<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1999
REGISTRATION NO. 333-88595
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EGREETINGS NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5947 94-3207092
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
149 NEW MONTGOMERY STREET
SAN FRANCISCO, CA 94105
(415) 375-4100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GORDON M. TUCKER
CHIEF EXECUTIVE OFFICER
EGREETINGS NETWORK, INC.
149 NEW MONTGOMERY STREET
SAN FRANCISCO, CA 94105
(415) 375-4100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
KENNETH L. GUERNSEY JOSE F. MACIAS
KARYN S. TUCKER BURKE F. NORTON
ANGELIQUE C. TREMBLE PABLO L. CHAVEZ
EDWARD A. KLEINHANS BROOKE D. COLEMAN
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
ONE MARITIME PLAZA, 20TH FLOOR PROFESSIONAL CORPORATION
SAN FRANCISCO, CA 94111 650 PAGE MILL ROAD
(415) 693-2000 PALO ALTO, CA 94304
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1999
6,000,000 Shares
LOGO
Common Stock
------------------
Egreetings Network, Inc. is offering 6,000,000 shares of common stock.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$8.00 and $10.00 per share. We have made application to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "EGRT."
The underwriters have an option to purchase a maximum of 900,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS EGREETINGS
---------- ------------- -----------
<S> <C> <C> <C>
Per share................................ $ $ $
Total.................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 1999.
<PAGE> 3
Greetings & gift giving made easy.
[Picture of Egreetings birthday channel Web page featuring several birthday
digital greetings]
1. Choose from thousands of free greetings.
[Picture of an Egreetings birthday digital greeting with personalized text to
recipient]
2. Write a personal message.
[Picture of Egreetings Web page featuring a watch]
3. Select a gift and send.
[Egreetings.com logo]
Say more. Give more.(SM)
<PAGE> 4
EVENT-BASED COMMUNICATIONS, MARKETING AND COMMERCE AT ONE WEB SITE.
[Picture of Egreetings bouncing babies channel Web page featuring an
advertisement for lifeminders.com, several bouncing babies digital greeting and
several gifts available from the Egreetings Gift Center]
Our Web site is designed to help consumers express their sentiments,
emotions and personalities and to enhance their ability to communicate and send
gifts. Our consumers' selections of greeting and gift content from the
occasion-related channels on our Web site, combined with our extensive database
of demographic information, gives us a good idea of what's on our consumers'
minds. This knowledge allows us to present a variety of relevant offers to our
consumers.
[Enlargement of lifeminders.com advertisement]
1. TARGETED ADVERTISEMENT
We offer our advertisers and sponsors targeted advertising opportunities
based on our consumers' greeting and gift selections, demographics and
historical site usage.
[Enlargement of several gifts available from the Egreetings Gift Center]
2. E-COMMERCE
While our consumers are browsing event-based greetings, we are able to
suggest timely and appropriate gifts. Consumers can also visit our Gift Center
where we offer gifts organized by departments, such as business, weddings,
birthdays and other special occasions.
[Enlargement of a direct marketing email for Buy.com]
3. DIRECT MARKETING
We have a database of consumers who have opted to receive communications
and special promotional offers from us. We are able to send them relevant offers
via direct email based on their demographics and site usage.
[Egreetings.com logo]
Say more. Give more.(SM)
Copyright 1999 Egreetings Network, Inc. All rights reserved. Egreetings is a
registered trademark of Egreetings Networking, Inc.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY..................... 4
RISK FACTORS........................... 7
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS........................... 24
USE OF PROCEEDS........................ 25
DIVIDEND POLICY........................ 25
CAPITALIZATION......................... 26
DILUTION............................... 28
SELECTED FINANCIAL DATA................ 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 30
BUSINESS............................... 41
MANAGEMENT............................. 58
RELATED TRANSACTIONS................... 74
PRINCIPAL STOCKHOLDERS................. 79
DESCRIPTION OF CAPITAL STOCK........... 82
SHARES ELIGIBLE FOR FUTURE SALE........ 89
UNDERWRITING........................... 91
NOTICE TO CANADIAN RESIDENTS........... 94
LEGAL MATTERS.......................... 96
EXPERTS................................ 96
ADDITIONAL INFORMATION................. 96
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>
-------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
-------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all the information you should consider before
buying shares in the offering. You should read the entire prospectus carefully.
EGREETINGS NETWORK, INC.
Egreetings offers consumers a simple and convenient solution to the problem
of finding and sending appropriate greetings and gifts. Our Web site contains
over 5,000 digital greetings incorporating rich media elements such as graphics,
animations and music that consumers can personalize and send for free. Because
our greetings are organized into content channels, consumers can quickly locate
appropriate greetings and we can offer consumers gift suggestions based on their
greeting selections. In addition, our service is "viral" in nature, as each
greeting sent creates an opportunity for us to acquire the recipient as a new
user of our service. In October 1999, our Web site was visited more than 14.5
million times, visitors to our Web site viewed over 123 million Web pages and
consumers used our service to send over 5 million digital greetings.
Consumers use our Web site to communicate for personal or business
purposes, typically related to an occasion, sentiment or emotion. We believe
these consumers are likely to be receptive to advertisements and gift
suggestions from our advertising and ecommerce partners related to the specific
occasions for which they are sending greetings. In addition, we are able to make
promotional and purchase offers through email to a large portion of our consumer
base, targeted according to their specific demographics and content affinity.
We provide benefits to both consumers and advertisers, including the
following:
- Superior Value and Enhanced Communications, enabling individuals to
convey personal, business and occasion-related communications in a
creative, entertaining and personalized manner.
- Convenient Communications and Gift-Giving, eliminating the
inconvenience associated with traditional paper-based communications
and retail gift stores.
- Targeted Online Opportunities, enabling advertisers and our ecommerce
partners to deliver their messages and promote their products to a
large and diverse group of consumers on a highly targeted basis.
- Viral Advertising, allowing advertisers and sponsors to establish and
build a brand image not only with the senders of the digital greetings
but also with the recipients.
The emergence of the Internet as a global medium and the rapid adoption of
email are changing the way people communicate and engage in commerce.
International Data Corporation estimates that the number of email messages sent
in the United States alone will grow from approximately 2.1 billion per day at
the end of 1998 to approximately 9.2 billion per day at the end of 2003. We
cannot be certain that these projections will be met or that we will benefit
from any growth that occurs.
Although text-based email is convenient, it does not allow consumers to
express themselves in a dynamic and entertaining fashion. As a result, enhanced
email services such as ours that provide consumers an opportunity to use
engaging graphics and imagery to express their emotions are gaining popularity.
According to a Jupiter Communications survey, sending electronic greetings was
the sixth most popular online activity in 1998.
We believe our status as a leader in the distribution of digital greetings,
as measured by the number of unique visitors to our Web site, together with our
ability to deliver highly targeted gift offers and advertisements to our
consumers, put us in a strong position to capitalize on expanding online
advertising and ecommerce opportunities.
4
<PAGE> 7
OTHER INFORMATION
We were incorporated in California in July 1994 under the name Virtual
Mall, Inc. We changed our name to E-greetings Network in July 1998 and to
Egreetings Network, Inc. in September 1999. Our principal executive offices are
located at 149 New Montgomery Street, San Francisco, California 94105, and our
telephone number is (415) 375-4100. Our Web site address is www.egreetings.com.
"E-greetings" is our registered trademark and service mark. This prospectus also
contains other of our trademarks, service marks and logos, including
"Egreetings," "Egreetings.com," "Perfect Memory," "Say more. Give More." and the
"E in a bubble" logo. All other trademarks, trade names or service marks used in
this prospectus are the property of their respective owners. The information on
our Web site is not part of this prospectus.
Unless otherwise indicated, all information contained in this prospectus
assumes:
- no exercise of the underwriters' over-allotment option;
- no exercise of outstanding options or warrants, except for the assumed
exercise of a warrant to purchase preferred stock convertible into
3,326,667 shares of common stock, which will expire upon the
completion of this offering;
- stock splits effected in May 1999 and November 1999;
- our reincorporation from California to Delaware in November 1999;
- the conversion of all outstanding shares of our preferred stock into
shares of common stock upon the completion of this offering; and
- the filing of our restated certificate of incorporation.
THE OFFERING
Common stock offered............ 6,000,000 shares
Common stock to be outstanding
after the offering............ 34,443,481 shares
Use of proceeds................. To fund increased sales and marketing
activities, content acquisition, expansion
of our network architecture and
brand-building activities. The balance of
the proceeds shall be utilized for general
corporate purposes, including potential
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol........................ EGRT
SHARES OUTSTANDING AFTER THE OFFERING
The number of shares of common stock to be outstanding after this offering
includes 3,326,667 shares issuable upon exercise of a warrant that will expire
upon the completion of this offering but does not include, as of November 22,
1999, 2,826,783 shares of common stock issuable upon the exercise of other
outstanding options and warrants and 5,623,401 shares of common stock available
for future issuance under our equity incentive plans.
5
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 164 $ 505 $ 317 $ 182 $ 1,527
Costs and expenses.................. 1,952 3,530 8,115 5,392 23,462
------- ------- ------- ------- --------
Loss from operations................ (1,788) (3,025) (7,798) (5,210) (21,935)
Interest income (expense), net...... 4 (68) (23) (3) (92)
------- ------- ------- ------- --------
Net loss............................ $(1,784) $(3,093) $(7,821) $(5,213) $(22,027)
======= ======= ======= ======= ========
Net loss per share(1):
Basic and diluted................. $ (1.14) $ (1.00) $ (2.26) $ (1.50) $ (6.12)
======= ======= ======= ======= ========
Weighted average shares........... 1,561 3,100 3,464 3,464 3,598
======= ======= ======= ======= ========
Pro forma net loss per share(1):
Basic and diluted................. $ (0.94) $ (1.51)
======= ========
Weighted average shares........... 8,324 14,570
======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2,376 $40,963 $ 89,683
Working capital(deficit)................. (3,811) 34,776 83,496
Total assets............................. 20,955 71,844 120,564
Long-term liabilities.................... 3,590 3,590 3,590
Total stockholders' equity............... 8,955 59,844 108,564
</TABLE>
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(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
(2) Pro forma balance sheet data gives effect to (a) net proceeds of
approximately $23.0 million received from the sale of 5,846,546 shares of
Series G preferred stock in October 1999; (b) gross proceeds of
approximately $7.5 million in cash (less approximately $1.0 million in
related placement agent, legal and other fees) and approximately $7.5
million of advertising rights received or recorded in connection with the
sale of an aggregate of 3,712,871 shares of Series G preferred stock to the
National Broadcasting Company, Inc. in November 1999; (c) approximately $4.8
million of deferred content costs recorded in connection with a content
license agreement entered into with NBC in November 1999; (d) net proceeds
of approximately $9.1 million upon the assumed exercise of a warrant to
purchase preferred stock convertible into 3,326,667 shares of common stock,
which will expire upon the completion of this offering; and (e) the
conversion of all outstanding shares of preferred stock into common stock
upon the completion of this offering. Each share of Series A through Series
F preferred stock is convertible into two shares of common stock and each
share of Series G preferred stock is convertible into two-thirds of one
share of common stock.
(3) Pro forma as adjusted balance sheet data gives effect to the sale by us in
this offering of 6,000,000 shares of common stock at an assumed initial
public offering price of $9.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
6
<PAGE> 9
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
also refer to the other information in this prospectus, including our financial
statements and the related notes.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS AND OUR PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE OUR OPERATING
HISTORY UNDER OUR CURRENT BUSINESS MODEL IS UNPROVEN AND WE MAY CHANGE OUR
BUSINESS MODEL IN THE FUTURE.
Though we were incorporated in and have been operating since July 1994, we
began to significantly change our business model in November 1998. The changes
to the business model include a shift from charging consumers for our digital
greetings to a free digital greeting service supported by the sale of
advertising and sponsorships and revenues derived from the sale of products
through our Web site. Our new business model is largely untested, and we cannot
be sure that it will yield the results that we expect. Because the Internet is
constantly changing, we may need to change our business model again to adapt to
those changes. Changes in our business model or organizational structure could
impose significant burdens on our management team and our employees and could
result in loss of productivity or increased employee attrition. When making your
investment decision, you should consider the risks, expenses and difficulties
that we may encounter as an early-stage company with a new and evolving business
model. To address the risks we face, we must, among other things:
- expand and enhance our product and service offerings;
- continually enhance the technology we use to deliver our products and
services;
- maintain and enhance our brand;
- increase the amount of traffic to our Web site;
- increase the value of our products and services to consumers, advertisers
and ecommerce merchants; and
- attract, integrate, retain and motivate qualified personnel.
We cannot be certain that our current and planned business strategies will
be successful or that we will successfully address these risks.
BECAUSE OUR METHODS OF GENERATING REVENUES ARE RELATIVELY NEW, LARGELY UNTESTED
AND CONTINUE TO CHANGE, WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES.
We recently began generating a significant portion of our revenues from sales of
advertising on our Web site. These sales may not grow at the rates we expect
because Internet advertising is still a new and largely unproven method of
advertising.
During the nine months ended September 30, 1999, our revenues were derived
primarily from Internet advertising and secondarily from direct marketing
activities. We
7
<PAGE> 10
expect revenues from Internet advertising to continue to comprise a significant
portion of our revenues for the foreseeable future. The effectiveness of
Internet advertising is difficult to gauge and advertisers may be reluctant to
advertise on the Internet and may allocate only limited portions or none of
their advertising budgets to Internet advertising in the future. Our business
could suffer if Internet advertising does not continue to grow.
Even if Internet advertising and direct marketing become widely accepted, we may
be unable to generate sufficient revenues from these activities because we have
limited experience generating revenues from Internet advertising and direct
marketing.
Our business model is based on generating increased advertising and direct
marketing revenues. Even if advertising and direct marketing on the Internet
become widely accepted, the success of our business strategy will depend on the
following factors:
- our ability to provide quality content on our Web site that will attract
the numbers and types of consumers that our advertising, direct marketing
and ecommerce partners want to reach;
- our ability to provide guaranteed views of our advertisers' ads by our
consumers; and
- our ability to sell existing and future Internet advertising inventory.
If we lose significant advertising or direct marketing customers or are
forced to significantly reduce advertising or direct marketing rates in order to
retain these customers, our business will suffer.
Although we intend to offer more ecommerce services, we may not generate
significant revenues from these services because we have very limited experience
in ecommerce.
Our future success will largely depend on our ability to generate revenues
through the facilitation of ecommerce transactions, a business area in which we
have very limited experience. We intend to facilitate these transactions both by
directing consumers to our partners and by enabling consumers to purchase
products and services directly from our Web site. We also expect third parties
to fulfill these orders and deliver to consumers the goods and services that are
purchased on or through our Web site. These methods of revenue generation are
relatively new and largely untested for us. In addition, the development and
implementation of our ecommerce services will require additional management,
financial and operational resources and may strain our existing resources. Our
expansion into ecommerce may not be timely or may not generate sufficient
revenues to offset the cost of our expansion into that area.
Our Internet advertising, direct marketing and ecommerce revenues will be
negatively impacted if we are unable to collect or use data about our consumers
in ways that allow us, our advertisers, sponsors and ecommerce partners to
generate revenues.
We intend to increase advertising, direct marketing and ecommerce revenues
by offering to our advertisers, sponsors and ecommerce partners aggregate
information about our registered members that is often difficult to obtain, such
as their gender, age, location, interests and online activities. Our
advertisers, sponsors and ecommerce partners will, in turn, use this demographic
and psychographic information to tailor their advertising campaigns, direct
marketing efforts or product offerings to the characteristics of our
8
<PAGE> 11
registered members. The ability of our advertisers, sponsors and ecommerce
partners to properly target their advertising and commercial offerings will
depend significantly on our ability to successfully collect and use data about
our registered members.
Privacy concerns may cause consumers to resist providing personal data. For
example, we currently allow our registered members to opt out of receiving
marketing and related communications. If a majority of our registered members
make this election, the amount of the demographic data we are able to provide to
advertisers, sponsors and ecommerce partners will be reduced significantly,
which could harm our ability to retain and attract advertisers, sponsors and
ecommerce partners. In addition, in October 1999, we eliminated the requirement
that consumers become registered members to use our services. Although we offer
personalization features and other benefits to our registered members that are
unavailable to unregistered consumers, our ability to collect the data desired
by advertisers, sponsors and ecommerce merchants may decrease as a result of
this change. This could result in less advertising, direct marketing and reduced
ecommerce activities on or through our Web site and less advertising via our
digital greetings, which would result in reduced revenues from advertising,
direct marketing and ecommerce.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES.
OUR BUSINESS WILL BE SERIOUSLY HARMED IF OUR REVENUES DO NOT GROW.
We have incurred significant net losses in each fiscal quarter since our
inception, including a net loss of approximately $10.0 million in the quarter
ended September 30, 1999. As of September 30, 1999, we had an accumulated
deficit of approximately $35.1 million. We expect to have net losses and
negative operating cash flows for the foreseeable future. The size of these net
losses will depend, in part, on the rate of growth of our revenues from our
advertisers, sponsors and ecommerce merchants and on our expenses. Through at
least 2002, our reported operating results will be negatively impacted by the
amortization of deferred expenses relating to warrants and stock options granted
through October 1999. It is critical to our success that we continue to expend
financial and management resources to develop and expand our consumer base
through marketing and promotion and enhancement and expansion of our products
and services. As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will need
to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we may never achieve profitability, and even
if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve, sustain or
increase profitability in the future, then we will be unable to continue our
operations.
SOME OF OUR CONTENT MAY BECOME UNAVAILABLE IF OUR RELATIONSHIPS WITH OUR
THIRD-PARTY CONTENT PROVIDERS, PARTICULARLY GIBSON GREETINGS, EXPIRE OR ARE
TERMINATED.
We rely on third-party content providers, such as Gibson Greetings, movie
studios, traditional card designers, cartoonists and independent artists, for a
significant portion of our content. To be successful, we will need to maintain
our existing relationships as well as establish similar relationships with new
parties who can provide us with cross-media and promotional opportunities. If we
fail to retain our existing content relationships or enter into new
relationships, the variety and quality of the content on our Web site may be
reduced, traffic to our Web site may decrease, our advertising revenues may be
impaired and future ecommerce revenues may not materialize.
9
<PAGE> 12
For the quarter ended September 30, 1999, 36% of all digital greetings sent
from our Web site contained content that we obtained pursuant to an exclusive
license agreement with Gibson that expires in December 2002. Gibson may
terminate our rights to exclusivity if our consumers do not send at least 2.8
million digital greetings via our Web site in each month during the term of the
license agreement and if this minimum delivery requirement is not exceeded in
any of the three months following the month in which the shortfall occurred. If
the license agreement terminates and we are unable to renew this arrangement,
the amount of content we are able to offer our consumers will decrease
significantly. In addition, if Gibson elects to enter the digital greetings
distribution market itself, or if following the termination or expiration of our
agreement, it enters into a licensing agreement with one of our competitors, we
may be unable to retain our existing consumers or gain new consumers. This would
affect our ability to attract advertisers, sponsors and ecommerce merchants, and
our business would suffer.
In November 1999, American Greetings, Inc. announced the execution of an
agreement to acquire Gibson. American Greetings also is the parent company of
AmericanGreetings.com, which is one of our competitors in the digital greetings
market. We do not know how our relationship with Gibson or our rights pursuant
to our license agreement with Gibson will be affected if this acquisition is
consummated. If Gibson or American Greetings fail to perform under the terms of
our license agreement, the amount of content we are able to offer our consumers
will decrease significantly, which would harm our business.
With the exception of our relationship with Gibson, our existing content
alliances are pursuant to short-term agreements. When these agreements expire or
otherwise terminate, we may be unable to renew them on favorable terms or at all
or to obtain similar agreements with other parties, in part because of our
relative size and our limited operating history under our current business
model. Additionally, our competitors may enter into agreements with existing or
prospective content partners that may be or would have been integral to our
future content and brand development.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO CONTINUE TO LICENSE AND DEVELOP
INTERESTING AND COMPELLING CONTENT, INCREASE THE VARIETY OF GIFTS AVAILABLE ON
OR THROUGH OUR WEB SITE AND ENHANCE OUR OVERALL SERVICES AND FUNCTIONALITY.
To remain competitive we must continue to license and create compelling and
entertaining content, increase the variety of gifts available on or through our
Web site and enhance and improve the ease of use, responsiveness, functionality
and features of our products and services. We may be unable to anticipate,
monitor and successfully respond to rapidly changing consumer tastes so as to
attract a sufficient number of consumers to our Web site. If we are unable to
license and develop content, increase the variety of gifts available and enhance
and improve the personalized services that allow us to attract, retain and
expand a loyal consumer base, we will be unable to generate advertising revenues
or ecommerce revenues and our business will suffer. The development and
integration of new functionality and services could be expensive and time
consuming, and the cost of the content that we license may increase in the
future. Any new content, gifts, features, functions or services that we license
or develop for consumers, advertisers or ecommerce merchants may not achieve
market acceptance.
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OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
In October 1998, we changed our name to E-greetings Network and launched a
marketing campaign to establish the brand name "Egreetings." We believe that
establishing and maintaining the Egreetings brand will be an important aspect of
our efforts to retain our current consumers, attract and expand our Internet
audience, license and create new content, and appeal to advertisers and
ecommerce merchants. We believe that the importance of brand recognition will
increase due to the growing number of Internet sites and the relatively low
barriers to entry in providing Internet content. Accordingly, we intend to
continue pursuing an aggressive brand enhancement strategy, which will include
mass market and multimedia advertising, promotional programs and public
relations activities. We intend to incur significant expenditures on these
advertising and promotional programs and activities in the future. These
expenditures may not result in a sufficient increase in revenues. In addition,
even if our brand recognition increases, we may not acquire new consumers and
even if we do, the amount of traffic on our Web site may not increase
sufficiently to justify the expenditures. If our brand enhancement strategy is
unsuccessful, we may be unable to increase future revenues.
OUR GROWTH WILL DEPEND SIGNIFICANTLY ON THE INCREASING ACCEPTANCE OF DIGITAL
GREETINGS AS A FORM OF ONLINE COMMUNICATIONS.
Our future success is substantially dependent on the widespread acceptance
of digital greetings as a form of online communications. While email
increasingly is affecting the way people communicate for personal and business
purposes, digital greetings as a form of communication is an evolving medium. We
cannot accurately predict the future growth rate, if any, or the ultimate size
of the consumer use of digital greetings as a form of online communication. The
failure of digital greetings to gain widespread acceptance by consumers,
advertisers, sponsors and ecommerce merchants as a form of online communication
would materially harm our business.
WE FACE INTENSE COMPETITION FROM COMPANIES THAT PROVIDE SERVICES AND PRODUCTS
THAT ARE SIMILAR TO OURS, AND WE THEREFORE MAY BE UNABLE TO COMPETE EFFECTIVELY
IN THE INTERNET GREETING AND GIFTING BUSINESS.
We compete with many Internet companies for content, consumer attention and
time, advertising revenue, direct marketing revenue and ecommerce revenue. We
expect this competition to increase. We compete, in particular, with the
following types of companies:
- Companies that offer digital greetings via the Internet. Companies or
their affiliates such as Blue Mountain Arts, American Greetings, Hallmark
and 123greetings.com offer digital greetings via the Internet. In
addition, some of these companies offer ecommerce merchants' products
that can be purchased at or through their Web sites. Several of these
companies also offer features on their Web sites that are similar or
identical to our Web site's features.
- Internet content aggregators and other Internet companies that offer
digital greetings and gifts. Companies such as Amazon.com, America
Online, Microsoft and Yahoo! offer digital greetings as a component of
their overall product and service offerings or provide links to
electronic greeting and gift companies. The digital greetings available
on or through these Web sites often are free and may be sent with a gift
purchased via the particular Web site or via the Web sites of ecommerce
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merchants that are partners or advertisers of the content aggregator or
Internet company.
- Internet companies that focus on gifts. Several Internet companies offer
gifts on their Web sites. Although these companies currently do not offer
electronic greetings, they may begin to do so in the near future. In
addition, they compete directly with our ecommerce business.
- Media, entertainment and other companies using electronic
greetings. Media, entertainment and other companies with an online
presence now offer or in the future may offer digital greetings to
consumers featuring their characters, logos, brand names and other
creative products.
In October 1999, Excite@Home Network announced an agreement to acquire
Bluemountain.com, the online business of Blue Mountain Arts. Excite@Home has
significantly greater resources than we do, and we expect it will use some of
these resources to focus on the digital greetings market if its acquisition of
Bluemountain.com is completed. This could harm our business and our ability to
compete effectively. Advertising revenues from Excite@Home accounted for
approximately 40% of our total revenues for the nine months ended September 30,
1999. Our advertising relationship with Excite@Home ended in November 1999 and
we do not anticipate receiving any future advertising revenues from Excite@Home.
In addition, if the acquisition of Gibson by American Greetings is consummated,
American Greetings will become our largest stockholder. American Greetings
competes with us in the digital greetings market through its affiliated company
AmericanGreetings.com. As a competitor, American Greetings' interests may
diverge from our interests, and it may take actions that would harm us
competitively, despite its status as our largest stockholder.
Many of our current and potential competitors in the Internet market,
including the companies named above, have significantly greater financial,
publishing, technical and marketing resources than we have. Many of these
companies also have longer operating histories, greater name recognition, more
traffic to their Web sites and more established relationships with advertisers
and advertising agencies than we have. These competitors may be able to
undertake more extensive marketing campaigns, adopt aggressive pricing policies
and devote substantially more resources to developing Internet content and
services than us.
We may be unable to compete successfully for advertisers.
The increasing number of Internet content and service providers has
resulted in increased competition for advertising dollars. Internet companies
currently sell advertisements largely based on the demographics of their
audience, the quality of their content and their ability to deliver guaranteed
"impressions," or the number of times an advertisement appears in Web pages
viewed by consumers using their Web sites. Our competitors may be able to
provide more desirable demographics, higher quality content and a higher number
of guaranteed impressions than we are able to. This could make it difficult for
us to obtain the advertising or direct marketing relationships that we will need
in order to generate sufficient revenues. In addition, increased competition for
advertising or direct marketing dollars could result in price reductions,
reduced margins or loss of market share, any of which would harm our business.
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We lack experience in ecommerce and we may not compete successfully for
ecommerce merchants or consumers.
Unlike many of our competitors, we have limited experience operating in the
ecommerce arena and we may not be successful in doing so. In addition, many of
our current and potential competitors are retailers with established brand names
and consumer loyalty, and we may be unable to attract consumers away from these
competitors. Our inability to compete successfully for ecommerce merchants or
consumers would harm our business significantly.
OUR FUTURE SUCCESS WILL DEPEND ON THE INCREASING USE OF THE INTERNET AND THE
GROWTH OF ECOMMERCE.
Our future success will depend heavily on the acceptance and wide use of
the Internet for ecommerce. If ecommerce does not continue to grow or grows more
slowly than expected, demand for our products and services will be reduced.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may be
unable to support the demands placed on it by increased usage. Internet service
providers, online service providers and other Web site operators have already
experienced significant outages. In addition, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, or increased governmental regulation, could cause the
Internet to lose its viability as a commercial medium. Even if the required
infrastructure, standards, protocols and complementary products, services or
facilities are developed, we may incur substantial expenses adapting to changing
or emerging technologies.
WE RELY ON ONLINE DISTRIBUTION CHANNELS FOR TRAFFIC TO OUR WEB SITE.
We rely on distribution relationships with high traffic Internet sites and
leading Internet portals to increase the visibility of our Web site and to
generate additional traffic. Our business could be materially harmed if any of
our distribution relationships do not result in increased Web site traffic and
visibility or are not available on commercially reasonable terms. Our
distribution relationships are based on short-term agreements and may not be as
favorable as the agreements of some of our competitors. Because there is intense
competition for online distribution relationships among Web sites, we may be
unable to maintain or renew these agreements or enter into new relationships on
commercially reasonable terms or at all. In addition, our online distribution
relationships may not generate enough additional traffic to our Web site or
create sufficient visibility to justify the costs we incur for these
relationships.
AS WE EXPAND OUR ECOMMERCE ACTIVITIES, WE WILL DEPEND ON THIRD PARTIES TO
FULFILL ORDERS AND DELIVER GOODS AND SERVICES TO OUR CONSUMERS; THEIR FAILURE TO
PERFORM ADEQUATELY WOULD HARM OUR BUSINESS.
As we expand our ecommerce activities, our success will depend in large
part on the ability of third parties to fulfill our consumers' orders and
deliver goods and services to our consumers. Failure of vendors or shippers to
fill our consumers' orders or deliver quality goods and services on time would
harm our business. In addition, strikes or other service
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interruptions affecting fulfillment and delivery services would impair our
ability to deliver merchandise ordered by our consumers on a timely basis.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, AND OUR BUSINESS COULD BE MATERIALLY
HARMED IF WE FAIL TO SUCCESSFULLY INTEGRATE, USE AND DEVELOP ANY ACQUIRED
BUSINESSES OR ASSETS.
We evaluate opportunities to acquire additional product or content
offerings or additional industry expertise and may in the future acquire
companies, divisions or assets of companies. Any future acquisition could result
in difficulties in assimilating acquired operations and products, diversion of
management's attention to acquisition matters and amortization of acquired
intangible assets. Our management has not had any experience in assimilating
acquired organizations and products into our operations. We may be unable to
integrate successfully any operations, personnel or products that we may acquire
in the future, which would harm our business.
EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION AND
RESOURCES AND MAY BE UNSUCCESSFUL.
To date, we have offered content and services directed at consumers in the
United States. We plan to offer localized content and services directed at
international consumers in the future in order to increase the international
traffic to our Web site. We do not have any experience in localizing our content
and services to conform to local cultures, standards and policies. We may have
to compete with local companies that are likely to understand the local market
better than we do. In addition, to achieve satisfactory performance for
consumers, advertisers and ecommerce partners in international locations, it may
be necessary to locate physical facilities, such as facilities to host our
server computers, in the foreign market. We do not have experience establishing
facilities in foreign countries. We may not be successful in appealing to a
larger international market or in generating revenues from foreign advertising
or ecommerce activities. In addition, different privacy, censorship and
liability standards and regulations and different intellectual property laws in
foreign countries could harm our business.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
It is likely that our operating results in one or more future quarters may
be below the expectations of stock market analysts, if any, or our investors,
and this could cause our stock price to decline. We expect that our quarterly
operating results will continue to fluctuate significantly and be affected by
many factors, including the following:
- fluctuations in the demand for Internet advertising generally and
advertising on our Web site and via our digital greetings specifically;
- fluctuations in purchases of products via the Internet generally and
through our Web site specifically;
- seasonal trends in Internet use, ecommerce and advertising demand;
- fluctuations in traffic on our Web site generally and as the result of
special promotions or seasonal events;
- introduction of new Web sites, products and services by competitors;
- marketing expenses and technology infrastructure costs;
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- expansion in our sales and customer support staff; and
- technical difficulties or system downtime affecting the Internet
generally or the operation of our Web site specifically.
We have experienced and expect to continue to experience seasonality in our
business. Consumer traffic on our Web site generally is higher during holiday
periods such as Valentine's Day, Mother's Day, Father's Day and Christmas and is
considerably slower during the summer months. In addition, sales of traditional
greeting cards and gifts tend to be lower in the third calendar quarter of each
year. Similarly, advertising sales in traditional media, such as television and
radio, generally are lower in the first calendar quarter of each year. We may
experience similar seasonality in our business. In addition, because advertising
on the Internet is an emerging market, additional seasonal and other patterns in
the usage of our products and services may emerge as the market matures.
Seasonal patterns like this may harm our business.
As a result of all of the factors discussed above, period-to-period
comparison of our operating results may not be a good indication of our future
performance.
RISKS RELATED TO OPERATIONS
TO MANAGE OUR GROWTH, WE WILL NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND
PROCEDURES.
We currently are experiencing a period of rapid expansion in our Web site
traffic, personnel, facilities and infrastructure. For example, the average
number of daily visits to our Web site increased approximately 329% from 112,800
for the month of November 1998, the month we began to offer our digital
greetings at no cost, to 483,900 for the month of October 1999, and our number
of employees increased from 52 on October 31, 1998 to 147 on October 31, 1999,
with most of this growth in the areas of marketing, engineering and operations.
We expect that the number of our employees, including management-level
employees, will continue to increase for the foreseeable future to address
expected growth in our consumer base, expansion of our product and service
offerings and the pursuit of ecommerce and other strategic opportunities. This
growth and expansion have placed, and we expect they will continue to place, a
significant strain on our management, operational and financial resources. In
order to manage our growth, we must continue to improve our operational and
financial systems and managerial controls and procedures, and we will need to
continue to expand, train and manage our work force. We cannot assure you that
our systems, procedures or controls will be adequate to support our operations
or that we will be able to manage our growth effectively. Our failure to manage
growth could disrupt our operations and ultimately prevent us from generating
the revenues we expect.
SYSTEM FAILURES, SLOW DOWNS OR SECURITY BREACHES WOULD HARM OUR REPUTATION AND
THUS REDUCE OUR ATTRACTIVENESS TO OUR CURRENT AND FUTURE CONSUMERS, ADVERTISERS
AND ECOMMERCE PARTNERS.
System failures and slow downs could permanently harm our reputation and
brand, and reduce our attractiveness to consumers, advertisers and ecommerce
partners. Our ability to attract consumers, advertisers and ecommerce partners
will depend significantly on the performance of our network infrastructure. A
key element of our strategy is to generate a high volume of traffic on our Web
site. Accordingly, the satisfactory
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performance, reliability and availability of our Web site and our computer
infrastructure are critical to our reputation and our ability to attract and
retain consumers, advertisers and ecommerce merchants. An increase in the volume
of consumer traffic could strain the capacity of our infrastructure. For
example, during the week before Valentine's Day 1999, we experienced a heavy
increase in traffic to our Web site, which resulted in slow response rates. We
may be unable to improve our technical infrastructure in relation to increased
consumer volume generally and, in particular, during peak capacity periods. If
we experience outages, frequent or persistent system failures or degraded
response times, our reputation and brand could be harmed permanently. In
addition, we could lose advertising revenues during these interruptions and
consumer satisfaction could be negatively impacted if our service is slow or
unavailable. Furthermore, our consumers use Internet service providers, online
service providers and other Web site operators for access to our Web site. Each
of these providers has experienced significant outages in the past and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems.
A fundamental requirement for the online communications products and
services we offer is the secure transmission of confidential information over
the Internet. The occurrence or perception of security breaches could harm our
business. Third parties may attempt to breach the security provided by our Web
site. If they are successful, they could obtain confidential information about
our consumers, including their passwords, financial account information, credit
card numbers or other personal information. Our consumers may file suits against
us for any breach in our Web site's security. If we are not held liable, a
security breach could still harm our reputation, as even the perception of
security risks, whether or not valid, could inhibit market acceptance of our
products and services. Despite our implementation of security measures, our
software is vulnerable to computer viruses, electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data. We may
be required to expend significant capital and other resources to license
encryption or other technologies to protect against security breaches or to
alleviate problems caused by these breaches. In addition, our consumers might
decide to stop using our products and services if we experience security
breaches.
We use third-party software to manage and deliver advertisements and to
provide our advertisers with advertisement performance data. The failure of
these systems to function properly could discourage advertisers from placing
advertisements on our Web site or merchants from offering their products through
our Web site. The failure of these systems also could require us to incur
additional costs or could result in interruptions in our business during the
time spent replacing these systems. Our failure to expand and upgrade our
network system, provide consumers with access to our service or timely address
any system error or failure could materially harm our business and reputation.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased facility in San Francisco, California or at the servers
that host or back-up our systems could result in interruptions or delays in our
business, loss of data or could render us unable to provide services. In
addition, our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, and similar events. Our
general liability insurance policies may not adequately compensate us for losses
that may occur due to interruption in our service.
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WE MAY BE UNABLE TO EXPAND OUR MARKETING, ENGINEERING, SALES AND CUSTOMER
SUPPORT ORGANIZATIONS BECAUSE QUALIFIED PERSONNEL ARE IN SHORT SUPPLY.
We will need to substantially expand both our consumer marketing and
corporate marketing efforts and advertising sales operations to increase market
awareness and sales of our products and services. We recently expanded our sales
forces and plan to hire additional sales personnel. Competition for highly
qualified sales personnel is intense, and we may be unable to hire the type and
number of sales personnel we are targeting. To support and enhance our
technology infrastructure, we will also need to increase the personnel in our
engineering department. In addition, we will need to increase our staff to
support new consumers and the expanding needs of our existing consumers. Hiring
highly qualified engineers, customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet.
WE RECENTLY RECRUITED MOST OF OUR MANAGEMENT TEAM.
Many members of our management team have recently been hired, including our
Chief Executive Officer, Chief Financial Officer, Senior Vice President of
Sales, Vice President of Marketing and Chief Technology Officer. Many of these
individuals do not have significant experience working together or with the rest
of our management team. We cannot assure you that they will be able to work
together successfully or manage any growth we experience. The process of
integrating these individuals may detract from the operation of, and have an
adverse effect on, our business.
OUR SENIOR MANAGEMENT TEAM AND OTHER KEY EMPLOYEES ARE CRITICAL TO OUR BUSINESS
AND THEY MAY NOT REMAIN WITH US IN THE FUTURE.
Our success will be substantially dependent on the performance of our
senior management and key creative, technical, marketing and sales personnel,
many of whom joined us only recently. The loss of the services of any of our
executive officers or other key employees could harm our business. Key employees
other than executive officers include our Vice President of Marketing, Vice
President of Engineering, Vice President of Sponsorship Sales and General
Counsel. We do not have employment agreements with our executive officers,
senior management or other key personnel, other than an employment agreement
with our Chief Executive Officer. In addition, our employees may voluntarily
terminate their employment at any time.
WE MAY BE UNABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CONSUMER
DEMANDS.
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing our products and services and introducing new services
to address our consumers' changing needs. We could incur substantial development
or acquisition costs if we need to modify our services or infrastructure to
adapt to changes affecting providers of Internet services. Our business could be
harmed if we incur significant costs to adapt to these changes. If we cannot
adapt to these changes, or do not sufficiently increase the features and
functionality of our products and services, our consumers may switch to the
product and service offerings of our competition. Furthermore, our competitors
or potential competitors may develop products or services that are more
appealing to our current and potential consumers. As a result, demand for our
services may decrease.
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YEAR 2000 PROBLEMS COULD LEAD TO MALFUNCTIONS OF OUR COMPUTER AND COMMUNICATIONS
SYSTEMS AND PREVENT US FROM RUNNING OUR BUSINESS.
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third parties with whom we have
a material relationship fail to achieve year 2000 readiness, our business may be
seriously harmed. In particular, year 2000 problems could temporarily prevent us
from offering our goods and services. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."
RISKS RELATED TO CONTENT, INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION
WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITE OR THE PRODUCTS
AND SERVICES AVAILABLE THROUGH OUR WEB SITE.
We provide a wide variety of content that enables consumers to send digital
greetings and other communications, and we intend to offer services that will
allow consumers to conduct business and engage in various online activities. The
laws relating to the liability of providers of these online services for the
activities of their consumers is currently unsettled. Claims could be made
against us for negligence, defamation, libel, copyright or trademark
infringement, personal injury or other legal claims based on the content that we
license from third parties or create internally or based on content that may be
posted online by our consumers. While we generally obtain written licenses to
use third-party content on our Web site, in some instances we rely only upon
oral licenses. In addition, we could be exposed to liability with respect to
third-party or internally created content on our Web site or with respect to the
content of third-party Web sites that may be accessible through our Web site.
These claims might include, among others, that by providing access to
third-party content or by linking to Web sites operated by third parties, we may
be liable for copyright or trademark infringement or other unauthorized actions
by third parties through those Web sites. Furthermore, we could be exposed to
liability for content and materials that may be created by consumers in
build-your-own customized digital greetings. Any claims like these, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention, require us to enter into costly royalty or
licensing arrangements or prevent us from using important technologies, ideas or
formats, any of which could materially harm our business. Although we carry
general liability insurance, our insurance policy does not currently cover
intellectual property infringement. Obtaining adequate insurance coverage or
implementing measures to reduce our exposure to this type of liability may
require us to spend substantial resources. We currently do not have plans to
obtain insurance that would cover intellectual property infringement.
OUR BUSINESS DEPENDS ON OUR PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, AND
WE MAY BE UNABLE TO ADEQUATELY PROTECT THEM.
Our success will depend on the protection of and the goodwill associated
with our trademarks and other intellectual property rights to our products and
services. A substantial amount of uncertainty exists concerning the application
of copyright and
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trademark laws to the Internet and other digital media, and existing laws may
not provide adequate protection of our content or our Internet addresses,
commonly referred to as "domain names." We have registered the name
"E-greetings" as our trademark and service mark in the United States. We also
have filed and plan to file applications to register a number of our other
trademarks, trade names and service marks in the United States and foreign
jurisdictions. We may be unable to obtain some or all of these registrations.
CONSUMER PRIVACY CONCERNS AND CONSUMER PROTECTION PRIVACY REGULATIONS COULD
IMPAIR OUR ABILITY TO OBTAIN OR USE INFORMATION ABOUT OUR CONSUMERS.
Privacy concerns may cause consumers to resist providing the personal data
necessary to support our ability to collect information about our consumers. Our
Web site currently uses "cookies" to track consumer preferences in order to
tailor content to them. A "cookie" is information keyed to a specific server,
file pathway or directory location that is stored on a consumer's hard drive,
possibly without the consumer's knowledge, but generally removable by the
consumer. We also capture demographic and profile information when an individual
registers with us, and we capture and retain data based on digital greetings
sent and received by our consumers. We utilize this information to assist
advertisers in targeting their online advertising campaigns to consumers with
particular demographic characteristics. Although we currently have a policy
against providing our consumers' personal information to third parties, we may
decide in the future to provide this information to our advertising and
ecommerce partners. In the past, the Federal Trade Commission has investigated
companies that have taken actions like this without permission or in violation
of the companies' stated privacy policies. If we begin providing information
like this without permission or in violation of our privacy policy, we may face
potential liability for invasion of privacy. Even the perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our Web site products and services. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
consumers that the data may be used by marketing entities to direct product
promotion and advertising to the consumer. Other countries and political
entities, such as the European Union, have adopted legislation and regulatory
requirements like this. The United States may adopt similar legislation or
regulatory requirements. If we do not adequately address consumer privacy
concerns, our business could be materially harmed.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL COSTS
OF DOING BUSINESS ON THE INTERNET.
We currently are not subject to meaningful direct regulation applicable to
access to, or commerce on, the Internet by any government agency. It is possible
that in the future a number of laws and regulations may be adopted with respect
to the Internet and other digital media, covering issues such as consumer
privacy, ecommerce and the pricing, characteristics and quality of products and
services. By conducting business via the Internet, we may be subject to the laws
of foreign jurisdictions in an unpredictable manner.
Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and providers
of online services in a manner similar to long distance telephone carriers and
to impose access fees on these companies. This could increase the cost of
transmitting data over the Internet. Moreover,
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the applicability of existing laws relating to issues such as property
ownership, defamation and personal privacy on the Internet is uncertain. Any new
laws or regulations relating to the Internet could harm our business.
We also could be exposed to liability arising from the activities of
consumers of our content or services or with respect to the unauthorized
duplication or insertion of material (such as material deemed obscene or
inappropriate for children) accessed directly or indirectly through our
services. Several private lawsuits seeking to impose such liability upon content
providers, online services companies and Internet access providers currently are
pending. In addition, legislation has been enacted that imposes, and further
legislation may be proposed that may impose liability for, or prohibit the
transmission over the Internet of, certain types of information and content. Any
legislation or regulation like this, or the application of existing laws to the
Internet, could expose us to significant liabilities associated with our content
or services.
There is also uncertainty regarding the imposition of sales and other taxes
on ecommerce transactions, which may impair our ability to derive financial
benefits from ecommerce activities. Although the Internet Tax Freedom Act
precludes, for a period of three years ending January 2002, the imposition of
state and local taxes that discriminate against or single out the Internet, it
does not currently impact existing taxes. However, one or more states may seek
to impose sales tax collection obligations on out-of-state companies, such as
us, which engage in or facilitate online commerce. A number of proposals have
been made at the state and local level that would impose additional taxes on the
sale of goods and services through the Internet. Proposals like these, if
adopted, could substantially impair the growth of ecommerce and could adversely
affect our opportunity to derive financial benefits from ecommerce. Moreover, if
any state or foreign country were to successfully assert that we should collect
sales or other taxes on the sale of merchandise on or through our Web site, it
could affect our cost of doing business.
CHANGES IN REGULATION COULD REDUCE THE VALUE OF OUR DOMAIN NAME.
We own the Internet domain name "Egreetings.com" in the United States.
Domain names generally are regulated by Internet regulatory bodies, and the
regulation of domain names is subject to change. Regulatory bodies could
establish new domain name systems, appoint additional domain name registrars or
modify the requirements for holding domain names. In addition, regulations
regarding foreign domain name registration vary from jurisdiction to
jurisdiction and are subject to change. As a result, we might not acquire or
maintain the "Egreetings.com" or comparable domain names in any of the countries
in which we conduct business, which could harm our business. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear and still evolving.
Therefore, we might be unable to prevent third parties from acquiring domain
names that infringe or otherwise decrease the value of our trademarks and other
proprietary rights. If we are unable to protect our domain names, our business
would suffer.
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RISKS RELATED TO THIS OFFERING
THE PRICE OF OUR SHARES COULD BE SUBJECT TO EXTREME FLUCTUATIONS AND YOU COULD
HAVE DIFFICULTY TRADING YOUR SHARES. WE MAY BE SUBJECT TO LAWSUITS AS A RESULT
OF EXTREME FLUCTUATIONS IN OUR STOCK PRICE.
The trading market price of our common stock may decline below the initial
public offering price. You may not be able to resell your shares at or above the
initial public offering price due to a number of factors, including the
following:
- actual or anticipated quarterly variations in our operating results;
- changes in market expectations of our future financial performance or
changes in the estimates of securities analysts;
- a limited public float;
- announcements by our competitors; and
- conditions affecting the Internet in general or our industry
specifically.
The trading price of our common stock may be volatile. Public market
analysts and investors have not been able to develop consistent financial models
for Internet companies because of the unpredictable rate of growth of Internet
users, the rapidly changing models of doing business on the Internet and the
Internet's relatively low barriers to entry. As a result, and because of the
other risks discussed in this prospectus, our operating results may not meet the
expectations of public market analysts, if any, or our investors in future
periods. If this occurs, the price of our common stock will likely fall. In
addition, the stock market in general and the market for technology and
Internet-related companies in particular have experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted. If this were to happen to us, litigation would be expensive and
would divert management's attention from the operation of our business.
The initial public offering price will be established by negotiation
between the underwriters and us. You should read the "Underwriters" section for
a more complete discussion of the factors to be considered in determining the
initial public offering price.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND THEIR
USES MAY NOT YIELD A FAVORABLE RETURN.
Most of the net proceeds of this offering are not allocated for specific
uses. Our management will have broad discretion to spend the proceeds from this
offering in ways with which stockholders may not agree. The failure of our
management to apply these funds effectively could result in unfavorable returns.
This could have significant adverse effects on our financial condition and could
cause the price of our common stock to decline.
21
<PAGE> 24
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL 63.5% OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of our outstanding common stock will, in the aggregate, beneficially own
63.5% of our outstanding common stock. As a result, these stockholders will be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership also may
have the effect of delaying, deterring or preventing a change in control of our
company and may make some transactions more difficult or impossible to complete
without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions also could discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions do the following:
- authorize us to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors without
prior stockholder approval, with rights senior to the rights attached to
the common stock;
- provide for a staggered board of directors, so that no more than three
directors could be replaced each year and it would take three successive
annual meetings to replace all of our current directors;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES.
The assumed initial public offering price is substantially higher than the
net tangible book value of each outstanding share of common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
their shares, since these investments will be at a substantially higher per
share price than they were for our existing stockholders. The dilution will be
$5.85 per share in the net tangible book value of the common stock from the
assumed initial public offering price of $9.00 per share. If additional shares
are sold by the underwriters following exercise of their over-allotment option,
or if outstanding options or warrants to purchase shares of common stock are
exercised, there will be further dilution.
22
<PAGE> 25
A SIGNIFICANT PERCENTAGE OF OUR STOCK MAY BE SOLD INTO THE PUBLIC MARKET IN THE
NEAR FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, we will have outstanding 34,443,481 shares of
common stock, based on the number of shares of common stock outstanding as of
November 22, 1999. The 6,000,000 shares offered for sale through the
underwriters will be freely tradable unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters. Of the remaining
28,443,481 shares of common stock outstanding after this offering, 19,150,931
shares will be eligible for sale in the public market beginning 181 days after
the date of this prospectus. The remaining 9,292,550 shares will become
available at various times thereafter upon the expiration of one-year holding
periods. See "Shares Eligible for Future Sale." We also intend to register up to
8,097,223 additional shares of our common stock after this offering for issuance
under our equity incentive plans. In addition, holders of approximately
22,717,555 shares of common stock will be entitled to certain demand and
piggyback registration rights with respect to the registration of their shares.
If these holders, by exercising their registration rights, cause a large number
of securities to be registered and sold in the public market, the market price
of our stock could decrease.
23
<PAGE> 26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "anticipate," "predict,"
"believe," "plan," "expect," "estimate," "future," "intend," "potential" or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described in "Risk Factors" above and in other
parts of this prospectus. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
our actual results or to changes in our expectations.
24
<PAGE> 27
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately
$48.7 million, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us. If the underwriters'
over-allotment option is exercised in full, we estimate that the net proceeds
will be approximately $56.3 million.
We intend to use between $20 million and $30 million of the net proceeds to
fund increased sales and marketing activities. We also intend to use
approximately $10 million of the net proceeds for capital expenditures,
including technology and physical infrastructure. We expect to use any remaining
net proceeds to fund the acquisition of content and general corporate purposes,
including possible acquisitions. We are not currently a party to any contracts
or letters of intent with respect to any acquisitions. We have not identified
specific uses for all of the proceeds from this offering and our management will
have discretion over their use and investment. We intend to invest the net
proceeds from this offering in short-term, investment grade, interest-bearing
securities until they are used. We reserve the right to increase or decrease the
size of this offering and the price per share of the shares we are offering.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends for the foreseeable
future. In addition, our bank line of credit agreement prohibits the payment of
cash dividends.
25
<PAGE> 28
CAPITALIZATION
The following table sets forth our total capitalization as of September 30,
1999. The pro forma column reflects:
- the sale of 5,846,546 shares of Series G preferred stock in October 1999
for net proceeds of approximately $23.0 million;
- the sale of 3,712,871 shares of Series G preferred stock in November 1999
to National Broadcasting Company, Inc. for gross proceeds of
approximately $7.5 million in cash (less approximately $1.0 million in
related placement, legal and other fees) and approximately $7.5 million
of advertising rights;
- approximately $4.8 million of deferred content costs recorded in
connection with a content license agreement entered into with NBC in
November 1999;
- net proceeds of approximately $9.1 million to be received upon the
assumed exercise of a warrant to purchase preferred stock convertible
into 3,326,667 shares of common stock, which will expire upon the
completion of this offering. A warrant to purchase 946,925 shares of our
Series E preferred stock at $9.60 per share was issued to Gibson
Greetings in December 1997. As a result of anti-dilution rights contained
in the warrant, the aggregate number of shares of Series E preferred
stock issuable pursuant to this warrant increased to 1,663,333 following
our sale of Series F and G preferred stock. Pursuant to the terms of the
warrant, there was no adjustment to the aggregate exercise price of the
warrant and, as a consequence, the per share exercise price of the
warrant currently is $5.46. Each share of Series E preferred stock
presently is convertible into two shares of common stock; and
- the conversion of all outstanding shares of preferred stock into common
stock upon the completion of this offering. Each share of Series A
through F preferred stock is convertible into two shares of common stock
and each share of Series G preferred stock is convertible into two-thirds
of one share of common stock.
The pro forma as adjusted column gives effect to the issuance and sale by us in
this offering of 6,000,000 shares of common stock at an assumed initial public
offering price of $9.00 per share after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us. This
table should be read in conjunction with the financial statements and related
notes thereto included elsewhere in this prospectus.
26
<PAGE> 29
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long-term liabilities................................ $ 3,590 $ 3,590 $ 3,590
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
15,500,000 shares authorized, 6,332,420 shares
issued and outstanding, actual; no shares issued
and outstanding, pro forma; 5,000,000 shares
authorized, no shares issued and outstanding pro
forma as adjusted............................... $ 42,395 $ -- $ --
Common Stock, $0.001 par value; 65,000,000 shares
authorized, 6,076,656 shares issued and
outstanding, actual; 28,441,107 shares issued
and outstanding, pro forma; 75,000,000 shares
authorized, 34,441,107 shares issued and
outstanding, pro forma as adjusted.............. 9,869 103,153 151,873
Deferred stock compensation.......................... (2,853) (2,853) (2,853)
Notes receivable from stockholders................... (5,360) (5,360) (5,360)
Accumulated deficit.................................. (35,096) (35,096) (35,096)
-------- -------- --------
Total stockholders' equity...................... 8,955 59,844 108,564
-------- -------- --------
Total capitalization....................... $ 12,545 $ 63,434 $112,154
======== ======== ========
</TABLE>
The above information excludes as of September 30, 1999:
- 2,317,115 shares of common stock issuable upon exercise of options
outstanding;
- 353,104 shares of common stock issuable upon conversion of preferred
stock issuable upon exercise of warrants outstanding; and
- 1,282,338 additional shares that remain available for grant under our
stock option plan.
