1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File number 000-25835
MYPOINTS.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3255692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100 California Street,12th Flr, San Francisco, CA 94111
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (415) 676-3700
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting common stock held by non-affiliates of the
registrant (based on the closing price for the Common Stock on the Nasdaq
National Market on March 1, 2001) was approximately $37,000,000. As of March 1,
2001, 40,749,044 shares of Common Stock were outstanding.
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INDEX
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business..................................................................
2. Properties................................................................
3. Legal Proceedings.........................................................
4. Submission of Matters to a Vote of Security Holders.......................
PART II
5. Market for Registrant's Common Equity and Related Stock Matters...........
6. Selected Financial Data...................................................
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................
7A. Quantitative and Qualitative Disclosures about Market Risk................
8. Financial Statements and Supplementary Data...............................
9. Changes in and Disagreements with accountants on Accounting and Financial
Disclosure................................................................
PART III
10. Directors and Executive Officers of the Registrant........................
11. Executive Compensation....................................................
12. Security Ownership of Certain Beneficial Owners and Management............
13. Certain Relationships and Related Transactions............................
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........
Signatures................................................................
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PART I
ITEM 1. BUSINESS
All statements in this discussion that are not historical are
forward-looking statements within the meaning of Section 21e of the Securities
Exchange Act, including statements regarding the Company's "Expectations",
"Beliefs", "Hopes", "Intentions", "Strategies", or the like. Such statements are
based on management's current expectations and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. MyPoints, Inc. and
subsidiaries ("the Company") cautions investors that there can be no assurance
that actual results or business conditions will not differ materially from those
projected or suggested in such forward-looking statement as a result of various
factors, including, but not limited to, the risk factors discussed in this
Annual Report on Form 10-K. MyPoints.com expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in MyPoints.com's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statements are based.
MyPoints.com, Inc. is a leading provider of Internet direct marketing
services. Our database-driven direct marketing services, marketed under the
trademarks MyPoints(R) and Cybergold(R), offer direct marketers an approach to
internet advertising that integrates targeted email and web-based offers with
incentives to respond to those offers. Points earned in the MyPoints program may
be redeemed for a wide variety of products and services, such as gift
certificates, travel awards and prepaid phone cards. The Cybergold program
offers a cash-based reward system. Our approach to direct marketing provides
internet consumers with the opportunity to earn rewards by responding to direct
offers and by participating in other online and offline activities, and provides
businesses with an integrated set of online customer acquisition and retention
tools. In addition, we build and manage on a select basis co-branded and private
label customer loyalty programs for our loyalty partners.
According to Media Metrix, a leading web rating service, the MyPoints.com
website, www.mypoints.com, was the internet's second most popular shopping site
and the 30th most popular site overall in December 2000.
INDUSTRY BACKGROUND
Growth of the Internet and Electronic Commerce
The internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
Jupiter Communications, a leading technology research organization, estimates
that the number of U.S. households online will grow from approximately 45
million, or 45 percent of U.S. households, at the end of 1999 to approximately
80 million, or 74 percent, by the end of 2005.
The growing use of the web represents a significant opportunity for
businesses to utilize the internet for their marketing activities. According to
Jupiter, U.S. Internet advertising expenditures are expected to rise from
approximately $5.3 billion, or 5.3 percent of total advertising expenditures, in
2000, to more than $16 billion, or 8 percent of total expenditures, by the end
of 2005. The internet allows businesses to develop one-to-one relationships with
customers worldwide without making significant investments in traditional
infrastructure such as retail outlets, distribution networks and sales
personnel.
Online Direct Marketing
Businesses operating in the electronic commerce marketplace engage in
various forms of online direct marketing to generate sales of products or
services. Direct marketing is advertising that is intended to generate a
specific response or action from a targeted group of consumers. Examples of
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traditional forms of direct marketing include catalog mailings, magazine inserts
and telesales. Online direct marketing can take the form of email or web-based
promotional offers. Online direct marketing is particularly attractive because
advertisers can use tools that are not available in traditional media, such as
measurement of "click-through" rates and one-click response to email offers.
These tools give advertisers rapid feedback on their marketing campaigns. This
feedback can be used to tailor new messages and targeted offers.
According to Jupiter, online direct marketing programs offer other unique
advantages to businesses as well, including:
- an interactive advertising format that enables consumers to respond and
purchase online, without the need for telephone calls or store visits;
- high rates of response to direct marketing offers of between 5% and 15%,
compared to the click-through rates of traditional internet advertising
consisting of "banners" on web sites -- which have reportedly declined
from 2.0% to 0.5%;
- low cost per email message of between $0.01 and $0.25, compared to $1.00
and $2.00 per piece of direct marketing material sent via postal mail;
and
- short campaign life cycles of between 48 and 72 hours, compared to six
to eight weeks offline.
Because of these advantages, advertisers are committing relatively more
dollars to online direct marketing campaigns than to other forms of internet
advertising, such as brand marketing using banner advertisements. According to
Jupiter, email direct marketing, for example, will account for $3.1 billion, or
more than 19 percent, of online advertising expenditures by 2005, up from just
$300 million, or 6%, in 2000.
Market Opportunity
Because of continuing corporate interest in using the internet to acquire
customers, and because of the need for online businesses to find effective ways
to retain customers once they have attracted them, we believe there is a
significant opportunity for a company that can overcome the barriers to direct
marketing on the internet, and bring cost-effective, integrated direct marketing
solutions to the online market.
THE MYPOINTS.COM SOLUTION
MyPoints.com is a leading provider of internet direct marketing services.
In the internet marketing sector, we believe that we are one of the first to
combine targeted email and web-based direct marketing offers with a rewards
program, called the MyPoints(R) program. We provide our advertisers with online
customer acquisition channels and retention tools.
By building our direct marketing service around the MyPoints program, we
believe we have overcome key barriers to effective direct marketing on the
internet. These barriers include inundation (the amount of email people
receive), spam (unsolicited commercial email) and anonymity (the difficulty of
matching a user's email address to a demographic profile). Our members opt into
the MyPoints program and we award them points for giving us personal
information. We inform our members that we will use the information to tailor
email offers to their interests and that they can earn additional points by
responding to those offers.
Consumers benefit from our direct marketing programs through the ability to
earn and redeem points by interacting with our advertisers and loyalty partners
online. Advertisers benefit from the ability to acquire and retain customers on
the internet cost-effectively.
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Consumer Benefits
We have designed the MyPoints(R) program to offer the following benefits to
members:
- Relevant Offers. The depth of our member database enables us to
accurately target advertisements to our members. This helps us to direct
only the most relevant offers to each member and increases the
likelihood that the member will view and respond to a given message.
- Leading Brands. We increase the attractiveness of our program by
providing our members with direct marketing offers from name brands such
as BMG Entertainment, Mastercard, Doubleday, Microsoft and Sprint.
- Wide Variety of Rewards. We have designed our rewards programs to be
broad. Rather than focusing on one particular type of consumer award,
such as frequent flyer miles, we provide a range of redemption
opportunities, including electronic gift certificates from name-brand
retailers, travel awards, prepaid phone cards and credits in other
popular rewards programs.
- Easily Attainable Rewards. Many of our reward opportunities are at point
levels that are low enough to be earned in a matter of weeks by a
typical active member. These easily attainable rewards include $10 gift
certificates for major retailers such as Barnes & Noble and for
restaurant chains such as The Olive Garden. We offer our members a
variety of point earning opportunities that do not require a purchase,
as well as the ability to earn points for offline activities including
credit card and long distance telephone usage.
- Engaging Member Experience. We have designed our web site to be highly
personalized and easy-to-use, featuring user friendly purchase and
redemption capability. We provide personalized web and email interfaces
that feature the member's name and current point balance. Our members
also have the option to receive our email offers in rich-media format,
such as HTML.
- Privacy and Control. We assure members that we will not sell personal
information to third parties without permission. We also give members a
significant amount of control over their experience by allowing them to
screen out unwanted advertisement or award categories or opt out of the
MyPoints program.
Business Benefits
MyPoints.com provides our advertising clients, for whom we deliver direct
marketing messages, with a competitive advantage in the acquisition of new
customers and the retention of existing customers:
-Integrated Approach to Online Direct Marketing. We believe we are a
leading direct marketing provider that has integrated online direct
marketing with an online rewards program. This enables our advertisers
to increase consumer response rates by rewarding consumers who take
advantage of their targeted offers.
- Access to Our Proprietary Member Database. Our members provide us with
demographic, behavioral and transactional information. We use these
detailed member profiles to target offers, allowing our advertising
clients to reach the most relevant audience for their promotions and
increase consumer response rates.
- Detailed Real Time Reporting. Online direct marketing campaigns
generally begin to generate results in two or three days compared to
several weeks in offline campaigns. We employ sophisticated marketing
analytics and real-time reporting technology to evaluate the initial
results of a campaign and use that information to improve the overall
results of the current and future campaigns of our advertisers.
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- High Return on Advertising Investment. We offer direct marketers the
ability to target and reward consumers with online offers for
approximately one-tenth the cost of typical offline direct marketing
promotions. As a consequence of improved testing, targeting and
rewarding capabilities, we expect online direct marketing response rates
to be higher than other online and offline media. This combination of
lower delivery costs and higher response rates generates returns on
advertising investment that are higher than those achieved by competing
direct response media.
- Rewards-Based Shopping Channel. We offer web retailers the ability to
take advantage of our traffic and our customer loyalty infrastructure by
joining MyPoints Shopping!, our reward shopping channel. Through
MyPoints Shopping!, retailers can join a select group of web businesses
that offer points for every dollar our members spend on their sites.
Customized Loyalty Solutions
MyPoints.com also offers a variety of cost-effective and customized
solutions to select loyalty partners, including co-branded and private label
versions of our MyPoints rewards program and offline credit card rewards
programs through our MyPoints Offline Services unit.
STRATEGY
Our objective is to build the leading online consumer membership service
and to enable our advertising clients to more easily and effectively acquire and
retain customers. Key elements of our strategy to achieve this objective are to:
Expand Our Membership and Deepen Our Proprietary Database
We seek to continually expand the size of our membership base and deepen
our proprietary database to provide a large audience to our advertisers and the
ability to more accurately target messages to our members. To increase the size
of our membership base, we plan to use a variety of approaches, including online
advertising, referrals, and co-branded and private label loyalty partnerships.
We increase the depth of our database by rewarding consumers for joining our
MyPoints program and for completing detailed surveys from which we collect
demographic and behavioral data. We also increase the depth of our database by
tracking the transaction activity of our members in the MyPoints program as our
members respond to direct offers and make purchases through our rewarded
shopping channel, MyPoints Shopping!. We also intend to continue to use
third-party data sources to build more detailed profiles of our members.
Leverage Our Direct Marketing and Loyalty Program Expertise
We will continue to use our expertise in managing direct marketing and
loyalty membership programs on behalf of our advertising clients and loyalty
partners, to enable them to maximize response rates to their offers and increase
customer retention. We use our tools and technology to assist merchants in
targeting members for specific marketing promotions based on a variety of
targeting criteria, including demographic profile and past-purchase behavior. As
we implement campaigns, we expect to continue to accumulate additional data and
improve our targeting capabilities and technologies. Additionally, we will
continue to provide our advertisers with support services, such as the design
and production of rich-media email and web-based offers and the graphical
interfaces for our partners' loyalty programs.
Increase Awareness of Our Brand
We seek to increase awareness of the MyPoints(R) brand through consumer and
trade advertising campaigns and through partnerships with high-profile Internet
brands. We also extend our brand presence through our association with the
strong brands of our rewards providers and advertisers.
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Pursue "Clicks and Mortar" Opportunities
We define "clicks and mortar" as using online marketing activities to
motivate offline purchases. Forrester estimates that 70 million shoppers
researched products and services on the web in 1999, leading to more than $100
billion in offline purchases. By 2003, Forrester predicts that online purchases
will reach $108 billion, and that online marketing will influence approximately
$500 billion in purchases at offline stores.
We believe the challenge for many merchants in the years to come will be to
effectively establish consumer relationships online and then to attract
consumers to an offline store for the final purchase. We are implementing a
number of initiatives to build out a "clicks and mortar" business to take
advantage of this large market. On behalf of some of our advertisers, we give
our members the opportunity to sign up for services online, but to earn points
for their offline purchases. For example, through our relationship with Sprint,
we reward members to sign up for Sprint long distance through our web site and
for every time they use Sprint long distance, an offline activity.
Maintain Our Technology Leadership
The MyPoints Digital Loyalty Engine, which underlies our rewards program,
is a scalable software platform designed to serve the needs of our
members and business partners. The system currently supports more than ten
million member accounts. We plan to continue developing and improving our
technology to meet the needs of a growing online marketplace. We also intend to
continue to leverage the technology and experience of Experian, a leading
information services and database management company and the parent of our
largest stockholder.
Pursue Strategic Acquisitions and Alliances
We have made several acquisitions, license arrangements and strategic
alliances to build our membership base and improve our level of services. In our
principal acquisition transaction, we acquired internet and electronic commerce
assets and technologies to support web-based rewards programs from Enhanced
Response Technologies, Inc. and a company affiliated with Experian. This
acquisition enabled us to integrate email and web-based direct marketing and
loyalty programs under the MyPoints(R) name. Through this acquisition, we
believe we have become a key element of Experian's long-term internet investment
strategy. We intend to pursue additional strategic alliances and acquisitions
aggressively to increase membership, offer new products and services, access new
geographic markets and obtain proprietary technologies. In addition, in August
2000, we acquired Cybergold, Inc., a company offering a rewards program similar
to the MyPoints program that uses cash as an incentive to encourage consumers to
respond to offers and shop online. After detailed analysis of the relationship
between the Cybergold and MyPoints programs, we determined in December 2000 to
maintain Cybergold(R) as a separate marketing product line focused on cash as an
incentive. In January 2000, we acquired Alliance Development Group, Inc., a
company that operates offline customer rewards programs. In June 2000, we
renamed this company MyPoints Offline Services and continue to focus on serving
the needs of its offline customer base.
International Ventures
Currently, we have signed agreements with three international partners:
Sweden Post, the Swedish postal service, The Great Universal Stores P.L.C
("GUS"), and Dai Nippon Printing ("DNP"), a direct marketing service company and
a leading printing company. Our program with Sweden Post to license a localized
version of our BonusMail(R) program for the Swedish market has been operational
since May 1999. Sweden Post operates one of Europe's leading electronic commerce
web sites. We also have entered into international joint venture agreements with
GUS and DNP. MyPoints.com owns less than 20% of both of those ventures and is
primarily responsible for providing the technology for those ventures to operate
in their respective markets. We are currently being compensated under hosting
agreements with our joint venture partners. The hosting agreements currently in
place cover operation of the programs on the Company's servers located in the
United States.
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Our agreement with GUS to operate a version of the MyPoints program to
serve the European markets (MyPoints Europe) has been operational since
September 2000. Our program with DNP, to operate a version of the MyPoints
program to serve the Japanese market (MyPoint Japan) has been operational since
December 2000. We do not anticipate undertaking any new international
initiatives in 2001.
MYPOINTS.COM PRODUCTS AND SERVICES
The following table summarizes our products and services:
PRODUCT/SERVICE DESCRIPTION SELECTED CLIENTS
- ------------------------ ------------------------- ----------------
MYPOINTS(R)/BONUSMAIL(R) Direct marketing system; BMG
integrating targeted DoubleDay
Internet Direct Marketing Fisher Price
Services email and web- Intuit
based offers with OurHouse.com
incentive points to Sprint
respond to those offers
MYPOINTS(R)SHOPPING! Rewards-based shopping Avon
channel featuring select Hickory Farms
online retailers with whom JC Penney
MyPoints members can Lands End
earn points for dollars Orvis
spent
MYPOINTS OFFLINE SERVICES Online and offline private label Albertsons
loyalty programs focused on the The Kroger Co.
financial services sector Nextcard
(i.e., credit cards) Staples
LICENSING & HOSTING International initiatives to MyPoints Japan
license the MyPoints software MyPoints Europe
and/or host the international Sweden Post
programs locally.
The MyPoints and CyberGold programs serve two primary constituencies, our
members and our advertising clients. Members enroll to earn rewards by
responding to targeted offers on the web at the MyPoints and Cybergold web sites
and to targeted offers by email. Advertising clients use MyPoints and Cybergold
programs to reach a selected group of members with targeted offers and
incentives.
The MyPoints program begins with enrollment, where consumers receive
rewards points for providing key demographic and behavioral information. This
enrollment information is supplemented with transactional data gathered as our
members interact with our services. Once enrolled, MyPoints program members
receive points for responding to targeted, personalized offers. Members may also
earn points by filling out additional online surveys. After earning a sufficient
number of points, MyPoints' program members may redeem their points online for
products and services from our rewards partners, including electronic gift
certificates, travel awards, prepaid phone cards and points in other loyalty
programs. Members may also spend their points at participating catalog sites
where merchandise prices are denominated in points for MyPoints program members.
Our rewards providers benefit from the MyPoints program through increased
revenue and additional customers.
The list of web-based point-earning opportunities presented to the member
on the MyPoints program web site "earn page" depends on the profile of the
visiting member. Some of the information that determines the point-earning
opportunities
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directed to a member include geographic location, leisure time interests,
financial information and investment interests. The MyPoints program features a
sophisticated online account maintenance area, where members may change their
preferences and other personal information, access their earning history and
account balance, contact a member care representative, and redeem points.
We also place a high degree of importance on our commitment to maintaining
the security of member information. We are members of both TRUSTe and the Online
Better Business Bureau, and we adhere to the principles of these organizations.
The CyberGold program operates in a similar fashion, enabling consumers to
enroll, share personal information, and then take advantage of web- and
email-based offers to earn rewards in the form of cash.
