10-Q 1 f66866e10-q.txt FORM 10-Q PERIOD 9/30/2000 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 September 30, 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 [ ] On September 30, 2000, 40,253,019 shares of the Registrant's Common Stock, $.001 par value, were outstanding. 2 MYPOINTS.COM, INC. FORM 10-Q Quarter ended September 30, 2000 INDEX Page ---- Part I: Financial Information Item 1: Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 Consolidated Statements of Operations for the three and nine months ended September 30, 2000 and September 30, 1999 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2000 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and September 30, 1999 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: Signatures 3 MYPOINTS.COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

~~Page~~September 30, December 31, 2000 1999 ------------- ~~Part~~------------ I(unaudited) ASSETS Current assets: ~~Financial~~Cash ~~Information~~and ~~Item~~cash 1:equivalents ~~Financial~~................................... ~~Statements~~$ ~~(Unaudited)~~114,818 ~~Consolidated~~$ ~~Balance~~21,792 ~~Sheets~~Short-term atinvestments ~~June~~...................................... 3010,396 ~~2000~~-- ~~and~~Cash ~~December~~to 31be distributed for dividend ......................... 4,050 ~~1999~~-- ~~Consolidated~~Accounts ~~Statements~~receivable, less allowances of ~~Operations~~$4,247 ~~for~~and ~~the~~$1,300, ~~three~~respectively ...................................... 17,174 12,500 Unbilled receivables, net ................................... 1,198 257 Prepaid expenses and ~~six~~other ~~months~~current ~~ended~~assets ~~June~~................... 301,826 ~~2000~~2,186 --------- --------- Total current assets ..................................... 149,462 36,735 Intangible assets .............................................. 176,360 7,757 Restricted cash ................................................ 2,908 2,208 Long-term investments .......................................... 841 -- Notes and ~~June~~interest 30receivable .................................. 467 -- Property and equipment, ~~1999~~net ~~Consolidated~~.................................... ~~Statement~~16,908 of8,891 ~~Stockholders~~Other assets 1,080 78 --------- --------- Total assets .............................................. $ 348,026 $ 55,669 ========= ========= LIABILITIES AND STOCKHOLDERS' ~~Equity~~EQUITY ~~for~~Current ~~the~~liabilities: ~~six~~Accounts ~~months~~payable ~~ended~~and ~~June~~accrued 30liabilities .................... $ 23,993 ~~2000~~$ ~~Consolidated~~13,842 ~~Statements~~Dividend payable ............................................ 4,050 -- Current portion of ~~Cash~~long-term ~~Flows~~obligations ~~for~~.................... ~~the~~682 ~~six~~432 ~~months~~Deferred ~~ended~~revenue ~~June~~............................................ 4,211 1,873 Members payable ............................................. 16,901 9,640 --------- --------- Total current liabilities ................................. 49,837 25,787 Long-term obligations .......................................... 874 1,029 --------- --------- 50,711 26,816 --------- --------- Commitments and contingencies Stockholders equity: Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2000 and ~~June~~December 3031, 1999 ~~Notes~~................ to-- ~~Unaudited~~-- ~~Consolidated~~Common ~~Financial~~stock, ~~Statements~~$0.001 ~~Item~~par 2:value, ~~Management's~~100,000,000 ~~Discussion~~shares authorized, 40,253,019 and ~~Analysis~~25,924,533 ofshares ~~Financial~~issued ~~Condition~~and outstanding at September 30, 2000 and ~~Results~~December of31, ~~Operations~~1999, ~~Item~~respectively 3:............................................... ~~Quantitative~~40 ~~and~~26 ~~Qualitative~~Additional ~~Disclosures~~paid-in ~~about~~capital ~~Market~~.................................. ~~Risk~~405,313 ~~Part~~96,711 ~~II:~~Deferred ~~Other~~compensation ~~Information~~....................................... ~~Item~~(7,425) 1:(9,406) ~~Legal~~Accumulated ~~proceedings~~deficit ~~Item~~......................................... 2:(100,613) ~~Changes~~(58,478) in--------- ~~Securities~~--------- ~~and~~Total ~~Use~~stockholders' ofequity ~~Proceeds~~297,315 ~~Item~~28,853 6:--------- ~~Exhibits~~--------- Total liabilities and ~~Reports~~stockholders' onequity ~~Form~~$ ~~8-K~~348,026 ~~Item~~$ 7:55,669 ~~Signatures~~========= =========

The accompanying notes are an integral part of these consolidated financial statements. 4 MYPOINTS.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

~~June~~THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, ~~December~~SEPTEMBER 3130, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (~~unaudited~~ UNAUDITED ) ~~ASSETS~~( ~~Current~~UNAUDITED ~~assets~~) Revenue: ~~Cash~~Advertising ~~and~~........................ ~~cash~~$ ~~equivalents~~14,485 $ ~~108~~6,~~461~~341 $ 2149,~~792~~013 ~~Accounts~~$ ~~receivable~~10,279 ~~net~~License ~~18,966~~............................ ~~12,500~~-- ~~Unbilled~~614 ~~receivables,~~-- ~~net~~614 ~~347~~-------- ~~257~~-------- ~~Notes~~-------- ~~and~~-------- ~~interest~~Total ~~receivable~~revenue 2..................... 14,~~035~~485 6,955 49,013 10,893 -------- ~~Deposits~~-------- ~~and~~-------- ~~prepaid~~-------- ~~expenses~~Cost 1of revenue: Advertising ........................ 4,~~842~~197 1,~~702~~958 ~~Other~~12,740 ~~current~~3,835 ~~assets~~License ~~1,008~~............................ ~~484~~-- 195 -- 195 -------- -------- -------- -------- Total ~~current~~cost ~~assets~~of ~~132~~revenue ............. 4,~~659~~197 362,~~735~~153 ~~Intangible assets 20~~12,~~150~~740 74,~~757~~030 ~~Restricted~~-------- ~~cash~~-------- ~~2,509~~-------- ~~2,208~~-------- ~~Property~~Gross ~~and~~profit ~~equipment~~........................ 10,288 ~~net~~4,802 1236,~~107~~273 86,~~891~~863 ~~Other assets 78 78~~ -------- -------- -------- -------- ~~Total~~Operating ~~assets~~expenses: $Technology ~~167~~costs .................... 7,~~503~~194 $2,658 5518,~~669~~112 ~~=========~~5,049 ~~=========~~Sales ~~LIABILITIES~~and ~~AND~~marketing ~~STOCKHOLDERS'~~expenses ~~EQUITY~~........ ~~Current~~11,049 ~~liabilities:~~7,486 ~~Accounts~~32,743 ~~payable~~17,371 General and ~~accrued~~administrative ~~liabilities~~expenses.. $5,259 133,~~168~~144 ~~$ 13~~15,~~842~~270 ~~Notes payable~~5,889 ~~current~~Amortization ~~portion~~of ~~335~~intangible ~~327~~assets ~~Obligations~~... ~~under~~9,400 ~~capital~~733 ~~leases~~11,819 ~~current~~2,367 ~~portion~~Stock-based ~~112~~compensation ~~105~~............ ~~Deferred revenue 2,497~~ 1,~~873~~230 ~~Points~~800 ~~redemption liability 13~~3,~~004~~430 91,~~640~~959 -------- -------- -------- -------- Total ~~current~~operating ~~liabilities~~expenses 29.......... 34,~~116~~132 2514,~~787~~821 ~~Notes payable~~81,374 ~~less current portion 738 932 Obligations under capital leases~~32,635 ~~less current portion 42 97~~ --------- --------- ~~29,896 26,816~~ --------- --------- ~~Commitments~~Operating ~~and~~loss ~~contingencies Stockholders equity: Preferred stock, $0~~.~~001~~........................ ~~par value~~(23,844) (10,~~000~~019) (45,~~000~~101) ~~shares authorized~~(25,772) 0Interest ~~shares~~income ~~issued~~........................ ~~and outstanding at June 30~~2,077 ~~2000~~223 ~~and December 31~~4,718 ~~1999~~233 --Interest --expense ~~Common~~and ~~stock~~other, $0net .~~001~~....... ~~par~~(45) ~~value,~~(42) ~~100,000,000~~(147) ~~shares~~(84) ~~authorized,~~Write-down ~~29,390,763~~of ~~and~~notes ~~25,924,533 shares issued~~ and ~~outstanding~~interest atreceivable ~~June~~........................... 30(1,605) ~~2000~~-- ~~and December 31~~(1,605) ~~1999,~~-- ~~respectively~~-------- 29-------- 26-------- ~~Additional paid~~-in------- ~~capital~~Net ~~221,980~~loss......................... ~~96,711 Deferred compensation~~ (723,~~206~~417) (9,~~406~~838) ~~Accumulated deficit~~ (7742,~~196~~135) (5825,~~478~~623) Dividend related to beneficial conversion of preferred stock ........ -- -- -- (9,800) --- ----- ---- ~~Total stockholders' equity 137,607 28,853~~ ---- ----- --- -------- ~~Total~~Net ~~liabilities~~loss ~~and~~attributable to common stockholders' ~~equity~~.............. $(23,417) ~~167~~$ (9,~~503~~838) $(42,135) 55$(35,~~669~~423) ======== ======== ======== ======== ~~The~~Net ~~accompanying~~loss ~~notes~~per ~~are~~share: anBasic ~~integral~~and ~~part~~diluted of................... ~~these~~$ ~~unaudited~~(0.66) ~~consolidated~~$ ~~financial~~(0.69) ~~statements~~$ (1.37) $ (4.21) ======== ======== ======== ======== Weighted average shares --- basic and diluted ...................... 35,495 14,214 30,668 8,408 ======== ======== ======== ======== Pro forma net loss per share: Basic and diluted ................... $ (0.66) $ (0.47) $ (1.37) $ (1.94) ======== ======== ======== ======== Weighted average shares --- basic and diluted .................... 35,495 20,947 30,668 18,222 ======== ======== ======== ========

