. Because of the uncertainty regarding the
Company's future profitability, the future tax benefits of its losses have been
fully reserved for. Therefore, no benefit for the net operating loss has been
recorded in the financial statements.
ADVERTISING AND PROMOTIONAL EXPENSE
Advertising costs are expensed as incurred and consist of the costs to
develop website, print, billboard and radio advertisements. Advertising expenses
are included in marketing and sales expense in the accompanying consolidated
statements of operations. No advertising expenses were incurred during the
period from Inception (October 16, 1997) to December 31, 1997 and the year ended
December 31, 1998. Advertising expense for the year ended December 31, 1999 was
$8,712,434. Advertising expense for the three months ended March 31, 1999 and
2000 was $129,201 and $3,026,442, respectively.
Promotional costs are related to coupons and other promotional programs.
These promotional programs consist primarily of discounts offered to the
customer, which reduce the purchase price of gift certificates and
SuperCertificates below their face value. The Company records a portion of the
promotional expenses as cost of revenues upon use by the customer. The portion
of the cost of the gift certificate sold through a promotional program that
exceeds the cash received from the customer is classified as marketing and sales
expense upon issuance of the gift certificate to the customer. No promotional
expenses were incurred during the period from Inception (October 16, 1997) to
December 31, 1997 and the year ended December 31, 1998. As a result of these
promotional programs, $558,447 was charged to marketing and sales expense and
$187,344 was charged to cost of revenues for the year ended December 31, 1999 in
the
F-13
<PAGE> 105
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
accompanying consolidated statements of operations. No promotional expenses were
incurred during the three months ended March 31, 1999. Promotional expense
charged to marketing and sales expense for the three months ended March 31, 2000
was not material, and $39,188 is included in cost of revenues.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock options as if the fair value based method of accounting in SFAS
No. 123 had been applied to these transactions.
The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings per Share." In accordance with SFAS No.
128, basic loss per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is calculated by dividing income available to
common shareholders by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the conversion of
convertible preferred stock and exercise of stock options and warrants (using
the Treasury Stock method). All common equivalent shares are excluded from the
calculation of diluted loss per share, as the effect of their inclusion would be
antidilutive.
F-14
<PAGE> 106
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
The following is the reconciliation of net loss per share:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE THREE MONTHS
(OCTOBER 16, FOR THE YEAR ENDED ENDED
1997) THROUGH DECEMBER 31 MARCH 31
DECEMBER 31 -------------------------- -------------------------
1997 1998 1999 1999 2000
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.................. $ (705,406) $(1,411,449) $(19,169,488) $ (675,959) $(9,173,936)
Less--Accretion of
mandatorily redeemable
convertible preferred
stock................... (20,779) (157,628) (1,228,334) (53,514) (750,525)
----------- ----------- ------------ ----------- -----------
Loss available to common
shareholders.......... $ (726,185) $(1,569,077) $(20,397,822) $ (729,473) $(9,924,461)
=========== =========== ============ =========== ===========
Denominator:
Weighted average shares
outstanding--basic...... 10,554,539 10,554,539 12,110,415 11,786,148 22,374,583
Effective conversion of
mandatorily redeemable
convertible preferred
stock................... -- -- -- -- --
Effective exercise of
dilutive options and
warrants................ -- -- -- -- --
----------- ----------- ------------ ----------- -----------
Weighted average shares
outstanding--diluted... 10,554,539 10,554,539 12,110,415 11,786,148 22,374,583
=========== =========== ============ =========== ===========
</TABLE>
CONCENTRATIONS OF RISK
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash, accounts receivable, accounts payable
and accrued liabilities. The carrying amounts of these instruments approximate
fair value.
The Company maintains cash with a domestic financial institution. The
Company performs periodic evaluations of the relative credit standing of this
institution. From time to time, the Company's cash balances with this financial
institution may exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are primarily concentrated in the United States.
The Company performs ongoing credit card authorizations before product is
shipped to reduce the risk of fraudulent credit card use.
For the period from Inception (October 16, 1997) to December 31, 1997, the
years ended December 31, 1998 and 1999 and the three months ended March 31, 1999
and 2000, no customers individually accounted for over 10% of total revenues by
the Company.
F-15
<PAGE> 107
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
No customers individually accounted for over 10% of accounts receivable at
December 31, 1997, 1998 and 1999 and at March 31, 2000.
COMPREHENSIVE INCOME
During 1998, the Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. The adoption of this standard has had no impact on the
Company's financial statements. Accordingly, the Company's comprehensive net
loss is equal to its net loss for the period from Inception (October 16, 1997)
to December 31, 1997, the years ended December 31, 1998 and 1999 and the three
months ended March 31, 1999 and 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 (as
amended by SFAS No. 137) is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not enter into derivative
instruments or engage in hedging activities as defined in SFAS No. 133. As such,
management has determined that the adoption of this standard will have no impact
on the Company's financial statements.
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
No. 101 expresses the views of the SEC staff in applying generally accepted
accounting principles to certain revenue recognition issues. The Company has
concluded that the implementation of this SAB will not have a material impact on
its financial position or its results of operations.
During March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which clarifies the
application of APB Opinion No. 25, regarding (a) the definition of an employee
for purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Interpretation No. 44 is effective on July 1,
2000. Certain events as defined by Interpretation No. 44, may require earlier
consideration if they occurred after December 15, 1998 or January 12, 2000,
depending on the event, although no financial statement effect would be
recognized until July 1, 2000. The effects of applying Interpretation No. 44 are
recognized prospectively. Management has reviewed its stock compensation events
and determined none qualify as those covered by Interpretation No. 44 that would
require early consideration.
F-16
<PAGE> 108
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
UNAUDITED PRO FORMA INFORMATION
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
mandatorily redeemable convertible preferred stock into common stock concurrent
with the closing of the Company's anticipated IPO (see Note 8 for conversion
terms).
The unaudited pro forma consolidated balance sheet as of March 31, 2000,
reflects the conversion of all shares of mandatorily redeemable convertible
preferred stock into common stock, including dividends paid in kind accrued
through March 31, 2000.
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding during the period and assuming conversion of all
shares of mandatorily redeemable convertible preferred stock (including
accumulated accrued paid in kind dividends thereon) into common stock as of the
date of issuance.
RECLASSIFICATIONS
Certain amounts relating to 1997 and 1998 have been reclassified to conform
with the 1999 presentation.
4. ACQUISITIONS AND FORMATIONS
JAPANESE SUBSIDIARIES
During December 1999, the Company formed three Japanese limited liability
companies, Jonas P. Lee and Partners, LLC, J.P.L. and Associates Japan, LLC and
Jonas P. Lee Communications, LLC, as wholly-owned subsidiaries of the Company.
These subsidiaries have had no material operations since their Inception.
GIFTPOINT ACQUISITION
On March 6, 2000, the Company purchased Giftpoint.com, Inc. ("Giftpoint"),
a Delaware corporation, with Giftpoint merging into a wholly owned subsidiary of
the Company (the "Giftpoint Acquisition"). The Giftpoint Acquisition was
approved by the Board of Directors of Giftpoint and by the written consent of
Giftpoint stockholders whereby the Company acquired all issued and outstanding
shares of preferred and common stock of Giftpoint from the Giftpoint
shareholders in exchange for an aggregate of 32,273,163 shares common stock of
the Company. The common stock was valued at $0.82 per share on the date of
purchase, as determined by an independent third-party valuation.
Outstanding warrants to purchase common stock of Giftpoint, outstanding
incentive stock options granted under the stock options plan of Giftpoint, and
outstanding nonqualified options were converted to warrants and options to
purchase an aggregate of 7,128,621 shares of common stock of the Company.
Accordingly, the Company has recorded an additional purchase price of
approximately $5.8 million.
F-17
<PAGE> 109
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
This acquisition has been accounted for under 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. As a result, the Company
has recorded goodwill of approximately $32.5 million, which represents the cost
in excess of net assets acquired and is being amortized over a period of five
years.
In addition, certain former Giftpoint stockholders are entitled to receive
additional shares of common stock of the Company, subject to the issuance of
additional shares of Redeemable Preferred Stock to the holders of the Redeemable
Preferred Stock as payments of accrued paid in kind dividends, through the date
of completion of the anticipated IPO. Any such issuances will be recorded as
additional purchase price and, accordingly, an adjustment to goodwill.
GIFTSPOT ACQUISITION
On April 17, 2000, the Company merged with GiftSpot.com, Inc. ("GiftSpot"),
a Delaware corporation, whereby the Company acquired all of the issued and
outstanding preferred and common stock of GiftSpot in exchange for shares of
common stock of the Company, constituting approximately 3% ownership, calculated
on a fully-diluted basis. GiftSpot merged into a wholly owned subsidiary of the
Company.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma consolidated statements of operations
data for the year ended December 31, 1999, and for the three months ended March
31, 1999 and 2000, give effect to the acquisitions of Giftpoint and Giftspot as
these acquisitions had occurred on January 1, 1999. All of the following
unaudited pro forma consolidated results of operations give 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 acquisitions actually taken place on January 1,
1999, and may not be indicative of future operating results.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE MONTHS ENDED
ENDED MARCH 31,
DECEMBER 31, ---------------------------
1999 1999 2000
(UNAUDITED)
<S> <C> <C> <C>
Revenue............................... $ 13,941,206 $ 797,927 $ 6,774,747
============ ========= ============
Net loss.............................. $(36,539,329) $(887,895) $(13,712,389)
============ ========= ============
Basic net loss per share.............. $ (0.74) $ (0.02) $ (0.28)
============ ========= ============
</TABLE>
F-18
<PAGE> 110
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
5. INCOME TAXES
The major components of the deferred tax assets and (liabilities) as of
December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1999
<S> <C> <C>
Depreciation.................................. $ -- $ 112,000
Net operating loss............................ 840,000 8,000,000
--------- -----------
840,000 8,112,000
Valuation allowance........................... (840,000) (8,112,000)
--------- -----------
Total deferred taxes, net..................... $ -- $ --
========= ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, 1999,
the Company had a net operating loss carryforward of approximately $20 million,
which is available to reduce its future taxable income and expires at various
dates between 2018 through 2019. As a result of certain ownership changes, the
utilization of net operating losses against future taxable income may be
limited.
Realization of deferred tax assets is dependent upon future earnings, if
any. The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that it is not more likely than not that
these assets will be realized. No income tax benefit has been recorded for all
periods presented because of the valuation allowance.
6. RELATED PARTY LOANS PAYABLE
The Company had a loan payable to Jonas Lee ("Lee"), the founder, Chief
Executive Officer and shareholder of the Company. The loan payable as of
December 31, 1998 was approximately $181,000 and was repaid with accrued
interest during the year ended December 31, 1999.
On March 10, 1998, the Company entered into a demand promissory note with
Gotham Partners, L.P., a shareholder, in the amount of $300,000. This note
accrued interest at 6% per annum and was payable with accrued interest upon
demand. The Company repaid the note with accrued interest on August 31, 1998.
On June 25, 1999, the Company entered into a demand promissory note with
Gotham Partners, L. P., a shareholder, in the amount of $250,000. This note
accrued interest at
F-19
<PAGE> 111
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
10% per annum and was payable with accrued interest upon demand. This note was
repaid in shares of Series H mandatorily redeemable convertible preferred stock.
On July 8, 1999, the Company entered into a demand promissory note with
Gotham Partners, L.P., a shareholder, in the amount of $250,000. This note
accrued interest at 10% per annum and was payable with accrued interest upon
demand. This note was repaid in shares of Series H mandatorily redeemable
convertible preferred stock.
On October 19, 1999, the Company entered into demand promissory notes with
TG Investments, Ltd. ("TGI"), Gotham Partners, L.P., Gotham Partners III, L.P.,
and Gotham Partners International, Ltd., shareholders of the Company, in the
aggregate amount of $5 million. These notes accrued interest at 12% per annum
and were repaid, with accrued interest, in shares of Series I mandatorily
redeemable convertible preferred stock (Note 7). The Company issued warrants to
these shareholders in conjunction with these notes and the issuance of Series I
(Note 8). The fair value of these warrants was allocated between the debt and
equity investments by these parties, whereby $309,129 was recorded as debt
issuance costs on the date of grant, and amortized through the earliest demand
date, November 18, 1999. However, upon repayment of these notes, the unamortized
debt issuance costs were expensed and included in interest expense in the
accompanying consolidated statements of operations.
On February 16, 2000, the Company made a recourse loan to Mr. Bardon in the
amount of $323,815 to cover the exercise price and tax obligations to an option
exercise. The interest on the loan is payable semi-annually at a rate of 7% per
year and the loan matures on February 17, 2003, subject to acceleration in
specified events. The loan is secured by a pledge of the common stock Mr. Bardon
received upon exercise of the option.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company, in its normal course of business, is subject to certain
litigation. In the opinion of the Company's management, settlements of
litigation will not have a material adverse effect on the Company's results of
operations, financial position or cash flows.
OPERATING LEASE
Effective July 1, 1999, the Company entered into a new lease for its
existing office space. Subsequent to year end the Company entered into
noncancelable operating leases for additional office space. These leases expire
on various dates through 2010. Future
F-20
<PAGE> 112
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
minimum lease payments under these operating leases expiring subsequent to
December 31, 1999 are:
<TABLE>
<S> <C>
Fiscal year ending:
2000........................... $ 448,494
2001........................... 616,816
2002........................... 616,816
2003........................... 616,816
2004 and thereafter............ 4,452,639
----------
$6,751,581
==========
</TABLE>
Rent expense under the expired operating lease for the period from
Inception (October 16, 1997) to December 31, 1997, the years ended December 31,
1998 and 1999 and the three months ended March 31, 1999 and 2000 was $2,000,
$11,800, $221,500, $12,850, and $83,000, respectively, and is included in
general and administrative expense in the accompanying consolidated statements
of operations.
AGREEMENTS WITH EMPLOYEES
Although the Company has not entered into any employment contracts, the
Company has entered into agreements with certain employees, which provide for
performance-based cash and stock option bonuses, severance benefits under
specified circumstances and other items.
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The mandatorily redeemable convertible preferred stock (the "Redeemable
Preferred Stock") may be redeemed, at the option of the holders, subsequent to
November 9, 2004. In order for the Redeemable Preferred Stock to be redeemed,
the Company must receive written notice from shareholders holding the majority
of the shares then outstanding at any time after November 9, 2004 and not less
than ninety days prior to the date set forth in the notice. Subsequent to
receipt of adequate written notice, the Company shall redeem at a price of $1.00
per share, plus an amount in cash equal to any dividends accrued but unpaid.
Each holder of Redeemable Preferred Stock shall have the right, at the
option of the holder, to convert any or all of its shares of Redeemable
Preferred Stock into a number of fully paid and nonassessable shares of common
stock calculated based on the applicable conversion rate. The Redeemable
Preferred Stock converts automatically upon the effective date of an IPO of the
Company's common stock, whereby net proceeds are not less than $15 million.
F-21
<PAGE> 113
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
SERIES A
On October 16, 1997, the Company entered into a Securities Purchase
Agreement with Gotham Partners, L.P. and Gotham Partners III, L.P. (who,
together with Gotham Partners International, Ltd., Gotham Ventures I, L.L.C.,
and Gotham Ventures II, L.L.C. -- collectively "Gotham," are shareholders of the
Company) whereby it, as amended, authorized the sale of up to 2,050,000 shares
of $0.01 par value Series A Redeemable Preferred Stock ("Series A"), of which
1,000,000 shares were issued. The holders of Series A shall be entitled to
receive preferential cumulative dividends payable in additional shares of Series
A at the rate of 10% per share per year at the stated value of $1.00 per share.