MyPoints(R)Shopping!
In July 1999, we launched MyPoints Shopping!, a shopping service that
enables our MyPoints members to earn points by shopping online at a network of
internet merchants. We work with our retail partners to increase site traffic
and sales through our rewarded shopping channel, MyPoints Shopping!. The
following merchants are among those participating in the program: Avon, Hickory
Farms, JC Penney, Lands End and Orvis.
Customized Loyalty Programs
We also build and operate fully customized, private label point programs
based on the MyPoints program technology or the technology of our MyPoints
Offline Services group. We currently operate private label programs and/or
credit card rewards programs on behalf of Albertsons, The Kroger Co., NextCard,
Providian Financial, and Staples.
SALES AND MARKETING
At December 31, 2000, our advertising sales organization consisted of 53
employees located primarily in San Francisco, New York, Los Angeles and Chicago.
This organization is dedicated to developing and maintaining relationships with
leading advertisers and advertising agencies nationwide. We also seek to enter
into relationships with third-party advertising sales representatives to augment
the efforts of our direct sales personnel.
At December 31, 2000, our consumer marketing organization consisted of 36
employees in San Francisco and Chicago. This organization is dedicated to
acquiring members for our online direct marketing program and developing new
products, such as new membership clubs and other benefits, to market to our
members. The MyPoints.com consumer marketing group uses a variety of member
acquisition strategies, including referrals by current members, banner bars and
other online media placements, and affiliate programs. Affiliate programs
include relationships in which partners bring new members to MyPoints.com by
introducing the service to their own user bases in exchange for exposure of
their own services to the MyPoints program membership or a cash payment per
member.
ADVERTISING CUSTOMERS AND REWARDS PROVIDERS
Our ten largest advertising customers accounted for 25% of our revenues in
1999 and 25% of our revenues in 2000. No single advertising customer accounted
for more than 10% of revenues in 1999 or 2000.
Included in our ten largest rewards providers, based upon points redeemed
during 2000 were Target, Home Depot, Toys R Us, and Brinker International.
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MEMBER CARE
We have established a member care process that is designed to provide
superior service to all program participants.
Automated Inquiry System
We have developed automated online support services for our members,
such as online access to account information and transaction histories. Our
new member inquiry interface is designed to answer member questions
automatically. Through this member inquiry system, a natural language query
engine parses the inquiry and provides the member with links to relevant
information on the web site to address their concern.
24-hour/7-day Support
We employ an internal staff dedicated to member care and a specialized
customer support vendor, the Global Email Company, to maximize coverage and
minimize cost and turnaround time. Through this combination, we are able to
provide 24-hour, 7-day coverage with immediate automated responses for all
online inquiries and a turnaround time for inquiries targeted to maintaining a
high level of member satisfaction.
TECHNOLOGY AND INFRASTRUCTURE
We have developed an expandable, secure and reliable technology
infrastructure to support our online direct marketing and loyalty rewards
programs. The principal element of our proprietary technology is our Digital
Loyalty Engine. The Digital Loyalty Engine is an Internet based software
application that enables our advertisers and loyalty partners to set the
parameters of point-earning transactions without our direct involvement.
Customizable elements include the number of times in a given period an award may
be earned, the number of points per transaction, the maximum number of
transactions per member and the maximum aggregate numbers of points that can be
awarded in a given campaign. Advertisers and loyalty partners can use the
Digital Loyalty Engine to take advantage of market opportunities on a real-time
basis by establishing new point-earning opportunities or altering the parameters
of existing opportunities.
Expandability
To date, we have demonstrated that our architecture is capable of rapid
expansion. Membership in our direct marketing and loyalty programs has grown
from fewer than two million members in January 1999 to more than 15.8 million
members in December 2000. Our systems are also designed to capture a large
amount of data from our members, which is critical to the creation of a
successful online loyalty rewards program. In addition, our systems are designed
to be integrated with our partners' own databases, thereby enhancing data
exchange and data mining for marketing purposes.
Security
We incorporate a variety of encryption techniques meant to protect the
privacy of consumer information and the integrity of client transactions. We
also employ a variety of automated fraud detection procedures to identify
patterns of abuse and potential fraudulent use of the system. Our fraud
detection systems can automatically disable accounts in which fraud is
suspected. The data center where our system is located provides 24-hour/7-day
security management.
Reliability
Our software system architecture uses industry standard technologies to
maximize reliability. We use Secure Socket Layer for secure transactions, Oracle
and Sybase databases, the UNIX operating system and the Netscape web server
within our infrastructure. All of these platforms have demonstrated a high
degree of reliability. Our databases are also distributed among clients and
among functions. In particular, each Digital Loyalty Engine, where transactions
are recorded, is separate from the main database of account records. As a
result, a database failure
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would typically affect only a particular client or function and would not
adversely impact our entire system. We back up our Oracle databases to long-term
tape storage on a daily basis.
Our network servers are housed separately at Exodus Communications' data
centers in Jersey City, New Jersey and Oak Brook, Illinois. The Exodus data
centers provide redundant network connections, redundant connections to power
grids, diesel generators for emergency power, air conditioning and 24-hour/7-day
engineering support. Our infrastructure is built to maximize reliability through
the use of multiple central processor units and redundant power supplies,
networking and input/output controllers.
COMPETITION
We face intense competition from both traditional and online advertising
and direct marketing businesses. We expect competition to increase due to the
lack of significant barriers to entry in the online advertising market. In the
future, we may compete with a greater number of media companies across a wide
range of advertising and direct marketing services. Online direct marketing
service companies that we currently compete with or may in the future compete
with include 24/7 Media, DoubleClick, Engage, Lifeminders, MatchLogic,
Netcreations and yesmail.com. In addition, several other companies offer
competitive online products, services and rewards programs, including
CoolSavings and Netcentives. We also face competition from established online
portals and community web sites that engage in direct marketing, as well as from
traditional advertising agencies and direct marketing companies and others that
may seek to offer online products or services.
Therefore, although we believe we were one of the first companies to
integrate online direct marketing with an online rewards program, we may face
additional competition from companies engaged in online direct marketing that
introduce rewards programs and from online rewards program providers that begin
offering direct marketing services.
Our ability to compete depends upon many factors, including:
- the timing and market acceptance of new products and services developed
either by us or our competitors;
- our ability to demonstrate the effectiveness of our service to
advertisers;
- our ability to increase the number of members who participate in our
online programs;
- our ability to increase the depth of information in our database
regarding our members by capturing demographic, behavioral and
transactional data;
- our ability to increase awareness of our brand;
- the capacity of our technology infrastructure to meet the needs of our
members, advertisers and loyalty partners;
- our size and reach in comparison to that of our principal competitors,
- sales and marketing efforts by us or our competitors;
and
- the availability of capital to ourselves and our competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success and ability to compete are substantially dependent on our
internally developed and acquired technologies and trademarks, which we seek to
protect through a combination of patent, copyright, trade secret and trademark
laws. We have filed three patent applications in the United States. For some of
these applications, we also plan to file corresponding international patent
applications. We have entered into confidentiality or license agreements with
our employees and consultants, and corporate and strategic partners and
generally seek to control access to and distribution of our documentation and
other proprietary information. Despite these precautions, it may be possible for
third parties to copy
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or otherwise obtain and use our proprietary information without authorization or
to develop similar technology independently. We pursue the registration of our
trade and service marks in the United States and internationally. We have
registered trademarks for "MyPoints(R)," "BonusMail(R)" and "Cybergold(R)" in
the United States. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are
distributed or made available through the internet, and policing unauthorized
use of our proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in internet-related businesses are uncertain
and still evolving. We cannot give any assurance as to the future viability or
value, if any, of our proprietary rights. In addition, we cannot give any
assurance that the steps taken by us will prevent misappropriation or
infringement of our proprietary information. Any infringement or
misappropriation, should it occur, could have a material adverse effect on our
business, results of operations and financial condition.
Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. We have received
one claim of alleged infringement, which has been resolved through a license
agreement. Litigation may also be necessary to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. An adverse determination in any litigation of
this type could require us to make significant changes to the structure and
operation of our online rewards program, attempt to design around a third
party's patent, or license alternative technology from another party.
Implementation of any of these alternatives could be costly and time consuming,
and might not be possible. Accordingly, an adverse determination in any
litigation that might ensue between a third party and us could have a material
adverse effect on our business, results of operations and financial condition.
In addition, any intellectual property litigation, even if successfully
defended, would result in substantial costs and diversion of resources and
management attention and could therefore have a material adverse effect on our
business, results of operations and financial condition.
We have licensed, and may license in the future, elements of our trademarks
and similar proprietary rights to third parties. While we attempt to ensure that
the quality of our brand is maintained by these business partners, they may take
actions that could materially and adversely affect the value of our proprietary
rights or reputation.
PRODUCT AND SERVICE WARRANTIES
When members purchase products in response to direct marketing offers that
we send them or redeem points for products and services, we pass on to these
members the warranties made by the manufacturers of products or providers of
services. We do not provide separate additional warranties.
EMPLOYEES
As of December 31, 2000, we employed 301 people, including 89 in sales and
marketing, 155 in technology and production and 57 in support, administration,
finance, management and human resources. We believe that we maintain good
relations with our employees. The number of employees may fluctuate based upon
the needs of our business.
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RISKS ASSOCIATED WITH OUR BUSINESS
WE HAVE ONLY A LIMITED OPERATING HISTORY THAT INVESTORS MAY USE TO ASSESS OUR
FUTURE PROSPECTS
We have only a limited operating history upon which you can evaluate our
business. We commenced operations in November 1996 and did not begin to generate
revenues until July 1997. We have not and may never generate sufficient revenues
to achieve profitability. We have limited experience addressing challenges
frequently encountered by early-stage companies in the electronic commerce and
direct marketing industries. We may not be successful in addressing these risks,
and our business strategy may not be successful. In addition, we have never
operated during a general economic downturn in the United States, which
typically adversely affects advertising and marketing expenditures and retail
sales. Accordingly, our limited operating history does not provide investors
with a meaningful basis for evaluating an investment in our common stock.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES TO CONTINUE AT LEAST THROUGH 2001
Our accumulated deficit as of December 31, 2000 was $272.2 million. We have
never operated profitably and, given our planned level of operating expenses, we
expect to continue to incur losses at least through 2001. Our losses may
increase in the future, and even if we achieve our revenue targets, we may not
be able to sustain or increase profitability on a quarterly or annual basis. If
our revenues grow more slowly than we anticipate, or if our operating expenses
exceed our expectations and cannot be adjusted accordingly, our losses could
continue beyond our present expectations.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH COULD AFFECT
OUR STOCK PRICE
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, some of which are outside of our control. As
a result, our operating results may be below the expectations of public market
analysts and investors. In this event, the price of our common stock may fall.
The factors most likely to produce varied results include:
- the advertising budget cycles of individual advertisers;
- the number of reward points redeemed by our members and the costs
associated with these redemptions;
- changes in the mix of our business;
- changes in marketing and advertising costs that we incur to attract and
retain members;
- changes in our pricing policies, the pricing policies of our competitors
or the pricing policies for internet advertising generally; and
- unexpected costs and delays.
Due to these factors, revenues and operating results are difficult to
forecast and you should not rely on period to period comparisons of results of
operations as an indication of our future performance.
OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS THAT COULD IMPACT OUR
GROWTH AND AFFECT OUR STOCK PRICE
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We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail advertising, which are typically lower
during the first and third quarter of the year and highest in the fourth
quarter. In addition, expenditures by advertisers tend to be cyclical,
reflecting general economic conditions and consumer buying patterns. The extent
of these seasonal fluctuations in any period may be difficult to predict and, if
the fluctuations are greater than our expectations, our growth rate would
decline. In this event, the price of our common stock may fall.
WE MAY HAVE DIFFICULTIES INTEGRATING RECENT AND FUTURE ACQUISITIONS AND ANY
FAILURE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES WOULD REDUCE OUR ABILITY TO
REALIZE THE ANTICIPATED VALUE OF THE ACQUISITION
In the first quarter of 2000, we acquired Alliance Development Group, Inc.
which we renamed MyPoints Offline Services, Inc.("ADG"). We closed the
acquisition of Cybergold in the third quarter of 2000. We intend to pursue other
acquisitions in the future. Based on our experiences with our first acquisition
in 1998, we expect to face numerous risks and uncertainties generally associated
with acquisitions, including:
- potentially adverse effects on our reported results of operations from
acquisition-related charges and amortization of goodwill and purchased
technology;
- our ability to maintain customers or the reputation of the acquired
businesses;
- potential dilution to current stockholders from the issuance of
additional equity securities;
- difficulties integrating operations, personnel, technologies, products
and information systems of the acquired businesses;
- diversion of management's attention from other business concerns; and
- potential loss of key employees of acquired businesses.
In January 2000, we acquired ADG, a company that operates offline customer
rewards programs. In connection with this acquisition, we intend to integrate
our technology with ADG's offline programs to help make them more efficient.
Even though we are a marketing company, we might find it difficult to integrate
offline and online marketing. If we are unable to integrate the two businesses,
we may be unable to realize the anticipated benefits of this Acquisition.
In August 2000, we closed the acquisition of Cybergold, Inc. As part of that
transaction, we acquired MagnaCash, a subsidiary 100% owned by Cybergold. In
October 2000, we sold 81.5% of MagnaCash to an investment group. Magnacash will
perform certain services to MyPoints.com with regard to the Cybergold business.
If Magnacash becomes illiquid we may be required to find an alternate source for
the services to be provided. We expect to face numerous risks and uncertainties
generally associated with the acquisition of Cybergold, discussed below.
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MYPOINTS.COM AND CYBERGOLD MAY NOT ACHIEVE THE BENEFITS THEY EXPECT FROM THE
MERGER, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON THE COMBINED COMPANY'S
BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS AND/OR COULD RESULT IN LOSS
OF KEY PERSONNEL.
We still need to overcome significant issues in order to realize any
benefits from the merger, including the timely, efficient and successful
execution of a number of post-merger events. Key events include:
- Retaining the existing customers and strategic partners of each company
- Developing new services that utilize the assets of both companies; and
- Maintaining uniform standards, controls, procedures and policies.
The successful execution of these post-merger events will involve
considerable risk and may not be successful. These risks include:
- The potential disruption of the combined company's ongoing business and
distraction of its management;
- The difficulty of incorporating acquired technology and rights into the
combined company's products and services;
- Unanticipated expenses related to technology integration;
- The impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
- Potential unknown liabilities associated with the acquired business.
WE HAVE GROWN RAPIDLY, AND THE FAILURE TO ADAPT OUR RESOURCES TO A FAST
CHANGING ENVIRONMENT COULD STRAIN OUR MANAGEMENT SYSTEMS AND RESOURCES
As we consolidate our operations, we may not have an effective planning
and management process in place to implement our business plan successfully. We
have grown from 24 employees on January 1, 1998 to 301 employees on December 31,
2000. In October 2000, we initiated a workforce reduction of 120 employees. The
staff reductions were primarily in technology, production and administrative
related positions. The growth in our business and the workforce reduction could
strain the development of our management systems. We anticipate the needs to
continue to improve our financial and managerial controls and our reporting
systems. In addition, we will need to train and manage our work force.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND EXPAND AN ACTIVE MEMBERSHIP
BASE
Our success largely depends on our ability to maintain and expand an active
membership base. Our revenues are primarily driven by fees paid by advertisers
and direct marketers based on specific actions taken by our members. If we are
unable to induce existing and new members to actively participate in our
programs, our business, results of operations and financial condition will be
harmed. We generate a significant portion of our revenues based on the activity
of a small percentage of our members, and we cannot assure you that the
percentage of active members will increase. In addition, some of our members
have requested to limit the number of emails they receive from us. Although our
membership has grown in prior periods, we cannot be sure that our membership
growth will continue at current rates or increase in the future.
WE FACE INTENSE COMPETITION, AND THE FAILURE TO COMPETE EFFECTIVELY COULD
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ADVERSELY AFFECT OUR MARKET SHARE AND RESULTS OF OPERATIONS
We face intense competition from both traditional and online advertising
and direct marketing businesses. We expect competition to increase due to the
lack of significant barriers to entry for online business generally. As we
expand the scope of our product and service offerings, we may compete with a
greater number of media companies across a wide range of advertising and direct
marketing services. Our ability to generate significant revenue from advertisers
and loyalty partners will depend on our ability to differentiate ourselves
through the technology and services we provide and to obtain adequate
participation from consumers in our online direct marketing and rewards
programs. Rewards providers are also a critical element of our business.
The attractiveness of our program to current and potential members and
loyalty partners depends in large part on the attractiveness of the rewards and
point redemption opportunities that we offer. Currently, several companies offer
competitive online products or services, including Netcentives. We also expect
to face competition from established online portals and community web sites that
engage in direct marketing and loyalty point programs, as well as from
traditional advertising agencies and direct marketing companies that may seek to
offer online products or services.
Many of our current competitors and potential new competitors have longer
operating histories, greater name recognition, larger customer bases and
greater financial, technical and marketing resources than we do. These
advantages may allow them to respond more quickly to new or emerging
technologies and changes in customer requirements. It may also allow them to
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies, and make more
attractive offers to potential employees, strategic partners and advertisers. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products or services to address the needs of our prospective
advertisers and advertising agency customers. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share. We may
not be able to compete effectively, and competitive pressures may result in
price reductions, reduced gross margins and loss of our market share.