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<PAGE> 30
DILUTION
Our pro forma net tangible book value at September 30, 1999 was
approximately $59.8 million, or $2.10 per share. Pro forma net tangible book
value per share is determined by dividing our pro forma tangible net worth
(total tangible assets less total liabilities) by the number of shares of common
stock outstanding, after giving effect to the sale of 5,846,546 shares of Series
G preferred stock in October 1999, the sale of 3,712,871 shares of Series G
preferred stock in November 1999, and the conversion of all outstanding shares
of our convertible preferred stock into common stock, which will occur
automatically upon the completion of this offering. After giving effect to our
sale in this offering of 6,000,000 shares of common stock at an assumed initial
public offering price of $9.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value at September 30, 1999 would have
been approximately $108.6 million, or $3.15 per share. This represents an
immediate increase in the pro forma net tangible book value per share of $1.05
to existing stockholders and an immediate dilution of $5.85 per share to new
investors purchasing shares in this offering. If the initial public offering
price is higher or lower, the dilution to new investors will be greater or less,
respectively. The following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $9.00
Pro forma net tangible book value per share before the
offering.................................................... $2.10
Increase per share attributable to new investors.......... 1.05
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.15
-----
Dilution per share to new investors......................... $5.85
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the number of shares of common stock purchased from us, the total
consideration provided to us and the average price per share provided by
existing stockholders and new investors. The calculation is based on an assumed
initial public offering of $9.00 per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 28,441,107 82.6% $ 89,318,000 62.3% $3.14
New investors................. 6,000,000 17.4 54,000,000 37.7 $9.00
---------- ----- ------------ ------
Total............... 34,441,107 100.0% $143,318,000 100.0%
========== ===== ============ ======
</TABLE>
This discussion and table give effect to the assumed exercise of a warrant
to purchase preferred stock convertible into 3,326,667 shares of common stock,
which will expire upon the completion of this offering, but assumes no exercise
of options and other warrants outstanding as of September 30, 1999. As of
September 30, 1999, there were options outstanding to purchase a total of
2,317,115 shares of common stock at a weighted average price of $1.52 per share
and warrants outstanding to purchase preferred stock convertible into 353,104
shares of common stock at a weighted average exercise price of $3.23 per share.
To the extent that any of these options or warrants are exercised, there will be
further dilution to new investors. For further information regarding options and
warrants, please see "Management -- Stock Option Plans," "-- 1996 Stock Option
Plan," "-- 1999 Equity Incentive Plan," "-- 1999 Non-Employee Directors' Plan,"
"-- 1999 Employee Stock Purchase Plan," "Description of Capital Stock" and Note
6 of Notes to Financial Statements.
28
<PAGE> 31
SELECTED FINANCIAL DATA
The statement of operations data for the three years in the period ended
December 31, 1998 and the related balance sheet data as of December 31, 1997 and
1998 are derived from our financial statements, which have been audited by Ernst
& Young LLP, independent auditors, and are included elsewhere in this
prospectus. The selected balance sheet data as of December 31, 1996 are derived
from audited financial statements not included in this prospectus. The selected
statement of operations data for the period from July 8, 1994 (inception) to
December 31, 1994 and the year ended December 31, 1995 and the selected balance
sheet data as of December 31, 1994 and 1995 are derived from unaudited financial
statements not included in this prospectus. The financial data for the nine
months ended September 30, 1998 and 1999 and as of September 30, 1999 are
derived from unaudited financial statements included elsewhere in this
prospectus. We have prepared this unaudited information on the same basis as the
audited financial statements and have included all adjustments, consisting only
of normal recurring adjustments, that we consider necessary for a fair
presentation of the financial position and operating results for such date and
periods. When you read this selected financial data, it is important that you
read the historical financial statements and related notes included in this
prospectus, as well as the section of this prospectus related to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 8, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
-------------- ------ ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 4 $ 58 $ 164 $ 505 $ 317 $ 182 $ 1,527
Costs and expenses:
Cost of services.................... 1 23 256 336 610 401 1,989
Sales and marketing................. -- 67 366 942 3,094 1,918 8,221
Operations and development.......... 14 66 552 1,422 2,628 1,631 7,081
General and administrative.......... 11 251 778 830 1,444 1,203 4,051
Amortization of deferred content
costs............................. -- -- -- -- 138 126 754
Amortization of deferred stock
compensation...................... -- -- -- -- 201 113 1,366
------- ------ ------- ------- ------- ------- --------
Total costs and expenses.......... 26 407 1,952 3,530 8,115 5,392 23,462
------- ------ ------- ------- ------- ------- --------
Loss from operations.................. (22) (349) (1,788) (3,025) (7,798) (5,210) (21,935)
Interest income (expense), net........ -- -- 4 (68) (23) (3) (92)
------- ------ ------- ------- ------- ------- --------
Net loss.............................. $ (22) $ (349) $(1,784) $(3,093) $(7,821) $(5,213) $(22,027)
======= ====== ======= ======= ======= ======= ========
Net loss per share:(1)
Basic and diluted................... $(11.00) $(0.16) $ (1.14) $ (1.00) $ (2.26) $ (1.50) $ (6.12)
======= ====== ======= ======= ======= ======= ========
Weighted average shares............. 2 2,144 1,561 3,100 3,464 3,464 3,598
======= ====== ======= ======= ======= ======= ========
Pro forma net loss per share:(1)
Basic and diluted................... $ (0.94) $ (1.51)
======= ========
Weighted average shares............. 8,324 14,570
======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 1 $101 $719 $3,524 $ 268 $ 2,376
Working capital (deficit)............................... 1 43 344 2,735 (2,838) (3,811)
Total assets............................................ 3 128 998 5,203 2,968 20,955
Long-term liabilities................................... 20 20 70 197 1,100 3,590
Total stockholders' equity (deficit).................... (18) 50 547 4,185 (1,489) 8,955
</TABLE>
- -------------------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the related notes and the other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by forward-looking information due to
factors discussed under "Risk Factors," "Business" and elsewhere in this
prospectus.
OVERVIEW
From our inception in July 1994 through 1996, we derived our revenues
primarily from the sale of paper greeting cards, first through CD-ROM based
catalogs and then through our Web site and our online store on America Online
(AOL). In February 1997, we implemented AOL's first digital greetings service,
and in late 1997, we launched our own digital greetings service from our Web
site. Revenues through 1997 consisted primarily of fees from AOL and, to a
lesser extent, sales of paper and digital greetings through our Web site. We
discontinued the sale of paper greeting cards through our Web site in July 1997
in order to focus on our digital greetings service. Revenues in 1998 were
derived largely from the sale of advertisements, sponsorships and digital
greetings on our Web site and from content licensing fees paid to us by AOL. Our
relationship with AOL ended in late 1998.
In November 1998, we made a significant change to our business model and
began offering our digital greetings for free. We made this change in order to
more rapidly build a large and active user base, which increases our ability to
sell advertisements and sponsorships on our Web site to third parties. Our
business model also includes ecommerce and direct marketing activities, although
we have not yet realized any significant revenues from these activities and are
still implementing the infrastructure and establishing the relationships
required to support these activities. As a result, our revenues since November
1998 have been derived primarily from the sale of advertisements and
sponsorships on our Web site and secondarily from direct marketing activities.
For the nine months ended September 30, 1999, approximately 99% of our revenues
were derived from the sale of advertisements and sponsorships and direct
marketing activities. As we develop and introduce more products and services in
the future, we anticipate that revenues from advertisements and sponsorships
will decrease as a percentage of total revenues.
In November 1999, American Greetings, Inc. announced the execution of an
agreement to acquire Gibson. American Greetings is the parent company of
AmericanGreetings.com, which is one of our competitors in the digital greetings
market. We do not know how our relationship with Gibson or our rights pursuant
to our license agreement with Gibson will be affected if this acquisition is
consummated. If Gibson or, upon consummation of the proposed acquisition,
American Greetings fails to perform under the terms of our license agreement,
the amount of content we are able to offer our consumers will decrease
significantly, which would harm our business.
30
<PAGE> 33
In addition, in October 1999, Excite@Home Network announced an agreement to
acquire Bluemountain.com, the online business of Blue Mountain Arts, which is
one of our competitors in the digital greetings market. Advertising revenues
from Excite@Home were approximately $615,000 in the nine months ended September
30, 1999 and represented approximately 40% of our total revenues for that
period. Our advertising relationship with Excite@Home ended in November 1999 and
we do not anticipate receiving any future revenues from Excite@Home.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Revenues
Revenues increased from $182,000 for the nine months ended September 30,
1998 to $1.5 million for the nine months ended September 30, 1999. Revenues
increased from $103,000 in the first quarter of 1999 to $621,000 in the second
quarter to $803,000 in the third quarter. The first quarter of 1999 was the
first full quarter after we changed our business model from one in which
revenues were derived from the sale of digital greetings to one in which
revenues are derived from the sale of advertisements and sponsorships. Since
making this change in November 1998, we have experienced significant growth in
traffic to our Web site, which has resulted in growth in our advertising
inventory. The number of visits to our Web site increased from 3.6 million in
October 1998, the month before our business model change, to more than 14.5
million in October 1999. In addition to advertising and sponsorship revenues, we
began to generate revenues from direct marketing email activities in the second
and third quarters of 1999. Revenues generated from these email campaigns
approximated $174,000 for the nine months ended September 30, 1999.
We typically guarantee advertisers a minimum number of "impressions," or
times that an advertisement appears in pages viewed by consumers using our Web
site. We recognize revenues on the sale of advertisements based on the ratio of
the number of impressions actually delivered to the guaranteed number of
impressions. We recognize revenues on the sale of sponsorships on a
straight-line basis over the period during which the sponsor's promotional
message is displayed on our Web site. Direct marketing revenues are recognized
based on the ratio of the number of emails actually sent to the guaranteed
number of emails to be sent. In all cases, revenues are recognized only if we
have no remaining significant obligations and the collection of the receivable
is probable.
Cost of Services
Cost of services is comprised primarily of royalties paid to content
licensors, the cost of our internal content production, Internet connectivity
charges and server co-location costs.
Cost of services increased from approximately $401,000 for the nine months
ended September 30, 1998 to approximately $2.0 million for the nine months ended
September 30, 1999. Cost of services increased from $399,000 in the first
quarter of 1999 to $672,000 in the second quarter to $918,000 in the third
quarter. The steady increase in this cost is primarily due to the increase in
content royalty fees, Internet connectivity costs and the number of employees
dedicated to content creation. To the extent we experience an increase in our
Web site traffic and the number of digital greetings sent, we would
31
<PAGE> 34
expect our cost of services to increase. Cost of services is not proportional to
revenues and may increase or decrease as a percentage of revenues.
Sales and Marketing
Sales and marketing expenses consist primarily of expenses related to
online and offline advertising, distribution, personnel and facilities,
promotional activities and public relations costs. Distribution costs reflect
amounts paid to online service providers, portals and other Web sites who market
and provide links to our Web site.
Sales and marketing expenses increased from approximately $1.9 million for
the nine months ended September 30, 1998 to approximately $8.2 million for the
nine months ended September 30, 1999. Sales and marketing expenses decreased
from approximately $2.9 million in the first quarter of 1999 to approximately
$2.4 million in the second quarter of 1999. Although we increased the size of
our sales department from three sales personnel at the end of the first quarter
of 1999 to 11 at the end of the second quarter, the decrease in sales and
marketing expenses primarily was due to reduced advertising activities in the
second quarter. Specifically, we conducted an advertising campaign in the first
quarter of 1999 in anticipation of Valentine's Day as consumers tend to send a
large number of greetings for this holiday. Because consumers typically send
fewer greetings and online traffic typically declines during the summer months,
we reduced our advertising activities in the months preceding the summer. Sales
and marketing expenses increased to $2.9 million in the third quarter of 1999, a
slight increase compared to the second quarter. This increase was the result of
more print and online advertising during the quarter and costs related to
broadcast advertising that will air in the fourth quarter. We anticipate that
overall sales and marketing expense will increase significantly in absolute
dollars in the foreseeable future. Sales and marketing expense as a percentage
of total revenues may fluctuate depending on the timing and type of new
marketing programs and distribution agreements and the addition of sales and
marketing personnel.
Operations and Development
Operations and development expenses consist primarily of personnel and
facilities costs for our site management, product management, business
development, engineering, site operations and site production departments.
Operations and development expenses increased from approximately $1.6
million for the nine months ended September 30, 1998 to approximately $7.1
million for the nine months ended September 30, 1999. Operations and development
expenses increased from approximately $1.3 million in the first quarter of 1999
to approximately $2.1 million in the second quarter and approximately $3.7
million in the third quarter. These increases primarily were due to increased
personnel costs, including the cost of independent contractors assisting on the
rearchitecture of our Web site and other engineering projects. Depreciation
expense also increased due to the addition of hardware and software to support
the increased traffic on our Web site. We anticipate that overall operations and
development expenses will increase in the foreseeable future. These expenses as
a percentage of revenues may fluctuate depending on the level of future revenues
and the timing of new personnel hires to support and expand our site
infrastructure and traffic.
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<PAGE> 35
General and Administrative
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
facilities and administration, legal, human resources and fees for professional
services.
General and administrative expenses increased from approximately $1.2
million for the nine months ended September 30, 1998 to approximately $4.1
million for the nine months ended September 30, 1999. General and administrative
expenses were approximately $1.0 million in each of the first two quarters of
1999 and increased to approximately $2.0 million in the third quarter of 1999,
primarily as a result of an increase in personnel and facility costs. We
anticipate that general and administrative expense will increase in the
foreseeable future. General and administrative expense as a percentage of
revenues may fluctuate depending on the level of future revenues and the timing
of additional investments in general and administrative infrastructure.
Amortization of Deferred Content Costs
Amortization of deferred content costs consists of the amortization of the
fair value of a warrant issued to Gibson Greetings, Inc. in December 1997 in
connection with the establishment of a relationship with Gibson under which we
obtained the right to distribute Gibson's content in the form of digital
greetings. The fair value of the Gibson warrant at each quarterly valuation date
is being amortized by charges to operations over the remaining life of the
Gibson agreement, which expires on December 31, 2002. Amortization of deferred
content costs was approximately $153,000 in the first quarter of 1999,
approximately $252,000 in the second quarter and approximately $349,000 in the
third quarter, for a total of approximately $754,000 for the nine months ended
September 30, 1999. In addition to the Gibson Greetings, Inc. deferred content
costs, approximately $4.8 million of content costs were incurred in November
1999 in conjunction with a content licensing agreement signed with the National
Broadcasting Company, Inc. We anticipate that amortization of the Gibson and NBC
deferred content costs will be approximately $1.1 million in each quarter
through 2001 and approximately $532,000 in each quarter of 2002. We will
periodically review the recoverability of the deferred content costs and will
write it down to its net realizable value if we consider it appropriate based on
expected future revenues (and other benefits) or as a result of this
amortization.
Amortization of Deferred Stock Compensation
We recorded aggregate deferred stock compensation of approximately $488,000
in 1998 and approximately $3.9 million in the nine months ended September 30,
1999. These charges were related to the grant of stock options at exercise
prices less than the deemed fair value of our common stock on the grant date.
The deferred stock compensation is being amortized over the vesting periods of
the options, generally four years, using a graded vesting method. Of the total
deferred stock compensation, approximately $201,000 was amortized in 1998 and
approximately $1.4 million was amortized in the first nine months of 1999. We
expect amortization of approximately $627,000 for the remainder of 1999 and
amortization of approximately $1.3 million in 2000, $649,000 in 2001 and
$243,000 in 2002 relating to these options.
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Interest Income (Expense), Net
Net interest expense increased from approximately $3,000 for the nine
months ended September 30, 1998 to approximately $92,000 for the nine months
ended September 30, 1999. We had net interest expense of $166,000 in the first
quarter of 1999, net interest income of $59,000 in the second quarter and net
interest income of $15,000 in the third quarter. The interest income in the
second and third quarters resulted from increased interest generated from the
net proceeds of our sale of preferred stock in March 1999.
Income Taxes
There has been no provision made for federal or state income taxes for any
period as we have incurred operating losses to date. As of December 31, 1998, we
had net operating loss carryforwards for federal income tax purposes of
approximately $11.8 million. The federal net operating loss carryforwards will
expire at various dates from 2010 through 2018 if not utilized. Due to the
"change of ownership" provisions of the Internal Revenue Code, the availability
of our net operating loss carryforwards may be subject to an annual limitation
against taxable income in future periods if a change in ownership of more than
50% of the value of our stock should occur over a three-year period. This could
substantially limit the eventual utilization of these carryforwards. For further
information regarding income taxes, see Note 5 of Notes to Financial Statements.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenues
Revenues increased from approximately $164,000 in 1996 to approximately
$505,000 in 1997 and decreased to approximately $317,000 in 1998. The increase
in revenues from 1996 to 1997 was due to the receipt of fees paid to us in 1997
by AOL for developing and implementing AOL's first digital greeting service.
Revenues decreased from 1997 to 1998 due to the expiration and nonrenewal of our
contract with AOL. In late 1997, we began selling digital greetings and
advertising on our own Web site. Revenues from these sales accounted for the
majority of our revenue in 1998.
Cost of Services
Cost of services increased from approximately $256,000 in 1996 to
approximately $336,000 in 1997 and approximately $610,000 in 1998. The increase
in cost of services from 1997 to 1998 was due to the increased cost of internal
content production, third-party content and Web site connectivity and support.
Sales and Marketing
Sales and marketing expenses increased from approximately $366,000 in 1996
to approximately $942,000 in 1997 and approximately $3.1 million in 1998. In
late 1997, we ceased working on AOL's digital greeting service and began
developing our own, which resulted in increased expenses for distribution
channels and marketing.
Operations and Development
Operations and development expenses increased from approximately $552,000
in 1996 to approximately $1.4 million in 1997 and approximately $2.6 million in
1998. These
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increases primarily were due to increased personnel, engineering and Web site
operating costs to build and maintain our digital greeting service.
General and Administrative
General and administrative expenses increased from approximately $778,000
in 1996 to approximately $830,000 in 1997 and approximately $1.4 million in
1998. These increases primarily were due to increased personnel and facility
expenditures necessary to support our growing digital greeting service.
Amortization of Deferred Content Costs
In December 1997, we recorded deferred content costs of approximately $1.3
million with no related amortization. In 1998, we recorded additional deferred
content costs of $445,000 and recorded amortization of $138,000.
Amortization of Deferred Stock Compensation
We did not record any deferred stock compensation in 1996 or 1997. We
recorded approximately $488,000 of deferred stock compensation in 1998 in
connection with the grant of options in 1998 at exercise prices less than the
deemed fair value of our common stock on the grant date. Of this amount,
approximately $201,000 was amortized in 1998. Net Interest Income (Expense)
Net Interest Income (Expense)
We had interest income of approximately $4,000 in 1996 and net interest
expense of approximately $68,000 in 1997 and approximately $23,000 in 1998.
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SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of
operations for the three quarters ended September 30, 1999. You should read the
following table in conjunction with our financial statements and related notes
included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as the audited financial statements. This table
includes all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of our financial position and
results of operations for the quarters presented. We have experienced and expect
to continue to experience fluctuations in operating results from quarter to
quarter. We have incurred net losses in each quarter since our inception, and we
expect to incur losses for the foreseeable future.
<TABLE>
<CAPTION>
1999 QUARTER ENDED
-----------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30
-------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues..................................... $ 103 $ 621 $ 803
Costs and expenses:
Cost of services........................... 399 672 918
Sales and marketing........................ 2,889 2,384 2,948
Operations and development................. 1,263 2,105 3,713
General and administrative................. 980 1,026 2,045
Amortization of deferred content costs..... 153 252 349
Amortization of deferred stock
compensation............................ 154 405 807
------- ------- -------
Total costs and expenses................ 5,838 6,844 10,780
------- ------- -------
Loss from operations......................... (5,735) (6,223) (9,977)
Interest income (expense), net............... (166) 59 15
------- ------- -------
Net loss................................ $(5,901) $(6,164) $(9,962)
======= ======= =======
</TABLE>
Our revenues and operating results are likely to vary significantly from
quarter to quarter in the future due to a number of factors, many of which are
outside of our control. These factors include:
- our ability to sell advertisements and sponsorships;
- our ability to offer compelling, original content and value-added
services;
- our ability to attract consumers of our products and services;
- new Web sites, services or products introduced by us or our competitors;
- the timing and uncertainty of sales cycles;
- seasonal fluctuations in advertising sales;
- the level of Internet usage;
- our ability to attract and retain qualified personnel;
- our ability to successfully integrate operations and technologies added
as a result of acquisitions or other business combinations;
- technical difficulties or system downtime affecting the Internet
generally or the operation of our network; and
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- general economic conditions, as well as economic conditions specific to
Internet companies.
Our revenues for the near future will be substantially dependent on our
relationships with advertisers and sponsors, many of which are short-term in
nature and subject to cancellation without penalty. In addition, we derive a
significant portion of our revenues from the sale of advertisements to a limited
number of customers. Accordingly, the loss of an important advertising
relationship or the cancellation or deferral of advertising orders could harm
our results in any one quarter. As a result of these and other factors, quarter-
to-quarter comparisons of our operating results should not be relied upon as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the sale
of preferred stock and, to a lesser degree, equipment financing facilities.
Net cash used in operating activities was approximately $5.8 million in
1998 and approximately $17.8 million for the nine months ended September 30,
1999. The $17.8 million in cash used in operating activities for the nine months
ended September 30, 1999 was the result of approximately $22.0 million of net
losses partially offset by an increase of approximately $4.2 million in accounts
payable and accrued liabilities and by approximately $3.6 million of non-cash
charges for depreciation of furniture and equipment and amortization of deferred
content and stock compensation costs. Uses of cash in addition to net losses
included approximately $3.9 million of expenditures on deposits, prepaids and
other assets. Net cash used in investing activities was approximately $786,000
in 1998 and approximately $7.4 million for the nine months ended September 30,
1999. Cash used in investing activities was related to the acquisition of
network hardware and software and other equipment in both periods. Net cash
provided by financing activities was approximately $3.4 million in 1998 and
approximately $27.3 million in the nine months ended September 30, 1999. The
primary source of cash provided by financing activities was the sale of
preferred stock and, to a lesser extent, borrowings under equipment facilities
and stockholder notes payable.
We have two equipment term loans. The loans bear interest at the prime rate
plus 1% and the prime rate plus 2%, respectively and mature in June 2000 and
March 2002, respectively. Principal and interest are payable monthly. In
February 1999, we received an additional $500,000 for our equipment term loans.
These loans are secured by the equipment purchased under the loan agreement and
a general lien against our assets and require us to comply with the following
four financial covenants:
1) a minimum monthly quick ratio of 2.00 to 1.00;
2) a minimum monthly liquidity ratio of 2.00 to 1.00;
3) a minimum monthly tangible net worth of $1.4 million; and
4) a quarterly profitability target defined as a maximum acceptable revenue
decline of 20%.
We violated two of these financial covenants in August 1999: the quick ratio and
liquidity covenants. We obtained a waiver for these covenant violations through
August 1999. At September 30, 1999, we once again were in violation of the
minimum quick ratio covenant. We have obtained a waiver for this covenant
violation through September 30, 1999.
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Subsequent to our sale of shares of Series G preferred stock in October of 1999,
we have not been in violation of any of these financial covenants and we do not
anticipate that we will be in violation of these covenants during the remaining
term of the related loans. If it appears we may be in violation of any financial
covenants in the future, we would expect to renegotiate such financial covenants
with the lender.
In August 1999, we entered into an equipment financing agreement with two
leasing companies and a financial institution which provides for borrowings of
up to $10.0 million, of which approximately $5.4 million was available for use
as of September 30, 1999. Amounts due bear interest at the applicable three-year
Treasury Note rate plus 2.75% per annum and are payable monthly over a 36 month
period from the date of each advance. An additional interest payment of 10% of
the total amount drawn-down on the facility is due upon extinguishment of the
debt. Advances under the facility are available through July 31, 2000.
Borrowings are secured by the equipment purchased under the financing agreement.
There are no financial covenants required by this agreement.
As of September 30, 1999, we had approximately $2.4 million of cash and
cash equivalents and a working capital deficit of approximately $3.8 million. In
October and November 1999, we issued and sold an aggregate of 9,559,417 shares
of Series G preferred stock for net proceeds of approximately $29.5 million in
cash and approximately $7.5 million of advertising credit on the NBC Television
Network. We currently expect that the net proceeds from this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next 12 months.
Thereafter, we anticipate that we will require additional funding through public
or private financings or other arrangements. Adequate funds may not be available
when needed or may not be available on favorable terms. If additional funds are
raised through the issuance of equity securities, dilution to existing
stockholders will result. If insufficient funds are available, we may be unable
to enhance our Web site and brand, make strategic investments or respond to
actions by competitors, any of which could materially harm our business.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such "Year 2000" or "Y2K" requirements or
risk system failure or miscalculations causing disruptions of normal business
activities.
State of Readiness
We have made an assessment of the Y2K readiness for all systems essential
to our business, and we believe that all of our critical systems are Y2K
compliant.
We have assessed our operating financial and administrative systems,
facilities, internal information systems and all systems essential to the
functioning of our Web site, including code we have written, third-party
software, operating systems, networks and hardware. The specific systems
involved in the operation of our Web site include, but are not limited to, Web
servers, Perl and FastCGI scripts, shell scripts, databases, session
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servers, image servers, load balancers, email systems, operating systems,
monitoring and maintenance systems, software libraries and configuration
management systems.
We have inventoried all code supplied by third parties. For each product
supplied by a third party, we have determined the version which is Y2K compliant
based upon the vendor's own assessment and statements. We are ensuring that this
version of the code, including all required patches, is installed on our system.
If a third-party component is not validated as Y2K compliant, we are performing
our own tests on the component, and fixing problems or replacing the component
as necessary.
We are conducting an extensive system test of our Web site using a
dedicated Y2K hardware and software environment, which will be completed in the
fourth quarter of 1999.
All code written internally has been scanned for date operations by
knowledgeable programmers and/or using code analysis tools. A code and system
configuration freeze will be implemented once the Y2K certification tests have
been completed to ensure that post-test Y2K bugs are not introduced.
Costs
We do not expect to incur any substantial costs in connection with
identifying, evaluating, and addressing Y2K compliance issues. We expect to
spend less than $50,000 on external consulting services, and are incurring
operating costs associated with approximately 10 person months of employee time
analyzing and testing our systems. If these expenses are significantly higher
than anticipated, our business could be harmed.
Risks
We are not currently aware of any Y2K compliance problems that would have a
material adverse effect on our business. We may discover Y2K compliance problems
in our systems that will require substantial resources to remedy. Third-party
hardware, software or services incorporated into our systems may also need to be
revised or replaced. Any revision or replacement of our systems could be time
consuming or costly.
The types of third-party components that we consider critical to our
business and might need to be revised or replaced include operating systems,
server and networking hardware, financial and administrative systems, Web
servers, application servers, email systems, software development libraries,
configuration management systems, load balancers, database and data warehouse
systems and site monitoring systems.
We have identified all critical third-party components and the versions of
the components that we use. We are searching our suppliers' Web sites for their
Y2K certification statements. If we cannot find appropriate, definitive answers
regarding the Y2K readiness of our components, we are contacting suppliers
directly. We are installing all recommended Y2K patches on third-party
components. If a third-party component is not validated as Y2K compliant, we are
performing our own tests on the component, and fixing problems or replacing the
component as necessary.
Our most reasonably likely worst case scenario is that one of the
components of our Web site fails to sufficiently address Y2K issues and we do
not discover it until the failure happens. Examples of this type of failure
include a network router failing, database software causing data loss or
corruption, Web servers not responding correctly to browser requests or our ISP
portal losing Internet connectivity.
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If this failure requires us to replace or revise a major component of our
system, it could result in our Web site being completely down until the problem
is corrected. This could result in lost revenues, increased operating costs, the
loss of customers and other business interruptions, any of which could harm our
business.
In addition, our failure to adequately address Y2K compliance issues could
result in claims of mismanagement, misrepresentation or breach of contract. The
resulting litigation could affect our financial and other resources.
We are dependent upon vendors to provide significant software hardware,
network services and equipment. A Y2K disruption of the network services and
equipment provided by vendors could cause our members and visitors to consider
seeking alternative providers or cause an unmanageable burden on our technical
support staff.
Contingency Plan
As part of our contingency plan, production support staff will be on site
for the period immediately before, during and after December 31, 1999.
Operations staff will also be at or near our operations centers during this
period. Programming staff will be on call via pager or phone. The functionality
of the system will be validated immediately following the midnight change to
January 1, 2000. A "fail-safe" support policy has been implemented such that the
programming staff assumes there is a problem and reports in unless notified that
the systems are performing normally.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the exposure related to those debt instruments and credit facilities which are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at September 30, 1999 would not cause the fair value of
our cash and cash equivalents or the expense paid with respect to our
outstanding debt instruments to change by a material amount. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase our interest expense.
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BUSINESS
OVERVIEW
Our online greetings and gift hub offers consumers a convenient and simple,
integrated solution to selecting and sending greetings and gifts. Through our
Web site, which offers over 5,000 digital greetings incorporating rich media
features such as graphics, animations and music, consumers can select,
personalize and send greetings free-of-charge for personal and business
occasions. Our Web site is also merchandised with a wide selection of gifts that
consumers can select and arrange to send at the same time they send a digital
greeting. Our internal records indicate that in October 1999, our Web site was
visited more than 14.5 million times, visitors to our Web site viewed over 123
million Web pages and customers used our service to send over 5 million digital
greetings. Since consumers often use our Web site to communicate on personal and
business occasions, we enable our advertisers and ecommerce partners to
effectively reach online consumers who are likely to be receptive to advertising
messages, product offerings and promotions related to the specific occasions for
which they are sending greetings.
INDUSTRY BACKGROUND
Online Communications
The emergence of the Internet as a global medium has enabled millions of
people worldwide to share information, communicate and conduct transactions
electronically. International Data Corporation, or IDC, estimates that the
number of individuals accessing the World Wide Web will grow from approximately
142 million at the end of 1998 to more than 502 million by the end of 2003. One
of the most important developments contributing to this dramatic growth is the
rapid adoption of electronic mail, or email, as a means of communication. IDC
projects that the number of email messages sent in the United States alone will
grow from approximately 2.1 billion per day at the end of 1998 to 9.2 billion
per day at the end of 2003. We cannot be certain that these projections will be
met or that we will benefit from any growth that occurs. We believe that the use
of email is growing so rapidly because it is a very convenient and efficient way
to communicate, is essentially free and allows people to more effectively manage
personal and business relationships.
While text-based email is convenient and inexpensive, it often fails to
express the sentiment and individuality of the sender. Consumers increasingly
are attracted to a means of communication that will allow them to express
themselves in a dynamic and entertaining fashion, while minimizing the time and
costs associated with doing so. Digital greetings provide the convenience and
ease of use of text-based email while allowing consumers to use engaging color
and imagery to express a wide range of emotions and sentiments. As a result,
enhanced email services such as ours that leverage multimedia elements such as
graphics, sound and animation are gaining popularity with online consumers.
According to a Jupiter Communications survey, in 1998 sending electronic
greetings was the sixth most popular online activity, with 55% of online users
visiting electronic greeting and postcard Web sites regularly. We believe
consumers will be attracted to a centralized Web site that aggregates
entertaining and relevant content and allows for the easy personalization and
delivery of this content in the form of a digital greeting.
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Online Commerce and Gifting
Advances in technology and functionality have resulted in the increased
popularity of the Internet as a means for both businesses and consumers to
conduct transactions. This has led to significant growth in the volume of
Internet-based electronic commerce, or ecommerce, and this growth is expected to
continue. While many of these ecommerce transactions represent purchases for an
individual's personal consumption, the Internet also is gaining acceptance as a
convenient and effective means of identifying and purchasing gifts. Because of
the broad selection of products and the speed and convenience of online
shopping, we believe consumers will purchase an increasing proportion of gifts
over the Internet in the future.
Online Advertising
The Internet has emerged as an important mass medium for advertising and
direct marketing. We believe that many companies have begun to focus significant
marketing efforts on online activities because the Internet represents a
cost-effective advertising alternative that is more focused and measurable than
traditional methods. The Internet enables advertisers to more accurately and
effectively target consumers through the use of demographic, psychographic and
behavioral data. We believe that advertisers continue to seek a more effective
and efficient means to capture consumer dollars, build a consistent brand image
and leverage their existing traditional campaigns through advertising on the
Internet. In order to achieve these objectives, we believe that companies will
seek to advertise on Web sites that attract a broad range of consumers, more
accurately target members of this audience and allow advertisers to deliver
contextually relevant messages to consumers at the time at which they are making
purchasing decisions. We further believe that Web sites offering an effective
combination of content and commerce will be the most desirable online
destinations for consumers and the most attractive vehicles for online
advertisers.
THE EGREETINGS SOLUTION
We are a leading provider of digital greetings, offering consumers an
integrated approach to communications and gift giving. Our easy-to-use Web site
allows consumers to send personalized, content-rich digital greetings and a wide
variety of gifts. We also provide advertisers and commerce partners with access
to a large and readily targeted group of consumers.
Benefits to Consumers
Superior Value and Enhanced Communications. We enable individuals to convey
personal, business and occasion-related communications in a creative,
entertaining and personalized manner. Through a combination of compelling
content and robust technology, our Web site allows consumers to create
personalized multimedia messages free of charge. Through these enhanced
electronic messages, which include postcards, animated greetings and multimedia
greetings, consumers can more vividly express their sentiments, emotions and
personalities than is possible with paper-based products or conventional
text-based email.
Convenient Communications and Gift Giving. Our service eliminates the
inconvenience associated with traditional paper-based communications and retail
gift stores. Our
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Web site offers a variety of digital greetings that are grouped into "channels"
such as holidays, life events and particular interests, as well as a selection
of appropriate gifts that consumers can choose to send to a recipient. Our
channel format not only allows a consumer to quickly locate and customize an
appropriate communication, but also allows us to offer gift ideas targeted to a
consumer's channel selection. Our My Egreetings service allows registered
members to personalize our Web site by saving content, email addresses and
occasion reminders, with reminder emails sent to them prior to the date of
specified occasions. Our service not only streamlines the process by which
individuals can communicate and send gifts, but also provides a more convenient
way for them to acknowledge occasions and maintain relationships than is
possible through retail stores and many other Web sites.
Benefits to Advertisers and Ecommerce Partners
Targeted Online Opportunities. We enable advertisers and ecommerce partners
to deliver their messages and promote their products to a large and diverse
group of consumers on a highly targeted basis. Our integration of communications
and gift-giving services in one site provides these partners with access to
consumers at a time when they may be acknowledging an occasion and are therefore
likely to be receptive to specific advertising and relevant gift ideas. For
example, consumers who select a congratulatory greeting from our "Bouncing
Babies" channel are offered gift options and shown advertisements relevant to
this occasion. Through their registration and their selection of specific
digital greetings and gifts, members provide us with valuable demographic and
psychographic data about themselves and their recipients. We use this data to
help advertisers and ecommerce partners selectively target appropriate consumer
subsets from our rapidly growing base of registered members and recipients
through strategically placed advertisements and product offerings in specific
content channels and through direct marketing campaigns.
Viral Advertising. Our extensive content selection combined with our
technology platform provides a new vehicle through which advertisers, sponsors
and commerce partners can increase brand awareness and expand their online
presence. Digital greetings and animations containing sponsorships, product
descriptions or pictures can be incorporated into relevant channels of our Web
site and made available for consumers to personalize and send. Through
integrated digital greetings like these, consumers can send content that can
help an advertiser establish and build a brand image not only with the consumers
sending the digital greetings but also with the recipients of the digital
greetings. As a result, our digital greetings not only enable existing
advertising and product content to be more fully utilized, but also allow
advertisers and sponsors to more effectively utilize the engaging, interactive
and dynamic nature of the Web. Examples of some of our partners who have used
our service to leverage their brand in this way include the National Football
League, the movie studios New Line Cinema and Sony TriStar in connection with
the release of the films "Austin Powers: The Spy Who Shagged Me" and "Big Daddy"
and The RCA Records Label in connection with the release of Christina Aguilera's
single "What a Girl Wants."
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OUR STRATEGY
Our objective is to be the destination of choice on the Web for greetings
and gift-giving and to leverage that leadership position into additional revenue
opportunities. Key elements of our strategy include the following:
Create a Highly Integrated Communications and Gift-Giving Hub. We intend to
capitalize on our leadership position in the aggregation and distribution of
digital content to create a highly integrated communications and gift-giving
center. To create this "one-stop" service, we intend to enter into joint
sponsorship and ecommerce relationships covering a wide range of products,
services and price points. We believe that by displaying a variety of
occasion-appropriate gift-giving alternatives at the time a consumer is
preparing to send a digital greeting, we can further simplify the gift-giving
process and increase the likelihood that an ecommerce transaction will occur.
Build Brand and Increase Traffic. We intend to increase our brand awareness
and traffic to our Web site by leveraging the viral marketing qualities inherent
in our product. Each digital greeting sent represents a free advertisement for
our product and Web site because the recipient visits our Web site to receive
the digital greeting. This allows us to promote our brand, services and products
to each recipient of one of our digital greetings at no incremental cost to us.
We also intend to achieve greater offline awareness of our brand by targeting
print, television and outdoor advertising and entering into new co-promotional
arrangements such as those we have with major motion picture studios, major
record companies and a major television network. We also are continuing to
increase our online presence through integrated distribution partnerships,
banner advertising, contests, promotions and targeted marketing activities via
email.
Create an Increasingly Personalized Environment for the Consumer. We intend
to offer consumers an increasingly personal and engaging experience in order to
retain our existing consumer base and attract new consumers. We currently offer
registered members features such as a personal address book, a personal calendar
of reminders for special occasions, the advanced scheduling of delivery of
digital greetings and a personal outbox that retains greetings sent by a
registered member for 30 days. We recently added features that allow our
registered members to further personalize their environment by saving their
favorite digital greetings to their own My Favorites area and creating their own
content. In addition, we intend to increase the amount of customized content we
offer based on consumers' interests, gender, age and location, including the
development of international Web sites that utilize a localized interface,
localized content and the local language. We believe these features will make it
easier for our consumers to access the content most relevant to their needs and
thus will drive them to our Web site and encourage them to use our services more
frequently. We also intend to allow our registered members to maintain digital
greeting and gift history profiles and to create gift "wish lists" for both
recipients and senders of gifts, thus further simplifying the process of
sending, receiving and acknowledging communications and gifts. We believe our
ability to suggest an appropriate and personalized gift for a consumer based on
the content channel, the selected greeting and the sender's and recipient's gift
histories will increase the likelihood of a gift-giving transaction.
Enhance our Consumers' Experience by Exploiting Evolving Broadband
Technologies. We expect to leverage infrastructure improvements in broadband
technologies such as cable, satellite and high-speed telephone access, including
DSL, to develop products and services that are increasingly interactive and
entertaining for our consumers. As these broadband technologies continue to
evolve, the speed and quality of transmission of data-
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intensive content over the Internet will enable us to incorporate richer content
and advanced functionality, including video and increased interactivity into our
range of products and services. We believe that these enhancements will allow us
to optimize the richness of our existing content and to develop new content with
increased multimedia capabilities that will improve our consumers' experience
and increase the use of our services.
Leverage Multiple Revenue Streams. We intend to capitalize on the breadth
and diversity of our content and our consumer community to create an
advertising- and transaction-rich environment and generate multiple revenue
streams. As of October 31, 1999, we had compiled demographic and psychographic
data on more than 8.4 million registered members. In addition, due to the nature
of our service, we collect significant additional data on the unregistered
recipients of the digital greetings sent by our registered members. We believe
our ability to deliver large demographically, psychographically and
geographically profiled audiences will be a valuable asset in developing
additional advertising, direct marketing and ecommerce services. We anticipate
our revenues primarily will be derived from the following activities:
- Advertising -- We intend to pursue additional advertising and sponsorship
relationships across a broad range of products and services.
- Ecommerce -- We believe our service provides ecommerce partners with a
unique, timely and contextual opportunity to reach consumers. We believe
the ease and convenience of our service will encourage individuals to use
our service to purchase products that they already intended to send and
may even encourage them to purchase products and gifts they might not
otherwise have sent. Although revenues from ecommerce activities
represented less than 1% of our revenues for the nine months ended
September 30, 1999, we intend to significantly expand our ecommerce
initiatives to provide our consumers with a greater variety of product
offerings. For example, we recently started offering products through our
Web site from vendors such as Godiva, Reel.com, Red Envelope Gifts Online
and Petstore.com. In addition, we have entered into an agreement with
Escalate, Inc. to provide us with ecommerce services that will enable us
to sell products directly through our Web site.
- Direct marketing -- We intend to enter into more promotional
relationships in order to engage in direct marketing activities that
capitalize on the interactive nature of our service. For example, we
intend to send emails on behalf of advertisers and sponsors promoting
their products, services or special events to our consumers who have
elected to receive communications like these.
THE EGREETINGS.COM WEB SITE
Our Web site is designed to help consumers express their sentiments,
emotions and personalities and to enhance their ability to communicate and send
gifts in a timely and effective way. Consumers can choose from thousands of
content options to convey a specific message or sentiment in a highly
personalized manner. In addition, we provide consumers with access to hundreds
of gift options appropriate for a wide range of occasions and sentiments.
The Home Page
Registered members receive a personalized welcome greeting when they visit
our home page. If a registered member has selected the automatic log-in option,
either during
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registration or at sign-in, she does not need to re-enter an email address and
password to send a digital greeting if she is logging in from the same computer.
From the home page, a consumer might send digital greetings, visit our Gift
Center or browse other features or promotions.
My Egreetings
To increase the value of our service as a resource for managing personal
and business communications, we offer our registered members the following
personalization features under our My Egreetings section:
- My Address Book -- Registered members can store information on individual
recipients and they can combine these individuals into mailing lists or
"groups," such as family, friends or clients. For each recipient,
registered members can store an email address, full name and reminders of
special dates such as birthdays and anniversaries.
- My Reminders -- Our reminder service allows registered members to request
advance notification by email of special dates. In addition, registered
members can link a reminder with a unique recipient in their My Address
Book.
- My Favorites -- This service allows registered members to select their
favorite content and gift selections and store them in a single,
easy-to-access location on our Web site.
- Perfect Memory -- This feature allows our registered members to schedule
delivery of digital greetings on a date up to three months in the future.
For example, a registered member could pre-order and schedule future
delivery of all of her year-end holiday digital greetings in October.
- My Outbox -- This feature provides registered members with a 30-day
history of their activity on our Web site, as well as a list of all
digital greetings scheduled to be delivered through Perfect Memory. After
a digital greeting has been sent, a registered member can check the
status of a digital greeting and view or resend the digital greeting for
30 days.
- My News -- Registered members can elect to receive our biweekly
newsletter and/or special promotional offerings via email.
- My Info -- Registered members can edit their account information.
Selecting a Digital Greeting
Consumers can select content by using our channels and subchannels or by
using our search feature. Most consumers elect to locate content by using our
channels, which are categorized based on holidays, life events and interests. If
a consumer does not find the desired digital greeting among our most popular
digital greetings in a particular channel, she can elect to continue searching
in one of our subchannels, which are structured to match a consumer's
sentiments. If a consumer is unable to locate the desired content through our
channels or subchannels, she may choose to use our search feature. Our search
feature allows consumers to locate content by specifying a particular
"personality" for the message to be conveyed, the type of imagery desired and
the occasion or reason for sending the greeting.
Once a consumer selects the content for a digital greeting, the content
options are presented in thumbnail at-a-glance versions, with the most popular
greetings (representing a range of sentiments appropriate to the occasion)
presented first. Consumers can choose
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from postcards, animated greetings and multimedia greetings. Consumers can also
upload their personal digital photos and integrate them into digital greetings.
In addition, a selection of gifts are presented simultaneously, as well as
partners' advertisements and other value-added content.
Personal Message
When a consumer has selected a digital greeting, a full-size view of the
digital greeting appears on the page. At this time, the consumer can choose to
write a personal message to send with the selected digital greeting or can
select a different digital greeting. Once a consumer has decided on a digital
greeting, she is prompted to address the digital greeting to one or more
recipients, either by typing in the email address or addresses or by selecting a
name or names from the consumer's My Address Book. The consumer then is prompted
to add a personal message of her own creation. The sender's message, of any
length, is incorporated directly into the artwork of the postcard or animation,
creating a high quality image that conveys the desired sentiment or emotion for
a particular relationship or occasion.
The Preview
Once the personalized message is complete, the consumer can elect to
preview the digital greeting before sending it. This allows the consumer to see
the message exactly as it will appear to the recipient. The consumer can edit
the message here or begin again with a different digital greeting. Once the
consumer is satisfied with the look and content of the digital greeting, she can
elect to send it immediately or on any date up to three months in the future.
Confirmation Page
The consumer is shown a confirmation page on our Web site when the order
has been processed. At this time, the consumer once again is presented with gift
suggestions that are appropriate to the occasion.
Confirmation Email
When the digital greeting has been sent to the recipient, the consumer
receives a confirmation email indicating that her digital greeting has been
sent. A registered member can verify whether a particular digital greeting has
been received by viewing the status of that digital greeting in her My Outbox.
Selecting a Gift
An important benefit of our service is the opportunity to communicate by
sending a gift as well as a digital greeting. We have established relationships
with numerous vendors to offer a wide variety of gifts through our Web site. We
merchandize appropriate gifts along with our digital greetings in several areas
of our Web site:
- Gift Center -- Gift selections are organized by departments such as best
sellers, seasonal occasions, business, weddings, birthdays and other
special occasions. Consumers can browse the departments to find the right
gift or they can click to the Web site of one of our ecommerce partners
for additional shopping options. We also offer consumers the opportunity
to purchase gift certificates from Flooz, Giftcertificates.com and
Sparks.com, which can be used to purchase goods over the Internet from
hundreds of vendors.
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- Greeting channels -- Throughout the greeting channels on our Web site,
gifts are merchandized to complement the occasions and sentiments
associated with those channels. Each greeting channel provides easy
access to the related Gift Center department for convenient browsing and
shopping.
- After sending a digital greeting -- Once a digital greeting has been
sent, the sender is presented with a small selection of gift
recommendations that are appropriate for the occasion.
To further increase the value and convenience of our gift-giving services,
we intend to allow our registered members to maintain gift history profiles and
to create gift "wish lists" for both recipients and senders of gifts.
Receiving a Digital Greeting
A recipient of a digital greeting receives an email message from the sender
with the subject specified by the sender in the subject field. This email
contains an announcement that the recipient has been sent a digital greeting
that can be accessed via a link to our Web site. This link takes the recipient
directly to the Egreetings viewing center, where the recipient's digital
greeting is displayed. Also appearing on this page are links that allow the
recipient not only to reply to the sender with a digital greeting of his own,
but also send a digital greeting to someone else.
DEVELOPMENT OF DIGITAL GREETING AND GIFT CONTENT ON OUR WEB SITE
Content Acquisition and Creation
As of November 30, 1999, our content library included over 5,000 digital
greetings. Of these greetings, approximately 21% were produced and owned by us,
approximately 49% were wholly produced by us but contained content owned by
third parties and approximately 30% were created and owned by third parties.
Currently, we have 25 people dedicated to the creation and acquisition of
content, 21 of whom are producers, artists and sound designers focused on
creating original content and four of whom are responsible for content
acquisition.
The members of our content acquisition group identify prospective content
partners, negotiate licensing arrangements, integrate content into digital
greetings and our Web site and manage ongoing relationships with our content
partners. We acquire content from a variety of sources, including traditional
greeting card publishers, entertainment companies, sports organizations and
several recognized independent artists. Our traditional greeting card publishing
partners include Gibson Greetings, Allport Editions, Ward One, Snafu Designs,
Inc. and Portal. We also have obtained content from entertainment companies such
as New Line Cinema, Paramount Pictures, Sony TriStar, Fox, Miramax Films,
Universal Studios, BMG Entertainment and United Media. In November 1999, we
entered into a two-year content agreement with the National Broadcasting
Company, Inc. pursuant to which we have the right to create and distribute
digital greetings for a minimum of five NBC television programs for each
six-month television season, which amount may be increased, at NBC's option, to
a maximum of 30 NBC television programs for each season.
The majority of our third-party content is obtained pursuant to exclusive
licensing arrangements and promotional partnerships. Under our standard
licensing contracts, the licensor grants us an exclusive right to reproduce and
distribute the licensed property in
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connection with digital greetings and we pay the licensor a royalty for the use
of its content. We also enter into promotional arrangements pursuant to which a
third party provides us with content at no cost in exchange for promotional
opportunities on our Web site. In addition, in some cases, a third party will
pay us to create and promote the use of digital greetings utilizing its content.
Product Technologies -- Future Offerings
We intend to introduce several new technologies to enhance our product
offerings and personalization features within the next 12 months, including the
following:
- Address book profiles -- Registered members will be able to create
profiles to specify the types of digital greetings or gifts that they
would like to send to individuals or groups within their My Address Book.
- Build-your-own greetings -- Consumers will be able to create their own
digital greetings by choosing from a menu of images and elements.
- Gift "wish lists" -- To further increase the value and convenience of our
gift-giving services, we intend to allow our registered members to
maintain gift history profiles and to create gift "wish lists" for both
recipients and senders of gifts.
PROMOTIONAL ACTIVITIES DIRECTED TO INCREASE THE USE OF OUR WEB SITE
We engage in several different marketing activities directed at consumers.
Our consumer marketing activities are designed to do the following:
- Increase consumer traffic to our Web site. We endeavor to increase the
traffic to our Web site primarily through the following means:
- Relationships with distribution partners -- Our distribution
relationships with portals, online service providers, Web-based email
services and entertainment and other Web sites direct consumer traffic
to our Web site. These relationships provide us with exposure to a
large and diverse consumer base and allow consumers to easily reach
our Web site by clicking on links on our partners' Web sites. For
example, Microsoft Hotmail customers can link to us from the Hotmail
email composition page.
- Promotional activities -- We use promotions and engage in other types
of direct marketing activities directed at our registered members to
increase the frequency of member visits and the number of transactions
per visit. For example, in connection with our promotion with the
National Football League, consumers that sent an NFL digital greeting
were automatically entered into a sweepstakes.
- Viral marketing -- Each digital greeting sent creates an opportunity
to acquire the recipient as a new consumer because the recipient must
visit our Web site to receive the digital greeting. This allows us to
promote our brand, services and products to each recipient of one of
our digital greetings at no incremental cost to us.
- Web site functionality and appeal -- We strive to make our Web site
highly appealing to and functional for consumers. We believe that
consumers will return to our Web site often and use our services
frequently as a result of a
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positive, efficient experience. To this end, we intend to further
increase the functionality and appeal of our Web site over time.
- Increase use of our gift service. As our consumers browse for, select and
send digital greetings, we direct products and services to them based on
the category of digital greeting they are focused on at that time. We
also direct our customer acquisition efforts to target consumers who are
more likely to buy products on the Internet, and we use direct member
communications and promotions to encourage consumers to visit our Gift
Center.
- Build brand recognition. Our efforts to build brand awareness include a
combination of online and offline advertising activities, including print
media, Internet trade media, outdoor media and radio advertisements. We
also have focused on building relationships with a broad range of
consumer and trade press organizations. In addition to continuing to use
a combination of online and offline marketing communications, we intend
to increase our use of broad-based mass media such as television and
radio to establish a leading brand position in the electronic greeting
and online gifting market. We also intend to use promotions that
encourage our members to market and extend our brand for us by sending
multiple digital greetings to their friends, family and business
associates.
ADVERTISING, SPONSORSHIP AND ECOMMERCE OPPORTUNITIES FOR OUR BUSINESS PARTNERS
Advertising and Sponsorship
We sell advertising and sponsorships through our direct advertising sales
department, with eight sales people located in San Francisco, eight sales people
located in New York and two sales people located in Los Angeles as of October
31, 1999. We intend to target national advertisers that are shifting advertising
dollars from offline to online advertising. We also intend to continue to pursue
sponsorship and promotional arrangements, which generally have longer terms and
higher dollar values than typical banner advertising. Revenues from advertising,
sponsorship, promotional and direct marketing activities accounted for virtually
all of our revenues for the nine months ended September 30, 1999. For the nine
months ended September 30, 1999, advertising revenues from Excite@Home Network
accounted for approximately 40% of our total revenues and advertising revenues
from Informix accounted for approximately 13% of our total revenues.
Set forth below is a list of our advertisers from whom we had derived more
than $10,000 in revenues in 1999 as of September 30, 1999:
Avenue A
Ask Jeeves
BabyCenter
Big Star Entertainment
Buy.com
Calyx & Corolla
Clinique
eFax
Excite@Home Network
Fresh Flower Source
Flooz
FutureCard
Games2Learn.com
Godiva
GreatFood.com
iprint
Informix
KBKids.com
match.com
National Football League
Netgrocer
Omaha Steaks
Orvis
PetStore.com
RedEnvelope Gifts Online
Sparks.com
Third Age Media
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Ecommerce
We began offering ecommerce services in February 1999. Our revenues from
ecommerce activities have been less than one percent to date, although we expect
to derive an increasing percentage of our revenues from ecommerce activities in
the future. Our goal is to enter into ecommerce relationships with leading
vendors in a variety of gift categories. Currently we have ten people focused on
implementing our ecommerce initiatives, in addition to our advertising sales
department, which also devotes time to managing relationships with our ecommerce
partners. Our ecommerce relationships typically have several components,
including the placement of vendors' banner advertisements in content channels on
our Web site that are relevant to their products and the placement of links
containing pictures of vendors' products in our Gift Center and relevant content
channels on our Web site. We also may send promotional emails featuring vendors'
products to our registered members who have elected to receive communications
like these. Our ecommerce partners pay us a percentage of net revenues received
by them for transactions by consumers who have been referred to their Web sites
through links on our Web site or through links embedded in our direct marketing
emails. During the ten months ended October 31, 1999, we had ecommerce
relationships with the following merchants:
CDNow
Flooz
Flowerbud.com
FTD
Giftcertificates.com
Giftspot.com
Gifts24.com
Godiva
GraceGourmet
Healthshop.com
HLH Entertainment/Monarch
Ibeauty
Illuminations.com
iprint
Miadora
PETsMART.com
Petstore.com
Qdecor.com
Reel.com
RedEnvelope Gifts Online
Send.com
toysmart.com
Whatshotnow
Zootsports.com
In addition to enabling our consumers to purchase products from the Web
sites of our ecommerce partners, in November 1999 we entered into an agreement
with Escalate, Inc. to provide us with ecommerce services that enable us to sell
products and services directly through our Web site. Under the agreement,
Escalate aggregates and supplies us with access to a wide range of products that
are available directly from our Web site. Escalate also has agreed to process
orders and coordinate the fulfillment and shipment of orders for products sold
through our Web site.
