10-Q 1 f72532e10-q.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2001 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 [ ] On April 23, 2001, 40,755,011 shares of the Registrant's Common Stock, $.001 par value, were outstanding. Page 1 2 MYPOINTS.COM, INC. FORM 10-Q Quarter ended March 31, 2001 INDEX Page ---- Part I: Financial Information Item 1: Financial Statements (Unaudited) Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 Consolidated Statements of Operations for the three months ended March 31, 2001 and March 31, 2000 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and March 31, 2000 Notes to Unaudited Consolidated Financial Statements Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3: Quantitative and Qualitative Disclosures about Market Risk Part II: Other Information Item 1: Legal proceedings Item 2: Changes in Securities and Use of Proceeds Item 6: Exhibits and Reports on Form 8-K Item 7: Signature Page 2 3 MYPOINTS.COM, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31, 2001 2000 --------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 63,301 $ 89,137 Short-term investments 34,860 15,962 Accounts receivable, net 11,943 14,793 Unbilled receivables, net 983 1,604 Prepaid expenses and other current assets 2,459 3,706 --------- --------- Total current assets 113,546 125,202 Restricted cash 2,559 2,601 Long-term investments 2,327 2,425 Investment in and amounts due from Magnacash 1,100 1,326 Property and equipment, net 14,181 14,831 Other assets 1,214 1,735 Intangible assets 21,768 23,477 --------- --------- Total assets $ 156,695 $ 171,597 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 17,438 $ 19,438 Current portion of long-term obligations 579 608 Deferred revenue 4,933 4,236 Members payable 18,742 18,534 --------- --------- Total current liabilities 41,692 42,816 Long-term obligations 600 782 --------- --------- 42,292 43,598 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value, 10,000,000 -- -- shares authorized; none issued and outstanding at March 31, 2001 and December 31, 2000, respectively Common stock, $0.001 par value, 100,000,000 shares 41 41 authorized; 40,741,667 and 40,522,611 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively Additional paid-in capital 402,732 403,106 Deferred stock-based compensation (1,474) (2,699) Accumulated deficit (286,601) (272,154) Less: cost of shares of common stock in treasury (295) (295) (216,000 shares) --------- --------- Total stockholders' equity 114,403 127,999 --------- ---------
Page 3 4 --------- --------- Total liabilities and stockholders' equity $ 156,695 $ 171,597 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. Page 4 5 MYPOINTS.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ----------------------- 2001 2000 -------- -------- (UNAUDITED) Revenues $ 10,027 $ 15,822 Cost of revenues 3,438 4,113 -------- -------- Gross profit 6,589 11,709 -------- -------- Operating expenses: Technology costs 7,716 5,276 Sales and marketing expenses 6,621 11,393 General and administrative expenses 5,041 4,400 Amortization of intangible assets 1,709 1,177 Stock-based compensation 806 1,100 -------- -------- Total operating expenses 21,893 23,346 -------- -------- Operating loss (15,304) (11,637) Interest income 1,459 816 Equity interest in investments (539) -- Interest expense and other, net (63) (53) -------- -------- Net loss $(14,447) $(10,874) ======== ======== Net loss per share: Basic and diluted $ (0.36) $ (0.40) ======== ======== Weighted average shares -- basic and diluted 40,490 26,872 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 5 6 MYPOINTS.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 --------- ------------ Cash flows from operating activities: Net loss $ (14,447) $ (10,874) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,428 2,570 Loss on disposal of fixed assets 71 -- Equity interest in investments including intercompany eliminations 710 -- Provision for bad debts 530 805 Stock - based compensation 806 1,100 Changes in operating assets and liabilities: Accounts receivable and unbilled receivables 2,941 (3,967) Prepaid expenses and other current assets 1,247 (374) Notes and interest receivable -- (170) Other assets 521 -- Accounts payable, accrued and other liabilities (2,386) (625) Deferred revenue 697 (237) Members payable 208 1,818 --------- --------- Net cash used in operating activities (5,674) (9,954) --------- --------- Cash flows from investing activities: Purchase of property and equipment (1,140) (2,013) Acquisition of ADG, net of cash acquired -- (175) Purchases of short-term investments (34,668) -- Proceeds from short-term investments 15,770 -- Receipt /(payment) of restricted cash 42 (300) --------- --------- Net cash provided by investing activities (19,996) (2,488) --------- ---------
Page 6 7 Cash flows from financing activities: Proceeds from issuance of common stock, net -- 106,153 Repayments of borrowings (211) (116) Proceeds from exercise of stock options 45 1,005 --------- --------- Net cash provided by (used in) financing activities (166) 107,042 --------- --------- Net increase (decrease) in cash and cash equivalents (25,836) 94,600 Cash and cash equivalents, beginning of period 89,137 21,792 --------- --------- Cash and cash equivalents, end of period $ 63,301 $ 116,392 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 63 $ 53 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. Page 7 8 MYPOINTS.COM, INC. (unaudited) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of MyPoints.com, Inc. and its wholly owned subsidiaries ("the Company"), and, in the opinion of management, reflect all adjustments(consisting only of normal recurring adjustments) necessary to fairly state the Company's consolidated financial position, results of operations, and cash flows as of and for the dates and periods presented. The consolidated balance sheet as of December 31, 2000 has been prepared from the audited consolidated financial statements of the Company. These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in its Form 10-K filed with the Securities and Exchange Commission on April 2, 2001. The results of operations for the three month period ended March 31, 2001 are not necessarily indicative of results for the entire fiscal year ending December 31, 2001. 