THE FAILURE TO ESTABLISH THE MYPOINTS(R)BRAND WOULD IMPAIR OUR COMPETITIVE
POSITION
We are highly dependent on establishing and maintaining our brand. Any event
or circumstance that negatively impacts our brand could have a direct and
material adverse effect on our business, results of operations and financial
condition. As competitive pressures in the online direct marketing industry
increase, we believe that brand strength will become increasingly important. The
reputation of the MyPoints brand will depend on our ability to provide a
high-quality member experience. We cannot assure you that we will be successful
in delivering this experience. If members are not satisfied with the quality of
their experience with the MyPoints program, their negative experiences might
result in publicity that could damage our reputation. If we expend additional
resources to build the MyPoints brand and do not generate a corresponding
increase in revenues as a result of our branding efforts, or if we otherwise
fail to promote our brand successfully, our competitive position would suffer.
NEW FINANCIAL ACCOUNTING STANDARDS COULD REQUIRE US TO CHANGE OUR REVENUE
RECOGNITION POLICIES, WHICH COULD SIGNIFICANTLY REDUCE OUR REVENUE OR ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS
At its September 2000 meeting, the Financial Accounting Standards Board
Emerging Issues Task Force, the EITF, began discussing Issue No. 00-22,
"Accounting for 'Points' and Certain Other Time- or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to be Delivered in the Future."
EITF Issue No. 00-22 addresses the accounting for revenues and expenses relating
to point and other loyalty programs. The EITF has not yet reached a consensus on
this issue and plans on discussing it at future meetings. Among alternatives
under consideration by the EITF is one that would, if adopted, result in a
significant
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delay in the timing of when we recognize revenue from the transmission of email
advertisements to enrolled members and receipt of qualified responses to this
email. Our current policy is to recognize revenue when email is transmitted to
members and responses are received. The alternative under consideration by the
EITF would result in this revenue being deferred until points issued in
connection with such emails are redeemed for rewards by our members. We believe
that our current revenue recognition policy related to the transmission of email
advertisements to enrolled members and receipt of qualified responses to such
email is in accordance with generally accepted accounting principles and is
based on views published by and consultations with the Securities and Exchange
Commission, as our advertising contracts with our business partners speak to
performing advertising services and do not require the issuance of points.
We are unable to quantify the impact of the proposed alternatives on our
financial results or predict the outcome of the EITF's project. We cannot assure
you as to what, if any, change, may ultimately be required by actions taken by
the EITF in this project. Please refer to our future Quarterly Reports on 10-Q
and Annual Reports on 10-K filed with the Securities and Exchange Commission for
updates on EITF No. 00-22 and its impact on us.
THE FAILURE TO ACCURATELY ESTIMATE LEVELS OF REDEMPTIONS WOULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS
Our historical and forecasted financial statements reflect our assumptions
as to the percentage of awards issued by us that will not be redeemed by members
prior to expiration. This percentage of unredeemed awards is known as
"breakage." The breakage rates we have used in preparing our financial
statements and forecasts are based primarily on our experience with our own
program since its launch in May 1997. If our actual breakage rates are less than
our assumed breakage rates, meaning that a greater number of awards are actually
redeemed than we had assumed would be redeemed, our results of operations could
be materially and adversely affected. If it becomes necessary for us to extend
the expiration date of a significant balance of outstanding awards in the
future, it is possible that our actual breakage rates would be lower than our
assumed breakage rates, which could materially and adversely affect our results
of operations. In addition, the timing of members' decisions to redeem is at the
discretion of members and cannot be controlled by us. Awards generally have a
life of two to three years and can be redeemed by members until their expiration
date. To the extent that members redeem at a rate that is more rapid than that
anticipated by us, we would experience a need for increased working capital to
fund these redemptions. Accordingly, the timing of redemptions by members could
materially and adversely affect our results of operations.
A SMALL NUMBER OF OUR ADVERTISING CUSTOMERS ACCOUNTS FOR A SIGNIFICANT PORTION
OF OUR REVENUES; THEREFORE THE LOSS OF PRINCIPAL CUSTOMERS COULD ADVERSELY
AFFECT OUR REVENUES
No single advertising customer accounted for more than 10% of our revenue in
2000. Our ten largest advertising customers were responsible for approximately
25% of our revenues during 2000. We do not have long-term contracts with most of
our customers, and customers can generally terminate their relationships with us
upon specified notice and without penalties. Thus, we may not be able to retain
our principal customers. The loss of one or more of our principal customers
could have a material adverse effect on our revenues.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING, IF REQUIRED, ARE UNCERTAIN AND
FAILURE TO OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO PURSUE FUTURE
GROWTH
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We may need to raise additional funds to develop or enhance our services or
products, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. We cannot assure you that
additional financing will be available on terms favorable to us, or at all. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced and
these securities might have rights, preferences or privileges senior to those of
our current stockholders. If adequate funds are not available on acceptable
terms, our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products, or otherwise respond to
competitive pressures would be significantly limited.
OUR MANAGEMENT HAS LIMITED EXPERIENCE WORKING TOGETHER AND THERE IS NO ASSURANCE
THAT ITS MEMBERS WILL OPERATE AS A TEAM
John Steuart, previously CFO of Cybergold, joined the company in August
2000 as the new CFO. Craig Stevens, Senior Vice President, General Counsel and
Secretary joined the company in August 2000. Steve Markowitz, our CEO and
President resigned on November 3, 2000 and Charles H. Berman, formerly COO,
resigned in December 2000. Layton Han, was Senior Vice President of Business
Development of the Company and is now the President of the Company. John Fullmer
became the CEO and Chairman of the Board of the Company in February 2001. The
new management team has limited experience working together.
WE DEPEND ON THE SERVICE OF WELL TRAINED AND MOTIVATED EMPLOYEES AND THERE IS
NO ASSURANCE THAT WE CAN RETAIN THEIR SERVICES.
Our success depends on our ability to attract, retain and motivate highly
skilled employees. Competition for employees in our industry is intense. We may
be unable to retain our key employees or to attract, assimilate and retain other
highly qualified employees in the future. We have experienced difficulties from
time to time in attracting and retaining the personnel necessary to support the
growth and the technical infrastructure of our business, and we may experience
similar difficulty in the future. In the first quarter of 2001 we have
implemented a plan to reprice employee stock options to better reflect the
current value of our stock in the marketplace. If the price of our stock
remains below $1.00, the repricing may not have the desired effect on our
employees.
FAILURE TO SAFEGUARD OUR DATABASE AND MEMBER PRIVACY COULD AFFECT OUR REPUTATION
AMONG CONSUMERS
An important feature of the MyPoints program is our ability to develop and
maintain individual member profiles. Security and privacy concerns may cause
consumers to resist providing the personal data necessary to support this
profiling capability. As a result of these security and privacy concerns, we may
incur significant costs to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Usage of our MyPoints program could
decline if any well-publicized compromise of security occurred. In addition,
third parties could alter information in our database that would adversely
affect our ability to target direct marketing offers to members. We could also
be subject to legal claims from members. Any public perception that we engaged
in unauthorized release of member information would adversely affect our ability
to attract and retain members.
As part of our point redemption services, we maintain a database containing
information on our members' account balances. Our database may be subject to
access by unauthorized users accessing our systems remotely. If we experience a
security breach, the integrity of our points database could be affected. This
breach could lead to financial losses through the unauthorized redemption of
points.
Our database of member accounts includes account information and
transaction
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information of each member. Failure by us to maintain the integrity of this data
could result in attrition of members or could result in emails delivered to
untargeted members. Failure by us to email the targeted member could result in a
reduction of revenues.
WE ARE VULNERABLE TO SYSTEM FAILURES WHICH COULD CAUSE INTERRUPTIONS OR
DISRUPTIONS IN OUR SERVICE
The hardware infrastructure on which the MyPoints system operates is
located at the Exodus Communications data centers in Jersey City, New Jersey and
Oak Brook, Illinois. We cannot assure you that we will be able to manage this
relationship successfully to mitigate any risks associated with having our
hardware infrastructure maintained by Exodus. Unexpected events such as natural
disasters, power losses and vandalism could damage our systems.
Telecommunications failures, computer viruses, electronic break-ins or other
similar disruptive problems could adversely affect the operation of our systems.
Our insurance policies may not adequately compensate us for any losses that may
occur due to any damages or interruptions in our systems. Accordingly, we could
be required to make capital expenditures in the event of damage. We do not
currently have fully redundant systems or a formal disaster recovery plan.
Periodically we experience unscheduled system downtime, which results in
our web site being inaccessible to members. In particular, during the relaunch
of the integrated MyPoints program in April 1999, we experienced significant
periods of system downtime during which our web site was inaccessible. Although
we did not suffer material losses during these downtimes, if these problems
persist in the future, members and advertisers could lose confidence in our
services.
SYSTEM CAPACITY CONSTRAINTS MAY RESULT IN A LOSS OF REVENUES
A substantial increase in the use of our products and services could strain
the capacity of our systems, which could lead to slower response time or system
failures. System failures or slowdowns adversely affect the speed and
responsiveness of our rewards transaction processing. These would diminish the
experience for our members and reduce the number of transactions, and thus,
could reduce our revenue. As a result, we face risks related to our ability to
scale up to our expected transaction levels while maintaining satisfactory
performance. If our transaction volume increases significantly, we will need to
purchase additional servers and networking equipment to maintain adequate data
transmission speeds. The availability of these products and related services may
be limited or their cost may be significant.
WE FACE RISKS ASSOCIATED WITH THIRD PARTY CLAIMS AND PROTECTION OF OUR
INTELLECTUAL PROPERTY RIGHTS, AND ANY LITIGATION RELATING TO INTELLECTUAL
PROPERTY RIGHTS COULD HARM OUR BUSINESS
Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. We have received
three claims of alleged infringement, one of which has been resolved through a
license agreement. The second claim of infringement was with Cybergold which we
acquired in August, 2000. Also, in July 1999, we received an infringement claim
from another party, along with an offer to grant a license to us at a cost that
would not be material. To our knowledge, no litigation has been filed against us
based on this claim. Litigation may also be necessary to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. An adverse determination
in any litigation of this type could require us to make significant changes to
the structure and operation of our online rewards program, attempt to design
around a third party's patent, or license alternative technology from another
party. Implementation of any of these alternatives could be costly and time
consuming, and might not be possible. In addition, any intellectual property
litigation, even if successfully defended, would result in substantial costs and
diversion of resources and management attention.
Our success and ability to compete depends on our internally developed
technologies and trademarks, which we seek to protect through a combination of
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patent, copyright, trade secret and trademark laws. Despite actions we take to
protect our proprietary rights, it may be possible for third parties to copy or
otherwise obtain and use our proprietary information without authorization or to
develop similar technology independently. In addition, legal standards relating
to the validity, enforceability and scope of protection of proprietary rights in
internet-related businesses are uncertain and still evolving. We cannot give any
assurance regarding the future viability or value of any of our proprietary
rights. In addition, we cannot give any assurance that the steps taken by us
will prevent misappropriation or infringement of our proprietary information.
Any infringement or misappropriation, should it occur, could have a material
adverse effect on any competitive advantage incident to our proprietary rights.
WE MAY NEED TO ADAPT OUR PRODUCTS AND SERVICES AND WE MAY BE SUBJECT TO FOREIGN
GOVERNMENT REGULATION AND TAXATION, CURRENCY ISSUES, DIFFICULTIES IN MANAGING
FOREIGN OPERATIONS AND FOREIGN POLITICAL ECONOMIC INSTABILITY
Our participation in international markets will be subject to our potential
inability to adapt, expand or enhance our products and services to suit foreign
markets. In addition, international operations are generally associated with
risks such as foreign government regulations, export license requirements,
tariffs and taxes, fluctuations in currency exchange rates, introduction of the
European Union common currency, difficulties in managing foreign operations and
political and economic instability. To the extent our potential international
members or our international partners are impacted by currency devaluations,
general economic crises or other macroeconomic events, the ability of our
members to utilize our services could be diminished. In order to help us address
some of the risks associated with introducing our services internationally, we
believe it will be necessary to establish strategic relationships with
international partners. We cannot assure you that electronic commerce will
develop successfully in international markets or that potential members in these
foreign markets will utilize incentives-based marketing programs. Furthermore,
we cannot assure you that we will be able to overcome any legal restrictions
related to offering rewards and incentives that may exist in foreign
jurisdictions.
RISKS ASSOCIATED WITH THE INTERNET INDUSTRY
IF THE ACCEPTANCE OF ONLINE ADVERTISING AND DIRECT MARKETING DOES NOT CONTINUE,
OUR REVENUES WOULD DECLINE
We expect to derive a substantial portion of our revenues from online
advertising and direct marketing, including both email and web-based programs.
If these services do not continue to achieve market acceptance, we cannot assure
you that we will generate business at a sufficient level to support our
continued operations. The internet has not existed long enough as an advertising
medium to demonstrate its effectiveness relative to traditional advertising
media. Advertisers and advertising agencies that have historically relied on
traditional advertising may be reluctant or slow to adopt online advertising.
Many potential advertisers have limited or no experience using email or the web
as an advertising medium. They may have allocated only a limited portion of
their advertising budgets to online advertising, or may find online advertising
to be less effective for promoting their products and services than traditional
advertising media. If the market for online advertising fails to develop or
develops more slowly than we expect, our revenues would decline. Additionally,
during the second half of 2000, market demand for on-line advertising services
such as those offered by us weakened, particularly from early-stage internet and
e-commerce companies. We expect weaker demand and smaller marketing budgets from
these companies to continue at least in the early part of 2001.
The market for email advertising in general is vulnerable to the negative
public perception associated with unsolicited email, known as "spam." We do not
send
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unsolicited email. However, public perception, press reports or governmental
action related to spam could reduce the overall demand for email advertising in
general and our MyPoints BonusMail service in particular.
IF ONLINE REWARDS PROGRAMS ARE NOT WIDELY ACCEPTED BY BUSINESSES AND INTERNET
USERS OUR BUSINESS MODEL WILL NOT SUCCEED
Our success depends in large part on the continued growth and acceptance of
online rewards programs. If online rewards programs are not widely accepted by
advertisers and embraced by internet users, our business model will not succeed.
Although loyalty and rewards programs have been used extensively in conventional
marketing and sales channels, they have only recently begun to be used online.
We cannot assure you that online programs will continue to be accepted by
advertisers and that we can continue to offer advertisers attractive promotions
and satisfied members. The success of our business model also will depend on our
ability to attract and retain members. We cannot assure you that our marketing
efforts and the quality of each member's experience, including the number and
relevance of the direct marketing offers we provide and the perceived value of
the rewards we offer, will generate sufficient satisfied members.
TO REMAIN COMPETITIVE, WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR
INDUSTRY
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions, short development cycles and evolving
industry standards. The recent growth of the internet and intense competition in
our industry exacerbate these market characteristics. In order to adapt to
rapidly changing technologies we are in the process of upgrading our
technological infrastructure beyond customary maintenance and improvements in
performance and features. The migration might impact the reliability of our
systems. We may experience technical difficulties that could delay or prevent
the successful development, introduction or marketing of new products and
services. In addition, any new enhancements to our products and services must
meet the requirements of our current and prospective users. We may incur
substantial costs to modify our services or infrastructure to adapt to rapid
technological change.
CONTINUED DEVELOPMENT AND USE OF THE INTERNET INFRASTRUCTURE IS CRITICAL TO OUR
ABILITY TO OFFER OUR SERVICES
Our members depend on internet service providers for access to our web
site. Internet service providers and web sites have experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. If outages or delays occur
frequently in the future, internet usage, as well as electronic commerce and the
usage of our products and services, could grow more slowly or decline. A number
of factors may inhibit internet usage, including inadequate network
infrastructure, security concerns, inconsistent quality of service, and lack of
availability of cost-effective, high-speed service. If internet usage grows, the
internet infrastructure may not be able to support the demands placed on it by
this growth and its performance and reliability may decline.
OUR BUSINESS DEPENDS ON OUR ABILITY TO COLLECT MEMBER INFORMATION; FUTURE
REGULATION OF THE INTERNET COULD RESTRICT OUR ACCESS TO THIS INFORMATION
Laws and regulations that apply to the internet may become more prevalent
in the future. The laws governing the internet and email services remain largely
unsettled. There is no single governmental body overseeing our industry, and
many state laws that have been enacted in recent years have different and
sometimes inconsistent application to our business. In particular, our business
model could be severely damaged if regulations were enacted that restricted our
ability to collect or use information about our members.
The governments of foreign countries may also attempt to regulate
electronic commerce. New laws could dampen the growth in use of the internet
generally and
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decrease the acceptance of the internet as a commercial medium. In addition,
existing laws such as those governing intellectual property and privacy may be
interpreted to apply to the internet. The federal government, state governments
or other governmental authorities could also adopt or modify laws or regulations
relating to the internet.
In 1998, the United States government enacted a three-year moratorium
prohibiting states and local governments from imposing new taxes on electronic
commerce transactions. Upon expiration of this moratorium, if it is not
extended, states or other governments might levy sales or use taxes on
electronic commerce transactions. An increase in the taxation of electronic
commerce transactions might also make the internet less attractive for consumers
and businesses. In addition, the Federal Trade Commission is considering the
adoption of regulations regarding the collection and use of personal information
obtained from individuals, especially children, when accessing web sites. These
regulations could restrict our ability to provide demographic data to our
advertising and marketing clients. At the international level, the European
Union has adopted a directive that will impose restrictions on the collection
and use of personal data. This directive could affect U.S. companies that
collect information over the internet from individuals in European Union member
countries and may impose restrictions that are more stringent than current
internet privacy standards in the United States. These developments could have
an adverse effect on our business, results of operations and financial
condition.
OTHER RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
SUBSTANTIAL CONTROL WILL REMAIN WITH OUR MANAGEMENT AND MAJOR STOCKHOLDERS AND
THIS COULD DELAY OR PREVENT A CHANGE OF CONTROL
Our executive officers, our directors and entities affiliated with them and
our 5% stockholders together currently beneficially own approximately 19% of our
outstanding common stock. These stockholders, if they vote together, will retain
substantial control over matters requiring approval by our stockholders, such as
the election of directors and approval of significant corporate transactions.