The accompanying notes are an integral part of these consolidated financial statements. 5 MYPOINTS.COM, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS)

~~THREE~~ADDITIONAL ~~MONTHS~~PREFERRED ~~ENDED~~STOCK ~~SIX~~COMMON ~~MONTHS~~STOCK ~~ENDED~~PAID-IN ~~JUNE~~DEFERRED ~~30,~~ACCUMULATED ~~JUNE~~SHARES ~~30,~~AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL ------ ------ -------- ------ -------- ------ ~~2000 1999 2000 1999~~ ------ -- --------- ------ Balance at December 31, 1999 ........ -- --~~------~~ ~~(UNAUDITED)~~25,925 ~~(UNAUDITED)~~$ ~~Revenues~~26 $ 1896,~~706~~711 $ 2(9,~~663~~406) $ 34(58,~~528~~478) $ 328,~~938~~853 ~~Cost~~Issuance of ~~revenues~~common ~~4,430~~stock ~~999~~for 8cash,~~543~~ ~~1,877~~net ~~--------~~of ~~--------~~issuance ~~--------~~costs ~~--------~~of ~~Gross~~$798 ~~profit~~..... 142,~~276~~480 ~~1,664~~2 25106,~~985~~594 2106,~~061~~596 ~~--------~~Issuance ~~--------~~of ~~--------~~common ~~--------~~stock ~~Operating~~pursuant ~~expenses:~~to ~~Technology~~the ~~costs~~acquisition ~~5,642~~of ~~1,423~~ADG ~~10,918~~......... ~~2,391~~270 ~~Sales and marketing expenses 10~~16,~~301~~562 716,~~321~~562 ~~21,694~~Issuance ~~9,885~~of ~~General~~common ~~and~~stock ~~administrative~~pursuant ~~expenses~~to ~~5,611~~the ~~1,671~~acquisition ~~10,011 2,745 Amortization~~ of ~~intangible~~Cybergold ~~assets~~.... 110,~~242~~636 ~~802~~11 2181,~~419~~801 (1,~~634~~449) ~~Stock-based compensation 1~~180,~~100~~363 ~~710~~Exercise ~~2,200~~of ~~1,159~~stock ~~--------~~options ~~--------~~for ~~--------~~cash ~~--------~~.. ~~Total~~942 ~~operating~~1 ~~expenses 23~~3,~~896~~645 113,~~927~~646 ~~47,242~~Net ~~17,814 -------- -------- -------- -------- Operating~~ loss ~~(9,620)~~............................ (1042,~~263~~135) (2142,~~257~~135) ~~(15,753)~~Amortization ~~Interest~~of ~~income~~deferred ~~1,825~~compensation 1....................... 23,~~641~~430 ~~10 Interest expense and other~~3,430 ~~net (49) (42) (102) (42)~~ -----~~---~~ -------- -------- -------- ~~Net loss (7,844) (10,304) (18,718) (15,785) Dividend related to beneficial conversion of preferred stock~~ - - - ~~(9,800)~~ -----~~---~~ -------- --------- -------- ~~Net~~Balance ~~loss~~at ~~attributable~~September ~~to common stockholders $ (7~~30,~~844)~~ ~~$(10,304)~~2000 $(~~18,718~~Unaudited) ~~$(25,585) ======== ======== ======== ======== Net loss per share: Basic and diluted $ (0~~.~~27) $ (1~~.~~86)~~....................... $ ~~(0.67)~~-- $ ~~(4.70) ======== ======== ======== ======== Weighted average shares~~ -- ~~basic and diluted 29~~40,~~046~~253 ~~5,546 27,944 5,441 ======== ======== ======== ======== Pro forma net loss per share: Basic and diluted~~ $ ~~(0.27)~~40 $405,313 ~~(0.57)~~ $ (~~0.67~~7,425) $ (~~1.52~~100,613) 297,315 =====~~===~~ ======== ======== ======== ~~Weighted average shares - basic and diluted 29,046 17,934 27,944 16,824~~ ======== ======== ========= =======~~= The accompanying notes are an integral part of these unaudited consolidated financial statements.~~

The accompanying notes are an integral part of these consolidated financial statements. 6 MYPOINTS.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

