<PAGE> 1
United States
Securities and Exchange Commission
Washington D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Transition Period From ___________ to ___________.
Commission File Number: 005-57829
EGREETINGS NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3207092
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
</TABLE>
149 New Montgomery Street
San Francisco, CA 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 375-4100
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JULY 31, 2000
----- ------------------------------
<S> <C>
Common Stock, $0.001 par value 35,360,034
</TABLE>
AMENDMENT AND CORRECTION TO ANNUAL REPORT ON FORM 10-QA
FOR QUARTER ENDED JUNE 30, 2000
The following additional information has been included in this amendment and
correction on Form 10-Q/A for quarter ended June 30, 2000. In aggregate these
amendments represent clarifications or additions to disclosures and do not
affect net loss per share for any period reported in Egreetings Network Inc.'s
Form 10-Q for the quarter ended June 30, 2000, filed on August 14, 2000.
The disclosures in Part I, Item 1, "Financial Information", of net loss per
share has been revised on the Statement of Operations and Note 2, "Significant
Accounting Policies", to exclude presentation of pro forma basic and diluted net
loss per share.
The Condensed Statement of Operations appearing in Part I, Item 1, "Financial
Information", has been amended to include the footnotes (1), (2), (3) and (4)
relating to allocation of amortization of deferred content and deferred stock
compensations costs to the line items entitled "Cost of Services", "Sales and
Marketing", "Operations and Development" and "General and Administrative",
respectively.
Part I, Item I, "Financial Information", "Notes to the Condensed Financial
Statements", Note 2, "Significant Accounting Policies" has been amended to
include a description of the Company's business communications services as the
sixth paragraph under the heading "Revenue Recognition".
Part I, Item I, "Financial Information", "Notes to the Condensed Financial
Statements", Note 2, "Significant Accounting Policies" has been amended to
include the Company's accounting policies for investments in marketable debt
securities.
Part I, Item I, "Financial Information", "Notes to the Condensed Financial
Statements" has been amended to include Note 4, "Investments", which provides
the information required under Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
The disclosure appearing in Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the heading
"Overview", second paragraph, has been revised to provide further description of
the Company's business communications services.
The disclosure appearing in Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the heading
"Revenues" has been amended to include a third paragraph to provide additional
explanation of the change in deferred revenues.
Except as noted above, information in the originally filed Form 10-Q for the
quarter ended June 30, 2000, filed on August 14, 2000, is presented as of the
original filing date and has not been updated in this amended filing. This
Form 10-Q, as amended, has not been updated for any subsequent events.
<PAGE> 2
TABLE OF CONTENTS
10-Q
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 Condensed Financial Statements (unaudited)
- Balance Sheets at June 30, 2000 and December 31, 1999
- Statements of Operations for the three months ended June 30, 2000 and 1999 and
the six months ended June 30, 2000 and 1999
- Statements of Cash Flows for the six months ended June 30, 2000 and 1999
- Notes to Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Item 6 Exhibits and Reports
Signatures
</TABLE>
2
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EGREETINGS NETWORK, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
--------- ------------
UNAUDITED
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 17,900 $ 81,774
Short-term investments ................................................. 15,572 --
Accounts receivable (net of allowance for doubtful
accounts of $500 as of June 30, 2000 and $69 as of December 31, 1999) 2,363 1,228
Prepaid expenses and other current assets .............................. 8,804 9,244
--------- ---------
Total current assets ........................................... 44,639 92,246
Long-term investments .................................................... 24,835 --
Property and equipment, net .............................................. 16,981 11,800
Deferred content costs ................................................... 10,351 12,740
Restricted cash deposit .................................................. 76 2,172
Deposits and other assets ................................................ 1,017 1,165
--------- ---------
Total assets ................................................... $ 97,899 $ 120,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 2,506 $ 7,910
Accrued expenses and other current liabilities ......................... 2,364 4,029
Accrued royalties ...................................................... 180 290
Deferred revenue ....................................................... 1,219 581
Current portion of equipment term loan ................................. 1,775 1,764
--------- ---------
Total current liabilities ...................................... 8,044 14,574
Equipment term loan, less current portion ................................ 2,846 3,718
--------- ---------
Total liabilities .............................................. 10,890 18,292
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value: 65,000,000 shares authorized; 35,360,034
and 34,501,140 shares issued and outstanding at June 30, 2000 and
December 31, 1999 respectively ...................................... 165,708 159,227
Deferred stock compensation ............................................ (1,189) (2,195)
Notes receivable from stockholders ..................................... (7,511) (5,490)
Accumulated deficit .................................................... (69,999) (49,711)
--------- ---------
Total stockholders' equity ..................................... 87,009 101,831
--------- ---------
Total liabilities and stockholders' equity ..................... $ 97,899 $ 120,123
========= =========
</TABLE>
See notes to condensed financial statements.