2. 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 also provides hosting services to its international partners, MyPoints Europe and MyPoints Japan. The hosting agreements provide for operation of the international programs by the Company, on the Company's servers located in the United States. During the three months ended March 31, 2001, the Company recognized revenues of $0.7 million related to these agreements. Page 8 9 MyPoints Offline Services, Inc., formerly known as Alliance Development Group, Inc., ("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 assisted to develop and implement. 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") 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 FASB 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- An Amendment of FASB Statement No. 133," which amended the accounting and reporting standards for certain derivative instruments and hedging activities. The adoption of SFAS No. 133 did not have a material effect on the Company's financial position or results of operations. 4. MEMBERS PAYABLE LIABILITY 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 Page 9 10 analysis is updated quarterly. At March 31, 2001 and December 31, 2000, the allowance for unredeemed points, net of points expired or deleted from inactive members accounts, was $5.6 million and $5.7 million, respectively. As of March 31, 2001, the gross points redemption liability was $20.3 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 March 31, 2001, the cash balance member liability amounted to $4.0 million. Following is a summary of the members payable liability activity for the three months ended March 31, 2001 and 2000 (in thousands):
THREE MONTHS ENDED MARCH 31, 2001 2000 -------- -------- (UNAUDITED) Outstanding at beginning of period ............ $ 18,534 $ 9,640 Accrual for new award redemption liability .... 4,440 3,876 Allowance for unredeemed awards ............... (1,675) (266) Awards redemption ............................. (2,557) (1,792) -------- -------- Outstanding at end of period .................. $ 18,742 $ 11,458 ======== ========
5. 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 are not included in diluted net loss per share because such shares are anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts): Page 10 11
THREE MONTHS ENDED MARCH 31, 2001 2000 -------- -------- (UNAUDITED) Numerator: Net loss ........................ $(14,447) $(10,874) ======== ======== Denominator: Weighted average shares ......... 40,490 27,177 Weighted average unvested common shares subject to repurchase agreements ........... -- (305) -------- -------- Denominator for basic and diluted calculation ..................... 40,490 26,872 ======== ======== Net loss per share: Basic and diluted ............... $ (0.36) $ (0.40) ======== ========
6. 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. During the first quarter of 2001, the Company recorded no compensation expense related to these repriced options as the fair market value of the Company's common stock at March 31, 2001 was below the exercise price of the repriced options. Page 11 12 Page 12 13 ITEM 2: 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-Q, 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-Q. 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 MyPoints Offline Services, Inc., formerly known as Alliance Development Group, Inc., ("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. Page 13 14 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 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. During the third and fourth quarters of 2000 and the first quarter of 2001, the Company's revenues declined from the first and second quarters of 2000. This decline was primarily attributable to weak demand for internet marketing services and lower pricing for the Company's products. 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 -THREE MONTHS ENDED MARCH 31, 2001 VERSUS THREE MONTHS ENDED MARCH 31, 2000 Revenues Revenues decreased to $10.0 million in the three months ended March 31, 2001 as compared to $15.8 million in the three months ended March 31, 2000. The decrease in revenues in the three months ended March 31, 2001 as compared to the prior year comparable period was primarily attributable to the following: (i) weak demand for internet marketing services which has resulted in a decrease in the number of direct marketing offers sent to our members and a decrease in our Page 14 15 active advertising customer base, and (ii) lower pricing for the Company's products. 