~~Additional~~NINE ~~Preferred~~MONTHS ~~Stock~~NINE ~~Common~~MONTHS ~~Stock~~ENDED ~~Paid-in~~ENDED ~~Deferred~~SEPTEMBER ~~Accumulated~~30, ~~Shares~~SEPTEMBER ~~Amount~~30, ~~Shares Amount Capital Compensation Deficit Total~~ ------- ------ ------------- 2000 1999 ------------- --------- ---- Cash flows from operating activities: Net loss .............................................. $ (42,135) $ (25,623) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ....................... 15,949 3,115 Provision for bad debts ............................. 2,245 686 Write-down of notes and interest receivable ......... 1,605 -- Revenues in exchange for equity instruments ......... (212) -- Barter revenues, net ................................ (337) 67 Stock - based compensation .......................... 3,430 1,959 Changes in operating assets and liabilities: Accounts receivable and unbilled receivables ..... (1,759) (6,550) Prepaid expenses and other current assets ........ 238 (1,299) Other assets ..................................... (911) (41) Accounts payable, accrued and other liabilities .. (1,139) 10,582 Deferred revenue ................................. 2,309 (17) Members payable .................................. 4,096 4,597 --------- --------- ~~Balance~~Net atcash ~~December~~used 31in operating activities ........ (16,621) ~~1999~~(12,524) --------- --------- ~~25,925~~Cash $flows 26from $investing ~~96,711~~activities: $Purchase of property and equipment ................... (98,~~406~~989) $ (586,~~478~~169) $Acquisition 28of ADG,~~853~~ ~~Issuance~~net of ~~common~~cash ~~stock~~acquired ~~for~~............. ~~cash,~~(175) ~~net~~-- Acquisition of ~~issuance~~Cybergold, ~~costs~~net of ~~$798~~cash acquired ....... 2,~~480~~577 2-- ~~106,594~~Proceeds ~~106~~from short-term investments ................. 7,~~596~~531 ~~Issuance~~-- ofNotes ~~common~~and ~~stock~~interest ~~pursuant~~receivable to........................ ~~the~~(100) ~~acquisition~~-- Purchase of ~~ADG~~long-term ~~270~~investments ~~16,562~~.................... 16(369) -- Increase in restricted cash .......................... (700) (275) --------- --------- Net cash used in investing activities ........ (225) (6,~~562~~444) ~~Exercise~~--------- --------- Cash flows from financing activities: Proceeds from issuance of preferred stock, ~~options~~net ~~for~~....... ~~cash~~-- ~~715~~10,300 1Proceeds 2from issuance of common stock,~~113~~ 2net .......... 106,~~114~~596 ~~Net~~41,205 ~~loss~~Repayments of borrowings ............................. (~~18,718~~370) (~~18,718~~683) ~~Deferred~~Repayments ~~compensation~~of ~~2,200~~software license ....................... -- (2,~~200~~624) Borrowing under capital lease line, net .............. -- 1,253 Exercise of stock options ............................ 3,646 179 Exercise of warrants ................................. --~~---~~ 1,300 ------ ---~~----~~ --------- Net cash provided by financing activities .... 109,872 50,930 --------- --------- Net increase in cash and cash equivalents .... 93,026 31,962 Cash and cash equivalents, beginning of period ........... 21,792 5,089 --------- --------- ~~Balance~~Cash atand ~~June~~cash 30equivalents, ~~2000~~end ~~(Unaudited)~~of period ................ $ 114,818 $ 37,051 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest ................ $ 147 $ 132 ========= ========= Noncash transactions: Exchange of advertising services ........................ $ 457 $ -- ========= ========= Warrants issued to non-employees ........................ $ -- ~~29,390~~ $ 29807 ========= ========= Deferred stock compensation as a result of option activity ....................................... $ ~~221~~1,~~980~~449 $ (710,~~206)~~156 ========= ========= Cashless exercise of warrants ........................... $ ~~(77,196)~~-- $ ~~137,607~~400 ========= ========= Conversion of preferred stock to common stock ........... $ -- $ 12 ========= ========= Exercise of stock options for notes receivable .......... $ -- $ 200 ========= ========= Equipment acquired under capital leases ................. $ -- $ 139 ========= =========

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. The accompanying notes are an integral part of these consolidated financial statements. 7 1. BASIS OF PRESENTATION The accompanying unaudited condensed 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, 1999 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 March 30, 2000. The results of operations for the three and nine month periods ended September 30, 2000 are not necessarily indicative of results for the entire fiscal year ending December 31, 2000. 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. 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. 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 developed and implemented. 8 Also included in revenues are revenues generated from exchanging qualified response generation of leads 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 three and nine months ended September 30, 2000 these revenues amounted to $0.8 million. During the three and nine months ended September 30, 2000, the Company generated revenues in the amount of $0.2 million 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. During the three months ended September 30, 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 three and nine months ended September 30, 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. The Company's chief financial officer is a member of the board of directors of KnowledgeTrack. 3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of highly liquid investments with original maturities of three months or less. Short-term investments consist primarily of government and fixed-income securities which the Company plans to hold to maturity. These investments are reported at amortized cost in the accompanying balance sheets. 4. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 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 Company is currently assessing the impact of this statement. 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. Management does not expect the adoption of SAB 101 to have a material effect on the Company's operations or financial position. The Company is required to adopt SAB 101 in the fourth quarter of fiscal 2000. 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) 9 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 Company believes the impact of FIN No. 44 will not have a material effect on its financial position or results of operations. 5. 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, points are valid through December 31st of the third calendar year following the date they are awarded to a member and may be redeemed at any time prior to expiration. The Company bases its estimate of points that will not be redeemed on an analysis of historical point earning trends, redemption activity and individual member accounts. This analysis is updated quarterly. At September 30, 2000 and December 31, 1999, the allowance for unredeemed points was $4.4 million and $2.8 million, respectively. As of September 30, 2000, the gross points redemption liability was $17.8 million. As of September 30, 2000, the cash balance members payable liability amounted to $3.5 million. 10 Following is a summary of the members payable liability activity for the three months ended September 30, 2000 and 1999 (in thousands):

~~SIX~~THREE MONTHS ~~SIX MONTHS~~ ENDED ~~ENDED~~SEPTEMBER ~~JUNE~~ 30, ~~JUNE~~(UNAUDITED) ~~30, -----------------------~~ 2000 1999 -------- --------~~-------~~ ~~Cash~~Outstanding ~~flows~~at ~~from~~beginning ~~operating~~of ~~activities:~~period ~~Net~~............ ~~loss~~ $ ~~(18~~13,~~718)~~004 $~~(15,785)~~ ~~Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization~~ 5,~~099~~636 ~~1,983~~Accrual ~~Provision~~ for ~~bad~~new ~~debts~~award ~~1,695 285 Points~~ redemption liability..... 34,~~364~~131 2,~~909~~701 ~~Barter~~Members revenues, net 67 Stock - based compensation 2,200 1,159 Changes in operating assets and liabilities: Accounts receivable and unbilled receivables (7,671) (2,823) Deposits, prepaid expenses and other current assets (845) (1,608) Other assets -- (11) Accounts payable, ~~accrued~~balance ~~and~~assumed ~~other~~as ~~liabilities~~of ~~(1,461)~~08/07/00 ~~2,282 Deferred revenue 624 907 --------- -------- Net cash used~~ in ~~operating~~the ~~activities~~Cybergold ~~(15,713)~~acquisition ~~(10,635)~~................ ~~--------- -------- Cash flows from investing activities: Purchase of property and equipment (5~~3,~~409)~~165 ~~(1,657) Acquisition of ADG, net of cash acquired (175)~~ -- ~~Restricted~~Allowance ~~cash~~for ~~(301)~~unredeemed --awards ~~Notes~~............... ~~and interest receivable~~ (~~209) -- --------- -------- Net cash used in investing activities (6,094) (~~1,~~657~~171) ~~--------- -------- Cash flows from financing activities: Proceeds from issuance of preferred stock, net -- 10,300 Proceeds from issuance of common stock, net 106,596 -- Repayments of borrowings~~ (~~186~~486) ~~(56)~~Awards ~~Repayments~~redemption of............................. ~~software license --~~ (~~210) Principal payments under capital lease obligations (48) (62) Borrowing under capital lease line, net -- 419 Exercise of stock options~~ 2,~~114~~228) ~~159 --------- -------- Net cash provided by financing activities 108,476 10,550 --------- -------- Net increase in cash and cash equivalents 86,669~~ (~~1,742~~527) ~~Cash and cash equivalents, beginning of period 21,792 5,089~~ --------- -------- ~~Cash~~Outstanding ~~and~~at ~~cash equivalents,~~ end of period .................. $ ~~108~~16,~~461~~901 $ 37,~~347~~324 ========= ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $102 $ 41 ==== ====== Noncash transactions: Exchange of advertising services $ 15 $ 85 ==== ====== Warrants issued to non-employees -- $ 807 ==== ====== Deferred stock compensation from issuance of options -- $9,511 ==== ====== The accompanying notes are an integral part of these unaudited consolidated financial statements.