ASSISTANCE FOR CUSTOMERS USING OUR WEB SITE
We believe that a high level of customer service and support is important
to retaining and expanding our customer base. We provide free customer support
assistance via email and telephone, and it is our policy to respond to all
customer inquiries within one business day. Our customer support team handles
general questions about how to use our Web site and serves as a clearinghouse
for feedback regarding customer satisfaction. Customer feedback is funneled to
our data warehouse system, where it is correlated with other customer
information that we use to improve our Web site, services and customer retention
and acquisition. Our customer support operations are fully integrated with our
system architecture, and customer support personnel have access through our Web
site to the transaction processing components of our service, which enables them
to easily trace
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individual transactions and quickly identify problems. As of October 31, 1999,
we employed 13 full-time customer support representatives.
OUR RELATIONSHIP WITH GIBSON GREETINGS, INC.
In December 1997, we entered into a content provider and distribution
agreement with Gibson Greetings, Inc., the third largest producer of paper-based
greeting cards in the United States. Pursuant to this five-year agreement, we
are the only company, other than Gibson itself, with the right to distribute
Gibson's content in the form of digital greetings. In exchange for this right,
we pay Gibson a royalty based on the number of digital greetings sent that
contain Gibson's content. We paid Gibson royalties of $358,000 in the nine
months ended September 30, 1999 and $112,000 in 1998 pursuant to this agreement.
In addition to the content we license, our relationship with Gibson has provided
us with access to expertise in the development and marketing of content,
introductions to movie studios and access to artists to whom we may not
otherwise have had access. This agreement can be terminated by either party
prior to December 2002 if the other party breaches a material obligation under
the agreement or by us if Gibson is acquired by American Greetings or Hallmark.
Gibson may terminate our rights to exclusivity if our consumers do not send at
least approximately 2.8 million digital greetings via our Web site in each month
during the term of the agreement and if this minimum delivery requirement is not
exceeded in any of the three months following the month in which the shortfall
occurred.
In November 1999, Gibson and American Greetings announced the execution of
an agreement for American Greetings to acquire Gibson. American Greetings
competes with us in the digital greetings market through its affiliated company
AmericanGreetings.com. If Gibson or American Greetings fail to perform under the
terms of our license agreement, the amount of content we are able to offer our
consumers will decrease significantly, which would harm our business.
In addition to our content provider and distribution relationship with
Gibson, as of September 30, 1999, Gibson owned a total of 3,034,328 shares of
our preferred stock and warrants to purchase an additional 3,007,854 shares of
our preferred stock (as adjusted to reflect the conversion of each share of
preferred stock into two shares of common stock). As of September 30, 1999,
these shares and warrants to purchase shares represented approximately 27.8% of
our outstanding capital stock. If the acquisition of Gibson by American
Greetings is consummated, these shares and warrants to purchase shares of our
capital stock will be owned by American Greetings. As a competitor, American
Greetings may have interests that are different than ours, and it may take
actions that would harm our business despite its status as our largest
stockholder. In addition, Frank O'Connell, the Chairman, President and Chief
Executive Officer of Gibson, is a member of our Board of Directors. Pursuant to
the terms of our agreement with Gibson, Gibson's right to elect a Board member
will terminate upon the completion of this offering.
OUR RELATIONSHIP WITH THE NATIONAL BROADCASTING COMPANY, INC.
In November 1999, we issued and sold 3,712,871 shares of Series G preferred
stock to the National Broadcasting Company, Inc. for gross proceeds of
approximately $7.5 million in cash (less approximately $1.0 million of related
professional fees) and an advertising credit of approximately $7.5 million.
Advertising will be provided to us pursuant to a two-year advertising agreement
that contains a pre-approved six-month advertising schedule
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and provides that no less than 60% of the value of the advertising provided to
us will be broadcast during prime time hours. In November 1999, we also entered
into a two-year content licensing agreement with NBC pursuant to which we have
the right to create and distribute digital greetings for a minimum of five NBC
television programs for each six-month television season, which amount may be
increased, at NBC's option, to a maximum of 30 NBC television programs for each
season. Under the NBC agreement, digital greetings are currently scheduled to be
developed for the television programs "The Tonight Show" and "Providence" and
for the television miniseries "The Tenth Kingdom," "Jason and the Argonauts" and
"The 70's." We will promote the NBC digital greetings on our Web site and
through email messages to our members who have elected to receive communications
like these.
THE TECHNOLOGY INFRASTRUCTURE THAT SUPPORTS OUR WEB SITE'S FUNCTIONS AND
FEATURES
Infrastructure
We have invested significant resources to develop the platform that is used
to support our products and services. Our system is based on a flexible
architecture that supports rapid development and incorporates both proprietary
technology and commercially available licensed technology. Our system is also
designed to provide high degrees of availability, reliability, scalability,
extensibility and performance.
- Availability and Reliability. We achieve a high degree of availability
and reliability by enforcing carefully devised operational procedures,
high quality software development procedures and stringent quality
assurance procedures. Our system is designed and built to provide a high
level of fault tolerance and maximum recoverability. Our system achieves
a fast response time by using efficient computer programming practices,
elaborate caching systems and an automatic load balancing system.
- Scalability. Our system achieves scalability by distributing the
processing load across multiple processors while efficiently managing and
recycling system resources. This enables us to increase our system's
processing capacity by adding more hardware. Our software system is
designed to be portable across different operating systems platforms,
which allows us to achieve scalability in a cost-effective manner.
- Extensibility and Performance. Our open system enables us to easily
interface with external systems. At the heart of the system is a
relational database management system hosting our customer, product and
transactional data. This database is supplemented by a sophisticated data
warehouse system that is a mirror copy of the production database. The
production database maintains data regarding customers' interaction with
our Web site and a number of other data points, including member data,
product data and purchase data. An online analytical processing tool is
used to extract reports from our data warehouse. Daily, weekly, monthly
and ad hoc reports are produced from our data warehouse system to support
targeted marketing activities. We intend to use our data warehouse
information to provide fully personalized merchandising so that cards and
gifts offered to consumers actually match their expressed interests as
well as their behavior while on our Web site. We use a merchandising tool
to assign digital greetings and gifts to appropriate channels and a
content management tool that allows us to put the appropriate components
together and to process changes to the Web site in an orderly manner.
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Our system is based on a Sun/Solaris platform that is hosted at Exodus
Communications in Santa Clara, California. We manage and monitor our servers and
our local area network remotely from our Santa Clara office, where our support
engineering staff resides. Our engineering department currently consists of 30
engineers organized into the following groups: core development, ecommerce,
development support, new architecture and quality assurance. We expect to
significantly increase our hiring of engineers over the next several months.
New Architecture under Development
We are in the process of designing the next generation of our system
architecture. We expect this new system to be based on a multi-tier architecture
that utilizes component-based technologies. We believe this will allow us to
route and distribute the processing load between appropriate components and
across multiple layers of servers to achieve higher levels of flexibility,
reliability, performance and scalability. The new architecture is expected to be
in place by May 2000.
COMPETITION IN THE DIGITAL GREETING, GIFT-GIVING AND ECOMMERCE MARKETS
We believe the principal competitive factors affecting our market include
the ability to provide the following:
- compelling and diverse content;
- value-added features, products and services;
- a wide range of ecommerce partners and products;
- a large and diverse audience; and
- demographic and psychographic data that is desirable to advertisers.
We believe that we currently compete favorably with respect to these
factors. Unlike many of our largest competitors who limit themselves to offering
consumers only their own content and products, we offer consumers digital
greeting content and gift options from a wide selection of vendors. We believe
our competitors' approach reduces the appeal of these companies to potential
distribution channels, as a broader content collection is likely to appeal to a
larger and more diverse audience, thus producing higher traffic, increased
consumer activity level and more desirable demographics. In addition, many of
our largest competitors focus primarily on social expression themes
traditionally associated with paper greeting cards. We believe that our approach
to electronic greetings and online gifting as a form of interactive
communication that extends beyond specific and mainstream occasions provides us
with a much larger potential market. In addition, we are one of the few Web
sites to integrate a broad and diverse base of digital greetings and gifts. We
believe this integration will help us to attract and retain a larger and more
diverse group of consumers, which will increase our appeal to advertisers and
commerce partners. Our more than 8 million registered members have provided us
with demographic data that most of our competitors do not collect. Although we
recently eliminated the requirement that consumers register in order to use our
service, we continue to offer personalization features that are available only
to registered members. Accordingly, we believe that we will continue to collect
a significant amount of demographic data that most of our competitors do not
collect. Finally, we believe that our technology infrastructure is superior to
that of any of our competitors and allows us to better address the needs of
distribution, content and ecommerce partners.
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Despite the fact that we believe we currently compete favorably with regard
to the factors discussed above, our market is evolving rapidly and we compete
with many Internet companies for content, consumer time and dollars, advertising
revenues and ecommerce revenues. We expect this competition to increase. We
compete, in particular, with the following types of companies:
- companies or their affiliates that offer digital greetings via the
Internet, such as Blue Mountain Arts, American Greetings, Hallmark and
123greetings.com;
- Internet content aggregators and other Internet companies that offer
digital greeting cards, such as Amazon.com, America Online, Microsoft and
Yahoo!;
- Internet companies that focus on gifts; and
- media, entertainment and other companies offering electronic greetings.
In October 1999, Excite@Home Network announced an agreement to acquire
Bluemountain.com, the online business of Blue Mountain Arts. Excite@Home has
significantly greater resources than we do, and we expect it will use some of
these resources to focus on the digital greetings market if its acquisition of
Bluemountain.com is completed. This could harm our business and our ability to
compete effectively.
In addition, in November 1999, Gibson and American Greetings announced the
execution of an agreement for American Greetings to acquire Gibson. American
Greetings also is the parent company of American Greetings.com, one of our
competitors in the digital greetings market. Gibson supplied us with the content
for approximately 36% of all digital greetings sent from our Web site in the
quarter ended September 30, 1999. If the acquisition of Gibson by American
Greetings is consummated, American Greetings will become our largest
stockholder. As a competitor, American Greetings interests may diverge from our
interests, and it may take actions that would harm us competitively, despite its
status as our largest stockholder.
Many of our current and potential competitors in the Internet market have
significantly greater financial, editorial, technical and marketing resources
than we have. Many of them also have longer operating histories, greater name
recognition, more traffic to their Web sites and more established relationships
with advertisers and advertising agencies than we have. These competitors may be
able to undertake more extensive marketing campaigns, adopt aggressive pricing
policies and devote substantially more resources to developing Internet content
and services than us. In addition, many of our current and potential competitors
are retailers with established brand names and consumer loyalty, and we may be
unable to attract consumers away from these competitors.
THE IMPACT OF GOVERNMENT REGULATION ON OUR WEB SITE AND OUR BUSINESS
We are subject to the same federal, state and local laws as other
businesses on the Internet. However, it is currently unclear how our business
may be affected by the application of existing laws governing issues such as
intellectual property, taxes, libel, obscenity and export or import matters,
because the vast majority of these laws were adopted prior to the advent of the
Internet. As a result, these current regulations do not fully contemplate or
address the unique issues of the Internet and related technologies. Changes in
laws intended to address these issues could create uncertainty in the Internet
marketplace which, in turn, could reduce demand for our services or increase the
cost of doing business due to increased litigation or service delivery costs.
Furthermore, due to the increasing popularity and use of the Internet and other
online services, a number of laws
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and regulations are likely to be adopted with respect to the Internet or other
online services. The following are some of the evolving areas of law that are
relevant to our business:
- Privacy Laws. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to use the information in
our databases to generate revenues.
- Content Regulation. Both foreign and domestic governments have adopted
and proposed laws governing the content of material transmitted over the
Internet. These include laws relating to obscenity, indecency, libel and
defamation. We could be liable if content delivered by us or placed on
our Web site violates these regulations.
- Sales and Use Tax. We currently do not collect sales, use or other taxes
on the sale of goods and services through our Web site. As we engage in
increased ecommerce activities, states or foreign jurisdictions may seek
to impose tax collection obligations on us. If they do, these obligations
could limit the growth of electronic commerce in general and limit our
liability to profit from the sale of goods and services over the
Internet.
Because of the rapidly evolving and uncertain Internet regulatory
environment, we cannot predict how these laws and regulations might affect our
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm us by subjecting us to liability or forcing us to change
how we do business.
Because our services are available over the Internet in multiple states and
foreign countries, other jurisdictions may claim that we are required to qualify
to do business in each such state or foreign country. We currently are qualified
to do business only in California and New York. Our failure to comply with
foreign laws or to qualify as a foreign corporation in a jurisdiction where we
are required to do so could subject us to taxes and penalties for the failure to
qualify and could result in the inability to enforce contracts in these
jurisdictions. Any new legislation or regulation like this, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to
our business, could have a negative effect on our business.
OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS IN OUR WEB SITE AND OUR
BRAND
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary intellectual
property rights in our products and services. We have entered into proprietary
information and invention assignment agreements with our employees and
contractors, and nondisclosure agreements with third parties to whom we disclose
confidential information in order to limit access to and disclosure of our
proprietary information. Despite our efforts in this regard, third parties may
attempt to disclose, obtain or use our proprietary information. In addition,
third parties may infringe or misappropriate our proprietary rights, which could
harm our business. The validity, enforceability and scope of protection of
proprietary rights in Internet-related industries is uncertain and still
evolving.
We have registered the name "E-greetings" as our trademark and service mark
in the United States. We have also filed applications in the United States and
several foreign
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countries to register a number of our other trademarks and service marks and
plan to file additional trademark applications both in the United States and
internationally. A substantial amount of uncertainty exists concerning the
application of copyright and trademark laws to the Internet and other digital
media, and existing laws may not provide adequate protection of trademarks,
service marks, our content or our Internet address, commonly referred to as a
"domain name." Furthermore, effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are made available online.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademark or copyrighted material, to
third parties. Despite our efforts to ensure that the quality of our brand is
maintained by licensees, our current or future licensees may take actions that
might harm the value of our proprietary rights, brand or reputation, which could
harm our business.
To date, we have not been notified that our trademarks or service marks
infringe the intellectual property rights of third parties, but third parties
may claim infringement by us with respect to past, current or future
intellectual properties. Any claim like this, whether meritorious or not, could
be time consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements might not be available on terms acceptable to us or at all.
Additionally, enforcing our intellectual property rights could entail
significant expenses and could prove difficult or impossible. As a result, the
defense of infringement claims against us and the costs associated with
enforcing our intellectual property rights could harm our business.
OUR EMPLOYEES
As of October 31, 1999, we had 148 full-time employees. We believe that our
relations with our employees are good. None of our employees are represented
under collective bargaining agreements.
OUR FACILITIES
We currently lease approximately 70,186 square feet of office space in San
Francisco, California pursuant to a lease that expires in August 2009. We also
have sales offices in New York, New York and Los Angeles, California, and
technical facilities in Santa Clara, California. We believe that our existing
facilities are adequate to meet our needs for the foreseeable future and that
future growth can be accommodated by leasing additional or alternative space
near our current facilities.
LEGAL PROCEEDINGS AFFECTING OUR BUSINESS
We are not presently involved in any legal proceedings.
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<PAGE> 60
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding our directors,
executive officers and other key employees as of November 1, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gordon M. Tucker................... 44 Chief Executive Officer and
Director
Andrew J. Moley.................... 35 Senior Vice President and Chief
Financial Officer
Behrouz Arbab, Ph.D. .............. 48 Senior Vice President and Chief
Technical Officer
Paul Lipman........................ 30 Senior Vice President, Business
Development
Kenneth W. Wallace................. 57 Senior Vice President, Sales
Sarah S. Anderson.................. 32 Vice President, Marketing
Donald E. Chaney................... 45 Vice President, Engineering
Joseph T. Mangione................. 49 Vice President, Sponsorship Sales
Andrew P. Missan................... 37 General Counsel
Stewart Alsop...................... 47 Director
Charles A. Holloway, Ph.D.(2)...... 63 Director
Brendon S. Kim(1).................. 32 Director
Peter Nieh(2)...................... 33 Director
Frank J. O'Connell................. 56 Director
Lee Rosenberg(1)................... 43 Director
</TABLE>
- -------------------------
(1) Member of compensation committee.
(2) Member of audit committee.
GORDON M. TUCKER -- Gordon Tucker joined Egreetings in February 1999 as our
Chief Executive Officer and as a director. From July 1994 to February 1999, Mr.
Tucker served as Chief Executive Officer and Chairman of the Board of Directors
of IdeaNet Management Company, a "virtual" management company serving
early-stage technology companies with venture capital financial support. In his
capacity as Chief Executive Officer of IdeaNet, from November 1996 to March
1998, Mr. Tucker served as acting Senior Vice President of Excite Studios,
Ecommerce and Communities at Excite, Inc. (now Excite@Home), an Internet media
company. From September 1993 to July 1994, Mr. Tucker was President, Chief
Executive Officer and a director of Micrografx, Inc., a graphics software
company. Earlier in his career, Mr. Tucker served as Brand Manager for The
Procter & Gamble Company, a leading consumer products company, and as Executive
Vice President for LoJack Corporation, a wireless communications company. Mr.
Tucker holds a B.B.A. degree from the University of Michigan School of Business
Administration.
ANDREW J. MOLEY -- Andrew Moley joined Egreetings in July 1999 as our
Senior Vice President and Chief Financial Officer. From July 1995 to July 1999,
Mr. Moley served as the Chief Financial Officer, Executive Vice President and a
director of CMC Industries, an electronic manufacturing services company. From
February 1993 to November 1994, Mr. Moley was the Chief Financial Officer of
Silicon Valley Technology, a contract manufacturing company. Mr. Moley holds a
B.S. degree in Economics from the Wharton
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School of the University of Pennsylvania and an M.B.A. degree from the Stanford
University Graduate School of Business.
BEHROUZ ARBAB, PH.D. -- Behrouz Arbab joined Egreetings in June 1999 as our
Senior Vice President and Chief Technology Officer. From May 1997 to June 1999,
Dr. Arbab served as the Vice President of Engineering at Semio Corporation, an
Internet software company. From September 1996 to May 1997, Dr. Arbab was the
Director of Server Technologies at Cisco Systems, Inc., an Internet networking
company. From January 1994 to September 1996, Dr. Arbab served as Senior
Director at Oracle Corporation, a software and information management company.
Dr. Arbab has also held management positions at Computer Power Software Group,
Database Consulting Associates and Harwell Computer Power. Dr. Arbab holds a
B.S. degree from Arya-Mehr University of Technology and a Ph.D. degree in
Computer Science from the University of Wales.
PAUL LIPMAN -- Paul Lipman joined Egreetings as our Vice President of
Business Development in June 1996, and is currently serving as our Senior Vice
President of Business Development. From September 1990 to July 1994, Mr. Lipman
was a systems analyst for Andersen Consulting, a management and technology
consulting firm, in Europe, where he designed and built trading systems and
advised financial institutions on the use and implementation of information
technology. Mr. Lipman holds a B.S. degree in Theoretical Physics from Victoria
University of Manchester, England and an M.B.A. degree from the Stanford
University Graduate School of Business.
KENNETH W. WALLACE -- Kenneth Wallace joined Egreetings in June 1999 as our
Senior Vice President of Sales. From May 1993 to June 1999, Mr. Wallace served
as Vice President and Group Publisher for Rodale Press, a magazine publishing
company. From December 1987 to March 1993, Mr. Wallace was the Vice President of
Advertising at Parade Magazine, a magazine publishing company. Mr. Wallace holds
a B.B.A. degree from St. Johns University.
SARAH S. ANDERSON -- Sarah Anderson joined Egreetings in June 1999 as our
Vice President of Marketing. From February 1997 to June 1999, Ms. Anderson was
the Vice President and General Manager of SegaSoft Inc., an interactive game
software company. From January 1996 to January 1997, Ms. Anderson was the
Director of Strategic Planning of RDA International, a multimedia group and
advertising agency. From January 1993 to December 1995, Ms. Anderson was the
Brand Manager of Sega of America, an interactive digital entertainment media
company. Ms. Anderson holds an M.B.A. degree in Marketing from the McLaren
School of Business of the University of San Francisco and a B.F.A. degree in
Graphic Design from Paier College of Art.
DONALD E. CHANEY -- Donald Chaney joined Egreetings in August 1998 as our
Vice President of Engineering. From May 1991 to August 1998, Mr. Chaney served
as a Manager, Director, and Senior Director of Applications Infrastructure and
Tools at DHL Airways, Inc., a shipping company. Mr. Chaney holds a B.S. degree
from Virginia Polytechnic Institute and State University and an M.S. degree in
Electrical Engineering from Santa Clara University.
JOSEPH T. MANGIONE -- Joseph Mangione joined Egreetings in July 1999 as our
Vice President, Sponsorship Sales. From 1993 to 1999, Mr. Mangione served as the
publisher of Integrated Marketing for Meredith Corporation, a diversified media
company involved in magazine and book publishing, television broadcasting and
integrated marketing programs. From 1991 to 1993, Mr. Mangione founded and
worked at Andrea Communications, a
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<PAGE> 62
licensing firm. From 1986 to 1991, Mr. Mangione served as Vice President and
General Manager at Billboard Entertainment Marketing, an entertainment company.
From 1979 to 1985, Mr. Mangione served as Vice President of Promotion at Playboy
Enterprises, Inc., a publishing and media company. Mr. Mangione holds an M.B.A.
degree from Wagner College.
ANDREW P. MISSAN -- Andrew Missan joined Egreetings as our General Counsel
in June 1999. From August 1998 to June 1999, Mr. Missan served as Corporate
Counsel to WebTV Networks, Inc., an Internet entertainment company. From August
1997 to July 1998, Mr. Missan was the Senior Business Counsel at Seagate
Software, Inc., an information technology company. From June 1994 to July 1997,
Mr. Missan served in the Business and Legal Affairs Department at The RCA
Records Label, a unit of BMG Entertainment, an entertainment company, most
recently as Senior Director. From June 1991 to June 1994, Mr. Missan served as
Counsel, Law Department, of Sony Music Entertainment Inc., an entertainment
company. He holds a B.A. degree from Oberlin College and a J.D. degree from the
Northwestern University School of Law.
STEWART ALSOP -- Stewart Alsop has served as a director of Egreetings since
March 1999. Mr. Alsop has been a general partner of New Enterprise Associates, a
venture capital investment firm since 1998 and was a Venture Partner at New
Enterprise Associates from 1996 to 1998. From June 1991 to 1996, Mr. Alsop
served as Senior Vice President and Editor-in-Chief of InfoWorld Media Group,
Inc., which publishes InfoWorld, a weekly newspaper for information technology
professionals. Mr. Alsop also serves on the board of directors of Macromedia,
Inc., a publicly held Internet software company, Be Incorporated, a publicly
held operating systems software company, TiVo Inc., a publicly held personal
television service company, and Netcentives, Inc., a publicly held Internet
promotions and customer loyalty vendor. Mr. Alsop holds a B.A. degree in English
from Occidental College.
CHARLES A. HOLLOWAY, PH.D. -- Charles Holloway has served as a director of
Egreetings since October 1995. Dr. Holloway holds the Kleiner, Perkins, Caufield
& Byers Professorship in Management at the Stanford Graduate School of Business
and has been a faculty member of the Stanford Graduate School of Business since
1968. Dr. Holloway is also currently co-director of the Stanford Center for
Entrepreneurial Studies at the Graduate School of Business. Dr. Holloway was the
founding co-chair of the Stanford Integrated Manufacturing Association, a
cooperative effort between the Graduate School of Business and the School of
Engineering, which focuses on research and curriculum development in
manufacturing and technology. Dr. Holloway serves on the board of Kana
Communications, Inc., a publicly held communications software company, and
several private companies. Dr. Holloway holds a B.S. degree in Electrical
Engineering from the University of California at Berkeley and an M.S. degree in
Nuclear Engineering and Ph.D. in Business Administration from the University of
California, Los Angeles.
BRENDON S. KIM -- Brendon Kim has served as a director of Egreetings since
April 1996. Mr. Kim has been a general partner of Altos Ventures, a venture
capital investment firm, since January 1996. From September 1994 to June 1996,
Mr. Kim worked at CSC Index, a consulting company, where he was an associate.
Mr. Kim also serves on the board of directors of several private companies,
including Branders.com, Blue Dot Software and Hearing Science. Mr. Kim also
serves on the board of directors of the Korean American Society of
Entrepreneurs, a not-for-profit organization to promote entrepreneurship. Mr.
Kim holds an A.B. degree from Princeton University and an M.B.A. degree from the
Stanford University Graduate School of Business.
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PETER NIEH -- Peter Nieh has served as a director of Egreetings since March
1999. Mr. Nieh has been a general partner of Weiss, Peck & Greer L.P., a
technology-focused venture capital investment firm since October 1995. From 1992
to 1995, Mr. Nieh held product marketing and business development roles at
General Magic, Inc., a communications software company. From 1990 to 1991, Mr.
Nieh managed the portable PC business in North America for Acer, Inc., a
personal computer manufacturer. Mr. Nieh is a director of several private
companies. Mr. Nieh holds a B.S. degree in Electrical Engineering and an A.B.
degree in Economics from Stanford University and an M.B.A. degree from the
Stanford University Graduate School of Business.
FRANK J. O'CONNELL -- Frank J. O'Connell has served as a director of
Egreetings since December 1997. Mr. O'Connell has served as President, Chief
Executive Officer and a director of Gibson Greetings, Inc., a greeting card
company, since August 1996, and has served as Chairman of the Board of Directors
of Gibson since April 1997. From May 1995 to August 1996, Mr. O'Connell was a
business consultant. From July 1991 to May 1995, he served as the President and
Chief Executive Officer of Skybox International, Inc., a trading card
manufacturer. Prior to joining Skybox International, Mr. O'Connell was a venture
capital consultant from February 1990 to July 1991 and served as President of
Reebok Brands, North America from 1988 to 1990. Mr. O'Connell is a director of
Moto Guzzi Corporation, a publicly traded manufacturer of motorcycles and
motorcycle parts.
LEE ROSENBERG -- Lee Rosenberg has served as a director of Egreetings since
November 1995. Mr. Rosenberg has been a general partner of Kettle Partners,
L.P., an Internet and technology-focused venture capital investment firm since
March 1998. Mr. Rosenberg also currently serves on the board of directors of
several private companies, including Ignite Sports Media, LLC, an Internet
sports media company, and ActiveUSA, a global registration site for active
sports communities. Over the past 15 years, Mr. Rosenberg has been President of
Rosenberg Capital and general partner of Rosy Partnership, entities involved in
a broad spectrum of venture capital and real estate investments. Previously, Mr.
Rosenberg served as a director of GRP Records. Mr. Rosenberg is a C.P.A. and
holds a B.B.A. degree from the University of Michigan School of Business
Administration.
BOARD COMPOSITION
Upon the completion of this offering, Egreetings will have authorized seven
directors. In accordance with the terms of our certificate of incorporation and
our bylaws, the board of directors will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. Upon
the completion of this offering, the members of the classes will be divided as
follows:
- Class I: Messrs. Alsop and O'Connell and Dr. Holloway
- Class II: Messrs. Kim and Nieh
- Class III: Messrs. Rosenberg and Tucker
The Class I directors, other than Mr. O'Connell, will stand for re-election
or election at the 2000 annual meeting of stockholders. The Class II directors
will stand for re-election or election at the 2001 annual meeting of
stockholders and the Class III directors will stand for re-election or election
at the 2002 annual meeting of stockholders. At each annual meeting of
stockholders after the initial classification, the successors to directors whose
terms will then expire will be elected to serve from the time of election
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and qualification until the third annual meeting following the election or
special meeting held in lieu thereof.
Our certificate of incorporation provides that the authorized number of
directors may be changed only by resolution of the board of directors. Any
additional directorships resulting from an increase in the number of directors
will be distributed between the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This classification of
the board of directors may have the effect of delaying or preventing changes in
the control or management of Egreetings. Notwithstanding the foregoing, so long
as Egreetings is subject to Section 2115 of the California General Corporation
Law, all directors shall be designated of the same class, and such directors
shall be elected by cumulative voting if any stockholder requests cumulative
voting.
Directors of Egreetings may be removed for cause by the affirmative vote of
the holders of a majority of our voting stock and such directors may be removed
without cause by the affirmative vote of the holders of at least two-thirds of
our voting stock. Notwithstanding the foregoing, so long as Egreetings is
subject to Section 2115 of the California General Corporation Law, unless every
director is removed, no single director may be removed without cause when the
votes cast against such director's removal would be sufficient to elect that
director if voted cumulatively.
See "Description of Capital Stock -- Section 2115" for additional
information relating to the effect of Section 2115 on Egreetings.
BOARD COMMITTEES
The audit committee of the board of directors consists of Mr. Nieh and Dr.
Holloway. The audit committee reviews our financial statements and accounting
practices, makes recommendations to the board of directors regarding the
selection of independent auditors and reviews the results and scope of the audit
and other services provided by our independent auditors.
The compensation committee of the board of directors consists of Messrs.
Kim and Rosenberg. The compensation committee makes recommendations to the board
of directors concerning salaries and incentive compensation for our officers and
employees and administers our employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of the board of directors
is an officer or employee of Egreetings. None of our executive officers serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving on our board of directors or
compensation committee.
DIRECTOR COMPENSATION
Our directors receive no cash compensation for their services as directors
but are reimbursed for their reasonable expenses in attending board meetings.
All directors are eligible to participate in our 1996 Stock Option Plan, 1999
Equity Incentive Plan, employee directors will be eligible to participate in our
1999 Employee Stock Purchase Plan and non-employee directors will be eligible to
participate in our 1999 Non-Employee
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Directors' Stock Option Plan. See "-- Employee Benefit Plans" for additional
information relating to these plans.
In June 1998, we granted director Charles Holloway options to purchase
10,000 shares of common stock at a price of $0.63 per share and granted director
Lee Rosenberg options to purchase 18,000 shares of common stock at a price of
$0.63 per share.
EXECUTIVE COMPENSATION
The following table shows compensation earned during fiscal year 1998 by
Egreetings' Chief Executive Officer and our other three executive officers who
earned more than $100,000 in 1998. These people are referred to as the named
executive officers. Titles shown in the table are titles held as of December 31,
1998. As of September 15, 1999, none of Messrs. Campbell, Levitan or Katin was
serving as an employee of Egreetings. The information in the table includes
salaries, bonuses, stock options granted and other miscellaneous compensation.
We have not granted stock appreciation rights or restricted stock awards and
provide no long-term compensation benefits other than stock options.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM AND
ANNUAL COMPENSATION OTHER COMPENSATION
FOR FISCAL YEAR 1998 ----------------------
----------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
--------------------------- ---------- --------- ----------------------
<S> <C> <C> <C>
Fredrick L. Campbell
Chief Executive Officer(2)........ 120,000 9,000 --
Anthony Levitan
President(3)...................... 120,000 9,000 --
Neil Katin
Chief Technical Officer(4)........ 120,000 9,000 --
Paul Lipman
Senior Vice President, Business
Development.................... 120,000 -- 6,366
</TABLE>
- -------------------------
(1) In accordance with the rules of the Commission, the compensation described
in this table does not include medical, group life insurance or other
benefits received by the named executive officers that are available
generally to all our salaried employees and certain perquisites and other
personal benefits received by the named executive officers, which do not
exceed the lesser of $50,000 or 10% of any such officer's salary and bonus
disclosed in this table.
(2) Mr. Campbell left his position as our Chief Executive Officer in February
1999. Gordon M. Tucker has been our Chief Executive Officer since then. See
"Management -- Employment and Severance Arrangements" for information
regarding Mr. Tucker's salary, stock option and other compensation
arrangements.
(3) Mr. Levitan left his position as our President in February 1999.
(4) Mr. Katin left his position as our Chief Technical Officer in June 1999.
Behrouz Arbab has been our Senior Vice President and Chief Technical Officer
since then.
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OPTION GRANTS DURING 1998
The following table sets forth each grant of stock options granted during
1998 to each of the named executive officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(4)
OPTIONS EMPLOYEES PER EXPIRATION ----------------------
NAME GRANTED(1) DURING 1998(2) SHARE(3) DATE 5% 10%
---- ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fredrick L. Campbell...... -- -- -- -- -- --
Anthony Levitan........... -- -- -- -- -- --
Neil Katin................ -- -- -- -- -- --
Paul Lipman............... 15,000 3.0% $0.63 7/16/08 $210,600 $340,200
</TABLE>
- -------------------------
(1) The option granted in 1998 to Paul Lipman was granted under our 1996 Stock
Option Plan. The option grant to Mr. Lipman is exercisable only as to the
vested portion of non-qualified options, to the extent permissible under
applicable IRS regulations.
(2) Based on an aggregate of 493,500 shares subject to options granted to our
employees in 1998, including named executive officers.
(3) The exercise price per share of each option granted was equal to the fair
market value of the common stock as determined by the board of directors on
the date of the grant. In determining the fair market value of the stock
granted on the grant date, our board considered, among other things, our
absolute and relative levels of revenues and other operating results and the
state of our strategic relationships.
(4) Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by an assumed initial
public offering price of $9.00 per share, (b) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option and (c)
subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock price appreciation are mandated by the
rules of the Commission and do not represent Egreetings' estimate or
projection of future common stock prices.
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AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END VALUES AT DECEMBER 31, 1998
The following table sets forth the number of shares of common stock
acquired and the value realized upon exercise of stock options during 1998 and
the number of shares of common stock subject to exercisable and unexercisable
stock options held as of December 31, 1998 by each of the named executive
officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fredrick L. Campbell.... -- -- -- -- -- --
Anthony Levitan......... -- -- -- -- -- --
Neil Katin.............. -- -- 71,999 63,000 $645,111 $564,480
Paul Lipman............. -- -- 42,046 43,954 $255,851 $267,051
</TABLE>
- -------------------------
(1) Value of unexercised in-the-money options are based on a value of $9.00 per
share, the assumed initial public offering price, minus the per share
exercise price, multiplied by the number of shares underlying the option.
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
General. In January 1996, our board adopted and our stockholders approved
our 1996 Stock Option Plan. All options granted to our employees, independent
contractors, advisors, consultants and directors have been granted pursuant to
the stock option plan in accordance with the terms set forth below.
The stock option plan provides for the grant of:
- incentive stock options, as defined under the Internal Revenue Code of
1986, as amended, to our employees (including our officers); and
- nonstatutory stock options to employees, directors, independent
contractors, advisors and consultants.
Administration. The stock option plan is administered by our board of
directors, which, among other things, selects eligible participants to whom
options may be granted, determines the exercise price of the options, determines
the vesting schedule of the options and establishes the period of time during
which an optionee may exercise his or her option after the optionee no longer
provides services to Egreetings. The board may delegate the authority to
administer the stock option plan to a committee.
Option Grants. The exercise price for an incentive stock option cannot be
less than 100% of the fair market value of the common stock on the date of
grant. The exercise price for a nonstatutory stock option cannot be less than
85% of the fair market value of the common stock on the date of grant.
Generally, the optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death. An
optionee whose service relationship with us ceases for any reason may exercise
vested options for the term provided in the option agreement. The terms of stock
options granted under the stock option plan generally may not exceed 10 years.
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No incentive stock options may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Egreetings or any parent or subsidiary of
Egreetings unless the following conditions are satisfied:
- the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
- the term of the incentive stock option award may not exceed five years
from the date of grant.
Vesting Schedule. Unless the optionee's stock option agreement otherwise
specifies, options granted under the stock option plan vest according to the
following schedule: 2.22% of the option vests per month after the six month
anniversary of the vesting commencement date, except that on the one year
anniversary of the vesting commencement date an additional 6.67% will vest, such
that a total of 20% of the option will be vested on the first anniversary of the
vesting commencement date and the option vests in full on the fourth anniversary
of the commencement date.
Right of First Refusal. We have a right of repurchase and first refusal
with respect to shares issued upon exercise of options granted under the stock
option plan.
Lock-Up Agreement. All shares of common stock issued under the stock option
plan are subject to a lock-up of 180 days after the completion of this offering
upon the request of the underwriters.
Change of Control. In the event of a change of control of Egreetings, our
board may, in its sole discretion, take any of the following actions with
respect to options outstanding as of the consummation of the change of control:
- cancel all such options effective as of the consummation of the change of
control and notify each optionee of the change of control reasonably
prior to its consummation so that the optionee may exercise any vested
options;
- require the acquiring company to assume the outstanding options or
substitute them with comparable options; or
- repurchase the outstanding options at a price per share equal to the fair
market value of the shares based on the board's good faith estimate of
the valuation of Egreetings implied by the total amount to be paid in
connection with the change of control.
As of September 30, 1999, options to purchase a total of 2,317,115 shares
of our common stock were outstanding and 1,282,338 shares remained available for
grant.
1999 Equity Incentive Plan
General. In September 1999, our board adopted, subject to stockholder
approval, the 1999 Equity Incentive Plan. The aggregate number of shares that
may be issued pursuant to stock awards granted under the equity incentive plan
is 3,000,000 shares. On each of the first nine anniversaries of the effective
date of the equity incentive plan, beginning in September 2000, the number of
shares that may be issued pursuant to options under the equity incentive plan
will automatically be increased by an amount equal to three percent of the total
number of shares outstanding on the anniversary date; provided that in no
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event shall the total number of shares issued or reserved for issuance under the
equity incentive plan exceed 15,000,000.
Types of Grants and Eligibility.
This plan provides for the grant of:
- incentive stock options, as defined under the Internal Revenue Code of
1986, as amended, to employees (including officers);
- nonstatutory stock options to employees, directors and consultants;
- restricted stock purchase awards to employees, directors and consultants;
and
- stock bonuses to employees, directors and consultants.
Administration. The equity incentive plan is administered by the board of
directors, which determines recipients and types of options, stock bonus awards
and restricted stock awards to be granted, including the exercise price, number
of shares subject to the grant and the exercisability thereof. The board of
directors may delegate authority to administer the equity incentive plan to a
committee.
Option Grants. The board of directors determines the exercise price of
options granted under the equity incentive plan. The exercise price for an
incentive stock option cannot be less than 100% of the fair market value of the
common stock on the date of grant. The exercise price for a nonstatutory stock
option cannot be less than 85% of the fair market value of the common stock on
the date of grant. Options granted under the equity incentive plan vest at the
rate specified in the option agreement signed by and between us and each
optionee. Generally, the optionee may not transfer a stock option other than by
will or the laws of descent or distribution unless the optionee holds a
nonstatutory stock option that provides otherwise. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with us or any affiliate of ours
ceases for any reason may exercise vested options for the term provided in the
optionee's option agreement. The terms of stock options granted under the equity
incentive plan generally may not exceed 10 years.
No stock option may be granted to any person who, at the time of the grant,
owns (or is deemed to own) stock possessing more than 10% of the total combined
voting power of Egreetings or any parent or subsidiary of Egreetings unless the
following conditions are satisfied:
- the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
- the term of the incentive stock option award may not exceed five years
from the date of grant.
When we become subject to Section 162(m) of the Internal Revenue Code of
1986 (which denies a deduction to publicly held corporations for certain
compensation paid to specified employees in a taxable year to the extent that
the compensation exceeds $1,000,000), no person may be granted options under the
equity incentive plan covering more than 1,000,000 shares of common stock in any
calendar year. Shares subject to stock options that have expired or otherwise
terminated without having been exercised in full again become available for the
grant of awards under the equity incentive plan. Under its general authority to
grant options, the board of directors has the implicit authority to
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<PAGE> 70
reprice outstanding options or to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares. Both the original and new options will count toward the Section 162(m)
limitation.
Options granted under the equity incentive plan generally expire three
months after the termination of the optionee's service to Egreetings or a parent
or subsidiary of Egreetings, except in the case of death or disability, in which
case the options generally may be exercised up to 18 months following the date
of death or up to 12 months following a termination due to the optionee's
disability.
Stock Bonus Awards. The board may grant stock bonus awards for past
services rendered to Egreetings or a parent or subsidiary of Egreetings which
stock bonus awards may be subject to a vesting schedule and right of repurchase
in favor of Egreetings. In the event the grantee's service to Egreetings or a
parent or subsidiary of Egreetings terminates, we may reacquire any or all of
the unvested shares of common stock held by the grantee on that date.
Restricted Stock Awards. The purchase price for each restricted stock award
granted must be at least 85% of the fair market value of the stock subject to
the option on the date of the award or at the time the purchase is consummated.
Restricted stock awards may, in the discretion of the board, be subject to a
vesting schedule and right of repurchase in favor of Egreetings. In the event
the grantee's service to Egreetings or a parent or subsidiary of Egreetings
terminates, we may reacquire any or all of the unvested shares of common stock
held by the grantee on that date.
Transferability. Rights to acquire our common stock under a stock bonus or
restricted stock agreement may not be transferred other than by will or by the
laws of descent and distribution and are exercisable during the life of the
holder only by the holder. Certain restricted stock or stock bonus awards made
following the completion of this offering may be otherwise transferable if the
applicable restricted stock or stock bonus agreement so provides.
Changes in Control. In the event of the transfer of all or substantially
all of our assets or our acquisition by another company, all outstanding stock
awards under the stock option plan may either be assumed or substituted for with
similar stock awards by the acquiring company. If the acquiring company
determines not to assume or substitute for those outstanding awards, the vesting
of the awards held by persons then employed by Egreetings will be accelerated
and exercisable in full and all outstanding stock awards will be terminated upon
the sale of assets or acquisition of Egreetings if not previously exercised.
1999 Non-Employee Directors' Stock Option Plan
General. In September 1999, our board adopted, subject to stockholder
approval, the 1999 Non-Employee Directors' Stock Option Plan to provide for the
automatic grant of options to purchase shares of our common stock to our
non-employee directors. The aggregate number of shares of Common Stock that may
be issued pursuant to options granted under the directors' plan is 500,000
shares.
Administration. The board will administer the directors' plan and may not
delegate administration of the directors' plan to a committee.
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<PAGE> 71
Option Terms. Options granted under the directors' plan are generally
subject to the following terms:
- the exercise price of the options granted will be equal to the fair
market value of the common stock on the date of grant;
- no option granted under the directors' plan may be exercised after the
expiration of ten years from the date it was granted;
- options granted are not transferable other than by will or by the laws of
descent and distribution and are exercisable during the life of the
optionee only by the optionee;
- an optionee may designate a beneficiary who may exercise the option
following the optionee's death;
- an optionee whose service relationship with Egreetings or any parent or
subsidiary of Egreetings, whether as a non-employee director of
Egreetings or, subsequently, as an employee, director or consultant of
either Egreetings or parent or subsidiary of Egreetings, terminates for
any reason other than death or disability may exercise vested options for
three months after the termination; and
- similarly, an optionee whose service relationship with Egreetings or any
parent or subsidiary of Egreetings terminates because of the optionee's
death or disability, then the optionee or the optionee's beneficiary may
exercise the vested options for 12 months after the termination, in the
case of a disability, and 18 months after the termination, in the case of
death.
Automatic Grants. Upon the completion of this offering, each non-employee
director will automatically be granted an option to purchase 24,000 shares of
common stock. Any individual who becomes a non-employee director after this
offering will automatically receive this initial grant upon being elected to the
board of directors. Any person who is a non-employee director on the day
following each annual meeting of Egreetings stockholders will be granted an
additional option to purchase 8,000 shares of common stock on that day. Any
director who has not served as a non-employee director for the entire period
since the preceding annual meeting of stockholders will have his or her
automatic additional grant for that year reduced pro rata for each full quarter
prior to the date of grant during which such person did not serve as a
non-employee director.
Vesting. Initial option grants to non-employee directors will vest at a
rate of 1/36 each month on the last day of each month following the date of
grant. Annual grants will also vest at a rate of 1/36 each month beginning on
April 30 of each year.
1999 Employee Stock Purchase Plan
General. In September 1999, our board adopted, subject to stockholder
approval, the 1999 Employee Stock Purchase Plan, authorizing the issuance of
1,000,000 shares of common stock pursuant to purchase rights granted to our
employees or to employees of any parent or subsidiary of Egreetings. On each of
the first nine anniversaries of the effective date of the purchase plan,
beginning in September 2000, the number of shares authorized under the purchase
plan will automatically be increased by an amount equal to one percent of the
total number of shares outstanding on the anniversary date; provided that in no
event shall the total number of shares issued or reserved for issuance under the
purchase plan exceed 5,000,000.
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The purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code of 1986, as
amended. As of the date hereof, no shares of common stock have been purchased
under the purchase plan.
Administration. The purchase plan shall be administered by the board of
directors unless and until it delegates administration to a committee. The
administrator will generally have the power to determine when and how rights to
purchase shares of common stock will be granted and the provisions of each
offering of rights, as well as the power to construe and interpret the purchase
plan.
Offering Terms. The purchase plan provides a means by which our employees
may purchase our common stock through payroll deductions. The purchase plan is
implemented by offerings of rights to eligible employees. Generally, all regular
employees, including executive officers, who are employed by Egreetings or by a
parent or subsidiary of Egreetings for a required period of time specified by
the board that may not exceed two years may participate in the purchase plan and
may authorize payroll deductions of up to 15% of their base compensation for the
purchase of stock under the purchase plan. Under the plan, the board may specify
offerings with a duration of not more than 27 months, and may specify shorter
purchase periods within each offering. The first offering will begin on the
effective date of this offering and be approximately 24 months in duration with
purchases occurring every six months. Unless otherwise determined by the board,
common stock is purchased for accounts of employees participating in the
purchase plan at a price per share equal to the lower of:
- 85% of the fair market value of a share of common stock on the date of
commencement of an employee's participation in the offering; or
- 85% of the fair market value of a share of common stock on the date of
purchase.
Limitations. Eligible employees may be granted rights only if the rights
together with any other rights granted under employee stock purchase plans, do
not permit such employee's rights to purchase stock of Egreetings to accrue at a
rate which exceeds $25,000 of the fair market value of such stock (calculated as
of the first day of the offering period) for each calendar year in which such
rights are outstanding. In addition, no employee may purchase more than 3,750
shares on any purchase date. No employee shall be eligible for the grant of any
rights under the purchase plan if immediately after such rights are granted,
such employee has voting power over 5% or more of Egreetings' outstanding
capital stock (measured by vote or value).
1999 Egreetings Network Incentive Bonus Plan
General. In August 1999, our board of directors adopted the 1999 Egreetings
Network Incentive Bonus Plan. Under the bonus plan, all of our employees who are
full-time employees and who were hired by us on or prior to September 30, 1999,
other than our sales employees who are on commission bonus plans, are eligible
to receive cash bonuses in amounts ranging from up to 50% of base salary for our
chief executive officer to between 5% and 35% of other employees' base salaries.
Calculation of Bonuses. Half of an employee's bonus is based on individual
performance and the other half is based on our achievement of financial and
operational goals as determined by our board.
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Administration. Our bonus plan is generally administered by our human
resources department under the supervision of our chief executive officer and
our chief financial officer.
401(k) Plan
We sponsor the Egreetings Network 401(k) Plan, a defined contribution plan
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended. All employees are eligible to participate and may enter the 401(k) Plan
as of the first day of each quarter. Participants may make pre-tax contributions
to the 401(k) Plan of up to 15% of their eligible earnings, subject to a
statutorily prescribed annual limit. Egreetings does not make matching
contributions. Each participants' contributions and the corresponding investment
earnings are generally not taxable to the participants until withdrawn.
Participant contributions are held in trust as required by law. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Gordon M. Tucker Employment Agreement
In February 1999, we entered into an employment agreement with Gordon M.
Tucker, our Chief Executive Officer and a director, under which Mr. Tucker is
compensated at a rate of $225,000 per year, paid on a semi-monthly basis. The
agreement also provides that Mr. Tucker's employment with us will last until the
earliest date on which any of the following events may occur:
- his death or resignation from Egreetings;
- his termination by us for cause;
- his termination by us without cause; or
- his termination due to a failure to maintain his employment conditions.
Pursuant to the employment agreement, Mr. Tucker received a non-qualified
stock option grant for the purchase of 2,267,563 shares of our common stock at
an exercise price of $2.10 per share. The option vests at a rate of 1/8 of the
total number of shares subject to the option on the six-month anniversary of the
grant and 1/48 of the total number each month thereafter, for a total vesting
period of four years. The employment agreement provides that, if Mr. Tucker is
terminated other than for cause, then the stock options for the month in
progress and for the twelve months thereafter shall immediately vest and shall
be exercisable for three years after his termination. In addition, Mr. Tucker's
employment agreement provides that, if Mr. Tucker is terminated other than for
cause or he terminates his employment agreement due to a failure to maintain
employment conditions and within 180 days of his termination a change of control
is announced or occurs, then all his unvested stock options will immediately
vest and will be exercisable for three years after Mr. Tucker's termination.
If there is a change of control while Mr. Tucker is still employed by us,
the vesting that was scheduled to occur during the first three years of Mr.
Tucker's option will accelerate and become fully vested and will be exercisable
for three years after termination of Mr. Tucker's employment with us. If, after
a change of control, Mr. Tucker remains employed as Chief Executive Officer and
is actually or constructively terminated within one year of the change of
control or, within that period, he terminates his employment with us, then all
of his remaining unvested shares will vest fully and will be exercisable for
three years from the date of his termination.
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The employment agreement also provides for an annual bonus, the target of
which is 50% of Mr. Tucker's base salary. Based on a proration for 1999, the
target bonus for Mr. Tucker is $99,555. We also paid Mr. Tucker a transition
allowance of $75,000 so that Mr. Tucker could be reimbursed for, or paid for the
reasonable costs and expenses of relocating from the Dallas, Texas metropolitan
area to San Francisco, California. To the extent the transition allowance was
not spent, Mr. Tucker has been paid the balance. All amounts paid under the
transition allowance will be credited against any amounts otherwise payable to
Mr. Tucker as part of his bonus for 1999. In the event Mr. Tucker is terminated
other than for cause, he is entitled to receive from us an amount equal to 12
months of his base salary and benefits.
Fredrick L. Campbell Employment and Consulting Agreement
In May 1999, we entered into an employment and consulting agreement with
Fredrick Campbell, our former Chief Executive Officer and Chief Financial
Officer. Pursuant to the agreement, Mr. Campbell agreed to serve as our Chief
Financial Officer until we hired a new Chief Financial Officer, which we did in
July 1999 when we hired Andrew J. Moley to fill that position. In addition, Mr.
Campbell agreed to provide consulting services to us until August 2000. For his
services as our Chief Financial Officer, Mr. Campbell received an annual base
salary of $175,000. For his services as a consultant, Mr. Campbell received a
payment of $125,000 in August 1999 and he will receive a final payment of
$125,000 in January 2000.
Anthony Levitan Employment and Consulting Agreement
In August 1999, we entered into an employment and consulting agreement with
Anthony Levitan, our former President and Chief Concept Officer. Pursuant to the
agreement, Mr. Levitan agreed to serve as our Chief Concept Officer until August
31, 1999. In addition, Mr. Levitan agreed to provide consulting services to us
until August 31, 2001. For his services as our Chief Concept Officer, Mr.
Levitan received an annual base salary of $175,000. For his services as a
consultant, Mr. Levitan will receive payments totaling $214,500 from November
1999 through August 2001. Under the agreement, Mr. Levitan received a severance
payment of $87,500 and will receive an additional severance payment of $87,500
on January 1, 2000. Mr. Levitan will also receive an additional payment of
$3,625 pursuant to the agreement.
Severance Arrangements for Senior Executives
In June 1999, the Egreetings board approved "double-trigger" change of
control acceleration for options granted to employees at the senior director
level and above, such as Andrew J. Moley, Behrouz Arbab, Paul Lipman, Kenneth W.
Wallace, Sarah S. Anderson, Joseph T. Mangione, Allen Chin, Scott Neamand and
Andrew P. Missan. This acceleration would occur in the event that, after the
acquisition of Egreetings, any such employee is actually or constructively
terminated by the acquiring company. Upon such a termination, a senior vice
president's options would accelerate by one year, a vice president's options
would accelerate by nine months and a senior director's options would accelerate
by six months. In addition, the board resolved that, upon such a termination, a
senior vice president would receive a cash severance payment equal to six months
of such officer's base salary, a vice president would receive a cash severance
payment equal to three months of such officer's base salary and a senior
director would receive a cash severance payment equal to three months of such
employee's base salary.
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INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages resulting from breach
of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; and
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
- we must indemnify our directors and executive officers to the fullest
extent permitted by Delaware law, subject to very limited exception;
- we may indemnify our other employees and agents to the same extent that
we indemnify our directors and executive officers, unless otherwise
required by law, our certificate of incorporation, bylaws or agreements;
and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and executive
officers to give them additional contractual assurances regarding the scope of
the indemnification provided in our certificate of incorporation and bylaws and
to provide additional procedural protections. Currently, there is no pending
litigation or proceeding involving any of our directors, executive officers or
employees for which indemnification is sought, nor are we aware of any
threatened litigation that may result in claims for indemnification.
We plan to obtain directors' and officers' liability insurance prior to the
effectiveness of this offering.
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RELATED TRANSACTIONS
Other than the employment agreements described in "Management -- Employment
and Severance Arrangements," and the transactions described below, since January
1996 there has not been nor is there currently proposed any transaction or
series of similar transactions to which we were or will be a party:
- in which the amount involved exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% or our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
PREFERRED STOCK FINANCINGS
In May 1996, we issued and sold an aggregate of 450,000 shares of Series B
preferred stock for gross proceeds of approximately $900,000 including 75,000
shares issued upon the conversion of convertible promissory notes having an
aggregate principal amount of $150,000 that were issued by us in April and May
1995. Each of these shares currently is convertible into two shares of common
stock.