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 decreased to $3.4 million in the three months ended March 31, 2001 from $4.1 million in the three months ended March 31, 2000. As a percentage of revenues, these costs increased to 34% in the three months ended March 31, 2001 from 26% in the three months ended March 31, 2000. The increase in the cost of revenues as a percentage of revenues in the three months ended March 31, 2001 as compared to the prior year comparable period was primarily attributable to (i) lower pricing for the Company's products and (ii) higher sales of the Company's lower margin products. The effect of (i) and (ii) was partially offset by an increase in the allowance for unredeemed points ("breakage") on the Company's members payable balance. Technology Costs Technology costs primarily consist of compensation for personnel associated with the development of our technology and the maintenance of our proprietary databases, hosting and storage costs, and depreciation. Technology costs increased to $7.7 million in the three months ended March 31, 2001 from $5.3 million in the three months ended March 31, 2000. The increase in technology costs in the three months ended March 31, 2001 as compared to the prior year comparable period was primarily due to increases in personnel costs and related expenses used to enhance and support our proprietary databases and products, increases in depreciation, and increases in hosting and storage expenses. 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 decreased to $6.6 million in the three months ended March 31, 2001 from $11.4 million in the three months ended March 31, 2000. The decrease in sales and marketing expenses in the three months ended March 31, 2001 as compared to the prior year comparable period was primarily attributable to decreases in sales commissions and member acquisition costs. The decrease in sales commissions was primarily related to a decrease in revenues and a decrease in the Company's commission rates paid to its sales staff. The decrease in member acquisition costs was primarily due to declining unit costs for new member acquisition due to general trends in on-line advertising and Page 15 16 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 $5.0 million in the three months ended March 31, 2001 from $4.4 million in the three months ended March 31, 2000. The increase in general and administrative expenses in the three months ended March 31, 2001 as compared to the prior year comparable period was primarily due to costs associated with the relocation of the Company's new chief executive officer and increases in office space rent. The Company believes it has excess office space and is evaluating this under-utilization of office space and intends to enter into sub-leases or work out arrangements with landlords to cancel the leases for this excess office space resulting in lower office space rent costs in the future. However, the Company can provide no assurances that it will be able to sub-lease or cancel the leases for this excess office space. The increase in general and administrative expenses was partially offset by a decrease in bad debt expense. 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 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. 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 $1.7 million in the three months ended March 31, 2001 as compared to $1.2 million in the three months ended March 31, 2000. The increase in the amortization of intangible assets in the three months ended March 31, 2001 as compared to the prior year comparable period was due to the acquisitions of ADG and Cybergold in 2000. 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. As a result, the Company could incur additional write-downs of long-lived assets related to Cybergold including intangible assets and property Page 16 17 and equipment. Additionally, in October 2000, the Company sold 81.5% of the issued and outstanding shares of Magnacash to an investment group. As part of this transaction, the Company loaned Magnacash $1.1 million for the funding of its 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. Magnacash currently receives a substantial portion of its revenues from the Company for hosting the Cybergold platform. If the Company were to discontinue its operations of Cybergold, the ability of Magnacash to remain as a going concern could be jeopardized. As a result, the $1.1 million due from Magnacash could become uncollectible. Stock-Based Compensation Stock-based compensation decreased to $0.8 million in the three months ended March 31, 2001 as compared to $1.1 million in the three months ended March 31, 2000. The decrease in stock-based compensation expense in the three months ended March 31, 2001 as compared to the prior year comparable period is primarily related to the cancellation of stock options due to a reduction in employee headcount. Interest Income Interest income increased to $1.5 million in the three months ended March 31, 2001 from $0.8 million in the three months ended March 31, 2000. This increase is primarily due to interest earned on higher average cash and investment balances resulting from proceeds received from our follow-on offering which was completed in February 2000, and cash and investment balances held by Cybergold upon acquisition in August 2000. Income Taxes We recorded a net loss of $14.4 million in the three months ended March 31, 2001 and a net loss of $213.7 million in the year ended December 31, 2000. Accordingly, no provision for income taxes was recorded in the period 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 March 31, 2001 amounted to $18.7 million. This liability is made up of cash balances owed to Cybergold members amounting to $4.0 million and point balances owed to Mypoints members. The total number of outstanding Page 17 18 points issued to members in the MyPoints database for which we have a recognized liability as of March 31, 2001 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 67% of the outstanding points would be redeemed in the future. We use historical redemption activity and individual member account activity to determine our estimated redemption liability. The factors that 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 988 million in the year ended December 31, 2000 and 270 million in the three months ended March 31, 2001. 