Following is a summary of members payable liability activity for the nine months ended September 30, 2000 and 1999 (in thousands):

~~Three~~NINE ~~months~~MONTHS ~~ended~~ENDED ~~June~~SEPTEMBER 30, (~~Unaudited~~UNAUDITED) 2000 1999 -------- -------- Outstanding at beginning of period ............ $ 9,640 $ 2,727 Accrual for new award redemption liability..... 12,617 6,651 Members payable balance assumed as of 08/07/00 in the Cybergold acquisition ................ 3,165 -- Allowance for unredeemed awards ............... (1,854) (1,268) Awards redemption ............................. (6,667) (786) -------- -------- Outstanding at ~~beginning~~end of period .................. $11 16,~~458~~901 $3 7,~~840~~324 ======== ========

11 6. 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):

~~Six~~THREE ~~months~~MONTHS ~~ended~~ENDED ~~June~~NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (~~Unaudited~~UNAUDITED) 2000 1999 2000 1999 -------- -------- ~~Outstanding~~-------- at-------- ~~beginning~~Numerator: ofNet ~~period~~loss ............................... $(23,417) $ (9,~~640~~838) $2(42,~~727~~135) ~~Accrual~~$(25,623) ~~for~~Dividend ~~new~~related ~~point~~to ~~redemption~~beneficial ~~liability~~conversion ~~8,486~~feature ~~3,950~~of ~~Allowance~~preferred ~~for~~stock ~~unredeemed~~.................................. ~~points~~-- -- -- (~~683~~9,800) -------- -------- -------- -------- Net loss available to common Stockholders .......................... $(~~782~~23,417) ~~Points~~$ ~~redemption~~(9,838) $(442,~~439~~135) $(~~259~~35,423) ======== ======== ======== ======== Denominator: Weighted average shares ................ 35,562 14,723 30,786 9,018 Weighted average unvested common shares subject to repurchase agreements .................. (67) (509) (118) (610) -------- -------- ~~Outstanding~~-------- at-------- ~~end~~Denominator for basic calculation ...... 35,495 14,214 30,668 8,408 Weighted average effect of ~~period~~dilutive ~~$13~~securities: Net effect of dilutive stock options -- -- -- -- Net effect of dilutive stock warrants -- -- -- -- -------- -------- -------- -------- Denominator for diluted calculation .... 35,~~004~~495 $514,~~636~~214 30,668 8,408 ======== ======== ======== ======== Net loss per share: Basic and diluted ...................... $ (0.66) $ (0.69) $ (1.37) $ (4.21) ======== ======== ======== ========

12 As presented in the condensed consolidated statements of operations, pro forma net loss per share has been computed by dividing net loss attributable to common stockholders by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares assume the conversion of all preferred stock (which were ultimately converted to common stock in conjunction with the initial public offering), as if the conversion occurred at the beginning of the period or at date of issuance, if later. 7. 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 Inc., a Delaware Corporation ("Cybergold") 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 .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. 13 The Company has accounted for this 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):

~~Three~~Amount ~~months ended Six months ended June 30, June 30, (Unaudited) 2000 1999 2000 1999~~ -------- ~~--------~~Fair ~~--------~~value ~~--------~~of ~~Numerator:~~tangible ~~Net~~net ~~loss~~assets $acquired ~~(7,844)~~ $~~(10,304)~~ ~~$(18,718)~~17.8 ~~$(15,785)~~Membership ~~Dividend~~base ~~related~~.......................... to1.7 ~~beneficial~~Existing ~~conversion~~technology ~~feature~~...................... of1.2 ~~preferred~~Workforce ~~stock~~................................ ~~-- -- -- (9,800) -------- -------- -------- -------- Net loss available to common Stockholders $ (~~3.7~~,844)~~ ~~$(10,304)~~Deferred ~~$(18,718)~~compensation ~~$(25,585)~~.................... ~~========~~1.4 ~~========~~Goodwill ~~========~~................................. ~~========~~159.0 ~~Denominator: Weighted average shares 29,249 6,156 28,198 6,102 Weighted average unvested common shares subject to repurchase agreements (203) (610) (254) (661)~~ -------- ~~--------~~Total ~~--------~~purchase ~~--------~~price Denominator for basic calculation 29,046 5,546 27,944 5,441 Weighted average effect of dilutive securities: Net effect of dilutive stock options -- -- -- -- Net effect of dilutive stock warrants -- -- -- -- -------- -------- -------- -------- Denominator for diluted calculation 29,046 5,546 27,944 5,441 ======== ======== ======== ======== Net loss per share: Basic $ (0.~~27) $ (1~~.~~86) $ (0~~.~~67) $ (4~~.~~70)~~ ~~======== ======== ======== ======== Diluted~~ $ (0184.~~27)~~8 ~~$ (1.86) $ (0.67) $ (4.70)~~ ======== ~~======== ======== ========~~

