<PAGE> 1
Filed pursuant to Rule 424(b)(4)
under the Securities Act of 1933.
Registration Number 333-88595
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.
Our common stock has been approved for listing 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.............................. $ 10.00 $ 0.70 $ 9.30
Total.................................. $60,000,000 $4,200,000 $55,800,000
</TABLE>
Delivery of the shares of common stock will be made on or about December
22, 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 December 16, 1999.
<PAGE> 2
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> 3
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> 4
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 JANUARY 12, 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> 5
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.
The use of the Internet as a means for conducting commercial transactions
is also growing dramatically. Jupiter Communications forecasts that online
shopping in the United States will reach an estimated $78 billion in 2003, and
that online advertising spending in the United States will reach $11.5 billion
by 2003. 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
these expanding online advertising and ecommerce opportunities.
4
<PAGE> 6
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."
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> 7
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)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2,376 $40,963 $ 95,263
Working capital(deficit)................. (3,811) 34,776 89,076
Total assets............................. 20,955 71,844 126,144
Long-term liabilities.................... 3,590 3,590 3,590
Total stockholders' equity............... 8,955 59,844 114,144
</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.
(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 initial public
offering price of $10.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
6
<PAGE> 8
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> 9
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> 10
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> 11
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.
10
<PAGE> 12
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 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, Excite@Home, 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
11
<PAGE> 13
ecommerce 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 December 1999, Excite@Home Network acquired 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. 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.
12
<PAGE> 14
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
13
<PAGE> 15
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;
14
<PAGE> 16
- 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 148 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
15
<PAGE> 17
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.
16
<PAGE> 18
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.
17
<PAGE> 19
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
18
<PAGE> 20
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,
19
<PAGE> 21
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.
20
<PAGE> 22
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 has been established by negotiation
between the underwriters and us. You should read the "Underwriters" section for
a more complete discussion of the factors that were 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> 23
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 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
$6.69 per share in the net tangible book value of the common stock from the
initial public offering price of $10.00 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> 24
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> 25
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> 26
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately
$54.3 million, after deducting the 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 $62.7 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> 27
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 initial public offering
price of $10.00 per share after deducting the 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> 28
<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.............. 9,869 103,153 157,453
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 59,844 114,144
-------- -------- --------
Total capitalization....................... $ 12,545 $ 63,434 $117,734
======== ======== ========
</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.
27
<PAGE> 29
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 initial public
offering price of $10.00 per share, and after deducting 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 $114.1
million, or $3.31 per share. This represents an immediate increase in the pro
forma net tangible book value per share of $1.21 to existing stockholders and an
immediate dilution of $6.69 per share to new investors purchasing shares in this
offering. The following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $10.00
Pro forma net tangible book value per share before the
offering............................................... $2.10
Increase per share attributable to new investors.......... 1.21
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.31
------
Dilution per share to new investors......................... $ 6.69
======
</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 initial
public offering of $10.00 per share, before deducting 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 59.8% $ 3.14
New investors................. 6,000,000 17.4 60,000,000 40.2 $10.00
---------- ----- ------------ ------
Total............... 34,441,107 100.0% $149,318,000 100.0%
========== ===== ============ ======
</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> 30
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> 31
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. If the proposed acquisition is consummated,
American Greetings would become our largest stockholder. 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. For the quarter ended
September 30, 1999, 36% of all digital greetings sent from our Web site
contained content obtained pursuant to our license agreement with Gibson.
30
<PAGE> 32
In addition, in December 1999, Excite@Home Network acquired
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> 33
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.
32
<PAGE> 34
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.
33
<PAGE> 35
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
34
<PAGE> 36
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)
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.
35
<PAGE> 37
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
36
<PAGE> 38
- 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.
37
<PAGE> 39
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
38
<PAGE> 40
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.
39
<PAGE> 41
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.
40
<PAGE> 42
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.
41
<PAGE> 43
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. Jupiter Communications forecasts that online shopping in the United
States will reach an estimated $78 billion in 2003. 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. Many companies have begun to focus significant marketing
efforts on online activities, with Jupiter estimating that online advertising
spending in the United States will reach $11.5 billion by 2003. 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.
42
<PAGE> 44
Convenient Communications and Gift Giving. Our service eliminates the
inconvenience associated with traditional paper-based communications and retail
gift stores. Our 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."
43
<PAGE> 45
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-
44
<PAGE> 46
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
45
<PAGE> 47
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
46
<PAGE> 48
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.
47
<PAGE> 49
- 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
48
<PAGE> 50
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
49
<PAGE> 51
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
50
<PAGE> 52
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.com
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
51
<PAGE> 53
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
52
<PAGE> 54
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." Under the NBC Agreement, we will display the NBC digital greetings
on our Web site, and offer consumers the opportunity to send the NBC digital
greetings free of charge through our Web site. We will also promote the NBC
digital greetings 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
53
<PAGE> 55
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.