Dividends shall accrue quarterly on December 31, March 31, June 30 and September
30 beginning December 31, 1997. Dividends are calculated quarterly compounded
and shall accumulate from the date of issuance. Each share of Series A converts
to 4.2 shares of common stock.
SERIES C
On March 17, 1998, the Company entered into a Securities Purchase Agreement
with Gotham and Lee whereby it, as amended, authorized the sale of up to
1,000,000 shares of $0.01 par value Series C Redeemable Preferred Stock ("Series
C"), of which 500,000 shares were issued. The holders of Series C shall be
entitled to receive preferential cumulative dividends payable in additional
shares of Series C at the rate of 10% per share per year at the stated value of
$1.00 per share. Dividends accrue quarterly in the same manner as Series A. Each
share of Series C converts to 10.92 shares of common stock. Series C has
liquidation preference over Series A.
SERIES D
On August 31, 1998 and December 31, 1998, the Company entered into a
Securities Purchase Agreement with Gotham and Lee whereby it, as amended,
authorized the sale of up to 1,000,000 shares of $0.01 par value Series D
Redeemable Preferred Stock ("Series D"), of which 475,967 shares were issued.
The holders of Series D shall be entitled to receive preferential cumulative
dividends payable in additional shares of Series D at the rate of 10% per year
at the stated value of $1.00 per share. Dividends accrue quarterly in the same
manner as Series A and Series C. Each share of Series D converts to 20.215
shares of common stock. Series D has liquidation preference over Series A and
Series C.
SERIES E AND F
On April 13, 1999, the Company entered a Securities Purchase Agreement with
Gotham and Lee whereby it, as amended, authorized the sale of up to 150,000 and
150,000 shares of $0.01 par value Series E Preferred Stock ("Series E") and
Series F Redeemable Preferred Stock ("Series F"), respectively, of which 81,242
shares and 57,748 shares were issued, respectively. These issuances include
7,468 and 1,498 shares of Series E and Series F, respectively, pursuant to
certain anti-dilutive preemptive rights
F-22
<PAGE> 114
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
agreements. The holders of Series E and F shall be entitled to receive
preferential cumulative dividends payable in additional shares of Series E and
Series F, respectively, at the rate of 9% per year at the stated value of $1.00
per share. Dividends accrue quarterly in the same manner as Series A, Series C
and Series D. Each share of Series E and Series F convert to 20.215 shares of
common stock. Series E and Series F have liquidation preference over all
previously issued Redeemable Preferred Stock.
SERIES G
On April 14, 1999, the Company entered a Securities Purchase Agreement with
Gotham and other third party investors whereby it, as amended, authorized the
sale of up to 2,000,000 shares of $0.01 par value Series G Redeemable Preferred
Stock ("Series G"), of which 1,149,786 shares and warrants were issued. This
issuance includes 28,688 shares of Series G pursuant to certain anti-dilutive
preemptive rights agreements. The holders of Series G shall be entitled to
received preferential cumulative dividends payable in additional shares of
Series G at the rate of 10% per year at the stated value of $1.00 per share.
Dividends accrued quarterly in the same manner as Series A, Series C, Series D,
Series E and Series F. Each share of Series G converts to 7.1964 shares of
common stock. Series G has liquidation preference over all previously issued
Redeemable Preferred Stock.
During November and December 1999, all shares of Series G were exchanged
for shares of Series H as described below.
SERIES H
On July 16, 1999, the Company entered into a Securities Purchase Agreement
with Gotham, TGI and other third party investors whereby it authorized the sale
of up to 15,000,000 shares of $0.01 par value of Series H Redeemable Preferred
Stock ("Series H"). The holders of Series H shall be entitled to receive
preferential cumulative dividends payable in additional shares of Series H at
the rate of 10% per year at the stated value of $1.00 per share. Dividends
accrue quarterly in the same manner as Series A, Series C, Series D, Series E,
Series F and Series G. Each share of Series H converts to 5.3973 shares of
common stock and 5,131,521 shares of Series H have been issued, with net
proceeds of approximately $5.1 million. This issuance includes 131,521 shares of
Series H pursuant to certain anti-dilutive preemptive rights agreements. Series
H has liquidation preference over all previously issued Redeemable Preferred
Stock.
During November and December 1999, the holders of Series G exchanged each
share of Series G, plus accrued dividends through the date of exchange, for
approximately 1.33 shares of Series H. As a result, an aggregate of 1,170,464
shares of Series G were canceled and an aggregate of 1,560,618 shares of Series
H were issued. All dividends accrued subsequent to the exchange accrue
consistent with the terms of Series H. Unamortized issuance costs as of the date
of exchange were charged against accumulated deficit of the Company.
F-23
<PAGE> 115
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
SERIES I
On November 9, 1999, the Company entered into a Securities Purchase
Agreement with SCP Private Equity Partners, L.P. ("SCP"), certain Gotham
entities, TGI and other current shareholders, whereby it, as amended, authorized
the sale of up to 35,000,000 shares of $0.01 par value Series I Redeemable
Preferred Stock ("Series I"). The holders of Series I shall be entitled to
receive preferential cumulative dividends payable in additional shares of Series
I at the rate of 10% per year at the stated value of $1.00 per share. Dividends
accrue quarterly in the same manner as Series A, Series C, Series D, Series E,
Series F, Series G and Series H. Each share of Series I converts to 2.4670
shares of common stock and 18,485,167 shares of Series I have been issued, with
net proceeds of approximately $17.9 million. Series I has preference over all
previously issued Redeemable Preferred Stock.
Subsequent to year end, the Company issued an additional 250,000 shares of
Series I for net proceeds of $230,887 pursuant to certain antidilutive
preemptive rights agreements (Note 9).
The accretion for each series of the Redeemable Preferred Stock for the
period from Inception (October 16, 1997) through December 31, 1997, the years
ended December 31, 1998 and 1999 and the three months ended March 31, 2000, is
as follows:
<TABLE>
<CAPTION>
SERIES A SERIES C SERIES D SERIES E SERIES F SERIES G SERIES H SERIES I
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 16,
1997 (Inception)...... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issued, net of
issuance costs...... 1,000,000 -- -- -- -- -- -- --
Accretion--
Accrued dividends... 20,779 -- -- -- -- -- -- --
Amortization of
issuance costs.... -- -- -- -- -- -- -- --
---------- -------- -------- ------- ------- ----------- ---------- -----------
Balance, December 31,
1997.................. 1,020,779 -- -- -- -- -- -- --
Issued, net of
issuance costs...... -- 495,000 469,967 -- -- -- -- --
Accretion--
Accrued dividends... 105,970 40,671 10,070 -- -- -- -- --
Amortization of
Issuance costs.... -- 594 323 -- -- -- -- --
---------- -------- -------- ------- ------- ----------- ---------- -----------
Balance, December 31,
1998.................. 1,126,749 536,265 480,360 -- -- -- -- --
Issued, net of
issuance costs...... -- -- -- 76,528 1,498 730,026 4,947,227 17,875,402
Accretion--
Accrued dividends... 116,971 56,128 50,456 5,210 3,779 64,276 250,550 261,951
Amortization of
Issuance costs.... -- 750 968 607 7,236 376,162 15,935 17,355
Conversion of Series G
to Series H......... -- -- -- -- -- (1,170,464) 1,170,464 --
---------- -------- -------- ------- ------- ----------- ---------- -----------
</TABLE>
F-24
<PAGE> 116
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A SERIES C SERIES D SERIES E SERIES F SERIES G SERIES H SERIES I
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1999.................. 1,243,720 593,143 531,784 82,345 12,513 -- 6,384,176 18,154,708
Issued, net of
issuance costs...... -- -- -- -- -- -- -- 230,887
Accretion--
Accrued dividends... 31,007 14,879 13,375 1,939 1,380 -- 179,355 470,441
Amortization of
Issuance costs.... -- 193 243 210 2,512 -- 8,631 26,360
---------- -------- -------- ------- ------- ----------- ---------- -----------
Balance, March 31,
2000.................. $1,274,727 $608,215 $545,402 $84,494 $16,405 $ -- $6,572,162 $18,882,396
========== ======== ======== ======= ======= =========== ========== ===========
</TABLE>
Shares issued and outstanding of each series of the Redeemable Preferred
Stock for the period from Inception (October 16, 1997) through December 31,
1997, the years ended December 31, 1998 and 1999 and the three months ended
March 31, 2000, are as follows:
<TABLE>
<CAPTION>
SERIES A SERIES C SERIES D SERIES E SERIES F SERIES G SERIES H SERIES I
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 16,
1997 (Inception)...... -- -- -- -- -- -- -- --
Issued................ 1,000,000 -- -- -- -- -- -- --
Accrued dividends..... 20,779 -- -- -- -- -- -- --
--------- ------- ------- ------ ------ ---------- --------- ----------
Balance, December 31,
1997.................. 1,020,779 -- -- -- -- -- -- --
Issued................ -- 500,000 475,967 -- -- -- -- --
Accrued dividends..... 105,970 40,671 10,070 -- -- -- -- --
--------- ------- ------- ------ ------ ---------- --------- ----------
Balance, December 31,
1998.................. 1,126,749 540,671 486,037 -- -- -- -- --
Issued................ -- -- -- 81,242 57,748 1,106,188 5,131,521 18,485,167
Accrued dividends..... 116,971 56,128 50,456 5,210 3,779 64,276 250,550 261,951
Conversion of Series G
to Series H......... -- -- -- -- -- (1,170,464) 1,560,619 --
--------- ------- ------- ------ ------ ---------- --------- ----------
Balance, December 31,
1999.................. 1,243,720 596,799 536,493 86,452 61,527 -- 6,942,690 18,747,118
Issued................ -- -- -- -- -- -- -- 250,000
Accretion--
Accrued dividends... 31,007 14,879 13,375 1,939 1,380 -- 179,355 470,441
--------- ------- ------- ------ ------ ---------- --------- ----------
Balance, March 31,
2000.................. 1,274,727 611,678 549,868 88,391 62,907 -- 7,122,045 19,467,559
========= ======= ======= ====== ====== ========== ========= ==========
</TABLE>
9. STOCKHOLDERS' DEFICIT
Upon incorporation in October 1997, the Company exchanged an aggregate of
10,554,539 shares of its common stock to the members of J.P.L. Associates, LLC
("JPL") for their respective interest in JPL. On this date, JPL ceased
operations and donated its cash and inventory to the Company. These assets were
recorded on the books of the Company at their respective carryover basis. As a
result, the Company absorbed the retained deficit of JPL as a decrease to
additional paid-in capital in the accompanying consolidated balance sheets.
During January 1999, the Company retained its legal counsel in exchange for
200,000 shares of its common stock. This transaction was recorded as an increase
in equity and
F-25
<PAGE> 117
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
professional fees at the fair value of the common stock on the date of issuance.
Professional fees are included in general and administrative expenses in the
accompanying consolidated statements of operations.
During January 1999, the Company purchased two URL addresses from third
parties in exchange for an aggregate of 1,453,600 shares of its common stock and
$17,500 in cash. The equity portion of this transaction was recorded as an
increase in capitalized software and equity at the fair value of the common
stock on the date of issuance. Both purchase agreements include antidilutive
preemptive rights granted to the sellers, allowing them to participate in common
stock or common stock equivalent issuances by the Company pursuant to a private
placement.
WARRANTS
In conjunction with the issuance of Series F, the Company issued warrants
to purchase an aggregate of 1,500,000 shares of common stock at $0.001 per share
to Gotham. The Company recorded the fair value of these warrants as Series F
issuance costs on the date of grant.
In conjunction with the issuance of Series G, the Company issued warrants
to purchase an aggregate of 43,600 shares of Series G at $1.00 per share to its
placement agents. These shares are convertible into approximately 314,000 shares
of common stock. The Company recorded the fair value of these warrants as Series
G issuance costs on the date of grant.
During November and December 1999, the holders of Series G exchanged each
share for approximately 1.33 shares of Series H. In conjunction with this
exchange, the holders of the warrants to purchase 43,600 shares of Series G
exchanged their warrants for warrants to purchase 58,133 shares of Series H.
These shares are convertible into approximately 314,000 shares of common stock.
In conjunction with the bridge financing from Gotham and TGI (Note 6) and
the issuance of Series I, the Company issued warrants to purchase an aggregate
of 2,594,286 shares of common stock at approximately $0.39 per share to Gotham
and TGI. The fair value of these warrants was deemed to be $693,894 on the date
of grant, of which $309,129 was recorded as debt issuance costs and the
remaining $384,765 was recorded as Series I issuance costs, based on the
relative debt and equity investments made by Gotham and TGI.
During the year ended December 31, 1999, the Company issued warrants to
purchase 110,000 shares of common stock at a purchase price of $0.41 per share
to consultants in lieu of payment for services. As such, the Company recorded a
charge of $37,668 in the accompanying consolidated statements of operations for
the year ended December 31, 1999, based upon a valuation of the fair market of
the warrants on the date of grant.
The following is a summary of all warrants granted during the years ended
December 31, 1998 and 1999 and the three months ended March 31, 2000, including
the
F-26
<PAGE> 118
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
effective conversion of the warrant to purchase Series H mandatorily redeemable
convertible preferred stock:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WARRANTS GRANTED EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding, December 31, 1998........ -- $ --
Granted............................. 4,518,049 0.24
Exercised........................... -- --
Forfeited........................... -- --
--------- -----
Outstanding, December 31, 1999........ 4,518,049 0.24
Granted............................. 246,697 0.41
Exercised
Forfeited........................... -- --
--------- -----
Outstanding, March 31, 2000........... 4,764,746 $ .25
========= =====
</TABLE>
Of those granted during the year ended December 31, 1999 and the three
months ended March 31, 1999, warrants to purchase 4,444,716 and 246,697 shares
of common stock, respectively, were vested upon issuance, assuming the effective
conversion of the warrants to purchase Series H. All warrants have expiration
dates ranging from five to ten years from the date of grant.
10. STOCK OPTION PLANS
In 1999, the Company adopted the Equity Incentive Plan ("1999 Plan")
pursuant to which, as amended, an aggregate of 20,000,000 shares of common stock
was reserved for issuance to directors, officers, employees and consultants of
the Company. The 1999 Plan provides for awards of incentive stock options and
nonqualified stock options. Options issued prior to approval of the 1999 Plan
were considered granted under the 1999 Plan.
The 1999 Plan is administered by the Board of Directors, which has the sole
discretion to select the employees, officers and consultants to whom awards are
made, to determine the nature and amounts of such awards and to interpret,
construe and implement the 1999 Plan. All of these options are nonqualified
stock options.
F-27
<PAGE> 119
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
Stock option activity through March 31, 2000, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS GRANTED EXERCISE PRICE
--------------- ----------------
<S> <C> <C>
Options outstanding, Inceptions
(October 16, 1997)................... -- $ --
Granted.............................. 616,182 0.17
---------- ------
Options outstanding, December 31,
1997................................. 616,182 0.17
Granted.............................. 1,313,000 0.10
---------- ------
Outstanding, December 31, 1998......... 1,929,182 0.12
Granted.............................. 13,323,650 0.14
Exercised............................ (60,000) (0.13)
Cancelled............................ (625,000) (0.10)
---------- ------
Outstanding, December 31, 1999......... 14,567,832 0.14
Granted.............................. 2,356,256 0.77
Exercised............................ (3,224,502) (0.16)
Cancelled............................ (15,000) (0.41)
---------- ------
Outstanding, March 31, 2000............ 13,684,586 $ 0.24
========== ======
Exercisable, March 31, 2000............ 2,604,813 $ 0.18
========== ======
</TABLE>
The weighted average fair value of options granted during the period from
Inception (October 16, 1997) through December 31,1997, and the years ended
December 31, 1998 and 1999, were $0.02, $0.03 and $0.20, respectively.