3
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EGREETINGS NETWORK, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ........................................ $ 3,054 $ 621 $ 5,875 $ 724
Costs and expenses:
Cost of services(1)............................ 1,343 672 2,414 1,071
Sales and marketing(2)......................... 4,413 2,384 10,270 5,273
Operations and development(3).................. 4,346 2,105 8,465 3,368
General and administrative(4).................. 1,712 1,026 3,673 2,006
Amortization of deferred content costs ........ 1,306 252 2,594 405
Amortization of deferred stock compensation ... 296 405 700 559
-------- -------- -------- --------
Total costs and expenses ............. 13,416 6,844 28,116 12,682
-------- -------- -------- --------
Loss from operations ............................ (10,362) (6,223) (22,241) (11,958)
Interest income (expense), net .................. 782 59 1,803 (107)
Other income ................................... 150 -- 150 --
-------- -------- -------- --------
Net loss ........................................ $ (9,430) $ (6,164) $(20,288) $(12,065)
======== ======== ======== ========
Net loss per share:
Basic and diluted............................ $ (0.28) $ $ (0.61) $
======== ======== ======== ========
Shares used in calculation of net loss per share:
Basic and diluted ........................... 33,312 33,168
======== ======== ======== ========
</TABLE>
(1) Excluding $1,396 and $252 in amortization of deferred content costs for
the three months ended June 30, 2000 and 1999, respectively, and $2,594
and $405 in amortization of deferred content costs for the six months
ended June 30, 2000 and 1999, respectively. Also excluding $29 and $20
in amortization of deferred stock compensation for the three months
ended June 30, 2000 and 1999, respectively, and $63 and $31 in
amortization of deferred stock compensation for the six months ended
June 30, 2000 and 1999, respectively.
(2) Excluding $86 and $109 in amortization of deferred stock compensation
for the three months ended June 30, 2000 and 1999, respectively, and
$212 and $145 in amortization of deferred stock compensation for the six
months ended June 30, 2000 and 1999, respectively.
(3) Excluding $136 and $218 in amortization of deferred stock compensation
for the three months ended June 30, 2000 and 1999, respectively, and
$322 and $303 in amortization of deferred stock compensation for the six
months ended June 30, 2000 and 1999, respectively.
(4) Excluding $45 and $58 in amortization of deferred stock compensation for
the three months ended June 30, 2000 and 1999, respectively, and $103
and $80 in amortization of deferred stock compensation for the six
months ended June 30, 2000 and 1999, respectively.
See notes to condensed financial statements.
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EGREETINGS NETWORK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
2000 1999
--------- ---------
UNAUDITED UNAUDITED
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ....................................................................... $ (20,288) $ (12,065)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ................................................................. 2,336 909
Amortization of deferred content costs ....................................... 2,594 405
Amortization of deferred stock compensation .................................. 700 559
Bad debt expense ............................................................. 393 --
Other ........................................................................ 13 46
Changes in operating assets and liabilities:
Accounts receivable ........................................................ (1,528) 95
Prepaid expenses and other current assets .................................. 387 (261)
Other assets ............................................................... 2,244 (2,192)
Accounts payable and accrued liabilities ................................... (7,179) (24)
Deferred revenue ........................................................... 638 363
--------- ---------
Net cash used in operating activities ........................................ (19,690) (12,165)
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment ............................................ (7,517) (4,946)
Purchases of available for sale securities ..................................... (101,453) --
Proceeds from sale/maturity of available for sale securities ................... 61,100 --
--------- ---------
Net cash used in investing activities .......................................... (47,870) (4,946)
--------- ---------
FINANCING ACTIVITIES
Borrowings under equipment term loans .......................................... -- 500
Payments on equipment term loans ............................................... (861) (148)
Issuance of common stock, net .................................................. 4,502 9
Issuance of preferred stock, net ............................................... -- 23,083
Proceeds from repayment of notes receivable from shareholders .................. 45 --
--------- ---------
Net cash provided by financing activities ...................................... 3,686 23,444
--------- ---------
Net increase (decrease) in cash and cash equivalents ........................... (63,874) 6,333
Cash and cash equivalents at beginning of period ............................... 81,774 268
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 17,900 $ 6,601
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest ....................................................... $ 229 $ 28
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for notes receivable ........................... $ 2,066 $ 4,805
========= =========
Valuation of common stock warrants ...................................... $ 205 $ --
========= =========
Valuation of preferred stock warrant in connection with
content agreement ...................................................... $ -- $ 3,713
========= ==========
Valuation of deferred stock compensation ................................ $ (306) $ 3,115
========= =========
Conversion of notes payable to stockholders to preferred stock .......... $ -- $ 1,514
========= =========
</TABLE>
See notes to condensed financial statements.