The Company is amortizing the intangibles acquired in the Cybergold acquisition over their estimated useful lives of 3 years. 8. 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. The notes were originally collateralized by ADG common stock. During the three and nine months ended September 30, 2000, the Company incurred a write-down of these notes of $1.6 million to their estimated recoverable amount of $0.5 million. 9. 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 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 three and nine months periods ended September 30, 2000, the Company recognized $0.2 million in revenues under the agreement. MyPoints Japan During the third quarter of 2000, the Company entered into an agreement ("DNP Agreement") with Dai Nippon Printing Co., Ltd, a Japanese Corporation ("DNP") 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. In September 2000, the Company and MyPoints Japan entered into a license and services agreement under which MyPoints Japan will license certain software and trademarks from the Company. The Company will also provide certain customization and localization services, training, and system support services to MyPoints Japan. The term of the agreement is three years. MyPoints Japan will pay the Company a non-refundable fee of $1 million in the first year of the agreement. Beginning in year two through the end of the term of the agreement, MyPoints Japan will pay the Company a royalty based upon direct marketing and other advertising sales by MyPoints Japan. During the three and nine months periods ended September 30, 2000, the Company has recognized $0.1 million in revenues for training services under the terms of the agreement. 10. CASH TO BE DISTRIBUTED FOR DIVIDEND In August 2000, the Company completed the acquisition of Cybergold, Inc. As part of that acquisition, a Cybergold subsidiary named Magnacash, Inc. ("Magnacash") (formerly Paytime, Inc.) was to be spun-off as a separate publicly listed entity. A dividend was to be distributed to the former Cybergold shareholders consisting of shares totaling 80.1% of Magnacash. Per the terms of the acquisition agreement, the Company contributed $5 million to Magnacash. The acquisition agreement stipulated that if the spin-off was not completed by September 30, 2000, the Company could choose to distribute as a cash dividend the cash contribution of $5.0 million to the former Cybergold shareholders, less expenses for the operation of Magnacash and up to $200,000 of shut-down costs, if any. The spin-off was not completed by September 30, 2000, and the Company intends to distribute a cash dividend amounting to $4.1 million, after expense deductions, in December 2000. (see note 11) 11. SUBSEQUENT EVENT 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. 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. The Company has also agreed to loan 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. 14 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 "Factors Affecting Operating Results" 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. 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 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. 15 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. Under new and some existing advertising contracts and partnerships, we sell points to private label partners and to advertisers for use in their promotional campaigns. We initially defer revenue and estimated point costs associated with the sale of points and recognize this revenue upon the expiration or redemption of the underlying points. Under some new contracts, we may amortize some associated fees and related costs over the life of these contracts. Our revenues depend on a number of factors. These include the number of advertisers engaging us to send direct marketing offers to our membership base, the size of our membership base, and the responsiveness of our members to these direct marketing offers. We believe that our revenues will be subject to seasonal fluctuations as a result of general patterns of retail advertising, which are typically 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 overall economic conditions and consumer buying patterns. During the third quarter of 2000, market demand for on-line advertising services such as those offered by the Company weakened, particularly from early-stage internet and e-commerce companies. We expect weaker demand and smaller marketing budgets from these companies to continue in the fourth quarter of 2000 and into 2001. We also offer technology licensing arrangements to customers seeking to develop email or web-based direct marketing and loyalty programs. We entered into our first license agreement in December 1998 with Sweden Post, the Swedish postal service. Sweden Post is establishing a version of the MyPoints BonusMail program for the Swedish market. This license agreement provides for a licensing fee, technical support fees and royalties based on a percentage of revenues from the program site. We recognized revenue under this agreement when the custom development work that we performed for Sweden Post was completed and accepted by Sweden Post. In addition, we will recognize royalty revenue as it is received from Sweden Post. We incurred a net loss of $37.5 million in the year ended December 31, 1999, and $42.1 million in the nine months ended September 30, 2000. We intend to implement our strategies by spending substantial amounts on member acquisition and retention, new product offerings, sales and marketing strategic relationships, brand development and technology and operating infrastructure development. As a result, we expect to incur net losses at least through 2001 and negative cash flows for the next several quarters. Our limited operating history makes it difficult to forecast future operating results. 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. 16 RESULTS OF OPERATIONS -THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenues Revenues increased to $14.5 million in the three months ended September 30, 2000 as compared to $7.0 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, revenues increased to $49.0 million from $10.9 million in the nine months ended September 30,1999. During the three and nine months ended September 30, 2000 and 1999, substantially all revenues were from advertising activities. The increase in revenues for the three and nine month periods ended September 30, 2000 as compared to the same periods of 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, (iii) an increase in average spending per advertiser and (iv) an increase in the number of consumer members participating in our programs. 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 $ 0.9 million and $ 2.4 million in revenues during the three and nine months ended September 30, 2000. Cybergold (including its wholly owned subsidiary itarget), which was acquired on August 7, 2000, contributed $ 2.6 million in revenues from the date of the acquisition to September 30, 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 $4.2 million in the three months ended September 30, 2000 from $2.2 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, cost of revenues increased to $12.7 million as compared to $4.0 million in the nine months ended September 30, 1999. As a percentage of revenues, these costs decreased to 29% and 26% in the three and nine months ended September 30, 2000 from 31% and 37% in the three and nine months ended September 30, 1999. The decrease in the cost of revenues as a percentage of revenues in the three and nine months ended September 30, 2000 as compared to the three and nine months ended September 30, 1999 was primarily attributable to 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 and fluctuations in product mix and associated point award levels. The cost of personnel included in cost of revenues increased to $ 0.9 million and $2.8 million in the three and nine months ended September 30, 2000 as compared to zero in the three and nine months ended September 30, 1999. Also contributing to a lower cost of revenue was reduced costs associated with redemption award purchases. As redemption volume has increased, we have been able to negotiate volume purchase discounts when purchasing gift awards. 17 Technology Costs Technology costs primarily consist of compensation for personnel associated with the development of our technology and the maintenance of our proprietary databases. Presently, we expense 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 three and nine months ended September 30, 2000, the Company deferred approximately $0.2 million and $0.5 million, respectively, related to these agreements. Additionally, in the future, certain technology costs may be capitalized, as appropriate. Technology costs increased to $7.2 million in the three months ended September 30, 2000 from $2.7 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, these costs increased to $18.1 million from $5.0 million in the nine months ended September 30, 1999. The increase in technology costs in the three and nine month periods ended September 30, 2000 as compared to the same periods in 1999 was primarily due to increases in personnel and consulting costs and related expenses used to enhance and support our proprietary databases and products. 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 $11.0 million in the three months ended September 30, 2000 from $7.5 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, these costs increased to $32.7 million from $17.4 million in the nine months ended September 30, 1999. The increases in sales and marketing expenses in the three and nine month periods ended September 30, 2000 as compared to the same periods in 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. 