Had compensation for the Stock Option Plan been determined consistent with
the provisions of SFAS No.123, the effect on the Company's net loss and basic
and diluted loss per share would have been changed to the following pro forma
amounts recorded for the period from Inception (October 16, 1997) through
December 31, 1997 and for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
FOR THE PERIOD OF
INCEPTION (OCTOBER
16, 1997) THROUGH
DECEMBER 31,
1997 1998 1999
------------------ ----------- ------------
<S> <C> <C> <C>
Net loss, as reported.... $(705,406) $(1,411,449) $(19,169,488)
Net loss, pro forma...... (706,582) (1,415,610) (19,237,993)
Basic and diluted loss
per share, as
reported............... (0.07) (0.15) (1.68)
Basic and diluted loss
per share, pro forma... (0.07) (0.15) (1.69)
</TABLE>
F-28
<PAGE> 120
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
The fair market value of each option grant has been estimated on the date
of grant using the Black-Scholes option pricing model based upon expected option
lives of five years; risk-free interest rate of between 4.70% and 6.11%;
expected volatility of 0% and a dividend yield of 0%.
The weighted average remaining life of the options outstanding at December
31, 1999 is 9.22 years.
DEFERRED COMPENSATION
During 1999, the Company granted stock options with exercise prices which
were less than the fair market value of the underlying shares of common stock at
the date of grant. As a result, the Company recorded deferred compensation of
$642,600. This amount will be recognized as noncash compensation expense over
the vesting period of the options. For the year ended December 31, 1999, $63,890
of the deferred compensation was amortized to expense and has been reflected as
noncash compensation expense in the accompanying statements of operations.
No compensation expense was recorded during the period from Inception
(October 16, 1997) through December 31, 1997 and the year ended December 31,
1998.
11. SUBSEQUENT EVENTS
BRIDGE FINANCING
During April 2000, the Company entered into promissory notes totaling $16
million with SCP, certain entities of Gotham, Hilal Capital, L.P., Hilal Capital
QP, L.P., Hilal Capital Associates LLC, Hilal Capital International, Ltd., and
Philip Hilal (collectively, "Hilal") and Transatlantic Investments, Ltd.
Interest accrues at 12% per annum. The promissory notes, with accrued and unpaid
interest, are payable upon closing of the Series J private placement in shares
of Series J, or upon demand subsequent to August 2000 if the Series J private
placement has not closed.
SERIES J
On May 4, 2000 the Company entered into a Securities Purchase Agreement
with Mellon Ventures, L.P. ("Mellon") and other investors, including Gotham,
SCP, Trump and Hilal whereby it authorized the sale of up to 85,000,000 shares
of $0.01 par value Series J Redeemable Preferred Stock ("Series J"). The holders
of Series J shall be entitled to receive preferential cumulative dividends
payable in additional shares of Series J at the rate of 10% per year at the
stated value of $1.00 per share. Dividends accrue quarterly in the same manner
as Series A, Series C, Series D, Series E, Series F, Series G, Series H and
Series I, except that they do not begin to accrue until the eighteen-month
anniversary of the closing. Each share of Series J converts to 0.93252 shares of
common stock and is subject to further adjustment based upon certain conditions
as defined in the Series J Securities Purchase Agreement. Series J has
preference over all previously issued Redeemable Stock.
F-29
<PAGE> 121
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
In connection with the issuance of Series J, the Company adopted the
Seventh Amended and Restated Certificate of Incorporation which, among other
things, requires the automatic conversion of all mandatorily redeemable
convertible preferred stock, upon the effective date of an Initial Public
Offering of the Company's common stock, whereby net proceeds are not less than
$30 million.
F-30
<PAGE> 122
GIFTPOINT.COM, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1999
TOGETHER WITH AUDITORS' REPORT
F-31
<PAGE> 123
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Giftpoint.com, Inc.:
We have audited the accompanying balance sheets of Giftpoint.com, Inc. (a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for the period
from Inception (August 27, 1998) to December 31, 1998 and the year ended
December 31, 1999. 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 in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Giftpoint.com, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the period from Inception (August 27, 1998) to December 31, 1998, and the
year ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
New York, New York
April 17, 2000
F-32
<PAGE> 124
GIFTPOINT.COM, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 593,794 $ 3,159,728
Accounts receivable, net.................................. 35,233 629,931
Inventory................................................. 30,105 760,732
Prepaid expenses.......................................... 11,422 124,604
--------- -----------
Total current assets.............................. 670,554 4,674,995
Property and equipment, net of accumulated depreciation of
$1,169 and $44,904, respectively.......................... 39,373 536,523
Capitalized software, net of accumulated amortization of $0
and $31,207, respectively................................. -- 154,955
--------- -----------
Total assets...................................... $ 709,927 $ 5,366,473
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 187,472 $ 1,268,435
Accrued expenses and other liabilities.................... 3,065 327,243
Deferred revenue.......................................... 46,864 2,276,684
--------- -----------
Total current liabilities......................... 237,401 3,872,362
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized of $.01 par
value; 0 and 2,724,068 shares issued and outstanding,
respectively........................................... -- 27,241
Common stock: 15,000,000 shares authorized of $.01 par
value; 5,460,125 and 6,089,475 shares issued and
outstanding, respectively.............................. 54,602 60,895
Additional paid-in capital................................ 654,983 6,460,194
Accumulated deficit....................................... (237,059) (5,054,219)
--------- -----------
Total stockholders' equity........................ 472,526 1,494,111
--------- -----------
Total liabilities and stockholders' equity........ $ 709,927 $ 5,366,473
========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-33
<PAGE> 125
GIFTPOINT.COM, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1998)
THROUGH DECEMBER 31, 1998 AND
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 27,
1998)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
<S> <C> <C>
Revenues, net....................................... $ 146,067 $ 4,035,306
Cost of revenues.................................... 133,366 3,402,594
--------- -----------
Gross profit.............................. 12,701 632,712
Costs and expenses:
Marketing and sales expenses...................... 98,161 4,524,326
Technology and system development expenses........ 69,901 327,025
General and administrative expenses............... 85,103 646,900
--------- -----------
Total costs and expenses.................. 253,165 5,498,251
--------- -----------
Loss from operations.............................. (240,464) (4,865,539)
Other income........................................ 3,405 48,379
--------- -----------
Net loss.................................. $(237,059) $(4,817,160)
========= ===========
Per share information:
Net loss per share--
Basic and diluted.............................. $ (0.05) $ (0.84)
========= ===========
Weighted average common shares outstanding--
Basic and diluted.............................. 4,956,100 5,706,692
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-34
<PAGE> 126
GIFTPOINT.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1998)
THROUGH DECEMBER 31, 1998 AND
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ------------------- PAID-IN ACCUMULATED
STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance, August 27, 1998..... $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock... -- 3,125 31 52,052 -- 52,083
Issuance of common stock in
connection with stock
dividend................. -- 4,831,250 48,313 (48,313) -- --
Issuance of common stock in
connection with private
placement................ -- 625,750 6,258 651,244 -- 657,502
Net loss................... -- -- -- -- (237,059) (237,059)
------- --------- ------- ---------- ----------- -----------
Balance, December 31, 1998... -- 5,460,125 54,602 654,983 (237,059) 472,526
Contributed capital........ -- -- -- 100,000 -- 100,000
Issuance of common stock... -- 629,350 6,293 666,331 -- 672,624
Issuance of Series A
preferred stock.......... 27,241 -- -- 5,038,880 -- 5,066,121
Net loss................... -- -- -- -- (4,817,160) (4,817,160)
------- --------- ------- ---------- ----------- -----------
Balance, December 31, 1999... $27,241 6,089,475 $60,895 $6,460,194 $(5,054,219) $ 1,494,111
======= ========= ======= ========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-35
<PAGE> 127
GIFTPOINT.COM, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1998)
THROUGH DECEMBER 31, 1998 AND
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 27,
1998)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(237,059) $(4,817,160)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization.................. 1,169 74,942
Allowance for doubtful accounts................ -- 20,000
(Increase) decrease in operating assets--
Accounts receivable............................ (35,233) (614,698)
Inventory...................................... (30,105) (730,627)
Prepaid expenses............................... (11,422) (113,182)
Decrease (increase) in operating liabilities--
Accounts payable............................... 187,472 1,080,963
Accrued expenses and other liabilities......... 3,065 324,178
Deferred revenue............................... 46,864 2,229,820
--------- -----------
Net cash used in operating activities..... (75,249) (2,545,764)
Cash flows from investing activities:
Purchase of property and equipment................ (40,542) (540,885)
Purchase of other assets.......................... -- (186,162)
--------- -----------
Net cash used by investing activities..... (40,542) (727,047)
Cash flows from financing activities:
Capital contributed by stockholders............... -- 100,000
Proceeds from issuance of common stock............ 709,585 672,624
Proceeds from issuance of preferred stock......... -- 5,066,121
--------- -----------
Net cash flows provided by financing
activities............................. 709,585 5,838,745
--------- -----------
Net increase in cash and cash
equivalents............................ 593,794 2,565,934
Cash and cash equivalents, beginning of period...... -- 593,794
--------- -----------
Cash and cash equivalents, end of period............ $ 593,794 $ 3,159,728
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for--
Interest....................................... $ 193 $ --
Income taxes................................... -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE> 128
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
On August 27, 1998, Giftpoint.com, Inc. ("GPoint" or the "Company") was
incorporated in the state of Delaware. The Company engages in the business of
sourcing, marketing and distributing branded gift certificates to the public,
primarily through its Internet website. The GiftPoint website provides consumers
and corporate buyers with a one-stop shop for both physical and online gift
certificates from a variety of merchants throughout the United States.
Activities from the date of Inception (August 27, 1998) through December
31, 1999 have been directed primarily to developing the corporate sales
business. The Company operates in the online retail industry, which is new,
rapidly evolving and intensely competitive. The Company competes primarily with
traditional retail and service merchants and other entities that maintain
similar commercial web sites.
Effective March 6, 2000, the Company merged with a wholly owned subsidiary
of GiftCertificates.com, Inc., in a business combination treated as a purchase
(Note 7).
Management has determined that it does not have any separately reportable
business segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of temporary cash investments in various
interest-earning accounts, commercial paper and certificates of deposit with
maturities of 90 days or less. Included in the cash and cash equivalent balance
is $25,000 of restricted cash for potential future chargebacks on the credit
card depository account.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's primary sources of revenue are from the sale of gift
certificates from various retail and service merchants and the sale of Giftpoint
Certificates over the Internet website. Giftpoint Certificates are the Company's
own branded gift certificates and are exchangeable only at the Company's
Internet website. Revenue from the sale of gift certificates includes the lower
of face value of the gift certificates sold or cash received upon sale of gift
certificates subject to coupons and promotional programs offered by the Company,
plus earned fees and commissions. The Company recognizes revenue when these gift
certificates are shipped to customers. Revenue from Giftpoint Certificates
F-37
<PAGE> 129
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
includes the lower of face value of the Giftpoint Certificates sold or cash
received upon sale of Giftpoint Certificates purchased subject to coupons and
promotional programs offered by the Company. The Company recognizes revenues
when the customer redeems the Giftpoint Certificate with the Company over its'
Internet website in exchange for a gift certificate issued by a retail or
service merchant.
Deferred revenue is recorded for unredeemed Giftpoint Certificates sold,
net of accrued shipping and handling costs and credit card fees. At December 31,
1999, unredeemed Giftpoint Certificates are presented net of $72,687 of accrued
shipping and handling costs and credit card fees.
Revenue also includes the sales of specialty greeting cards, customer
boxes, and other ancillary products. Revenue for these items is also recognized
when these products are shipped to customers.
COST OF REVENUES
Cost of revenues includes the cost of the gift certificates, specialty
greeting cards, upgrading packaging, and other ancillary products to the
Company, as well as shipping and handling costs and credit card fees.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$20,000 at December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided for by
the straight-line method for financial statement reporting and accelerated
methods for income tax return purposes, over the estimated useful lives of three
to seven years.
At December 31, 1998 and 1999, property and equipment consist of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Computers and equipment................... $36,968 $527,006
Furniture and fixtures.................... 3,574 54,421
------- --------
Total property and equipment.... 40,542 581,427
Less--Accumulated depreciation............ (1,169) (44,904)
------- --------
Property and equipment, net........ $39,373 $536,523
======= ========
</TABLE>
CAPITALIZED SOFTWARE
Capitalized software consists of web site development costs.
F-38
<PAGE> 130
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
Web site development costs consist of amounts paid to consultants and
employees to develop the web site and systems infrastructure for tracking gift
certificates, customer orders and business and merchant promotional programs and
for fraud prevention. For the period from Inception (August 27, 1998) to
December 31, 1998, all web site and software development costs have been
expensed as incurred. In January 1999, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance for determining whether
computer software is internal-use software and on accounting for the costs of
computer software originally developed or obtained for internal-use and then
subsequently sold to the public. It also provides guidance on capitalization of
the costs incurred for computer software developed or obtained for internal use.
In accordance with this policy, the Company expensed all costs incurred in
the preliminary project stage for software developed for internal use. In
addition, the Company capitalizes all external direct costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the internal-use computer software project to the extent
of the time spent directly on the project; and interest costs incurred when
developing computer software once the development has reached the application
development stage. All costs incurred for upgrades, maintenance and enhancements
that do not result in additional functionality are expensed.
Capitalized software is amortized using the straight-line method over the
estimated useful life of the software of three years. Total amortization expense
was $0 and $31,207 for the period from Inception (August 27, 1998) to December
31, 1998 and the year ended December 31, 1999, respectively. Amortization
expense is included in technology and system development expenses in the
accompanying statements of operations.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of their carrying values has occurred as of December 31, 1998
and 1999.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
F-39
<PAGE> 131
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
effect on deferred tax assets or liabilities of a change in tax rates is
recognized in the period that the tax change occurs.
ADVERTISING AND PROMOTIONAL EXPENSE
Advertising costs are expensed as incurred and consist of the costs to
develop web site, print, billboard and radio advertisements. Advertising
expenses are included in marketing and sales expense in the accompanying
statements of operations. No advertising expenses were incurred during the
period from Inception (August 27,1998) to December 31, 1998. Advertising expense
for the year ended December 31, 1999 was $2,796,290.
Promotional costs are related to coupons and other promotional programs.
These promotional programs consist primarily of discounts offered to the
customer, which reduce the purchase price of gift certificates and Giftpoint
Certificates below their face value. The Company records promotional expenses
upon use by the customer. The portion of the cost of the gift certificate sold
through a promotional program that exceeds the cash received from the customer
is classified as marketing and sales expense. No promotional expenses were
incurred during the period from Inception (August 27, 1998) to December 31,
1998. Total promotional expense for the year ended December 31, 1999 was
$607,346, of which $534,233 is included in cost of revenues.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock options as if the fair value based method accounting in SFAS No.
123 had been applied to these transactions.