5
<PAGE> 6
EGREETINGS NETWORK, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
Egreetings Network, Inc. (the "Company") offers consumers and businesses
a convenient and simple integrated solution for communicating and sending gifts
online. The Company's Web site allows users to send personalized content-rich
online cards and a wide variety of gifts. The Company operates in one business
segment and generates revenue from corporate advertising and sponsorships,
direct marketing, e-commerce, and business communication services. The business
communication services include creating and distributing customized, media-rich
communication products for business to send to their employees, customers and
partners. The Company's platform card service also offers other Web sites a
highly engaging and viral way to build and maintain traffic.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by general accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
Certain prior period balances have been reclassified to conform to
current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues are generated primarily as a result of advertising and
sponsorship, direct marketing, Ecommerce activities, and business
communications services.
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 the sale of banner
advertisements as the impression is delivered or displayed.
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. To the extent minimum guaranteed impressions, if any, are
not met, revenue recognition is deferred until the remaining guaranteed
impressions are delivered.
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 collection is probable.
Revenue from Ecommerce transactions is recognized on the date the
digital gift certificate code is emailed to the buyer or designated recipient
and on the date of shipment for physical goods.
Revenue from business communications services is recognized on the date
that the custom-made digital greeting is transmitted to the customer.
Deferred revenue is primarily comprised of billings in excess of
recognized revenue relating to advertising contracts and payments received
pursuant to revenue generating contracts in advance of revenue recognition.
Investments
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At June 30, 2000, the Company's investment portfolio
consisted of securities classified as available for sale. At December 31, 1999,
the Company did not hold any investments in such securities. Unrealized holding
gains and losses, if material, are included as a separate component of other
comprehensive income on the Statement of Stockholders' Equity. At June 30,
2000, unrealized holding gains and losses are not material. Realized gains and
losses are recorded in the Statement of Operations upon selling the security.
Deferred Content Costs
The Company records the value of deferred content costs as of the date
of the related content licensing agreements and amortizes these costs to expense
over the life of the contract using the straight-line method. Realization of
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
various content agreements not accrue to the Company, the carrying value of the
asset could become impaired and the Company would write
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<PAGE> 7
down the asset value to its net realizable value at that time. The Company
continually evaluates the realizability of its deferred content costs for
impairment.
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.
Dependence on Third Parties and Related Party Transactions
A common stockholder, Gibson Greetings, Inc. ("Gibson"), now a
wholly-owned subsidiary of American Greetings Corp., provides a significant
portion of the Company's online cards content pursuant to an agreement that
obligates the Company to pay royalties. Under this agreement, the Company
accrued royalties payable to this related party of $103,000 and $169,000 in the
three months ended June 30, 2000 and 1999, respectively, and $212,000 and
$236,000 in the six months ended June 30, 2000 and 1999, respectively. Royalty
obligations arise as online cards 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 another entity for Internet
connectivity and to house and maintain its Web servers. The inability of any of
these parties to fulfill their obligations with the Company could negatively
impact the Company's future results.
3. NET LOSS PER SHARE DATA
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 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 also been excluded
from the computation of diluted net loss per share as their inclusion would be
antidilutive.