This concentration of ownership might also have the effect of delaying or
preventing a change in control.
PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS COULD DELAY OR PREVENT A CHANGE OF
CONTROL
Various provisions of our certificate of incorporation and bylaws, and in
particular certain actions of the Board in adopting a Shareholder Rights Plan in
December 2000, may have the effect of delaying or preventing a change in control
and make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. These provisions, if used by our
management, could negatively affect our stock price.
OUR STOCK PRICE HAS BEEN VOLATILE, AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES
AT A PROFIT
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly internet-related
companies, have been highly volatile. Investors may not be able to resell their
shares at or above the price which they paid for their shares. In addition, our
results of operations during future fiscal periods might fail to meet the
expectations of stock market analysts and investors. This failure could lead the
market price of our common stock to decline and cause us to become the subject
of securities class action lawsuits.
THE COMPANY MAY NOT BE ABLE TO MAINTAIN ITS LISTING ON THE NASDAQ NATIONAL
MARKET.
The Company's Common Stock is currently listed on the Nasdaq National
Market. The Company must satisfy a number of requirements to maintain its
listing on the Nasdaq National Market, including maintaining a minimum bid price
for the Common
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Stock of $1.00 per share. As of March 15, 2001 the bid price of the Common Stock
has closed below $1.00 per share since March 6, 2001. If the Common Stock loses
its Nasdaq National Market status, the Common Stock would likely trade on the
Over the Counter Bulletin Board, which is viewed by most investors as a less
desirable, less liquid marketplace.
ITEM 2. PROPERTIES.
Our properties and associated leases are comprised of the following. We are
currently leasing approximately 40,000 square feet of office space in San
Francisco, California, approximately 28,000 square feet of space in Oakland,
California, approximately 6,300 square feet in San Diego, California,
approximately 53,000 square feet in Schaumburg, Illinois, approximately 1,300
square feet in Houston, Texas, approximately 1,900 square feet in Boston,
Massachusetts, and approximately 4,500 square feet in New York, New York. Our
sales, marketing, finance, and administration functions for MyPoints are based
in San Francisco. Our technology and production groups for MyPoints are based in
Schaumburg. Our Cybergold sales, marketing, technology, and production functions
are based in Oakland. Sales, marketing, administration and production for our
ADG group is based in Boston. We have additional sales staff located in New York
and Houston. The lease for the San Francisco facility expires in 2007. The lease
for the Oakland facility expires in 2004. The lease for the San Diego facility
expires in 2003. The lease for the Schaumburg facility expires in 2004 with
about 25% of the lease space expiring in 2002. The lease for the Houston
facility expires in 2003. The lease for the Boston facility expires in 2006 and
the lease for the New York facility expires in 2004. The Company believes it has
excess office space in San Francisco, Oakland, San Diego and Schaumburg. The
Company is currently evaluating this under-utilization of office space and
intends to sub-lease or work out arrangements with landlords to cancel the
leases for this excess office space. The Company can provide no assurances that
it will be able to sub-lease or cancel the leases for this excess office space.
ITEM 3. LEGAL PROCEEDINGS.
MyPoints.com and certain of its subsidiaries have been named as defendants
in various legal actions arising from their normal business activities in which
varying amounts are claimed. Although the amount of any ultimate liability with
respect to such matters cannot be determined, in the opinion of management,
based upon the opinions of counsel, any such liability will not have a material
effect on the consolidated financial position of the Corporation and its
subsidiaries.
An action was filed in January 2001 against MyPoints.com in the United
States Superior Court of the State of California, County of San Diego. This
action names MyPoints.com, Cybergold, Inc. and several of Cybergold's and
MyPoints.com's officers and directors as defendants. Plaintiffs are the majority
shareholder of iTarget.com, Inc., an entity which Cybergold acquired during the
first quarter of 2000. The complaint alleges that defendants are liable based on
e.g. fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary
duty, negligence, negligent misrepresentation, breach of contract/warranty,
unfair business practices, and violations of the California corporate securities
laws. Among others it is alleged that defendants did not inform plaintiffs in
time of MyPoints.com's and Cybergold's acquisition negotiations. Plaintiffs seek
a judgment awarding damages and other relief. MyPoints.com believes the
allegations contained in these actions are without merit and will vigorously
defend them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of stockholders during the fourth
quarter of 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol of MYPT. The following table sets forth, for the period
indicated, the low and high bid prices per share for the Company's Common Stock
as reported by the Nasdaq National Market.
LOW HIGH
------ ------
First Quarter 2000............................. $26-3/4 $68-11/16
Second Quarter 2000............................ $10-1/4 $32-5/16
Third Quarter 2000............................. $4-15/16 $20-9/16
Fourth Quarter 2000............................ $1-5/32 $6-3/16
As of February 19, 2001, there were approximately 582 holders of record of
the Company's Common Stock.
No dividends have been paid on the Common Stock since the Company's
inception and the Company currently intends to retain all future earnings, if
any, for use in its business and does not anticipate paying any cash dividends
in the foreseeable future.
In September 2000, the Company announced a stock repurchase program. Through
December 31, 2000, 216,000 shares were repurchased at prices ranging from $1.32
to $1.54.
USE OF PROCEEDS OF STOCK OFFERINGS
On February 23, 2000 we completed a follow-on stock offering in which we
sold 2,450,000 shares of common stock at $45.88 per share. The total aggregate
gross proceeds amounted to $112.4 million. Underwriters' discounts and other
related costs were $6.7 million resulting in net proceeds of $105.7 million. On
August 19, 1999, we completed our initial public offering, in which we sold
5,750,000 shares of common stock at $8 per share. The total aggregate gross
proceeds amounted to $46 million. Underwriters' discounts and other related
costs were $4.8 million resulting in net proceeds of $41.2 million. From August
19,1999 to December 31, 2000, the Company estimates that it has primarily used
the net proceeds of the two offerings as follows: (i) investments in cash, cash
equivalents and short-term investments of $89.1 million; (ii) working capital of
$42.5 million; and (iii) property and equipment purchases of $15.3 million.
RECENT SALES OF UNREGISTERED SECURITIES
Prior to its initial public offering, the Company adopted the 1999
Supplemental Stock Plan. Thereafter, options were issued to certain non-officer
employees but none had been exercised by March 30, 2001. Then, the Plan and the
shares to be issued thereunder were registered on the Company's Form S-8
Registration Statement.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical information has been derived from the
audited financial statements of the Company. The financial information as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000 are derived from audited financial statements and are included
elsewhere in this Form 10-K. The table should be read in conjunction with Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 8. "Financial Statements and Supplementary Data."
NOVEMBER 7,
1996
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------
1996 1997 1998 1999 2000
-------------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ -- $ 151 $ 1,286 $ 24,140 $ 63,501
Cost of revenues -- 78 1,121 7,407 17,425
--------- ------- ------- -------- ---------
Gross profit -- 73 165 16,733 46,076
--------- ------- ------- -------- ---------
Operating expenses:
Technology costs 16 560 1,520 8,665 26,917
Sales and marketing expenses 36 1,669 4,513 30,247 42,557
General and administrative expenses 16 712 2,028 9,601 22,521
Amortization of intangible assets -- -- 275 3,116 26,830
Impairment of intangible assets -- -- -- -- 138,573
Stock-based compensation -- 77 158 3,054 5,110
--------- ------- ------- -------- ---------
Total operating expenses 68 3,018 8,494 54,683 262,508
--------- ------- ------- -------- ---------
Operating loss (68) (2,945) (8,329) (37,950) (216,432)
Interest and other income (expense), net 1 56 63 494 2,756
--------- ------- ------- -------- ---------
Net loss $ (67) $(2,889) $(8,266) $(37,456) $(213,676)
========= ======= ======= ======== =========
Net loss attributable to common stockholders $ (67) $(2,889) $(8,266) $(47,256) $(213,676)
========= ======= ======= ======== =========
Net loss per share:
Basic and diluted $ (0.08) $ (2.56) $ (4.37) $ (3.53) $ (6.47)
========= ======= ======= ======== =========
Weighted average shares-- basic and diluted .. 891 1,127 1,890 13,397 33,044
========= ======= ======= ======== =========
DECEMBER 31,
-----------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,118 $ 2,948 $ 5,089 $ 21,792 $ 89,137
Working capital (deficit) 1,099 2,381 (307) 10,948 82,386
Total assets 1,205 3,474 18,306 55,669 171,597
Long-term obligations, less current maturities .. -- 47 2,408 1,029 782
Accumulated deficit (67) (2,956) (11,222) (58,478) (272,154)
Total stockholders' equity 1,412 2,692 9,283 28,853 127,999
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. When used in this Form 10-K,
the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and
similar expressions are included to identify forward-looking statements. Our
actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Form 10-K.
OVERVIEW
MyPoints.com, Inc. was founded as Intellipost Corporation in November 1996.
In May 1997, we launched our email direct marketing and rewards program. In
November and December 1998, through our acquisition of Enhanced Response
Technologies, Inc. ("ERT") and a company affiliated with Experian, we acquired
internet and electronic commerce related assets and technologies through a
series of related transactions. Through these transactions, we acquired a
technology license for the operation of a web-based rewards program. In early
March 1999, we changed our corporate name to MyPoints.com, Inc. in order to
unify our corporate and brand identities. During March and April 1999, we
integrated our email and web-based direct marketing and rewards programs under
the MyPoints brand. In August 1999, we completed our initial public offering and
in February 2000 we completed an additional public offering of shares of our
common stock. In January 2000, we acquired all the outstanding shares of ADG, a
company that operates offline customer rewards programs. In August, 2000, we
acquired all the outstanding shares of Cybergold, Inc.("Cybergold"), a provider
of online direct marketing and advertising solutions.
We generate a substantial portion of our revenues by delivering email and
web-based direct marketing offers for our advertising customers. In exchange for
these services, we receive fees from our advertisers based on any or all of the
following:
- the number of offers delivered to members;
- the number of qualified responses generated; and
- the number of qualified purchases made.
For direct marketing services, we recognize revenues when an offer is
delivered, when a qualified response is received or when a product or service is
purchased, depending upon the pricing arrangement used. Pricing of our direct
marketing services is not based on the issuance of incentives to our members.
Direct marketing services represent our largest business activity and the
majority of our revenues.
As an ancillary activity, we sell points to private label partners and to
advertisers for use in their promotional campaigns. We initially defer revenue
and estimated point costs associated with the sale of points and recognize this
revenue upon the expiration or redemption of the underlying points.
Our revenues depend on a number of factors. These include the number of
advertisers engaging us to send direct marketing offers to our membership base,
the size of our membership base or targeted subset of our membership base
demanded by our advertisers, and the responsiveness of our members to these
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direct marketing offers. We believe that our revenues will be subject to
seasonal fluctuations as a result of general patterns of retail advertising,
which are typically higher during the fourth calendar quarter. In addition,
expenditures by advertisers tend to be cyclical, reflecting overall economic
conditions and consumer buying patterns.
We also offer technology licensing arrangements to customers seeking to
develop email or web-based direct marketing and loyalty programs. We entered
into our first license agreement in December 1998 with Sweden Post, the Swedish
postal service. Sweden Post has established a version of the MyPoints BonusMail
program for the Swedish market. This license agreement provides for a licensing
fee, technical support fees and royalties based on a percentage of revenues from
the program site. We recognized revenue under this agreement when the custom
development work that we performed for Sweden Post was completed and accepted by
Sweden Post. In addition, we will recognize royalty revenue as it is received
from Sweden Post.
We incurred a net loss of $37.5 million in 1999 which includes $3.1 million
for stock-based compensation and $3.1 million for amortization of intangible
assets. We incurred a net loss of $213.7 million in 2000 which includes a charge
of $138.6 million for the impairment of intangible assets, $5.1 million for
stock-based compensation and $26.8 million for amortization of intangible
assets. During the third and fourth quarters of 2000, the Company's revenues
declined from the second quarter of 2000. This decline was primarily
attributable to weak demand for internet marketing services and lower pricing
for the Company's products. The Company expects revenues will decrease in the
first half of 2001 as compared to the second half of 2000.
In the past, we have implemented our strategies by spending substantial
amounts on member acquisition and retention, new product offerings, sales and
marketing strategic relationships, brand development and technology and
operating infrastructure development. The Company is currently assessing its
cost structure in light of its prior losses, a slowdown in the economy, and
other factors. It is unclear when profitability will be achieved, if ever. Even
if we were to achieve profitability in any period, we might fail to sustain or
increase that profitability on a quarterly or annual basis.
RESULTS OF OPERATIONS FOR 1999 AND 2000
Revenues
Revenues increased to $63.5 million in the year ended December 31, 2000 as
compared to $24.1 million in the year ended December 31, 1999. The increase in
revenues for 2000 as compared to 1999 was primarily attributable to the
following: (i) an increase in the number of direct marketing offers to our
members, (ii) an increase in our advertising customer base, and (iii) an
increase in average spending per advertiser. The increase in revenues can also
be attributed to the two acquisitions the Company made during the current year,
ADG and Cybergold. Both acquisitions were accounted for under the purchase
method of accounting. ADG, which was acquired on January 12, 2000 contributed
$3.1 million in revenues during the year ended December 31, 2000. Cybergold
(including its wholly owned subsidiary itarget), which was acquired on August 7,
2000, contributed $4.3 million in revenues from the date of the acquisition to
December 31, 2000.
Cost of Revenues
Cost of revenues primarily represents the costs of incentives awarded to
our members for responding to advertisements and related purchasing activities
associated with our direct marketing offers as well as personnel costs
associated with creating, delivering and monitoring email campaigns. Cost of
revenues increased to $17.4 million in the year ended December 31, 2000 from
$7.4 million in the year ended December 31, 1999.
As a percentage of revenues, these costs decreased to 27% in the year ended
December 31, 2000 from 31% in the year ended December 31, 1999. The decrease in
the cost of revenues as a percentage of revenues in 2000 as compared to 1999 was
primarily attributable to a higher number of revenue-generating responses to
direct marketing offers and an increase in the allowance for unredeemed points
("breakage") on the Company's members payable balance, partially offset by an
increase in personnel costs associated with creating, delivering and monitoring
email campaigns. The cost of personnel included in cost of revenue increased to
$3.6 million in the year ended December 31, 2000 as compared to $0.5 million in
the year ended December 31, 1999. Also contributing to a lower cost of revenue
was reduced costs associated
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with redemption award purchases. As redemption volume has increased, we have
been able to negotiate volume purchase discounts when purchasing gift awards.
Technology Costs
Technology costs primarily consist of compensation for personnel associated
with the development of our technology and the maintenance of our proprietary
databases. To date, we have expensed technology costs as incurred except those
costs directly related to license and partnership agreements. Technology costs
related to these agreements are deferred and recognized over the life of the
contracts, as appropriate. In the year ended December 31, 2000, the Company
deferred approximately $0.7 million, net, related to these agreements.
Additionally, in the future, certain technology costs may be capitalized, as
appropriate. Technology costs increased to $26.9 million in the year ended
December 31, 2000 from $8.7 million in the year ended December 31, 1999. The
increase in technology costs in 2000 as compared to 1999 was primarily due to
increases in personnel and consulting costs and related expenses used to enhance
and support our proprietary databases and products. Technology costs also
increased in the third and fourth quarters of 2000 due to the acquisition of
Cybergold.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of payroll, sales
commissions and related expenses for personnel engaged in sales, marketing and
customer support, as well as advertising and promotional expenditures including
member acquisition costs. Member acquisition costs consist primarily of online
advertising, promotional costs and payments to partners, which may be in the
form of cash or points, to attract members to our email and web-based programs.
Sales and marketing expenses increased to $42.6 million in the year ended
December 31, 2000 from $30.2 million in the year ended December 31, 1999. The
increase in sales and marketing expenses in 2000 as compared to 1999 was
primarily attributable to increases in personnel costs, including sales
commissions, member acquisition costs and related expenses required to implement
our sales and marketing strategy. Sales and marketing cost increases were
partially offset by declining unit costs for new member acquisition during the
second half of 2000 due to general trends in on-line advertising and new, lower
cost membership marketing programs implemented by the Company.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and
related costs for general corporate functions, including finance, accounting,
business development, human resources, investor relations, facilities and
administration, as well as legal fees, insurance, bad debt and fees for
professional services. General and administrative expenses increased to $22.5
million in the year ended December 31, 2000 from $9.6 million in the year ended
December 31, 1999. The increase in general and administrative expenses in 2000
as compared to 1999 was primarily due to the expansion of our corporate
infrastructure, including the addition of finance and administrative personnel,
increased general corporate expenses including legal costs and bad debt
reserves, and facility-related expenses. General and administrative expenses
also increased in the third and fourth quarters of 2000 due to the acquisition
of Cybergold.
Amortization of Intangible Assets
The Company acquired various intangible assets as part of the acquisition
of ERT and a company affiliated with Experian in the fourth quarter of 1998, the
acquisition of ADG in the first quarter of 2000 and the acquisition of Cybergold
in the third quarter of 2000. The Company recorded intangible assets of $11.2
million on the acquisition of ERT and a company affiliated with Experian. These
intangible assets are being amortized over their estimated useful lives of six
months to five years. The Company recorded intangible assets of $14.8 million on
the acquisition of ADG in the first quarter
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of 2000. These intangible assets are being amortized over their estimated useful
lives of thirty-six to ninety months. The Company recorded intangible assets of
$166 million on the acquisition of Cybergold in the third quarter of 2000.
During the fourth quarter of 2000, the Company incurred a write-down of $138.6
million related to these intangible assets. See discussion below. The remaining
intangible assets related to the Cybergold acquisition are being amortized over
their estimated useful lives of thirty-six months.