STOCK SPLIT
On October 1, 1999, the Company's Board of Directors declared a
five-for-one stock split of the Company's Common stock. All references in the
financial statements to number of shares, price per share, per share amounts and
common stock equivalent data have been restated to reflect the split.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings per Share." In accordance with SFAS No.
128, basic loss per share is calculated by dividing income available to common
shareholders by
F-40
<PAGE> 132
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
the weighted average number of common shares outstanding during the period.
Diluted loss per share is calculated by dividing income available to common
shareholders by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the Treasury Stock method). All options and warrants
are excluded from the calculation of diluted loss per share, as the effect of
their inclusion would be antidilutive.
The following is the reconciliation of net loss per share:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 27,
1998)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
<S> <C> <C>
Numerator:
Loss available to common shareholders........... $(237,059) $(4,817,160)
========= ===========
Denominator:
Weighted average shares outstanding--basic...... 4,956,100 5,706,692
Effective exercise of dilutive options.......... -- --
--------- -----------
Weighted average shares
outstanding--diluted................. 4,956,100 5,706,692
========= ===========
</TABLE>
CONCENTRATIONS OF RISK
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash, accounts receivable, accounts payable
and accrued liabilities. The carrying amounts of these instruments approximate
fair value.
The Company maintains cash with certain domestic financial institutions.
From time to time, the Company's cash balances with these financial institutions
may exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are primarily concentrated in the United States.
The Company performs ongoing credit card authorizations before product is
shipped to reduce the risk of fraudulent credit card use.
During fiscal 1999, one customer accounted for approximately 36% of total
gross sales.
COMPREHENSIVE INCOME
During 1998, the Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial
F-41
<PAGE> 133
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
statements. The adoption of this standard has had no impact on the Company's
financial statements. Accordingly, the Company's comprehensive net loss is equal
to its net loss for the period from Inception (August 27, 1998) to December 31,
1998 and the year ended December 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 (as
amended by SFAS No. 137) is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not enter into derivative
instruments or engage in hedging activities as defined in SFAS No. 133. As such,
management has determined that the adoption of this standard will have no impact
on the Company's financial statements.
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principals to certain revenue recognition issues.
The Company has concluded that the implementation of this SAB will not have a
material impact on its financial position or its results of operations.
During March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which clarifies the
application of APB Opinion No. 25 regarding (a) the definition of an employee
for purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Interpretation No. 44 is effective on July 1,
2000. Certain events, as defined by Interpretation No. 44, may require earlier
consideration if they occurred after December 15, 1998, or January 12, 2000,
depending on the event, although no financial statement effect would be
recognized until July 1, 2000. The effects of applying Interpretation No. 44 are
recognized prospectively. Management has reviewed its stock compensation events
and determined none qualify as those covered by Interpretation No. 44 that would
require early consideration.
3. INCOME TAXES
Deferred taxes primarily relate to timing differences associated with
depreciation, the allowance for doubtful accounts and the Company's net
operating loss carryforwards. The net deferred tax assets are offset by a full
valuation allowance.
The Company has available at December 31, 1999, unused operating loss
carryforwards of approximately $5,250,000 which may be applied against future
taxable income expiring between 2018 and 2019.
F-42
<PAGE> 134
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
4. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company, in its normal course of business, may be subject to certain
litigation. In the opinion of the Company's management, settlements of
litigation will not have a material adverse effect on the Company's results of
operations, financial position or cash flows.
OPERATING LEASE
The Company has entered into noncancelable operating leases for certain
office space and equipment which expire on various dates through 2004. Future
minimum lease payments under these operating leases expiring subsequent to
December 31, 1999 are:
<TABLE>
<S> <C>
Fiscal year ending:
2000....................................... 129,329
2001....................................... 106,821
2002....................................... 81,692
2003....................................... 77,175
2004....................................... 47,700
--------
$442,717
========
</TABLE>
Rental expense under these leases totaled $92,390 in 1999.
5. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT
The Company issued 625,750 shares of the Company's common stock, par value
$.01 per share (the "Stock"), at a price of $1.20 per share in a Private
Placement Memorandum during 1998 for net proceeds of $657,502.
During 1999, the Company issued 629,350 shares of the Company's common
stock, par value $.01 per share (the "Stock"), at a price of $1.20 per share in
a Private Placement Memorandum for net proceeds of $672,624.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of preferred stock in one or more series, from time to time, with such
distinction, designations, or title as may be fixed by the Board of Directors
prior to the issuance of any shares thereof. The authority of the Board of
Directors includes, but is not limited to, the determination or fixing of the
following with respect to shares of such class or any series thereof: (i) the
number of shares; (ii) the dividend rate, whether dividends shall be cumulative;
(iii) whether shares are to be redeemable and, if so, the terms and amount of
F-43
<PAGE> 135
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
any sinking fund providing for the purchase or redemption of such shares; (iv)
whether shares shall be convertible and, if so, the terms and provisions
thereof; (v) the amount per share received in case of voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or winding of the
Corporation; and (vi) whether shares have voting rights. The preferred stock may
be issued with a preference over the common stock as to the payment of
dividends.
During 1999, the Company issued 2,724,068 shares of Series A convertible
preferred stock ("Series A") for net proceeds of $5,066,121. The issued Series A
preferred stock has the following features: (i) dividends equal to the dividends
such holders would receive as though they were the holders of the number of
shares of common stock of the Corporation into which their shares are
convertible as of the record date; (ii) $1.872 per share in case of liquidation
for each Series A preferred stock then held by them, plus declared but unpaid
dividends, and of the remaining assets a pro rata share based on the number of
converted Series A preferred stock and common stock up to $3.744 per share,
(iii) the right to one vote for each share of common stock into which such
preferred stock could then be converted; and (iv) the right to convert to common
stock as it is determined by dividing $1.872 by the conversion price applicable
to such shares. At December 31, 1999, no dividends had been declared.
6. STOCK OPTIONS
In 1999, the Company adopted the Incentive Stock Option Plan, as amended
("1999 Plan") pursuant to which an aggregate of 1,723,900 shares of common stock
are reserved for issuance by the Board of Directors as incentive stock options.
In September 1998, the Company granted, outside of the 1999 plan, a nonqualified
stock option to an officer of the Company for the right to purchase 139,230
shares at an exercise price of $.20 per share.
Under the 1999 Plan and the nonqualified grant, the exercise price of each
option equals the market price at the time of the grant. For the 1999 Plan,
vesting begins at the end of the first year of the grant at 25% increments for
the first four years. For the nonqualified grant, 50% vests immediately and 25%
at the end of the first and second years. Expiration of grants is 10 years from
the date of grant.
F-44
<PAGE> 136
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
Stock option activity through December 31, 1999, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
<S> <C> <C>
Balance, Inception (August 27, 1998)..... -- --
Granted................................ 139,230 0.20
--------- ------
Balance, December 31, 1998............... 139,230 0.20
Granted................................ 990,250 1.28
Exercised.............................. -- --
Forfeited.............................. (7,500) (1.20)
--------- ------
Balance, December 31, 1999............... 1,121,980 $ 1.15
========= ======
Exercisable at December 31, 1999......... 104,490 $ 0.20
========= ======
</TABLE>
Had compensation for the 1999 Plan been determined consistent with the
provisions of SFAS No.123, the effect on the Company's net loss and basic and
diluted loss per share would have been changed to the following pro forma
amounts recorded for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Net loss, as reported................. $(237,059) $(4,817,160)
Net loss, pro forma................... (238,007) (4,834,354)
Basic and diluted loss per share, as
reported............................ (0.05) (0.84)
Basic and diluted loss per share, pro
forma............................... (0.05) (0.85)
</TABLE>
The fair market value of each option grant has been estimated on the date
of grant using the Black-Scholes option pricing model based upon expected option
lives of five years; risk-free interest rate of between 4.70% and 6.30%;
expected volatility of 0% and a dividend yield of 0%.
The weighted average remaining life of the options outstanding at December
31, 1999, is 8.88 years.
7. SUBSEQUENT EVENT
Effective March 6, 2000, the Company merged with a wholly owned subsidiary
of Giftcertificates.com, Inc., with the Company surviving as a new wholly owned
subsidiary of Giftcertificates.com, Inc. This transaction was accounted for by
GiftCertificates under the purchase method of accounting and resulted in
GiftCertificates recording approximately $32.5 million of cost in excess of net
assets acquired. In conjunction with this stock-for-
F-45
<PAGE> 137
GIFTPOINT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1999
stock transaction, GiftCertificates acquired all issued and outstanding
preferred and common stock of the Company from the GPoint shareholders in
exchange for an aggregate of 32,273,163 shares of common stock of
GiftCertificates. Outstanding warrants, incentive stock options and nonqualified
options were converted to warrants and options to purchase an aggregate of
7,128,621 shares of common stock of GiftCertificates. In addition, certain
former GPoint shareholders are entitled to receive additional shares of common
stock of GiftCertificates, pursuant to certain anti-dilutive provision.
F-46
<PAGE> 138
GIFTSPOT.COM, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 2000
TOGETHER WITH AUDITORS' REPORT
F-47
<PAGE> 139
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GiftSpot.com, Inc.:
We have audited the accompanying balance sheet of GiftSpot.com, Inc. (a Delaware
corporation) as of December 31, 1999, and the related statements of operations,
stockholders' equity and cash flows for the period from Inception (April 21,
1999) to December 31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GiftSpot.com, Inc. for the
period from Inception (April 21, 1999) to December 31, 1999, and the results of
its operations and its cash flows in conformity with accounting principles
generally accepted in the United States.
New York, New York
April 17, 2000
F-48
<PAGE> 140
GIFTSPOT.COM, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 612,254 $ 54,948
Marketable securities..................................... 335,753 259,301
Inventory................................................. 18,964 19,298
Prepaid expenses and other current assets................. 27,530 27,292
----------- -----------
Total current assets.............................. 994,501 360,839
Property and equipment, net of accumulated depreciation of
$95,000 and $143,000 respectively......................... 499,085 456,406
Other assets................................................ 47,557 48,328
----------- -----------
Total assets...................................... $ 1,541,143 $ 865,573
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,402,787 $ 1,601,987
Accrued expenses and other liabilities.................... 114,403 69,698
Deferred revenue.......................................... 47,335 52,450
Note payable.............................................. 87,440 362,655
----------- -----------
Total current liabilities......................... 1,651,965 2,086,790
Long term debt.............................................. 2,839,743 2,817,883
Commitments and contingencies (Note 4)
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized
of $0.001 par value, 786,713 shares issued and
outstanding............................................ 1,075,708 1,075,708
Common stock; 20,000,000 shares authorized of $0.001 par
value, 6,300,750 and 6,402,912 shares issued and
outstanding, respectively.............................. 6,301 6,402
Additional paid-in capital................................ 74 69,060
Treasury stock............................................ (72,907) (74,757)
Stock subscription receivable............................. -- (4,083)
Accumulated other comprehensive income.................... 85,753 9,301
Accumulated deficit....................................... (4,045,494) (5,120,731)
----------- -----------
Total stockholders' equity........................ (2,950,565) (4,039,100)
----------- -----------
Total liabilities and stockholders' equity........ $ 1,541,143 $ 865,573
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
balance sheets.
F-49
<PAGE> 141
GIFTSPOT.COM, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1999)
THROUGH DECEMBER 31, 1998 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(APRIL 21, 1999) ENDED
DECEMBER 31, MARCH 31,
1999 2000
(UNAUDITED)
<S> <C> <C>
Revenues, net..................................... $ 1,027 $ 1,711
Cost of revenues.................................. 8,297 8,524
----------- -----------
Gross profit............................ (7,270) (6,813)
Costs and expenses:
Marketing and sales expenses.................... 1,871,082 219,877
Technology and system development expenses...... 1,477,990 580,005
General and administrative expenses............. 537,375 183,802
----------- -----------
Total costs and expenses................ 3,886,447 983,684
----------- -----------
Loss from operations.................... (3,893,717) (990,497)
Other expense..................................... (151,777) (84,740)
----------- -----------
Net loss................................ $(4,045,494) $(1,075,237)
=========== ===========
Per share information:
Net loss per share--
Basic and diluted............................ $ (.64) $ (.17)
=========== ===========
Weighted average common shares outstanding--
Basic and diluted............................ 6,300,750 6,305,077
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-50
<PAGE> 142
GIFTSPOT.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1999)
THROUGH DECEMBER 31, 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL STOCK OTHER
PREFERRED ------------------ PAID-IN TREASURY SUBSCRIPTION COMPREHENSIVE ACCUMULATED
STOCK SHARES AMOUNT CAPITAL STOCK RECEIVABLE INCOME DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 21, 1999...... $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock... -- 6,300,750 6,301 74 -- -- -- --
Issuance of Series A
preferred stock.......... 1,075,708 -- -- -- -- -- -- --
Common stock repurchase to
treasury, 819,000
shares................... (72,907)
Change in unrealized gain
on marketable
securities............... -- -- -- -- -- -- 85,753 --
Net Loss................... -- -- -- -- -- -- -- (4,045,494)
---------- --------- ------ ------- -------- ------- -------- -----------
Balance, December 31, 1999... 1,075,708 6,300,750 6,301 74 (72,907) -- 85,753 (4,045,494)
Issuance of Common Stock... -- 12,122 12 19,988 -- -- -- --
Issuance of stock subject
to subscription
receivable............... -- 20,416 20 4,063 -- (4,083) -- --
Exercise of options........ -- 34,624 34 9,928 -- -- -- --
Issue of common stock for
services rendered........ -- 35,000 35 35,007 -- -- -- --
Change in unrealized gain
on marketable
securities............... (76,452)
Common stock repurchase to
treasury, 1,850,000
shares................... -- (1,850)
Net Loss................... -- -- -- -- -- -- -- (1,075,237)
---------- --------- ------ ------- -------- ------- -------- -----------
Balance, March 31, 2000
(unaudited)................ $1,075,708 6,402,912 $6,402 $69,060 $(74,757) $(4,083) $ 9,301 $(5,120,731)
========== ========= ====== ======= ======== ======= ======== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
Balance, April 21, 1999...... $ --
Issuance of common stock... 6,375
Issuance of Series A
preferred stock.......... 1,075,708
Common stock repurchase to
treasury, 819,000
shares................... (72,907)
Change in unrealized gain
on marketable
securities............... 85,753
Net Loss................... (4,045,494)
-----------
Balance, December 31, 1999... (2,950,565)
Issuance of Common Stock... 20,000
Issuance of stock subject
to subscription
receivable............... --
Exercise of options........ 9,962
Issue of common stock for
services rendered........ 35,042
Change in unrealized gain
on marketable
securities............... (76,452)
Common stock repurchase to
treasury, 1,850,000
shares................... (1,850)
Net Loss................... (1,075,237)
-----------
Balance, March 31, 2000
(unaudited)................ $(4,039,100)
===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-51
<PAGE> 143
GIFTSPOT.COM, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1999)
THROUGH DECEMBER 31, 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 21, 1999) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1999 1999
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(4,045,494) $(1,075,237)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation................................... 95,000 48,000
(Increase) decrease in operating assets--
Inventory...................................... (18,964) (334)
Other Assets................................... (47,557) (771)
Prepaid expenses and other current assets...... (27,530) 238
Increase (decrease) in operating liabilities--
Accounts payable............................... 1,402,787 199,200
Accrued expenses and other liabilities......... 114,403 (44,705)
Deferred Revenue............................... 47,335 5,115
----------- -----------
Net cash used in operating activities..... (2,480,020) (868,494)
Cash flows from investing activities:
Purchase of property and equipment................ (594,085) (5,321)
----------- -----------
Net cash used in investing activities..... (594,085) (5,321)
Cash flows from financing activities:
Capital contributed by stockholders............... 6,301 101
Proceeds from equipment loan...................... 218,600 --
Proceeds from convertible notes................... 2,708,583 --
Proceeds from issuance of common stock............ 74 68,986
Repurchase of treasury stock...................... (72,907) (1,850)
Stock subscription receivable..................... -- (4,083)
Proceeds from related parties..................... -- 253,355
Proceeds from issuance of preferred stock......... 825,708 --
----------- -----------
Net cash flows provided by financing
activities.............................. 3,686,359 316,509
----------- -----------
Net increase in cash and cash
equivalents............................. 612,254 (557,306)
Cash and cash equivalents, beginning of period...... -- 612,254
----------- -----------
Cash and cash equivalents, end of period............ $ 612,254 $ 54,948
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for--
Interest.................................. $ 193 $ --
=========== ===========
Income taxes.............................. $ -- $ --
=========== ===========
Supplemental disclosure of noncash activities:
Marketable securities received as payment for
issuance of preferred stock.................... $ 250,000 $ --
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-52
<PAGE> 144
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
On April 21, 1999, GiftSpot.com, Inc. ("GiftSpot" or the "Company") was
incorporated in the state of Delaware. The Company engaged in the business of
sourcing, marketing and distributing branded gift certificates to the public,
primarily through its Internet website. The GiftSpot website provides consumers
and corporate buyers with a one-stop shop for both physical and on-line gift
certificates from a variety of retail and service merchants throughout the
United States.