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 $5.3 million in the three months ended September 30, 2000 from $3.1 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, these costs increased to $15.3 million from $5.9 million in the nine months ended September 30, 1999. The increases in general and administrative expenses in the three and nine month periods ended September 30, 2000 as compared to the same periods in 1999 was primarily due to the expansion of our corporate infrastructure, including the addition of finance and administrative personnel, increased 18 general corporate expenses including legal costs and bad debt reserves, and facility-related expenses. Amortization of Intangible Assets The Company acquired various intangible assets as part of the acquisitions of Enhanced Response Technologies, Inc. ("ERT") and a company affiliated with Experian in the fourth quarter of 1998, ADG in the first quarter of 2000 and Cybergold in the third quarter of 2000. In regards to the acquisition of ERT and a company affiliated with Experian, the Company recorded intangible assets of $11.2 million. These intangible assets are being amortized over their estimated useful lives of six months to five years. In regards to the acquisition of ADG in the first quarter of 2000, the Company recorded intangible assets of $14.8 million. These intangible assets are being amortized over their estimated useful lives of thirty-six to ninety months. In regards to the acquisition of Cybergold in the third quarter of 2000, the Company recorded intangible assets of $165.5 million. These intangible assets are being amortized over their estimated useful lives of thirty-six months. We recorded amortization of intangible assets of $9.4 million in the three months ended September 30, 2000 as compared to $0.7 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, these costs increased to $11.8 million from $2.4 million in the nine months ended September 30, 1999. The increases in the amortization of intangible assets in the three and nine month periods ended September 30, 2000 as compared to the same periods in 1999 was due to the acquisitions of ADG and Cybergold in 2000. The Company expects the amortization of intangibles to approximate $15.0 million in the fourth quarter of 2000. Stock-Based Compensation Through September 30, 2000, we recorded aggregate deferred compensation totaling $14.1 million in connection with the grant of stock options to employees and consultants and the acceleration of vesting of stock options in the Cybergold acquisition. This charge is being amortized over the vesting periods of the options. Stock-based compensation increased to $1.2 million in the three months ended September 30, 2000 from $0.8 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, these costs increased to $3.4 million from $2.0 million in the nine months ended September 30, 1999. Interest Income Interest income increased to $2.1 million in the three months ended September 30, 2000 from $0.2 million in the three months ended September 30, 1999. For the nine months ended September 30, 2000, interest income increased to $4.7 million from $0.2 million in the nine months ended September 30, 1999. This increase is 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 and our follow-on offering which was completed in February 2000. 19 Write-down of Notes and Interest Receivable During the three and nine months ended September 30, 2000, the Company incurred $1.6 million for the write-down of notes and interest receivable, due from the former shareholders of ADG. Income Taxes We recorded a net loss of $37.5 million for 1999 and a net loss of $42.1 million in the nine months ended September 30, 2000. Accordingly, no provision for income taxes was recorded in the year and no tax benefit has been recognized due to the uncertainty of realizing a future tax deduction for these losses. RESULTS OF OPERATIONS- THREE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 2000 Revenues Revenues decreased to $14.5 million in the three months ended September 30, 2000 as compared to $18.7 million in the three months ended June 30, 2000. This decrease is primarily attributable to weak demand for internet marketing services, lower pricing for the Company's products and lower than expected responses in qualified response priced campaigns, particularly repeat campaigns of the same offer. Cost of Revenues Cost of revenues decreased to $4.2 million in the three months ended September 30, 2000 from $4.4 million in the three months ended June 30, 2000. As a percentage of revenues, these costs increased to 29% in the three months ended September 30, 2000 from 24% in the three months ended June 30, 2000. This increase as a percentage of revenues is primarily due to lower pricing for the Company's products, higher production costs as a percentage of revenues, and a higher percentage of revenue produced by the Company's lower margin products, partially offset by an increase in the allowance for unredeemed points ("breakage"). Operating Expenses Operating expenses which includes technology costs, sales and marketing expenses, general and administrative expenses, amortization of intangible assets, and stock-based compensation increased to $34.1 million in the three months ended September 30, 2000 as compared to $23.9 million in the three months ended June 30, 2000. This increase was primarily attributable to the acquisition of Cybergold. Operating expenses related to Cybergold (including its wholly owned subsidiary itarget) included in the three months ended September 30, 2000 results of operations are amortization of intangibles of $ 8.2 million and technology costs, sales and marketing expenses, and general and administrative expenses of $4.6 million. 20 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 September 30, 2000 amounted to $16.9 million. This liability is made up of cash balances owed to Cybergold members amounting to $3.5 million and points balances owed to Mypoints members. The total number of outstanding points issued to members in the MyPoints database for which we have a recognized liability as of September 30, 2000 was approximately 2.2 billion points with a redemption liability of $13.4 million. This liability was calculated based on certain assumptions, including the assumption that 75% 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 the year ended December 31, 1999 and 669 million in the nine months ended September 30, 2000. Points issued by us have a life of three to four years. Our current policy is that unredeemed points will expire on December 31 of the third calendar year following the calendar year in which such points are first deemed earned. Although we do not anticipate making changes to our current policy we reserve the right to alter point expiration terms at anytime. In the past, we have both extended as well as reduced expiration terms of points. Members may redeem points in their discretion at any time prior to the expiration of the points. We fund 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 $16.6 million in the nine months ended September 30, 2000. This cash used in operating activities was due to our expanded operations and primarily resulted from the net loss and higher accounts receivable. Net cash used in investing activities was $0.2 million in the nine months ended September 30, 2000 which was primarily used to acquire property and equipment, primarily computer equipment, software and leasehold improvements, partially offset by proceeds from short-term investments. Net cash provided by financing activities was $109.9 million in the nine months ended September 30, 2000 which includes net proceeds of $105.7 million from our follow-on offering in February 2000. 21 At September 30, 2000 we had cash and cash equivalents of $114.8 million. Additionally, at September 30, 2000, we had $10.4 million of short-term investments primarily in government and fixed-income securities with maturities of less than six months. 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 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 did not reach a consensus on this issue at the September meeting and plans on discussing it at a future meeting. 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 to our members are redeemed for rewards or expire. 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. 22 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 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. Although we have experienced revenue growth in recent periods, these growth rates may not be sustainable or indicative of our future growth. We have limited experience addressing challenges frequently encountered by early-stage companies in the electronic commerce and direct marketing industries. We may not be successful in addressing these risks, and our business strategy may not be successful. In addition, we have never operated during a general economic downturn in the United States, which typically adversely affects advertising and marketing expenditures and retail sales. Accordingly, our limited operating history does not provide investors with a meaningful basis for evaluating an investment in our common stock. WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES TO CONTINUE AT LEAST THROUGH 2001 Our accumulated deficit as of September 30, 2000 was $100.6 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. We plan to increase our operating expenses as we continue to build infrastructure to support the expansion of our business. Our losses may increase in the future, and even if we achieve our revenue targets, we may not be able to sustain or increase profitability on a quarterly or annual basis. If our revenues grow more slowly than we anticipate, or if our operating expenses exceed our expectations and cannot be adjusted accordingly, our losses could continue beyond our present expectations. 23 OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH COULD AFFECT OUR STOCK PRICE Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors, some of which are outside of our control. As a result, our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. The factors most likely to produce varied results include: - the advertising budget cycles of individual advertisers; - the number of reward points redeemed by our members and the costs associated with these redemptions; - changes in the mix of our business; - changes in marketing and advertising costs that we incur to attract and retain members; - changes in our pricing policies, the pricing policies of our competitors or the pricing policies for internet advertising generally; and - unexpected costs and delays relating to the expansion of our operations. Due to these factors, revenues and operating results are difficult to forecast and you should not rely on period to period comparisons of results of operations as an indication of our future performance. OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS THAT COULD IMPACT OUR GROWTH AND AFFECT OUR STOCK PRICE We believe that our revenues will be subject to seasonal fluctuations as a result of general patterns of retail advertising, which are typically 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 ADG. We closed the acquisition of 24 Cybergold in the third quarter of 2000. We may 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 November and December 1998, through our acquisition of Enhanced Response Technologies, Inc. and a company affiliated with Experian Information Solutions, Inc., we acquired internet and electronic commerce related assets and technologies to support a web-based rewards program known as MyPoints. We integrated MyPoints with our