From December 1996 to October 1997, we issued and sold an aggregate of
702,763 shares of Series C preferred stock for gross proceeds of approximately
$2.8 million, including 229,798 shares issued upon the conversion of convertible
promissory notes having an aggregate principal amount of approximately $919,000
that were issued by us in October and November 1996. Each of these shares
currently is convertible into two shares of common stock.
In December 1997, we issued and sold an aggregate of 933,164 shares of
Series D preferred stock for gross proceeds of approximately $5.9 million,
including shares issued upon the conversion of a convertible promissory note
having an aggregate principal amount of approximately $1.9 million that was
issued in December 1997. Approximately $1.4 million of that note was converted
into 224,805 shares of Series D preferred stock in July 1998, while the
remaining portion of the note was converted into 82,381 shares of Series D
preferred stock in April 1999. Each of these shares currently is convertible
into two shares of common stock.
From March to April 1999, we issued and sold an aggregate of 3,726,493
shares of Series F preferred stock for gross proceeds of approximately $26.1
million including 442,857 shares issued upon conversion of convertible
promissory notes having an aggregate principal amount of approximately $3.1
million that were issued between November 1998 and March 1999. Each of these
shares currently is convertible into two shares of common stock.
In October 1999, we issued and sold an aggregate of 5,846,546 shares of
Series G preferred stock for gross proceeds of approximately $23.6 million, each
of which currently is convertible into two-thirds of one share of common stock.
In November 1999, we issued and sold 3,712,871 shares of Series G preferred
stock for gross proceeds of approximately $7.5 million in cash and an
advertising credit of approximately $7.5 million. Each of these shares is
currently convertible into two-thirds of one share of common stock.
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Purchasers of our preferred stock include, among others, the following
directors, holders of more than 5% of our outstanding stock and a trust of which
the father of one of our executive officers is the sole trustee. All of the
share numbers in the following table reflect the conversion of each outstanding
share of the Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock and Series F preferred stock into two
shares of common stock, and each outstanding share of Series G preferred stock
into two-thirds of one share of common stock.
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF
SERIES B SERIES C SERIES D SERIES F SERIES G
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
-------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Lee Rosenberg(1).......................... 46,916 31,266 -- 192,858 96,204
Entities affiliated with Altos
Ventures(2)............................. 582,174 630,414 -- 485,714 512,540
Gibson Greetings, Inc.(3)................. -- -- 1,866,328 1,168,000 412,226
National Broadcasting Company, Inc.(4).... -- -- -- -- 3,712,871
New Enterprises Associates(5)............. -- -- -- 1,400,000 264,026
Vulcan Ventures, Inc...................... -- -- -- 1,114,286 144,884
Entities affiliated with Weiss, Peck &
Greer Venture Partners(6)............... -- -- -- 1,971,428 362,041
Richard M. Moley Annuity Trust U/A dated
May 12, 1998(7)......................... -- -- -- -- 166,666
</TABLE>
- -------------------------
(1) Includes 142,858 shares of Series F preferred stock and 82,508 shares of
Series G preferred stock held by Kettle Partners, L.P. for which Mr.
Rosenberg, a director of Egreetings, serves as a principal.
(2) Consists of 11,428 shares of Series F preferred stock held by Altos Partners
I, 582,174 shares of Series B preferred stock, 630,414 shares of Series C
preferred stock and 474,286 shares of Series F preferred stock held by Altos
Ventures I, L.P., and 512,540 shares of Series G preferred stock held by
Altos Ventures II, L.P. Brendon Kim, a director of Egreetings, is affiliated
with the Altos entities.
(3) Frank O'Connell, a director of Egreetings, is the Chairman of the Board,
President and Chief Executive Officer of Gibson Greetings, Inc.
(4) National Broadcasting Company, Inc. subsequently transferred its shares of
Series G preferred stock to NBC-EGRT Holding, Inc., a wholly owned
subsidiary of NBC.
(5) Stewart Alsop, a director of Egreetings, is affiliated with New Enterprise
Associates.
(6) Consists of 148,909 shares of Series G preferred stock held by Weiss, Peck &
Greer Venture Associates V, L.L.C., 422,674 shares of Series F preferred
stock and 77,622 shares of Series G preferred stock held by WPG Enterprise
Fund III, L.L.C., 483,394 shares of Series F preferred stock and 88,773
shares of Series G preferred stock held by Weiss, Peck & Greer Venture
Associates, IV, L.L.C., 18,728 shares of Series F preferred stock and 3,439
shares of Series G preferred stock held by WPG Information Sciences
Entrepreneur Fund, L.P., 60,938 shares of Series F preferred stock and
11,186 shares of Series G preferred stock held by Weiss, Peck & Greer
Venture Associates IV Cayman, L.P., 801,764 shares of Series F preferred
stock held by WPG Venture Associates V, L.L.C. 8,280 shares of Series F
preferred stock and 1,266 shares of Series G preferred stock held by WPG
Venture Associates V-A, L.L.C., and 175,650 shares of Series F preferred
stock and 30,846 shares of Series G preferred stock held by WPG Venture
Associates V, Cayman L.P. Peter Nieh, a director of Egreetings, is a general
partner of Weiss, Peck
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& Greer Venture Partners and a member or a general partner of the
above-named funds.
(7) Mr. Moley, the sole trustee of this trust, is the father of Andrew J. Moley,
our Chief Financial Officer.
WARRANTS
In March 1996, in connection with a loan financing, we issued warrants to
purchase an aggregate amount of 7,503 shares of Series B preferred stock, each
of which is presently convertible for two shares of common stock, at an exercise
price of $2.00 per share to investors, including Lee Rosenberg, a director of
Egreetings, who acquired a warrant to purchase 1,821 shares of Series B
preferred stock, each of which is presently convertible into two shares of
common stock, that expires on March 19, 2003.
From October to November 1996, in connection with a loan financing, we
issued warrants to purchase an aggregate amount of 41,910 shares of Series C
preferred stock, each of which is presently convertible into two shares of
common stock, at an exercise price of $4.00 per share, except for a warrant for
4,166 shares of Series C preferred stock that has an exercise price of $3.60 per
share. The investors included Lee Rosenberg, who acquired a warrant to purchase
1,313 shares of Series C preferred stock, and Altos Ventures, a holder of more
than 5% of our common stock, which acquired a warrant to purchase 9,781 shares
of Series C preferred stock, each of which is presently convertible into two
shares of common stock. Each of Mr. Rosenberg's and Altos Ventures' warrants
expires in April 2007.
In December 1997, we issued a warrant to purchase 946,925 shares of Series
E preferred stock, at a purchase price of $9.60 per share, to Gibson Greetings,
Inc., a holder of more than 5% of our common stock. As a result of anti-dilution
adjustments in connection with sales of our Series F preferred stock and Series
G preferred stock, the number of shares of Series E preferred stock issuable
pursuant to this warrant was increased to 1,470,000 in March 1999 and 1,663,333
in October 1999. Pursuant to the terms of the warrant, there was no adjustment
to the aggregate exercise price of the warrant in connection with these
adjustments. Each share of Series E preferred stock is presently convertible
into two shares of common stock.
From November 1998 to January 1999, in connection with loan financings, we
issued warrants to purchase an aggregate amount of 67,139 shares of Series F
preferred stock, each of which is presently convertible into two shares of
common stock at an exercise price of $6.30 per share to investors including
holders of more than 5% of our outstanding stock as set forth in the table
below.
All of the share numbers in the following table reflect the conversion of
each outstanding share of Series F preferred stock into two shares of common
stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
WARRANT HOLDER SUBJECT TO WARRANT EXPIRATION DATE
-------------- ------------------ ---------------
<S> <C> <C>
Gibson Greetings, Inc.(1)........ 53,570 November 2005
Gibson Greetings, Inc.(1)........ 14,284 January 2006
Altos Ventures I, L.P.(2)........ 17,856 November 2005
Altos Ventures I, L.P.(2)........ 14,284 January 2006
Kettle Partners, L.P.(3)......... 28,570 January 2006
</TABLE>
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- -------------------------
(1) Frank O'Connell, a director of Egreetings, is the President, Chief Executive
Officer and Chairman of the Board of Gibson Greetings, Inc.
(2) Brendon Kim, a director of Egreetings, is a general partner of Altos
Ventures I, L.P.
(3) Lee Rosenberg, a director of Egreetings, is a principal of Kettle Partners,
L.P.
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
In February 1999, we entered into an employment agreement with Gordon M.
Tucker, our Chief Executive Officer. This agreement is discussed in more detail
in "Management -- Employment and Severance Arrangements."
In June 1999, Mr. Tucker exercised in full the option granted to Mr. Tucker
pursuant to his employment agreement and acquired 2,267,563 shares of common
stock. However, as of September 30, 1999, 1,936,877 shares held by Mr. Tucker
may be repurchased at $2.10 per share by Egreetings, subject to certain
acceleration provisions in Mr. Tucker's employment agreement. Mr. Tucker paid
the $2.10 exercise price per share for such shares by delivery of a promissory
note bearing a simple interest rate of 5.37% per annum. The full principal and
interest payable under the note are due in June 2003 or, if Mr. Tucker's
employment is terminated prior to that time, 60 days after the termination. The
note is secured by the shares of common stock purchased by Mr. Tucker. As of
September 30, 1999, approximately $4,761,882 in unpaid principal and interest
was outstanding in the aggregate under the note.
In July 1999, Andrew J. Moley, our Chief Financial Officer, exercised an
option grant to purchase an aggregate of 200,000 shares of common stock and
entered into an early exercise stock purchase agreement under the 1996 Stock
Option Plan regarding the shares. However, we have a right to repurchase any of
the unvested 200,000 shares within 90 days upon Mr. Moley's termination of
employment. As of September 30, 1999, all 200,000 shares held by Mr. Moley
remain subject to repurchase at $2.78 per share. Mr. Moley paid the $2.78
purchase price per share for such shares by delivery of a promissory note
bearing a simple interest rate of 6.00% per annum. The full principal and
interest payable under the note are due in July 2004 or, if Mr. Moley's
employment is terminated prior to that time, the date of Mr. Moley's
termination. The note is secured by the shares of common stock purchased by Mr.
Moley. As of September 30, 1999, approximately $555,000 in unpaid principal and
interest was outstanding in the aggregate under the note.
In July 1999, we loaned $200,000 to Mr. Levitan, our former President and
Chief Concept Officer and a holder of more than 5% of our outstanding stock, in
exchange for a promissory note bearing a simple interest rate of 6% per annum.
Principal payments of $25,000, plus interest thereon, will become due quarterly,
on the last day of February, May, August and November of each year such that the
full principal and interest payable under the note will be repaid no later than
August 31, 2001.
In May 1999, we entered into an employment and consulting agreement with
Fredrick Campbell, our former Chief Financial Officer and a holder of more than
5% of our outstanding stock. In August 1999, we entered into an employment and
consulting agreement with Anthony Levitan, our former President and Chief
Concept Officer and a holder of more than 5% of our outstanding stock. These
agreements are discussed in more detail in "Management -- Employment and
Severance Arrangements."
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CONTENT PROVIDER AND DISTRIBUTION AGREEMENT WITH GIBSON GREETINGS, INC.
In December 1997, we entered into a content provider and distribution
agreement with Gibson Greetings, Inc. Pursuant to this five-year agreement, we
are the only company, other than Gibson itself, that may distribute Gibson's
content in the form of digital greetings. In exchange for this right, we pay
Gibson a royalty based on the number of digital greetings sent via our Web site
that contain Gibson's content. Gibson may terminate our rights to exclusivity if
our consumers do not send at least approximately 2.8 million digital greetings
via our Web site in each month during the term of the agreement and if this
minimum delivery requirement is not exceeded in any of the three months
following the month in which the shortfall occurred. See "Risk Factors -- Risks
Related to Our Business," "Business -- Our Relationship with Gibson Greetings,
Inc.," and "Business -- Competition in the Digital Greeting, Gift-Giving and
Ecommerce Markets" for additional information relating to our relationship with
Gibson.
ADVERTISING AND CONTENT PROVIDER AGREEMENTS WITH NATIONAL BROADCASTING COMPANY,
INC.
In November 1999, we entered into a two-year advertising agreement with
National Broadcasting Company, Inc. for approximately $7.5 million in
advertising credit. The agreement contains a pre-approved six-month advertising
schedule and provides that no less than 60% of the value of the advertising
provided to us will be broadcast during prime time hours. In November 1999, we
also entered into a two-year content licensing agreement with NBC pursuant to
which we have the right to create and distribute digital greetings for a minimum
of five NBC television programs for each six-month television season, which
amount may be increased, at NBC's option, to a maximum of 30 NBC television
programs for each season.
We believe that the foregoing transactions were in our best interest and
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future transactions between us and any of our
officers, directors or principal stockholders will be approved by a majority of
the disinterested members of the board of directors, will be on terms no less
favorable to us than could be obtained from unaffiliated third parties and will
be in connection with our bona fide business purposes.
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<PAGE> 81
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of November 22, 1999 and as advised
to reflect the sale of the common stock in this offering by:
- each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
- each of our directors;
- each of the executive officers named in the Summary Compensation Table;
and
- all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise indicated below, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Percentage ownership is based on 25,116,814 shares of common
stock outstanding as of November 22, 1999, assuming the conversion of all
outstanding shares of preferred stock into common stock, and 34,443,481 shares
of common stock outstanding immediately following the completion of this
offering. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of November 22, 1999 are deemed to be
outstanding and to be beneficially owned by the person holding such options for
the purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.
Unless otherwise indicated, the address for each stockholder named below
is: c/o Egreetings Network, Inc., 149 New Montgomery Street, San Francisco,
California 94105.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
---------------------------------
NAME OF BENEFICIAL OWNER SHARES BEFORE OFFERING AFTER OFFERING
------------------------ ---------- --------------- --------------
<S> <C> <C> <C>
Gibson Greetings, Inc.(1)............. 6,841,074 24.0% 19.8%
2100 Section Road
Cincinnati, OH 45326
NBC-EGRT Holding, Inc................. 2,475,247 9.9 7.2
30 Rockefeller Plaza
New York, NY 10112
Entities Affiliated with Weiss, Peck &
Greer Venture Partners(2)............. 2,333,469 9.3 6.8
555 California St., Suite 3130
San Francisco, CA 94194
Entities Affiliated with Altos
Ventures(3)........................... 2,162,543 8.6 6.3
2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Entities Affiliated with New
Enterprises Associates(4)............. 1,664,026 6.6 4.8
2490 Sand Hill Road
Menlo Park, CA 94025
Vulcan Ventures Inc................... 1,259,170 5.0 3.7
110-110th Ave. NE, Suite 550
Bellevue, WA 98004
</TABLE>
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<PAGE> 82
<TABLE>
<CAPTION>
PERCENTAGE OWNED
---------------------------------
NAME OF BENEFICIAL OWNER SHARES BEFORE OFFERING AFTER OFFERING
------------------------ ---------- --------------- --------------
<S> <C> <C> <C>
Anthony Levitan(5).................... 1,630,833 6.5% 4.7%
Fredrick L. Campbell(5)............... 1,609,999 6.4 4.6
Frank O'Connell(1).................... 6,841,074 24.0 19.8
c/o Gibson Greetings, Inc.
2100 Section Road
Cincinnati, OH 45326
Peter Nieh(2)......................... 2,333,469 9.3 6.8
c/o Weiss, Peck & Greer Venture
Partners
555 California Street, Suite 3130
San Francisco, CA 94194
Brendon Kim(3)........................ 2,162,543 8.6 6.3
c/o Altos Ventures
2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Stewart Alsop(4)...................... 1,664,026 6.6 4.8
c/o New Enterprise Associates, Inc.
2490 Sand Hill Road
Menlo Park, CA 94025
Lee Rosenberg(6)...................... 672,590 2.7 1.9
Gordon M. Tucker(7)................... 2,267,563 9.0 6.6
Charles A. Holloway(8)................ 74,000 * *
Neil Katin(9)......................... 307,903 1.2 *
Paul Lipman(10)....................... 86,084 * *
All directors and executive officers
as a group (12 persons)(11)......... 16,361,416 56.9 47.1
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) All of these shares are owned by Gibson Greetings, Inc. Includes warrants
held by Gibson Greetings, Inc. to purchase 3,394,520 shares that are
currently exercisable. Mr. O'Connell is the Chairman of the Board,
President and Chief Executive Officer of Gibson. Mr. O'Connell disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934.
(2) Consists of 500,296 shares held by WPG Enterprise Fund III, L.L.C., 572,167
shares held by Weiss, Peck & Greer Venture Associates IV, L.L.C., 22,167
shares held by WPG Information Sciences Entepreneur Fund, L.P., 72,124
shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P.,
1,134,603 shares held by Weiss, Peck & Greer Venture Associates V, L.L.C.,
1,266 shares held by WPG Venture Associates V-A, L.L.C. and 30,846 shares
held by WPG Venture Associates V, Cayman L.P. Mr. Nieh, a director of
Egreetings, is a Managing Member of WPG VC Fund Adviser, L.L.C., the Fund
Investment Advisory Member of WPG Enterprise Fund III, L.L.C., and Weiss,
Peck & Greer Venture Associates IV, L.L.C., and the General Partner of WPG
Information Sciences Entrepreneur Fund, L.P. In addition, Mr. Nieh is a
Managing Member of WPG VC Fund
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<PAGE> 83
Adviser II, L.L.C., the Fund Investment Advisory Member of Weiss, Peck &
Greer Venture Associates V, L.L.C., Weiss Peck & Greer Venture Associates
V-A, L.L.C., and the Fund Investment Advisory Partner of Weiss, Peck &
Greer Venture Associates V Cayman, L.P. In such capacities, Mr. Nieh may be
deemed to have an indirect pecuniary interest in an indeterminate portion
of the shares beneficially owned by the Weiss Peck & Greer funds. Mr. Nieh
disclaims beneficial ownership of the shares held by the Weiss Peck & Greer
funds within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934.
(3) Includes 11,428 shares held by Altos Partners I, 1,686,874 shares held by
Altos Ventures I, L.P. and 412,540 shares held by Altos Ventures II, L.P.
Also includes warrants to purchase 51,702 shares that are currently
exercisable. Mr. Kim, a director of Egreetings, is a general partner of
Altos Partners and, as such, may be deemed to have an indirect pecuniary
interest in an indeterminate portion of the shares beneficially owned by
the Altos funds. Mr. Kim disclaims beneficial ownership of these shares
within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934.
(4) Includes 17,142 shares held by NEA Presidents Fund, L.P., 1,428 shares held
by NEA Ventures 1999, L.P., and 1,645,456 shares held by New Enterprise
Associates VIII, L.P. Mr. Alsop, a director of Egreetings, is a general
partner of New Enterprise Associates and, as such, may be deemed to have an
indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by the NEA funds. Mr. Alsop disclaims beneficial
ownership of these shares within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934.
(5) Included in the number of shares that Messrs. Levitan and Campbell
beneficially own in the aggregate are 160,000 shares pledged by each of
them to Information Technology Ventures II, L.P. and ITV Affiliates Fund
II, L.P. to secure a $520,000 full recourse loan made to Messrs. Levitan
and Campbell pursuant to a Loan and Pledge Agreement dated June 1999. All
of the shares pledged by Messrs. Levitan and Campbell are also subject to
an immediately exercisable call option pursuant to a Call Option Agreement
dated June 1999 among Information Technology Ventures II, L.P., ITV
Affiliates Fund II, L.P. and Messrs. Levitan and Campbell and are covered
by a put option pursuant to a Put Option Agreement dated June 1999 among
the same parties.
(6) Includes 18,000 shares issuable upon exercise of options exercisable within
60 days of November 22, 1999. Includes 225,366 shares held by Kettle
Partners L.P. Also includes warrants to purchase 34,846 shares that are
currently exercisable. Mr. Rosenberg, a director of Egreetings, is a
principal of Kettle Partners L.P. and, as such, may be deemed to have an
indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by Kettle Partners L.P. Mr. Rosenberg disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934.
(7) Includes 1,747,913 shares subject to repurchase by us as of November 22,
1999.
(8) Includes 7,500 shares issuable upon exercise of options exercisable within
60 days of November 22, 1999 and 15,375 shares subject to repurchase by us
as of November 22, 1999.
(9) Includes 35,999 shares issuable upon exercise of options exercisable within
60 days of November 22, 1999.
(10) Includes 86,084 shares issuable upon exercise of options exercisable within
60 days of November 22, 1999.
(11) See footnotes 1 through 4 and 6 through 10 above, as applicable.
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<PAGE> 84
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and material provisions of
our certificate of incorporation and bylaws, which will become effective upon
the completion of this offering, is a summary only and is qualified in its
entirety by the complete provisions of the certificate of incorporation and
bylaws, which have been filed as exhibits to the registration statement, of
which this prospectus is a part.
Upon the closing of this offering, our authorized capital stock will
consist of 75,000,000 shares of common stock, $0.001 par value per share, and
5,000,000 shares of preferred stock, $0.001 par value per share.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Unless Section
2115 of the California Corporations Code is applicable to us, holders of common
stock are not entitled to cumulative voting rights with respect to the election
of directors and, as a consequence, minority stockholders will not be able to
elect directors on the basis of their votes alone. Upon a liquidation,
dissolution or winding-up of Egreetings, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
common stock and any participating preferred stock outstanding at that time
after payment of liquidation preferences, if any, on any outstanding preferred
stock and payment of other claims of creditors. Each outstanding share of common
stock is, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, the board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series, to establish from time to time
the number of shares to be included in each such series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding). The board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
have the effect of delaying, deferring or preventing a change in control of
Egreetings and may adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock.
WARRANTS
As of November 1, 1999, warrants to purchase an aggregate of 7,503 shares
of Series B preferred stock were outstanding at an exercise price of $2.00 per
share. Each warrant contains provisions for the adjustment of the exercise price
and the aggregate
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<PAGE> 85
number of shares issuable upon the exercise of the warrant in the event of stock
dividends, stock splits, reorganizations and reclassifications and
consolidations. Upon the closing of this offering, all warrants to purchase
Series B preferred stock will become exercisable for common stock at a rate of
two shares of common stock for each one share of Series B preferred stock.
As of October 31, 1999, warrants to purchase an aggregate of 41,910 shares
of Series C preferred stock were outstanding at an exercise price of $4.00 per
share, except for a warrant for 4,166 shares of Series C preferred stock that
has an exercise price of $3.60 per share. Each warrant contains provisions for
the adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant in the event of stock dividends, stock splits,
reorganizations and reclassifications and consolidations. Upon the closing of
this offering, all warrants to purchase Series C preferred stock will become
exercisable for common stock at a rate of two shares of common stock for each
one share of Series C preferred stock.
As of October 31, 1999, a warrant to purchase an aggregate of 1,663,333
shares of Series E preferred stock was outstanding at an exercise price of $5.46
per share to Gibson Greetings, Inc. Upon closing of this offering, this warrant
will become exercisable at a rate of two shares of common stock for each one
share of Series E preferred stock and will expire unless earlier exercised.
As of October 31, 1999, warrants to purchase an aggregate of 67,139 shares
of Series F preferred stock were outstanding at an exercise price of $6.30 per
share. Each warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon the exercise of the warrant in
the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. Upon the closing of this offering, all
warrants to purchase Series F preferred stock will become exercisable at a rate
of two shares of common stock for each one share of Series F preferred stock.
As of October 31, 1999, warrants to purchase an aggregate of 60,000 shares
of Series F preferred stock were outstanding at an exercise price of $9.00 per
share. Each warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon the exercise of the warrant in
the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. Upon the closing of this offering, all
warrants to purchase Series F preferred stock will become exercisable for common
stock at a rate of two shares of common stock for each one share of Series F
preferred stock.
REGISTRATION RIGHTS
Holders of 23,955,170 shares of stock held by them, or subject to
acquisition upon exercise of warrants, have registration rights and can require
that we file a registration statement under the Securities Act of 1933 covering
all or a portion of the investors' registrable securities. These registration
rights are subject to our right to delay the filing of a registration statement
for a period not to exceed 180 days. We cannot delay the filing of a
registration statement more than once in a 12-month period after receiving the
registration demand. The managing underwriter, if any, of any offering pursuant
to a registration has certain rights to limit the number of the registrable
securities proposed to be included in such registration. In addition, these
registration rights are no longer effective once we have effected two
registrations pursuant to these provisions.
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<PAGE> 86
These investors also have certain "piggyback" registration rights. If we
propose to register any of our securities under the Securities Act of 1933
(other than pursuant to the investors' demand registration rights noted above),
the investors may require us to use our best efforts to include all or a portion
of their registrable securities in such registration. The managing underwriter,
if any, of any such offering will have the right to limit or exclude registrable
securities from such registration.
All registration expenses incurred in connection with the above
registrations would be borne by us, including, without limitation, all fees and
disbursements of a single counsel for the selling investors, except for expenses
incurred in connection with more than two registrations of Form S-3 per year.
Each selling investor would pay all underwriting discounts and selling
commissions applicable to the sale of his or its registrable securities, as well
as any fees and disbursements of counsel beyond those of a single counsel for
the selling investors.
All registration rights described above will terminate on the earlier of
four years after the date of this offering or the date on which an investor may
sell all of its or his shares under Rule 144(k) of the Securities Act or during
any 90-day period under Rule 144 of the Securities Act.
SECTION 2115
We currently are subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, certain provisions of California corporate law, as further described
in the table below, will apply to that company if more than 50% of its
outstanding voting securities are held of record by persons having addresses in
California and the majority of the company's operations occur in California.
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<PAGE> 87
The following table sets forth some of the effects on our corporate
governance of Section 2115:
<TABLE>
<CAPTION>
SECTION 2115 NON-SECTION 2115
------------ ----------------
<S> <C> <C>
Election of Cumulative voting is allowed No cumulative voting is
Directors which allows each shareholder allowed; accordingly a holder
to vote the number of votes of 50% or more of voting stock
equal to the number of controls election of all
candidates multiplied by the directors.
number of votes to which the
shareholders' shares are
normally entitled in favor of
one candidate. This potentially
allows minority stockholders to
elect some members of the
board.
Removal of Removal with or without cause If the Board is classified,
Directors by the affirmative vote of the removal is only allowed for
holders of a majority of cause upon the affirmative vote
outstanding voting stock is of a majority of the
allowed. outstanding voting stock
entitled to vote in the
election of directors.
Supermajority In order to institute a Simple majority may adopt
Vote supermajority provision, the amendment providing for
Requirement amendment must be approved by supermajority.
at least as large a proportion
as would be required under the
amendment.
Dividend Dividends are only payable (a) Dividends are payable out of
Distribution out of the surplus of retained either the surplus of retained
earnings and (b) if, earnings or out of its net
immediately after the profits for the year the
distribution, a company's distribution takes place, or
assets are at least equal to the preceding year.
its liabilities.
Dissenters' Generally available in any type Generally only available in a
Rights of reorganization, including a merger. No rights so long as
merger, sale of assets or our common stock is quoted on
sale/exchange of shares. If the the Nasdaq National Market or
shares are listed on an traded on an exchange.
exchange, 5% of the
stockholders must assert their
right for any stockholder to
have these rights.
</TABLE>
In addition to these differences, Section 2115 also provides for information
rights and required filings in the event a company effects a sale of assets or
completes a merger.
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2000 annual meeting of
stockholders. See "-- Common Stock" and "Management -- Board Composition" for
additional information relating to the effects of Section 2115 on Egreetings.
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DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203, subject to exceptions, prohibits a
Delaware corporation from engaging in any "business combination" with any
"interested stockholder" for a period of three years following the date that the
stockholder became an interested stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Section 203 defines an "interested stockholder" as:
- any entity or person beneficially owning 15% or more of the outstanding
voting stock of the corporation; and
- any entity or person affiliated with or controlling or controlled by the
entity or person.
A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. We
have not "opted out" of the provisions of the Section 203. The statute could
prohibit or delay mergers or other takeover or change-in-control
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attempts with respect to Egreetings and, accordingly, may discourage attempts to
acquire Egreetings.
Charter Provisions
Our bylaws divide the board of directors into three classes as nearly equal
in size as possible with staggered three-year terms. The classification of the
board of directors could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, control of
Egreetings. In addition, the bylaws provide that any action required or
permitted to be taken by our stockholders at an annual meeting or a special
meeting of the stockholders may be taken only if it is properly brought before
such meeting and may not be taken by written action in lieu of a meeting. The
bylaws also provide that special meetings of the stockholders may be called only
by the chairman of the board, the chief executive officer or the holders of 50%
or more of our outstanding stock. See "Management -- Board Composition" for
additional information relating to the classification of the board of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation contains provisions permitted under
Delaware law relating to the liability of directors. These provisions eliminate
a director's personal liability for monetary damages resulting from a breach of
fiduciary duty, except in circumstances involving wrongful acts, such as:
- any breach of the director's duty of loyalty;
- acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law;
- payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law; or
- any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
Our bylaws require us to indemnify our directors and executive officers to
the fullest extent not prohibited by the Delaware law. We may limit the extent
of such indemnification by individual contracts with our directors and executive
officers. Further, we may decline to indemnify any director or executive officer
in connection with any proceeding initiated by such person or any proceeding by
such person against us or our directors, officers, employees or other agents,
unless indemnification is expressly required to be made by law or the proceeding
was authorized by our board of directors.
Prior to completion of this offering, we intend to enter into indemnity
agreements with each of our current directors and certain of our executive
officers to give such directors and officers additional contractual assurances
regarding the scope of the indemnification set forth in our certificate of
incorporation and bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving any of our
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<PAGE> 90
directors, officers or employees for which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
We plan to obtain directors' and officers' liability insurance prior to the
completion of this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be Norwest Bank
Minnesota, N.A.
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<PAGE> 91
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock may
develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this offering
due to certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 34,443,481
shares of common stock, based on the number of shares of common stock
outstanding as of November 22, 1999, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless these
shares are purchased by affiliates.
The remaining 28,443,481 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- 19,150,931 shares will have been held long enough to be sold under Rule
144 or Rule 701 beginning 181 days after the date of this prospectus; and
- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.
Lock-Up Agreements. All of our stockholders have agreed not to transfer or
dispose of, directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for shares of our
common stock, for a period of 180 days after the date the registration statement
of which this prospectus is a part is declared effective. Transfers or
dispositions can be made sooner with the prior written consent of Credit Suisse
First Boston Corporation and, in some instances, Egreetings.
Rule 144. In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding which
will equal approximately 344,433 shares immediately after this offerings;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also limited by manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
89
<PAGE> 92
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us under a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the date of this prospectus.
Non-affiliates will be able to sell their shares subject only to the
manner-of-sale provisions of Rule 144. Affiliates will be able to sell their
shares without compliance with the holding period requirements of Rule 144.
Registration Rights. Upon completion of this offering, holders of
22,717,555 shares of our common stock will be entitled to rights with respect to
the registration of their shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Except for shares purchased by
affiliates, registration of their shares under the Securities Act would result
in these shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration.
Stock Options. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance upon exercise of outstanding options. The
registration statement is expected to be filed and become effective as soon as
practicable after the closing of this offering. Accordingly, shares registered
under the registration statement will be available for sale in the open market
beginning 180 days after the effective date of the registrant statement of which
this prospectus is a part, except with respect to Rule 144 volume limitations
that apply to our affiliates. As of November 22, 1999, 2,473,680 shares of
common stock were reserved for issuance upon the exercise of outstanding
options.
90
<PAGE> 93
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
BancBoston Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc. are
acting as representatives, the following respective number of shares of common
stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
BancBoston Robertson Stephens Inc...........................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 900,000 additional shares at the initial offering price less
the underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the representatives.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our officers and directors and all of our stockholders have agreed
that we and they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to any
additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common
91
<PAGE> 94
stock or publicly disclose the intention to make any such offer, sale, pledge
disposition or filing without the prior written consent of Credit Suisse First
Boston Corporation and, in some instances, Egreetings for a period of 180 days
after the date of this prospectus, except, in our case, grants of employee stock
options pursuant to our equity incentive plans; issuances pursuant to the
exercise of those options or options outstanding on the date hereof; and shares,
options or warrants issued or granted in connection with equipment lease
financing arrangements, credit agreements or other commercial transactions or
corporate strategic partner transactions approved by our board of directors.
At our request, the underwriters have reserved up to 400,000 shares of
common stock offered hereby for sale at the initial public offering price to our
customers, consultants and others with whom we do business, existing
stockholders and friends of Egreetings. As a result, the number of shares
available for sale to the general public will be reduced to the extent that
persons purchase these reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares of common stock offered hereby.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in respect to those liabilities.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "EGRT."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The shares will be sold at a price
determined by the pricing committee of our board of directors. The principal
factors to be considered in determining the public offering price include the
following:
- the information set forth in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
92
<PAGE> 95
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
93
<PAGE> 96
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions of
the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
94
<PAGE> 97
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
95
<PAGE> 98
LEGAL MATTERS
Cooley Godward LLP, San Francisco, California, will pass for us upon the
validity of the shares of common stock offered in this prospectus. The
underwriters have been represented by Wilson Sonsini Goodrich & Rosati, Palo
Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement, does
not contain all of the information, exhibits, schedules and undertakings
included in the registration statement. For further information pertaining to us
and the common stock offered by this prospectus, reference is made to the
registration statement and the attached exhibits and schedules. Although
required material information has been presented in this prospectus, statements
contained in this prospectus as to the contents or provisions of any contract or
other document referred to in this prospectus may be summary in nature, and in
each instance reference is made to the copy of this contract or other document
filed as an exhibit to the registration statement, and each statement is
qualified in all respects by this reference. A copy of the registration
statement, including all exhibits and schedules thereto, may be inspected
without charge at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of all or any part of the registration statement may be obtained
from the Commission offices upon the payment of the fees prescribed by the
Commission. In addition, registration statements and certain other filings made
with the Commission through its Electronic Data Gathering, Analysis and
Retrieval system, including our registration statement and all exhibits and
amendments to our registration statement, are publicly available without charge
through the Commission's Web site at http://www.sec.gov.
After this offering, we will have to provide the information and reports
required by the Exchange Act and we will file periodic reports, proxy statements
and other information with the Securities and Exchange Commission. Upon approval
of the common stock for listing on Nasdaq, these reports, proxy and information
statements and other information may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
96
<PAGE> 99
EGREETINGS NETWORK, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 100
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Egreetings Network, Inc.
We have audited the accompanying balance sheets of Egreetings Network, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Egreetings Network, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
November 22, 1999
F-2
<PAGE> 101
EGREETINGS NETWORK, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 3,524 $ 268 $ 2,376
Accounts receivable..................... 10 210 693
Prepaid expenses and other current
assets................................ 22 41 1,530
------- -------- --------
Total current assets............. 3,556 519 4,599
Furniture and equipment, net.............. 367 845 6,834
Restricted cash deposit................... -- -- 2,000
Deferred content costs.................... 1,259 1,566 6,920
Deposits and other assets................. 21 38 602
------- -------- --------
Total assets..................... $ 5,203 $ 2,968 $ 20,955
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses... $ 423 $ 1,518 $ 4,531
Accrued compensation and related
expenses.............................. 48 205 1,191
Accrued royalties (including $1, $134
and $231, respectively, payable to a
related party)........................ 3 220 343
Deferred revenue........................ -- 86 465
Current portion of equipment term
loan.................................. 325 374 1,880
Notes payable to stockholders........... 22 954 --
------- -------- --------
Total current liabilities........ 821 3,357 8,410
Equipment term loan, less current
portion................................. 197 586 3,590
Notes payable to stockholders............. -- 514 --
------- -------- --------
Total liabilities................ 1,018 4,457 12,000
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par
value: 15,500,000 shares authorized;
2,298,741 shares issued and
outstanding in 1997; 2,523,546 in 1998
and 6,332,420 in 1999 (none pro
forma)................................ 9,417 11,363 42,395
Common stock, $0.001 par value;
20,000,000 shares authorized in 1997
and 1998 and 65,000,000 in 1999;
3,466,000 shares issued and
outstanding in 1997 and 1998;
6,076,656 in 1999 and 18,741,496 (pro
forma)................................ 16 504 9,869 $ 52,264
Deferred stock compensation............. -- (287) (2,853) (2,853)
Notes receivable from stockholders...... -- -- (5,360) (5,360)
Accumulated deficit..................... (5,248) (13,069) (35,096) (35,096)
------- -------- -------- --------
Total stockholders' equity
(deficit)...................... 4,185 (1,489) 8,955 $ 8,955
------- -------- -------- ========
Total liabilities and
stockholders' equity
(deficit)...................... $ 5,203 $ 2,968 $ 20,955
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 102
EGREETINGS NETWORK, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 164 $ 505 $ 317 $ 182 $ 1,527
Costs and expenses:
Cost of services(1)............. 256 336 610 401 1,989
Sales and marketing(2).......... 366 942 3,094 1,918 8,221
Operations and development(3)... 552 1,422 2,628 1,631 7,081
General and administrative(4)... 778 830 1,444 1,203 4,051
Amortization of deferred content
costs........................ -- -- 138 126 754
Amortization of deferred stock
compensation................. -- -- 201 113 1,366
--------- --------- ---------- --------- ----------
Total costs and expenses........ 1,952 3,530 8,115 5,392 23,462
--------- --------- ---------- --------- ----------
Loss from operations.............. (1,788) (3,025) (7,798) (5,210) (21,935)
Interest income................... 11 -- 42 39 182
Interest expense.................. (7) (68) (65) (42) (274)
--------- --------- ---------- --------- ----------
Net loss.......................... $(1,784) $(3,093) $(7,821) $(5,213) $(22,027)
========= ========= ========== ========= ==========
Net loss per share:
Basic and diluted............... $ (1.14) $ (1.00) $ (2.26) $ (1.50) $ (6.12)
========= ========= ========== ========= ==========
Pro forma basic and diluted
(unaudited).................. $ (0.94) $ (1.51)
========== ==========
Shares used in calculation of net
loss per share:
Basic and diluted............ 1,561 3,100 3,464 3,464 3,598
========= ========= ========== ========= ==========
Pro forma basic and diluted
(unaudited)................ 8,324 14,570
========== ==========
</TABLE>
- ---------------
(1) Excluding $138, $126 and $754 in amortization of deferred content costs for
the year ended December 31, 1998 and the nine months ended September 30,
1998 and 1999, respectively, and excluding $20, $11 and $77 in amortization
of deferred stock compensation for the year ended December 31, 1998 and the
nine months ended September 30, 1998 and 1999, respectively.
(2) Excluding $40, $23 and $280 in amortization of deferred stock compensation
for the year ended December 31, 1998 and the nine months ended September 30,
1998 and 1999, respectively.
(3) Excluding $111, $62 and $598 in amortization of deferred stock compensation
for the year ended December 31, 1998 and the nine months ended September 30,
1998 and 1999, respectively.
(4) Excluding $30, $17 and $411 in amortization of deferred stock compensation
for the year ended December 31, 1998 and the nine months ended September 30,
1998 and 1999, respectively.
See accompanying notes.
F-4
<PAGE> 103
EGREETINGS NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES TOTAL
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE STOCKHOLDERS'
-------------------- ------------------ STOCK FROM ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS DEFICIT (DEFICIT)
---------- ------- --------- ------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995...................... 520,000 $ 416 3,220,000 $ 5 $ -- $ -- $ (371) $ 50
Issuance of common
stock................. -- -- 246,000 11 -- -- -- 11
Issuance of Series B
preferred stock....... 375,000 750 -- -- -- -- -- 750
Issuance of Series B
preferred stock for
conversion of notes
payable............... 75,000 150 -- -- -- -- -- 150
Issuance of warrants in
connection with debt
financing............. -- 4 -- -- -- -- -- 4
Issuance of Series C
preferred stock....... 341,753 1,367 -- -- -- -- -- 1,367
Net loss and
comprehensive loss.... -- -- -- -- -- -- (1,784) (1,784)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at December 31,
1996.................... 1,311,753 2,687 3,466,000 16 -- -- (2,155) 548
Issuance of Series C
preferred stock....... 131,212 525 -- -- -- -- -- 525
Issuance of Series C
preferred stock for
conversion of notes
payable............... 229,798 919 -- -- -- -- -- 919
Issuance of Series D
preferred stock....... 625,978 4,000 -- -- -- -- -- 4,000
Issuance of warrants in
connection with debt
financing............. -- 27 -- -- -- -- -- 27
Valuation of preferred
stock warrant in
connection with
content agreement..... -- 1,259 -- -- -- -- -- 1,259
Net loss and
comprehensive loss.... -- -- -- -- -- -- (3,093) (3,093)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at December 31,
1997.................... 2,298,741 9,417 3,466,000 16 -- -- (5,248) 4,185
Issuance of Series D
preferred stock for
conversion of notes
payable............... 224,805 1,436 -- -- -- -- -- 1,436
Issuance of warrants in
connection with debt
financing............. -- 65 -- -- -- -- -- 65
Deferred stock
compensation related
to grant of stock
options............... -- -- -- 488 (488) -- -- --
Amortization of deferred
stock compensation.... -- -- -- -- 201 -- -- 201
Valuation of preferred
stock warrant in
connection with
content agreement..... -- 445 -- -- -- -- -- 445
Net loss and
comprehensive loss.... -- -- -- -- -- -- (7,821) (7,821)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at December 31,
1998.................... 2,523,546 11,363 3,466,000 504 (287) -- (13,069) (1,489)
Issuance of Series D
preferred stock for
conversion of notes
payable (unaudited)... 82,381 514 -- -- -- -- -- 514
Issuance of Series F
preferred stock, net
of issuance costs
(unaudited)........... 3,283,636 20,882 -- -- -- -- -- 20,882
Issuance of Series F
preferred stock for
conversion of notes
payable (unaudited)... 442,857 3,100 -- -- -- -- -- 3,100
Issuance of common stock
under stock option
plan (unaudited)...... -- -- 2,610,656 5,433 -- (5,360) -- 73
Issuance of warrants in
connection with debt
financing
(unaudited)........... -- 428 -- -- -- -- -- 428
Deferred stock
compensation related
to grant of stock
options (unaudited)... -- -- -- 3,932 (3,932) -- -- --
Amortization of deferred
stock compensation
(unaudited)........... -- -- -- -- 1,366 -- -- 1,366
Valuation of preferred
stock warrant in
connection with
content agreement
(unaudited)........... -- 6,108 -- -- -- -- -- 6,108
Net loss and
comprehensive loss
(unaudited)........... -- -- -- -- -- -- (22,027) (22,027)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at September 30,
1999 (unaudited)........ 6,332,420 $42,395 6,076,656 $9,869 $(2,853) $(5,360) $(35,096) $ 8,955
========== ======= ========= ====== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 104
EGREETINGS NETWORK, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(1,784) $(3,093) $(7,821) $(5,213) $(22,027)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 70 158 308 83 1,436
Amortization of deferred content costs.................. -- -- 138 126 754
Amortization of deferred stock compensation............. -- -- 201 113 1,366
Other................................................... 4 68 19 -- 46
Changes in operating assets and liabilities:
Accounts receivable................................... -- (10) (200) (97) (483)
Prepaid expenses and other current assets............. (7) (16) (19) 2 (1,289)
Other assets.......................................... (7) (13) (17) (16) (2,136)
Accounts payable and accrued liabilities.............. 373 43 1,469 1,028 4,122
Deferred revenue...................................... -- -- 86 -- 379
------- ------- ------- ------- --------
Net cash used in operating activities..................... (1,351) (2,863) (5,836) (3,974) (17,832)
------- ------- ------- ------- --------
INVESTING ACTIVITIES
Purchases of furniture and equipment, net................. (309) (320) (786) (602) (7,425)
------- ------- ------- ------- --------
Net cash used in investing activities..................... (309) (320) (786) (602) (7,425)
------- ------- ------- ------- --------
FINANCING ACTIVITIES
Borrowings under equipment term loan...................... -- 478 764 -- 4,971
Payments on equipment term loan........................... -- -- (282) (151) (461)
Advance on note receivable from stockholder............... -- -- -- -- (200)
Borrowings on notes payable to stockholders............... 150 941 2,950 1,408 2,100
Payments on notes payable to stockholders................. -- -- (22) (22) --
Issuance of common stock.................................. 11 -- -- -- 73
Other borrowings.......................................... -- 44 (44) (44) --
Issuance of preferred stock, net.......................... 2,117 4,525 -- -- 20,882
------- ------- ------- ------- --------
Net cash provided by financing activities................. 2,278 5,988 3,366 1,191 27,365
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash equivalents...... 618 2,805 (3,256) (3,385) 2,108
Cash and cash equivalents at beginning of period.......... 101 719 3,524 3,524 268
------- ------- ------- ------- --------
Cash and cash equivalents at end of period................ $ 719 $ 3,524 $ 268 $ 139 $ 2,376
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest.................................... $ -- $ 10 $ 13 $ 24 $ 103
======= ======= ======= ======= ========
Conversion of notes payable to stockholders to preferred
stock................................................... $ 150 $ 919 $ 1,436 $ 1,408 $ 3,614
======= ======= ======= ======= ========
Issuance of warrants in connection with debt financing.... $ 4 $ 27 $ 65 $ -- $ 428
======= ======= ======= ======= ========
Issuance of common stock for notes receivable............. $ -- $ -- $ -- $ -- $ 5,360
======= ======= ======= ======= ========
Valuation of preferred stock warrant in connection with
content agreement....................................... $ -- $ 1,259 $ 445 $(1,153) $ 6,108
======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 105
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Egreetings Network, Inc. (the "Company"), formerly The Virtual Mall (dba
Greet Street), was incorporated in California in 1994. The Company offers
consumers a solution for finding and sending appropriate greetings and gifts.
The Company's Web site allows consumers to send personalized content-rich
digital greetings and a wide variety of gifts. The Company operates in one
business segment and generates revenue from corporate advertising and
sponsorships, ecommerce and direct marketing.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of September 30, 1999 and for the nine
months ended September 30, 1998 and 1999 is unaudited, but includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its financial position at such
date and its results of operations and cash flows for such periods. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of results that may be expected for any future periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid short-term investments
with insignificant interest rate risk and original maturities from date of
purchase of three months or less.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful life of the related asset, which
currently averages three years. Leasehold improvements are amortized over the
shorter of the estimated useful life or the life of the lease.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of risk include cash and cash equivalents and accounts
receivable.
F-7
<PAGE> 106
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
For the year ended December 31, 1998, one corporate advertising sponsor
accounted for 11% of the Company's revenues. Three corporate sponsors accounted
for 17%, 14% and 12% of accounts receivable at December 31, 1998. An inability
to demonstrate an active and growing user base to advertisers and sponsors may
result in a loss of advertisement and sponsorship agreements and a decline in
advertisement and sponsorship revenues.
A third party accounted for approximately 80% and 90% of the Company's
revenues for the years ended December 31, 1996 and 1997, respectively. This
relationship accounted for 100% of accounts receivable at December 31, 1997.
DEPENDENCE ON THIRD PARTIES
A preferred stockholder provides a significant portion of the Company's
digital greetings content pursuant to an agreement which the Company pays
royalties. Under this agreement, the Company paid royalties of $1,000, $112,000
and $358,000 in 1997, 1998 and for the nine months ended September 30, 1999,
respectively (none in 1996). Royalty obligations arise as digital greetings
containing third-party content are sent by consumers. Royalty expenses are
recorded with a charge to cost of services in the statement of operations in the
period during which the related obligations arise. In addition, the Company
relies on two other entities, one to provide a majority of support necessary to
maintain the server and transmit data; the other party serves as a channel
distribution partner. The inability of any of these parties to fulfill their
obligations with the Company could negatively impact the Company's future
results.
CHANNEL DISTRIBUTION COSTS
The Company has contracted with several third party channel distribution
partners whose internet Web sites direct internet traffic to the Egreetings Web
site by a link from the distribution partners' Web site. The contracts typically
range from 12 - 24 months. The Company charges the cost of these distribution
services to sales and marketing expense over the life of the contracts.
REVENUE RECOGNITION
Revenues consist primarily of advertising and sponsorship revenues and
direct marketing revenues. The duration of banner advertising and sponsorship
commitments typically range from one month to one year. The Company's
advertisement obligations typically include guarantees of a minimum number of
impressions, or times that an advertisement appears in pages viewed by consumers
using the Company's Web site. The Company recognizes revenues on sale of banner
advertisements as the impression is delivered or displayed. To the extent
minimum guaranteed impressions are not met, revenue recognition is deferred
until the remaining guaranteed impressions are delivered.
F-8
<PAGE> 107
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
The Company recognizes revenues on the sale of sponsorship advertisements on a
straight-line basis over the period in which the sponsor's message is displayed.
Revenue from direct marketing activities is recognized based on the ratio of the
number of emails actually sent to the guaranteed number of emails to be sent. In
each case, revenues are recognized only if the Company has no remaining
significant obligations and the collection of the receivable is probable.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock option grants using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25 and
has adopted the disclosure-only alternative of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
approximately $80,000, $134,000 and $478,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
COMPREHENSIVE INCOME
In June 1998, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which established new standards
for reporting and displaying comprehensive income and its components in a full
set of general purpose financial statements. There is no difference in the
Company's historical net losses as reported and the comprehensive net losses
under the provisions of SFAS 130 for all periods presented. Accordingly, the
adoption of SFAS 130 had no effect on the Company's reported results of
operations.
NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirement of SFAS No. 128, "Earnings per Share" ("SFAS
128"). Basic earnings per
F-9
<PAGE> 108
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
share has been computed using the weighted-average number of common shares
outstanding during the period, less shares subject to repurchase, and excludes
any dilutive effects of stock options, warrants, and convertible securities.
Potentially dilutive securities have been excluded from the computation of
diluted net loss per share as their inclusion would be antidilutive.
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that will automatically
convert upon completion of the Company's initial offering, using the
if-converted method.
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, expect share and per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss................................ $ (1,784) $ (3,093) $ (7,821) $ (5,213) $ (22,027)
=========== ========== =========== ========== ===========
Weighted average shares of common stock
outstanding........................... 3,380,000 3,466,000 3,466,000 3,466,000 4,447,823
Less: weighted average shares of common
stock that may be repurchased......... (1,819,279) (365,925) (1,543) (2,057) (850,057)
----------- ---------- ----------- ---------- -----------
Weighted average shares of common stock
outstanding used in computing basic
and diluted net loss per share........ 1,560,721 3,100,075 3,464,457 3,463,943 3,597,766
=========== ========== =========== ========== ===========
Basic and diluted net loss per share.... $ (1.14) $ (1.00) $ (2.26) $ (1.50) $ (6.12)
=========== ========== =========== ========== ===========
Pro forma (unaudited):
Net loss............................ $ (7,821) $ (22,027)
=========== ===========
Weighted average shares used in
computing basic and diluted net loss
per share (from above)................ 3,464,457 3,597,766
Adjustment to reflect the effect of the
assumed conversion of preferred stock
to common stock from the date of
issuance.............................. 4,859,755 10,972,007
----------- -----------
Weighted average shares used in
computing pro forma basic and diluted
net loss per share.................... 8,324,212 14,569,773
=========== ===========
Pro forma basic and diluted net loss per
share................................. $ (0.94) $ (1.51)
=========== ===========
</TABLE>
F-10
<PAGE> 109
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 223,000, 380,000, 424,000, 675,000, and 1,692,000 common equivalent
shares related to the outstanding stock options and warrants not included above
(determined using the treasury stock method) for the years ended December 31,
1996, 1997 and 1998, and for the nine months ended September 30, 1998 and 1999,
respectively.
EFFECT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 131 ("SFAS 131"),
"Disclosure about Segments of an Enterprise and Related Information,"
establishes standards for the way public business enterprises report information
in annual statements and interim financial reports regarding operating segments,
products and services, geographic areas, and major customers. The Company
adopted SFAS 131 in the year ended December 31, 1998, and operates in one
business segment which is, providing digital greetings.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
----- ------
<S> <C> <C>
Furniture and fixtures...................................... $ 49 $ 98
Computer equipment and purchased software................... 502 1,220
Leasehold improvements...................................... 14 34
----- ------
565 1,352
Less accumulated depreciation and amortization.............. (198) (507)
----- ------
$ 367 $ 845
===== ======
</TABLE>
3. COMMITMENTS
The Company leases its office facilities and certain office equipment under
noncancelable lease agreements which require the Company to pay operating costs,
including property taxes, normal maintenance and insurance. Rent expense
amounted to approximately $35,000, $98,000, and $216,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-11
<PAGE> 110
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
3. COMMITMENTS (CONTINUED)
Future minimum payments under the Company's operating leases as of December
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999.................................................... $421
2000.................................................... 60
2001.................................................... 3
----
Total minimum lease payments.......................... $484
====
</TABLE>
In April 1999, the Company entered into a long-term noncancelable lease on
an office building which expires August 2009. Future minimum payments under the
terms of the agreement are $722,000, $2,166,000, $2,166,000, $2,166,000, and
$2,166,000 for the years ended December 31, 1999, 2000, 2001, 2002, and 2003,
respectively. Also under the terms of the agreement, the Company is required to
provide a $2,000,000 letter of credit supporting the minimum lease payments. The
letter of credit is fully collateralized with a compensating cash balance at the
issuing bank.
4. DEBT
The Company has two equipment term loans. The loans bear interest at the
prime rate plus 1% and the prime rate plus 2%, respectively and mature in June
2000 and March 2002, respectively. Principal and interest are payable monthly.
At December 31, 1998, the outstanding loan balance was $210,000 and $750,000,
respectively. In February 1999, the Company received an additional $500,000 to
its equipment term loans. These loans are secured by the equipment purchased
under the loan agreement and a general lien against the Company's assets and
require the Company to comply with certain financial covenants. At September 30,
1999, the Company was in violation of certain financial covenants and has
obtained a waiver for these covenant violations through September 30, 1999.