Activities from the date of Inception (April 21, 1999) through December 31,
1999 have been directed primarily to developing the enablement technology. The
Company operates in the online retail industry, which is new, rapidly evolving
and intensely competitive. The Company competes primarily with traditional
retail and service merchants and other entities that maintain similar commercial
web sites.
Effective April 17, 2000, the Company merged with a wholly owned subsidiary
of GiftCertificates.com, Inc., in a business combination treated as a purchase
(Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's source of revenues are from the sale of digital and physical
gift certificates from various retail and service merchants over the Internet
website. Revenue from the sales of physical gift certificates includes the face
value of the gift certificates sold, earned fees and commissions. The Company
recognizes revenue when these gift certificates are shipped to customers.
Revenue from the sales of online gift certificates includes only the earned fees
and commissions, as the Company never takes title to the online gift certificate
inventory. The Company recognizes revenues on the online gift certificates when
the merchant notifies the Company of customer use. Deferred revenue is recorded
for unused online gift certificates.
COST OF REVENUES
Cost of revenues includes the cost of the physical gift certificates, as
well as related shipping and handling costs and credit card fees.
F-53
<PAGE> 145
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided for by
the straight-line method for financial statement reporting and accelerated
methods for income tax return purposes, over the estimated useful lives of 3 to
5 years.
At December 31, 1999 and March 31, 2000, property and equipment consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
<S> <C> <C>
Computers and equipment................................ $524,150 $516,136
Furniture and fixtures................................. 69,935 83,270
-------- --------
Total property and equipment................. 594,085 599,406
Less--Accumulated depreciation and amortization........ (95,000) (143,000)
-------- --------
$499,085 $456,406
======== ========
</TABLE>
WEBSITE DEVELOPMENT COSTS
Website development costs consist of amounts paid to consultants to develop
the website and systems infrastructure for tracking gift certificates, customer
orders and business and merchant promotional programs and for fraud prevention.
For the period from Inception (April 21, 1999) to December 31, 1999, all web
site and software development costs have been expensed as incurred, in
accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the costs of computer software originally developed or
obtained for internal-use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use.
In accordance with this policy, the Company expensed all costs incurred in
the preliminary project stage for software developed for internal use. All
external direct costs of materials and services consumed in developing or
obtaining internal-use computer software, payroll and payroll-related costs for
employees who are directly associated with and who devote time to the
internal-use computer software project to the extent of the time spent directly
on the project and interest costs incurred when developing computer software
once the development has reached the application development stage would be
capitalized, however, such costs were not material and were expensed. All costs
for upgrades, maintenance and enhancements that do not result in additional
functionality are expensed as incurred.
The Company has expensed all costs for the quarter ended March 31, 2000, as
only maintenance and operational costs relating to its website and previously
developed internal software have been incurred.
F-54
<PAGE> 146
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
MARKETABLE SECURITIES
The Company's marketable securities consist of publicly traded equity
instruments, which are classified as available-for-sale and are reported at fair
value. Unrealized gains and losses are reported, net of taxes, as a component of
stockholders' equity within accumulated other comprehensive income. No realized
gains or losses were incurred during the period from Inception (April 21, 1999)
to December 31, 1999 and the three months ended March 31, 2000.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of their carrying values has occurred as of December 31, 1999
and the three months ended March 31, 2000.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in the
period that the tax change occurs.
ADVERTISING AND PROMOTIONAL EXPENSE
Advertising costs are expensed as incurred and consist of the costs to
develop website and print advertisements. Advertising expenses are included in
marketing and sales expense in the accompanying statements of operations.
Advertising expense for the period from Inception (April 21, 1999) to December
31, 1999 was $689,460. No advertising expenses were incurred during the three
months ended March 31, 2000.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only
F-55
<PAGE> 147
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," which
allows entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock options as if the fair value
based method accounting in SFAS No. 123 had been applied to these transactions.
The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings per Share." In accordance with SFAS No.
128, basic loss per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is calculated by dividing income available to
common shareholders by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares, which
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the Treasury Stock method). All common equivalent
shares are excluded from the calculation of diluted loss per share, as the
effect of their inclusion would be antidilutive.
The following is the reconciliation of net loss per share:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(APRIL 21, 1999) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1999 2000
(UNAUDITED)
<S> <C> <C>
Numerator:
Loss available to common shareholders........... $(4,045,494) $(1,075,237)
=========== ===========
Denominator:
Weighted average shares outstanding--basic......
Effective exercise of dilutive options and
warrants..................................... -- --
----------- -----------
Weighted average shares
outstanding--diluted................. 6,300,750 6,305,077
=========== ===========
</TABLE>
CONCENTRATIONS OF RISK
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash, accounts payable and accrued
liabilities. The carrying amounts of these instruments approximate fair value.
F-56
<PAGE> 148
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
The Company maintains cash with a domestic financial institution. From time
to time, the Company's cash balances with this financial institution may exceed
Federal Deposit Insurance Corporation insurance limits.
The Company's customers are primarily concentrated in the United States.
The Company performs ongoing credit card authorizations before product is
shipped to reduce the risk of fraudulent credit card use.
COMPREHENSIVE INCOME
During 1999, the Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. The adoption of this standard has had no impact on the
Company's financial statements. Accordingly, the Company's comprehensive net
loss is equal to its net loss for the period from Inception (April 21, 1999) to
December 31, 1999 and the three months ended March 31, 1999 and 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 (as
amended by SFAS No. 137) is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not enter into derivative
instruments or engage in hedging activities as defined in SFAS No. 133. As such,
management has determined that the adoption of this standard will have no impact
on the Company's financial statements.
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
No. 101 expresses the views of the SEC staff in applying generally accepted
accounting principals to certain revenue recognition issues. The Company has
concluded that the implementation of this SAB will not have a material impact on
its financial position or its results of operations.
During March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which clarifies the
application of APB Opinion No. 25 regarding (a) the definition of an employee
for purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Interpretation No. 44 is effective on July 1,
2000. Certain events, as defined by Interpretation No. 44, may require earlier
consideration if they occurred after December 15, 1998, or January 12, 2000,
depending on the event, although no financial statement effect would be
recognized until July 1, 2000. The effects of applying Interpretation No. 44 are
recognized prospectively. Management
F-57
<PAGE> 149
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
has reviewed its stock compensation events and determined that none qualify as
those covered by Interpretation No. 44 that would require early consideration.
3. INCOME TAXES
Deferred taxes are primarily related to timing differences associated with
the Company's net operating loss carryforwards. The net deferred tax assets are
offset by a full valuation allowance. At December 31, 1999, the Company has
available at December 31, 1999, unused operating loss carryforward of
approximately $5 million, which is available to reduce its future taxable income
and expires in 2019.
4. COMMITMENTS
The Company has entered into an operating lease for certain office space
and parking which expires in 2004. Rental expense under these leases totaled
$131,418 in 1999. Future minimum lease payments under these operating leases
expiring subsequent to December 31, 1999, are:
<TABLE>
<S> <C>
Fiscal year ending:
2000....................................... 202,744
2001....................................... 208,340
2002....................................... 214,100
2003....................................... 220,052
2004....................................... 74,020
--------
$919,256
========
</TABLE>
5. LONG-TERM DEBT
Long-term debt as of December 31, 1999, is comprised of the following:
<TABLE>
<S> <C>
Convertible notes(a)............................... $2,708,583
Loan and security agreement(b)..................... 218,600
----------
2,927,183
Less--current portion.............................. (87,440)
----------
Long-term debt--non-current portion................ $2,839,743
==========
</TABLE>
-------------------------
(a) During 1999, the Company entered into Convertible Note and Warrant Purchase
Agreements with various third parties (the "Convertible Notes"). The
Convertible Notes accrue interest at 5% per year, compounded annually, and
is due, including accrued and unpaid interest, on December 31, 2000.
F-58
<PAGE> 150
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
On December 31, 2000, the principal and interest of the Convertible Notes
may be converted, at the option of the holders, into shares of common stock
of the Company. At the option of the Company, the Convertible Notes may be
converted into shares of an alternate equity instrument issued subject to a
private equity funding of at least $5 million (including conversion of the
principal and accrued interest of the Convertible Notes).
In conjunction with the Convertible Notes, the Company is obligated, under
circumstances defined in the Convertible Note and Warrant Purchase
Agreements, to issue warrants to the holders of the Convertible Notes to
purchase shares of an alternate equity instrument issued subject to a
private equity funding, as described above. As of March 31, 2000, no
warrants had been issued pursuant to this obligation.
(b) On September 22, 1999, the Company entered into a Loan and Security
Agreement with Imperial Bank (the "Imperial Loan"). The Imperial Loan
provides for up to $350,000 committed revolving loan to cover certain
equipment advances, up to $150,000 in letters of credit and other advances.
Interest accrues at prime plus 1% (9.5% and 10.0% at December 31,1999 and
March 31, 2000, respectively) and is payable, with interest in 30 equal
monthly installments commencing in the month subsequent to each advance. No
payments had been made on the outstanding principal balance of $218,600 as
of March 31, 2000.
In conjunction with the Imperial Loan, the Company issued to Imperial Bank a
warrant to purchase 7,000 shares of common stock of the Company at an
exercise price of $0.25 per share. The warrant could also be exercised for
shares of an alternate equity instrument issued subject to a venture capital
group funding of at least $1 million. The warrant is fully vested as of
March 1, 2000 and has an immaterial fair value.
6. STOCKHOLDERS' EQUITY
The Company's Board of Directors is authorized to issue up to 20,000,000
shares of common stock and 10,000,000 shares of preferred stock, in one or more
series, with such distinction, designations, or title as may be fixed by the
Board of Directors.
COMMON STOCK
On April 21,1999 the Company issued 4,095,000 of common stock to the
founders. During fiscal year 1999, the Company purchased 819,000 of its treasury
stock. In the first quarter of 2000, the Company issued 27,122 of common stock
for services rendered. In addition, the Company purchased 1,850,000 of treasury
stock on March 24, 2000.
CONVERTIBLE PREFERRED STOCK
On December 14, 1999, the Company entered into the Series A Preferred Stock
Purchase Agreement (the "Series A Agreement") with ShopNow.com, Inc.
("ShopNow"), and the holders of the Convertible Notes, whereby it authorized the
F-59
<PAGE> 151
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
issuance of up to 3,531,942 shares of Series A Preferred Stock ("Series A").
Pursuant to the Series A Agreement, ShopNow agreed to purchase up to 1,573,426
shares of Series A at a purchase price of $1.43 per share and the Company
reserved 1,958,516 shares of Series A for issuance to the holders of the
Convertible Notes upon conversion of the Convertible Notes at a conversion price
of $1.43 per share. During 1999, the Company issued 786,713 shares of Series A
to ShopNow, of which payment of $250,000 of the purchase price was made in
shares of ShopNow common stock, with a fair market value of $14.10 per share on
the date of issuance. These shares are included in marketable securities in the
accompanying balance sheets. No other shares of Series A have been issued to
ShopNow and none of the Convertible Notes have been converted to shares of
Series A.
The Series A accrues dividends at $0.14 per share per year, payable
quarterly, when, as and if declared by the Board of Directors. The Series A has
liquidation preference of at least $1.43 per share and up to $3.575 over the
common stock. The liquidation preference is activated by a change in control, as
defined in the Series A Agreement. The Series A is also convertible at any time,
at the option of the holder, at $1.43 per share of Series A, as adjusted for
certain dilutive issuances, splits and combinations, as defined in the Series A
Agreement, for shares of common stock of the Company. The Series A is
automatically converted into shares of common stock of the Company upon an
initial public offering of the common stock of the Company with net proceeds of
at least $15 million and a valuation of at least $4.29 per share.
STOCK OPTION PLAN
In 1999, the Company adopted the 1999 Stock Option Plan ("1999 Plan")
pursuant to which, an aggregate of 700,000 shares of common stock was reserved
for issuance to directors, officers, employees and consultants of the Company.
The 1999 Plan provides for awards of incentive stock options and nonqualified
stock options.
The 1999 Plan is administered by the Board of Directors, which has the sole
discretion to select employees, officers and consultants to whom awards are
made, to determine the nature and amounts of such awards and to interpret,
construe and implement the 1999 Plan.
F-60
<PAGE> 152
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
Stock option activity through March 31, 2000, is as follows:
<TABLE>
<CAPTION>
NON-QUALIFIED
INCENTIVE STOCK OPTIONS STOCK OPTIONS
----------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE
GRANTED PRICE GRANTED PRICE
<S> <C> <C> <C> <C>
Outstanding, Inception
(April 21, 1999).................. -- $ -- -- $ --
Granted........................... 1,058,250 0.17 80,000 0.20
Exercised......................... --
Forfeited......................... (10,000) (0.20)
--------- ------ ------- ------
Outstanding, December 31, 1999...... 1,058,250 0.17 70,000 0.20
Granted........................... 259,500 0.35 -- --
Exercised......................... (26,040) (0.18) (29,000) (0.32)
Forfeited......................... (94,595) (0.18) -- --
--------- ------ ------- ------
Outstanding, March 31, 2000......... 1,197,115 $ 0.21 41,000 $ 0.15
========= ------ ======= ------
Exercisable, March 31, 2000......... 187,627 $ 0.17 24,166 $ 0.12
========= ------ ======= ------
</TABLE>
The weighted average fair value of options granted during the period from
Inception (April 21, 1999) through December 31, 1999, was $0.17.
Had compensation for the 1999 Plan been determined consistent with the
provisions of SFAS No. 123, the effect on the Company's net loss and basic and
diluted loss per share would have been changed to the following pro forma
amounts recorded for the period from Inception (April 21, 1999) through December
31, 1999:
<TABLE>
<S> <C>
Net loss, as reported............................. $(4,045,494)
Net loss, pro forma............................... (4,048,190)
Basic and diluted loss per share, as reported..... (0.64)
Basic and diluted loss per share, pro forma....... (0.64)
</TABLE>
The fair market value of each option grant has been estimated on the date
of grant using the Black-Scholes option pricing model based upon expected option
lives of 4 years; risk-free interest rates of 6.0%; expected volatility of 0%
and a dividend yield of 0%.