We recorded amortization of intangible assets of $26.8 million in the year
ended December 31, 2000 as compared to $3.1 million in the year ended December
31, 1999. The increase in the amortization of intangible assets in 2000 as
compared to 1999 was due to the acquisitions of ADG and Cybergold in 2000.
Impairment of Intangible Assets
On April 14, 2000, the Company agreed to acquire Cybergold. In the
evaluation of the merger, the Company identified several potential benefits of
the merger including:
- the opportunities for MyPoints to achieve growth and a leading market
position;
- the potential synergies of the combined companies in marketing,
technology and sales;
- the opportunity for MyPoints to accelerate its revenue growth and reduce
its time to profitability based on synergies from the merger;
- the acquisition of a pool of talented and highly skilled employees with
proven capabilities in a tight labor market; and
- Cybergold's patents;
At the time the merger agreement was signed, Cybergold had experienced
rapid growth to 179 employees with revenues having grown to $4.3 million during
the first quarter of 2000, an increase of over 700% from the $0.5 million
reported in the first quarter of 1999. At the time that the merger was
consummated on August 7, 2000, the Company anticipated continued growth from the
Cybergold business and planned to integrate the Cybergold business to achieve
cost savings.
During the period from August 7 through September 30, 2000, the Cybergold
business unit generated $2.6 million in revenues, a level consistent with the
first quarter 2000, but less than internal projections. During this period,
approximately 6% of Cybergold's employees departed (from 148 to 139).
In October of 2000, the Company reduced headcount at the Cybergold business
unit by approximately 50% (from 139 to 74) and outsourced the operation of the
technical backend of the Cybergold operations to an affiliate. During the fourth
quarter additional staff departed, including key managers associated with the
business.
As a result of the overall changes in integration strategy, management
changes, staff departures and a weaker on-line advertising market, revenues from
the Cybergold business declined sharply in the fourth quarter to $1.7 million.
Cybergold's revenues in the fourth quarter were over 80% less than internal
projections, and were approximately 50% less than the third quarter. Revenues
from Cybergold's 10 largest customers experienced a similar reduction.
Additionally, the effective price per email sent by Cybergold declined
substantially during the fourth quarter.
In December 2000, the Company appointed a new general manager of the
Cybergold operations and decided to close Cybergold's Itarget subsidiary due to
sharp declines in revenues and the departure of Itarget's founder from the
Company. By December, Cybergold's total employee base had declined by 61% from
the acquisition date (148 to 58) and virtually all of its senior managers had
departed or had been reassigned to new duties. The integration plan was again
modified to reduce integration costs as the anticipated costs of combining the
MyPoints and Cybergold databases was greater than the Company had anticipated.
Since the acquisition of Cybergold in April, the Company's stock price has
had a sustained decline and has been reduced by approximately 90%.
The Company is currently evaluating the Cybergold business unit as a stand
alone product line and may discontinue its operations or merge all or part of
its membership list into the Mypoints program.
Due to the impairment factors described above, the Company performed an
impairment assessment of identified intangibles and goodwill recorded in
connection with the acquisition of Cybergold. As a result, the Company recorded
a $138.6 million impairment charge to reduce goodwill. The charge was based upon
the estimated discounted cash flows over the remaining useful life of the
goodwill using a discount rate of 20%. The assumptions supporting the cash
flows, including the discount rate, were determined using the Company's best
estimates as of such date. The discount rate was determined based upon the
weighted average cost of capital of comparable companies. The remaining goodwill
and identifiable intangibles balance are expected to be amortized over the
remaining useful life.
Stock-Based Compensation
Stock-based compensation increased to $5.1 million in the year ended
December 31, 2000 as compared to $3.1 million in the year ended December 31,
1999. The increase in stock-based compensation expense in 2000 as compared to
1999 is primarily related to grants of stock options to employees at prices
below market value (prior to the Company's initial public offering) and
stock-based compensation related to the Cybergold acquisition.
Interest Income
Interest income increased to $6.6 million in the year ended December 31,
2000 from $0.6 million in the year ended December 31, 1999. This increase is
primarily due to interest earned on higher average cash and investment balances
resulting from proceeds received from our initial public offering which was
completed in August 1999, our follow-on offering which was completed in February
2000, and cash and investment balances held by Cybergold upon acquisition in
August 2000.
Write-down of Notes and Interest Receivable
In connection with the ADG acquisition in January 2000, the net assets
purchased included notes and interest receivable amounting to $ 2.0 million.
These notes and interest receivable are due from two former shareholders of ADG.
During the year ended December 31, 2000, the Company determined that the notes
and related interest were not fully collectible. The carrying value of the notes
and interest receivable were reduced to their estimated net realizable value.
Income Taxes
We recorded a net loss of $213.7 million in 2000 and a net loss of $37.5
million in 1999. Accordingly, no provision for income taxes was recorded in the
year and no tax benefit has been recognized due to the uncertainty of realizing
a future tax deduction for these losses.
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RESULTS OF OPERATIONS FOR 1998 AND 1999
We completed the acquisitions of internet and electronic commerce related
assets from ERT and a company affiliated with Experian during November and
December 1998. Accordingly, actual results of operations for the years ended
December 31, 1998 and 1999 include results for the acquired businesses from the
dates of acquisition.
Revenues
For 1999, total revenues increased to $24.1 million from $1.3 million in
1998. The increase in revenues for 1999 as compared to 1998 was primarily
attributable to the following: (i) an increase in the number of direct marketing
offers to our members, (ii) an increase in our advertising customer base, and
(iii) an increase in average spending per advertiser. Additionally, we
recognized license revenues of $614,000 in 1999 attributable to our license
arrangement with Sweden Post.
Cost of Revenues
Cost of revenues represents the costs of points awarded to our members for
receiving and responding to advertisements and related purchasing activities
associated with our direct marketing offers as well as personnel costs
associated with creating, delivering and monitoring email campaigns. For 1999,
cost of revenues increased to $7.4 million from $1.1 million in 1998. As a
percentage of revenues, these costs decreased to 31% in 1999 from 87% in 1998.
The decrease in the cost of revenues as a percentage of revenues in 1999 as
compared to 1998 is primarily attributable to a higher number of
revenue-generating responses to direct marketing offers, as well as the
elimination of points cost associated with members' receipt of email direct
marketing offers. We eliminated this points cost because we discontinued our
practice of providing points to members for simply receiving our email direct
marketing offers. We discontinued this practice in April 1999. We now require
members to respond to email offers to earn points.
Technology Costs
Technology costs primarily consist of compensation for personnel associated
with the development of our technology and the maintenance of our proprietary
database. We expense technology costs as incurred. For 1999, technology costs
increased to $8.7 million from $1.5 million in 1998. This increase was primarily
due to increased number of personnel and related expenses used to enhance and
support our proprietary database and products. We expect our technology costs to
increase in future periods as we continue to improve and enhance our direct
marketing technology and expand our membership database.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of payroll, sales
commissions and related expenses for personnel engaged in sales, marketing and
customer support, as well as advertising and promotional expenditures including
member acquisition costs. Member acquisition costs consist primarily of online
advertising, promotional costs and payments to partners, which may be in the
form of cash or points, to attract members to our email and web-based programs.
For 1999, sales and marketing expenses increased to $30.2 million from $4.5
million in 1998. This increase was primarily attributable to increased number of
personnel and related expenses required to implement our sales and marketing
strategy as well as increased promotional and advertising expenses. We expect
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increases in sales and marketing expenses to continue in future periods as we
continue to hire additional marketing and sales employees, and continue to spend
more on member acquisition and promotions.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and
related costs for general corporate functions, including finance, accounting,
business development, human resources, investor relations, facilities and
administration, as well as legal fees, insurance, bad debt and fees for
professional services. General and administrative expenses increased to $9.6
million in 1999 from $2.0 million in 1998. This increase was primarily due to
the expansion of our corporate infrastructure, including the addition of finance
and administrative personnel. We expect general and administrative expenses to
increase in absolute dollars in future periods as we expand our administrative
staff to support the growth of our operations.
Amortization of Intangible Assets
As part of the acquisition of assets from ERT and a company affiliated with
Experian, in the fourth quarter of 1998, we recorded intangible assets related
to the acquired assets in the amount of $11.2 million. These intangible assets
include core technology, purchased trademark, assembled workforce and other
intangibles. These intangibles are being amortized over their estimated useful
lives of six months to five years. We recorded amortization of intangible assets
of $3.1 million in 1999 as compared to $275,000 in 1998. Amortization charges in
1998 were attributable to the acquisition of ERT and a company affiliated with
Experian, which was completed in the fourth quarter of 1998.
Stock-Based Compensation
As of December 31, 1999, we recorded aggregate deferred compensation
totaling $12.7 million in connection with the grant of stock options to
employees and consultants. This charge is being amortized over the vesting
periods of the options, which generally range from three to four years.
Stock-based compensation increased to $3.1 million during 1999 from $158,000
during 1998.
Interest Income
Interest income increased to $633,000 in 1999 from $87,000 in 1998. This
increase is primarily due to interest earned on higher average cash and
investment balances resulting from proceeds received from our initial public
offering which was completed in August 1999.
Income Taxes
We recorded a net loss of $37.5 million for 1999. Accordingly, no provision
for income taxes was recorded in the year and no tax benefit has been recognized
due to the uncertainty of realizing a future tax deduction for these losses.
LIQUIDITY AND CAPITAL RESOURCES
Since incorporation, we have financed our operations primarily from the
sale of equity securities to venture capital firms and other individual,
institutional and strategic investors as well as our initial public offering in
August 1999 and our follow-on public offering in February 2000. We have also
borrowed funds under long-term capital lease and equipment financing facilities.
The outstanding members payable liability balance at December 31, 2000
amounted to $18.5 million. This liability is made up of cash balances owed to
Cybergold members amounting to $3.8 million and point balances owed to Mypoints
members. The total number of outstanding points issued to members
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in the MyPoints database for which we have a recognized liability as of December
31, 2000 was approximately 2.3 billion points with a redemption liability of
$14.7 million. This liability was calculated based on certain assumptions,
including the assumption that 72% of the outstanding points would be redeemed in
the future. We also use historical redemption activity and individual member
account activity to determine our estimated redemption liability. The factors
that were considered in our estimated point redemption liability include points
held by terminated and inactive members, as well as those members we believe
will not respond to our direct marketing offers with sufficient frequency to
accumulate points to meet our minimum redemption levels. This information is
updated on a quarterly basis. The total number of points redeemed by members was
227 million in 1999 and 988 million in the year ended December 31, 2000. Our
current policy is that unredeemed points held by inactive members will expire no
later than December 31 of the second calendar year following the calendar year
in which such points are first deemed earned. Although we do not anticipate
making changes to our current policy we reserve the right to alter point
expiration terms at anytime. Members may redeem points at their discretion at
any time prior to the expiration of the points. We fund redemptions through our
working capital resources. Because we cannot control the timing of members'
decisions to redeem, should the rate of redemption exceed our estimates, it
could be necessary for us to obtain additional working capital and our results
of operations could be materially and adversely affected.
Net cash used in operating activities was $32.6 million in the year ended
December 31, 2000. This cash used in operating activities was due to our
expanded operations and primarily resulted from the net loss and a reduction in
accounts payable and accrued liabilities partially offset by an increase in the
members payable liability and deferred revenue. Net cash used in investing
activities was $9.7 million in the year ended December 31, 2000 which was
primarily used to acquire property and equipment, primarily computer equipment,
software and leasehold improvements. Net cash provided by financing activities
was $109.6 million in the year ended December 31, 2000 which includes net
proceeds of $105.7 million from our follow-on offering in February 2000.
At December 31, 2000 we had unrestricted cash, cash equivalents and liquid
short-term investments of $105.1 million.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, we may need to raise
additional funds to fund more rapid expansion, to develop new or enhance
existing services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If adequate funds are not
available on acceptable terms, our business, results of operations and financial
condition could be materially and adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires recognition of all derivatives as assets or liabilities and measurement
of those instruments at fair value. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the required date of adoption of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. The effect of SFAS No. 133 is not
expected to be material to the Company's financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"),"Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The effect of SAB 101 was not
material to the Company's financial statements.
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In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44") "Accounting for Certain Transactions
involving Stock Compensation," an interpretation of APB No. 25. FIN No. 44
clarifies the application of APB No. 25 for (a) the definition of employee for
purposes of applying APB 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. FIN No. 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN No. 44 did not have a material effect on the Company's
financial position or results of operations for fiscal year 2000.
Recent Developments
At its September 2000 meeting, the Financial Accounting Standards Board
Emerging Issues Task Force, the EITF, began discussing Issue No. 00-22,
"Accounting for 'Points' and Certain Other Time- or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to be Delivered in the Future."
EITF Issue No. 00-22 addresses the accounting for revenues and expenses relating
to point and other loyalty programs. The EITF has not yet reached a consensus on
this issue and plans on discussing it at future meetings. Among alternatives
under consideration by the EITF is one that would, if adopted, result in a
significant delay in the timing of when we recognize revenue from the
transmission of email advertisements to enrolled members and receipt of
qualified responses to this email. Our current policy is to recognize revenue
when email is transmitted to members and responses are received. The alternative
under consideration by the EITF would result in this revenue being deferred
until points issued in connection with such emails are redeemed for rewards by
our members. We believe that our current revenue recognition policy related to
the transmission of email advertisements to enrolled members and receipt of
qualified responses to such email is in accordance with generally accepted
accounting principles and is based on views published by and consultations with
the Securities and Exchange Commission, as our advertising contracts with our
business partners speak to performing advertising services and do not require
the issuance of points.
We are unable to quantify the impact of the proposed alternatives on our
financial results or predict the outcome of the EITF's project. We cannot assure
you as to what, if any, change, may ultimately be required by actions taken by
the EITF in this project.
FACTORS AFFECTING OPERATING RESULTS
Our results of operations have varied widely in the past and we expect that
they will continue to vary significantly in the future due to number of factors,
including those set forth under "Risks Associated with our Business" in Item 1
of this report. You should read the "Risks Associated with our Business" section
of this report carefully. Due to these factors, we believe that
quarter-to-quarter or year-to-year comparisons of our results of operations are
not a good indication of our future performance. Our results of operations in
some future quarter may be below the expectations of public market analysts and
investors. In this event, the price of our common stock is likely to decline.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates is limited to the
exposure related to our debt instruments which are tied to market rates. We do
not plan to use derivative financial instruments in our investment portfolio. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risks, market risk and reinvestment risk. We plan to invest in
high-credit quality securities. See note 2 to the notes to the financial
statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
MYPOINTS.COM, INC. -- CONSOLIDATED FINANCIAL STATEMENTS
Report of PricewaterhouseCoopers LLP, Independent Accountants..................
Consolidated Balance Sheets....................................................
Consolidated Statements of Operations..........................................
Consolidated Statements of Stockholders' Equity................................
Consolidated Statements of Cash Flows..........................................
Notes to Consolidated Financial Statements.....................................