Future payments are as follows at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
1999................................................... $ 441
2000................................................... 358
2001................................................... 265
2002................................................... 21
------
Total payments....................................... 1,085
Less amount representing interest.................... (125)
------
Total principal payments............................. 960
Less current portion................................. (374)
------
$ 586
======
</TABLE>
In August 1999, the Company entered into an equipment financing agreement
with two leasing companies and a financial institution which provides for
borrowings of up to $10.0 million, of which approximately $5.4 million is
available for use as of September 30, 1999. Amounts due bear interest at the
applicable three-year treasury note rate plus 2.75%
F-12
<PAGE> 111
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
4. DEBT (CONTINUED)
per annum and are payable monthly over a 36 month period from the date of each
advance. An additional interest payment of 10% of the total amount drawn-down on
the facility is due upon extinguishment of the debt. Advances under the facility
are available through July 31, 2000. Borrowings are secured by the equipment
purchased under the financing agreement. In connection with the financing, the
Company granted warrants to purchase 60,000 shares of the Company's Series F
preferred stock at an exercise price of $9.00 per share. The Company has
recorded the value of the warrant using the Black-Scholes option pricing model
and will record a charge to operations on a monthly basis over the term of the
financing agreement.
NOTE PAYABLE TO STOCKHOLDER
In October 1998, the Company entered into a convertible promissory note
with a preferred stockholder under which it borrowed approximately $514,000. The
note bears interest at 5.6%, compounded semi-annually. In March 1999, principal
and accrued interest were converted into 82,381 shares of Series D preferred
stock at $6.39 per share.
5. INCOME TAXES
There has been no provision for United States federal or state or foreign
income taxes for any period as the Company has incurred operating losses for all
periods and in all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 1,898 $ 4,710
Other.............................................. 17 80
------- -------
Total deferred tax assets............................ 1,915 4,790
Valuation allowance.................................. (1,915) (4,790)
------- -------
Net deferred tax assets.............................. $ -- $ --
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $1,215,000 and $2,875,000 during the years ended December
31, 1997 and 1998, respectively.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $11,776,000, which expire in
the years 2010
F-13
<PAGE> 112
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
through 2018. The Company also had net operating loss carryforwards for state
income tax purposes of approximately $11,775,000 expiring in 2003. Utilization
of the Company's net operating losses may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. Such an annual limitation
could result in the expiration of the net operating losses before utilization.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In May 1999, the Company completed a three-for-one stock split of issued
and outstanding shares of common stock. In November 1999, the Company completed
a two-for-three reverse stock split of issued and outstanding shares of common
stock. All common share prices, conversion rates and other amounts associated
with rights, preferences and privileges in the accompanying financial statements
have been retroactively adjusted to reflect the effect of these stock splits.
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock is as follows by series:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
----------------------------------------
DECEMBER 31, AGGREGATE LIQUIDATION
DESIGNATED ---------------------- SEPTEMBER 30, PREFERENCE AT
SERIES SHARES 1997 1998 1999 DECEMBER 31, 1998
------ ---------- --------- --------- -------------- ---------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A.................... 520,000 520,000 520,000 520,000 $ 416,000
B.................... 457,500 450,000 450,000 450,000 900,000
C.................... 808,257 702,763 702,763 702,763 2,811,000
D.................... 933,200 625,978 850,783 933,164 5,437,000
E.................... 1,500,000 -- -- -- --
F.................... 3,800,000 -- -- 3,726,493 --
---------- --------- --------- ---------- ----------
8,018,957 2,298,741 2,523,546 6,332,420 $9,564,000
========== ========= ========= ========== ==========
</TABLE>
Each share of preferred stock is convertible at any time, at the option of
the holder, into two shares of the Company's common stock, subject to
anti-dilution provisions. Each share of preferred stock will automatically
convert into two shares of common stock upon the earlier of the completion of an
initial public offering of the Company's common stock with proceeds to the
Company of at least $7,500,000 for Series A through E and $15,000,000 for Series
F at a per share price of $2.50, $5.00, $6.00 and $15.00 for Series A, B, C and
F, respectively, or the date on which the number of shares of Series A, B, C, D,
E or F preferred stock outstanding is less than 50% of the greatest number of
Series A, B, C, D, E or F, respectively, that has been outstanding at any time
on a series-by-series basis. The holders of Series A through D and F preferred
stock are entitled to
F-14
<PAGE> 113
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
the number of votes equal to the number of shares of common stock into which
their preferred stock is convertible. The holders of Series E do not have voting
rights.
The holders of preferred stock, in preference to the holders of any other
capital stock of the Company, are entitled to receive non-cumulative dividends,
when and if the Board of Directors declares and pays a dividend on shares of
common stock, in such amount pro rata, on an as-converted basis. No dividends
had been declared as of December 31, 1998.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A, Series B, Series C, Series D, and Series F preferred
stock have a liquidation preference of $0.80, $2.00, $4.00, $6.39, and $7.00 per
share, respectively, over the holders of common stock plus any declared but
unpaid dividends. The holders of Series E preferred stock, as of December 31,
1998, have a liquidation preference of $6.43 per share over the holders of
common stock plus any declared but unpaid dividends. The liquidation preference
adjusts to the lesser of i) $6.43 per share or ii) the exercise price of the
Gibson Series E warrant. To the extent that additional funds are available after
distribution to the holders of Series A through D preferred stock and common
stock, the holders of Series A, Series B and Series C preferred stock will
receive additional distributions not to exceed $1.00, $2.52 and $5.00 per share,
respectively, along with the holders of common stock.
BRIDGE FINANCINGS
In October and November 1996, the Company issued notes payable with an
aggregate principal amount of $919,000 and interest rates ranging from 8.5% to
10.75% per annum, together with warrants to purchase 41,910 shares of Series C
preferred stock. The principal amount of these notes was converted into 229,798
shares of Series C preferred stock in October 1997.
Between November 1998 and January 1999, the Company issued subordinated
notes for an aggregate amount of $2,100,000 and an interest rate of 8.0% per
annum, together with warrants to purchase 67,139 shares of Series F preferred
stock. The principal amount of these notes was converted into 300,000 shares of
Series F preferred stock in March 1999.
In February and March 1999, the Company issued short-term notes payable
with an aggregate principal amount of $1,000,000 and interest rates ranging from
4.6% to 8.0% per annum. The principal amount of these notes was converted into
142,857 shares of Series F preferred stock in March 1999.
F-15
<PAGE> 114
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The Company had the following warrants to purchase shares of stock
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PREFERRED PRICE PER EXPIRATION OF
SHARES STOCK SHARE WARRANTS
- --------- ---------- --------- -------------------
<C> <C> <C> <S>
7,503 Series B $2.00 March 2003
41,910 Series C 4.00 April - August 2007
946,925 Series E 9.60 June 2000
31,746 Series F 6.30 November 2005
- ---------
1,028,084
=========
</TABLE>
In connection with the sale of the Series D preferred stock and a content
provider and distribution agreement ("Content Agreement") which expires in
December 2002, the Company granted the purchaser of these shares the right to
purchase 946,925 shares of Series E preferred stock at a price of $9.60 per
share in December 1997. This right originally expired in September 1998, but in
September 1998, the warrant expiration date was amended to expire upon the
earlier of June 5, 2000 or the completion of an initial public offering of the
Company's common stock with proceeds to the Company of at least $7,500,000;
provided, however, that if the Company's initial public offering has not
occurred by January 5, 2000, the right expires as to one-half of the shares
subject to this warrant if the warrant has not been exercised by that date. The
number of shares subject to this warrant was increased in March 1999 pursuant to
certain anti-dilution provisions that were triggered by the Company's sale of
its Series F preferred stock. As a result, as of September 30, 1999, the warrant
was exercisable for 1,470,000 shares of Series E preferred stock at an exercise
price per share equal to the lesser of (i) $6.18 per share and (ii) the price
per share to the public in an initial public offering.
Exercise of this warrant was contingent on the preferred stockholder not
being in material violation of the Content Agreement and therefore was accounted
for as a variable warrant. The warrant was valued by management using a model
based on the Black-Scholes model at each quarter end with the fair value
recorded as deferred content costs in the accompanying balance sheets. The
assumptions used to compute the value of the warrant at each measurement date
under Black-Scholes were as follows: expected volatility, 0.7; expected dividend
yield, 0%; risk-free interest rate, 4.34% to 5.38%; expected life, amount of
time between measurement date and expiration of warrant; and exercise price and
stock price, consistent with information at each relevant date. On September 30,
1999, in connection with the execution of the first amendment to the Content
Agreement, the warrant became non-forfeitable, fully exercisable and fully
vested and was no longer linked to performance under the Content Agreement. The
warrant value at September 30, 1999 was $7,812,000. The Company's sale of Series
G preferred stock in October 1999 triggered certain anti-dilution provisions
such that the warrant entitled the holder to
F-16
<PAGE> 115
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
purchase an additional 193,333 shares for a total of 1,663,333 shares of Series
E preferred stock. The price-protection features reduced the price per share
from $6.18 to $5.46 per share. The Company performed a final valuation of
Black-Scholes at that date, resulting in a value of $9,449,000 which will be
amortized over the remaining period of the Content Agreement. Realization of the
deferred content costs is subject to the Company generating adequate revenues
and other benefits as a result of the arrangement. Should the benefits under the
Content Agreement not accrue to the Company, the carrying value of the asset may
be impaired and the Company would be required to write down the asset value to
its net realizable value at that time. The Company will evaluate the
realizability of this asset at each reporting date in the future.
STOCK OPTIONS
The Company's 1996 Stock Option Plan provides for the issuance of 6,450,109
shares of common stock to employees, officers, directors and consultants and is
limited to 17.5% of fully diluted common stock equivalents as defined. Options
granted under the plan may be incentive stock options ("ISOs") or non-statutory
stock options ("NSOs") to employees, officers, directors and consultants. The
ISOs may be granted at a price per share not less than the fair market value at
the date of grant. The NSOs may be granted at a price per share not less than
85% of the fair market value at the date of grant. If at any time the Company
grants an option and the optionee directly or by attribution owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, the option price shall be at least 110% of the fair value
at that date. Options granted are exercisable over a maximum term of ten years
from the date of grant and generally vest over a period of four years.
F-17
<PAGE> 116
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
WEIGHTED-
AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
---------------- --------------
<S> <C> <C>
Outstanding at December 31, 1995.................. 415,000 $0.05
Options granted................................... 199,000 0.11
Options canceled................................ (4,000) 0.11
---------- -----
Outstanding at December 31, 1996.................. 610,000 0.06
Options granted................................. 117,000 0.23
Options canceled................................ (75,071) 0.11
---------- -----
Outstanding at December 31, 1997.................. 651,929 0.09
Options granted................................. 493,500 0.83
Options canceled................................ (112,928) 0.03
---------- -----
Outstanding at December 31, 1998.................. 1,032,501 0.05
Options granted (unaudited)..................... 4,594,309 2.07
Options exercised (unaudited)................... (2,610,656) 2.09
Options canceled (unaudited).................... (699,039) 1.38
---------- -----
Outstanding at September 30, 1999 (unaudited)..... 2,317,115 $1.52
========== =====
Exercisable at December 31, 1998.................. 426,056 $0.11
========== =====
Exercisable at September 30, 1999 (unaudited)..... 524,518 $0.36
========== =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE
EXERCISE NUMBER EXERCISE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE
PRICE RANGE OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ----------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.05-0.33 581,763 $0.09 8.1 406,788 $0.08
0.63-0.93 410,238 0.80 9.5 19,268 0.68
1.25-1.55 40,500 1.26 9.8 -- --
--------- -------
1,032,501 426,056
========= =======
</TABLE>
In June 1999, an officer of the Company exercised an option to purchase
2,267,563 shares of restricted common stock at an exercise price of $2.10 per
share. 1,936,877 shares are subject to repurchase at September 30, 1999 at $2.10
per share in the event of termination. The repurchase right lapses upon vesting.
These shares were purchased with a $4.8 million promissory note payable to the
Company. This full recourse note bears interest at 5.37% per annum, with
principal and interest due February 2003.
F-18
<PAGE> 117
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
In July 1999, another officer of the Company exercised an option to
purchase 200,000 shares of restricted common stock at an exercise price of $2.78
per share. All unvested shares are subject to repurchase at September 30, 1999
at $2.78 per share in the event of termination. The repurchase right lapses upon
vesting. These shares were purchased with a $555,000 promissory note payable to
the Company. This full recourse note bears interest at 6.0% per annum, with
principal and interest due July 2004.
DEFERRED STOCK COMPENSATION
The Company recorded deferred stock compensation of $488,000 and $3,932,000
during the year ended December 31, 1998 and the nine months ended September 30,
1999, respectively, representing the difference between the exercise price and
the deemed fair value for financial accounting purposes of certain of the
Company's stock options granted to employees. In the absence of a public market
for the Company's common stock, the deemed fair value of the Company's common
stock was based on the price per share of recent preferred stock financings,
less a discount to give effect to the superior rights of the preferred stock.
These amounts are being amortized by charges to operations over the vesting
periods of the individual stock options using a graded vesting method. Such
amortization amounted to $201,000 and $1,366,000 for the year ended December 31,
1998 and the nine months ended September 30, 1999, respectively.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
Pro forma information regarding results of operations and net loss per
share is required by SFAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the following
weighted average assumptions: a risk-free interest rate of 5.5% for the years
ended December 31, 1996, 1997 and 1998, no dividend yield or volatility factors
with respect to the expected market price of the Company's common stock, and a
weighted average expected life of the options of 4.5 years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under the plan
calculated
F-19
<PAGE> 118
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION (CONTINUED)
using the minimal value method of SFAS 123, the Company's net loss and pro forma
basic and diluted net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Pro forma net loss (in thousands).................... $(1,786) $(3,096) $(7,833)
======= ======= =======
Pro forma basic and diluted net loss per share....... $ (1.14) $ (1.00) $ (2.26)
======= ======= =======
</TABLE>
The weighted-average fair value of options granted, which is the value
assigned to the options under SFAS 123, was $0.02, $0.05, and $0.18 for options
granted during the years ended December 31, 1996, 1997, and 1998, respectively.
The pro forma impact of options on the net loss is not representative of
the effects on net income (loss) for future years, as future years will include
the effects of additional years of stock option grants.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company has reserved shares of capital stock for
future issuance as follows:
<TABLE>
<CAPTION>
COMMON PREFERRED
---------- ---------
<S> <C> <C>
Convertible preferred stock, including effect of
preferred stock warrants............................... 7,103,260 --
Stock options outstanding................................ 1,032,501 --
Stock options available for grant........................ 5,417,608 --
Warrants to purchase preferred stock..................... -- 1,028,084
---------- ---------
13,553,369 1,028,084
========== =========
</TABLE>
7. RETIREMENT PLAN
The Company has a defined contribution plan for all full-time employees
which qualifies under Section 401(k) of the Internal Revenue Code. Under the
terms of the plan, employees may contribute up to 15%, subject to Internal
Revenue Service limitations, of their annual compensation. The plan provides for
discretionary employer contributions. As of December 31, 1998, there have been
no employer contributions to the plan.
F-20
<PAGE> 119
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING OF COMMON STOCK
In September 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, each share of outstanding preferred stock
will automatically convert into three shares of common stock. The unaudited pro
forma stockholders' equity at September 30, 1999 gives effect to the conversion
of all outstanding shares of convertible preferred stock at that date into
12,664,840 shares of common stock upon the completion of the offering.
REINCORPORATION
In connection with the Company's reincorporation in the State of Delaware,
the Board of Directors authorized and the stockholders approved an increase in
the number of authorized shares of common stock to 75,000,000 and a decrease in
the number of authorized shares of preferred stock to 5,000,000 shares.
1999 EQUITY INCENTIVE PLAN
In September 1999, the Company's Board of Directors adopted, and in
November 1999 the stockholders approved, the 1999 Equity Incentive Plan. There
are 2,000,000 shares of common stock authorized for issuance under the plan.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1999, the Company's Board of Directors adopted, and in
November 1999 the stockholders approved, the 1999 Non-Employee Directors' Stock
Option Plan and reserved an aggregate of 500,000 shares of common stock for
grants of stock options under such plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Company's Board of Directors adopted, and in
November 1999 the stockholders approved, the 1999 Employee Stock Purchase Plan .
The Company has reserved a total of 666,667 shares of common stock for issuance
under this plan. Beginning with the date of the Company's initial public
offering of its common stock, eligible employees may purchase common stock at
85% of the lesser of the fair market value of the Company's common stock on the
first day of the applicable six-month offering period or the fair market value
of the Company's common stock at the date of purchase.
SERIES G PREFERRED STOCK
In October 1999, the Company entered into a stock purchase agreement
pursuant to which it issued to investors an aggregate of 5,846,546 shares of
Series G convertible preferred stock for gross proceeds to the Company of
approximately $23,600,000.
F-21
<PAGE> 120
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
In November 1999, the Company entered into an agreement with the National
Broadcasting Company ("NBC") to sell 3,712,871 shares of Series G preferred
stock at $4.04 per share, for an aggregate purchase price of approximately $15.0
million. Consideration was paid to the Company in the form of approximately $7.5
million in cash and $7.5 million in advertising rights. Approximately $1.0
million of placement agent, legal and other fees related to the consummation of
the NBC agreement are expected to be offset against the related preferred
stockholders' equity. Advertising will be provided to the Company on the NBC
Television Network pursuant to a two-year advertising agreement with NBC. As the
advertisements air, the Company's $7.5 million of prepaid advertising will be
charged to operations at amounts equal to NBC's market rates for such
advertising airtime, less a 15% discount. In conjunction with NBC's preferred
stock purchase, in November 1999, the Company also entered into a two-year
content licensing agreement with NBC pursuant to which the Company has the right
to create and distribute digital greetings for a minimum of five NBC television
programs for each six-month television season, which amount may be increased, at
NBC's option, to a maximum of 30 NBC television programs for each season. The
consideration for this content agreement, in addition to the promotion by the
Company of digital greetings containing NBC content, is equal to the difference
in NBC's per share cost of the Series G preferred stock from the deemed fair
market value of the Company's common shares as of the date of the preferred
stock purchase by NBC. This equates to a value of approximately $4.8 million
which has been recorded as deferred content costs with an offset to preferred
stockholders' equity. The deferred content costs will be amortized over the
two-year life of the related content agreement.
F-22
<PAGE> 121
[Rendering of several individuals using the Egreetings network that depicts how
the use of Egreetings can multiply.]
HOW MULTIPLE GREETINGS GROW OUT OF ONE
At Egreetings.com, you can choose from thousands of heartfelt greetings.
Plus they're so simple to send that every friend you send one to can easily
reply or pass another greeting along. You can start a whole chain of happiness,
love and fun. And it all starts at Egreetings.com.
[Text box listing various gifts to send.]
[Egreetings.com Logo]
SAY MORE. GIVE MORE.
<PAGE> 122
LOGO
<PAGE> 123
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by us in
connection with the sale of the shares of common stock being registered hereby.
All amounts are estimates except for the SEC registration fee, the NASD filing
fee and the Nasdaq National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........ $ 20,850
NASD filing fee............................................ 8,000
Nasdaq National Market filing fee.......................... 95,000
Accounting fees and expenses............................... 350,000
Legal fees and expenses.................................... 650,000
Printing and engraving expenses............................ 200,000
Blue sky fees and expenses................................. 5,000
Transfer agent and registrar fees and expenses............. 15,000
Miscellaneous.............................................. 156,150
----------
Total............................................ $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of Delaware General Corporation Law provides for the
indemnification of directors and officers. Our amended and restated certificate
of incorporation contains provisions permitted under Delaware law relating to
the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in circumstances involving wrongful acts, such as:
- any breach of the director's duty of loyalty
- acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law
- any transaction from which the director derives an improper personal
benefit
- payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
Our bylaws require us to indemnify our directors and executive officers to
the fullest extent not prohibited by the Delaware law. We may limit the extent
of such indemnification by individual contracts with our directors and executive
officers. Further, we may decline to indemnify any director or executive officer
in connection with any proceeding initiated by such person or any proceeding by
such person against Egreetings or its directors, officers, employees or other
agents, unless such indemnification is expressly required to be made by law or
the proceeding was authorized by our board of directors.
II-1
<PAGE> 124
We intend to enter into indemnity agreements with each of our current
directors and certain of our executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of Egreetings
for which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
Egreetings plans to obtain directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth information regarding all securities sold by
the Registrant since October 1, 1996;
1. In December 1996, we issued and sold 341,753 shares of Series C
preferred stock, each of which will convert into two shares of common
stock upon completion of this offering, at $4.00 per share to six
accredited investors, 245,750 of which were sold to three of our
executive officers and/or directors (and related entities).
2. In October 1997, we issued and sold 131,212 shares of Series C preferred
stock, each of which will convert into two shares of common stock upon
completion of this offering, to one accredited investor at $4.00 per
share, none of which were sold to our executive officers and/or
directors (and related entities).
3. In October 1997, we issued an aggregate of 229,798 shares of Series C
preferred stock, each of which will convert into two shares of common
stock upon completion of this offering, to five accredited investors in
connection with the conversion of convertible promissory notes having an
aggregate principal amount of approximately $919,000 that were issued
from October 1996 to November 1996. 78,340 of these shares were issued
to two of our executive officers and/or directors (and related
entities).
4. In December 1997, we issued and sold 625,978 shares of Series D
preferred stock, each of which will convert into two shares of common
stock upon completion of this offering, to one accredited investor at
$6.39 per share, 625,978 of which were sold to one of our executive
officers and/or directors (and related entities).
5. In December 1997, we issued a warrant to purchase 946,925 shares of
Series E preferred stock, each of which will convert into two shares of
common stock upon the completion of this offering, to one accredited
investor at an exercise price of $9.60 per share, 946,925 of which were
issued to one of our executive officers and/or directors (and related
entities). In March 1999 and April 1999, the number of shares of Series
E preferred stock issuable pursuant to this warrant was increased to an
aggregate of 1,470,000 shares as an anti-dilution adjustment in
connection with the sale of our Series F preferred stock. In October
1999, the number of shares of Series E preferred stock issuable pursuant
to this warrant was increased to 1,663,333 shares as an anti-dilution
adjustment in connection with the sale of our Series G preferred stock.
There was no additional
II-2
<PAGE> 125
consideration paid in connection with these adjustments, and there was
no adjustment to the aggregate exercise price of the warrant.
6. In July 1998 and April 1999, we issued 224,805 and 82,381 shares of
Series D preferred stock, respectively, each share of which will convert
into two shares of common stock upon completion of this offering, to one
accredited investor in connection with the conversion of a convertible
promissory note having a principal amount of $1.95 million that was
issued in December 1997. 307,186 of these shares were issued to one of
our executive officers and/or directors (and related entities).
7. In March 1999, we issued and sold 2,574,785 shares of Series F
preferred stock, each of which will convert into two shares of common
stock upon completion of this offering, to eight accredited investors
at $7.00 per share, of which 1,039,286 shares were sold to three of our
executive officers and/or directors (and related entities).
8. In March 1999, we issued 300,000 shares of Series F preferred stock,
each of which will convert into two shares of common stock upon
completion of this offering, to three accredited investors in
connection with the conversion of convertible promissory notes having a
principal amount of $2.1 million that were issued from November 1998 to
January 1999. 285,714 of these shares were issued to three of our
executive officers and/or directors (and related entities).
9. In April 1999, we issued 708,851 shares of Series F preferred stock,
each of which will convert into two shares of common stock, to three
accredited investors at $7.00 per share, 441,144 of which were sold to
one of our executive officer and/or directors (and related entities).
10. In April 1999, we issued 142,857 shares of Series F preferred stock,
each of which will convert into two shares of common stock upon
completion of this offering, to one accredited investor in connection
with the conversion of convertible promissory notes having an aggregate
principal amount of $1.0 million that were issued from November 1998 to
January 1999. 142,857 of these shares were issued to one of our
executive officers and/or directors (and related entities).
11. In October 1999, we issued and sold an aggregate of 5,846,546 shares of
Series G preferred stock, each of which will convert into two-thirds of
one share of common stock upon completion of this offering, to 17
accredited investors at $4.04 per share, 2,330,562 of which were sold
to five of our executive officers and/or directors (and related
entities).
12. In November 1999, we issued and sold 3,712,871 shares of Series G
preferred stock, each of which will convert into two-thirds of one
share of common stock upon completion of this offering, to one
accredited investor at $4.04 per share, none of which were sold to our
executive officers and/or directors (and related entities).
13. Between October 1, 1996 and October 1, 1999, we granted options to
purchase an aggregate of 5,277,808 shares of common stock at exercise
prices ranging from $.11 to $9.75 per share with a weighted average
exercise price of $1.91 per share.
II-3
<PAGE> 126
The sales and issuances of common stock made pursuant to the exercise of
stock options granted under the 1996 Stock Option Plan to our officers,
directors, employees and consultants as described in paragraph (13) above were
made in reliance on Rule 701 promulgated under the Securities Act.
The sales and issuances of securities in the transactions described in
paragraphs (1) through (12) above were made in reliance on Rule 506 of
Regulation D promulgated under the Securities Act. These sales and issuances
were made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the shares were
being acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01 Amended and Restated Certificate of Incorporation.
3.02 Bylaws.
3.03+ Form of Amended and Restated Certificate of Incorporation to
be in effect upon Egreetings' reincorporation in Delaware.
4.01 Reference is made to Exhibits 3.01 to 3.03
4.02 Form of Specimen Stock Certificate.
4.03 Fifth Amended and Restated Investors' Rights Agreement dated
November 19, 1999.
5.01 Opinion of Cooley Godward LLP.
10.01+ Form of Indemnity Agreement.
10.02 1999 Equity Incentive Plan.
10.03+ Form of Grant Notice and Stock Option Agreement under the
1999 Equity Incentive Plan.
10.04 1999 Non-Employee Directors' Stock Option Plan.
10.05+ Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06 1999 Employee Stock Purchase Plan.
10.07 Form of 1999 Employee Stock Purchase Plan Offering.
10.08+ Office Lease between South Beach Development Company and
Egreetings dated October 1999.
10.09+ Lease between Jonathan Parker, Thomas M. Monahan, Harold
Parker Properties, L.P., Harold A. Parker, Trustee, Gertrud
V. Parker, Trustee of the Harold A. Parker Company Trust and
Egreetings dated August 1999.
10.10** Content Provider and Distribution Agreement between
Egreetings and Gibson Greetings, Inc., as amended on
September 30, 1999.
10.11** Agreement between Hotmail Corporation and Egreetings, as
amended through August 1998.
10.12+ Employment Agreement between Gordon M. Tucker and Egreetings
dated February 12, 1999 and Promissory Note and Pledge
Agreement between Gordon M. Tucker and Egreetings dated June
18, 1999.
10.13+ Early Exercise Stock Purchase Agreement, Promissory Note and
Pledge Agreement between Andrew J. Moley and Egreetings
dated July 30, 1999.
</TABLE>
II-4
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
10.14+ 1996 Stock Option Plan, as amended.
10.15+ 1999 Egreetings Network Incentive Bonus Plan
23.01 Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, independent auditors.
24.01+ Power of Attorney. Reference is made to page II-6.
27.01+ Financial Data Schedules.
99.1+ Consent of Jupiter Communications.
99.2+ Consent of International Data Corporation.
</TABLE>
- -------------------------
+ Previously filed.
** Confidential treatment has been requested for portions of this document. The
information omitted pursuant to such confidential treatment request has been
filed separately with the Securities and Exchange Commission.
(b) No financial statement schedules are provided because the information
called for is not required or is shown either in the consolidated financial
statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE> 128
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City and County of San
Francisco, State of California, on the 8th day of December, 1999.
Egreetings Network, Inc.
By: /s/ ANDREW J. MOLEY
--------------------------------------
Andrew J. Moley
Chief Financial Officer
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* Chief Executive Officer, December 8, 1999
- ----------------------------- Principal Executive Officer
Gordon M. Tucker and Director
/s/ ANDREW J. MOLEY Senior Vice President and December 8, 1999
- ----------------------------- Chief Financial Officer,
Andrew J. Moley Principal Financial Officer
and Principal Accounting
Officer
* Director December 8, 1999
- -----------------------------
Stewart Alsop
* Director December 8, 1999
- -----------------------------
Charles A. Holloway
* Director December 8, 1999
- -----------------------------
Brendon S. Kim
* Director December 8, 1999
- -----------------------------
Peter Nieh
* Director December 8, 1999
- -----------------------------
Frank J. O'Connell
* Director December 8, 1999
- -----------------------------
Lee Rosenberg
*By: /s/ ANDREW J. MOLEY
- -----------------------------
Andrew J. Moley
Attorney-in-fact
</TABLE>
II-7
<PAGE> 130
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01 Amended and Restated Certificate of Incorporation.
3.02 Bylaws.
3.03+ Form of Amended and Restated Certificate of Incorporation to
be in effect upon Egreetings' reincorporation in Delaware.
4.01 Reference is made to Exhibits 3.01 to 3.04
4.02 Form of Specimen Stock Certificate.
4.03 Fifth Amended and Restated Investors' Rights Agreement dated
November 19, 1999.
5.01 Opinion of Cooley Godward LLP.
10.01+ Form of Indemnity Agreement.
10.02 1999 Equity Incentive Plan.
10.03+ Form of Grant Notice and Stock Option Agreement under the
1999 Equity Incentive Plan.
10.04 1999 Non-Employee Directors' Stock Option Plan.
10.05+ Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06 1999 Employee Stock Purchase Plan.
10.07 Form of 1999 Employee Stock Purchase Plan Offering.
10.08+ Office Lease between South Beach Development Company and
Egreetings dated October 1999.
10.09+ Lease between Jonathan Parker, Thomas M. Monahan, Harold
Parker Properties, L.P., Harold A. Parker, Trustee, Gertrud
V. Parker, Trustee of the Harold A. Parker Company Trust and
Egreetings dated August 1999.
10.10** Content Provider and Distribution Agreement between
Egreetings and Gibson Greetings, Inc., as amended on
September 30, 1999.
10.11** Agreement between Hotmail Corporation and Egreetings, as
amended through August 1998.
10.12+ Employment Agreement between Gordon M. Tucker and Egreetings
dated February 12, 1999 and Promissory Note and Pledge
Agreement between Gordon M. Tucker and Egreetings dated June
18, 1999.
10.13+ Early Exercise Stock Purchase Agreement, Promissory Note and
Pledge Agreement between Andrew J. Moley and Egreetings
dated July 30, 1999.
10.14+ 1996 Stock Option Plan, as amended.
10.15+ 1999 Egreetings Network Incentive Bonus Plan
23.01 Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, independent auditors.
24.01+ Power of Attorney. Reference is made to page II-6.
27.01+ Financial Data Schedules.
99.1+ Consent of Jupiter Communications.
99.2+ Consent of International Data Corporation.
</TABLE>
- -------------------------
+ Previously filed.
** Confidential treatment has been requested for portions of this document. The
information omitted pursuant to such confidential treatment order has been
filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 1.01
6,000,000 SHARES
EGREETINGS NETWORK, INC.
COMMON STOCK, PAR VALUE $0.001 PER SHARE
UNDERWRITING AGREEMENT
December __, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
BANCBOSTON ROBERTSON STEPHENS, INC.
U.S. BANCORP PIPER JAFFRAY INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Egreetings Network, Inc., a Delaware corporation
("Company"), proposes to issue and sell 6,000,000 shares ("Firm Securities") of
its Common Stock, par value $0.001 per share ("Securities") and also proposes to
issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than 900,000 additional shares ("Optional Securities") of
its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities." As part of
the offering contemplated by this Agreement, [____________________] (the
"Designated Underwriter") has agreed to reserve out of the Firm Securities
purchased by it under this Agreement, up to [_________________] shares, for sale
to the Company's directors, officers, employees and other parties associated
with the Company (collectively, "Participants"), as set forth in the Prospectus
(as defined herein) under the heading "Underwriters" (the "Directed Share
Program"). The Firm Securities to be sold by the Designated Underwriter pursuant
to the Directed Share Program (the "Directed Shares") will be sold by the
Designated Underwriter pursuant to this Agreement at the public offering price.
Any Directed Shares not orally confirmed for purchase by a Participant by the
end of the business day on which this Agreement is executed will be offered to
the public by the Underwriters as set forth in the Prospectus. The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-88595) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 (the "Act") and is not
proposed to be amended or (ii) is proposed to be amended by amendment or
post-effective amendment. If such registration statement ("initial registration
statement") has been declared effective, either (i) an additional registration
statement ("additional registration statement") relating to the Offered
Securities may have been filed with the Commission pursuant to Rule 462(b)
("Rule 462(b)") under the Act and, if so filed, has become effective upon filing
pursuant to such Rule and the Offered Securities all have been duly registered
under the Act pursuant to the initial registration statement and, if applicable,
the additional registration statement or (ii) such an additional registration
statement is proposed to be filed with the Commission pursuant to Rule 462(b)
and will become effective upon filing pursuant to such Rule and upon such filing
the Offered Securities will all have been duly registered under the Act pursuant
to the initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial registration
statement or if an additional registration statement has been filed and the
Company does not propose to amend it, and if any post-effective amendment to
either such registration
<PAGE> 2
statement has been filed with the Commission prior to the execution and delivery
of this Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become effective
upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the
case of the additional registration statement, Rule 462(b). For purposes of this
Agreement, "Effective Time" with respect to the initial registration statement
or, if filed prior to the execution and delivery of this Agreement, the
additional registration statement means (i) if the Company has advised the
Representatives that it does not propose to amend such registration statement,
the date and time as of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the execution and
delivery of this Agreement, was declared effective by the Commission or has
become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has
advised the Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and time as of
which such registration statement, as amended by such amendment or
post-effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed prior to
the execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect to
such additional registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule 462(b).
"Effective Date" with respect to the initial registration statement or the
additional registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its Effective Time,
including all information contained in the additional registration statement (if
any) and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the contents
of the initial registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "Additional Registration Statement". The Initial
Registration Statement and the Additional Registration Statement are herein
referred to collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "Prospectus". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration Statement
conformed in all respects to the requirements of the Act and the rules and
regulations of the Commission ("Rules and Regulations") and did not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
(ii) on the Effective Date of the Additional Registration Statement (if any),
each Registration Statement conformed, or will conform, in all respects to the
requirements of the Act and the Rules and Regulations and did not include, or
will not include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) on the date of
this Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and delivery of
this Agreement, the Additional Registration Statement each conforms, and at the
time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing
is required) at the Effective Date of the Additional Registration Statement in
which the Prospectus is included, each Registration Statement and the Prospectus
will conform, in all respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the Effective
Date of the Initial Registration Statement, the Initial Registration Statement
and the Prospectus will conform in all respects to the requirements of the Act
and
-2-
<PAGE> 3
the Rules and Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only such
information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business requires
such qualification, except where the failure to so qualify would not have a
material adverse effect on the condition, (financial or other) business,
properties or results of operations of the Company ("Material Adverse Effect").
(d) The Company has no subsidiaries.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding shares
of capital stock of the Company are, and, when the Offered Securities have been
delivered and paid for in accordance with this Agreement on each Closing Date
(as defined below), such Offered Securities will have been, validly issued,
fully paid and nonassessable and will conform to the description thereof
contained in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Securities.
(f) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with this
offering.
(g) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such securities
in the securities registered pursuant to a Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Act.
(h) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market, subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the issuance and sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be required under
state securities laws.
(j) The execution, delivery and performance of this Agreement,
and the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or, to the Company's knowledge, any
order of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any of its properties, or any agreement
or instrument to which the Company is a party or by which the Company is bound
or to which any of the properties of the Company is subject, or the charter or
by-laws of the Company, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated by this
Agreement.
-3-
<PAGE> 4
(k) This Agreement has been duly authorized, executed and
delivered by the Company.
(l) Except as disclosed in the Prospectus, the Company has good
and marketable title to all real properties and all other properties and assets
owned by it, in each case free from liens, encumbrances and defects that would
materially affect the value thereof or materially interfere with the use made or
to be made thereof by them; and except as disclosed in the Prospectus, the
Company holds any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made or
to be made thereof by it.
(m) The Company possesses adequate certificates, authorities or
permits issued by appropriate governmental agencies or bodies necessary to
conduct the business now operated by it and has not received any notice of
proceedings relating to the revocation or modification of any such certificate,
authority or permit that, if determined adversely to the Company, would
individually or in the aggregate have a Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that might
have a Material Adverse Effect.
(o) The Company owns, possesses or can acquire on reasonable
terms, adequate trademarks, trade names and other rights to inventions,
know-how, patents, copyrights, confidential information and other intellectual
property, including applications licensed directly from third parties
(collectively, "intellectual property rights") necessary to conduct the business
now operated by it, or presently employed by it, and has not received any notice
of, and is not aware of, any infringement of or conflict with asserted rights of
others with respect to any intellectual property rights that, if determined
adversely to the Company, would individually or in the aggregate have a Material
Adverse Effect. The discoveries, inventions, products or processes of the
Company referred to in the Prospectus do not, to the Company's knowledge,
infringe or conflict with any intellectual property right of any third party.
(p) The Company is not in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, "environmental
laws"), does not own or operate any real property contaminated with any
substance that is subject to any environmental laws, is not liable for any
off-site disposal or contamination pursuant to any environmental laws, and is
not subject to any claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the aggregate have a
Material Adverse Effect; and the Company is not aware of any pending
investigation which might lead to such a claim.
(q) There are no pending actions, suits or proceedings against or
affecting the Company or any of its properties that, if determined adversely to
the Company, would individually or in the aggregate have a Material Adverse
Effect, or would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise material in
the context of the sale of the Offered Securities; and, to the Company's
knowledge, no such actions, suits or proceedings are threatened or contemplated.
(r) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates shown and its results of operations and cash flows for
the periods shown, and such financial statements have been prepared in
conformity with the generally accepted accounting principles in the United
States applied on a consistent basis and the schedules included in each
Registration Statement present fairly the information required to be stated
therein and the assumptions used in preparing the pro forma financial statements
included in each Registration Statement and the Prospectus provide a reasonable
basis for presenting the significant effects directly attributable to the
transactions or events described therein, the related pro forma adjustments give
-4-
<PAGE> 5
appropriate effect to those assumptions, and the pro forma columns therein
reflect the proper application of those adjustments to the corresponding
historical financial statement amounts.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has been no
material adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
properties or results of operations of the Company, and, except as disclosed in
or contemplated by the Prospectus, there has been no dividend or distribution of
any kind declared, paid or made by the Company on any class of its capital
stock.
(t) The execution and delivery of the Agreement and Plan of
Merger dated as of November 18, 1999 (the "Merger Agreement") between Egreetings
Network, Inc., a California corporation (the "California Corporation"), and the
Company, effecting the reincorporation of the California Corporation under the
laws of the State of Delaware, was duly authorized by all necessary corporate
action on the part of each of the California Corporation and the Company. Each
of the California Corporation and the Company had all corporate power and
authority to execute and deliver the Merger Agreement, to file the Merger
Agreement with the Secretary of State of California and the Secretary of State
of Delaware and to consummate the reincorporation contemplated by the Merger
Agreement, and the Merger Agreement at the time of execution and filing
constituted a valid and binding obligation of each of the California Corporation
and the Company.
(u) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as defined
in the Investment Company Act of 1940.
(v) The Company (i) has notified each holder of a currently
outstanding option issued under the Company's 1996 Stock Option Plan (the
"Option Plan"), and each person who has acquired Securities pursuant to the
exercise of any option granted under such option plans that pursuant to the
terms of such option plans, none of such options or shares may be sold or
otherwise transferred or disposed of for a period of 180 days after the date of
the initial public offering of the Offered Securities and (ii) has imposed a
stop-transfer instruction with the Company's transfer agent in order to enforce
the foregoing lock-up provision imposed pursuant to the Option Plan.
(w) Except as disclosed in the Prospectus, all outstanding
Securities, and all securities convertible into or exercisable or exchangeable
for Securities, are subject to valid and binding agreements (collectively,
"Lock-up Agreements") that restrict the holders thereof from selling, making any
short sale of, granting any option for the purchase of, or otherwise
transferring or disposing of, any of such Securities, or any such securities
convertible into or exercisable or exchangeable for Securities, for a period of
180 days after the date of the Prospectus without the prior written consent of
Credit Suisse First Boston Corporation ("CSFBC") and the Company.
(x) The Company (i) has notified each stockholder who is party to
the Fifth Amended and Restated Investors' Rights Agreement dated November 12,
1999 (the "Rights Agreement"), that pursuant to the terms of the Rights
Agreement, none of the shares of the Company's capital stock held by such
stockholder may be sold or otherwise transferred or disposed of for a period of
180 days after the date of the initial public offering of the Offered Securities
and (ii) has imposed a stop-transfer instruction with the Company's transfer
agent in order to enforce the foregoing lock-up provision imposed pursuant to
the Rights Agreement.
(y) The Company has not offered, or caused the Underwriters to
offer, any offered Securities to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to write or
publish favorable information about the Company or its products.
-5-
<PAGE> 6
(z) The Company's issuance of Series G Preferred Stock on
November __, 1999 is not integrated with the offering contemplated hereby. Such
issuance was exempt from the registration requirements of Section 5 of the Act
pursuant to Section 4(2) thereof.
(aa) All of the Company's products (including products currently
under development) will record, store, process, calculate and present calendar
dates falling on and after (and if applicable, spans of time including) January
1, 2000, and will calculate any information dependent on or relating to such
dates in the same manner, and with the same functionality, data integrity and
performance, as the products record, store, process, calculate and present
calendar dates on or before December 31, 1999, or calculate any information
dependent on or relating to such dates (collectively, "Year 2000 Compliant").
All of the Company's products will lose no functionality with respect to the
introduction of records containing dates falling on or after January 1, 2000.
All of the Company's internal computer and technology products and systems are
Year 2000 Compliant.
Furthermore, the Company represents and warrants to the Underwriters
that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is necessary under the securities
law and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $[____] per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, at the office of CSFBC, Eleven Madison Avenue,
New York, New York, against payment of the purchase price in Federal (same day)
funds by official bank check or checks or wire transfer to an account at a bank
acceptable to CSFBC drawn to the order of the Company at the office of Cooley
Godward LLP ("Cooley Godward"), One Maritime Plaza, 20th Floor, San Francisco,
California, at 10:00 A.M., New York time, on December __, 1999 or at such other
time not later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "First Closing Date." For
purposes of Rule 15c6-1 under the Exchange Act, the First Closing Date (if later
than the otherwise applicable settlement date) shall be the settlement date for
payment of funds and delivery of securities for all the Offered Securities sold
pursuant to the offering. The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the above office of CSFBC in New York at least 24 hours prior to
the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any
-6-
<PAGE> 7
portion thereof may be exercised from time to time and to the extent not
previously exercised may be surrendered and terminated at any time upon notice
by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date," which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the above
office of CSFBC in New York, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Company at the
above office of Cooley Godward in San Francisco, California. The certificates
for the Optional Securities being purchased on each Optional Closing Date will
be in definitive form, in such denominations and registered in such names as
CSFBC requests upon reasonable notice prior to such Optional Closing Date and
will be made available for checking and packaging at the above office of CSFBC
in New York at a reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement, the Company will file
the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph
(4)) of Rule 424(b) not later than the earlier of (A) the second business day
following the execution and delivery of this Agreement or (B) the fifteenth
business day after the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Prospectus is printed and distributed to any Underwriter, or
will make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without CSFBC's consent; and the Company will
also advise CSFBC promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best efforts
to prevent the issuance of any such stop order and to obtain as soon as possible
its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the
-7-
<PAGE> 8
Prospectus to comply with the Act, the Company will promptly notify CSFBC of
such event and will promptly prepare and file with the Commission, at its own
expense, an amendment or supplement which will correct such statement or
omission or an amendment which will effect such compliance. Neither CSFBC's
consent to, nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (five of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M.,
New York time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial Registration
Statement. All other documents shall be so furnished as soon as available. The
Company will pay the expenses of printing and distributing to the Underwriters
all such documents.
(f) The Company will cooperate with CSFBC in endeavoring to
qualify the Offered Securities for sale under the securities laws of such
jurisdictions as CSFBC may reasonably have designated in writing and will make
such applications, file such documents, and furnish such information as may be
reasonably required for that purpose; provided that the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where is it now so qualified or required
to file such a consent. The Company will, from time to time, prepare and file
such statements, reports, and other documents, as are or may be required to
continue such qualifications in effect for so long a period as CSFBC may
reasonably request for distribution of the Offered Securities.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or mailed to
stockholders.
(h) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, for any filing fees and other expenses
(including fees and disbursements of counsel) incurred in connection with
qualification of the Offered Securities for sale under the laws of such
jurisdictions as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. of the Offered Securities,
for any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except (i) issuances of
Securities pursuant to the conversion of convertible securities or the exercise
of warrants and options, in each case outstanding on the date hereof; (ii)
grants of employee stock options pursuant to the terms of the Company's stock
option and equity
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<PAGE> 9
incentive plans; (iii) issuances of Securities pursuant to the exercise of such
options; or (iv) the exercise of any other employee stock options outstanding on
the date hereof.
(j) The Company agrees to use its best efforts to cause (i) each
of its directors, officers and stockholders and (ii) each person who acquires
Securities of the Company pursuant to the exercise of any option or right
granted under the Option Plan to sign an agreement that restricts such person
from selling, making any short sale of, granting any option for the purchase of,
or otherwise transferring or disposing of, any of such Securities, or any such
securities convertible into or exercisable or exchangeable for Securities, for a
period of 180 days after the date of the Prospectus without the prior written
consent of CSFBC; and the Company will (i) with regard to any such agreement to
which the Company is a party, enforce the terms of each such agreement and (ii)
issue and impose a stop-transfer instruction with the Company's transfer agent
in order to enforce the foregoing lock-up agreements.
(k) The Company will (i) with regard to any Lock-up Agreement to
which the Company is a party, enforce the terms of each Lock-up Agreement, and
(ii) issue stop-transfer instructions to the transfer agent for the Securities
with respect to any transaction or contemplated transaction that would
constitute a breach of or default under the applicable Lock-up Agreement. In
addition, except with the prior written consent of CSFBC, the Company agrees (i)
not to amend or terminate, or waive any right under, any Lock-up Agreement, or
take any other action that would directly or indirectly have the same effect as
an amendment or termination, or waiver of any right under any Lock-up Agreement,
that would permit any holder of Securities, or any securities convertible into,
or exercisable or exchangeable for, Securities, to make any short sale of, grant
any option for the purchase of, or otherwise transfer or dispose of, any such
Securities or other securities, prior to the expiration of the 180 days after
the date of the Prospectus and (ii) not to consent to any sale, short sale,
grant of an option for the purchase of, or other disposition or transfer of
shares of Securities, or securities convertible into or exercisable or
exchangeable for Securities, subject to a Lock-up Agreement.
(l) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of the effectiveness of the Registration
Statement. The Designated Underwriter will notify the Company as to which
Participants will need to be so restricted. The Company will direct the transfer
agent to place stop transfer instructions upon such securities for such period
of time.
(m) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred by the
underwriters in connection with the Directed Share Program.
Furthermore, the Company covenants with the Underwriters that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement,
shall be on or prior to the date of this Agreement (but in no event earlier than
the Effective Time) or, if the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement, shall
be prior to the filing of the amendment or post-effective amendment to
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<PAGE> 10
the registration statement to be filed shortly prior to such Effective Time), of
Ernst & Young LLP confirming that they are independent public accountants within
the meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in Statement
of Auditing Standards No. 71, Interim Financial Information, on
the unaudited financial statements included in the Registration
Statements;
(iii) on the basis of the review referred to in clause
(ii) above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company
who have responsibility for financial and accounting matters and
other specified procedures, nothing came to their attention that
caused them to believe that:
(A) the unaudited financial statements included in
the Registration Statements do not comply as to form in
all material respects with the applicable accounting
requirements of the Act and the related published Rules
and Regulations or any material modifications should be
made to such unaudited financial statements for them to
be in conformity with generally accepted accounting
principles;
(B) at the date of the latest available balance
sheet read by such accountants, or at a subsequent
specified date not more than three business days prior to
the date of such letter, there was any change in the
capital stock or deferred revenue or any increase in
long-term debt, total or current liabilities or
stockholders' deficit, or any decrease in current assets
or total assets of the Company and its consolidated
subsidiaries, as compared with amounts shown on the
latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the
latest statement of operations included in the Prospectus
to a specified date not more than three business days
prior to the date of such letter, there were any
decreases, as compared with the corresponding period of
the previous year and with the period of corresponding
length in the previous quarter, in total revenues, or
increases in loss from operations, comprehensive loss or
the total or per share amounts of basic net loss;
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred or may occur
or which are described in such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each
case to the extent that such dollar amounts, percentages and
other financial and statistical information are derived from the
general accounting records of the Company and its subsidiaries
subject to the internal controls of the Company's accounting
system or are derived directly from such records by analysis or
computation) with the results obtained from inquiries, a reading
of such general accounting records and other procedures specified
in such letter and have found such dollar amounts,
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<PAGE> 11
percentages and other financial and statistical information to be
in agreement with such results, except as otherwise specified in
such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery of
this Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration is
subsequent to such execution and delivery, "Registration Statements" shall mean
the Initial Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"Prospectus" shall mean the prospectus included in the Registration Statements.
(b) The Company shall have received from Ernst & Young LLP (and
furnished to the Representatives) an examination report with respect to
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company for the three fiscal years ending December 31, 1998 in
accordance with Statement on Standards for Attestation Engagement No. 8 issued
by the Auditing Standards Board of the American Institute of Certified Public
Accountants, and such examination report shall be included in the Registration
Statement.
(c) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by CSFBC.
If the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission.
(d) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other), business,
properties or results of operations of the Company or its subsidiaries taken as
one enterprise which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public offering or
the sale of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company (other
than an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market; (iv) any banking moratorium declared
by U.S. Federal or New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any declaration of war
by Congress or any other substantial national or international calamity or
emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment for
the Offered Securities.
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<PAGE> 12
(e) The Representatives shall have received an opinion, dated
such Closing Date, of Cooley Godward, counsel for the Company, to the effect
that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus; and, to such counsel's knowledge, the Company is duly
qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification, except where the failure to so qualify would not
have a Material Adverse Effect;
(ii) The Offered Securities delivered on such Closing
Date and all other outstanding shares of the capital stock of the
Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the description thereof
contained in the Prospectus under the heading "Description of
Capital Stock"; and the stockholders of the Company have no
preemptive rights with respect to the Offered Securities;
(iii) Except as disclosed in the Prospectus, to such
counsel's knowledge, there are no contracts, agreements or
understandings known to such counsel between the Company and any
person granting such person the right to require the Company to
file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or
in any securities being registered pursuant to any other
registration statement filed by the Company under the Act;
(iv) The Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not become required to register as an
"investment company" pursuant to the Investment Company Act of
1940.
(v) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by
this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required under
state securities laws;
(vi) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or
any court having jurisdiction over the Company or any of its
properties, or any agreement or instrument to which the Company
is a party or by which the Company is bound or to which any of
the properties of the Company is subject and which is filed as an
exhibit to the Registration Statement, or the charter or by-laws
of the Company, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated
by this Agreement;
(vii) The Company's issuance of Series G Preferred
Stock on November __, 1999 is not integrated with the offering
contemplated hereby. Such issuance was exempt from the
registration requirements of Section 5 of the Act pursuant to
Section 4(2) thereof.
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<PAGE> 13
(viii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed
and became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either
was filed with the Commission pursuant to the subparagraph of
Rule 424(b) specified in such opinion on the date specified
therein or was included in the Initial Registration Statement or
the Additional Registration Statement (as the case may be), and,
to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act,
and each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective
or issue dates, complied as to form in all material respects with
the requirements of the Act and the Rules and Regulations. To the
knowledge of such counsel, there are no legal or governmental
proceedings required to be described in a Registration Statement
or the Prospectus which are not described as required, nor are
there contracts or documents of a character required to be
described in a Registration Statement or the Prospectus or to be
filed as exhibits to a Registration Statement which are not
described and filed as required;
(ix) The statements set forth under the headings "Risk
Factors - Risks Related to Our Business", "Risk Factors - Risks
Related to Content, Intellectual Property and Government
Regulation", "Risk Factors - Risks Related to This Offering",
"Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business - Our Strategy", "Business -
Development of Digital Greeting and Gift Content on Our Web
Site", "Business - Advertising, Sponsorship and Ecommerce
Opportunities for Our Business Partners", "Business - Our
Relationship with Gibson Greetings, Inc.", "Business - Our
Relationship with the National Broadcasting Company, Inc.",
"Business - The Impact of Government Regulation on Our Web Site
and Our Business", "Business - Our Facilities", and "Business -
Legal Proceedings Affecting Our Business", "Management -
Employment and Severance Arrangements", "Related Transactions",
"Description of Capital Stock", "Shares Eligible for Future
Sale", and "Underwriting" in the Prospectus, insofar as such
statements purport to summarize legal matters, documents or
proceedings referred to therein, provide a fair summary of such
legal matters, documents or proceedings to the extent required
under the Act and the Rules and Regulations thereunder;
(x) This Agreement has been duly authorized, executed
and delivered by the Company;
(xi) The execution and delivery of the Merger
Agreement, effecting the reincorporation of the California
Corporation under the laws of the State of Delaware, was duly
authorized by all necessary corporate action on the part of each
of the California Corporation and the Company;
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to such counsel's attention which has caused such counsel to believe that
any part of a Registration Statement or any amendment thereto (except as to the
financial statements and schedules and other financial data and statistical data
derived therefrom as to which such counsel need express no opinion) on the date
it became effective under the Act, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
or any amendment or supplement thereto (except as to the financial statements
and schedules and other financial data and statistical data derived therefrom as
to which such counsel need express no opinion), as of its date or as of the date
hereof contained an untrue statement of a material fact or omitted or omits to
state a material fact
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<PAGE> 14
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the Chief Executive Officer or any Vice President and the
Chief Financial Officer of the Company in which such officers shall state that:
to the best of their knowledge the representations and warranties of the Company
in this Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no proceedings
for that purpose have been instituted or are contemplated by the Commission; the
Additional Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b),
including payment of the applicable filing fee in accordance with Rule 111(a) or
(b) under the Act, prior to the time the Prospectus was printed and distributed
to any Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has not been a Material Adverse Effect, nor
any development or event involving a prospective Material Adverse Effect, except
as set forth in or contemplated by the Prospectus or as described in such
certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of subsection
(a) of this Section, except that the specified date referred to in such
subsection will be a date not more than three days prior to such Closing Date
for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies
of such opinions, certificates, letters and documents as the Representatives
reasonably request. CSFBC may in its sole discretion waive on behalf of the
Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter upon demand for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the
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<PAGE> 15
Securities Act or Section 20 of the Exchange Act (the "Designated Entities"),
from and against all and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) (i) caused
by any untrue statement or alleged untrue statement of a material fact contained
in any material prepared by or with the consent of the Company for distribution
to Participants in connection with the Directed Share Program or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; (ii)
caused by the failure of any Participant to pay for and accept delivery of
Directed Shares that the Participant agreed to purchase, or (iii) related to,
arising out of, or in connection with the Directed Share Program, other than
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person, if any
who controls the Company within the meaning of Section 15 of the Act, against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: The fourth and fifth paragraphs of "Underwriting".