7. SUBSEQUENT EVENT
Effective April 17, 2000, the Company merged with a wholly owned subsidiary
of GiftCertificates.com, Inc., with the Company surviving as a new wholly owned
subsidiary of GiftCertificates.com, Inc.
F-61
<PAGE> 153
GIFTSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
This transaction was accounted for by GiftCertificates under the purchase
method of accounting and resulted in GiftCertificates recording approximately
$8.0 million of cost in excess of net assets acquired. In conjunction with this
stock-for-stock transaction, GiftCertificates acquired all issued and
outstanding preferred and common stock of the Company from the GiftSpot
shareholders in exchange for an aggregate 4,810,698 shares of common stock of
GiftCertificates. Outstanding warrants, incentive stock options and nonqualified
options were converted to warrants and options to purchase an aggregate of
1,589,299 shares of common stock of GiftCertificates.
F-62
<PAGE> 154
GIFTCERTIFICATES.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND FOR THE YEAR ENDED DECEMBER 31, 1999
F-63
<PAGE> 155
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
OF GIFTCERTIFICATES.COM, INC.
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
ACQUISITION PRO FORMA FOR OFFERING
GIFTCERTIFICATES.COM GIFTSPOT.COM ADJUSTMENTS ACQUISITION ADJUSTMENTS PRO FORMA
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents......... $ 101 $ 55 $ $ 156
Marketable securities............. -- 259 259
Accounts receivable............... 2,048 -- 2,048
Inventory......................... 2,765 19 2,784
Prepaid expenses.................. 753 27 780
Other current assets.............. 155 0 155
-------- ------- ------- -------- -------- --------
Total current assets....... 5,822 360 6,182
Fixed assets, net................. 3,040 456 3,496
Capitalized software, net......... 975 -- 975
Goodwill, net..................... 32,234 -- 8,224(d) 40,458
Other assets...................... 851 48 899
-------- ------- ------- -------- -------- --------
Total assets............... $ 42,922 $ 864 $ 8,224 $ 52,010
======== ======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT EQUITY
Accounts payable.................. $ 2,847 $ 1,602 $ 250(g) $ 4,699
Accrued expenses.................. 1,423 70 1,493
Note payable...................... -- 363 363
Deferred revenue.................. 4,957 52 5,009
-------- ------- ------- -------- -------- --------
Total current
liabilities.............. 9,227 2,087 250 11,564
Long term liabilities............. 3,810 2,817 (2,817)(f) 3,810
Redeemable preferred stock........ 27,984 -- 27,984
Common stock...................... 49 6 (1)(e) 54
Preferred stock................... -- 1,076 (1,076)(e) --
Additional paid-in capital........ 35,384 69 7,471(e) 42,924
Other comprehensive income........ -- 9 (9)(e) 0
Deferred compensation............. (914) -- (914)
Treasury stock.................... -- (75) 75(e) --
Stock subscription receivable..... -- (4) 4(e) --
Accumulated deficit............... (32,618) (5,121) 4,327(e) (33,412)
-------- ------- ------- -------- -------- --------
Total stockholders'
(deficit) equity......... 1,901 (4,040) 10,791 8,652
-------- ------- ------- -------- -------- --------
Total liabilities and
stockholders' (deficit)
equity................... $ 42,922 $ 864 $ 8,224 $ 52,010
======== ======= ======= ======== ======== ========
</TABLE>
F-64
<PAGE> 156
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
OF GIFTCERTIFICATES.COM, INC.
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
GIFTPOINT.COM
TWO MONTHS ENDED
GIFTCERTIFICATES.COM FEBRUARY 29, 2000(A) GIFTSPOT.COM
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues, net(b)........ $ 4,804 $ 1,969 $ 2
Cost of revenues........ 4,691 1,970 9
------- ------- -------
Gross profit........ 113 (1) (7)
Marketing and sales
expenses.............. 5,697 679 220
Technology and systems
development
expenses.............. 407 115 580
General and
administrative
expenses.............. 2,603 436 184
Non-cash consulting and
compensation
expense............... 38 -- --
Amortization of
goodwill.............. 544 -- --
------- ------- -------
Loss from
operations........ (9,176) (1,231) (991)
Other income
(expense)............. 2 16 (85)
------- ------- -------
Net loss............ $(9,174) $(1,215) $(1,076)
======= ======= =======
Net loss available to
common stockholders... $(9,924) $(1,215) $(1,076)
======= ======= =======
Basic and diluted net
loss per share(h)..... $ (0.44)
=======
Weighted average common
shares outstanding
basic and
diluted(h)............ 22,375
=======
<CAPTION>
ACQUISITION PRO FORMA FOR OFFERING
ADJUSTMENTS ACQUISITIONS ADJUSTMENTS PRO FORMA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues, net(b)........ $ 6,775
Cost of revenues........ 6,670
------- --------
Gross profit........ 105
Marketing and sales
expenses.............. 6,596
Technology and systems
development
expenses.............. 1,102
General and
administrative
expenses.............. 3,223
Non-cash consulting and
compensation
expense............... 38
Amortization of
goodwill.............. 1,455(c) 1,999
------- --------
Loss from
operations........ (1,455) (12,853)
Other income
(expense)............. (794)(e) (861)
------- --------
Net loss............ $(2,249) $(13,714)
======= ========
Net loss available to
common stockholders... $(2,249) $(14,464)
======= ========
Basic and diluted net
loss per share(h)..... $ (0.28)
========
Weighted average common
shares outstanding
basic and
diluted(h)............ 52,494
========
</TABLE>
F-65
<PAGE> 157
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
OF GIFTCERTIFICATES.COM, INC.
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
GIFTSPOT.COM
PERIOD FROM
INCEPTION
(APRIL 21, 1999)
THROUGH
DECEMBER 31,
GIFTCERTIFICATES.COM GIFTPOINT.COM 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES, net(b).............. $ 9,905 $ 4,035 $ 1
COST OF REVENUES.............. 9,568 3,403 8
-------- ------- -------
Gross profit.......... 337 632 (7)
Marketing and sales
expenses.................. 12,927 4,524 1,871
Technology and systems
development expenses...... 1,039 327 1,478
General and administrative
expenses.................. 4,924 647 537
Non-cash consulting and
compensation expense...... 276 -- --
Amortization of goodwill.... -- -- --
-------- ------- -------
Loss from
operations.......... (18,829) (4,866) (3,893)
OTHER INCOME (EXPENSE)........ (340) 48 (152)
-------- ------- -------
Net loss.............. $(19,169) $(4,818) $(4,045)
======== ======= =======
Net loss available to common
stockholders.............. $(20,398) $(4,818) $(4,045)
======== ======= =======
Basic and diluted net loss
per share(h).............. $ (1.68)
========
Weighted average common
shares outstanding basic
and diluted(h)............ 12,110
========
<CAPTION>
PRO FORMA
ACQUISITION FOR OFFERING
ADJUSTMENTS ACQUISITIONS ADJUSTMENTS PRO FORMA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES, net(b).............. $ $ 13,941
COST OF REVENUES.............. 12,979
------- --------
Gross profit.......... 962
Marketing and sales
expenses.................. 19,322
Technology and systems
development expenses...... 2,844
General and administrative
expenses.................. 6,108
Non-cash consulting and
compensation expense...... 276
Amortization of goodwill.... 7,713(c) 7,713
------- --------
Loss from
operations.......... (7,713) (35,301)
OTHER INCOME (EXPENSE)........ (794)(e) (1,238)
------- --------
Net loss.............. $(8,507) $(36,539)
======= ========
Net loss available to common
stockholders.............. $(8,507) $(37,768)
======= ========
Basic and diluted net loss
per share(h).............. $ (0.74)
======== ========
Weighted average common
shares outstanding basic
and diluted(h)............ 51,379
======== ========
</TABLE>
F-66
<PAGE> 158
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS)
(a) Giftpoint.com, Inc. was acquired on March 6, 2000. The period from March 1
through March 6, 2000 would not have a material effect on the Unaudited Pro
Forma Consolidated Statement of Operations presented above.
(b) We do not recognize revenue on SuperCertificates sales until redemption.
Similarly, Giftpoint.com, Inc. did not recognize revenue on Giftpoint
Certificates sales until redemption. As a result, our pro forma cash
receipts would be greater than our pro forma revenues. The following table
recognizes cash receipts to net revenues on a pro forma basis:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
<S> <C> <C>
Cash receipts........................ $18,372 $ 7,420
SuperCertificates issued............. (3,002) (2,974)
Giftpoint Certificates issued........ (4,769) (1,222)
SuperCertificates redeemed........... 872 2,141
Giftpoint Certificates redeemed...... 2,468 1,410
------- -------
Revenues, net........................ $13,941 $ 6,775
======= =======
</TABLE>
(c) With respect to the Unaudited Pro Forma Consolidated Statement of Operations
of GiftCertificates.com, Inc. for the three months ended March 31, 2000, the
adjustments represent the amortization of the excess of the purchase price
over the net assets of Giftpoint.com, Inc. acquired for the period from
January 1 to February 29, 2000 which was $1,093 and the amortization of the
excess of the purchase price over the net assets of GiftSpot.com, Inc.
acquired for the three month period ended March 31, 2000, which was $362.
With respect to the Unaudited Pro Forma Consolidated Statement of Operations
of GiftCertificates.com, Inc. for the year ended December 31, 1999, the
adjustments represent the amortization of the excess of the purchase price
over the net assets of Giftpoint.com, Inc. acquired for the year ended
December 31, 1999 which was $6,313 and the amortization of the excess of the
purchase price over the net assets of GiftSpot.com, Inc. acquired for the
year ended December 31, 1999, which was $1,400.
(d) Represents the preliminary estimates of the excess purchase price over the
net assets acquired for the GiftSpot.com acquisition as follows:
<TABLE>
<S> <C>
Purchase price (including professional fees)......... $ 7,001
Net tangible assets acquired......................... (1,223)
-------
Excess of purchase price over net tangible assets
acquired........................................... $ 8,224
=======
</TABLE>
We believe that all significant assets and liabilities have been identified
and, accordingly, that the final determination of the allocation of
GiftSpot.com, Inc. purchase price should not vary materially from the
preliminary estimate. We anticipate finalizing the purchase price allocation
upon completing the preparation and review of the April 17, 2000 (acquisition
date) financial statements of GiftSpot.com, Inc.
F-67
<PAGE> 159
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- CONTINUED
(IN THOUSANDS)
The identifiable assets are being amortized over their estimated useful
lives. Intangible assets resulting from the excess of the purchase price over
the fair value of the net assets acquired are being amortized over a period of 5
years.
We are reviewing the carrying values assigned to the intangible assets to
determine whether later events or circumstances have occurred that indicate that
the balance of the intangible assets may be impaired. Our principal
considerations in determining the impairment of the intangible assets will
include the strategic benefit to us of the particular business as measured by
expected undiscounted future cash flows.
(e) Reflects the adjustments to stockholders' equity attributable to the
acquisition of GiftSpot.com as follows:
<TABLE>
<S> <C>
Common Stock:
Elimination of GiftSpot.com, Inc. common stock...... $ (6)
Issuance of common stock............................ $ 5
Preferred Stock:
Elimination of GiftSpot.com, Inc. preferred stock... $(1,076)
Additional paid-in capital:
Elimination of GiftSpot.com, Inc. additional paid-in
capital.......................................... $ (69)
Additional paid-in capital in connection with
issuance of common stock......................... $ 6,746
Amortization of debt discount created by fair value
of warrants issued immediately prior to
acquisition...................................... $ 794
Elimination of other comprehensive income of
GiftSpot.com, Inc................................... $ (9)
Elimination of GiftSpot.com, Inc. treasury stock...... $ 75
Elimination of stock-subscription receivable.......... $ 4
Retained earnings:
Elimination of GiftSpot.com, Inc. accumulated
deficit.......................................... $ 5,121
Amortization of debt discount created by fair value
of warrants issued immediately prior to
acquisition...................................... $ (794)
(f) Conversion of long-term debt to equity upon
acquisition....................................... $ 2,817
</TABLE>
(g) Reflects estimated professional fees incurred to complete the transaction
$250
(h) The basic and diluted share and per share information does not reflect the
reverse stock split anticipated to occur immediately prior to this offering.
F-68
<PAGE> 160
GIFTCERTIFICATES.COM, INC.
"MEET THE MANAGEMENT" PRESENTATION
Prospective investors will be able to log on to a website maintained by
E*OFFERING Corp. at www.eoffering.com, where a prospectus is available for
review. Within designated sections of the prospectus, including the table of
contents and the Underwriting Section of the prospectus, an embedded hyperlink
{click here for "Meet the Management" Presentation} will provide exclusive
access to the "Meet the Management" Presentation. This presentation highlights
selected information contained elsewhere in the prospectus. This presentation
does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the "Risk Factors" and our financial statements and notes to those
financial statements, before making an investment decision.
Visual 1: Disclaimer
Imagery: Company logo. Ribbon with Company logo at top of page.
Visual Text: The "Meet the Management" Presentation is part of our
prospectus. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before making
an investment decision.
Script: (Jonas Lee) The "Meet the Management" Presentation is part of
our prospectus. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before making
an investment decision.
Visual 2: Introduction
Imagery: See Description of the inside cover of the Registration
Statement for a description of the image located on the inside front cover of
the prospectus.
Script: (Jonas Lee) Welcome to the "Meet the Management" Presentation
for GiftCertificates.com. I'm Jonas Lee, President and CEO. I would like to
introduce Michael Stephenson, our Chief Financial Officer. We would like to talk
to you about GiftCertificates.com, a leading Internet marketplace for physical
and emailable gift certificates used for employee incentives, customer loyalty
programs, marketing promotions and consumer gifts.
Visual 3: Market Opportunity
Imagery: Company logo at the bottom of the page. Three bullets and one
footnote.
Visual Text: Title: Market Opportunity. Bullets: "According to
industry sources, the global market for corporate incentives, customer loyalty
programs and some elements of marketing promotions, was estimated to be $26
billion in 1999", "Over $18 billion in gift certificates and prepaid gift cards
were sold in the United States in 1998", "We estimate that consumer gift
spending in the U.S. in 1999 was approximately $125 billion and in 2000 will be
approximately $134 billion*". Footnote at bottom of page reads: "*Based on
statistics from the U.S. Department of Labor and the U.S. Census Bureau."
Script: (Jonas Lee) (see "Business -- Industry Background -- Market
Opportunity") Gift certificates are well-suited for sale through the Internet
since they do not require in-person physical inspection, experience low return
rates, do not spoil, do not go out of fashion and can be delivered via email.