Financial Statement Schedules:
II -- Valuation and Qualifying Accounts for each of the three years in the
period ended December 31, 2000
All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MyPoints.com, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of MyPoints.com, Inc. and its subsidiaries at December 31, 1999 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly in all material respects the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and the financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
March 29, 2001
San Francisco, California
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MYPOINTS.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, December 31,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,792 $ 89,137
Short-term investments -- 15,962
Accounts receivable, net of allowance of $1,288 and $4,797
in 1999 and 2000, respectively 12,500 14,793
Unbilled receivables, net 257 1,604
Prepaid expenses and other current assets 2,186 3,706
-------- ---------
Total current assets 36,735 125,202
Restricted cash 2,208 2,601
Long-term investments -- 2,425
Investment in and amounts due from Magnacash -- 1,326
Property and equipment, net 8,891 14,831
Other assets 78 1,735
Intangible assets 7,757 23,477
-------- ---------
Total assets $ 55,669 $ 171,597
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 13,842 $ 19,438
Current portion of long-term obligations 432 608
Deferred revenue 1,873 4,236
Members payable 9,640 18,534
-------- ---------
Total current liabilities 25,787 42,816
Long-term obligations 1,029 782
-------- ---------
26,816 43,598
-------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000
shares authorized; none issued and outstanding
at December 31, 1999 and 2000, respectively -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized; 25,924,533 and 40,522,611 shares issued
and outstanding at December 31, 1999 and 2000,
respectively 26 41
Additional paid-in capital 96,711 403,106
Deferred stock-based compensation (9,406) (2,699)
Accumulated deficit (58,478) (272,154)
Less: cost of shares of common stock in treasury (216,000
shares) -- (295)
-------- ---------
Total stockholders' equity 28,853 127,999
-------- ---------
Total liabilities and stockholders' equity $ 55,669 $ 171,597
======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
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MYPOINTS.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
1998 1999 2000
------- -------- ---------
Revenue:
Advertising $ 1,286 $ 23,526 $ 63,501
License -- 614 --
------- -------- ---------
Total revenue 1,286 24,140 63,501
------- -------- ---------
Cost of revenue:
Advertising 1,121 7,212 17,425
License -- 195 --
------- -------- ---------
Total cost of revenue 1,121 7,407 17,425
------- -------- ---------
Gross profit 165 16,733 46,076
------- -------- ---------
Operating expenses:
Technology costs 1,520 8,665 26,917
Sales and marketing expenses 4,513 30,247 42,557
General and administrative expenses 2,028 9,601 22,521
Amortization of intangible assets 275 3,116 26,830
Impairment of intangible assets -- -- 138,573
Stock-based compensation 158 3,054 5,110
------- -------- ---------
Total operating expenses 8,494 54,683 262,508
------- -------- ---------
Operating loss (8,329) (37,950) (216,432)
Interest income 87 633 6,581
Equity interest in investments -- -- (670)
Loss on sale of Magnacash -- -- (995)
Write-down of notes and interest receivable -- -- (1,605)
Interest expense and other, net (24) (139) (555)
------- -------- ---------
Net loss (8,266) (37,456) (213,676)
Dividend related to beneficial
conversion of preferred stock -- (9,800) --
------- -------- ---------
Net loss attributable to
common stockholders $(8,266) $(47,256) $(213,676)
======= ======== =========
Net loss per share:
Basic and diluted $ (4.37) $ (3.53) $ (6.47)
======= ======== =========
Weighted average shares --
basic and diluted 1,890 13,397 33,044
======= ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
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MYPOINTS.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Preferred Stock
Convertible Common Stock Additional
------------------ ------------------ Paid-in
Shares Amount Shares Amount Capital
------- ------- -------- ------ -----------
Balance at January 1, 1998 5,900 $ 6 2,500 $ 3 $ 6,027
Issuance of Series C preferred stock for cash,
net of issuance costs of $6 527 784
Issuance of common stock upon exercise of stock options 96 9
Issuance of stock options to non-employees for services 13
Issuance of warrants to non-employees 12
Issuance of Series D preferred stock for cash, net of
issuance costs of $12 2,748 3 5,646
Issuance of Series D preferred stock, net of issuance
costs of $28, pursuant to an acquisition 1,214 1 2,939
Issuance of common stock pursuant to an acquisition 3,600 3 5,375
Issuance of stock options pursuant to an acquisition 264
Deferred stock-based compensation 1,782
Net loss
Repurchase of common stock (181)
------- ------- -------- ---- ---------
Balance, December 31, 1998 10,389 10 6,015 6 22,851
Issuance of common stock for cash, net of issuance
costs of $1,575 5,811 6 41,199
Receipt of subscription receivable from Series D
preferred stock
Issuance of Series E preferred stock for cash,
net of issuance costs of $50 2,000 2 9,948
Issuance of warrants 807
Receipt of subscription receivable from Series E
preferred stock
Beneficial conversion feature related to issuance
of preferred stock (9,800) 9,800
Dividend related to beneficial conversion feature
of preferred stock 9,800
Exercise of warrants for cash 704 1 1,449
Cashless exercise of warrants 503 1
Exercise of stock options for cash 478 209
Exercise of stock options for note receivable 25
Conversion of preferred stock to common stock (12,389) (12) 12,389 12
Net loss
Deferred stock-based compensation 10,448
------- ------- -------- ---- ---------
Balance, December 31, 1999 -- -- 25,925 26 96,711
Issuance of common stock for cash, net of
issuance costs of $798 2,606 3 106,721
Issuance of common stock pursuant to the acquisition
of Alliance Development Group, Inc. 270 16,562
Issuance of common stock pursuant to the acquisition
of Cybergold, Inc. 10,636 11 181,801
Exercise of stock options for cash 1,086 1 3,716
Net loss
Deferred stock-based compensation (2,405)
Purchase of treasury stock
------- ------- -------- ---- ---------
Balance, December 31, 2000 -- $ -- 40,523 $ 41 $ 403,106
======= ======= ======== ==== =========
Stock Deferred
Subscription Stock-based Accumulated Treasury
Receivable Compensation Deficit Stock Total
------------ ------------ ---------- -------- ---------
Balance at January 1, 1998 $ (388) $ (2,956) $ -- $ 2,692
Issuance of Series C preferred stock for cash,
net of issuance costs of $6 784
Issuance of common stock upon exercise of stock options 9
Issuance of stock options to non-employees for services 13
Issuance of warrants to non-employees 12
Issuance of Series D preferred stock for cash, net of
issuance costs of $12 (350) 5,299
Issuance of Series D preferred stock, net of issuance
costs of $28, pursuant to an acquisition 2,940
Issuance of common stock pursuant to an acquisition 5,378
Issuance of stock options pursuant to an acquisition 264
Deferred stock-based compensation (1,624) 158
Net loss (8,266) (8,266)
Repurchase of common stock --
------ -------- ---------- ------ ---------
Balance, December 31, 1998 (350) (2,012) (11,222) -- 9,283
Issuance of common stock for cash, net of issuance
costs of $1,575 41,205
Receipt of subscription receivable from Series D
preferred stock 350 350
Issuance of Series E preferred stock for cash,
net of issuance costs of $50 (9,950) --
Issuance of warrants 807
Receipt of subscription receivable from Series E
preferred stock 9,950 9,950
Beneficial conversion feature related to issuance
of preferred stock --
Dividend related to beneficial conversion feature
of preferred stock (9,800) --
Exercise of warrants for cash 1,450
Cashless exercise of warrants 1
Exercise of stock options for cash 209
Exercise of stock options for note receivable --
Conversion of preferred stock to common stock --
Net loss (37,456) (37,456)
Deferred stock-based compensation (7,394) 3,054
------ -------- ---------- ------ ---------
Balance, December 31, 1999 -- (9,406) (58,478) -- 28,853
Issuance of common stock for cash, net of
issuance costs of $798 106,724
Issuance of common stock pursuant to the acquisition
of Alliance Development Group, Inc. 16,562
Issuance of common stock pursuant to the acquisition
of Cybergold, Inc. (808) 181,004
Exercise of stock options for cash 3,717
Net loss (213,676) (213,676)
Deferred stock-based compensation 7,515 5,110
Purchase of treasury stock (295) (295)
------ -------- ---------- ------ ---------
Balance, December 31, 2000 $ -- $ (2,699) $ (272,154) $ (295) $ 127,999
====== ======== ========== ====== =========
The accompanying notes are an integral part of these
consolidated financial statements.
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MYPOINTS.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
------- -------- ---------
Cash flows from operating activities:
Net loss $(8,266) $(37,456) $(213,676)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 555 4,901 32,675
Impairment of intangible assets -- -- 138,573
Loss on sale of Magnacash -- -- 995
Equity interest in investments -- -- 670
Write-down of notes and interest receivable -- -- 1,605
Write-off of collateral for loan guarantee -- -- 357
Provision for bad debts 60 1,228 2,859
Revenues in exchange for equity instruments -- -- (528)
Barter revenues, net (59) 67 --
Issuance of stock options to non-employees for services 15 -- --
Stock - based compensation 158 3,054 5,110
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables (639) (12,986) (775)
Prepaid expenses and other current assets (138) (1,482) (1,642)
Other assets (28) (61) (1,197)
Accounts payable, accrued and other liabilities 878 9,679 (5,694)
Deferred revenue 258 1,242 2,334
Members payable 1,732 6,913 5,729
------- -------- ---------
Net cash used in operating activities (5,474) (24,901) (32,605)
------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment (358) (7,191) (9,848)
Proceeds received pursuant to an acquisition 1,747 -- --
Acquisition of ADG, net of cash acquired -- -- (175)
Acquisition of Cybergold, net of cash acquired -- -- 2,515
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40
Note receivable from Magnacash -- -- (1,100)
Purchases of short-term investments -- -- (5,566)
Proceeds from short-term investments -- -- 7,531
Purchase of long-tem investments -- -- (2,267)
Payment of restricted cash -- (2,208) (750)
------- -------- ---------
Net cash provided by (used in) investing activities 1,389 (9,399) (9,660)
------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net 6,084 10,300 --
Proceeds from issuance of common stock, net -- 41,205 106,724
Purchase of treasury stock -- -- (295)
Bank overdraft (54) -- --
Borrowings under credit line 400 -- --
Repayments of borrowings (213) (791) (536)
Repayments of software license -- (2,624) --
Borrowing under capital lease line -- 1,254 --
Proceeds from exercise of stock options 9 209 3,717
Proceeds from exercise of warrants -- 1,450 --
------- -------- ---------
Net cash provided by financing activities 6,226 51,003 109,610
------- -------- ---------
Net increase in cash and cash equivalents 2,141 16,703 67,345
Cash and cash equivalents, beginning of period 2,948 5,089 21,792
------- -------- ---------
Cash and cash equivalents, end of period $ 5,089 $ 21,792 $ 89,137
======= ======== =========
See supplemental disclosure of cash flow information in note 14.
The accompanying notes are an integral part of these
consolidated financial statements.
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MYPOINTS.COM, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
MyPoints.com, Inc. and its wholly owned subsidiaries (together, the
"Company") was founded in November 1996. The Company offers advertisers the
ability to target internet users enrolled as members of its direct marketing and
loyalty programs. The Company's programs provide enrolled members awards for
responding to advertisements. Awards may be redeemed by members for gift
certificates, other rewards or cash depending upon the program the member is
enrolled in. The Company has determined that it does not have any separately
reportable business segments as of December 31, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 in the consolidation process.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Such estimates include the levels of valuation allowances for doubtful accounts
receivable, deferred taxes, members payable liability and the value of the
Company's capital stock. Actual results could differ from those estimates, and
such differences could be material.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests its excess cash in debt instruments of the U.S.
Government and its agencies, high-quality corporate issuers and money market
funds. All highly liquid instruments with an original maturity of three months
or less are considered cash equivalents; those with original maturities greater
than three months and less than twelve months are considered short-term
investments.
LONG-TERM INVESTMENTS
The Company invests in equity instruments of privately-held companies for
business and strategic purposes. These investments are included in long-term
investments and are accounted for under the cost method when ownership is less
than 20% and the Company does not have the ability to exercise significant
influence over operations. For these investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses when events and circumstances indicate that such
assets might be impaired. To date, no such impairment has been recorded.
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LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with 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" whereby assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The Company
estimates undiscounted future cash flows produced by the asset, or the
appropriate grouping of assets, and compares such cash flows to the assets'
carrying value. Where it is determined that the assets' carrying value exceeds
expected undiscounted cash flows, the loss is measured based on quoted market
prices in active markets, if available. If quoted market prices are not
available the estimate of fair value is based on various valuation techniques,
including a discounted value of estimated future cash flows and other
fundamental analysis.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements are stated at cost
and depreciated using the straight-line method over their respective estimated
useful lives, which range from three to seven years. Maintenance and repairs are
charged to expense as incurred, and improvements and betterments are
capitalized. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is reflected in the consolidated statement of operations
for the period in which it is realized.
INTANGIBLE ASSETS
Identified intangible assets resulting from the acquisition of Enhanced
Response Technologies, Inc. ("ERT"), MotivationNet LLC ("MNet"), Cybergold, Inc.
("Cybergold") and MyPoints Offline Services, Inc., formerly known as Alliance
Development Group, Inc., ("ADG") were estimated by management to comprise the
acquired trademark and trade name, customer base, membership base, workforce,
technology license agreements and other intangible assets, comprising primarily
goodwill. Intangible assets are amortized on a straight-line basis over the
estimated periods of benefit which range from six to ninety months.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are determined based on temporary differences between the financial
statement and tax bases of assets and liabilities and net operating loss and
credit carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
A provision for income tax expense is recognized for income taxes payable for
the current period, plus the net changes in deferred tax amounts.
MEMBERS PAYABLE LIABILITY
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The Company's members payable liability balance consists of cash amounts
due to members of the Cybergold database and points redemption liability payable
to the members of the MyPoints database. The members payable liability
represents the estimated costs associated with the Company's obligation to
redeem outstanding member balances, less an allowance for awards expected to
expire prior to redemption, which may be converted by enrolled members into
various third party gift certificates, frequent travel programs, coupons, other
rewards or for cash in regards to the Cybergold database members. Awards are
provided to members when they respond to direct marketing offers delivered by
the Company, or purchase goods from advertisers. The Company is liable for
providing the rewards to members, if and when such members seek to redeem
accumulated awards upon reaching required redemption thresholds.
The liability for the Company's point balance member accounts is estimated
based upon the weighted average cost of awards that may be redeemed in the
future. The liability is based upon redemption cost trends and management
estimates of future redemption costs. Under the Company's current points
program, unredeemed points held by inactive members are valid through December
31st of the second calendar year following the date they are awarded to a member
and may be redeemed at any time prior to expiration. The Company bases its
estimate of points that will not be redeemed on an analysis of historical point
earning trends, redemption activity and individual member accounts. This
analysis is updated quarterly. At December 31, 1999 and December 30, 2000, the
allowance for unredeemed points was $2.8 million and $5.7 million, respectively.
As of December 31, 2000, the gross points redemption liability was $20.4
million.
The liability for the Company's cash balance members accounts is recorded
at its outstanding cash balance which has been reduced by fees charged to
members who are inactive. As of December 31, 2000, the cash balance member
liability amounted to $3.8 million.
REVENUE RECOGNITION
The Company earns revenues from corporate advertisers by charging fees for
sending email to its members. Under the terms of advertising contracts, the
Company earns revenues primarily based on three components: (1) transmission of
email advertisements to enrolled members, (2) receipt of qualified responses to
email sent and (3) actual purchases of goods by members over the internet. It is
the Company's policy to recognize revenues when email is transmitted to members,
when responses are received and when the Company is notified of purchases. Each
of these activities are discrete, independent activities, which generally are
specified in the advertising sales agreement entered into with the customer. As
the earning activities take place, activity measurement data (e.g., number of
emails sent, and number of responses received) is accumulated and the related
revenues are recorded.
The Company also sells points to private label partners and to advertisers
for use in such partner's or advertiser's promotional campaigns. The Company is
responsible for redeeming a member's points upon the balance reaching required
thresholds and request by the member recipients of points. Revenues and
estimated point costs under these contracts are deferred until the time points
are redeemed and an award is provided by the Company or the points expire prior
to redemption. The Company expects that sales of points will likely represent a
decreasing percentage of its business in the future but has continued to
participate in the sale of points business.
ADG, a wholly owned subsidiary of the Company specializes in rewards-based
credit card loyalty programs. ADG typically provides assistance with program
development and implementation, marketing consultation and travel rewards. ADG
recognizes revenues when purchases are made with credit cards that ADG has
developed and implemented.
Also included in revenues are revenues generated from exchanging lead
generation and advertising services for advertising services. Such transactions
are recorded at the lower of the estimated fair value of the advertisements
received or delivered, whichever is more reliably measurable. Revenues from
these types of transactions are recognized when advertising or lead generation
is provided, and services received are charged to expense when used. For the
years ended December 31, 1999 and 2000, these revenues amounted to zero and $1.4
million, respectively.
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44
During the year ended December 31, 2000, the Company entered into
cross-marketing arrangements with various third parties. These arrangements
provided for the Company to generate qualified response of leads and advertising
services in exchange for advertising services from the various third parties. As
the fair value of the services exchanged could not be reasonably determined, the
Company recorded the transactions on a net basis resulting in no revenue or
expense for these transactions.
During the years ended December 31, 1999 and 2000, the Company generated
revenues in the amount of zero and $0.5 million, respectively, in exchange for
equity instruments. Such transactions are recorded at the estimated fair value
of the advertisements delivered or the fair value of the equity instruments
received, whichever is more reliably measurable.
TECHNOLOGY COSTS
Product development costs and costs of enhancing existing products are
charged to technology costs as incurred except those costs related to license
and partnership agreements, which are capitalized and amortized over the life of
the agreement, as appropriate. Software development costs are required to be
capitalized beginning when a product's technological feasibility has been
established by completion of a working model of the product, and ending when the
product is available for general release to customers. To date, completion of a
working model of the Company's products and general release have substantially
coincided. In the years ended December 31, 1999 and 2000, the Company
capitalized zero and $0.8 million, respectively, related to license and
partnership agreements. During the year ended December 31, 2000, the Company
amortized $0.1 million of these costs.
BUSINESS RISKS AND CONCENTRATION OF CREDIT RISKS
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by companies in
new and rapidly evolving markets for Internet products and services. These risks
include the failure to develop and extend the Company's online service brands,
the rejection of the Company's services by web consumers and/or advertisers and
the inability of the Company to maintain and increase the levels of traffic on
its online services, as well as other risks and uncertainties. Failure to
address these risks successfully may have a material adverse impact on the
Company's operations and financial position.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments,
including money market mutual fund accounts, short-term investments and accounts
receivable. The Company deposits its temporary cash investments and short-term
investments with two financial institutions and these deposits exceed insured
amounts. The Company evaluates customer creditworthiness and establishes
allowances as necessary based on management estimates of collectibility.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, for stock awards qualifying for fixed expense recognition, compensation
expense is based on the difference, if any, on the date of the grant, between
the estimated fair value of the Company's stock and the exercise price of
options to purchase that stock. For stock based awards that do not qualify for
fixed expense recognition, the value of the underlying unvested award is
periodically remeasured, and the resulting adjustment is recognized as
compensation expense.
TREASURY STOCK
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45
In September 2000, the board of directors authorized the repurchase, at
management's discretion, of up to $20 million of the Company's common stock. The
Company's repurchases of shares of common stock are recorded as treasury stock.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic net income per share is
computed by dividing the net income available to common stockholders for the
period by the weighted average number of vested common shares outstanding during
the period. Diluted net income per share is computed by dividing the net income
for the period by the weighted average number of vested common and common
equivalent shares outstanding during the period. However, as the Company has
generated net losses in all periods presented, common equivalent shares,
composed of incremental common shares issuable upon the exercise of stock
options and warrants and upon conversion of Series A, Series B, Series C, Series
D and Series E convertible preferred stock, are not included in diluted net loss
per share (prior to conversion on August 19, 1999) because such shares are
anti-dilutive.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
------- -------- ---------
Numerator:
Net loss $(8,266) $(37,456) $(213,676)
Dividend related to beneficial
conversion feature of preferred stock -- (9,800) --
------- -------- ---------
Net loss available to common
stockholders $(8,266) $(47,256) $(213,676)
======= ======== =========
Denominator:
Weighted average shares 2,856 13,964 33,196
Weighted average unvested
common shares subject to
repurchase agreements (966) (567) (152)
------- -------- ---------
Denominator for basic calculation 1,890 13,397 33,044
Weighted average effect of
dilutive securities:
Net effect of dilutive stock options -- -- --
Net effect of dilutive stock warrants -- -- --
------- -------- ---------
Denominator for diluted calculation 1,890 13,397 33,044
======= ======== =========
Net loss per share:
Basic $ (4.37) $ (3.53) $ (6.47)
======= ======== =========
Diluted $ (4.37) $ (3.53) $ (6.47)
======= ======== =========
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46
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires recognition of all derivatives as assets or
liabilities and measurement of those instruments at fair value. In June 1999,
the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133," which deferred the required date of adoption of SFAS
No. 133 for one year, to fiscal years beginning after June 15, 2000. The effect
of SFAS No. 133 is not expected to be material to the Company's financial
statements.