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a) or (b) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (b) above. In case any such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to the
last paragraph in Section 7(a) hereof in respect of such action or proceeding,
then in addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses of not
more than one separate firm (in addition to any local counsel) for the
Designated Underwriter for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control the Designated Underwriter within the meaning of the either Section
15 of the Act of Section 20 of the Exchange Act. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement (i) includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter
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<PAGE> 16
of such action and (ii) does not include a statement as to, or an admission of,
fault, culpability or a failure to act by or on behalf of an indemnified party.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other from the offering
of the Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of
-16-
<PAGE> 17
any non-defaulting Underwriter or the Company, except as provided in Section 9
(provided that if such default occurs with respect to Optional Securities after
the First Closing Date, this Agreement will not terminate as to the Firm
Securities or any Optional Securities purchased prior to such termination). As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 149 New Montgomery
Street, San Francisco, California 94105, Attention: Gordon M. Tucker, with a
copy to: Cooley Godward LLP, One Maritime Plaza, 20th Floor, San Francisco,
California 94111, Attention: Kenneth L. Guernsey; provided, however, that any
notice to an Underwriter pursuant to Section 7 will be mailed, delivered or
telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
-17-
<PAGE> 18
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
EGREETINGS NETWORK, INC.
------------------------------------
By: Gordon M. Tucker
Chief Executive Officer
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first
above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BANCBOSTON ROBERTSON STEPHENS, INC.
U.S. BANCORP PIPER JAFFRAY INC.
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:
---------------------------------
Title: Managing Director
-----------------------------
<PAGE> 19
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SECURITIES
----------- ---------------
<S> <C>
Credit Suisse First Boston Corporation..........................
BancBoston Robertson Stephens, Inc..............................
U.S. Bancorp Piper Jaffray Inc. ................................
---------------
Total.................................... 6,000,000
</TABLE>
-19-
<PAGE> 1
EXHIBIT 3.01
[X] AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
EGREETINGS NETWORK, INC.
EGREETINGS NETWORK, INC., a corporation organized and existing under the
laws of the State of Delaware originally incorporated under the name Egreetings
Merger Corporation on October 19, 1999 (the "Corporation") hereby certifies
that:
1. The name of the Corporation is Egreetings Network, Inc.
2. The original Certificate of Incorporation of the corporation was
filed with the Secretary of State of the State of Delaware on October 19, 1999.
An Agreement and Plan of Merger was filed with the Secretary of State of the
State of Delaware on November 19, 1999.
3. The Amended and Restated Certificate of Incorporation of the
Corporation as provided in Exhibit A hereto was duly adopted in accordance with
the provisions of Section 242 and 245 of the General Corporation Law of the
State of Delaware by the Board of Directors of the Corporation.
4. Pursuant to Section 245 of the Delaware General Corporation Law,
approval of the stockholders of the Corporation has been obtained.
The Amended and Restated Certificate of Incorporation so adopted reads
in full as set forth in EXHIBIT A attached hereto and is hereby incorporated by
reference.
IN WITNESS WHEREOF, the undersigned has signed this certificate this
19th day of November, 1999, and hereby affirms and acknowledges under penalty of
perjury that the filing of this Amended and Restated Certificate of
Incorporation is the act and deed of Egreetings Network, Inc.
EGREETINGS NETWORK, INC.
By: /s/ ANDREW J. MOLEY
--------------------------
Andrew J. Moley
Senior Vice President
ATTEST:
/s/ ANDREW P. MISSAN
- -----------------------
Andrew P. Missan
Secretary
1.
<PAGE> 2
EXHIBIT A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
EGREETINGS NETWORK, INC.
I.
The name of this corporation is Egreetings Network, Inc.
II.
The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware is
National Registered Agents, Inc.
III.
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Delaware General
Corporation Law.
IV.
This corporation is authorized to issue two classes of shares of stock,
to be designated Common Stock and Preferred Stock, respectively. This
corporation is authorized to issue 75,000,000 shares of Common Stock and
20,000,000 shares of Preferred Stock. The shares of Preferred Stock may be
issued from time to time in series. The par value of Common Stock and Preferred
Stock is $0.001 per share.
Of the 20,000,000 shares of Preferred Stock, this corporation is
authorized to issue 520,000 shares of Series A Preferred Stock, 457,503 shares
of Series B Preferred Stock, 808,257 shares of Series C Preferred Stock, 933,200
shares of Series D Preferred Stock, 2,200,000 shares of Series E Preferred
Stock, 3,853,632 shares of Series F Preferred Stock and 10,000,000 Shares of
Series G Preferred Stock.
The Board of Directors of this corporation is authorized to fix or alter
the rights, preferences, privileges, and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock, including but not limited to the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions) and the liquidation
preferences, and the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issue of shares of such series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series. The respective
rights, preferences, privileges, and restrictions of the Series A Preferred
Stock, Series B Preferred Stock, Series C
2.
<PAGE> 3
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock (the "Series A-G Preferred Stock")
are set forth below.
1. VOTING RIGHTS.
(a) Except as otherwise provided below or as required by law, the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock (such stock collectively, the "Series A-D, F and G Preferred
Stock" and such holders, collectively, the "Series A-D, F and G Preferred
Stockholders") will be entitled to notice of any meeting of stockholders of the
corporation and to vote upon any matter submitted to stockholders of the
corporation on the following basis: each share of Series A-D, F and G Preferred
Stock will be treated as the number of shares of Common Stock into which such
share could be converted pursuant to paragraph 4 below on the record date fixed
for the vote or consent of stockholders. The holders of the Series E Preferred
Stock will have no vote on any matter submitted to the stockholders of the
corporation, except as required by law or as otherwise provide in paragraph 5
below.
(b) (i) The holders of the Series A Preferred Stock will be
entitled, voting as a separate class, to elect one (1) director, the holders of
the Series B Preferred Stock will be entitled, voting as a separate class, to
elect one (1) director, and the holders of the Series F Preferred Stock will be
entitled, voting as a separate class, to elect one (1) director, in each case on
an as converted into Common Stock basis.
(ii) The holders of the Series D Preferred Stock will be
entitled, voting as a separate class, to elect one (1) director, on an as
converted into Common Stock basis, provided that at least 931,142 shares of
Series D Preferred Stock remain issued and outstanding, provided further that
such right may be waived by the consent of the holders of a majority of the
outstanding shares of Series D Preferred Stock expressed in a written instrument
or agreement.
(iii) The holders of Common Stock (the "Common
Stockholders"), voting as a separate class, will be entitled to elect three (3)
directors.
(iv) The remaining directors shall be elected by the
Series A-D, F and G Preferred Stockholders and the Common Stockholders, voting
together as a single class (the "Combined Class"), with each share of Series
A-D, F and G Preferred Stock being treated as the number of shares of Common
Stock into which such share could be converted in the manner set forth in
paragraph 1(a) above.
(v) Any director elected solely by the holders of the
Series A Preferred Stock, by the holders of the Series B Preferred Stock, by the
holders of the Series D Preferred Stock, by the holders of the Series F
Preferred Stock, by the Common Stockholders, or by the Combined Class, as the
case may be, may be removed, either with or without cause, by, and only by, the
affirmative vote of the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series D Preferred Stock, Series F Preferred Stock, the Common
Stockholders, or the Combined Class, respectively, either at a special meeting
of such stockholders duly called for that purpose or pursuant to a written
consent of such stockholders, and any vacancy thereby created or otherwise
3.
<PAGE> 4
resulting may be filled by, and only by, the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series D Preferred Stock, Series F Preferred
Stock, the Common Stockholders, or the Combined Class, as the case may be.
(c) Except as otherwise required by law or provided by this
Certificate of Incorporation, a majority of the shares entitled to vote,
represented in person or by proxy, will constitute a quorum at a meeting of
stockholders; provided that for action upon any matter as to which holders of
shares are entitled to vote as a class or series, a majority of the shares of
such class or series, represented in person or by proxy, will constitute a
quorum.
2. DIVIDENDS. In the event that any dividend (cash or otherwise) is
declared on Common Stock, the holders of the Series A-G Preferred Stock will be
entitled to receive dividends pari passu, out of funds legally available
therefor, prior and in preference to payment on Common Stock, in an amount per
share of Series A-G Preferred Stock as would be payable on the number of shares
of Common Stock into which each such share of Series A-G Preferred Stock would
be converted pursuant to paragraph 4 as of the record date for the determination
of the Common Stockholders entitled to receive such dividend. Such dividends
will not be cumulative.
3. LIQUIDATION PREFERENCE.
(a) For purposes hereof, the Original Purchase Price of the
Series A Preferred Stock is Eighty Cents ($.80) per share, the Original Purchase
Price of the Series B Preferred Stock is Two Dollars ($2.00) per share, the
Original Purchase Price of the Series C Preferred Stock is Four Dollars ($4.00)
per share, the Original Purchase Price of the Series D Preferred Stock is Six
Dollars and Thirty-Nine Cents ($6.39) per share, the Original Purchase Price of
the Series E Preferred Stock is the lesser of (i) Six Dollars and Forty-Three
Cents ($6.43) per share, and (ii) the amount stated as the "Exercise Price" in
that certain Warrant to Purchase Series E Preferred Stock dated September 30,
1999 issued to Gibson Greetings, Inc., the Original Purchase Price of the Series
F Preferred Stock is Seven Dollars ($7.00) per share and the Original Purchase
Price of the Series G Preferred Stock is Four Dollars and Four Cents ($4.04) per
share.
(b) In the event of the liquidation, dissolution or winding up of
the corporation, either voluntary or involuntary (a "Liquidation"), the assets
of the corporation legally available for distribution to the stockholders of the
corporation (the "Distributable Assets") will be distributed in the following
order:
(i) first, to the Series A-G Preferred Stockholders, in
each case prior to and in preference to any distribution to the Common
Stockholders, an amount per share equal to the applicable Original Purchase
Price of such series of Preferred Stock (as appropriately adjusted for stock
splits, recapitalizations, combinations and the like) plus all declared and
unpaid dividends with respect thereto; and
(ii) second, to the holders of the Series A Preferred
Stock, the Series B Preferred Stock and the Series C Preferred Stock, the
"Series A-C Preferred Stock," and the Commonn Stockholders, based on their
respective pro rata share of such Distributable Assets (such
4.
<PAGE> 5
pro rata share being an amount equal to the percentage of the outstanding shares
of Common Stock held by such stockholder, as if all outstanding shares of Series
A-C Preferred Stock had been converted into shares of Common Stock as provided
in paragraph 4), provided that aggregate distributions to the Series A-C
Preferred Stockholders pursuant to paragraph 3(b)(i) above and this paragraph
3(b)(ii) shall not exceed $1.00 per share of Series A Preferred Stock, $2.50 per
share of Series B Preferred Stock and $5.00 per share of Series C Preferred
Stock (each as appropriately adjusted for stock splits, recapitalizations,
combinations and the like).
(iii) if upon the occurrence of a Liquidation the
Distributable Assets are insufficient to permit the payment to the Series A-G
Preferred Stockholders of the full preferential amounts to which they are then
entitled as provided in clause (i) of this paragraph 3(b), then the
Distributable Assets will be distributed ratably among such Series A-G Preferred
Stockholders based on their respective liquidation preference amounts as set
forth in clause (i) above.
(iv) If upon the occurrence of a Liquidation, the
Distributable Assets are sufficient to permit the payment to the Series A-G
Preferred Stockholders of the full preferential amounts to which they are then
entitled as provided in clause (i) above, but are insufficient to permit the
payment to the Series A-C Preferred Stockholders and the Common Stockholders of
the additional full amount to which they are then entitled as provided in clause
(ii) of this paragraph 2(b), then the full preferential amounts provided in
clause (i) will be paid to the Series A-G Preferred Stockholders, and the
remaining Distributable Assets will be distributed ratably among such Series A-C
Preferred Stockholders and the Common Stockholders based on the formula set
forth in clause (ii) above.
(v) After payment has been made to the Series A-G
Preferred Stockholders and the Common Stockholders of the full amounts to which
they are then entitled as provided in clauses (i) and (ii) of this paragraph
2(b), any remaining Distributable Assets will be distributed ratably among the
Common Stockholders.
(c) A Liquidation for the purposes of this paragraph 3 includes a
sale of all or substantially all of the assets of the corporation and a merger
or consolidation of the corporation with or into any other corporation or
corporations, or any other corporate reorganization, where the stockholders of
the corporation immediately prior to such event do not retain more than a fifty
percent (50%) interest in the successor entity (a "Merger or Sale of
Corporation"). No later than 10 days before the consummation of any Merger or
Sale of Corporation, the corporation shall deliver a notice to each Series A-G
Preferred Stockholder setting forth the principal terms of such Merger or Sale
of Corporation. Such notice shall be delivered as provided in paragraph 4(h)
below.
(d) Each Series A-G Preferred Stockholder shall be deemed to have
consented, for purposes of Sections 502, 503 and 506 of the California
Corporations Code, to distributions made by the corporation in connection with
the repurchase at cost (or such other price as may be agreed to by this
corporation's Board of Directors) of shares of Common Stock issued to or held by
officers, directors or employees of, or consultants, advisers and others who
provide services to, this corporation or its subsidiaries upon termination of
their employment or services pursuant
5.
<PAGE> 6
to agreements (whether now existing or hereafter entered into) providing for the
right of said repurchase between the corporation and such persons.
4. CONVERSION TO COMMON STOCK. The Series A-G Preferred Stock shall
be convertible into Common Stock of the corporation as follows:
(a) OPTIONAL CONVERSION. Each Series A-G Preferred Stockholder
may, at any time, and from time to time, convert any or all of such holder's
shares of Series A-G Preferred Stock into fully-paid and non-assessable shares
of Common Stock.
(b) AUTOMATIC CONVERSION.
(i) Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock:
(1) immediately upon the closing of the
corporation's sale of its Common Stock in an underwritten public offering
registered under the Securities Act of 1933, as amended, on Form S-1, Form SB-1
or Form SB-2 (or any successor equivalent forms) at a per share public offering
price of not less than $2.50 (as appropriately adjusted for stock splits,
recapitalizations, combinations and the like) and for an aggregate public
offering price of not less than $7,500,000; or
(2) the date on which the number of shares of
Series A Preferred Stock outstanding is less than 50% of the greatest number of
shares of Series A Preferred Stock that have been outstanding at any time (as
appropriately adjusted for stock splits, recapitalizations, combinations and the
like).
(ii) Each share of Series B Preferred Stock shall
automatically be converted into shares of Common Stock:
(1) immediately upon the closing of the
corporation's sale of its Common Stock in an underwritten public offering
registered under the Securities Act of 1933, as amended, on Form S-1, Form SB-1
or Form SB-2 (or any successor equivalent forms) at a per share public offering
price of not less than $5.00 (as appropriately adjusted for stock splits,
recapitalizations, combinations and the like) and for an aggregate public
offering price of not less than $7,500,000; or
(2) the date on which the number of shares of
Series B Preferred Stock outstanding is less than 50% of the greatest-number of
shares of Series B Preferred Stock that have been outstanding at any time (as
appropriately adjusted for stock splits, recapitalizations, combinations and the
like).
(iii) Each share of Series C Preferred Stock shall
automatically be converted into shares of Common Stock:
(1) immediately upon the closing of the
corporation's sale of its
6.
<PAGE> 7
Common Stock in an underwritten public offering registered under the Securities
Act of 1933, as amended, on Form S-1, Form SB-1 or Form SB-2 (or any successor
equivalent forms) at a per share public offering price of not less than $6.00
(as appropriately adjusted for stock splits, recapitalizations, combinations and
the like) and for an aggregate public offering price of not less than
$7,500,000; or
(2) the date on which the number of shares of
Series C Preferred Stock outstanding is less than 50% of the greatest number of
shares of Series C Preferred Stock that have been outstanding at any time (as
appropriately adjusted for stock splits, recapitalizations, combinations and the
like).
(iv) Each share of Series D Preferred Stock shall
automatically be converted into shares of Common Stock:
(1) immediately upon the closing of the
corporation's sale of its Common Stock in an underwritten public offering
registered under the Securities Act of 1933, as amended, on Form S-1, Form SB-1
or Form SB-2 (or any successor equivalent forms) for an aggregate public
offering price of not less than $7,500,000; or
(2) the date on which the number of shares of
Series D Preferred Stock outstanding is less than 50% of the greatest number of
shares of Series D Preferred Stock that have been outstanding at any time (as
appropriately adjusted for stock splits, recapitalizations, combinations and the
like).
(v) Each share of Series E Preferred Stock shall
automatically be converted into shares of Common Stock:
(1) immediately upon the closing of the
corporation's sale of its Common Stock in an underwritten public offering
registered under the Securities Act of 1933, as amended, on Form S-1, Form SB-l
or Form SB-2 (or any successor equivalent forms) for an aggregate public
offering price of not less than $7,500,000; or
(2) the date on which the number of shares of
Series E Preferred Stock outstanding is less than 50% of the greatest number of
shares of Series E Preferred Stock that have been outstanding at any time (as
appropriately adjusted for stock splits, recapitalizations, combinations and the
like).
(vi) Each share of Series F Preferred Stock shall
automatically be converted into shares of Common Stock:
(1) immediately upon the closing of the
corporation's sale of its Common Stock in an underwritten public offering
registered under the Securities Act of 1933, as amended, on Form S-1, Form SB-l
or Form SB-2 (or any successor equivalent forms) at a per share public offering
price of not less than $15.00 (as appropriately adjusted for stock splits,
recapitalizations, combinations and the like) for an aggregate public offering
price of not less than $15,000,000; or
7.
<PAGE> 8
(2) upon the vote or written consent of the
holders, of at least a majority of the outstanding shares of Series F Preferred
Stock.
(vii) Each share of Series G Preferred Stock shall
automatically be converted into shares of Common Stock:
(1) immediately upon the closing of the
corporation's sale of its Common Stock in an underwritten public offering
registered under the Securities Act of 1933, as amended, on Form S-1, Form SB-l
or Form SB-2 (or any successor equivalent forms) at a per share public offering
price of not less than $5.25 (as appropriately adjusted for stock splits,
recapitalizations, combinations and the like) for an aggregate public offering
price of not less than $15,000,000; or
(2) upon the vote or written consent of the
holders, of at least a majority of the outstanding shares of Series G Preferred
Stock.
(c) CONVERSION RATE.
(i) Upon conversion of the Series A Preferred Stock, each
such share shall be converted into the number of shares of Common Stock that
results from dividing the Original Purchase Price of the Series A Preferred
Stock by the Series A Conversion Price in effect at the time of conversion. Upon
conversion of the Series B Preferred Stock, each such share shall be converted
into the number of shares of Common Stock that results from dividing the
Original Purchase Price of the Series B Preferred Stock by the Series B
Conversion Price in effect at the time of conversion. Upon conversion of the
Series C Preferred Stock, each such share shall be converted into the number of
shares of Common Stock that results from dividing the Original Purchase Price of
the Series C Preferred Stock by the Series C Conversion Price in effect at the
time of conversion. Upon conversion of the Series D Preferred Stock, each such
share shall be converted into the number of shares of Common Stock that results
from dividing the Original Purchase Price of the Series D Preferred Stock by the
Series D Conversion Price in effect at the time of conversion. Upon conversion
of the Series E Preferred Stock, each such share shall be converted into the
number of shares of Common Stock that results from dividing the Original
Purchase Price of the Series E Preferred Stock by the Series E Conversion Price
in effect at the time of conversion. Upon conversion of the Series F Preferred
Stock, each such share shall be converted into the number of shares of Common
Stock that results from dividing the original Purchase Price of the Series F
Preferred Stock by the Series F Conversion Price in effect at the time of
conversion. Upon conversion of the Series G Preferred Stock, each such share
shall be converted into the number of shares of Common Stock that results from
dividing the original Purchase Price of the Series G Preferred Stock by the
Series G Conversion Price in effect at the time of conversion.
(ii) The initial Series A Conversion Price will be the
Original Purchase Price of the Series A Preferred Stock; the initial Series B
Conversion Price will be the Original Purchase Price of the Series B Preferred
Stock; the initial Series C Conversion Price will be the Original Purchase Price
of the Series C Preferred Stock; the initial Series D Conversion Price will be
the Original Purchase Price of the Series D Preferred Stock; the initial Series
E Conversion
8.
<PAGE> 9
Price will be the Original Purchase Price of the Series E Preferred Stock; the
initial Series F Conversion Price will be the Original Purchase Price of the
Series F Preferred Stock; and the initial Series G Conversion Price will be the
Original Purchase Price of the Series G Preferred Stock; each as set forth in
paragraph 3(a) above. (The Series A Conversion Price, the Series B Conversion
Price, the Series C Conversion Price, the Series D Conversion Price, the Series
E Conversion Price, the Series F Conversion Price and the Series G Conversion
Price sometimes are referred to hereafter, either individually or collectively
as the context requires, as the "Conversion Price.") The Conversion Price shall
be subject to adjustment from time to time in certain instances as hereinafter
provided.
(iii) In the case of optional conversion, before any
Series A-G Preferred Stockholder shall be entitled to convert shares of Series
A-G Preferred Stock into Common Stock, such holder shall surrender the
certificate or certificates therefor (or an affidavit certifying that such
certificate has been mutilated or apparently lost, destroyed or stolen along
with an appropriate indemnity), duly endorsed, to the office of the corporation
or any transfer agent for such series of Preferred Stock and shall give written
notice to the corporation at such office that he elects to convert the same. The
corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder, or to his nominee or nominees, certificates for the
number of full shares of Common Stock to which he shall be entitled, together
with cash in lieu of any fraction of a share as hereinafter provided, and, if
less than all of the shares represented by such certificate are converted, a
certificate representing the unconverted shares of Series A-G Preferred Stock,
as the case may be. Such conversion shall be deemed to have been made as of the
date of such surrender of the certificate for the stock to be converted, and the
person or persons entitled to receive the Common Stock deliverable upon such
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock on such date. If the conversion is in connection with an offer
of securities registered pursuant to the Securities Act of 1933, as amended, the
conversion may, at the option of any holder tendering shares of Series A-G
Preferred Stock for conversion, be conditioned upon the closing of the sale of
securities pursuant to such offering, in which event the person(s) entitled to
receive the Common Stock deliverable upon such conversion of the Series A-G
Preferred Stock shall not be deemed to have converted such Series A-G Preferred
Stock until immediately prior to the closing of such sale of securities.
(iv) In the case of automatic conversion, on and after the
related conversion event, notwithstanding that any certificates for such shares
of Series A-G Preferred Stock subject to such conversion shall not have been
surrendered for conversion, the shares of Series A-G Preferred Stock evidenced
thereby shall be deemed to be no longer outstanding, and all rights with respect
thereto shall forthwith cease and terminate, except only the rights of the
holder (1) to receive the shares of Common Stock to which such holder shall be
entitled upon conversion thereof, and (2) to receive the amount of cash payable
in respect of any fractional share of Common Stock to which such holder shall be
entitled.
(d) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price of the
Series A-G Preferred Stock in effect from time to time shall be subject to
adjustment in certain cases as follows:
9.
<PAGE> 10
(i) ADJUSTMENT FOR COMBINATIONS OR CONSOLIDATIONS OF
COMMON STOCK. In the event the corporation at any time or from time to time
after the effective date of the initial sale of Series A Preferred Stock (the
"Series A Preferred Original Issue Date"), the effective date of the initial
sale of Series B Preferred Stock (the "Series B Preferred Original Issue Date"),
the effective date of the initial sale of Series C Preferred Stock (the "Series
C Preferred Original Issue Date"), the effective date of the initial sale of
Series D Preferred Stock (the "Series D Preferred Original Issue Date"), the
effective date of the initial sale of Series E Preferred Stock (the "Series E
Preferred Original Issue Date"), the effective date of the initial sale of
Series F Preferred Stock (the "Series F Preferred Original Issue Date") or the
effective date of the initial sale of Series G Preferred Stock (the "Series G
Preferred Original Issue Date"), as the case may be, effects a subdivision or
combination of its outstanding Common Stock into a greater or lesser number of
shares without a proportionate and corresponding subdivision or combination of
its outstanding Series A-G Preferred Stock, as the case may be, then the
existing Conversion Price for each series of the Series A-G Preferred Stock will
be decreased or increased proportionately.
(ii) ADJUSTMENT FOR DIVIDENDS AND DISTRIBUTIONS OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS. In the event the corporation at any time or
from time to time after the applicable Original Issue Date makes or issues, or
fixes a record date for the determination of holders of Common Stock (but not
Series A-G Preferred Stockholders) entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights (hereinafter referred to as "Common Stock Equivalents") convertible into
or entitling the holder thereof to receive additional shares of Common Stock
without payment of any consideration for such Common Stock Equivalents or the
additional shares of Common Stock, for the purpose of protecting the Series A-G
Preferred Stockholders from any dilution in connection therewith, then and in
each such event the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a
subsequent adjustment of such number) of Common Stock issuable in payment of
such dividend or distribution or upon conversion or exercise of such Common
Stock Equivalents will be deemed to be issued and outstanding as of the time of
such issuance or, in the event such a record date has been fixed, as of the
close of business on such record date. In each such event, the then existing
Conversion Price for each series of the Series A-G Preferred Stock will be
decreased as of the time of such issuance or, in the event such a record date
has been fixed, as of the close of business on such record date, by multiplying
the applicable Conversion Price by a fraction:
(1) the numerator of which will be the total number
of shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date; and
(2) the denominator of which will be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus that
number of shares of Common Stock issuable in payment of such dividend or
distribution or upon conversion or exercise of such Common Stock Equivalents;
provided that if such record date has been fixed and such dividend is not fully
paid or if such distribution is not fully made on the date fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, then the Conversion Price for the
10.
<PAGE> 11
applicable series of the Series A-G Preferred Stock will be recomputed
accordingly as of the close of business on such record date and thereafter the
Conversion Price for the applicable series of the Series A-G Preferred Stock
will be adjusted pursuant to this paragraph 4(d) as of the time of actual
payment of such dividends or distribution.
(iii) RECAPITALIZATION. If at any time or from time to
time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or Merger or Sale of Corporation transaction provided
for elsewhere in this paragraph 4), a provision shall be made so that the Series
A-G Preferred Stockholders shall thereafter be entitled to receive upon
conversion of such Preferred Stock the number of shares of stock or other
securities or property of the corporation or otherwise, to which a holder of
Common Stock issuable upon conversion thereof would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this paragraph 4 with respect to the rights of
the Series A-G Preferred Stockholders after the recapitalization to the end that
the provisions of this paragraph 4 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of shares of
Series A-G Preferred Stock) shall be applicable after that event as nearly
equivalent as may be practicable.
(iv) ADJUSTMENT FOR SALE OF SHARES.
(1) If at any time after the Series A Preferred
Original Issue Date, the corporation issues or sells any shares of its Common
Stock, other than "Excluded Shares" (as defined below), for a consideration per
share less than the Series A Conversion Price in effect on the date of and
immediately prior to such issue, then and in each such case, the Series A
Conversion Price will be reduced to a price (calculated to the nearest cent)
determined by multiplying the Series A Conversion Price by a fraction: (a) the
numerator of which will be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
which the aggregate consideration received by the corporation for such issuance
would purchase at such applicable Series A Conversion Price, and (b) the
denominator of which will be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
issued pursuant to such issuance; provided that such fraction will in no event
be greater than one (a), such that the Series A Conversion Price will not be
increased by the adjustment provided in this clause (1).
(2) If at any time after the Series B Preferred
Original Issue Date, the corporation issues or sells any shares of its Common
Stock other than "Excluded Shares," for a consideration per share less than the
Series B Conversion Price in effect on the date of and immediately prior to such
issue, then and in each such case, the Series B Conversion Price will be reduced
to a price (calculated to the nearest cent) determined by multiplying such
Series B Conversion Price by a fraction: (a) the numerator of which will be the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Common Stock which the aggregate consideration
received by the corporation for such issuance would purchase at such applicable
Series B Conversion Price, and (b) the denominator of which will be the number
of shares of Common Stock outstanding immediately prior to such issuance plus
the number of shares of Common Stock issued pursuant to such issuance; provided
that such
11.
<PAGE> 12
fraction will in no event be greater than one (a), such that the Series B
Conversion Price will not be increased by the adjustment provided in this
lause (2).
(3) If at any time after the Series C Preferred
Original Issue Date, the corporation issues or sells any shares of its Common
Stock, other than "Excluded Shares," for a consideration per share less than the
Series C Conversion Price in effect on the date of and immediately prior to such
issue, then the Series C Conversion Price will be reduced to a price (calculated
to the nearest cent) determined by multiplying such Series C Conversion Price by
a fraction: (a) the numerator of which will be the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock which the aggregate consideration received by the corporation
for such issuance would purchase at such applicable Series C Conversion Price,
and (b) the denominator of which will be the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of shares of
Common Stock issued pursuant to such issuance; provided that such fraction will
in no event be greater than one (a) such that the Series C Conversion Price will
not be increased by the adjustment provided in this clause (3).
(4) If at any time after the Series D Preferred
Original Issue Date, the corporation issues or sells any shares of its Common
Stock, other than "Excluded Shares," for a consideration per share less than the
Series D Conversion Price in effect on the date of and immediately prior to such
issue, then and in each such case, the Series D Conversion Price will be reduced
to a price (calculated to the nearest cent) determined by multiplying such
Series D Conversion Price by a fraction: (a) the numerator of which will be the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Common Stock which the aggregate consideration
received by the corporation for such issuance would purchase at such applicable
Series D Conversion Price, and (b) the denominator of which will be the number
of shares of Common Stock outstanding immediately prior to such issuance plus
the number of shares of Common Stock issued pursuant to such issuance; provided
that such fraction will in no event be greater than one (a), such that the
Series D Conversion Price will not be increased by the adjustment provided in
this clause (4).
(5) If at any time after the Series F Preferred
Original Issue Date, the corporation issues or sells any shares of its Common
Stock, other than "Excluded Shares," for a consideration per share less than the
Series F Conversion Price in effect on the date of and immediately prior to such
issue, then and in each such case, the Series F Conversion Price will be reduced
to a price (calculated to the nearest cent) determined by multiplying such
Series F Conversion Price by a fraction: (a) the numerator of which will be the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Common Stock which the aggregate consideration
received by the corporation for such issuance would purchase at such applicable
Series F Conversion Price, and (b) the denominator of which will be the number
of shares of Common Stock outstanding immediately prior to such issuance plus
the number of shares of Common Stock issued pursuant to such issuance; provided
that such fraction will in no event be greater than one (a), such that the
Series F Conversion Price will not be increased by the adjustment provided in
this clause (5).
12.
<PAGE> 13
(6) If at any time after the Series G Preferred
Original Issue Date, the corporation issues or sells any shares of its Common
Stock, other than "Excluded Shares," for a consideration per share less than the
Series G Conversion Price in effect on the date of and immediately prior to such
issue, then and in each such case, the Series G Conversion Price will be reduced
to a price (calculated to the nearest cent) determined by multiplying such
Series G Conversion Price by a fraction: (a) the numerator of which will be the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Common Stock which the aggregate consideration
received by the corporation for such issuance would purchase at such applicable
Series G Conversion Price, and (b) the denominator of which will be the number
of shares of Common Stock outstanding immediately prior to such issuance plus
the number of shares of Common Stock issued pursuant to such issuance; provided
that such fraction will in no event be greater than one (a), such that the
Series G Conversion Price will not be increased by the adjustment provided in
this clause (6).
For purposes of this paragraph 4(d): the shares of Common Stock initially
issuable upon conversion of Series A-G Preferred Stock will be deemed to be
outstanding on each of the Series A Preferred Original Issue Date, the Series B
Preferred Original Issue Date, the Series C Preferred Original Issue Date, the
Series D Preferred Original Issue Date, the Series F Preferred Original Issue
Date and the Series G Preferred Original Issue Date; and the term "Excluded
Shares" will mean: (a) shares of Common Stock issued on conversion of Series A-G
Preferred Stock; (b) shares of Common Stock issued either directly or upon
exercise of options or warrants to officers, directors or employees of, or
consultants, advisers and others who provide services to, the corporation and
its subsidiaries (the "Compensatory Shares" pursuant to any stock option or
purchase plan or similar arrangement approved by the Board of Directors and (c)
shares of Common Stock or Preferred Stock issued either directly or upon the
exercise or conversion of options, warrants or rights or other securities
convertible into shares of Common Stock ("Strategic Shares"), in connection with
a transaction with a third party which is determined to have as its primary
purpose the formation of a strategic business relationship, such determination
being made in good faith by the Board of Directors, provided that the number of
Strategic Shares so issued does not exceed, in the aggregate, 10% of the
Fully-Diluted Outstanding Stock, or such higher percentage of the Fully-Diluted
Outstanding Stock as may be approved by either the unanimous vote of the
Directors present at a duly held meeting of the Board of Directors of the
corporation, or the unanimous written consent of all of the Directors of this
corporation, or the unanimous vote or written consent of the holders of a
majority of the outstanding shares of Series A-D, F and G Preferred Stock, with
each series voting as a separate class. For purposes of this paragraph 4(d), the
term "Fully-Diluted Outstanding Stock" means all of the outstanding shares of
Common Stock of the corporation, including the total number of shares of Common
Stock into which all outstanding shares of Preferred Stock are then convertible
and all outstanding warrants, options and rights which are then exercisable.
(7) For the purpose of making any adjustment in the
Conversion Price as provided above, the consideration received by the
corporation for any issue or sale of Common Stock will be computed:
a. to the extent it consists of cash, as the
amount of
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<PAGE> 14
cash received by the corporation before deduction of any offering expenses
payable by the corporation and any underwriting or similar commissions,
compensation, or concessions paid or allowed by the corporation in connection
with such issue or sale;
b. to the extent it consists of property
other than cash, at the fair market value of that property as determined in good
faith by the corporation's Board of Directors; and
c. if Common Stock is issued or sold
together with other stock or securities or other assets of the corporation for a
consideration which covers both, as the portion of the consideration so received
that may be reasonably determined in good faith by the Board of Directors to be
allocable to such Common Stock.
(8) If the corporation:
a. grants any rights or options (other than
rights or options issued in connection with the Compensatory Shares or Strategic
Shares) to subscribe for, purchase, or otherwise acquire shares of Common Stock,
or
b. issues or sells any security ultimately
convertible into shares of Common Stock, then, in each such case, the price per
share of Common Stock issuable on the exercise of the rights or options or the
conversion of the securities will be determined by dividing the total amount, if
any, received or receivable by the corporation as consideration for the granting
of the rights or options or the issue or sale of the convertible securities,
plus the minimum aggregate amount of additional consideration payable to the
corporation on exercise or conversion of the securities, by the maximum number
of shares of Common Stock issuable on the exercise of conversion. Such granting
or issue or sale will be considered to be an issuance or sale for cash of the
maximum number of shares of Common Stock issuable on exercise or conversion at
the price per share determined under this subsection, and the Conversion Price
for the Series A-G Preferred Stock will be adjusted as above provided to reflect
(on the basis of that determination) the issuance or sale. No further adjustment
of the Conversion Price will be made as a result of the actual issuance of
shares of Common Stock on the exercise of any such rights or options or the
conversion of any such convertible securities.
(9) Upon the redemption or repurchase of any such
securities convertible or exercisable into Common Stock, or the expiration or
termination of the right to convert into, exchange for, or exercise with respect
to, Common Stock, the Conversion Price will be readjusted to such price as would
have been obtained had the adjustment made upon their issuance been made upon
the basis of the issuance of only the number of such securities as were actually
converted into, exchanged for, or exercised with respect to, Common Stock. If
the purchase price or conversion or exchange rate provided for in any such
security changes at any time, then, upon such change becoming effective, the
Conversion Price then in effect will be readjusted forthwith to such price as
would have been obtained had the adjustment made upon the issuance of such
securities been made upon the basis of: (a) the issuance of only the number of
shares of Common Stock theretofore actually delivered upon the conversion,
exchange or exercise of such securities, and the total consideration received
therefor, and (b) the granting or
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<PAGE> 15
issuance, at the time of such change, of any such securities then still
outstanding for the consideration, if any, received by the corporation therefor
and to be received on the basis of such changed price or rate.
(v) SUCCESSIVE CHANGE. The above provisions of this
paragraph 4. shall similarly apply to successive issuances, sales, dividends or
other distributions, subdivisions and combinations on or of the Common Stock
after the applicable Original Issue Date.
(vi) NO IMPAIRMENT. The corporation will not, by amendment
of the corporation's Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this paragraph 4. and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the Series A-G Preferred Stockholders against impairment.
(vii) EXCLUDED EVENTS. Notwithstanding anything in this
paragraph 4. to the contrary, the Conversion Price shall not be adjusted by
virtue of the conversion of shares of Series A-G Preferred Stock into shares of
Common Stock.
(viii) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence
of each adjustment or readjustment of the Conversion Price for any of the Series
A-G Preferred Stock, pursuant to this paragraph 4 the corporation, at its
expense upon request by any Series A-G Preferred Stockholder shall compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each such Series A-G Preferred Stockholder a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. Such certificate shall set forth (1)
such adjustment and readjustment, (2) the current Conversion Price for the
applicable series of the Series A-G Preferred Stock, at the time in effect, (3)
the number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of a share of Series A-G
Preferred Stock, and (4) if such adjustment is the result of an issuance of
Common Stock, the number of shares of Common Stock issued and die consideration
received therefor.
(e) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
corporation at all times will reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Series A-G Preferred Stock such number of its shares
of Common Stock as from time to time will be sufficient to effect the conversion
of all then outstanding shares of Series A-G Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock is not sufficient
to effect such conversion, in addition to such other remedies as may be
available to the Series A-G Preferred Stockholders for such failure, the
corporation will take such corporate action as, in the opinion of its counsel,
may be necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as will be sufficient for such purpose.
(f) NO FRACTIONAL SHARE. No fractional shares shall be issued
upon
15.
<PAGE> 16
conversion of shares of Series A-G Preferred Stock. Whether or not fractional
shares would be issuable upon such conversion shall be determined on the basis
of the total number of shares of Series A-G Preferred Stock which the Series A-G
Preferred Stockholder is at the time converting into Common Stock and the number
of shares of Common Stock issuable upon such aggregate conversion. If the
conversion would result in any fractional share, the corporation shall, in lieu
of issuing any fractional share, pay the holder an amount in cash equal to the
fair market value of such fractional share on the date of conversion (as
determined in good faith by the Board of Directors of the corporation).
(g) NOTICES OF RECORD DATE. In the event of any taking by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the corporation
will mail to each Series A-G Preferred Stockholder at least 10 days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or rights, and the
amount and character of such dividend, distribution or right.
(h) OTHER NOTICES. Any notices required by the provisions of
paragraph 3. above or this paragraph 4 to be given to any Series A-G Preferred
Stockholder must be in writing and will be deemed given upon personal delivery,
one day after deposit with a reputable overnight courier service for overnight
delivery or after transmission by facsimile telecopier with confirmation of
successful transmission, or five days after deposit in the United States mail,
by certified mail postage prepaid, or upon actual receipt if given by any other
method, addressed to each holder of such record at his or her address appearing
on the books of the corporation.
5. COVENANTS.
(a) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of Series A Preferred Stock voting as a
class, take any action, or permit any action to be taken, to (1) amend or repeal
any provision of, or add any provision to, the corporation's Certificate of
Incorporation or Bylaws if such action would alter or change the rights,
preferences, privileges or powers of or the restrictions provided for the
benefit of, the Series A Preferred Stock; (2) increase the number of shares of
Series A Preferred Stock authorized hereby; or (3) authorize or issue shares of
any class or series of stock having any preference or priority as to voting,
liquidation preference or dividends superior or equal to any such preferences or
priorities of the Series A Preferred Stock set forth herein.
(b) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of Series B Preferred Stock voting as a
class, take any action, or permit any action to be taken, to (1) amend or repeal
any provision of, or add any provision to, the corporation's Certificate of
Incorporation or Bylaws if such action would alter or change the rights,
preferences, privileges or powers of, or the
16.
<PAGE> 17
restrictions provided for the benefit of, the Series B Preferred Stock; (2)
increase the number of shares of Series B Preferred Stock authorized hereby; or
(3) authorize or issue shares of any class or series of stock having any
preference or priority as to voting, liquidation preference or dividends
superior or equal to any such preferences or priorities of the Series B
Preferred Stock set forth herein.
(c) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of Series C Preferred Stock voting as a
class, take any action, or permit any action to be taken, to (1) amend or repeal
any provision of, or add any provision to, the corporation's Certificate of
Incorporation or Bylaws if such action would alter or change the rights,
preferences, privileges or powers of, or the restrictions provided for the
benefit of, the Series C Preferred Stock; (2) increase the number of shares of
Series C Preferred Stock authorized hereby, or (3) authorize or issue shares of
any class or series of stock having any preference or priority as to voting,
liquidation preference or dividends superior or equal to any such preferences or
priorities of the Series C Preferred Stock set forth herein.
(d) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of Series D Preferred Stock voting as a
class, take any action, or permit any action to be taken, to (1) amend or repeal
any provision of, or add any provision to, the corporation's Certificate of
Incorporation or Bylaws if such action would alter or change the rights,
preferences, privileges or powers of or the restrictions provided for the
benefit of the Series D Preferred Stock; (2) increase the number of shares of
Series D Preferred Stock authorized hereby, or (3) authorize or issue shares of
any class or series of stock having any preference or priority as to voting,
liquidation preference or dividends superior to any such preferences or
priorities of the Series D Preferred Stock set forth herein.
(e) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of Series E Preferred Stock voting as a
class, take any action, or permit any action to be taken, to (1) amend or repeal
any provision of, or add any provision to, the corporation's Certificate of
Incorporation or Bylaws if such action would alter or change the rights,
preferences, privileges or powers of, or the restrictions provided for the
benefit of the Series E Preferred Stock; (2) increase the number of shares of
Series E Preferred Stock authorized hereby; or (3) authorize or issue shares of
any class or series of stock having any preference or priority as to voting,
liquidation preference or dividends superior to any such preferences or
priorities of the Series E Preferred Stock set forth herein.
(f) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of Series F Preferred
17.
<PAGE> 18
Stock voting as a class, take any action, or permit any action to be taken, to
(1) amend or repeal any provision of, or add any provision to, the corporation's
Certificate of Incorporation or Bylaws if such action would alter or change the
rights, preferences, privileges or powers of, or the restrictions provided for
the benefit of, the Series F Preferred Stock; (2) increase the number of shares
of Series F Preferred Stock authorized hereby; or (3) authorize or issue shares
of any class or series of stock having any preference or priority as to voting,
liquidation preference or dividends superior or equal to any such preferences or
priorities of the Series F Preferred Stock set forth herein.
(g) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of Series G Preferred Stock voting as a
class, take any action, or permit any action to be taken, to (1) amend or repeal
any provision of, or add any provision to, the corporation's Certificate of
Incorporation or Bylaws if such action would alter or change the rights,
preferences, privileges or powers of, or the restrictions provided for the
benefit of, the Series G Preferred Stock; (2) increase the number of shares of
Series G Preferred Stock authorized hereby; or (3) authorize or issue shares of
any class or series of stock having any preference or priority as to voting,
liquidation preference or dividends superior or equal to any such preferences or
priorities of the Series G Preferred Stock set forth herein.
(h) Except as otherwise required by law, and in addition to any
other rights provided by law, the corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the aggregate outstanding shares of Series A-D, F and G Preferred
Stock, voting together as a single class, take any action or permit any action
to be taken, to (1) make any distributions on equity securities other than in
connection with a Liquidation; (2) effectuate a Merger or Sale of Corporation,
or a Liquidation; (3) apply any of the corporation's assets to the redemption,
retirement, purchase or acquisition of any shares of capital stock, other than
pursuant to agreements which permit the corporation to repurchase such shares
upon the termination of employment or consulting services to the corporation or
in exercise of the corporation's right of first refusal or similar right with
respect to a proposed transfer of capital stock; (4) change the number of
directors authorized in the corporation's bylaws or Certificate of
Incorporation; or (5) increase the number of Compensatory Shares issued or
reserved for issue under any stock option or purchase plan (other than as a
result of a stock split or a stock dividend declared and paid on the capital
stock or as a result of any amendment to the corporation's Certificate of
Incorporation); or (6) increase the authorized number of shares of Preferred
Stock or Common Stock of the corporation.
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of the
corporation
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<PAGE> 19
shall be vested in its Board of Directors. The number of directors which shall
constitute the whole Board of Directors shall be fixed exclusively by one or
more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specified circumstances, following the
closing of the initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "1933 Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Section v(2), each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. Subject to the rights of the holders of any Series of Preferred
Stock, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all of the then outstanding stock of voting
stock of the Corporation, entitled to vote at an election of directors (the
"Voting Stock").
4. Subject to the rights of the holders of any Series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
5. In the event that Section 2115(a) of the California Corporations Code
is applicable to this corporation, then the following shall apply:
19.
<PAGE> 20
(a) Every stockholder entitled to vote in any election of
directors of this corporation may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder thinks fit;
(b) No stockholder, however, may cumulate such stockholder's
votes for one or more candidates unless (i) the names of such candidates have
been properly placed in nomination, in accordance with the Bylaws of the
corporation, prior to the voting, (ii) the stockholder has given advance notice
to the corporation of the intention to cumulate votes pursuant to the Bylaws,
and (iii) the stockholder has given proper notice to the other stockholders at
the meeting, prior to voting, of such stockholder's intention to cumulate such
stockholder's votes; and (c) If any stockholder has given proper notice, all
stockholders may cumulate their votes for any candidates who have been properly
placed in nomination. The candidates receiving the highest number of votes of
the shares entitled to be voted for them up to the number of directors to be
elected by such shares shall be declared elected.
6. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may
be altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend or repeal Bylaws.
(a) The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
(b) No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by written consent of the stockholders in
accordance with the Bylaws prior to the closing of the Initial Public Offering
and following the closing of the Initial Public Offering no action shall be
taken by the stockholders by written consent.
(c) Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
1. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law (c) under Section 174 of the Delaware General Corporation Law,
or (d) for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended after approval by
the stockholders of this Article to
20.
<PAGE> 21
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended.
2. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
1. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph 2 of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
2. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or Series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
21.
<PAGE> 22
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EGREETINGS NETWORK, INC.
EGREETINGS NETWORK, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware, does hereby certify as
follows:
FIRST: The name of the corporation is EGREETINGS NETWORK, INC.
SECOND: The original Certificate of Incorporation of the corporation
was filed with the Secretary of State of the State of Delaware on October 19,
1999. An Agreement and Plan of Merger was filed with the Secretary of State of
the State of Delaware on November 19, 1999. An Amended and Restated Certificate
of Incorporation was filed with the Secretary of State of the State of Delaware
on November 19, 1999.
THIRD: The following amendment to the Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 141(f) and 242 of the
General Corporation Law of the State of Delaware (the "General Corporation Law")
by resolutions duly adopted by the Board of Directors of this Corporation and
was approved by the stockholders as provided in Section 228 of the General
Corporation Law.
FOURTH: The first paragraph of Article IV of the Amended and Restated
Certificate of Incorporation is hereby deleted in its entirety and replaced with
the following:
"IV.
This corporation is authorized to issue two classes of shares
of stock, to be designated Common Stock and Preferred Stock,
respectively. This corporation is authorized to issue 75,000,000 shares
of Common Stock and 20,000,000 shares of Preferred Stock. The shares of
Preferred Stock may be issued from time to time in series. The par
value of Common Stock and Preferred Stock is $0.001 per share. Upon the
filing of this Certificate of Amendment, every three (3) shares of
Common Stock outstanding shall be combined into two (2) shares of
Common Stock; provided, however, that the Corporation shall issue no
fractional shares of Common Stock, but shall instead pay to any
stockholder who would be entitled to receive a fractional share as a
result of the actions set forth herein a sum in cash equal to the fair
market value of such fractional share."
<PAGE> 23
IN WITNESS WHEREOF, EGREETINGS NETWORK, INC. has caused this
Certificate of Amendment of Amended and Restated Certificate of Incorporation to
be signed by its Senior Vice President and Secretary in San Francisco,
California this _____day of November, 1999.
EGREETINGS NETWORK, INC.
/s/ Andrew J. Moley
-------------------------------
Andrew J. Moley
Senior Vice President
Attest:
/s/ Andrew P. Missan
- -------------------------------
Name: Andrew Missan
Title: Secretary
<PAGE> 1
EXHIBIT 3.02
BYLAWS
OF
EGREETINGS MERGER CORPORATION
(A DELAWARE CORPORATION)
<PAGE> 2
BYLAWS
OF
EGREETINGS MERGER CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETINGS.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought
1.
<PAGE> 3
before an annual meeting, business must be: (A) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or (C) otherwise properly brought before the
meeting by a stockholder. For business to be properly brought before an annual
meeting by a stockholder, (i) the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation, (ii) such business must
be a proper matter for stockholder action under the Delaware General Corporation
Law ("DGCL"), (iii) if the stockholder, or the beneficial owner on whose behalf
any such proposal or nomination is made, has provided the corporation with a
Solicitation Notice (as defined in this Section 5(b)), such stockholder or
beneficial owner must, in the case of a proposal, have delivered a proxy
statement and form of proxy to holders of at least the percentage of the
corporation's voting shares required under applicable law to carry any such
proposal, or, in the case of a nomination or nominations, have delivered a proxy
statement and form of proxy to holders of a percentage of the corporation's
voting shares reasonably believed by such stockholder or beneficial owner to be
sufficient to elect the nominee or nominees proposed to be nominated by such
stockholder, and must, in either case, have included in such materials the
Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has
been timely provided pursuant to this section, the stockholder or beneficial
owner proposing such business or nomination must not have solicited a number of
proxies sufficient to have required the delivery of such a Solicitation Notice
under this Section 5. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not later
than the close of business on the ninetieth (90th) day nor earlier than the
close of business on the one hundred twentieth (120th) day prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced more than thirty (30)
days prior to or delayed by more than thirty (30) days after the anniversary of
the preceding year's annual meeting, notice by the stockholder to be timely must
be so delivered not earlier than the close of business on the one hundred
twentieth (120th) day prior to such annual meeting and not later than the close
of business on the later of the ninetieth (90th) day prior to such annual
meeting or the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above. Such stockholder's
notice shall set forth: (A) as to each person whom the stockholder proposed to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "1934 Act") and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (B) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (C) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the corporation's books, and of
such beneficial owner, (ii) the class and number of shares of the corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner, and (iii)
2.
<PAGE> 4
whether either such stockholder or beneficial owner intends to deliver a proxy
statement and form of proxy to holders of, in the case of the proposal, at least
the percentage of the corporation's voting shares required under applicable law
to carry the proposal or, in the case of a nomination or nominations, a
sufficient number of holders of the corporation's voting shares to elect such
nominee or nominees (an affirmative statement of such intent, a "Solicitation
Notice").
(c) Notwithstanding anything in the third sentence of Section
5(b) of these Bylaws to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the corporation
at least one hundred (100) days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this Section 5 shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the corporation.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 5 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as the
case may be, in accordance with the procedures set forth in these Bylaws and, if
any proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
(e) Notwithstanding the foregoing provisions of this Section 5,
in order to include information with respect to a stockholder proposal in the
proxy statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
(f) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may
be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the President or the Chief Executive Officer or (iii) the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board of
3.
<PAGE> 5
Directors for adoption), and shall be held at such place, on such date, and at
such time as they, he or she shall fix.
At any time or times that the corporation is subject to Section 2115(b) of the
California General Corporation Law ("CGCL"), stockholders holding five percent
(5%) or more of the outstanding shares shall have the right to call a special
meeting of stockholders only as set forth in Section 18(c) herein
(b) If a special meeting is properly called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within one hundred (100) days after the receipt of the request, the
person or persons properly requesting the meeting may set the time and place of
the meeting and give the notice. Nothing contained in this paragraph (b) shall
be construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
(c) Nominations of persons for election to the Board of Directors
may be made at a special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
corporation who is a stockholder of record at the time of giving notice provided
for in these Bylaws who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 6(c). In the event
the corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by Section 5(b) of these Bylaws shall be delivered
to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not
4.
<PAGE> 6
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting, such notice to specify the
place, date and hour and purpose or purposes of the meeting. Notice of the time,
place and purpose of any meeting of stockholders may be waived in writing,
signed by the person entitled to notice thereof, either before or after such
meeting, and will be waived by any stockholder by his attendance thereat in
person or by proxy, except when the stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Any stockholder so waiving notice of such meeting shall be bound by
the proceedings of any such meeting in all respects as if due notice thereof had
been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by statute, the Certificate of Incorporation or these Bylaws,
in all matters other than the election of directors, the affirmative vote of the
majority of shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders.