Gift certificates are ideal products for corporate gift, incentive, loyalty and
promotions programs, because they provide the recipient with much of the choice
and flexibility of cash, while allowing the corporation to personalize and
tailor their programs. The effectiveness of many internally administered
corporate programs may be impaired by either the high cost of establishing an
appealing variety of vendor relationships or, alternatively, the limited ability
to provide diverse product offerings. As more businesses offer loyalty programs,
other businesses may be required to adopt similar
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programs to remain competitive. We believe that, other than cash, gift
certificates are the gift most highly valued by many recipients. Gift
certificate programs are perceived by many marketers as preferable to cash-based
incentive and other reward programs because recipients tend to associate gift
certificate incentives with the emotional and tangible qualities of the gift
item ultimately purchased. Individuals purchase gift certificates for a variety
of reasons, but primarily because they are a convenient gift to give and because
they allow the recipient to get exactly what they want. Over $18 billion in gift
certificates and prepaid gift cards were sold in the United States in 1998. We
estimate that consumer gift spending in the U.S. in 1999 was approximately $125
billion and in 2000 will be approximately $134 billion, based on statistics from
the U.S. Department of Labor and the U.S. Census Bureau. Gift certificates are
valuable products for merchants since their use drives traffic, may result in
incremental sales and creates cash float.
Visual 4: The GiftCertificates.com Solution
Imagery: Company logo at the bottom of the page. Three bullets in
middle of page.
Visual Text: Title: The GiftCertificates.com Solution. Bullets:
"Corporate clients", "Individuals", and "Merchants".
Script: (Jonas Lee) (see "Business -- The GiftCertificates.com
Solution"): We supply an array of products and services for corporate
incentives, loyalty and promotions programs and enable merchants to offer their
own gift certificates online without significant fixed costs. Our leading
Internet marketplace and technology and service offerings provide the following
benefits to our merchants, corporate clients, and individual consumers.
Visual 5: The GiftCertificates.com Solution (2)
Imagery: Company logo at the bottom of the page. Heading with three
bullets.
Visual Text: Title: The GiftCertificates.com Solution. Heading:
"Benefits to Corporate Clients:". Bullets: "Appealing choice and variety of
products for corporate programs", "More effective customer loyalty and
promotional programs", "Outsourced program tools and fulfillment".
Script: (Jonas Lee) (see "Business -- The GiftCertificates.com
Solution -- Benefits to Corporate Clients"): Benefits to corporate clients:
With over 600 brands and our SuperCertificate products, we provide
corporations with a broad selection of gifts that cross geographic and
demographic ranges. The SuperCertificate allows a corporation to avoid the
difficulty of selecting specific gifts that meet the needs of each recipient.
The SuperCertificate also saves the corporation the expense and difficulty of
developing relationships with large numbers of vendors.
Our products and services enable corporations to offer customer loyalty
programs and marketing promotions that facilitate customer retention and new
customer acquisition, without having to discount the corporation's own products
and services and potentially dilute the value of its brand. Our extensive
merchant network increases our appeal to individual consumers, and, as a result,
makes our products and services more valuable to corporate clients seeking to
reach large numbers of current and potential customers.
We provide ready to use tools to corporations for their program
management and fulfillment. Our choice of products, technological capabilities
and commitment to customer service allow corporations to administer their
programs through us at a lower cost and with greater convenience, efficiency and
quality than if they were to undertake these functions themselves.
Visual 6: The GiftCertificates.com Solution (4)
Imagery: Company logo at the bottom of the page. Heading with three
bullets.
Visual Text: Title: The GiftCertificates.com Solution. Heading:
"Benefits to Individuals:". Bullets: "One-stop shopping with quality leading
brands", "Convenience and timely fulfillment services", "Superior shopping
experience and customer service".
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<PAGE> 162
Script: (Jonas Lee) (see "Business -- The GiftCertificates.com Solution
-- Benefits to Individuals"): Benefits to individuals:
Consumers can purchase physical and emailable gift certificates for a
broad range of products and services to be redeemed at many of the nation's
leading retailers, hotels, Internet companies, spas, theaters and restaurants.
We also offer our own SuperCertificates which recipients can redeem for the gift
certificates of nearly all of the merchants on our website.
Purchasers of our products can easily buy and send gift certificates
online without any need for in-person physical inspection. If a purchaser opts
for electronic delivery of a gift certificate, fulfillment is made by e-mail. We
also provide a choice of physical delivery channels, including overnight or
regular mail delivery.
We provide toll-free telephone and e-mail support 24 hours a day seven
days a week from well-trained customer service representatives. In addition, our
primary website provides our customers with a number of additional services
designed to enhance their overall shopping experience, including gift
recommendations, geographical search capability, merchant partner location,
delivery information and a range of packaging and shipping options. We also
maintain our own frequent buyer reward program.
Visual 7: The GiftCertificates.com Solution (3)
Imagery: Company logo at the bottom of the page. Heading with
three bullets.
Visual Text: Title: The GiftCertificates.com Solution. Heading:
"Benefits to Merchants:". Bullets: "New marketing and distribution channel for
gift certificate sales", "Turnkey solutions for private label gift certificates"
Script: (Jonas Lee) (see "Business -- The GiftCertificates.com
Solution -- Benefits to Merchants"): Benefits to merchants:
Participation in our marketplace provides our merchant partners with a
new marketing and distribution channel for the sale of physical and emailable
gift certificates to large numbers of corporate clients and individual
consumers. Gift certificates are particularly attractive products for merchants
to sell given the significant float and incremental sales they may generate.
We provide enabling technology and fulfillment services to merchants
that allow them to outsource their physical and emailable gift certificate
fulfillment requirements.
Visual 8: Business Strategy
Imagery: Company logo at the bottom of page. Pyramid of blocks
with text inside and logo at top.
Visual Text: Title: Business Strategy. Inside blocks: "Pursue
higher margin and float opportunities", "Build our network and drive sales",
"Enhance brand recognition", "Invest in technology", "Expand globally".
Script: (Jonas Lee) (see "Business -- Business Strategy"): In order
to strengthen our position as a leading Internet marketplace for gift
certificates and provider of related technologies and services, we intend to
pursue the following strategies:
We continue to add new products and services for our corporate clients,
merchant clients and consumers with a particular focus on those that earn higher
margins and create additional float for us. Our merchant enablement business
offers a significant opportunity to expand higher margin products and services.
In addition, we are developing variants of our SuperCertificate product such as
The Dining SuperCertificate, The Wedding SuperCertificate, The Entertainment
SuperCertificate and The Fashion SuperCertificate, that will promote higher
margin products and provide us with additional cash float.
By increasing our merchant network we enhance our appeal to individual
customers, which in turn makes our products and services more valuable to
corporate clients offering employee incentives, customer loyalty
A-3
<PAGE> 163
programs or marketing promotions. Larger numbers of customers and increased
sales will help us attract new merchant partners. This virtuous cycle provides a
lower cost method of new customer acquisition. In addition, an increasing number
of merchants enhances the range of redemption opportunities for our own branded
certificates and, as a result, makes them more desirable products.
We believe strong brand equity, recognition and visibility is important
in building our business. We continue to build our brand through a broad-based
marketing and advertising campaign utilizing both online and offline channels.
We continue to invest in technology in order to enhance our product and
service offerings, enablement capabilities for our merchants, program management
tools for our corporate clients, the overall experience for our customers and
our economies of scale. We recently acquired GiftSpot.com, Inc. primarily to
expand our merchant enablement technology offerings.
We are planning a focused international effort by targeting countries
with high Internet, credit card and gift certificate usage. We believe there may
be significant first mover advantages in these countries and have already
obtained domain names for this purpose.
Visual 9: Acquisitions
Imagery: Company logo at the bottom of page. Three puzzle pieces with
text inside.
Visual Text: Title: Acquisitions. Inside puzzle pieces:
"GiftCertificates.com", "GiftSpot.com", "Giftpoint.com".
Script: (Jonas Lee) (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisitions"). On March 6,
2000, we acquired Giftpoint.com, Inc., an Internet marketer and seller of gift
certificates and other related services that focused on corporate sales.
On April 17, 2000, we acquired GiftSpot.com, Inc., an online
gift-giving company and provider of private label electronic gift certificate
and promotional technology services for merchants. By completing this
acquisition we have accelerated the timeframe in which we can provide electronic
gift certificate enabling services to merchants.
Visual 10: Products and Services
Imagery: Company logo at the bottom of page. Three columns and five
rows of boxes with text.
Visual Text: Title: Products and Services. Inside boxes:
"Apparel & Accessories", "Beauty and Spa", "Books, CD's & Videos", "Children",
"Digital (email delivery)", "Dining", "Entertainment", "Home", "Hotels &
Travel", "Jewelry & China", "Luxury", "Specialty", "Sports Plus", "Teen".
Script: (Jonas Lee) (see "Business -- Products and Services") Our site
at www.GiftCertificates.com organizes our merchant brands into 14 main
categories. We also provide our own gift certificate product, the
SuperCertificate, in both emailable and physical form. SuperCertificates may be
redeemed on our website for the recipient's choice of gift certificates from
nearly all of our merchant partners.
Visual 11: Products and Services (2)
Imagery: Company logo at the bottom of page. Four bullets with text.
Visual Text: Title: Products and Services. Bullets:
"SuperCertificates", "Corporate Incentive, Loyalty and Promotional Gift
Certificate Programs", "Enabling Technologies and Related Services", "Other
Products and Services".
Script: (Jonas Lee) (see "Business -- Products and Services") The
SuperCertificate enables corporations to provide a wide range of choices in
their promotions, rewards and incentives programs, thereby appealing to a
significantly diverse audience. In addition, many individual consumers purchase
SuperCertificates when they are
A-4
<PAGE> 164
looking for a highly flexible gift. New SuperCertificate products currently in
development include The Dining SuperCertificate, The Wedding SuperCertificate
and The Entertainment SuperCertificate. These products will promote tailored
subsets of our merchant brands.
For over 1,000 corporate clients, we provide a variety of gift
certificate related services in connection with their incentive, customer
loyalty and marketing programs, including custom design, reporting, advisory,
fulfillment and other services. We are developing several tools that will
greatly assist corporate award and incentive program managers with program
administration. For example, we are developing a reporting tool that program
managers can use to track what gifts were given, when they were given, and to
whom they were given, via a simple Web interface. Other more sophisticated tools
for tracking and controlling discretionary business gift accounts are under
development. We seek to expand our corporate relationships through the provision
of additional products and services.
While gift certificates are an economically attractive product for
merchants, they are difficult to administer and fulfill. We provide enabling
technology and related services so that merchants can establish gift certificate
programs without the expense and difficulty of developing these capabilities
independently. By making a relatively simple connection to our systems, our
merchant clients can quickly acquire the capability to offer emailable gift
certificates to their customers without significant up-front costs. To offer
physical gift certificates, merchants need to have the operational capability of
accepting orders over a website, screening for internet fraud, managing a
customer service center, and billing and fulfilling individual orders. Many
merchants do not have this capability, but can acquire the functionality by
outsourcing their gift certificate operations to us via a link from their
website. Through our acquisition of GiftSpot.com, Inc. in April 2000, we
acquired the technology and related administrative tools to enable merchants to
sell and redeem private label emailable gift certificates through their own
websites, powered by our servers.
We provide various ancillary products, such as specialty greeting
cards, priority shipping, custom boxes and other seasonal and holiday
promotions. We also promote our merchant brands with featured and suggested
merchant listings on our primary website.
Visual 12: Competition
Imagery: Company logo at the bottom of page. Four bullets with text.
Visual Text: Title: Competition. Bullets: "Traditional sellers
and online gift certificate and technology providers", "Corporate program
providers and alternatives", "Providers of alternative products", "Other
vendors".
Script: (Jonas Lee) (see "Business -- Competition") The market for
selling gift certificates is highly competitive. Since gift certificates are
currently all sold at face value, competition in the industry has been primarily
based on convenience, service and brand recognition. Our current competitors
include the following kinds of businesses: traditional sellers and online gift
certificate and technology providers, corporate program providers and
alternatives, providers of alternative products and other vendors.
And with that, I will turn it over to Michael Stephenson for an
overview of our financial results. Michael . . .
Visual 13: Financial Summary
Imagery: (See "Selected Financial Data") Statement of Operations and
Balance Sheet Data.
Visual Text: (See "Selected Financial Data") Statement of
Operations and Balance Sheet Data.
Script: (Michael Stephenson) (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations"): We primarily generate
revenues from the sale of two distinct types of gift certificate products:
Merchant-issued gift certificates, gift cards and similar products issued by our
merchant partners that are redeemable for their goods and/or services, and
SuperCertificates, a gift certificate to our website that can be exchanged for
the recipient's choice of a range of merchant issued gift certificates. We also
generate revenue from transaction and service fees and the sale of specialty
greeting cards, custom boxes and other ancillary products. The transaction and
service fees relating to our corporate programs consist of program management
fees and technical and creative fees. In addition, we generate revenues from
co-marketing promotional arrangements and distribution
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<PAGE> 165
partnerships. Our enablement fees are generated from the oversight and
management of merchants' gift certificate programs. The revenues generated as a
result of enablement services consist of transaction, installation, licensing
and monthly processing fees.
The time differential between the sale and redemption of
SuperCertificates generates cash float that we can use in our business, subject
to liquidity needs. In addition, we anticipate that some of our
SuperCertificates may never be redeemed. Although nonredemption provides
substantial float to support working capital, we may not be able to recognize
revenue on a substantial portion of nonredeemed SuperCertificates.
We have historically derived gross margin by purchasing branded gift
certificates and related products from our merchant partners at a discount and
then selling them to our customers at face value.
Revenues increased in 1999 to $9.9 million from $2.6 million in 1998.
In January 1999, we established our primary website that enables consumers to
easily select and purchase gift certificates, gift cards and gift checks over
the Internet, transitioning our company from a telemarketer of gift certificates
to an e-commerce provider of branded gift certificates and related products and
services. We also expanded the number of merchants represented on our website
thereby increasing consumer selection. We increased brand awareness through an
increase in marketing and advertising expenditure during the fourth quarter of
1999.
Cost of revenues increased to $9.6 million, or 96.6% of net revenues,
in 1999 from $2.4 million, or 92.3% of net revenues, in 1998. This increase was
due to the development of promotional programs that were implemented in the
second half of 1999.
Marketing and sales expenses increased to $12.9 million, or 130.5% of
net revenues, in 1999 compared with $0.7 million, or 28.1% of net revenues, in
1998.
General and administrative expenses increased to $4.9 million, or 49.7%
of net revenues, in 1999 as compared to $0.9 million, or 32.9% of net revenues,
in 1998. The increase in general and administrative expenses was primarily due
to increased salaries and related expenses associated with the hiring of
additional personnel as well as increases in recruiting, professional fees and
travel expenditures.
JONAS . . .
VISUAL 14: END OF PRESENTATION
Imagery: See Description of the inside front cover in the Registration
Statement for a description of the image located on the inside front cover of
the prospectus.
Script: (Jonas Lee): We hope that this presentation was helpful in
understanding the business model of GiftCertificates.com and the strategy that
our management team intends to execute. We encourage you to refer back to the
prospectus for additional support and disclosure as well as to take a look at
the "Risk Factors" in detail. Again, thank you for your interest in
GiftCertificates.com.
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<PAGE> 166
================================================================================
--------------------------------------------------------------------------------
, 2000
[GiftCertificates.com, Inc. Logo]
SHARES OF COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
ROBERTSON STEPHENS
E*OFFERING
--------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in the prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained in this prospectus or the affairs of
GiftCertificates.com, Inc. have not changed since the date of this prospectus.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealer's obligation to deliver a prospectus when acting as an underwriter
and with respect to unsold allotments or subscriptions.