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The effect of SAB No. 101 was not material to the
Company's financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44") "Accounting for Certain Transactions
involving Stock Compensation," an interpretation of APB No. 25. FIN No. 44
clarifies the application of APB No. 25 for (a) the definition of employee for
purposes of applying APB 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. FIN No. 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN No. 44 did not have a material effect on the Company's
financial position or results of operations for fiscal year 2000 (see note 16).
3. ACQUISITIONS
On January 12, 2000, the Company agreed to acquire all the outstanding
shares of ADG. ADG operates offline customer reward programs including rewards
based credit card loyalty programs. The total purchase price of approximately
$16.7 million included 270,000 shares of the Company's common stock with an
estimated fair value of $16.6 million based upon its value at the closing of the
transaction. Following the acquisition, ADG is now a wholly owned subsidiary of
the Company.
On August 7, 2000, the Company acquired all of the outstanding shares of
Cybergold, a Delaware Corporation as approved by the Company's Board of
Directors on April 14, 2000. Cybergold was a public company that provided online
direct marketing and advertising solutions. The shares were acquired in a
tax-free stock-for-stock exchange. Each share of Cybergold was exchanged for
0.48 shares of the Company's common stock resulting in the issuance of
approximately 10.6 million shares of the Company's common stock. In addition,
the Company assumed all outstanding options to purchase Cybergold common stock
at a ratio of 0.48 of the Company's shares for each share of Cybergold common
stock underlying the option. Following the acquisition, Cybergold became a
wholly-owned subsidiary of the Company.
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47
The Company has accounted for the Cybergold transaction under the purchase
method of accounting. The purchase price of the Cybergold acquisition amounted
to $184.8 million including the estimated value of the Company's shares and
transaction costs of $3.0 million. The purchase price allocation is as follows
(in millions):
Amount
------
Fair value of tangible net assets acquired $ 17.8
Membership base 1.7
Existing technology 1.2
Workforce 3.7
Deferred compensation 0.8
Goodwill 159.6
------
Total purchase price $184.8
======
The Company is amortizing the intangibles acquired in the Cybergold acquisition
over their estimated useful lives of 3 years.
Following its acquisition by the Company, Cybergold experienced significant
changes in market conditions which led to substantial declines in revenue. Due
to the significance of these changes, management performed an evaluation of the
recoverability of the long-lived assets of Cybergold as described in Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" during the fourth
quarter ended December 31, 2000. Management concluded from the results of this
evaluation that a significant impairment of goodwill had occurred and recorded a
$138.6 impairment charge to reduce goodwill. The charge was based upon the
estimated discounted cash flows over the remaining useful life of the goodwill
using a discount rate of 20%. The assumptions supporting the cash flows,
including the discount rate, were determined using the Company's best estimates.
The discount rate was determined based upon the weighted average cost of capital
for comparable companies. The remaining goodwill and identifiable intangibles
related to Cybergold will be amortized over their remaining useful lives.
The following unaudited pro forma results of operations have been prepared
assuming that the acquisitions of ADG and Cybergold occurred at the beginning of
the respective years. The pro forma financial information is not necessarily
indicative of the combined results that would have occurred, nor is it
necessarily indicative of future results (in thousands, except per share
amounts).
2000 1999
--------- ---------
(unaudited)
Revenues ................................... $ 76,953 $ 32,465
Operating loss ............................. (235,282) (108,781)
Net loss ................................... (231,450) (105,453)
Net loss per basic and diluted share ....... $ (5.87) $ (4.81)
4. INVESTMENTS
MyPoints Europe
During the third quarter of 2000, the Company entered into an agreement
("Agreement") with The Great Universal Stores PLC ("GUS"), an affiliate of
Experian, a stockholder of the Company, under which MyPoints Europe Limited
("MyPoints Europe") was established for the purpose of owning and operating
internet based loyalty rewards and other direct marketing programs in Europe.
The Agreement provides for initial capitalization of MyPoints Europe by the
Company in the amount of $0.4 million in exchange for 19.9% of the total
outstanding shares of MyPoints Europe. The shares were acquired in October 2000.
The remaining 80.1% of all outstanding shares were purchased by GUS at the same
price per share paid by Company. The Agreement permits MyPoints Europe to issue
additional shares to increase capitalization up to an additional $13 million,
with the parties subscribing to any such share issue in accordance with the same
ratio as provided above. The Agreement also provides the Company the option to
purchase additional shares of MyPoints Europe which in the aggregate total the
number of share owned by GUS, at a share price equal to 1.25 times the initial
share paid by GUS. The investment by the Company under the Agreement has been
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48
accounted for under the equity method of accounting. The Company's share of the
net loss of MyPoints Europe, to date, has not been significant.
In September 2000, the Company and MyPoints Europe entered into an
agreement under which the Company will develop, design and manage a private
label version of the MyPoints(R) Program for MyPoints Europe. The term of the
agreement is for nine calendar months from the effective date of the agreement.
The agreement provides for a monthly renewal option at the sole discretion of
MyPoints Europe. The Company will receive program management fees and other
service fees during the term of the agreement. During the year ended December
31, 2000, the Company recognized $0.4 million in revenues under the agreement.
MyPoints Japan
During the third quarter of 2000, the Company entered into an agreement
("the DNP Agreement") with Dai Nippon Printing Co., Ltd. ("DNP"), a Japanese
Corporation under which the parties agreed to form MyPoint.com Japan Co., Ltd.
("MyPoints Japan") for the purpose of developing and operating internet based
loyalty rewards and other direct marketing programs in Japan. The agreement
provided for DNP to initially subscribe for 4,000 shares of common stock
representing 100% of the issued and outstanding shares of MyPoints Japan. During
the third quarter of 2000, the Company purchased 796 shares of common stock from
DNP, representing a 19.9% interest in MyPoints Japan for an aggregate purchase
price of $0.4 million. The Agreement also calls for additional funding, on a pro
rata basis in accordance with the then current ownership interest, provided
however, that in no event shall either Party be required to provide more than
800,000,000 yen in total funding to the Company. The investment has been
accounted for under the equity method of accounting. The Company's share of the
net loss of MyPoints Japan, to date, has not been significant.
During the year ended December 31, 2000, the Company has recognized $0.1
million in revenues for training services provided to MyPoints Japan.
5. INVESTMENT IN AND ADVANCES TO MAGNACASH
On October 13, 2000 the Company sold 81.5% of the issued and outstanding
shares of Magnacash to an investment group for a purchase price of $7.2 million
plus the Company contributed equipment with a book value of $1.2 million. The
Company took a collateralized promissory note for the full amount from the
buyers. The note bears interest at an annual rate of prime plus two percent and
is collateralized under a Stock Pledge Agreement by the Magnacash common stock
purchased. Payment of the note and all accrued and unpaid interest is due upon
the earlier of October 13, 2010 or occurrence of a qualified Initial Public
Offering ("IPO") or sale of substantially all of the assets of Magnacash. Due to
the uncertainty of the collectibility of the promissory note of $7.2 million,
the Company deems the fair value of this note to be zero. During the year ended
December 31, 2000, the Company recorded a loss of $1.0 million as a result of
the sale of Magnacash.
The Company has also loaned Magnacash $1.1 million for the funding of
operations. The loan bears interest at an annual rate of prime plus two percent
and is collateralized by a senior secured convertible promissory note and
Security Agreement covering all of the assets of Magnacash. The Company has the
option to convert any portion of the outstanding principal together with accrued
and unpaid interest into shares of capital stock of Magnacash in connection with
a qualified financing, as defined in the note. Payment of the note and all
accrued and unpaid interest is due upon the earlier of October 12, 2010 or the
occurrence of a qualified IPO by Magnacash or the sale of substantially all of
the assets of Magnacash.
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
Page 48
49
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
Computer and office equipment ............... $ 6,852 $ 14,096
Computer software ........................... 2,948 5,021
Furniture and fixtures ...................... 720 1,442
Leasehold improvements ...................... 405 1,468
-------- --------
10,925 22,027
Accumulated depreciation .................... (2,034) (7,196)
-------- --------
$ 8,891 $ 14,831
======== ========
Depreciation expense amounted to $265,000, $1,462,000 and $5,361,000 for
the years ended December 31, 1998, 1999 and 2000, respectively.
7. MEMBERS PAYABLE LIABILITY
Following is a summary of members payable liability activity for the years
ended December 31, 1998, 1999 and 2000:
Outstanding as of January 1, 1998 ................................. 519
Accrual for new awards redemption liability ....................... 2,825
Allowance for unredeemed awards ................................... (563)
Awards redemption ................................................. (54)
--------
Outstanding as of December 31, 1998 ............................... 2,727
Accrual for new awards redemption liability ....................... 11,372
Allowance for unredeemed awards ................................... (2,212)
Awards redemption ................................................. (2,247)
--------
Outstanding as of December 31, 1999 ............................... $ 9,640
Accrual for new awards redemption liability ....................... 18,668
Member payable balance acquired in the Cybergold acquisition ...... 3,165
Allowance for unredeemed awards ................................... (3,188)
Awards redemption ................................................. (9,751)
--------
Outstanding as of December 31, 2000 ............................... $ 18,534
========
8. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
On December 19, 1997, the Company entered into a promissory note with a
bank to borrow $400,000 at an interest rate of prime plus 0.5% (initial rate of
8.50%). The Company was required to make 36 equal payments from July 31, 1998
through June 30, 2001. The agreement contains certain negative covenants
including financial covenants related to a minimum liquidity coverage ratio and
monthly minimum points redemption liability. The Company was in compliance with
these covenants as of December 31, 2000.
On March 26, 1999, the Company entered into a senior loan and security
agreement with a financing company. The lender has committed to finance up to
$1.5 million under this capital lease line of which borrowings of $0.9 million
were outstanding as of December 31, 2000. These capital lease agreements have
terms ranging three to five years with interest rates ranging from 7.2% to
18.0%. Borrowings against this line are collateralized by certain fixed assets
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50
of the Company. The agreement contains certain negative covenants including
financial covenants related to minimum liquidity coverage ratios. The Company
was in compliance with the covenants at December 31, 2000.
During February 1999, Cybergold entered into a $400,000 equipment credit
line to be used solely for capital expenditures. Interest of approximately 20
percent and principal are payable monthly over a three-year period. At December
31, 2000, borrowings outstanding under this line amounted to $0.3 million.
Annual maturities of notes payable and capital lease obligations are as
follows (in thousands):
YEAR ENDING DECEMBER 31,
------------------------
2001 $ 608
2002 528
2003 254
------
$1,390
======
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under noncancelable operating leases with
various expiration dates through the year 2007. Rent expense amounted to
$180,000, $775,000 and $2,914,000 for the years ended December 31, 1998, 1999
and 2000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
OPERATING
YEAR ENDING DECEMBER 31, LEASES
------------------------ ---------
2001.................................................. $3,725
2002.................................................. 3,834
2003.................................................. 3,647
2004.................................................. 2,985
2005.................................................. 2,253
Thereafter............................................ 2,381
------
Total minimum lease payments.......................... $18,825
=======
LEGAL
In the normal course of business, the Company is at times subject to
pending and threatened legal actions and proceedings. After reviewing pending
and threatened actions and proceedings with counsel, management believes that
the outcome of such actions or proceedings is not expected to have a material
adverse effect on the financial position or results of operations of the
Company.
10. CAPITAL STRUCTURE
The Company is authorized to issue 100,000,000 shares of $0.001 par value
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51
common stock and 10,000,000 shares of $0.001 par value preferred stock. The
Board of Directors has the authority to issue the undesignated preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
WARRANTS
In connection with the issuance of Series D preferred stock in 1998, the
Company issued warrants to the holders of Series D preferred stock to purchase
1,374,028 additional shares of Series D preferred stock with an exercise price
of $2.06 per share. The warrants became exercisable three months from the
closing date of the Stock Purchase Warrant Agreement and are exercisable for a
period up to five years. The Company determined that the fair value of the
warrants approximated $1.5 million on the date of grant. The fair value of the
warrants was estimated using the Black-Scholes model with the following weighted
average assumptions, risk-free interest rate of 4.59%, expected life of five
years, expected dividend rate of 0%, and volatility rate of 109%. The estimated
fair value of the warrants of $1.5 million is included in additional paid-in
capital.
During May and June 1999, the Company issued warrants in connection with
commercial agreements entered into with two third parties. The warrants were
fully vested at the date of grant, enable the holders to purchase an aggregate
of 150,000 shares of the Company's common stock at a price of $8.00 per share
and were exercisable for a period of one year. The fair value of these warrants,
estimated at approximately $807,000 using the Black-Scholes valuation model,
were charged to operations over the term of the agreements.
PREFERRED STOCK
Upon completion of the Company's Initial Public Offering in August 1999,
the Company's preferred stock was converted into 12,388,316 shares of common
stock, and all outstanding shares of preferred stock were cancelled and retired.
Upon conversion of the preferred stock, all rights to accrued and unpaid
dividends were waived.
PREFERRED STOCK RIGHTS
In December 2000, the Company adopted a stockholder rights plan. Under
the Company's stockholder rights plan, each stockholder receives one right to
purchase one one-thousandth of a share of Series A Participating Preferred Stock
("the Rights") for each share of common stock owned by the stockholder. Holders
of the Rights are entitled to purchase for $20.00 ("the Purchase Price") one
one-thousandth of one share of the Company's Series A Participating Preferred
Stock in certain limited circumstances involving acquisitions of, or offers for,
20 percent or more of the Company's common stock. In the event that 20% or more
of the Company's common stock is acquired, the holders of the Rights will have
the right to receive, upon exercise, common shares having a value equal to two
times the Purchase Price, as defined in the Company's Preferred Stock Rights
Agreement.
COMMON STOCK OPTIONS
The Company adopted several employee stock option plans including the 1996
Stock Plan adopted on November 7, 1996, the 1999 Stock Plan adopted on November
13, 1998, and the 1999 Supplemental Stock Plan adopted on December 8, 1999
(together, the "Plans"). The Plans provide for the grant of incentive stock
options and nonstatutory stock options to employees and consultants of the
Company.
In April 1999, the Company adopted the senior management incentive plan.
The terms of this plan apply to discretionary option grants to executive
officers under the 1999 Stock Plan. In 1999, options to purchase a total of
690,000 shares with exercise prices of $8.00 per share were granted under this
senior management incentive plan.
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The Company has reserved 9,335,833 shares of common stock for issuance
under the Plans as of December 31, 2000. The Company has granted incentive and
nonstatutory stock options with vesting, in most cases, equal to either 25.0% at
the first anniversary date and 1/48th per month thereafter or 25.0% immediately
with the remainder vesting 1/48th per month thereafter. These options are
exercisable for a period of no more than ten years from the date of grant.
Following is a summary of stock option activity for the years ended
December 31, 1998, 1999 and 2000:
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
SHARES PRICE
----------- --------
Outstanding as of January 1, 1998 ............... 664,999 0.074
Granted ...................................... 1,069,562 0.204
Exercised .................................... (96,666) 0.057
Canceled ..................................... (226,245) 0.126
----------
Outstanding as of December 31, 1998 ............. 1,411,650 0.165
Granted ...................................... 5,185,128 12.218
Exercised .................................... (492,610) 0.844
Canceled ..................................... (437,679) 4.166
----------
Outstanding as of December 31, 1999 ............. 5,666,489 10.826
Granted ...................................... 5,333,764 17.359
Exercised .................................... (1,164,830) 3.341
Canceled ..................................... (3,056,645) 16.454
----------
Outstanding as of December 31, 2000 ............. 6,778,778 14.715
==========
Options vested as of December 31, 2000 .......... 2,568,359 $ 11.93
==========
The following table summarizes information about stock options outstanding
at December 31, 2000:
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53
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
DECEMBER 31, 2000 DECEMBER 31, 2000
------------------------------------ ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
- ---------------- ----------- ------------ -------- ------- --------
- --------------------------------------------------------------------------------------
$0.03--$0.05 230,124 6.1 $ 0.05 227,010 $ 0.05
- --------------------------------------------------------------------------------------
$0.10--$0.15 68,280 6.6 0.12 48,945 0.12
- --------------------------------------------------------------------------------------
$0.20--$0.26 82,646 7.1 0.22 47,599 0.24
- --------------------------------------------------------------------------------------
$0.47--$0.47 34,174 7.1 0.47 25,589 0.47
- --------------------------------------------------------------------------------------
$1.00--$1.50 622,039 7.8 1.02 349,827 1.01
- --------------------------------------------------------------------------------------
$1.56--$2.09 141,961 7.5 1.86 34,061 1.56
- --------------------------------------------------------------------------------------
$2.38--$2.84 221,900 9.9 2.42 0 0.00
- --------------------------------------------------------------------------------------
$5.00--$6.00 210,296 8.8 5.29 92,515 5.00
- --------------------------------------------------------------------------------------
$7.63--$11.38 2,296,181 8.6 7.94 890,057 7.96
- --------------------------------------------------------------------------------------
$11.46--$17.12 915,486 8.1 14.74 360,140 15.17
- --------------------------------------------------------------------------------------
$17.45--$22.92 943,255 8.7 18.33 224,936 18.52
- --------------------------------------------------------------------------------------
$31.25--$39.58 583,436 8.8 37.71 178,648 38.14
- --------------------------------------------------------------------------------------
$47.00--$68.69 400,200 9.1 58.96 81,832 68.02
- --------------------------------------------------------------------------------------
$88.50--$88.50 28,800 9.0 88.50 7,200 88.50
- --------------------------------------------------------------------------------------
6,778,778 $14.71 2,568,359 $11.93
========= =========
- --------------------------------------------------------------------------------------
The Company accounts for the Plans in accordance with APB No. 25 and
related Interpretations and complies with the disclosure requirements of SFAS
No. 123, Accounting for Stock-Based Compensation. In connection with certain
stock option grants during the years ended December 31, 1998, 1999 and 2000, the
Company recognized unearned compensation that is being amortized over the
four-year vesting periods of the related options. Amortization expense
recognized during the years ended December 31, 1998, 1999 and 2000 totaled
$158,000, $3,054,000, and $5,110,000, respectively.