Except as otherwise provided by statute, the Certificate of Incorporation or
these Bylaws, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Where a separate vote by a class or classes
or series is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter and, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes cast
by the holders of shares of such class or classes or series shall be the act of
such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
5.
<PAGE> 7
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents all have the right to do so either
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the DGCL, Section 217(b). If the instrument filed with the
Secretary shows that any such tenancy is held in unequal interests, a majority
or even-split for the purpose of subsection (c) shall be a majority or
even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
6.
<PAGE> 8
(b) Every written consent shall bear the date of signature of
each stockholder who signs the consent, and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the earliest dated consent delivered to the corporation in the
manner herein required, written consents signed by a sufficient number of
stockholders to take action are delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the DGCL if such action had been voted on by stockholders at a meeting
thereof, then the certificate filed under such section shall state, in lieu of
any statement required by such section concerning any vote of stockholders, that
written consent has been given in accordance with Section 228 of the DGCL.
(d) Notwithstanding the foregoing, no such action by written
consent may be taken following the closing of the initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock
of the corporation (the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board
of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by a
majority in interest of the stockholders entitled to vote, present in person or
by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
(b) The Board of Directors of the corporation shall be entitled
to make such rules or regulations for the conduct of meetings of stockholders as
it shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by
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the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with rules of parliamentary
procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be determined from time to time by resolution
of the Board of Directors. Directors need not be stockholders unless so required
by the Certificate of Incorporation. If for any cause, the directors shall not
have been elected at an annual meeting, they may be elected as soon thereafter
as convenient at a special meeting of the stockholders called for that purpose
in the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation. (Del. Code Ann., tit. 8, Section 141(a))
SECTION 17. CLASSES OF DIRECTORS.
(a) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the Initial Public Offering, the directors shall be
divided into three classes designated as Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the closing of the Initial Public Offering,
the term of office of the Class I directors shall expire and Class I directors
shall be elected for a full term of three years. At the second annual meeting of
stockholders following the Initial Public Offering, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders following
the Initial Public Offering, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting. During such time or times that the corporation is
subject to Section 2115(b) of the CGCL, this Section 17(a) shall become
effective and apply only when the corporation is a "listed" corporation within
the meaning of Section 301.5 of the CGCL.
(b) In the event that the corporation (i) is subject to Section
2115(b) of the CGCL AND (ii) is not a "listed" corporation or ceases to be a
"listed" corporation under Section 301.5 of the CGCL, Section 17(a) of these
Bylaws shall not apply and all directors shall be elected at each annual meeting
of stockholders to hold office until the next annual meeting.
(c) No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation (i) is subject to Section 2115(b) of the CGCL AND (ii)
is not a "listed" corporation or ceases to be a "listed" corporation under
Section 301.5 of the CGCL. During this time, every stockholder entitled to
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vote at an election for directors may cumulate such stockholder's votes and give
one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder thinks fit. No stockholder,
however, shall be entitled to so cumulate such stockholder's votes unless (i)
the names of such candidate or candidates have been placed in nomination prior
to the voting and (ii) the stockholder has given notice at the meeting, prior to
the voting, of such stockholder's intention to cumulate such stockholder's
votes. If any stockholder has given proper notice to cumulate votes, all
stockholders may cumulate their votes for any candidates who have been properly
placed in nomination. Under cumulative voting, the candidates receiving the
highest number of votes, up to the number of directors to be elected, are
elected.
Notwithstanding the foregoing provisions of this section, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
SECTION 18. VACANCIES.
(a) Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A vacancy
in the Board of Directors shall be deemed to exist under this Section 18 in the
case of the death, removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
DGCL.
(c) At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy, the directors
then in office who have been elected by stockholders shall constitute less than
a majority of the directors then in office, then
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(1) Any holder or holders of an aggregate of five percent
(5%) or more of the total number of shares at the time outstanding having the
right to vote for those directors may call a special meeting of stockholders; or
(2) The Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of stockholders, to be held to elect the entire board, all in accordance
with Section 305(c) of the CGCL. The term of office of any director shall
terminate upon that election of a successor.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When one
or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. REMOVAL.
(a) During such time or times that the corporation is subject to
Section 2115(b) of the CGCL, the Board of Directors or any individual director
may be removed from office at any time without cause by the affirmative vote of
the holders of at least a majority of the outstanding shares entitled to vote on
such removal; provided, however, that unless the entire Board is removed, no
individual director may be removed when the votes cast against such director's
removal, or not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively at an election which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire number of directors
authorized at the time of such director's most recent election were then being
elected.
(b) Following any date on which the corporation is no longer
subject to Section 2115(b) of the CGCL and subject to any limitations imposed by
law, Section 20(a) above shall no longer apply and removal shall be as provided
in Section 141(k) of the DGCL.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
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(b) REGULAR MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of Directors may be
held at any time or date and at any place within or without the State of
Delaware which has been designated by the Board of Directors and publicized
among all directors. No formal notice shall be required for regular meetings of
the Board of Directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, facsimile, telegraph or telex, or
by electronic mail or other electronic means, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
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(b) At each meeting of the Board of Directors at which a quorum
is present, all questions and business shall be determined by the affirmative
vote of a majority of the directors present, unless a different vote be required
by law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or
repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, from time to
time, appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall any such committee have the powers denied to
the Executive Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to any requirements of any
outstanding series of preferred Stock and the provisions of subsections (a) or
(b) of this Bylaw, may at any time increase or decrease the number of members of
a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any
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reason remove any individual committee member and the Board of Directors may
fill any committee vacancy created by death, resignation, removal or increase in
the number of members of the committee. The Board of Directors may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee, and, in addition,
in the absence or disqualification of any member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President (if a director), or if the President is absent, the
most senior Vice President (if a director), or, in the absence of any such
person, a chairman of the meeting chosen by a majority of the directors present,
shall preside over the meeting. The Secretary, or in his absence, any Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers
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and agents with such powers and duties as it shall deem necessary. The Board of
Directors may assign such additional titles to one or more of the officers as it
shall deem appropriate. Any one person may hold any number of offices of the
corporation at any one time unless specifically prohibited therefrom by law. The
salaries and other compensation of the officers of the corporation shall be
fixed by or in the manner designated by the Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of
the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is present.
Unless some other officer has been elected Chief Executive Officer of the
corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers, as
the Board of Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings
of the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform
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other duties commonly incident to his office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep or cause to be kept the books of account of the corporation
in a thorough and proper manner and shall render statements of the financial
affairs of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order of
the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant Treasurer,
or the Controller or any Assistant Controller to assume and perform the duties
of the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly incident
to his office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts
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on behalf of the corporation, except where otherwise provided by law or these
Bylaws, and such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class
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of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights. Except as otherwise expressly provided by
law, the rights and obligations of the holders of certificates representing
stock of the same class and series shall be identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such form and amount as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the DGCL.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall, subject to applicable law, not be more than sixty (60) nor less than ten
(10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
(b) Prior to the Initial Public Offering, in order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any stockholder of
record seeking to have the
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stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board of Directors to fix a record
date. The Board of Directors shall promptly, but in all events within ten (10)
days after the date on which such a request is received, adopt a resolution
fixing the record date. If no record date has been fixed by the Board of
Directors within ten (10) days of the date on which such a request is received,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a
18.
<PAGE> 20
trustee under an indenture pursuant to which such bond, debenture or other
corporate security shall be issued, the signatures of the persons signing and
attesting the corporate seal on such bond, debenture or other corporate security
may be the imprinted facsimile of the signatures of such persons. Interest
coupons appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation and applicable law, if any, may be declared by the Board of
Directors pursuant to law at any regular or special meeting. Dividends may be
paid in cash, in property, or in shares of the capital stock, subject to the
provisions of the Certificate of Incorporation and applicable law.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
19.
<PAGE> 21
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the DGCL or any
other applicable law; provided, however, that the corporation may modify the
extent of such indemnification by individual contracts with its directors AND
executive officers; and, provided, further, that the corporation shall not be
required to indemnify any director or executive officer in connection with any
proceeding (or part thereof) initiated by such person unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board of Directors of the corporation, (iii) such
indemnification is provided by the corporation, in its sole discretion, pursuant
to the powers vested in the corporation under the DGCL or any other applicable
law or (iv) such indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the DGCL or any other applicable law. The Board of Directors shall
have the power to delegate the determination of whether indemnification shall be
given to any such person to such officers or other persons as the Board of
Directors shall determine.
(c) EXPENSES. The corporation shall advance to any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director OR EXECUTIVE OFFICER in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Section 43 or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Section 43, no advance shall be made by the corporation to
an executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a
20.
<PAGE> 22
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Section 43 to a director or executive officer shall
be enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
DGCL or any other applicable law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the DGCL or any other applicable law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
by this Bylaw shall not be exclusive of any other right which such person may
have or hereafter acquire under any applicable statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law, or by any other applicable law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
21.
<PAGE> 23
(g) INSURANCE. To the fullest extent permitted by the DGCL or any
other applicable law, the corporation, upon approval by the Board of Directors,
may purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this Section 43.
(h) AMENDMENTS. Any repeal or modification of this Section 43
shall only be prospective and shall not affect the rights under this Bylaw in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Section 43 that
shall not have been invalidated, or by any other applicable law. If this Section
43 shall be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each director and
[EXECUTIVE] OFFICER to the full extent under any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(1) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and expenses
of any nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition
to the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Section 43 with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(4) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer,
22.
<PAGE> 24
officer, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
(5) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Section 43.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by overnight
delivery service, facsimile, telex or telegram, except that such notice other
than one which is delivered personally shall be sent to such address as such
director shall have filed in writing with the Secretary, or, in the absence of
such filing, to the last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail or by
overnight delivery service, as above provided, shall be deemed to have been
given as at the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending time recorded at
time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
23.
<PAGE> 25
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the DGCL, the certificate shall state, if such is the fact and if
notice is required, that notice was given to all persons entitled to receive
notice except such persons with whom communication is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice
is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the DGCL, the certificate need not state that notice was not given
to persons to whom notice was not required to be given pursuant to this
paragraph.
24.
<PAGE> 26
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding shares of the voting stock of the
corporation entitled to vote. The Board of Directors shall also have the power
to adopt, amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
25.
<PAGE> 27
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I OFFICES................................................................. 1
Section 1 Registered Office.................................................. 1
Section 2. Other Offices...................................................... 1
ARTICLE II CORPORATE SEAL.......................................................... 1
Section 3. Corporate Seal..................................................... 1
ARTICLE III STOCKHOLDERS' MEETINGS.................................................. 1
Section 4. Place of Meetings.................................................. 1
Section 5. Annual Meetings.................................................... 1
Section 6. Special Meetings................................................... 3
Section 7. Notice of Meetings................................................. 4
Section 8. Quorum............................................................. 5
Section 9. Adjournment and Notice of Adjourned Meetings....................... 5
Section 10. Voting Rights...................................................... 5
Section 11. Joint Owners of Stock.............................................. 6
Section 12. List of Stockholders............................................... 6
Section 13. Action Without Meeting............................................. 6
Section 14. Organization....................................................... 7
ARTICLE IV DIRECTORS............................................................... 8
Section 15. Number and Term of Office.......................................... 8
Section 16. Powers............................................................. 8
Section 17. Classes of Directors............................................... 8
Section 18. Vacancies.......................................................... 9
Section 19. Resignation........................................................ 10
Section 20. Removal............................................................ 10
Section 21. Meetings........................................................... 10
Section 22. Quorum and Voting.................................................. 11
Section 23. Action Without Meeting............................................. 12
Section 24. Fees and Compensation.............................................. 12
Section 25. Committees......................................................... 12
</TABLE>
i.
<PAGE> 28
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C>
Section 26. Organization....................................................... 13
ARTICLE V OFFICERS................................................................ 13
Section 27. Officers Designated................................................ 13
Section 28. Tenure and Duties of Officers...................................... 14
Section 29. Delegation of Authority............................................ 15
Section 30. Resignations....................................................... 15
Section 31. Removal............................................................ 15
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED
BY THE CORPORATION...................................................... 15
Section 32. Execution of Corporate Instruments................................. 15
Section 33. Voting of Securities Owned by the Corporation...................... 16
ARTICLE VII SHARES OF STOCK......................................................... 16
Section 34. Form and Execution of Certificates................................. 16
Section 35. Lost Certificates.................................................. 17
Section 36. Transfers.......................................................... 17
Section 37. Fixing Record Dates................................................ 17
Section 38. Registered Stockholders............................................ 18
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION..................................... 18
Section 39. Execution of Other Securities...................................... 18
ARTICLE IX DIVIDENDS............................................................... 19
Section 40. Declaration of Dividends........................................... 19
Section 41. Dividend Reserve................................................... 19
ARTICLE X FISCAL YEAR............................................................. 19
Section 42. Fiscal Year........................................................ 19
ARTICLE XI INDEMNIFICATION......................................................... .20
Section 43. Indemnification of Directors, Executive Officers, Other
Officers, Employees And Other Agents............................... 20
ARTICLE XII NOTICES................................................................. 23
Section 44. Notices............................................................ 23
ARTICLE XIII AMENDMENTS.............................................................. 25
</TABLE>
ii.
<PAGE> 29
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C>
Section 45. Amendments......................................................... 25
ARTICLE XIV LOANS TO OFFICERS....................................................... 25
Section 46. Loans To Officers.................................................. 25
</TABLE>
iii.
<PAGE> 1
EXHIBIT 4.02
[EGREETINGS NETWORK, INC. LOGO]
COMMON STOCK
_______________
Shares
SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
----------------------------------------
IS THE OWNER OF
----------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $0.001 PER SHARE, OF
EGREETINGS NETWORK, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
In Witness Whereof, the Corporation has caused this Certificate to be
executed and attested to by the manual or facsimile signatures of its duly
authorized officers, under a facsimile of its corporate seal and to be affixed
hereto.
Dated:
-------------------
[EGREETINGS NETWORK, INC. SEAL]
/s/ ANDREW P. MISSAN /s/ GORDON M. TUCKER
- --------------------------- -------------------------
SECRETARY CHIEF EXECUTIVE OFFICER
<PAGE> 2
EGREETINGS NETWORK, INC.
Upon request the Corporation will furnish any holder of shares of Common
Stock of the Corporation, without charge, with a full statement of the powers,
designations, preferences, and relative, participating, optional or other
special rights of any class or series of capital stock of the Corporation, and
the qualifications, limitations or restrictions of such preferences and/or
rights.
The following abbreviations, when used in the inscription on the face of
the certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - all tenants in common UNIF G FT MIN ACT Custodian
TEN ENT - as tenants by the entireties -------------------------------------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants
in common under Uniform Gifts to Minors
Act
----------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above at.
For value received, _____________________________ hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF SIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
______________________________________________________________________ Shares
of Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated _______________________________
In presence of
X ______________________________________
X _______________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
__________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR, INSTITUTION, BANK,
STOCK (BANKS, STOCKHOLDERS, SAVINGS AND LOAN ASSOCIATION AND CREDIT UNION WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
SEC RULE 17Ad-15.
<PAGE> 1
EXHIBIT 4.03
EGREETINGS NETWORK, INC.
FIFTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
NOVEMBER 19, 1999
<PAGE> 2
FIFTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS FIFTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of November 19, 1999 by and among
EGREETINGS NETWORK, INC., a California corporation (the "Company"), and the
persons identified on the signature page hereof (the "Investors").
RECITALS
WHEREAS, certain Investors entered into a Fourth Amended and Restated
Investors' Rights Agreement with the Company dated as of October 5, 1999 (the
"Rights Agreement"); and
WHEREAS, the existing Investors and the Company desire that the Company
sell shares of its Series G Preferred Stock to National Broadcasting Company,
Inc. ("NBC"), and the existing Investors acknowledge that such sale will be
conditioned upon NBC being made a party to this Agreement, which amends and
restates the Rights Agreement, and the existing Investors are therefore willing
to enter into this Agreement with the Company and NBC in order to induce NBC to
make such an investment in the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, all parties hereto agree as follows:
SECTION 1
RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
(a) "AFFILIATE" shall mean affiliate as defined in Rule 144.
(b) "COMMISSION" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
(c) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(d) "HOLDER" shall mean any Investor who holds Registrable Securities
and any holder of Registrable Securities to whom the registration rights
conferred by this Agreement have been transferred in compliance with Section
1.11 hereof.
(e) "INITIATING HOLDER" shall mean any Holder or Holders who in the
aggregate hold not less than thirty-three percent (33%) of the outstanding
Registrable securities. For purposes of such calculation, holders of Shares
shall be considered to hold the shares of Common Stock then issuable upon
conversion of such Shares.
1.
<PAGE> 3
(f) "OTHER STOCKHOLDER" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their securities
in certain registrations.
(g) "RESTRICTED SECURITIES" shall mean the securities of the Company
required to bear or bearing a legend stating that the shares have not been
registered under the Securities Act.
(h) "REGISTRABLE SECURITIES" shall mean (i) shares of Common Stock
issued or issuable pursuant to the conversion of the Shares and (ii) any Common
Stock issued as a dividend or other distribution with respect to or in exchange
for or in replacement of the shares referenced in (i) above, provided, however,
that Registrable Securities shall not include any shares of Common Stock that
have been sold to the public pursuant to a registration statement or Rule 144 or
sold in a private transaction in which the transferor's rights pursuant to this
Agreement have not been assigned.
(i) The terms "REGISTER," "REGISTERED" and "REGISTRATION" shall refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement by the Commission.
(j) "REGISTRATION EXPENSES" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, expenses of any regular or special audits incident to or required
by any such registration, but shall not include Selling Expenses or, except as
expressly set forth in Section 1.4 of this Agreement, fees and disbursements of
counsel for the Holders (and excluding the compensation of regular employees of
the Company, which shall be paid in any event by the Company).
(k) "RULE 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(l) "RULE 145" shall mean Rule 145 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(m) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time, corresponding
to such act.
(n) "SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for any Holder except as set forth in Section
1.4 of this Agreement.
(o) "SHARES" shall mean the Company's Series A Preferred Stock; the
Company's Series B Preferred Stock; the Company's Series C Preferred Stock; the
Company's
2.
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Series D Preferred Stock; the Company's Series E Preferred Stock, including any
shares of Series E Preferred Stock issuable upon exercise of that certain
Warrant to Purchase Shares of Series E Preferred Stock dated September 30, 1999
issued to Gibson Greetings, Inc.; the Company's Series F Preferred Stock; and
the Company's Series G Preferred Stock.
1.2 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. If the Company shall receive from
Initiating Holders at any time or times not earlier than the earlier of (i)
October 5, 2002, or (ii) six months after the effective date of the first
registration statement filed by the Company covering an underwritten offering of
any of its securities to the general public (an "initial public offering"), a
written request specifying that it is made pursuant to this Section 1.2 and
requesting that the Company effect any registration with respect to all or a
part of the Registrable Securities having, in the case of an initial public
offering, a reasonably anticipated aggregate offering price, net of underwriting
discounts and commissions, that exceeds $15,000,000 and, in the case of a
subsequent public offering, a reasonably anticipated aggregate offering price,
net of underwriting discounts and commissions, that exceeds $5,000,000, the
Company will:
(i) promptly give written notice of the proposed registration to
all other Holders;
(ii) and as soon as practicable, use its diligent best efforts to
effect such registration (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with the Securities Act) as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after such written notice from the Company described in
clause (i) above is effective.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.2:
(A) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) After the Company has effected two such registrations
pursuant to this Section 1.2(a) and each such registration has been declared or
ordered effective by the Commission;
(C) During the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of, a
registration pursuant to Section 1.3 hereof, provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;
3.
<PAGE> 5
(b) Subject to the foregoing clauses (A) through (C), the Company
shall prepare and file a registration statement covering the Registrable
Securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Initiating Holders; provided, however, that if
(i) in the good faith judgment of the Board of Directors of the Company, such
registration would be seriously detrimental to the Company and the Board of
Directors of the Company concludes, as a result, that it is essential to defer
the filing of such registration statement at such time, and (ii) the Company
shall furnish to such Holders a certificate signed by the president or chief
executive officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company for such registration statement to be filed in the near future and that
it is, therefore, essential to defer the filing of such registration statement,
then the Company shall have the right to defer such filing for the period during
which such registration would be seriously detrimental, provided, that the
Company may not defer the filing for a period of more than 180 days after
receipt of the request of the Initiating Holders, and, provided further, that
(except as provided in clause (C) above) the Company shall not defer its
obligation in this manner more than once in any 12-month period.
The registration statement filed pursuant to the request of the Initiating
Holders may, subject to the provisions of this Section 1.2(b) and Section 1.12
hereof, include other securities of the Company and may include securities of
the Company being sold for the account of the Company.
(c) UNDERWRITING. If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 1.2 and the Company shall include such information in the written
notice referred to in Section 1.2(a)(i) above. In such event, the right of any
Holder to registration pursuant to this Section 1.2 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder with
respect to such participation and inclusion) to the extent provided herein. A
Holder may elect to include in such underwriting all or a part of the
Registrable Securities he holds.
(d) PROCEDURE. If the Company shall request inclusion in any
registration pursuant to this Section 1.2 of securities being sold for its own
account, or if persons other than Holders shall request inclusion of their
securities in any registration pursuant to this Section 1.2, the Initiating
Holders shall, on behalf of all Holders, offer to include such securities in the
underwriting and may condition such offer on their acceptance of the further
applicable provisions of this Section 1. If the Initiating Holders' intend to
distribute the Registrable Securities covered by their request pursuant to this
Section 1.2 by means of an underwriting, the Company shall (together with all
Holders and other persons proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for such underwriting
by a majority in interest of the Initiating Holders, which underwriter(s) are
reasonably acceptable to the company. Notwithstanding any other provision of
this Section 1.2, if the representative of the underwriters advises the
Initiating Holders in writing that marketing factors require a limitation on the
number of shares to be underwritten, the number of shares to be included in the
4.
<PAGE> 6
underwriting or registration shall be allocated as set forth in Section 1.12
hereof. If the person who has requested inclusion in such registration as
provided above does not agree to the terms of any such underwriting, such person
shall be excluded therefrom by written notice from the Company, the underwriter
or the Initiating holders. The securities so excluded shall also be withdrawn
from registration. Any Registrable Securities or other securities excluded shall
also be withdrawn from such registration. If shares are so withdrawn from the
registration and if the number of shares to be included in such registration was
previously reduced as a result of marketing factors pursuant to this Section
1.2(d), then the Company shall offer to all Holders who have retained rights to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number of
shares withdrawn, with such shares to be allocated among such Holders requesting
additional inclusion in accordance with Section 1.12.
1.3 COMPANY REGISTRATION.
(a) If the Company shall determine to register any of its securities
either for its own account or the account of a security holder or holders
exercising their respective demand registration rights (other than pursuant to
Section 1.2 hereof), other than a registration relating solely to employee
benefit plans, or a registration relating solely to a Commission Rule 145
transaction, or a registration on any registration form which does not permit
secondary sales, the Company will:
(i) promptly give to each Holder written notice thereof, and
(ii) use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance), except as
set forth in Section 1.3(b) below, and in any underwriting involved therein, all
the Registrable Securities specified in a written request or requests, made by
any Holder within twenty (20) days after the written notice from the Company
described in clause (i) above is effective. Such written request may specify all
or a part of a Holder's Registrable Securities.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.3(a)(i). In such event the right of any Holder to
registration pursuant to this Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the holders of other securities of the Company
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 1.3, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Registrable Securities from, or limit the number of Registrable Securities to be
included in, the registration and underwriting. The Company shall so advise all
holders of
5.
<PAGE> 7
securities requesting registration, and the number of shares of securities that
are entitled to be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account and
thereafter as set forth in Section 1.12. If any person does not agree to the
terms of any such underwriting, he shall be excluded therefrom by written notice
from the Company or the underwriter. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration.
If shares are so withdrawn from the registration or if the number of shares
of Registrable Securities to be included in such registration was previously
reduced as a result of marketing factors, the Company shall then offer to all
persons who have retained the right to include securities in the registration
the right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among the persons requesting additional inclusion in accordance with
Section 1.12 hereof
1.4 EXPENSES OF REGISTRATION. All Registration Expenses, together with
reasonable fees of one counsel for the selling Holders, incurred in connection
with all registrations pursuant to Section 1.3 hereof, up to two (2)
registrations per year pursuant to Section 1.5 hereof and two (2) registrations
pursuant to Section 1.2 hereof, shall be borne by the Company; provided,
however, that if the Holders bear the Registration Expenses for any registration
proceeding begun pursuant to Section 1.2 and subsequently withdrawn by the
Holders registering shares therein, such registration proceeding shall not be
counted as a requested registration pursuant to Section 1.2 hereof. In the event
that such withdrawal is based upon material adverse information relating to the
Company that is materially different from the information known or available
(upon request from the Company or otherwise) to the Holders requesting
registration at the time of their request for registration under Section 1.2,
such registration shall not be treated as a counted registration for purposes of
Section 1.2 hereof even though the Holders do not bear the Registration Expenses
for such registration. All Selling Expenses relating to securities registered
shall be borne by the holders of such securities pro rata on the basis of the
number of shares of securities so registered on their behalf.
1.5 REGISTRATION ON FORM S-3.
(a) After its initial public offering as described in Section 1.2(a)
above, the Company shall use its best efforts to qualify for registration on
Form S-3 or any comparable or successor form or forms. After the Company has
qualified for the use of Form S-3, in addition to the rights contained in the
foregoing provisions of this Section 1, the Holders of Registrable Securities
shall have the right to request registrations on Form S-3 (such requests shall
be in writing and shall state the number of shares of Registrable Securities to
be disposed of and the intended methods of disposition of such shares by such
Holder or Holders), provided, however, that the Company shall not be obligated
to effect any such registration if (i) the Holders, together with the holders of
any other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) on
Form S-3 at an aggregate price to the public of less than $1,000,000, or (ii) in
a given 12-month period, after the Company has effected two (2) such
registrations pursuant to this Section 1.5 in any such period.
(b) If a request complying with the requirements of Section 1.5(a)
hereof is delivered to the Company, the provisions of Sections 1.2(a)(i) and
(ii) (other than Section 1.2(a)(ii)(B))
6.
<PAGE> 8
and Section 1.2(b) hereof shall apply to such registration. The provisions of
Sections 1.2(c) and 1.2(d) hereof shall apply to all registrations pursuant to
this Section 1.5.
1.6 REGISTRATION PROCEDURE. In the case of each registration effected by
the Company pursuant to this Section 1, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred
twenty (120) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however that (i) such 120-day period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 415, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment which (i) includes any prospectus required by Section
10(a)(3) of the Securities Act or (ii) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (i) and (ii) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Exchange Act in the registration statement;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including a preliminary prospectus and any amendment of or supplement
to the prospectus, as a Holder from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
7.
<PAGE> 9
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration;
(g) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the Registration Statement.'
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(h) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 1.2 hereof the Company will
enter into an underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the underwriter
so requests, the underwriting agreement will contain customary contribution
provision; and
(i) Furnish, at the request of a majority in interest of Holders
participating in the registration, on the date that such Registered Securities
are delivered to the underwriters for sale, or if such securities are not being
sold through underwriters, on the date that the registration statement with
respect to such securities becomes effective, (i) an opinion dated as of such
date, of the counsel representing the Company for purposes of such registration,
in a form and substance as is customarily provided to underwriters in an
underwritten public offering and reasonably satisfactory to a majority in
interest of Holders requesting registration, addressed to the underwriters, if
any, and Holders and (ii) a letter dated as of such date from the independent
public accountants of the Company in form and substance as is customarily
provided to underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders, addressed to the
underwriters, if any, and, if permitted, by applicable accounting standards, the
Holders requesting registration.
1.7 INDEMNIFICATION.
(a) To the extent permitted by law, the Company will indemnify each
Holder, each of its officers, directors and partners, legal counsel and
accountants and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter for such Holder, if any, and each person who controls within
the meaning of Section 15 of the Securities Act any underwriter, against all
expenses, claims, losses, damages and liabilities (or actions, proceedings or
settlements in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any prospectus,
preliminary or final, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or
8.
<PAGE> 10
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities Act,
the Exchange Act, any state securities laws or any rule or regulation thereunder
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and will reimburse each such Holder, each of its officers, directors, partners,
legal counsel and accountants and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, for any legal and
any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or, its agents, underwriter or persons who control such
Holder and stated to be specifically for use therein. It is agreed that the
indemnity agreement contained in this Paragraph 1.7(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
has not been unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by him are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors,
officers, partners, legal counsel and accountants and each underwriter, if any,
of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, each other such Holder and Other Stockholder
and each of their officers, directors and partners, and each person controlling
such Holder or Other Stockholder, against all expenses, claims, losses, damages
and liabilities (or actions, proceedings or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any such registration statement, prospectus,
preliminary or final, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company and such Holders, Other Stockholders, directors, officers, partners,
legal counsel and accountants, persons, underwriters or control persons for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by such Holder
its agents, underwriter or persons who control such Holder and stated to be
specifically for use in connection with such registration; provided, however,
that the obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld) and provided further
that in no event shall any indemnity under this Section 1.7(b) exceed the net
proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 1.7
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim
9.
<PAGE> 11
as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom,
provided that counsel for the Indemnifying Party, who shall conduct the defense
of such claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense at such party's expense, and
provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 1.7, to the extent such failure is not prejudicial. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.7 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission provided that in no event shall any contribution by a
Holder hereunder exceed the net proceeds from the offering received by such
Holder.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, and provided that Holder is a party to such
underwriting agreement, the provisions in the underwriting agreement shall
control.
(f) The obligations of the Company and the Holders under this Section
1.7 shall survive completion of any offering of Registrable Securities and the
termination of this Agreement.
1.8 INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company or its underwriters may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this
Section 1.
10.
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1.9 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act at all times
following the effective date of the first registration under the Securities Act
filed by the Company for an offering of its securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements;
(c) So long as a Holder owns any Restricted Securities, furnish to
the Holder forthwith upon written request a written statement by the Company as
to its compliance with the reporting requirements of Rule 144 (at any time from
and after ninety (90) days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed as a Holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
1.10 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register securities granted to a Holder by the Company under Sections
1.2, 1.3 and 1.5 may be transferred or assigned by a Holder only to a transferee
or assignee who holds or will hold, subsequent to such transfer not less than
150,000 shares of Registrable Securities (as presently constituted and subject
to subsequent adjustments for stock splits, stock dividends, reverse stock
splits and the like), or to a transferee or assignee who holds or will hold,
subsequent to such transfer not less than 45,000 shares of Registrable
Securities (as presently constituted and subject to subsequent adjustments for
stock splits, stock dividends, reverse stock splits and the like) that (i) is a
subsidiary, parent, Affiliate, shareholder, general partner, limited partner or
retired partner of Holder, or (ii) is a Holder's family member (or a family
member of a Holder's spouse) or trust for the benefit of such person or persons;
and provided that the Company is given written notice at the time of or within a
reasonable time after said transfer or assignment, stating the name and address
of said transferee or assignee and identifying the securities with respect to
which such registration rights are being transferred or assigned, and provided
further that the transferee or assignee of such rights agrees in writing to
assume the obligations of such Holder under this Section 1.
1.11 "MARKET STAND-OFF" AGREEMENT. If requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, an Investor
shall not sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such an Investor (other than those included
in the registration) during the one hundred eighty (180) day period following
the effective date of a registration statement of the Company filed under the
Securities Act in connection with an initial public offering, provided that:
11.
<PAGE> 13
(a) all Holders and officers and directors of the Company enter into
similar agreements;
(b) such agreements shall provide that any discretionary waiver or
termination of the restrictions of such agreements by the representatives of the
underwriters shall apply to all persons subject to such agreements pro rata
based on the number of shares held;
(c) transfers to an Affiliate of a Holder shall not be prohibited so
long as such Affiliate agrees to be bound by this Section 1.11; and
(d) sales of securities of the Company acquired by a Holder on the
open market shall not be prohibited by this Section 1.11.
The Company may impose stop-transfer instructions with respect to the
shares (or other securities) subject to the foregoing restriction until the end
of said one hundred eighty (180) day period.
1.12 ALLOCATION OF REGISTRATION OPPORTUNITIES. In any circumstance in
which all of the Registrable Securities and other shares of Common Stock of the
Company (including shares of Common Stock issued or issuable upon conversion of
shares of any currently unissued series of Preferred Stock of the Company) with
registration rights (the "Other Shares") requested to be included in a
registration on behalf of the Holders or other selling shareholders cannot be so
included as a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares which may be so included, the number of
shares of Registrable Securities and Other Shares which may be included shall be
allocated first to the Holders pro rata based on the number of shares of
Registrable Securities held by each, and second to holders of Other Shares
(including Holders) pro rata based on the number of shares of Other Shares held
by each (on an as converted basis); provided, however, that, if any Holder does
not request inclusion of the maximum number of shares of Registrable Securities
allocated to him pursuant to the above-described procedure, the remaining
portion of his allocation shall be reallocated first among those requesting
Holders with respect to their shares of Registrable Securities and second among
holders of Other Shares (including Holders) and this procedure shall be repeated
until all of the shares of Registrable Securities and Other Shares that may be
included in the registration on behalf of the Holders and other selling
shareholders have been so allocated. The Company shall not limit the number of
Registrable Securities to be included in a registration pursuant to this
Agreement (i) in order to include shares held by shareholders with no
registration rights or to include stock issued prior to the date of this
Agreement, other than to the Holders, or any other shares of stock issued to
employees, officers, directors or consultants pursuant to the Company's equity
incentive plans, or (ii) with respect to registrations under Sections 1.2 and
1.5 hereof, in order to include in such registration securities registered for
the Company's own account.
1.13 RESTRICTION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this
Agreement, the Company shall not, without prior written consent of the Holders
of a majority of the Registrable Securities, enter into any agreement with any
holder or prospective holder of any securities of the Company that would grant
such Holder registration rights senior to those granted to the Holders
hereunder.
12.
<PAGE> 14
1.14 DELAY OF REGISTRATION. No Holder shall have any right to take any
action to restrain, enjoin or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.15 TERMINATION OF REGISTRATION RIGHT. The right of any Holder to request
registration or inclusion in any registration pursuant to this Section 1 shall
terminate on the fourth anniversary of the closing of the Company's sale of its
Common Stock in an underwritten public offering under the Act at a per share
public offering price of at least $15.00 (as appropriately adjusted for stock
splits, recapitalizations, combinations and the like) for an aggregate public
offering price of not less than $15,000,000; provided that, with respect to any
Holder of less than two percent (2%) of the Company's outstanding stock, the
right of any such Holder to request registration or inclusion in any
registration pursuant to this Section 1 shall terminate at such earlier time as
any such Holder shall be able to sell all shares of Registrable Securities held
or entitled to be held upon conversion by such Holder under Rule 144 during any
90-day period.
1.16 LIMITATIONS ON DISPOSITION. Each Investor agrees not to make any
disposition of any Shares or Registrable Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 1.16 provided and to the extent this Section is then applicable,
and:
(a) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) (i) such Investor shall have notified the Company of the proposed
disposition and shall have furnished the Company with the identity of the
proposed purchaser and (ii) if reasonably requested by the Company, such
Investor shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company that such disposition will not require registration
of such shares under the Securities Act, provided that the Company will not
require opinions of counsel for transactions made pursuant to Rule 144.
Notwithstanding the foregoing, no such registration statement or opinion of
counsel shall be necessary for a transfer which complies with all applicable
federal and state securities laws by an Investor (i) that is a partnership to
its partners or former partners in accordance with their partnership interests,
(ii) that is a corporation to its shareholders in accordance with their equity
interests therein, (iii) to an Affiliate or (iv) to family members of an
Investor or a trust for the benefit of an individual Investor or family member
thereof, provided in each case that the transferee agrees to be bound by this
Section 1.16. This Section 1.16 shall terminate and be of no further force and
effect upon the closing of the Company's initial public offering as defined in
Section 1.2 above.
13.
<PAGE> 15
SECTION 2
RIGHTS OF FIRST REFUSAL
2.1 RIGHTS OF FIRST REFUSAL. The Company hereby grants to each Investor,
as long as the Investor holds at least 150,000 shares of Registrable Securities
(as appropriately adjusted for stock splits, recapitalizations, combinations and
the like), the right of first refusal to purchase, pro rata, a portion of any
New Securities (as defined in Section 2.1(a) below) that the Company, from time
to time, may propose to sell and issue. Each Investor's pro rata share of the
New Securities will be the ratio of (i) the number of shares of Common Stock
issued and held, and issuable upon the conversion of the Shares then held, by
such Investor as of the date of the Rights Notice (as defined below) to (ii) the
total number of shares of Common Stock issued and held, and issuable upon the
conversion of the Shares then held by all shareholders of the Company as of such
date plus the total number of shares of Common Stock issuable upon exercise of
all then-outstanding options, warrants and rights issued by the Company. This
right of first refusal will be subject to the following provisions:
(a) "NEW SECURITIES" will mean any shares of Common Stock or
Preferred Stock of any kind of the Company, whether now or hereafter authorized;
rights, options, or warrants to purchase said Common Stock or Preferred Stock
and securities carrying any such right, option or warrant; and securities of any
type whatsoever that are, or may become, convertible into said Common Stock or
Preferred Stock, provided that "New Securities" will not include: (i) any shares
of Common Stock or Preferred Stock of the Company that would be deemed "Excluded
Shares" for purposes of paragraph D(4) of Article IV of the Company's Amended
and Restated Articles of Incorporation; (ii) securities issued in connection
with the acquisition of another corporation by the Company by merger,
consolidation, purchase of substantially all of the assets, or other
reorganization as a result of which the Company owns more than fifty percent
(50%) of the voting power of such corporation; or (iii) shares of the Company's
Common Stock or Preferred Stock issued in connection with any stock split, stock
dividend, recapitalization, reclassification or similar event.
(b) If the Company proposes to issue New Securities, it will give
each Investor that holds at least 150,000 shares of Registrable Securities (as
appropriately adjusted for stock splits, recapitalizations, combinations and the
like) written notice (the "Rights Notice") of the Company's intention to do so,
describing the New Securities, the price, and the general terms upon which the
Company proposes to issue them. Each such Investor will have 15 days from the
date of delivery of the Rights Notice to agree to purchase its pro rata share of
such New Securities for the price and upon the general terms specified in the
Rights Notice by giving written notice to the Company setting forth the quantity
of New Securities to be purchased.
(c) If any Investor fails to exercise in full its rights of first
refusal hereunder, the Company will have 90 days after the date of delivery of
the Rights Notice to sell the New Securities that were not purchased by the
Investor, at a price and upon general terms no more favorable to the purchasers
thereof than the price and general terms specified in the Rights Notice. If the
Company does not sell the New Securities within said 90 day period as provided
in the preceding sentence, the Company will not thereafter issue or sell any of
such New Securities without complying with the provisions of Section 2.l(b)
above.
14.
<PAGE> 16
(d) TERMINATION. The rights of first refusal granted in this Section
2 shall not apply to, and shall terminate upon the earlier of (i) the closing of
the Company's sale of its Common Stock in an underwritten public offering with
an aggregate public offering price of $15,000,000 or more, or (ii) a sale of all
or substantially all of the assets of the Company or a merger or consolidation
of the Company with or into any other corporation or corporations in which the
shareholders of the Company immediately prior to such event retain less than a
fifty percent (50%) interest in the surviving entity.
(e) TRANSFER OF RIGHT. The rights of first refusal of each Holder
under this Section 2.1 may be transferred to the same parties subject to the
same restrictions as any transfer of registration rights pursuant to Section
1.10.
SECTION 3
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees, so long as any Holder owns any
Registrable Shares as follows:
3.1 BASIC FINANCIAL INFORMATION. The Company will furnish the following
reports to each Holder:
(a) As soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, and consolidated statements of income and sources and applications
of funds of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles consistently applied,
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail, and audited in each case by independent
public accountants of national standing selected by the Company, and a Company
prepared comparison to the Company's operating plan for such year.
(b) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company, and in
any event within forty-five (45) days thereafter, an unaudited consolidated
balance sheet of the Company and its subsidiaries, if any, as of the end of each
such quarterly period, and unaudited consolidated statements of income and
statements of cash flows of the Company and its subsidiaries, if any, for such
period and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles consistently applied and setting forth
in comparative form the figures for the corresponding periods of the previous
fiscal year and to the Company's operating plan then in effect and approved by
its Board of Directors, subject to changes resulting from normal year-end audit
adjustments, all in reasonable detail and certified by the principal financial
or accounting officer of the Company, except that such balance sheet need not
contain the notes or the end-of-period adjustments required by generally
accepted accounting principles.
(c) From the date the Company becomes subject to the reporting
requirements of the Exchange Act, and in lieu of the financial information
required pursuant to Sections 3.1(a)
15.
<PAGE> 17
and (b), copies of its annual reports on Form 10-K and its quarterly reports on
Form 10-Q respectively.
3.2 ADDITIONAL INFORMATION AND RIGHTS.
(a) The Company will permit any Investor, so long as such Investor
(or its representative) owns at least 300,000 Shares, or such number of shares
of Common Stock issued upon conversion of 300,000 or more Shares, or any
combination thereof (as presently constituted and subject to subsequent
adjustment for stock splits, stock dividends, reverse stock splits,
recapitalizations and the like) (a "Significant Holder") (or a representative of
any Significant Holder) to visit and inspect any of the properties of the
Company, including its books of account and other records (and make copies
thereof and take extracts therefrom), and to discuss its affairs, finances and
accounts with the Company's officers and its independent public accountants, all
at such reasonable times and as often as any such person may reasonably request.
(b) Until the earlier to occur of (x) the date on which the Company
is subject to the reporting requirements of Sections 13(a) or 15(d) of the
Exchange Act, or (y) the date on which quotations for the Common Stock of the
Company are reported by the automated quotations systems operated by the
National Association of Securities Dealers, Inc., or by an equivalent quotations
system, the Company will deliver the reports described below in this Section 3.2
to each Significant Holder:
(i) As soon as practical after the end of each month and in any
event within thirty (30) days thereafter copies of any financial reports or
statements for the Company and for its subsidiaries, if any, that the Company
actually prepares for internal use or for other purposes, including but not
limited to any statements of income and sources and applications of funds of the
Company and its subsidiaries, together with any comparisons of such statements
to the corresponding periods of the prior fiscal year and to the Company's
operating plan then in effect and approved by its Board of Directors; provided,
however, that this Section 3.2(b)(i) shall not be construed to require the
Company to create reports that it would not otherwise create as part of its
monthly analysis of the Company's business or as otherwise required by its Board
of Directors.
(ii) Annually (but in any event at least thirty (30) days prior
to the commencement of each fiscal year of the Company) the financial plan of
the Company, in such manner and form as approved by the Board of Directors of
the Company, which financial plan shall include a projection of income and a
projected cash flow statement for such fiscal year and a projected balance sheet
as of the end of such fiscal year. Any material changes in such financial plan
shall be submitted as promptly as practicable after such changes have been
approved by the Board of Directors of the Company.
(iii) With reasonable promptness, but without unduly interfering
with the Company's business, such other information and data with respect to the
Company and its subsidiaries as any such person may from time to time reasonably
request.
16.
<PAGE> 18
(iv) As soon as practicable after transmission or occurrence and
in any event within ten (10) days thereof, copies of any reports or
communications delivered to any class of the Company's security holders or
broadly to the financial community, including any filings by the Company with
any securities exchange, the Commission or the National Association of
Securities Dealers, Inc.
(c) The provisions of Section 3.1 and this Section 3.2 shall not be
in limitation of any rights which any Holder or Significant Holder may have with
respect to the books and records of the Company and its subsidiaries, or to
inspect their properties or discuss their affairs, finances and accounts, under
the laws of the jurisdictions in which they are incorporated.
3.3 PROMPT PAYMENT OF TAXES, ETC. The Company will promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful
taxes, assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company or any subsidiary; provided,
however, that any such tax, assessment, charge or levy need not be paid if the
validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Company shall have set aside on its books adequate
reserves with respect thereto, and provided further, that the Company will pay
all such taxes, assessments, charges or levies forthwith upon the commencement
of proceedings to foreclose any lien which may have attached as security
therefor. The Company will promptly pay or cause to be paid when due, or in
conformance with customary trade terms or otherwise in accordance with policies
related thereto adopted by the Company's Board of Directors, all other
indebtedness incident to operations of the Company.
3.4 MAINTENANCE OF PROPERTIES AND LEASE. The Company will keep its
properties and those of its subsidiaries in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and the Company and its subsidiaries will at all times comply with each
material provision of all leases to which any of them is a party or under which
any of them occupies property if the breach of such provision might have a
material and adverse effect on the condition, financial or otherwise, or
operations of the Company.
3.5 INSURANCE. Except as otherwise decided in accordance with policies
adopted by the Company's Board of Directors, the Company will keep its assets
and those of its subsidiaries which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by companies in the
Company's line of business, and the Company will maintain, with financially
sound and reputable insurers, insurance against other hazards and risks and
liability to persons and property to the extent and in the manner customary for
companies in similar businesses similarly situated.
3.6 ACCOUNTS AND RECORDS. The Company will keep true records and books of
account in which full, true and correct entries will be made of all dealings or
transactions in relation to its business and affairs in accordance with
generally accepted accounting principles applied on a consistent basis.
3.7 INDEPENDENT ACCOUNTANTS. The Company will retain independent public
accountants of recognized national standing who shall certify the Company's
financial
17.
<PAGE> 19
statements at the end of each fiscal year. In the event the services of the
independent public accountants so selected, or any firm of independent public
accountants hereafter employed by the Company are terminated, the Company will
promptly thereafter notify the Holders and will request the firm of independent
public accountants whose services are terminated to deliver to the Holders a
letter from such firm setting forth the reasons for the termination of their
services. In the event of such termination, the Company will promptly thereafter
engage another firm of independent public accountants of recognized national
standing. In its notice to the Holders the Company shall state whether the
change of accountants was recommended or approved by the Board of Directors of
the Company or any committee thereof.
3.8 COMPLIANCE WITH REQUIREMENTS OF GOVERNMENTAL AUTHORITIES. The Company
and all its subsidiaries shall duly observe and conform to all valid
requirements of governmental authorities relating to the conduct of their
businesses or to their properties or assets.
3.9 MAINTENANCE OF CORPORATE EXISTENCE, ETC. The Company shall maintain in
full force and effect its corporate existence, rights and franchises and all
licenses and other rights in or to use patents, processes, trademarks, trade
names or copyrights owned or possessed by it or any subsidiary and deemed by the
Company to be necessary to the conduct of their business.
3.10 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. The Company will
cause each person now or hereafter employed by it or any subsidiary with access
to confidential information to enter into a proprietary information and
inventions agreement substantially in the form approved by the Board of
Directors.
3.11 EMPLOYEE AND OTHER STOCK ARRANGEMENTS. The Company will not, without
the approval of the Board of Directors, issue any of its capital stock, or grant
an option or rights to subscribe for, purchase or acquire any of its capital
stock, to any employee, consultant, officer or director of the Company or a
subsidiary. Each acquisition of any shares of capital stock of the Company or
any option or right to acquire any shares of capital stock of the Company by an
employee, officer or director of the Company will be conditioned upon the
execution and delivery by the Company and such employee, officer or director of
an agreement substantially in a form approved by the Board of Directors of the
Company.
3.12 BOARD OF DIRECTORS. Immediately following the execution of this
Agreement and at all times thereafter until the time of effectiveness of its
initial public offering as defined in Section 1.2 above, the Company shall take
all appropriate actions to fix and maintain a Board of Directors of no more than
seven (7) persons. The makeup of the Board of Directors immediately following
the execution of this Agreement shall be Stewart Alsop, Charles Holloway,
Brendon Kim, Peter Nieh, Frank O'Connell, Lee Rosenberg and Gordon Tucker. The
Investors agree that upon the death or resignation of Peter Nieh, Brendon Kim or
Frank O'Connell as a Director of the Company, they will vote their Shares in
favor of a nominee to fill such vacancy or vacancies only if each nominee
therefor (i) has, in their reasonable judgment, significant business experience
and (ii) does not serve as an officer or director of, or hold a controlling
interest in, a direct competitor of the Company. In the event the Company has
not closed its initial public offering on or prior to July 22, 2000, then the
Company shall take such actions as may be necessary to increase the number of
members of the Board of Directors by one and allow NBC to appoint such
additional member to the Board of Directors.
18.
<PAGE> 20
3.13 TRANSACTIONS WITH RELATED PARTIES. The Company shall not, without the
approval of a majority of the disinterested members of the Company's Board of
Directors, engage in any loans, leases, contracts or other transactions with any
director, officer or key employee of the Company, or any member of any such
person's immediate family, including the parents, spouse, children and other
relatives of any such person, on terms less favorable than the Company would
obtain in a transaction with an unrelated party, as determined in good faith by
the Board of Directors.
3.14 AUDITS BY INVESTORS. Investors holding a majority of the Shares shall
have the right, through independent certified public accountants retained at
their expense, to audit the books and records of the Company. At such Investors'
request the Company shall provide an employee to assist in such audit.
3.15 RESERVATION OF COMMON STOCK. The Company will at all times reserve and
keep available, solely for issuance upon conversion of the Shares, at least that
number of shares of Common Stock issuable from time to time upon conversion of
the Shares.
3.16 QUALIFIED SMALL BUSINESS. The Company will use reasonable efforts to
comply with the reporting and record keeping requirements of Section 1202 of the
Internal Revenue Code of 1986, as amended, and any regulations promulgated
thereunder.
3.17 TERMINATION OF COVENANTS. The covenants set forth in this Section 3
shall terminate and be of no further force and effect after the time of the
closing of the Company's initial public offering as defined in Section 1.2
above.
SECTION 4
MISCELLANEOUS
4.1 GOVERNING LAW. This Agreement shall be governed in all respects by the
laws of the State of California, as if entered into by and between California
residents exclusively for performance entirely within California.
4.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
4.3 ENTIRE AGREEMENTS AMENDMENT; WAIVER. This Agreement (including the
Exhibits hereto) constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and is
intended to amend, restate and supersede the Rights Agreement in its entirety.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated, except by a written instrument signed by the Company and the holders
of at least fifty percent (50%) of the Registrable Shares and any such
amendment, waiver, discharge or termination shall be binding on all the holders
of Registrable Securities, but in no event shall the obligation of any holder of
Registrable Securities hereunder be materially increased, except upon the
written consent of such holder of Registrable Securities.
19.
<PAGE> 21
4.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, or delivered personally addressed by hand or
special courier (a) if to a Holder, as indicated on the list of Holders attached
hereto as Exhibit A, or at such other address as such Investor or permitted
assignee shall have furnished to the Company in writing, or (b) if to the
Company, at 149 New Montgomery Street, San Francisco, California, 94105,
attention: Chief Executive Officer, or at such other address as the Company
shall have furnished to each holder in writing. All such notices and other
written communications shall be effective (i) if mailed, five (5) days after
mailing and (ii) if delivered, upon delivery.
4.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power
or remedy accruing to any Holder, upon any breach or default of the Company
under this Agreement shall impair any such right, power or remedy of such Holder
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
Holder of any breach or default under this Agreement or any waiver on the part
of any Holder of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any Holder, shall be cumulative and not alternative.
4.6 RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein, a
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
4.7 INFORMATION CONFIDENTIAL. Each Holder acknowledges that the
information received by them pursuant hereto is confidential and for its use
only on behalf of the Company, and it will not use such confidential information
in violation of the Exchange Act or reproduce, disclose or disseminate such
information to any other person (other than its partners, parent, subsidiaries,
employees or agents having a need to know the contents of such information, and
its attorneys), except in connection with the exercise of rights under this
Agreement, unless the Company or some other party other than the Holder has made
such information available to the public generally, or such Holder is required
to disclose such information by a governmental body (or order thereof) or
pursuant to any law, statute, rule or regulation.
4.8 TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
4.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
20.
<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year, first above written.
COMPANY SHAREHOLDERS:
EGREETINGS NETWORK, INC. NATIONAL BROADCASTING COMPANY, INC.
By: By:
------------------------------------ ------------------------------------
Gordon M. Tucker Its:
Chief Executive Officer -----------------------------------
149 New Montgomery Street Address: 30 Rockefeller Plaza
San Francisco, CA 94105 New York, NY 10112
Attention:
-----------------------------
AUSTIN VENTURES VI, L.P.
By: AV Partners VI, L.P,
Its: General Partner
By:
------------------------------------
Its: Managing Member
-----------------------------------
Address: 114 West 7th Street, Suite 1300
Austin, TX 78701
AUSTIN VENTURES VI AFFILIATES
FUND, L.P.
By: AV Partners VI, L.P,
Its: General Partner
By:
------------------------------------
Its: Managing Member
-----------------------------------
Address: 114 West 7th Street, Suite 1300
Austin, TX 78701
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 23
TRANS COSMOS USA, INC.
By:
------------------------------------
Yasuki Matsumoto
President
Address: 777 10th Avenue NE, Suite 2300
Bellevue, WA 98004
INFORMATION TECHNOLOGY VENTURES II, L.P.
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 100 Hamilton Ave., Suite 400
Palo Alto, CA 94301
ITV AFFILIATES FUND II, L.P.
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 100 Hamilton Ave., Suite 400
Palo Alto, CA 94301
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 24
VULCAN VENTURES, INC.
By:
------------------------------------
Its:
-----------------------------------
Address: 110 110th Avenue NE
Bellevue, WA 98004
E-COMMERCE PARTNERS I, L.P.
By:
------------------------------------
Its: General Partner
-----------------------------------
By:
------------------------------------
Its:
-----------------------------------
Address: Two Embarcadero Center
Suite 2930
San Francisco, CA 94111
RICHARD M. MOLEY ANNUITY TRUST U/A
DATED 5/12/98
By:
------------------------------------
Richard M. Moley
Sole Trustee
Address: 19910 Robin Way
Saratoga, CA 95070
COMDISCO, INC.