BonusMail email service during March and April 1999. This integration involved the combination of two different marketing programs and technology platforms, as well as operations in San Francisco and Chicago. In connection with this integration, we incurred substantial costs. During the relaunch of the integrated MyPoints program, we encountered several unanticipated problems which resulted in significant periods of system downtime during April 1999. During these periods of downtime, our web site was not accessible by members. We believe that we have resolved the problems that caused this downtime; however, there can be no assurance that we will not encounter additional system-related problems. In January 2000, we acquired Alliance Development Group, Inc., a company that operates offline customer rewards programs. In connection with this acquisition, we intend to integrate our technology with ADG's offline programs to help make them more efficient. If we are unable to do this in a timely manner, we may be unable to realize the anticipated benefits of this acquisition. In August 2000, we closed the acquisition of Cybergold. As part of that transaction, we have created a subsidiary called Magnacash, 81.5% of which has been sold to an investment group. Magnacash will perform certain services to MyPoints.com with regard to the Cybergold business. If Magnacash becomes illiquid we will be required to find an alternate source for the services to be provided. We expect to face numerous risks and uncertainties generally associated with this acquisition, including: MYPOINTS AND CYBERGOLD MAY NOT ACHIEVE THE BENEFITS THEY EXPECT FROM THE MERGER, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON THE COMBINED 25 COMPANY'S BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS AND/OR COULD RESULT IN LOSS OF KEY PERSONNEL. We will 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: - Integrating the operations of the two companies; - Retaining and assimilating the key personnel of each company; - Offering the existing services of each company to the other Company's customers; - 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 it's 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. THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER. The market price of our common stock may decline as a result of the merger for a number of reasons including if: - The integration of MyPoints and Cybergold is unsuccessful; - We do not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts; or - The effect of the merger in our financial results is not considered with the expectations of financial or industry analysts. In addition, our customers and strategic partners, in response to the 26 announcement of the merger, may delay or defer decisions concerning the relevant company. Any delay or deferral in those decisions by customers, strategic partners or suppliers could have a material adverse effect on business of the relevant company. Similarly, current and prospective employees may experience uncertainty about their future roles with us until our strategies with regard to Cybergold are announced or executed. This may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel. WE ARE GROWING RAPIDLY, AND THE FAILURE TO MANAGE OUR GROWTH COULD STRAIN OUR MANAGEMENT SYSTEMS AND RESOURCES As we continue to increase the scope of our operations, we may not have an effective planning and management process in place to implement our business plan successfully. We have grown from 24 employees on January 1, 1998 to 439 employees on September 30, 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 expand, 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 27 to face competition from established online portals and community web sites that engage in direct marketing and loyalty point programs, as well as from traditional advertising agencies and direct marketing companies that may seek to offer online products or services. Many of our current competitors and potential new competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These advantages may allow them to respond more quickly to new or emerging technologies and changes in customer requirements. It may also allow them to engage in more extensive research and development, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies, and make more attractive offers to potential employees, strategic partners and advertisers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or services to address the needs of our prospective advertisers and advertising agency customers. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share. We may not be able to compete effectively, and competitive pressures may result in price reductions, reduced gross margins and loss of our market share. THE FAILURE TO ESTABLISH THE MYPOINTS BRAND WOULD IMPAIR OUR COMPETITIVE POSITION We are highly dependent on establishing and maintaining our brand. Any event or circumstance that negatively impacts our brand could have a direct and material adverse effect on our business, results of operations and financial condition. As competitive pressures in the online direct marketing industry increase, we believe that brand strength will become increasingly important. The reputation of the MyPoints brand will depend on our ability to provide a high-quality member experience. We cannot assure you that we will be successful in delivering this experience. If members are not satisfied with the quality of their experience with the MyPoints program, their negative experiences might result in publicity that could damage our reputation. If we expend additional resources to build the MyPoints brand and do not generate a corresponding increase in revenues as a result of our branding efforts, or if we otherwise fail to promote our brand successfully, our competitive position would suffer. 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 did not reach a consensus on this issue at the September meeting and plans on discussing it at a future meeting. 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 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 limited experience with our own program since its launch in May 1997. We have also reviewed breakage rates reported by other operators of loyalty and rewards programs, such as airlines. Although we believe that the breakage rates we have used are reasonable in light of our analysis and experience, we cannot assure you that our actual breakage rates will equal or be less than our assumed breakage rates. 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. In addition, operators of loyalty programs have, from time to time, for competitive or other reasons, extended the expiration dates for awards, miles or other rewards currencies. For 28 example, we extended the expiration date for the points associated with the email portion of our program when we relaunched our email and web-based services. If it becomes necessary for us to extend the expiration date of a significant balance of outstanding 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 three to four 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 1999 and the nine months ended September 30, 2000. Our ten largest advertising customers were responsible for approximately 25% of our revenues during 1999 and 32% in the three months ended September 30, 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 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. WE DEPEND ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES TO MANAGE OUR GROWTH, AND THERE IS NO ASSURANCE WE CAN RETAIN THEIR SERVICES Our future success depends on the continued service of our key senior management and technical and sales personnel. The loss of any of these persons could have a material adverse effect on our business. We do not have key-person insurance on any of our employees. Frank J. Pirri, our Senior Vice President, Offline Commerce, joined us in December 1998 as the result of acquisition transactions that took place in the fourth quarter of 1998. Charles H. Berman, formerly Executive Vice President, Sales, has become the new COO succeeding Robert C. Hoyler, our former Chief Operating Officer, who left the company in August 2000. John Steuart, 29 previously CFO of Cybergold, joined the company in August 2000 as the new CFO. Craig Stevens, Senior Vice President of Legal Affairs, General Counsel and Assistant Secretary joined the company in August 2000. Steven E. Parker, our Senior Vice President, Marketing, resigned in August 2000. In addition, Steve Markowitz, our CEO and President resigned on November 3, 2000. Layton Han, Senior Vice President of Business Development of the company, will act as President for the company until a new CEO can be found, for which a search is being conducted. The new management team has limited experience working together. Our success depends on our ability to attract, retain and motivate highly skilled employees. Competition for employees in our industry is intense. We may be unable to retain our key employees or to attract, assimilate and retain other highly qualified employees in the future. We have experienced difficulty from time to time in attracting the personnel necessary to support the growth of our business, and we may experience similar difficulty in the future. FAILURE TO SAFEGUARD OUR DATABASE AND MEMBER PRIVACY COULD AFFECT OUR REPUTATION AMONG CONSUMERS An important feature of the MyPoints program is our ability to develop and maintain individual member profiles. Security and privacy concerns may cause consumers to resist providing the personal data necessary to support this profiling capability. As a result of these security and privacy concerns, we may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. Usage of our MyPoints program could decline if any well-publicized compromise of security occurred. In addition, third parties could alter information in our database that would adversely affect our ability to target direct marketing offers to members. We could also be subject to legal claims from members. Any public perception that we engaged in unauthorized release of member information would adversely affect our ability to attract and retain members. As part of our point redemption services, we maintain a database containing information on our members' account balances. Our database may be subject to access by unauthorized users accessing our systems remotely. If we experience a security breach, the integrity of our points database could be affected. This breach could lead to financial losses through the unauthorized redemption of points. 