In accordance with SFAS No. 123, the fair value of employee stock option
grants has been estimated on the date of grant using the minimum value model for
grants in 1998. For grants in 1999 and 2000, the fair value has been estimated
using the Black-Scholes Option Pricing Model.
The Black-Scholes Option Pricing Model was developed for use in estimating
the fair value of traded options and warrants that have no vesting restrictions
and are fully transferable. In addition, valuation models require the input of
highly subjective assumptions, including the expected stock volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Utilizing the minimum value model, the weighted
average fair value of employee stock options granted during 1998 was $2.27.
Utilizing the Black-Scholes Option Pricing Model, the weighted average fair
value of employee stock options granted during 1999 and 2000 was $7.83 and
$13.61 per share, respectively.
The following assumptions were used in determining the fair value of
options granted and warrants issued:
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DECEMBER 31,
-------------------------------
1998 1999 2000
------- ------- -------
Risk-free interest rates................... 4.59% 5.45% 6.11%
Expected life.............................. 5 years 5 years 4 years
Dividends.................................. -- -- --
Volatility................................. -- 109% 139%
Had compensation cost for the Plans been determined based on fair value at
the grant date consistent with the method prescribed by SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts below (in
thousands)(unaudited):
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
------- ------- --------
Net loss as reported.................. $(8,266) $(47,256) $(213,676)
Net loss pro forma.................... $(8,291) $(52,682) $(236,477)
Net loss per share as reported ........ $ (4.37) $ (3.53) $ (6.47)
Net loss per share pro forma .......... $ (4.39) $ (3.93) $ (7.16)
OTHER
A portion of the common stock issued to the Company's founders at inception
is subject to restricted stock purchase agreements which provide that one-third
of the Company's repurchase right lapses on the vesting start date and 1/48th of
the Company's remaining repurchase right lapses at the end of each month
thereafter. Upon a merger or sale of the Company, one-half of the remaining
shares subject to the Company's right of repurchase will become vested.
11. EMPLOYEE BENEFIT PLANS
In February 1997, the Company established a 401(k) Savings Plan (the
"401(k) Plan") that covers substantially all employees. Under the 401(k) Plan,
employees are permitted to contribute a portion of gross compensation not to
exceed standard limitations provided by the Internal Revenue Service.
Discretionary contributions may be made by the Company; however, no
contributions have been made to date.
In March 1999, the Company adopted an employee stock purchase plan ("the
Purchase Plan") effective on the date of the prospectus for the Company's
Initial Public Offering. The Purchase Plan, as of December 31, 2000, provides
for the issuance of a maximum of 400,000 shares of common stock. On the first
day of each fiscal year beginning January 1, 2001, the number of shares reserved
for issuance under the Purchase Plan will be automatically increased by an
amount equal to the lesser of (i) 500,000 shares, (ii) 1.0% of the outstanding
shares of the Company's common stock on such date, or (iii) a lesser amount
determined by the Company's Board of Directors. Eligible employees can have up
to 15% of their earnings withheld, subject to certain maximum limits, to be used
to purchase shares of the Company's common stock on every December 31st and June
30th. The purchase price of the common stock purchased under the Purchase Plan
will be equal to 85% of the lower of the fair market value of the Common Stock
on the commencement date of each six month offering period or the specified
purchase date. During 1999, 60,371 shares were purchased at $6.80. During 2000,
156,428 shares were purchased at prices from $1.01 to $16.10 per share.
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12. NOTES AND INTEREST RECEIVABLE
In connection with the ADG acquisition in January 2000, the net assets
purchased included notes and interest receivable amounting to $ 2.0 million.
These notes and interest receivable are due from two former shareholders of ADG.
During the year ended December 31, 2000, the Company determined that the notes
and related interest were not fully collectible. The carrying value of the notes
and interest receivable were reduced to their estimated net realizable value.
13. INCOME TAXES
As of December 31, 1999 and December 31, 2000, the Company had net
operating loss carryforwards of approximately $27,332,000 and $50,236,000 for
federal income tax purposes, and $27,371,000 and $41,947,000 for state income
tax purposes, respectively. The federal and state net operating loss
carryforwards begin to expire in the years 2011 and 2004, respectively.
The Company's ability to utilize its net operating loss carryforwards to
offset any future taxable income may be restricted as a result of equity
transactions that give rise to changes in ownership as defined in the Tax Reform
Act of 1986. These restrictions may limit, on an annual basis, the Company's
future use of its net operating loss carryforwards and research and
experimentation credit carryforwards.
A reconciliation of the provision for income taxes to the federal statutory
rate of 34% is as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
---- ---- ----
Tax at statutory rate............................ 34% 34% 34%
State taxes, net of federal benefit.............. 6 6 6
Permanent differences............................ (1) (2) (27)
Valuation allowance.............................. (39) (38) (13)
--- --- ---
- - -
=== === ===
The estimated tax effects of significant temporary differences and
carryforwards that give rise to deferred income tax assets are as follows (in
thousands):
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
Non-deducted start-up costs .................. $ 205 $ (83)
Net operating loss carryforwards ............. 10,890 19,288
Non-deducted research and experimental costs . 430 950
Points redemption liability .................. 4,270 7,064
Accrued liabilities and other ................ 2,045 6,315
Non-deducted intangible assets ............... (1,250) (174)
-------- --------
Gross deferred tax assets .................... 16,590 33,360
Valuation allowance .......................... (16,590) (33,360)
-------- --------
Net deferred tax assets ...................... $ -- $ --
======== ========
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The Company has recorded a valuation allowance against gross deferred tax
assets due to uncertainties surrounding their realization. The change in the
valuation allowance amounted to $11,325,000 and $16,770,000 in 1999 and 2000,
respectively.
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Years Ended December 31,
1998 1999 2000
-------- --------- -------
Cash paid during the period for interest $ 34 $ 194 $ 198
======== ========= =======
Non-cash transactions:
Exchange of advertising services $ 128 $ 85 $ 1,376
======== ========= =======
Warrants issued to non-employees $ 12 $ 807 $ --
======== ========= =======
Deferred stock compensation as a result of option activity $ 1,782 $ 10,448 $(1,597)
======== ========= =======
Cashless exercise of warrants $ -- $ 1,407 $ --
======== ========= =======
Conversion of preferred stock to common stock $ -- $ 12 $ --
======== ========= =======
Exercise of stock options for notes receivable $ -- $ 200 $ --
======== ========= =======
Equipment acquired under capital leases $ 329 $ 139 $ --
======== ========= =======
Issuance of capital stock for business acquisition $ (8,582) $ -- $ --
======== ========= =======
Stock subscription receivable $ 350 $ -- $ --
======== ========= =======
Stock options issued to non-employees $ 277 $ -- $ --
======== ========= =======
Disposal of fully depreciated assets $ -- $ 54 $ --
======== ========= =======
Property and equipment included in accounts payable $ -- $ 1,982 $ --
======== ========= =======
In January 2000, the Company issued 270,000 shares of common stock in
exchange for all the outstanding shares of Alliance Development Group, Inc.
In August 2000, the Company issued 10.6 million shares of common stock in
exchange for all the outstanding shares of Cybergold, Inc.
15. RELATED PARTY TRANSACTIONS
One of the Company's directors is also a member of the law firm that has
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served as the Company's corporate counsel since its inception. From inception
through December 31, 1998, 1999 and 2000, the Company incurred a total of
$227,000 $875,000 and $1,270,000, respectively, in fees to the law firm.
The Company entered into an agreement with Direct Marketing Technology,
Inc., a wholly owned subsidiary of Experian, a stockholder of the Company and
Experian, in which Direct Marketing Technology and Experian agreed to provide
demographic data and other services for the Company. From inception through
December 31, 1998, 1999, and 2000 the Company has incurred a total of $0,
$226,000, and $295,000 respectively, in fees under this agreement.
During the year ended December 31, 2000, the Company purchased software
amounting to $0.2 million from KnowledgeTrack. In connection with this
transaction, KnowledgeTrack purchased $0.1 million of media services from the
Company which is included in accounts receivable as of December 31, 2000. John
Steuart, the Company's chief financial officer is a member of the board of
directors of KnowledgeTrack.
16. SUBSEQUENT EVENT
REPRICING OF STOCK OPTIONS
In January 2001, the Company announced a voluntary option repricing
program for its employees. Under the program, the Company's employees were
given the opportunity, if they so chose, to modify outstanding stock options
previously granted to them which had an exercise price of at least $3 per
share. As modified, the exercise price would be equal to the fair market value
of the Company's common stock on the effective date of the program, January 3,
2001, which was $1.00. In addition, the number of shares subject to options
would be reduced by 1/2 of the number of shares which previously had an
exercise price of at least $20 per share. The modified options could not be
exercised for six months unless the employee dies, becomes disabled or is
terminated by the Company (other than for cause). The Company expects the
accounting for these new options to comply with FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and
therefore expects compensation charges based upon variable plan accounting.
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QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share amounts)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2000
Net revenues $ 15,822 $ 18,706 $ 14,485 $ 14,488
Gross profit 11,709 14,276 10,288 9,803
Net loss (10,874) (7,844) (23,417) (171,541)
Net loss per share -- basic and diluted (0.40) (0.27) (0.66) (4.25)
Shares used in per share calculation --
basic and diluted 26,872 29,046 35,495 40,320
1999
Net revenues $ 1,275 $ 2,663 $ 6,955 $ 13,247
Gross profit 397 1,664 4,802 9,870
Net loss attributable to common
stockholders (15,281) (10,304) (9,838) (11,833)
Net loss per share -- basic and diluted (3.00) (1.86) (0.69) (0.47)
Shares used in per share calculation --
basic and diluted 5,097 5,546 14,214 24,986
59
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING AT END
DESCRIPTION OF YEAR ADDITIONS(1) DEDUCTIONS OF YEAR
----------- ---------- ------------ ---------- -------
Allowance for doubtful accounts for
the years ended:
December 31, 1998 .................. $ -- 60 $ -- $ 60
December 31, 1999 .................. 60 1,228 -- 1,288
December 31, 2000 .................. $1,288 3,733 $224 $4,797
(1) Additions in 2000 includes the allowance for doubtful accounts amounting to
$874 assumed upon the acquisition of Cybergold on August 07, 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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PART III
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference from
the information under the caption "Election of Directors" contained in the
Company's definitive Proxy Statement, to be filed with the Securities and
Exchange Commission no later than 120 days from the end of the Company's last
fiscal year in connection with the solicitation of proxies for its 2000 Annual
Meeting of Stockholders (the "Proxy Statement"). The information required by
Section 16(a) is incorporated by reference from the information under the
caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934"
in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Officer Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The financial statements (including the notes thereto) listed in the Index
to Consolidated Financial Statement Schedule (set forth in Item 8 of Part II of
the Form 10-K) are filed as part of this Annual Report on Form 10-K.
(a)2. FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements at Item 8 of Part II of this
Form 10-K.
(a)3. EXHIBITS
Refer to the Exhibit Index.
(b) REPORTS ON FORM 8-K
On October 23, 2000, the Company filed a report on Form 8-K relating to its
acquisition of Cybergold, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, MyPoints.com has duly caused this report to be signed on its behalf by
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the undersigned, thereunto duly authorized, in the City of San Francisco, State
of California, on the 30th day of March, 2001.
MYPOINTS.COM, INC.
By: /s/ JOHN FULLMER
-----------------------------------
John Fullmer
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
John Fullmer and John Steuart, and each of them, his or her attorneys-in-fact,
each with the power of substitution, for him or her in any and all capacities,
to sign any amendments to this Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact, or his
substitute or substitutes, the power and authority to perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN FULLMER Chief Executive Officer and March 30, 2001
- --------------------------- Chairman of the Board
John Fullmer (Principal Executive Officer)
/s/ JOHN STEUART Senior Vice President, Finance and March 30, 2001
- --------------------------- Chief Financial Officer
John Steuart (Principal Financial and Accounting Officer)
/s/ A. NATHANIEL GOLDHABER Director March 30, 2001
- ---------------------------
A. Nathaniel Goldhaber
/s/ STEVEN M. MARKOWITZ Director March 30, 2001
- ---------------------------
Steven M. Markowitz
/s/ MARK METCALFE Director March 30, 2001
- ---------------------------
Mark Metcalfe
/s/ HOWARD L. MORGAN Director March 30, 2001
- ---------------------------
Howard L. Morgan
/s/ THOMAS NEWKIRK Director March 30, 2001
- ---------------------------
Thomas Newkirk
/s/ LAWRENCE E. PHILLIPS Director March 30, 2001
- ---------------------------
Lawrence E. Phillips
/s/ MARIO M. ROSATI Director March 30, 2001
- ---------------------------
Mario M. Rosati
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1(b)* Certificate of Incorporation, as currently in effect
3.2(b)* Bylaws of the registrant, as currently in effect
10.1* Amended and Restated Investors Rights Agreement dated March 30, 1999
10.2* 1996 Stock Plan and forms of agreements thereunder
10.3* 1999 Stock Plan and forms of agreements thereunder
10.3(a) Amendment to 1999 Stock Plan
10.4* 1999 Employee Stock Purchase Plan
10.5* Form of Director and Executive Officer Indemnification Agreement
10.6* Representative form of Stock Purchase Warrant
10.7*** Office Building Lease, between Cybergold, Inc., and 1330 Broadway
(Zimmerman Investments), dated July 5, 1999. Incorporated by
reference from Exhibit 10.13 to Registration Statement No. 333-79067)
as well as Amendment to Office Building Lease, between Cybergold,
Inc., and Zimmerman Investments, dated November 16, 1999 and
Amendment to Office Building Lease, between Cybergold, Inc., and
Zimmerman Investments, dated February 8, 2000. (Incorporated by
reference from Exhibit 10.17 and 10.18 respectively to Registration
Statement No. 333-79067)
10.8* Lease dated March 18, 1999 between registrant and TA/Western, L.L.C.
for office space located at 1375 E. Woodfield Road, Suite 520,
Schaumburg, Illinois
10.9* Lease dated January 22, 1998 between MotivationNet, Inc. and The
Mutual Life Insurance Company of New York for office space located at
1375 E. Woodfield Road, Suite 540, Schaumburg, Illinois
10.10* Agreement and Plan of Merger dated November 30, 1998 among the
registrant, IPOST Acquisition Subsidiary, Inc. and Enhanced Response
Technologies, Inc.
10.11* Interest Purchase Agreement dated November 30, 1998 among registrant,
Direct Marketing Technology, Inc. and Brigar Computer Services, Inc.
10.12* Asset Purchase Agreement dated November 30, 1998 between registrant
and Metromail Corporation
10.13* License Agreement dated November 30, 1998 between registrant and
Direct Marketing Technologies, Inc.
10.14* Services Agreement dated November 30, 1998 between registrant and
Direct Marketing Technologies, Inc.
10.15* Business Loan Agreement dated January 27, 1997 between registrant and
Silicon Valley Bank and related promissory notes
10.16* Master Equipment Lease Agreement dated May 1, 1998 between registrant
and Phoenix Leasing Incorporated
+10.17* Patent License Agreement dated March 31, 1999 between registrant and
Netcentives, Inc.
10.18** Office Lease dated November 16, 1999 between registrant and
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WHLNF Real Estate Limited Partnership for facility located at 100
California Street, 12th Floor, San Francisco, California 94111
10.19*** Cybergold 1996 Stock Plan
10.20*** Cybergold 1999 Omnibus Equity Incentive Plan
10.21**** Agreement and Plan of Reorganization and Merger by and between
Cybergold, Inc., Mygo Acquisition Corporation and MyPoints Inc.,
dated as of April 14, 2000, as amended by Amendment No. 1 dated as of
June 20, 2000
10.22***** 1999 Supplemental Stock Plan, as amended.
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
- ----------
* Exhibit incorporated by reference to the like-numbered exhibit to
Registrant's registration statement on Form S-1 filed with the Securities
and Exchange Commission on April 1, 1999 (File No. 333-75523).
** Exhibit incorporated by reference to the like-numbered exhibit to
Registrant's registration statement on Form S-1 filed with the Securities
and Exchange Commission on January 20, 2000 (File No. 333-95009).
*** Exhibit incorporated by reference to the like-numbered exhibit to
Cybergold, Inc.'s annual report on Form 10-K filed with the Securities
and Exchange Commission on March 30, 2000 (File No. 000-27329).
**** Exhibit incorporated by reference to the like-numbered exhibit to
Registrant's registration statement on Form S-4 filed with the Securities
and Exchange Commission on June 23, 2000.
***** Exhibit incorporated by reference to Exhibit 4.1 to Registrant's
registration statement on Form S-8 filed with the Securities and Exchange
Commission on March 30, 2000.
+ Confidential treatment has been granted for portions of this exhibit.
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