By:
------------------------------------
Its:
-----------------------------------
Address: 100 Hamilton Avenue
Suite 104A
Palo Alto, CA 94301
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 25
DUFF ACKERMAN & GOODRICH, L.P.
By:
------------------------------------
John Duff
Its:
-----------------------------------
Address: Two Embarcadero Center
Suite 2300
San Francisco, CA 94111
DEVON GROUP
By:
------------------------------------
Its:
-----------------------------------
Address: 201 Alameda del Prado
Novato, CA 94949
----------------------------------------
WOLTER LINK
Address: c/o Rosewood Stone Group
377 Summitt Ave.
Mill Valley, CA 94941
Attn: Claudia Stroud
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 26
----------------------------------------
BRUCE KATZ
Address: 2320 Marinship Way, Ste.240
Sausalito, CA 94965
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 27
WEISS, PECK & GREER VENTURE
ASSOCIATES V, L.L.C.
By:
------------------------------------
Peter Nieh
Its: Managing Member
Address: 555 California Street,
Suite 3130
San Francisco, CA 94104
WPG INFORMATION SCIENCES
ENTREPRENEUR FUND, L.P.
By: WPG VC Fund Adviser, L.L.C.
Its: General Partner
By:
------------------------------------
Peter Nieh
Its: Managing Member
Address: 555 California Street,
Suite 3130
San Francisco, CA 94104
WEISS, PECK & GREER VENTURE
ASSOCIATES IV CAYMAN, L.P.
By: WPG Venture Advisers, Ltd.
Its: General Partner
By:
------------------------------------
Peter Nieh
Its: Managing Member
Address: 555 California Street,
Suite 3130
San Francisco, CA 94104
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 28
WEISS, PECK & GREER VENTURE
ASSOCIATES V-A, L.L.C.
By: WPG VC Fund Adviser II, L.L.C.
Its: Fund Investment Advisory Member
By:
------------------------------------
Peter Nieh
Its: Managing Member
Address: 555 California Street,
Suite 3130
San Francisco, CA 94104
WEISS, PECK & GREER VENTURE
ASSOCIATES V CAYMAN, L.P.
By: WPG VC Fund Adviser II, L.L.C.
Its: Fund Investment Advisory Partner
By:
------------------------------------
Peter Nieh
Its: Managing Member
Address: 555 California Street,
Suite 3130
San Francisco, CA 94104
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 29
NEW ENTERPRISE ASSOCIATES VIII,
LIMITED PARTNERSHIP
By: NEA Partners VIII,
Limited Partnership
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 2490 Sand Hill Road
Menlo Park, CA 94025
NEA VENTURES 1999, LIMITED
PARTNERSHIP
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 2490 Sand Hill Road
Menlo Park, CA 94025
NEA PRESIDENTS FUND, LIMITED
PARTNERSHIP
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 2490 Sand Hill Road
Menlo Park, CA 94025
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 30
ALTOS VENTURES I, L.P.
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
ALTOS VENTURES II, L.P.
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
ALTOS PARTNERS I
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 31
GIBSON GREETINGS, INC.
By:
------------------------------------
Its:
-----------------------------------
Address: 2100 Section Road
Cincinnati, OH 45326
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 32
KETTLE PARTNERS, L.P.
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 350 West Hubbard Street
Suite 501
Chicago, IL 60610
----------------------------------------
LEE ROSENBERG
Address: 350 West Hubbard Street
Suite 501
Chicago, IL 60610
NEW WORLD EQUITIES
By:
------------------------------------
Its: General Partner
By:
------------------------------------
Its:
-----------------------------------
Address: 1603 Orrington Ave., Ste .1070
Evanston, IL 60201
Attn: Christopher Girgenti
INVESTORS' RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 33
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS................ 1
1.1 Certain Definitions............................................................... 1
1.2 Requested Registration............................................................ 3
1.3 Company Registration.............................................................. 5
1.4 Expenses of Registration.......................................................... 6
1.5 Registration on Form S-3.......................................................... 6
1.6 Registration Procedure............................................................ 7
1.7 Indemnification................................................................... 8
1.8 Information by Holder.............................................................10
1.9 Rule 144 Reporting................................................................11
1.10 Transfer or Assignment of Registration Rights.....................................11
1.11 "Market Stand-Off" Agreement......................................................11
1.12 Allocation of Registration Opportunities..........................................12
1.13 Restriction on Subsequent Registration Rights.....................................12
1.14 Delay of Registration.............................................................13
1.15 Termination of Registration Right.................................................13
1.16 Limitations on Disposition........................................................13
SECTION 2 RIGHTS OF FIRST REFUSAL...........................................................14
2.1 Rights of First Refusal...........................................................14
SECTION 3 COVENANTS OF THE COLMPANY.........................................................15
3.1 Basic Financial Information.......................................................15
3.2 Additional Information and Rights.................................................16
3.3 Prompt Payment of Taxes, Etc......................................................17
3.4 Maintenance of Properties and Lease...............................................17
3.5 Insurance.........................................................................17
3.6 Accounts and Records..............................................................17
3.7 Independent Accountants...........................................................17
3.8 Compliance with Requirements of Governmental Authorities..........................18
3.9 Maintenance of Corporate Existence, Etc...........................................18
</TABLE>
i.
<PAGE> 34
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
3.10 Proprietary Information and Inventions Agreements.................................18
3.11 Employee and Other Stock Arrangements.............................................18
3.12 Board of Directors................................................................18
3.13 Transactions with Related Parties.................................................19
3.14 Audits by Investors...............................................................19
3.15 Reservation of Common Stock.......................................................19
3.16 Qualified Small Business..........................................................19
3.17 Termination of Covenants..........................................................19
SECTION 4 MISCELLANEOUS.....................................................................19
4.1 Governing Law.....................................................................19
4.2 Successors and Assigns............................................................19
4.3 Entire Agreements Amendment; Waiver...............................................19
4.4 Notices, Etc......................................................................20
4.5 Delays or Omissions...............................................................20
4.6 Rights; Separability..............................................................20
4.7 Information Confidential..........................................................20
4.8 Titles and Subtitles..............................................................20
4.9 Counterparts......................................................................20
</TABLE>
ii.
<PAGE> 1
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
December 8, 1999
Egreetings Network, Inc. KENNETH L. GUERNSEY
149 New Montgomery St. 415 693-2091
San Francisco, CA 94105 [email protected]
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Egreetings Network, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission, including a related prospectus filed with the Registration
Statement (the "Prospectus"), covering an underwritten public offering of up to
6,900,000 shares of the Company's common stock, including 900,000 shares of
common stock that may be sold pursuant to the exercise of an over-allotment
option.
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, and the originals or copies certified to our
satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares to be sold by the Company, when sold and issued in accordance
with the Registration Statement and the related Prospectus will be validly
issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
By: /s/ Kenneth L. Guernsey
-------------------------------
Kenneth L. Guernsey
KLG: act
<PAGE> 1
EXHIBIT 10.02
EGREETINGS NETWORK, INC.
1999 EQUITY INCENTIVE PLAN
ADOPTED SEPTEMBER 21, 1999
APPROVED BY STOCKHOLDERS NOVEMBER 19, 1999
TERMINATION DATE: SEPTEMBER 20, 2009
This 1999 Amended and Restated Equity Incentive Plan is an amendment and
restatement of the Egreetings Network, Inc. 1996 Stock Option Plan. All
outstanding options under the 1996 Stock Option Plan shall also be amended
effective as of the adoption of this amendment and restatement.
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
1.
<PAGE> 2
(f) "COMPANY" means Egreetings Network, Inc., a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors who are not compensated by the Company for their services as Directors
or Directors who are merely paid a director's fee by the Company for their
services as Directors.
(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director will not
constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
2.
<PAGE> 3
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(r) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(u) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.
(v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
3.
<PAGE> 4
(w) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
(x) "PLAN" means this Egreetings Network, Inc. 1999 Amended and Restated
Equity Incentive Plan.
(y) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(z) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(aa) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(bb) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(cc) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section
12.
(iv) To terminate or suspend the Plan as provided in Section 13.
4.
<PAGE> 5
(v) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan
to a Committee or Committees of one (1) or more members of the Board, and the
term "Committee" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest in
the Board the administration of the Plan.
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED.
At such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (2)
delegate to a committee of one or more members of the Board who are not
Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.
(d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate three million
(3,000,000) shares of Common Stock plus an annual increase to be added on each
of the first nine (9) anniversaries of the effective date of the Plan, beginning
in September 2000, equal to the lesser of (i) three percent (3%) of the total
number of shares of Common Stock outstanding on such anniversary date, or (ii)
the number of shares that increases the cumulative number of shares added as a
result of such annual increases to fifteen million (15,000,000) shares.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full,
5.
<PAGE> 6
the shares of Common Stock not acquired under such Stock Award shall revert to
and again become available for issuance under the Plan.
(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may
be unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may
be granted only to Employees. Stock Awards other than Incentive Stock Options
may be granted to Employees, Directors and Consultants.
(b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be
granted an Incentive Stock Option unless the exercise price of such Option is at
least one hundred ten percent (110%) of the Fair Market Value of the Common
Stock at the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant.
(c) SECTION 162(M) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in the shares of Common Stock, no Employee
shall be eligible to be granted Options covering more than one million
(1,000,000) shares of Common Stock during any calendar year.
(d) CONSULTANTS.
(i) A Consultant shall not be eligible for the grant of a Stock
Award if, at the time of grant, a Form S-8 Registration Statement under the
Securities Act ("Form S-8") is not available to register either the offer or the
sale of the Company's securities to such Consultant because of the nature of the
services that the Consultant is providing to the Company, or because the
Consultant is not a natural person, or as otherwise provided by the rules
governing the use of Form S-8, unless the Company determines both (i) that such
grant (A) shall be registered in another manner under the Securities Act (e.g.,
on a Form S-3 Registration Statement) or (B) does not require registration under
the Securities Act in order to comply with the requirements of the Securities
Act, if applicable, and (ii) that such grant complies with the securities laws
of all other relevant jurisdictions.
(ii) Form S-8 generally is available to consultants and advisors
only if (i) they are natural persons; (ii) they provide bona fide services to
the issuer, its parents, its majority-owned subsidiaries or majority-owned
subsidiaries of the issuer's parent; and (iii) the services are not in
connection with the offer or sale of securities in a capital-raising
transaction, and do not directly or indirectly promote or maintain a market for
the issuer's securities.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a
6.
<PAGE> 7
separate certificate or certificates will be issued for shares of Common Stock
purchased on exercise of each type of Option. The provisions of separate Options
need not be identical, but each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of each
of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, an Incentive Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the Common Stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(d) CONSIDERATION. The purchase price of Common Stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board. Unless otherwise specifically
provided in the Option, the purchase price of Common Stock acquired pursuant to
an Option that is paid by delivery to the Company of other Common Stock
acquired, directly or indirectly from the Company, shall be paid only by shares
of the Common Stock of the Company that have been held for more than six (6)
months (or such longer or shorter period of time required to avoid a charge to
earnings for financial accounting purposes). At any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
7.
<PAGE> 8
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing, the Optionholder may,
by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option shall be transferable to the extent provided in the Option Agreement. If
the Nonstatutory Stock Option does not provide for transferability, then the
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of
the Optionholder only by the Optionholder. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.
(h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Option
Agreement), or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, after termination, the Optionholder does not exercise his
or her Option within the time specified in the Option Agreement, the Option
shall terminate.
(i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares of Common Stock would violate the registration requirements under the
Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(j) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his
8.
<PAGE> 9
or her Option (to the extent that the Optionholder was entitled to exercise such
Option as of the date of termination), but only within such period of time
ending on the earlier of (i) the date twelve (12) months following such
termination (or such longer or shorter period specified in the Option Agreement)
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionholder does not exercise his or her
Option within the time specified herein, the Option shall terminate.
(k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
Option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement) or (2) the expiration of the term of such Option as set
forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.
(l) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Any unvested shares of Common Stock so purchased may be subject to a
repurchase option in favor of the Company or to any other restriction the Board
determines to be appropriate. The Company will not exercise its repurchase
option until at least six (6) months (or such longer or shorter period of time
required to avoid a charge to earnings for financial accounting purposes) have
elapsed following exercise of the Option unless the Board otherwise specifically
provides in the Option.
(m) RE-LOAD OPTIONS.
(i) Without in any way limiting the authority of the Board to
make or not to make grants of Options hereunder, the Board shall have the
authority (but not an obligation) to include as part of any Option Agreement a
provision entitling the Optionholder to a further Option (a "Re-Load Option") in
the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Unless otherwise specifically provided in the Option, the Optionholder shall not
surrender shares of Common Stock acquired, directly or indirectly from the
Company, unless such shares have been held for more than six (6) months (or such
longer or shorter period of time required to avoid a charge to earnings for
financial accounting purposes).
(ii) Any such Re-Load Option shall (1) provide for a number of
shares of Common Stock equal to the number of shares of Common Stock surrendered
as part or all of the exercise price of such Option; (2) have an expiration date
which is the same as the expiration
9.
<PAGE> 10
date of the Option the exercise of which gave rise to such Re-Load Option; and
(3) have an exercise price which is equal to one hundred percent (100%) of the
Fair Market Value of the Common Stock subject to the Re-Load Option on the date
of exercise of the original Option. Notwithstanding the foregoing, a Re-Load
Option shall be subject to the same exercise price and term provisions
heretofore described for Options under the Plan.
(iii) Any such Re-Load Option may be an Incentive Stock Option
or a Nonstatutory Stock Option, as the Board may designate at the time of the
grant of the original Option; provided, however, that the designation of any
Re-Load Option as an Incentive Stock Option shall be subject to the one hundred
thousand dollar ($100,000) annual limitation on the exercisability of Incentive
Stock Options described in subsection 9(d) and in Section 422(d) of the Code.
There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option
shall be subject to the availability of sufficient shares of Common Stock under
subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options
under subsection 5(c) and shall be subject to such other terms and conditions as
the Board may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:
(i) CONSIDERATION. A stock bonus may be awarded in consideration
for past services actually rendered to the Company or an Affiliate for its
benefit.
(ii) VESTING. Shares of Common Stock awarded under the stock
bonus agreement may, but need not, be subject to a share repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.
(iv) TRANSFERABILITY. Rights to acquire shares of Common Stock
under the stock bonus agreement shall be transferable by the Participant only
upon such terms and conditions as are set forth in the stock bonus agreement, as
the Board shall determine in its discretion, so long as Common Stock awarded
under the stock bonus agreement remains subject to the terms of the stock bonus
agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The
10.
<PAGE> 11
terms and conditions of the restricted stock purchase agreements may change from
time to time, and the terms and conditions of separate restricted stock purchase
agreements need not be identical, but each restricted stock purchase agreement
shall include (through incorporation of provisions hereof by reference in the
agreement or otherwise) the substance of each of the following provisions:
(i) PURCHASE PRICE. The purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. The purchase price shall
not be less than eighty-five percent (85%) of the Common Stock's Fair Market
Value on the date such award is made or at the time the purchase is consummated.
(ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion; provided, however, that at any time that the Company is
incorporated in Delaware, then payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by deferred
payment.
(iii) VESTING. Shares of Common Stock acquired under the
restricted stock purchase agreement may, but need not, be subject to a share
repurchase option in favor of the Company in accordance with a vesting schedule
to be determined by the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may repurchase
or otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the terms
of the restricted stock purchase agreement.
(v) TRANSFERABILITY. Rights to acquire shares of Common Stock
under the restricted stock purchase agreement shall be transferable by the
Participant only upon such terms and conditions as are set forth in the
restricted stock purchase agreement, as the Board shall determine in its
discretion, so long as Common Stock awarded under the restricted stock purchase
agreement remains subject to the terms of the restricted stock purchase
agreement.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of
the Stock Awards; provided, however, that this undertaking shall not
require the Company to register under the Securities Act the Plan, any Stock
Award or any Common Stock issued or
11.
<PAGE> 12
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of Common Stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell Common Stock upon exercise of such Stock
Awards unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
12.
<PAGE> 13
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (1) the issuance of the shares of
Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (2) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award, provided, however, that no
shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of Common Stock.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common
Stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a transaction "without receipt of consideration"
by the Company.)
(b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company, then all outstanding Stock Awards shall terminate
immediately prior to such event.
13.
<PAGE> 14
(c) CHANGE IN CONTROL. In the event of (i) a sale, lease or other
disposition of all or substantially all of the assets of the Company, (ii) a
merger or consolidation in which the Company is not the surviving corporation or
(iii) a reverse merger in which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, then any surviving corporation or acquiring
corporation may assume any Stock Awards outstanding under the Plan or may
substitute similar stock awards (including an award to acquire the same
consideration paid to the shareholders in the transaction described in this
subsection 11(c)) for those outstanding under the Plan. In the event any
surviving corporation or acquiring corporation does not assume such Stock Awards
or substitute similar stock awards for those outstanding under the Plan, then
with respect to Stock Awards held by Participants whose Continuous Service has
not terminated, the vesting of such Stock Awards (and, if applicable, the time
during which such Stock Awards may be exercised) shall be accelerated in full,
and the Stock Awards shall terminate if not exercised (if applicable) at or
prior to such event. With respect to any other Stock Awards outstanding under
the Plan, such Stock Awards shall terminate if not exercised (if applicable)
prior to such event.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
14.
<PAGE> 15
(E) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect except with the written consent of the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the stockholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.
15. CHOICE OF LAW.
The law of the State of Delaware shall govern all questions concerning the
construction, validity and interpretation of this Plan, without regard to such
state's conflict of laws rules.
15.
<PAGE> 1
EXHIBIT 10.04
EGREETINGS NETWORK, INC.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED SEPTEMBER 21, 1999
APPROVED BY STOCKHOLDERS NOVEMBER 19, 1999
EFFECTIVE DATE: DECEMBER __, 1999
1. PURPOSES.
(a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options
are the Non-Employee Directors of the Company.
(b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by
which Non-Employee Directors may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of Nonstatutory
Stock Options.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of its Non-Employee Directors, to secure and retain the services of
new Non-Employee Directors and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "ANNUAL GRANT" means an Option granted annually to all Non-Employee
Directors who meet the specified criteria pursuant to subsection 6(b) of the
Plan.
(c) "ANNUAL MEETING" means the annual meeting of the stockholders of the
Company.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "COMMON STOCK" means the common stock of the Company.
(g) "COMPANY" means Egreetings Network, Inc., a Delaware corporation.
(h) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the
1.
<PAGE> 2
term "Consultant" shall not include either Directors of the Company who are not
compensated by the Company for their services as Directors or Directors of the
Company who are merely paid a director's fee by the Company for their services
as Directors.
(i) "CONTINUOUS SERVICE" means that the Optionholder's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Optionholder's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionholder renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Optionholder
renders such service, provided that there is no interruption or termination of
the Optionholder's Continuous Service. For example, a change in status from a
Non-Employee Director of the Company to a Consultant of an Affiliate or an
Employee of the Company will not constitute an interruption of Continuous
Service. The Board or the chief executive officer of the Company, in that
party's sole discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by that
party, including sick leave, military leave or any other personal leave.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(o) "INITIAL GRANT" means an Option granted to a Non-Employee Director
who meets the specified criteria pursuant to subsection 6(a) of the Plan.
2.
<PAGE> 3
(p) "IPO DATE" means the effective date of the initial public offering
of the Common Stock.
(q) "NON-EMPLOYEE DIRECTOR" means a Director who is not an Employee.
(r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(s) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "OPTION" means a Nonstatutory Stock Option granted pursuant to the
Plan.
(u) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.
(w) "PLAN" means this Egreetings Network, Inc. 1999 Non-Employee
Directors' Stock Option Plan.
(x) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(y) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan. The
Board may not delegate administration of the Plan to a committee.
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine the provisions of each Option to the extent not
specified in the Plan.
(ii) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
(iii) To amend the Plan or an Option as provided in Section 12.
3.
<PAGE> 4
(iv) To terminate or suspend the Plan as provided in Section 13.
(v) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company that are not in conflict with the provisions of the Plan.
(c) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in the Common Stock, the Common Stock that may be
issued pursuant to Options shall not exceed in the aggregate five hundred
thousand (500,000) shares of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the shares of Common Stock not acquired under such
Option shall revert to and again become available for issuance under the Plan.
(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may
be unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
The Options as set forth in section 6 automatically shall be granted
under the Plan to all Non-Employee Directors.
6. NON-DISCRETIONARY GRANTS.
(a) INITIAL GRANTS. Without any further action of the Board, each
Non-Employee Director shall be granted the following Options:
(i) On the IPO Date, each person who is then a Non-Employee
Director automatically shall be granted an Initial Grant to purchase twenty-four
thousand (24,000) shares of Common Stock on the terms and conditions set forth
herein.
(ii) After the IPO Date, each person who is elected or appointed
for the first time to be a Non-Employee Director automatically shall, upon the
date of his or her initial election or appointment to be a Non-Employee Director
by the Board or stockholders of the Company, be granted an Initial Grant to
purchase twenty-four thousand (24,000) shares of Common Stock on the terms and
conditions set forth herein.
(b) ANNUAL GRANTS. On the day following each Annual Meeting commencing
with the Annual Meeting in 2000, each person who is then a Non-Employee Director
automatically
4.
<PAGE> 5
shall be granted an Annual Grant to purchase eight thousand (8,000) shares of
Common Stock on the terms and conditions set forth herein; provided, however,
that if the person has not been serving as a Non-Employee Director for the
entire period since the preceding Annual Meeting, then the number of shares
subject to the Annual Grant shall be reduced pro rata for each full quarter
prior to the date of grant during which such person did not serve as a
Non-Employee Director.
7. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as required by the Plan. Each Option shall contain such additional
terms and conditions, not inconsistent with the Plan, as the Board shall deem
appropriate. Each Option shall include (through incorporation of provisions
hereof by reference in the Option or otherwise) the substance of each of the
following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) EXERCISE PRICE. The exercise price of each Option shall be one
hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, an
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option may be paid, to the extent permitted by applicable statutes and
regulations, in any combination of (i) cash or check, (ii) delivery to the
Company of other Common Stock, (ii) deferred payment or (iv) any other form of
legal consideration that may be acceptable to the Board. The purchase price of
Common Stock acquired pursuant to an Option that is paid by delivery to the
Company of other Common Stock acquired, directly or indirectly from the Company,
shall be paid only by shares of the Common Stock of the Company that have been
held for more than six (6) months (or such longer or shorter period of time
required to avoid a charge to earnings for financial accounting purposes). At
any time that the Company is incorporated in Delaware, payment of the Common
Stock's "par value," as defined in the Delaware General Corporation Law, shall
not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by will
or by the laws of descent and distribution and shall be exercisable during the
lifetime of the Optionholder only by the Optionholder. Notwithstanding the
foregoing, the Optionholder may, by delivering written notice to the Company, in
a form satisfactory to the Company, designate a third party
5.
<PAGE> 6
who, in the event of the death of the Optionholder, shall thereafter be entitled
to exercise the Option.
(e) VESTING GENERALLY. Options shall vest and become exercisable as
follows:
(i) [Initial Grants shall provide for vesting of 1/5th of the
shares 12 months after the date of the grant and 1/60th of the shares each month
thereafter.]
(ii) [Annual Grants shall provide for vesting of 1/12th of the
shares each month after the date of the grant.]
(f) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionholder's Continuous Service, or
(ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionholder does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate.
(g) EXTENSION OF TERMINATION DATE. If the exercise of the Option
following the termination of the Optionholder's Continuous Service (other than
upon the Optionholder's death or Disability) would be prohibited at any time
solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in subsection
7(a) or (ii) the expiration of a period of three (3) months after the
termination of the Optionholder's Continuous Service during which the exercise
of the Option would not be in violation of such registration requirements.
(h) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, after termination, the Optionholder does
not exercise his or her Option within the time specified herein, the Option
shall terminate.
(i) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the three-month period after the termination of the
Optionholder's Continuous Service for a reason other than death, then the Option
may be exercised (to the extent the Optionholder was entitled to exercise the
Option as of the date of death) by the Optionholder's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the Option upon the Optionholder's death, but only
within the period ending on the earlier of (1) the date eighteen (18) months
following the date of death or (2) the expiration of
6.
<PAGE> 7
the term of such Option as set forth in the Option Agreement. If, after death,
the Option is not exercised within the time specified herein, the Option shall
terminate.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Options, the Company
shall keep available at all times the number of shares of Common Stock required
to satisfy such Options.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Options and to issue and sell shares of
Common Stock upon exercise of the Options; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Option or any stock issued or issuable pursuant to any such
Option. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Options unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
10. MISCELLANEOUS.
(a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares subject
to such Option unless and until such Optionholder has satisfied all requirements
for exercise of the Option pursuant to its terms.
(b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument executed or
Option granted pursuant thereto shall confer upon any Optionholder any right to
continue to serve the Company as a Non-Employee Director or shall affect the
right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(c) INVESTMENT ASSURANCES. The Company may require an Optionholder, as a
condition of exercising or acquiring stock under any Option, (i) to give written
assurances satisfactory to the Company as to the Optionholder's knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
7.
<PAGE> 8
risks of exercising the Option; and (ii) to give written assurances satisfactory
to the Company stating that the Optionholder is acquiring the stock subject to
the Option for the Optionholder's own account and not with any present intention
of selling or otherwise distributing the stock. The foregoing requirements, and
any assurances given pursuant to such requirements, shall be inoperative if
(iii) the issuance of the shares upon the exercise or acquisition of stock under
the Option has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.
(d) WITHHOLDING OBLIGATIONS. The Optionholder may satisfy any federal,
state or local tax withholding obligation relating to the exercise or
acquisition of stock under an Option by any of the following means (in addition
to the Company's right to withhold from any compensation paid to the
Optionholder by the Company) or by a combination of such means: (i) tendering a
cash payment; (ii) authorizing the Company to withhold shares from the shares of
the Common Stock otherwise issuable to the Optionholder as a result of the
exercise or acquisition of stock under the Option, provided, however, that no
shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of the Common Stock.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock
subject to the Plan, or subject to any Option, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject both to the
Plan pursuant to subsection 4(a) and to the nondiscretionary Options specified
in Section 5, and the outstanding Options will be appropriately adjusted in the
class(es) and number of securities and price per share of stock subject to such
outstanding Options. The Board shall make such adjustments, and its
determination shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a transaction
"without receipt of consideration" by the Company.)
(b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company, then all outstanding Options shall terminate
immediately prior to such event.
(c) CHANGE IN CONTROL. In the event of (i) a sale, lease or other
disposition of all or substantially all of the assets of the Company, (ii) a
merger or consolidation in which the Company is not the surviving corporation or
(iii) a reverse merger in which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the
8.
<PAGE> 9
merger are converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise, then any surviving corporation or
acquiring corporation may assume any Options outstanding under the Plan or may
substitute similar Options (including an option to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 11(c)) for those outstanding under the Plan). In the event any
surviving corporation or acquiring corporation does not assume such Options or
substitute similar Options for those outstanding under the Plan, then with
respect to Options held by Optionholders whose Continuous Service has not
terminated, the vesting of such Options (and the time during which such Options
may be exercised) shall be accelerated in full, and the Options shall terminate
if not exercised at or prior to such event. With respect to any other Options
outstanding under the Plan, such Options shall terminate if not exercised prior
to such event.
12. AMENDMENT OF THE PLAN AND OPTIONS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval.
(c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.
(d) AMENDMENT OF OPTIONS. The Board at any time, and from time to time,
may amend the terms of any one or more Options; provided, however, that the
rights under any Option shall not be impaired by any such amendment unless (i)
the Company requests the consent of the Optionholder and (ii) the Optionholder
consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
No Options may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Option granted while the Plan is in
effect except with the written consent of the Optionholder.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the IPO Date, but no Option shall be
exercised unless and until the Plan has been approved by the stockholders of the
Company.
9.
<PAGE> 10
15. CHOICE OF LAW.
All questions concerning the construction, validity and interpretation
of this Plan shall be governed by the law of the State of Delaware, without
regard to such state's conflict of laws rules.
10.
<PAGE> 1
EXHIBIT 10.06
EGREETINGS NETWORK, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS SEPTEMBER 21, 1999
APPROVED BY STOCKHOLDERS NOVEMBER 19, 1999
1. PURPOSE.
(a) The purpose of the Plan is to provide a means by which Employees of
the Company and certain designated Affiliates may be given an opportunity to
purchase shares of the Common Stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
such Employees, to secure and retain the services of new Employees and to
provide incentives for such persons to exert maximum efforts for the success of
the Company and its Affiliates.
(c) The Company intends that the Rights to purchase shares of the Common
Stock granted under the Plan be considered options issued under an "employee
stock purchase plan," as that term is defined in Section 423(b) of the Code.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subparagraph 3(c) of the Plan.
(e) "COMMON STOCK" means the Common Stock of Egreetings Network, Inc.
(f) "COMPANY" means Egreetings Network, Inc., a Delaware corporation.
(g) "DIRECTOR" means a member of the Board.
(h) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set
forth in the Offering for eligibility to participate in the Offering.
(i) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or an Affiliate of the Company. Neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
"employment" by the Company or the Affiliate.
1.
<PAGE> 2
(j) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights
intended to be options issued under an "employee stock purchase plan," as that
term is defined in Section 423(b) of the Code.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means the value of a security, as determined in
good faith by the Board. If the security is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
then, except as otherwise provided in the Offering, the Fair Market Value of the
security shall be the closing sales price (rounded up where necessary to the
nearest whole cent) for such security (or the closing bid, if no sales were
reported) as quoted on such exchange or market (or the exchange or market with
the greatest volume of trading in the relevant security of the Company) on the
trading day prior to the relevant determination date, as reported in The Wall
Street Journal or such other source as the Board deems reliable, or if such date
is not a trading day, then on the next previous trading day.
(m) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.
(n) "OFFERING" means the grant of Rights to purchase shares of the
Common Stock under the Plan to Eligible Employees.
(o) "OFFERING DATE" means a date selected by the Board for an Offering
to commence.
(p) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(q) "PARTICIPANT" means an Eligible Employee who holds an outstanding
Right granted pursuant to the Plan or, if applicable, such other person who
holds an outstanding Right granted under the Plan.
(r) "PLAN" means this Egreetings Network, Inc. 1999 Employee Stock
Purchase Plan.
2.
<PAGE> 3
(s) "PURCHASE DATE" means one or more dates established by the Board
during an Offering on which Rights granted under the Plan shall be exercised and
purchases of shares of the Common Stock carried out in accordance with such
Offering.
(t) "RIGHT" means an option to purchase shares of the Common Stock
granted pursuant to the Plan.
(u) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3 as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subparagraph 3(c).
Whether or not the Board has delegated administration, the Board shall have the
final power to determine all questions of policy and expediency that may arise
in the administration of the Plan.
(b) The Board (or the Committee) shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine when and how Rights to purchase shares of the
Common Stock shall be granted and the provisions of each Offering of such Rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 14.
(v) To terminate or suspend the Plan as provided in paragraph 16.
(vi) Generally, to exercise such powers and to perform such acts
as it deems necessary or expedient to promote the best interests of the Company
and its Affiliates and to carry out the intent that the Plan be treated as an
Employee Stock Purchase Plan.
(c) The Board may delegate administration of the Plan to a Committee of
the Board composed of two (2) or more members, all of the members of which
Committee may be, in the discretion of the Board, Non-Employee Directors and/or
Outside Directors. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
3.
<PAGE> 4
subcommittee of two (2) or more Outside Directors any of the administrative
powers the Committee is authorized to exercise (and references in this Plan to
the Board shall thereafter be to the Committee or such a subcommittee), subject,
however, to such resolutions, not inconsistent with the provisions of the Plan,
as may be adopted from time to time by the Board. The Board may abolish the
Committee at any time and revest in the Board the administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 13 relating to adjustments
upon changes in securities, the shares of the Common Stock that may be sold
pursuant to Rights granted under the Plan shall not exceed in the aggregate one
million (1,000,000) shares of the Common Stock (the "Reserved Shares"). As of
the first nine (9) anniversaries of the Effective Date of the Plan, beginning in
2000, the number of Reserved Shares will be increased automatically by the
lesser of (i) one percent (1%) of the total number of shares of the Common Stock
outstanding on such anniversary date or (ii) the number of shares that increases
the cumulative number of shares added as a result of such annual increases to
five million (5,000,000) shares. If any Right granted under the Plan shall for
any reason terminate without having been exercised, the shares of the Common
Stock not purchased under such Right shall again become available for the Plan.
(b) The shares of the Common Stock subject to the Plan may be unissued
shares of the Common Stock or shares of the Common Stock that have been bought
on the open market at prevailing market prices or otherwise.
5. GRANT OF RIGHTS; OFFERING.
The Board may from time to time grant or provide for the grant of Rights
to purchase shares of the Common Stock under the Plan to Eligible Employees in
an Offering on an Offering Date or Dates selected by the Board. Each Offering
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate, which shall comply with the requirements of Section
423(b)(5) of the Code that all Employees granted Rights to purchase shares of
the Common Stock under the Plan shall have the same rights and privileges. The
terms and conditions of an Offering shall be incorporated by reference into the
Plan and treated as part of the Plan. The provisions of separate Offerings need
not be identical, but each Offering shall include (through incorporation of the
provisions of this Plan by reference in the document comprising the Offering or
otherwise) the period during which the Offering shall be effective, which period
shall not exceed twenty-seven (27) months beginning with the Offering Date, and
the substance of the provisions contained in paragraphs 6 through 9, inclusive.
6. ELIGIBILITY.
(a) Rights may be granted only to Employees of the Company or, as the
Board may designate as provided in subparagraph 3(b), to Employees of an
Affiliate. Except as provided in subparagraph 6(b), an Employee shall not be
eligible to be granted Rights under the Plan unless, on the Offering Date, such
Employee has been in the employ of the Company or the Affiliate, as the case may
be, for such continuous period preceding such grant as the Board may require,
but
4.
<PAGE> 5
in no event shall the required period of continuous employment be equal to or
greater than two (2) years.
(b) The Board may provide that each person who, during the course of an
Offering, first becomes an Eligible Employee will, on a date or dates specified
in the Offering which coincides with the day on which such person becomes an
Eligible Employee or which occurs thereafter, receive a Right under that
Offering, which Right shall thereafter be deemed to be a part of that Offering.
Such Right shall have the same characteristics as any Rights originally granted
under that Offering, as described herein, except that:
(i) the date on which such Right is granted shall be the
"Offering Date" of such Right for all purposes, including determination of the
exercise price of such Right;
(ii) the period of the Offering with respect to such Right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board may provide that if such person first becomes an
Eligible Employee within a specified period of time before the end of the
Offering, he or she will not receive any Right under that Offering.
(c) No Employee shall be eligible for the grant of any Rights under the
Plan if, immediately after any such Rights are granted, such Employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
subparagraph 6(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any Employee, and stock which such Employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such Employee.
(d) An Eligible Employee may be granted Rights under the Plan only if
such Rights, together with any other Rights granted under all Employee Stock
Purchase Plans of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase
shares of the Common Stock or any Affiliate to accrue at a rate which exceeds
twenty five thousand dollars ($25,000) of the fair market value of such shares
of the Common Stock (determined at the time such Rights are granted) for each
calendar year in which such Rights are outstanding at any time.
(e) The Board may provide in an Offering that Employees who are highly
compensated Employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
7. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each Eligible Employee, pursuant to an
Offering made under the Plan, shall be granted the Right to purchase up to the
number of shares of the Common Stock purchasable either:
(i) with a percentage designated by the Board not exceeding
fifteen percent (15%) of such Employee's Earnings (as defined by the Board in
each Offering) during the period
5.
<PAGE> 6
which begins on the Offering Date (or such later date as the Board determines
for a particular Offering) and ends on the date stated in the Offering, which
date shall be no later than the end of the Offering; or
(ii) with a maximum dollar amount designated by the Board that,
as the Board determines for a particular Offering, (1) shall be withheld, in
whole or in part, from such Employee's Earnings (as defined by the Board in each
Offering) during the period which begins on the Offering Date (or such later
date as the Board determines for a particular Offering) and ends on the date
stated in the Offering, which date shall be no later than the end of the
Offering and/or (2) shall be contributed, in whole or in part, by such Employee
during such period.
(b) The Board shall establish one or more Purchase Dates during an
Offering on which Rights granted under the Plan shall be exercised and purchases
of shares of the Common Stock carried out in accordance with such Offering.
(c) In connection with each Offering made under the Plan, the Board may
specify a maximum number of shares of the Common Stock that may be purchased by
any Participant as well as a maximum aggregate number of shares of the Common
Stock that may be purchased by all Participants pursuant to such Offering. In
addition, in connection with each Offering that contains more than one Purchase
Date, the Board may specify a maximum aggregate number of shares of the Common
Stock which may be purchased by all Participants on any given Purchase Date
under the Offering. If the aggregate purchase of shares of the Common Stock upon
exercise of Rights granted under the Offering would exceed any such maximum
aggregate amount, the Board shall make a pro rata allocation of the shares of
the Common Stock available in as nearly a uniform manner as shall be practicable
and as it shall deem to be equitable.
(d) The purchase price of shares of the Common Stock acquired pursuant
to Rights granted under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the shares of the Common Stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the shares of the Common Stock on the Purchase Date.
8. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An Eligible Employee may become a Participant in the Plan pursuant
to an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board of such Employee's Earnings during the Offering (as
defined in each Offering). The payroll deductions made for each Participant
shall be credited to a bookkeeping account for such Participant under the Plan
and either may be deposited with the general funds of the Company or may be
deposited in a separate account in the name of, and for the benefit of, such
Participant with a financial institution designated by the Company. To the
extent provided in the Offering, a Participant may reduce (including to zero) or
increase such payroll deductions. To the extent provided in the Offering, a
Participant may begin such payroll deductions after the beginning of the
Offering. A
6.
<PAGE> 7
Participant may make additional payments into his or her account only if
specifically provided for in the Offering and only if the Participant has not
already had the maximum permitted amount withheld during the Offering.
(b) At any time during an Offering, a Participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board in the Offering. Upon such withdrawal
from the Offering by a Participant, the Company shall distribute to such
Participant all of his or her accumulated payroll deductions (reduced to the
extent, if any, such deductions have been used to acquire shares of the Common
Stock for the Participant) under the Offering, without interest unless otherwise
specified in the Offering, and such Participant's interest in that Offering
shall be automatically terminated. A Participant's withdrawal from an Offering
will have no effect upon such Participant's eligibility to participate in any
other Offerings under the Plan but such Participant will be required to deliver
a new participation agreement in order to participate in subsequent Offerings
under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating Employee's employment
with the Company or a designated Affiliate for any reason (subject to any
post-employment participation period required by law) or other lack of
eligibility. The Company shall distribute to such terminated Employee all of his
or her accumulated payroll deductions (reduced to the extent, if any, such
deductions have been used to acquire shares of the Common Stock for the
terminated Employee) under the Offering, without interest unless otherwise
specified in the Offering. If the accumulated payroll deductions have been
deposited with the Company's general funds, then the distribution shall be made
from the general funds of the Company, without interest. If the accumulated
payroll deductions have been deposited in a separate account with a financial
institution as provided in subparagraph 8(a), then the distribution shall be
made from the separate account, without interest unless otherwise specified in
the Offering.
(d) Rights granted under the Plan shall not be transferable by a
Participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 15 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such Rights
are granted.
9. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant Offering,
each Participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of shares of the Common Stock up to the maximum
number of shares of the Common Stock permitted pursuant to the terms of the Plan
and the applicable Offering, at the purchase price specified in the Offering. No
fractional shares of the Common Stock shall be issued upon the exercise of
Rights granted under the Plan unless specifically provided for in the Offering.
(b) Unless otherwise specifically provided in the Offering, the amount,
if any, of accumulated payroll deductions remaining in any Participant's account
after the purchase of
7.
<PAGE> 8
shares of the Common Stock that is equal to the amount required to purchase one
or more whole shares of the Common Stock on the final Purchase Date of the
Offering shall be distributed in full to the Participant at the end of the
Offering, without interest. If the accumulated payroll deductions have been
deposited with the Company's general funds, then the distribution shall be made
from the general funds of the Company, without interest. If the accumulated
payroll deductions have been deposited in a separate account with a financial
institution as provided in subparagraph 8(a), then the distribution shall be
made from the separate account, without interest unless otherwise specified in
the Offering. The amount of accumulated payroll deductions remaining in any
Participant's account that is less than the amount required to purchase one
whole share of Common Stock on the final Purchase Date of the Offering shall be
carried over to the next Offering or shall, if the Participant requests or does
not participate in the next Offering, be refunded.
(c) No Rights granted under the Plan may be exercised to any extent
unless the shares of the Common Stock to be issued upon such exercise under the
Plan (including Rights granted thereunder) are covered by an effective
registration statement pursuant to the Securities Act and the Plan is in
material compliance with all applicable state, foreign and other securities and
other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no Rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If, on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no Rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire Shares) shall be distributed to the
Participants, without interest unless otherwise specified in the Offering. If
the accumulated payroll deductions have been deposited with the Company's
general funds, then the distribution shall be made from the general funds of the
Company, without interest. If the accumulated payroll deductions have been
deposited in a separate account with a financial institution as provided in
subparagraph 8(a), then the distribution shall be made from the separate
account, without interest unless otherwise specified in the Offering.
10. COVENANTS OF THE COMPANY.
(a) During the terms of the Rights granted under the Plan, the Company
shall ensure that the number of shares of the Common Stock required to satisfy
such Rights are available.
(b) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of the Common Stock upon
exercise of the Rights granted under the Plan. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of shares of the Common Stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell shares of the Common
Stock upon exercise of such Rights unless and until such authority is obtained.
8.
<PAGE> 9
11. USE OF PROCEEDS FROM SHARES.
Proceeds from the sale of shares of the Common Stock pursuant to Rights
granted under the Plan shall constitute general funds of the Company.
12. RIGHTS AS A STOCKHOLDER.
A Participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, shares of the Common Stock subject to
Rights granted under the Plan unless and until the Participant's shares of the
Common Stock acquired upon exercise of Rights under the Plan are recorded in the
books of the Company.
13. ADJUSTMENTS UPON CHANGES IN SECURITIES.
(a) If any change is made in the shares of the Common Stock subject to
the Plan, or subject to any Right, without the receipt of consideration by the
Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of shares of the Common Stock subject to the Plan
pursuant to subparagraph 4(a), and the outstanding Rights will be appropriately
adjusted in the class(es), number of shares of the Common Stock and purchase
limits of such outstanding Rights. The Board shall make such adjustments, and
its determination shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a transaction that
does not involve the receipt of consideration by the Company.)
(b) In the event of: (i) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (ii) a merger or consolidation
in which the Company is not the surviving corporation; or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then: (1) any surviving or acquiring corporation may assume Rights
outstanding under the Plan or may substitute similar rights (including a right
to acquire the same consideration paid to the Company's stockholders in the
transaction described in this subparagraph 13(b)) for those outstanding under
the Plan, or (2) in the event any surviving or acquiring corporation does not
assume such Rights or substitute similar rights for those outstanding under the
Plan, then the Participants' accumulated payroll deductions (exclusive of any
accumulated interest which cannot be applied toward the purchase of shares of
the Common Stock under the terms of the Offering) will be used to purchase
shares of the Common Stock immediately prior to the transaction described above
under the ongoing Offering and the Participants' Rights under the ongoing
Offering thereafter terminated.
14. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 13 relating to adjustments upon changes
in securities and except as to minor amendments to benefit the administration of
the Plan, to take account of a change in
9.
<PAGE> 10
legislation or to obtain or maintain favorable tax, exchange control or
regulatory treatment for Participants or the Company or any Affiliate, no
amendment shall be effective unless approved by the stockholders of the Company
to the extent stockholder approval is necessary for the Plan to satisfy the
requirements of Section 423 of the Code, Rule 16b-3 under the Exchange Act and
any Nasdaq or other securities exchange listing requirements. Currently under
the Code, stockholder approval within twelve (12) months before or after the
adoption of the amendment is required where the amendment will:
(i) Increase the number of shares of the Common Stock reserved
for Rights under the Plan;
(ii) Modify the provisions as to eligibility for participation in
the Plan to the extent such modification requires stockholder approval in order
for the Plan to obtain employee stock purchase plan treatment under Section 423
of the Code or to comply with the requirements of Rule 16b-3; or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3.
(b) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide Employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Employee Stock Purchase Plans
and/or to bring the Plan and/or Rights granted under it into compliance
therewith.
(c) Rights and obligations under any Rights granted before amendment of
the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such Rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or Rights granted under the Plan comply with the
requirements of Section 423 of the Code.
15. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a beneficiary who is
to receive any shares of the Common Stock and/or cash, if any, from the
Participant's account under the Plan in the event of such Participant's death
subsequent to the end of an Offering but prior to delivery to the Participant of
such shares of the Common Stock and cash. In addition, a Participant may file a
written designation of a beneficiary who is to receive any cash from the
Participant's account under the Plan in the event of such Participant's death
during an Offering.
(b) The Participant may change such designation of beneficiary at any
time by written notice. In the event of the death of a Participant and in the
absence of a beneficiary validly designated under the Plan who is living at the
time of such Participant's death, the Company shall deliver such shares of the
Common Stock and/or cash to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its sole discretion, may deliver such
shares of the Common Stock and/or cash to the spouse or to any one or more
dependents or relatives of the
10.
<PAGE> 11
Participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate at the time that all of
the shares of the Common Stock subject to the Plan's reserve, as increased
and/or adjusted from time to time, have been issued under the terms of the Plan.
No Rights may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) Rights and obligations under any Rights granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except as
expressly provided in the Plan or with the consent of the person to whom such
Rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
Rights granted under the Plan comply with the requirements of Section 423 of the
Code.
17. EFFECTIVE DATE OF PLAN.
The Plan shall become effective simultaneously with the effectiveness of
the Company's registration statement under the Securities Act with respect to
the initial public offering of shares of the Company's Common Stock (the
"Effective Date"), but no Rights granted under the Plan shall be exercised
unless and until the Plan has been approved by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board, which date may be prior to the Effective Date.
11.
<PAGE> 1
EGREETINGS NETWORK, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
OFFERING
ADOPTED SEPTEMBER 21, 1999
1. GRANT OF RIGHTS.
(a) The Board of Directors of Egreetings Network, Inc. (the "Company"),
pursuant to the Company's 1999 Employee Stock Purchase Plan (the "Plan"), hereby
authorizes the grant of rights to purchase shares of the common stock of the
Company ("Common Stock") to all Eligible Employees (an "Offering"). The first
Offering shall begin simultaneously with the effectiveness of the Company's
registration statement under the Securities Act of 1933 with respect to the
initial public offering of the Company's Common Stock and end on December 31,
2001 (the "Initial Offering"). Thereafter, Offerings shall begin every other
year on January 1, beginning on January 1, 2002, and each such Offering shall
end on the day prior to the second anniversary of its Offering Date. The first
day of an Offering is that Offering's "Offering Date." If a scheduled Offering
Date falls on a day on which the Common Stock is not actively traded, then the
Offering Date shall be the next succeeding day on which the Common Stock is
actively traded.
(b) Prior to the commencement of any Offering, the Board of Directors (or
the Committee described in subparagraph 3(c) of the Plan, if any) may change any
or all terms of such Offering and any subsequent Offerings. The granting of
rights pursuant to each Offering hereunder shall occur on each respective
Offering Date unless, prior to such date (a) the Board of Directors (or such
Committee) determines that such Offering shall not occur, or (b) no shares
remain available for issuance under the Plan in connection with the Offering.
(c) Notwithstanding anything to the contrary, in the event that the fair
market value of a share of Common Stock on any Purchase Date during an Offering
is less than the fair market value of a share of Common Stock on the Offering
Date of such Offering, then, following the purchase of Common Stock on such
Purchase Date: (i) the Offering shall terminate and (ii) all participants in the
just-terminated Offering shall automatically be enrolled in a new Offering that
shall commence on the day following the Purchase Date on the same terms on which
such participants were enrolled in the terminated Offering. The Offering Date
for any such new Offering shall be the first day of the Offering. Any such new
Offering shall end on the day prior to the second anniversary of its Offering
Date.
2. ELIGIBLE EMPLOYEES.
Except as described below, all employees of the Company (other than those
employees who reside and/or perform services in jurisdictions whose laws make
participation impractical) shall be granted rights to purchase Common Stock
under each Offering on the Offering Date of such Offering (each, an "Eligible
Employee"); provided that each Eligible Employee may participate in only one
Offering at any given time. The following employees shall not be Eligible
Employees or be granted rights under an Offering: (i) part-time or seasonal
employees
1.
<PAGE> 2
whose customary employment is less than twenty (20) hours per week or less than
five (5) months per calendar year, and (ii) 5% stockholders (including ownership
through unexercised options) described in subparagraph 6(c) of the Plan.
Each person who first becomes an Eligible Employee during any Offering
shall be granted a right to purchase Common Stock under such Offering on the
next January 1 or July 1 during such Offering, which right shall thereafter be
deemed to be a part of such Offering. Such right shall have the same
characteristics as any rights originally granted under the Offering except that:
(a) the date on which such right is granted shall be the "Offering Date"
of such right for all purposes, including determination of the exercise price of
such right; and
(b) the Offering for such right shall begin on its Offering Date and end
coincident with the ongoing Offering.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such Participant's Earnings during the period of such Offering. "Earnings" is
defined as an Eligible Employee's wages (including amounts thereof elected to be
deferred by the Eligible Employee, that would otherwise have been paid, under
any arrangement established by the Company that is intended to comply with
Section 125, Section 401(k), Section 402(h) or Section 403(b) of the Code or
that provides non-qualified deferred compensation), which shall include overtime
pay, bonuses, incentive pay, and commissions, but shall exclude profit sharing
or other remuneration paid directly to the employee, the cost of employee
benefits paid for by the Company or an Affiliate, education or tuition
reimbursements, imputed income arising under any group insurance or benefit
program, traveling expenses, business and moving expense reimbursements, income
received in connection with stock options, contributions made by the Company or
an Affiliate under any employee benefit plan, and similar items of compensation
(b) The maximum number of shares that may be purchased by an eligible
employee on a Purchase Date shall not exceed three thousand seven hundred fifty
(3,750) shares. The maximum aggregate number of shares available to be purchased
by all Eligible Employees under an Offering shall be the number of shares
remaining available under the Plan on the Offering Date. If the aggregate
purchase of shares of Common Stock upon exercise of rights granted under the
Offering would exceed the maximum aggregate number of shares available, the
Board shall make a pro rata allocation of the shares available in a uniform and
equitable manner.
(c) Notwithstanding the foregoing, no employee shall be granted an option
under the Plan which permits such employee's right to purchase stock under this
Plan and all other employee stock purchase plans (described in Section 423 of
the Code) of the Company to accrue at a rate which exceeds twenty-five thousand
dollars ($25,000) of fair market value of such stock (determined at the time
such option is granted) for each calendar year in which such option is
outstanding at any time.
2.
<PAGE> 3
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date.
5. PARTICIPATION.
(a) Except as otherwise provided herein or in the Plan, an Eligible
Employee may elect to participate in an Offering only as of the beginning of the
Offering; provided, however, that employees who first become Eligible Employees
during an Offering may elect to participate in that Offering as of the day after
the first Purchase Date that occurs after they become Eligible Employees. An
Eligible Employee shall become a participant in the Plan by delivering an
agreement authorizing payroll deductions. Such deductions shall be made each pay
period and must be in whole percentages not to exceed fifteen percent (15%) of
Earnings. The agreement shall be made on such enrollment form as the Company or
a designated Affiliate provides and must be delivered to the Company or
designated Affiliate before the Offering Date to be effective for such Offering,
unless a later time for filing the enrollment form is set by the Company for all
Eligible Employees with respect to a given Offering Date. In addition to
authorizing payroll deductions, the agreement must authorize the Company to
withhold any applicable payroll and income taxes from the Eligible Employee's
wages. For the Initial Offering, the time for filing an enrollment form and
commencing participation for individuals who are Eligible Employees on the
Offering Date for the Initial Offering shall be determined by the Company and
communicated to such Eligible Employees. A participant may not make additional
contributions under the Plan.
(b) A participant may increase or reduce (including to zero) his or her
participation level as of any January 1 or July 1 during an Offering. Any such
change in participation shall be made by delivering a notice to the Company or a
designated Affiliate in such form and at such time as the Company provides. In
addition, a participant may withdraw from an Offering and receive his or her
accumulated payroll deductions from the Offering (reduced to the extent, if any,
such deductions have been used to acquire Common Stock for the Participant on
any prior Purchase Dates), without interest, at any time prior to the end of the
Offering, excluding the fifteen (15) day period immediately preceding the
Purchase Date, by delivering a withdrawal notice to the Company or designated
Affiliate in such form as the Company of designated Affiliate provides. A
participant who has withdrawn from an Offering shall not again participate in
such Offering but may participate in subsequent Offerings under the Plan by
submitting a new participation agreement in accordance with the terms thereof.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering. "Purchase
Date" shall be defined as June 30, 2000, and each June 30 and December 31
thereafter. If a scheduled Purchase Date falls on a day on which the
3.
<PAGE> 4
Common Stock is not actively traded, then the Purchase Date shall be the nearest
prior day on which the Common Stock is actively traded.
7. NOTICES.
Any notices or agreements provided for in the Offering or the Plan shall be
given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders of the Company as required for the Plan to obtain
employee stock purchase plan treatment under Section 423 of the Code or to
comply with the requirements of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
4.
<PAGE> 1
EXHIBIT 23.02
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated November 22, 1999
with respect to the financial statements of Egreetings Network, Inc. as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 in Amendment No. 3 to the Registration Statement (Form S-1,
No. 333-88595) and the related Prospectus of Egreetings Network, Inc. for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
Walnut Creek, California
December 8, 1999