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 Jersey City, New Jersey. In April 1999, we completed a transition to Exodus from a combination of internally maintained systems and systems maintained by another third-party service provider. We cannot assure you that we will be able to manage this relationship successfully to mitigate any risks associated with having our hardware infrastructure maintained by Exodus. Unexpected events such as natural disasters, power losses and vandalism could damage our systems. Telecommunications failures, computer viruses, electronic break-ins or other similar disruptive problems could adversely affect the operation of our systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any damages or interruptions in our systems. Accordingly, we could be required to make capital expenditures in the event of damage. We do not currently have fully redundant systems or a formal disaster recovery plan. 30 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 is 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. We are evaluating the claim and have not yet begun substantive discussions regarding it. Litigation may also be necessary to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. An adverse determination in any litigation of this type could require us to make significant changes to the structure and operation of our online rewards program, attempt to design around a third party's patent, or license alternative technology from another party. Implementation of any of these alternatives could be costly and time consuming, and might not be possible. In addition, any intellectual property litigation, even if successfully defended, would result in substantial costs and diversion of resources and management attention. Our success and ability to compete depends on our internally developed technologies and trademarks, which we seek to protect through a combination of patent, copyright, trade secret and trademark laws. Despite actions we take to protect our proprietary rights, it may be possible for third parties to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. In addition, legal standards relating 31 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. AS WE EXPAND OUR BUSINESS INTERNATIONALLY, WE MAY NEED TO ADAPT OUR PRODUCTS AND SERVICES AND WE MAY BE SUBJECT TO FOREIGN GOVERNMENT REGULATION AND TAXATION, CURRENCY ISSUES, DIFFICULTIES IN MANAGING FOREIGN OPERATIONS AND FOREIGN POLITICAL ECONOMIC INSTABILITY An element of our growth strategy is to further introduce our services in international markets. Our participation in international markets will be subject to our potential inability to adapt, expand or enhance our products and services to suit foreign markets. In addition, international operations are generally associated with risks such as foreign government regulations, export license requirements, tariffs and taxes, fluctuations in currency exchange rates, introduction of the European Union common currency, difficulties in managing foreign operations and political and economic instability. To the extent our potential international members or our international partners are impacted by currency devaluations, general economic crises or other macroeconomic events, the ability of our members to utilize our services could be diminished. In order to help us address some of the risks associated with introducing our services internationally, we believe it will be necessary to establish strategic relationships with international partners. We cannot assure you that electronic commerce will develop successfully in international markets or that potential members in these foreign markets will utilize incentives-based marketing programs. Furthermore, we cannot assure you that we will be able to overcome any legal restrictions related to offering rewards and incentives that may exist in foreign jurisdictions. Any failure to develop our business internationally may harm our competitive position and consequently our business. RISKS ASSOCIATED WITH THE INTERNET INDUSTRY IF THE ACCEPTANCE OF ONLINE ADVERTISING AND DIRECT MARKETING DOES NOT CONTINUE, OUR REVENUES WOULD DECLINE We expect to derive a substantial portion of our revenues from online advertising and direct marketing, including both email and web-based programs. If these services do not continue to achieve market acceptance, we cannot assure you that we will generate business at a sufficient level to support our continued operations. The internet has not existed long enough as an advertising medium to demonstrate its effectiveness relative to traditional advertising media. Advertisers and advertising agencies that have historically relied on traditional advertising may be reluctant or slow to adopt online advertising. Many potential advertisers have limited or no experience using email or the web as an advertising medium. They may have allocated only a limited portion of their advertising budgets to online advertising, or may find online advertising to be less effective for promoting their products and services than traditional advertising media. If the market for online advertising fails to develop or develops more slowly than we expect, our revenues would decline. Additionally, during the third quarter 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 in the fourth quarter of 2000 and into 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 32 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. We must adapt to rapidly changing technologies by maintaining and improving the performance features and reliability of our services. We may experience technical difficulties that could delay or prevent the successful development, introduction or marketing of new products and services. In addition, any new enhancements to our products and services must meet the requirements of our current and prospective users. We could incur substantial costs to modify our services or infrastructure to adapt to rapid technological change. CONTINUED DEVELOPMENT AND USE OF THE INTERNET INFRASTRUCTURE IS CRITICAL TO OUR ABILITY TO OFFER OUR SERVICES Our members depend on internet service providers for access to our web site. Internet service providers and web sites have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. If outages or delays occur frequently in the future, internet usage, as well as electronic commerce and the usage of our products and services, could grow more slowly or decline. A number of factors may inhibit internet usage, including inadequate network infrastructure, security concerns, inconsistent quality of service, and lack of availability of cost-effective, high-speed service. If internet usage grows, the internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. OUR BUSINESS DEPENDS ON OUR ABILITY TO COLLECT MEMBER INFORMATION; FUTURE REGULATION OF THE INTERNET COULD RESTRICT OUR ACCESS TO THIS INFORMATION 33 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 countries and may impose restrictions that are more stringent than current internet privacy standards in the United States. These developments could have an adverse effect on our business, results of operations and financial condition. OTHER RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK SUBSTANTIAL CONTROL WILL REMAIN WITH OUR MANAGEMENT AND MAJOR STOCKHOLDERS AND THIS COULD DELAY OR PREVENT A CHANGE OF CONTROL Our executive officers, our directors and entities affiliated with them and our 5% stockholders together currently beneficially own approximately 30% of our outstanding common stock. These stockholders, if they vote together, will retain substantial control over matters requiring approval by our stockholders, such as the election of directors and approval of significant corporate transactions. This concentration of ownership might also have the effect of delaying or preventing a change in control. PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS COULD DELAY OR PREVENT A CHANGE OF CONTROL Various provisions of our certificate of incorporation and bylaws could have the effect of delaying or preventing a change in control and make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions, if used by our management, could negatively affect our stock price. 34 FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES TO DECLINE As a result of an offering of common stock which we completed in February 2000, approximately 13.6 million shares of our common stock were subject to lock-up agreements between the holders of those shares and the representatives of the underwriters in the offering, under which the holders had agreed not to offer, sell, contract to sell or grant any option to purchase or otherwise dispose of their common stock until May 14, 2000, subject to limited exceptions. Following the expiration of the lock-up period, approximately 13.1 million shares subject to the lock-up agreements as well as approximately 10.6 million shares issued upon the closing of the Cybergold acquisition became available for immediate resale in the public market subject, in some instances, to the volume and other limitations of Rule 144. Resales of a substantial number of shares of our common stock into the public market could cause its price to decline. This is particularly the case because a substantial portion of our outstanding shares of common stock are held by persons who purchased their shares at prices below recent market prices of our stock. OUR STOCK PRICE HAS BEEN VOLATILE, AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT A PROFIT The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies, particularly internet-related companies, have been highly volatile. Investors may not be able to resell their shares at or above the price which they paid for their shares. In addition, our results of operations during future fiscal periods might fail to meet the expectations of stock market analysts and investors. This failure could lead the market price of our common stock to decline and cause us to become the subject of securities class action lawsuits. 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 plan to invest in high-credit quality securities. 35 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 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 September 30, 2000, the Company estimates that it has used a portion of the net proceeds of the two offerings as follows: (i) investments in cash and cash equivalents of $108.5 million; and (ii) working capital of $ 38.4 million. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K: The Registrant filed Form 8-K/A on October 23, 2000 with respect to the acquisition of Cybergold, Inc. 36 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, November 14, 2000 MYPOINTS.COM, INC. By /s/ John Steuart ------------------- John Steuart Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 37 EXHIBIT INDEX

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