--------------------------------------------------------------------------------
<PAGE> 167
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by
GiftCertificates.com, Inc. (other than underwriting discounts and commissions)
expected to be incurred in connection with the issuance and distribution of the
securities described in this registration statement. All amounts are estimated
except for the Securities and Exchange Commission's registration fee, the Nasdaq
National Market fees and the National Association of Securities Dealers' filing
fee.
<TABLE>
<CAPTION>
Amount
<S> <C>
Registration fee under Securities Act............................................. $13,200.00
NASD filing fee................................................................... 5,500.00
The Nasdaq National Market fees................................................... *
Legal fees and expenses........................................................... *
Blue sky fees and expenses........................................................ *
Accounting fees and expenses...................................................... *
Printing expenses................................................................. *
Registrar and transfer agent fees................................................. *
Miscellaneous expenses............................................................ *
-----------------
Total............................................................................. $ *
=================
</TABLE>
------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our certificate of incorporation and bylaws provide that we will
indemnify our directors and officers to the fullest extent permitted by Delaware
law, as it now exists or may in the future be amended. Section 145 of the
Delaware General Corporation Law permits a corporation to indemnify any
director, officer, employee or agent of the corporation against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, if such person acted in good
faith and in a manner that he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, if he had no reason to believe his conduct was unlawful. In a
derivative action (meaning, one brought by or on behalf of the corporation),
indemnification may be made only for expenses, actually and reasonably incurred
by any director, officer, employee or agent in connection with the defense or
settlement of such an action or suit, if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged to be liable to the corporation, unless and
only to the extent that the court in which the action or suit was brought shall
determine that the defendant is fairly and reasonably entitled to indemnity for
such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, our certificate of
incorporation eliminates the liability of a director to the corporation or its
stockholders for monetary damages for such breach of fiduciary duty as a
director, except for liabilities arising (a) from any breach of the director's
duty of loyalty to the corporation or its stockholders; (b) from acts or
omissions not in good
II-1
<PAGE> 168
faith or that involve intentional misconduct or a knowing violation of law; (c)
under Section 174 of the DGCL; or (d) from any transaction from which the
director derived an improper personal benefit.
We have entered into indemnification agreements with our directors and
officers. These agreements contain provisions that may require us, among other
things, to indemnify these directors and officers against certain liabilities
that may arise because of their status or service as directors or officers.
We have obtained insurance policies insuring our directors and officers
and those of our subsidiaries against certain liabilities they may incur in
their capacity as directors and officers. Under these policies, the insurer, on
behalf of GiftCertificates.com, Inc., may also pay amounts for which
GiftCertificates.com, Inc. has granted indemnification to the directors or
officers.
Additionally, reference is made to the underwriting agreement filed as
Exhibit 1.1 to this registration statement, which provides for indemnification
by the underwriters of GiftCertificates.com, Inc., its directors and officers
who sign the registration statement and persons who control
GiftCertificates.com, Inc., under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years preceding the filing of this registration
statement, the Registrant has not sold securities without registration under the
Securities Act of 1933, except as described below.
In connection with our reorganization as a corporation on October 16,
1997, we issued an aggregate of 10,544,539 shares of our common stock to members
of J.P.L. Associates, L.L.C. for their respective interests in J.P.L.
Associates, L.L.C. These shares were offered and sold in reliance on Section
4(2) under the Securities Act.
On October 16, 1997, we issued 1,000,000 shares of Series A Preferred
Stock for aggregate consideration of $1,000,000. These shares were offered and
sold to Gotham Partners, L.P. and Gotham Partners III, L.P. which are each
accredited investors. These shares were offered and sold in reliance on Section
4(2) under the Securities Act.
On March 17, 1998, we issued 500,000 shares of Series C Preferred Stock
for aggregate consideration of $500,000. These shares were offered and sold to
an executive officer of our company and Gotham Partners, L.P. and Gotham
Partners III, L.P. These shares were offered and sold in reliance on Section
4(2) under the Securities Act.
On August 31, 1998, we issued 300,000 shares of Series D Preferred
Stock for aggregate consideration of $300,000. These shares were offered and
sold to Gotham Partners, L.P. and Gotham Partners III, L.P. which are each
accredited investors. These shares were offered and sold in reliance on Section
4(2) under the Securities Act.
On December 31, 1998, we issued 175,967 shares of our Series D
Preferred Stock for aggregate consideration of $175,967. These shares were
offered and sold to Jonas P. Lee, our Chief Executive Officer of our company.
These shares were offered and sold in reliance on Section 4(2) under the
Securities Act.
On January 15, 1999, in exchange for performance of services, we issued
200,000 shares of our common stock to our former legal counsel. These shares
were offered and sold in reliance on Section 4(2) under the Securities Act.
On January 22, 1999 we purchased a URL address from a corporation
controlled by one of our current executive officers for consideration including
953,600 shares of our common stock. The purchaser was an accredited investor.
These shares were offered and sold in reliance on Section 4(2) under the
Securities Act.
On January 28, 1999, we purchased a URL address from two corporations
for consideration including 500,000 shares of our common stock and $17,500 in
cash. These shares were offered and sold in reliance on Section 4(2) under the
Securities Act.
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<PAGE> 169
On April 13, 1999, we issued 73,760 shares of Series E Preferred Stock
for aggregate consideration of $73,760. These shares were offered and sold to
Jonas P. Lee, our Chief Executive Officer. These shares were offered and sold in
reliance on Rule 506 of Regulation D under the Securities Act.
On April 13, 1999, we issued 56,250 shares of Series F Preferred Stock
for aggregate consideration of $56,250. These shares were offered and sold to
Gotham Partners, L.P. and Gotham Partners III, L.P., each of which are
accredited investors. In conjunction with the issuance of the Series F Preferred
Stock, we issued warrants to purchase an aggregate of 1,500,000 shares of our
common stock at $0.001 per share to Gotham Partners, L.P. and Gotham Partners
III, L.P. These shares and warrants were offered and sold in reliance on Rule
506 of Regulation D under the Securities Act.
On April 14, 1999, we issued 777,500 shares of Series G Preferred Stock
for aggregate consideration of $777,500. These shares were offered and sold to
Gotham Partners, International, Ltd., and other third party investors all but
one of whom was an accredited investor. In conjunction with the issuance of the
Series G Preferred Stock, we issued warrants to purchase an aggregate of 43,600
shares of Series G Preferred Stock at $1.00 per share to our placement agents.
These shares were offered and sold in reliance on Rule 506 of Regulation D under
the Securities Act.
On May 12, 1999, we issued 300,000 shares of Series G Preferred Stock
for an aggregate consideration of $300,000 to accredited investors. These shares
were offered and sold in reliance on Regulation D under the Securities Act.
On June 4, 1999, we purchased consulting services from Rosetta
Technology Group in exchange for $1,250,000 and options to purchase 415,000
shares of our common stock at $0.10 per share. These options were offered and
sold in reliance on Section 4(2) under the Securities Act.
On July 13, 1999, we issued 6,664,569 shares of Series H Preferred
Stock for aggregate consideration of $6,664,569 (including the value of Series G
Preferred Stock exchanged for the Series H Preferred Stock. These shares were
offered and sold to Gotham Partners, L.P., Gotham Partners III, L.P., Gotham
International, Limited, Gotham Ventures I, L.L.C. and other third party
investors. All but one of these investors was an accredited investor. These
shares were offered and sold in reliance on Rule 506 of Regulation D under the
Securities Act.
On July 14, 1999, we issued 7,482 shares of Series E Preferred Stock,
1,498 shares of Series F Preferred Stock and 28,688 shares of Series G Preferred
Stock to a corporation owned by one of our current executive officers for an
aggregate consideration of $37,668 to satisfy a preemptive right. The purchaser
was an accredited investor. These shares were offered and sold in reliance on
Section 4(2) under the Securities Act.
On October 19, 1999, we entered into a demand promissory note with
Gotham, Gotham Partners III, L.P., Gotham Partners, L.P., Gotham Partners
International Limited, and Gotham Ventures I, L.L.C., in the amount of
$2,050,000. Each of these entities were accredited investors. The Gotham note
accrued interest at 12% per annum and is payable with accrued interest upon
demand subsequent to November 18, 1999. Pursuant to the demand note, on October
25, 1999 we issued warrants to the Gotham entities to purchase 1,063,657 shares
of our common stock at $0.385463 per share. These shares were offered and sold
in reliance on Section 4(2) under the Securities Act.
On October 19, 1999, we entered into a demand promissory note with TG
Investments, Ltd. in the amount of $2,950,000. The demand note accrues
interest at 12% per annum and is payable with accrued interest upon demand
subsequent on November 18, 1999. Pursuant to the demand note, on October 25,
1999 we issued warrants to TG Investments, Ltd. to purchase 1,530,629 shares of
our common stock at $0.385463 per share. TG Investments, Ltd. is an accredited
investor. These shares were offered and sold in reliance on Section 4(2) under
the Securities Act.
On November 9, 1999, we issued 18,485,167 shares of Series I Preferred
Stock for aggregate consideration of $18,485,167. These shares were offered and
sold to Gotham Partners, L.P., Gotham Partners III, L.P., Gotham Partners
International, Limited, Gotham Ventures II, L.L.C. and other third party
accredited investors. These shares were offered and sold in reliance on Rule 506
of Regulation D under the Securities Act.
On January 18, 2000, we issued warrants to purchase 110,000 shares of
common stock with an exercise price of $0.4100 per share as part of a business
relationship. Of the total warrants, 100,000 were offered and sold in reliance
on Rule 903
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under the Securities Act to persons who represented that they were non-U.S.
persons and 10,000 were offered and sold to the William Morris Agency in
reliance of Section 4(2) under the Securities Act.
On January 31, 2000, we issued warrants to purchase an aggregate of
246,697 shares of our common stock at $0.41 per share to Pentech Financial
Services, Inc. in connection with an equipment lease agreement. These warrants
were offered and sold in reliance on Section 4(2) under the Securities Act.
On February 15, 2000, we issued 250,000 shares of Series I Preferred
Stock for $250,000 to a corporation controlled by one of our current executive
officers. The purchaser was an accredited investor. These shares were issued in
reliance on Section 4(2) under the Securities Act.
On March 6, 2000, we issued 32,273,163 shares of common stock, options to
acquire 6,787,891 shares of common stock and warrants to acquire 340,738 shares
of common stock in connection with our acquisition of Giftpoint.com, Inc. to the
then current securityholders of Giftpoint.com, Inc. These shares and warrants
were offered and sold in reliance on Rule 506 of Regulation D under the
Securities Act. The options were issued in reliance on Section 701 under the
Securities Act.
On April 7, 2000, we entered into a bridge financing in which we issued
$16 million principal amount of debt to a group of lenders which included Gotham
Partners, L.P. and related entities, SCP Private Equity Partners, L.P.,
Transatlantic and other third party accredited investors. In connection with the
bridge financing, we issued warrants exercisable into a number of shares
expected to equal $3,200,000 worth of Series J Preferred Stock or our common
stock in the alternative that another equity securities offering precedes the
Series J Preferred Stock offering or neither the Series J Preferred Stock nor
any other equity security offering occurs before October 7, 2000. These warrants
were offered and sold in reliance on Rule 506 of Regulation D under the
Securities Act.
On April 17, 2000, we issued 4,810,698 shares of common stock options
to acquire 1,007,640 shares of common stock and warrants to acquire 581,662
shares of common stock in connection with our acquisition of GiftSpot.com, Inc.
to the then current stockholders of GiftSpot.com, Inc. These shares were offered
and sold in reliance on Rule 506 of Regulation D under the Securities Act.
In May and June 2000, we issued 43,757,844 shares of Series J Preferred
Stock for an aggregate consideration of $43,757,844 including the proceeds of
the bridge financing described above which was converted into Series J Preferred
Stock. These shares were offered and sold in reliance on Rule 506 of Regulation
D under the Securities Act.
As of June 1, 2000, there were 16,786,470 options outstanding under the
Company's option plan, other than the options issued in the acquisitions
described above. These shares were offered and sold in reliance on Section 4(2)
and Rule 701 under the Securities Act and were sold pursuant to a written
compensatory benefit plan to employees of the Registrant and its subsidiaries.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement
2.1* Agreement and Plan of Merger, dated February 24, 2000, by and among, GiftCertificates.com,
Inc., Merger Sub, GiftPoint.com, Inc. and certain stockholders thereof.
2.2* Agreement and Plan of Merger, dated April 4, 2000, by and among, GiftSpot.com, Inc., Spot
Acquisition Corp., GiftCertificates.com, Inc. and certain stockholders thereof.
3.1* Seventh Amended and Restated Certificate of Incorporation of the Registrant
3.2* Form of amended and restated certificate of incorporation of the Registrant to be effective
upon the closing of the offering
3.3* Bylaws of the Registrant
3.4* Form of amended and restated bylaws of the Registrant to be effective upon the closing of
the offering
</TABLE>
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<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
4.1* Form of common stock certificate
5.1* Opinion of Fried, Frank, Harris, Shriver & Jacobson
10.1* J.P.L. Associates, Inc. Equity Incentive Plan
10.2* Giftpoint.com, Inc. Incentive Stock Option Plan
10.3* GiftSpot.com, Inc. Amended and Restated 1999 Stock Option Plan
10.4* Form of J.P.L. Associates, Inc. Equity Incentive Plan Non-Qualified Stock Option Agreement
(restricted shares)
10.5* Form of J.P.L. Associates, Inc. Equity Incentive Plan Non-Qualified Stock Option Agreement
(unvested option)
10.6* Form of Giftpoint.com, Inc. Stock Option Agreement
10.7* Amended and Restated Registration Rights Agreement, dated as of May 4, 2000, among the
Registrant and investors party thereto.
10.8* Employment letter, dated January 11, 1999, between Max Bardon and the Registrant
21. List of Subsidiaries
23.1* Consent of Fried, Frank, Harris, Shriver & Jacobson
23.2 Consent of Arthur Andersen LLP
27.* Financial Data Schedule
</TABLE>
* To be filed in an amendment to this registration statement.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) It will provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
(2) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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<PAGE> 172
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on June 13, 2000.
GIFTCERTIFICATES.COM, INC.
By: /s/ Jonas P. Lee
--------------------------------------
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jonas P. Lee and Michael D. Stephenson,
and each of them, his true and lawful attorneys-in-fact and agents, each acting
alone, with full powers of substitution and resubstitution, for and in his name,
place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this registration statement, and any
registration statement related to the offering contemplated by this registration
statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as might or could be done in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, each
acting alone, or their substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jonas P. Lee Chief Executive Officer, President, Secretary June 13, 2000
--------------------------------- and Director (principal executive officer)
Jonas P. Lee
/s/ Michael D Stephenson Chief Financial Officer (principal financial June 13, 2000
--------------------------------- and accounting officer)
Michael D. Stephenson
</TABLE>
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<PAGE> 173
<TABLE>
<S> <C> <C>
/s/ William A. Ackman Director June 13, 2000
--------------------------------------
William A. Ackman
/s/ Howard Berk Director June 13, 2000
-----------------------------------
Howard Berk
/s/ David P. Berkowitz Director June 13, 2000
---------------------------------------
David P. Berkowitz
/s/ Richard C. Marcus Director June 13, 2000
--------------------------------------
Richard C. Marcus
/s/ Paul T. Morrison Director June 13, 2000
--------------------------------------
Paul T. Morrison
/s/ Douglas S. Nielsen Director June 13, 2000
-------------------------------------
Douglas S. Nielsen
/s/ Gary D. Offner Director June 13, 2000
-------------------------------------
Gary D. Offner
</TABLE>
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