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 $5.7 million in the three months ended March 31, 2001. This cash used in operating activities primarily resulted from the net loss and a reduction in accounts payable and accrued liabilities partially offset by an decrease in accounts receivable and prepaid expenses. Net cash used in investing activities was $20.0 million in the three months ended March 31, 2001 which was primarily used to purchase short-term investments. Net cash used in financing activities was $0.2 million in the three months ended March 31, 2001. At March 31, 2001 we had unrestricted cash, cash equivalents and liquid short-term investments of $98.2 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. FACTORS AFFECTING OPERATING RESULTS All statements in this Form 10-Q that do not discuss past results are forward-looking statements. Forward-looking statements are based on management's current expectations and are therefore subject to certain Page 18 19 risks and uncertainties. Any of the following risks could seriously harm our business, financial condition or results of operations. As a result, these risks could cause the decline of the trading price of our common stock. The risks described below, however, are not the only ones that we face. You should also refer to the other information set forth in this Form 10-Q, including our financial statements and the related notes. RISKS ASSOCIATED WITH OUR BUSINESS WE HAVE ONLY A LIMITED OPERATING HISTORY THAT INVESTORS MAY USE TO ASSESS OUR FUTURE PROSPECTS We have only a limited operating history upon which you can evaluate our business. We commenced operations in November 1996 and did not begin to generate revenues until July 1997. We have not and may never generate sufficient revenues to achieve profitability. 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 March 31, 2001 was $286.6 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. Page 19 20 OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS THAT COULD IMPACT OUR GROWTH AND AFFECT OUR STOCK PRICE We believe that our revenues will be subject to seasonal fluctuations as a result of general patterns of retail advertising, which are typically 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. 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 Page 20 21 - 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 265 employees on March 31, 2001. In October 2000, we initiated a workforce reduction of 120 employees. The staff reductions were primarily in technology, production and administrative related positions. 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 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 Page 21 22 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 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 Page 22 23 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 the three months ended March 31, 2001 and in 2000. Our ten largest advertising customers were responsible for approximately 38% and 25% of our revenues during the three months ended March 31, 2001 and in 2000, respectively. We do not have long-term contracts with most of our customers, and customers can generally terminate their relationships with us upon specified notice and without penalties. Thus, we may not be able to retain our principal customers. The loss of one or more of our principal customers could have a material adverse effect on our revenues. OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING, IF REQUIRED, ARE UNCERTAIN AND FAILURE TO OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO PURSUE FUTURE GROWTH We may need to raise additional funds to develop or enhance our services or products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced and these securities might have rights, preferences or privileges senior to those of our current stockholders. If adequate funds are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited. 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 Page 23 24 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 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 center in 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 Page 24 25 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 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, Page 25 26 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 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. Page 26 27 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 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 Page 27 28 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 Stock of $1.00 per share. The Company's common stock has closed below $1.00 per share for a period exceeding thirty days. Consequently, on April 18, 2001, the Company received a letter from NASDAQ urging it, to regain compliance with Nasdaq National Marketplace rules. If the Company is unable to demonstrate compliance with these requirements by July 17, 2001, Nasdaq staff will provide the Company with written notification that its securities will be delisted. At that time, the Company may appeal this decision to a Nasdaq Listing Qualifications Panel. 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. Page 28 29 ITEM 3. 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 invest in high-credit quality securities. Page 29 30 PART II: OTHER INFORMATION ITEM 1. 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 2. 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 March 31, 2001, 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 $82.2 million; (ii) working capital of $48.3 million; and (iii) property and equipment purchases of $16.4 million. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K: None Page 30 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, May 15, 2001 MYPOINTS.COM, INC. By /s/ John Steuart ------------------- John Steuart Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Page 31