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
54
<PAGE> 56
any of our competitors and allows us to better address the needs of
distribution, content and ecommerce partners.
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 American Greetings, Hallmark and 123greetings.com;
- Internet content aggregators and other Internet companies that offer
digital greeting cards, such as Amazon.com, America Online, Excite@Home,
Microsoft and Yahoo!;
- Internet companies that focus on gifts; and
- media, entertainment and other companies offering electronic greetings.
In December 1999, Excite@Home Network acquired 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. 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
55
<PAGE> 57
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 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.
56
<PAGE> 58
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 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.
57
<PAGE> 59
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
Technology 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
58
<PAGE> 60
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
59
<PAGE> 61
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.
60
<PAGE> 62
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
61
<PAGE> 63
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
62
<PAGE> 64
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 Technology
Officer since then.
63
<PAGE> 65
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 $235,050 $379,050
</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 initial public
offering price of $10.00 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.
64
<PAGE> 66
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 $717,110 $627,480
Paul Lipman............. -- -- 42,046 43,954 $413,984 $297,193
</TABLE>
- -------------------------
(1) Value of unexercised in-the-money options are based on a value of $10.00 per
share, the 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.
65
<PAGE> 67
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
66
<PAGE> 68
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
67
<PAGE> 69
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.
68
<PAGE> 70
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.
69
<PAGE> 71
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, who were hired by us on or prior to September 30, 1999,
other than our sales employees who are on commission bonus plans and who remain
employees of Egreetings through the end of 1999, 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.
Funding and Payment of Bonuses. If we achieve certain financial and
operational goals as determined by our board, a bonus pool will be funded with
an amount equal to the aggregate target bonuses available to employees under the
bonus plan. Once the bonus
70
<PAGE> 72
pool is funded, 50% of each employee's target bonus becomes payable, with the
remaining 50% payable based on the employee's performance.
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
71
<PAGE> 73
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.
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
72
<PAGE> 74
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.
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 applicable law, subject to very limited exceptions;
- we may indemnify our other officers, employees and other agents to the
same extent that we indemnify our directors and executive officers,
unless such indemnification is prohibited by law, our certificate of
incorporation, our bylaws or pursuant to contractual arrangements; 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 applicable 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 have obtained directors' and officers' liability insurance.
73
<PAGE> 75
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.
74
<PAGE> 76
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
75
<PAGE> 77
& 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>
76
<PAGE> 78
- -------------------------
(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."
77
<PAGE> 79
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.
78
<PAGE> 80
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>
79
<PAGE> 81
<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
80
<PAGE> 82
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.
81
<PAGE> 83
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 October 31, 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 number of
82
<PAGE> 84
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.
83
<PAGE> 85
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.
84
<PAGE> 86
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.
Our common stock has been qualified for trading as a national market
security on the Nasdaq National Market and we anticipate that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If this latter condition occurs, 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.
85
<PAGE> 87
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
86
<PAGE> 88
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.
We have entered 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 directors, officers or employees
87
<PAGE> 89
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 have obtained directors' and officers' liability insurance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Norwest Bank
Minnesota, N.A.
88
<PAGE> 90
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> 91
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> 92
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated December 16, 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, FleetBoston
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...................... 2,144,000
FleetBoston Robertson Stephens Inc.......................... 2,144,000
U.S. Bancorp Piper Jaffray Inc.............................. 1,072,000
Dain Rauscher Incorporated.................................. 80,000
E*Offering Corp............................................. 80,000
First Union Securities, Inc................................. 80,000
Invemed Associates LLC...................................... 80,000
Maxus Securities Inc........................................ 80,000
Charles Schwab & Co., Inc................................... 80,000
TD Securities (USA) Inc..................................... 80,000
C.E. Unterberg, Towbin...................................... 80,000
---------
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 $0.42 per share. The
underwriters and the selling group members may allow a discount of $0.10 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.
A copy of this prospectus in electronic format will be made available on
the Internet by E*OFFERING Corp. on a web site hosted by E*TRADE Securities,
Inc. Customers seeking to submit conditional offers to purchase shares online
must meet certain eligibility requirements promulgated by these institutions.
91
<PAGE> 93
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..................... $0.70 $ 0.70 $4,200,000 $4,830,000
Expenses payable by us... $0.25 $0.217 $1,500,000 $1,500,000
</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 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 and issuances pursuant to the
exercise of those options or options outstanding on the date hereof.
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.
Our common stock has been approved for listing 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 was determined by negotiation between
us and the representatives. The principal factors considered in determining the
public offering price included 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 compete;
- the ability of our management;
- our prospects for future earnings;
92
<PAGE> 94
- 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.
- 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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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 (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 6,456,109
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> 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)
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> 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)
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> 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)
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> 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)
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> 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 (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> 120
[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> 121
LOGO