The calculation of basic and diluted net loss per share is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Historical:
Net loss ...................................... $ (9,430) $ (6,164) $(20,288) $(12,065)
-------- -------- -------- --------
Weighted average shares of common stock
Outstanding .................................. 35,357 3,848 35,201 3,677
Less: weighted average shares of common
stock that may be repurchased ................ (2,045) (302) (2,033) (163)
-------- -------- -------- --------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share ................... 33,312 3,546 33,168 3,514
-------- -------- -------- --------
Basic and diluted net loss per share .......... $ (.28) $ (1.74) $ (.61) $ (3.43)
======== ======== ======== ========
</TABLE>
4. INVESTMENTS
At June 30, 2000, all marketable debt securities were classified as
available for sale. At December 31, 1999, the Company did not hold any
investments in securities. Investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 CURRENT LONG-TERM
---------------------------- ------------ ---------------
<S> <C> <C>
Corporate Bonds 5,060 9,919
Government Agencies 4,998 14,916
Commercial Paper 4,889 --
Accrued Interest Receivable 625 --
---------- -------------
15,572 24,835
========== =============
</TABLE>
At June 30, 2000, maturities for long-term securities were between one
and two years. At June 30, 2000, the estimated fair value of each investment
approximated its amortized cost and, therefore, there were no significant
unrealized gains or losses.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that
involve risks and uncertainties that are based on our current expectations about
our company and our industry. We make such forward-looking statements under the
provisions of the "Safe Harbor" section of the Private Securities Litigation
Reform Act of 1995. Any forward-looking statements should be considered in light
of the factors described below in Item 2 under "Factors That May Affect Future
Results." Actual results may differ materially from those projected, anticipated
or indicated in any forward-looking statements. In Item 2, we use the words
"anticipates," "believes," "intends," "future," "could" and similar words and
expressions referencing future events, conditions or circumstances identify
forward-looking statements, but not all forward-looking statements include these
words. Some of these forward-looking statements relate to our strategy, the
launch of new services leveraging our Web site, our market opportunities, the
ability to meet revenue-generating milestones with our current partners, the
anticipated use of proceeds from our recent offering, our anticipated
advertising revenues, our ability to attract and retain distribution partners,
our ability to attract and retain quality e-commerce partners and generate
revenues from such partnerships, our competitive position, our ability to
continue to license and develop high quality content and services on our Web
site, our management's discussion and analysis of our financial condition and
results of operations. The section entitled "Risk Factors" appearing in this
report describes those factors that we currently consider material and that
could cause these differences. These factors also include, but are not limited
to, those discussed in our other SEC filings, including our Registration
Statement on Form S-1 declared effective December 16, 1999 by the SEC (File No.
333-88595) and in our Annual Report on Form 10-K filed June 30, 2000 with the
SEC. We urge you to consider these cautionary statements carefully in evaluating
our forward-looking statements. Except as required by law, we undertake no
obligation to publicly update any forward-looking statements to reflect
subsequent events and circumstances.
You should read the following discussion and analysis in conjunction
with our financial statements and related notes included in this report.
OVERVIEW
From our inception in July 1994 through the year ended 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 online cards
service, and in late 1997, we launched our own online cards service from our Web
site. Revenues through the year ended 1997 consisted primarily of fees from AOL
and, to a lesser extent, sales of paper and online cards 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 online cards service. Revenues for the year ended
1998 were derived largely from the sale of advertisements, sponsorships and
online cards 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 online cards 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 and has been
the launching pad for our online direct marketing business. Our business model
also includes e-commerce activities, primarily in the form of digital gift
certificates, and a business communications service. Business communications
services consist of developing custom-made digital greetings, announcements and
invitations for companies for their communications with their customers,
potential customers, employees or other business associates. Lastly, we are
developing and marketing a platform card service licensed to other Websites as a
tool for customer acquisition and retention. 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.
RESULTS OF OPERATIONS
Revenues
Revenues grew to $3.1 million and $5.9 million for the three- and six-
month periods ended June 30, 2000 from $621,000 and $724,000 for the
corresponding periods ended June 30, 1999. The catalyst for this growth has been
the significant increase in traffic to our Web site and in registration of
members who opt in to receive sponsored email promotions, which in turn has
driven growth in our advertising inventory and direct marketing base. We have
capitalized on this growth by building our sales team steadily throughout 1999
and in the first two quarters of 2000.
Deferred revenue increased to $1.2 million as of June 30, 2000 from
$581,000 as of December 31, 1999. This increase is primarily attributable to a
non-refundable fee of $1 million received from a platform card service customer.
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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. E-commerce revenues are recognized upon electronic
delivery of digital gift certificates or shipment of physical goods. 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, server co-location costs, direct marketing list management costs and
the cost of goods sold from our online gift store.
Cost of services increased to $1.3 million and $2.4 million for the
three- and six-month periods ended June 30, 2000 from $672,000 and $1.1 million
for the corresponding periods ended June 30, 1999. The increase in this cost is
primarily due to increases of in-house content costs resulting from the rise in
demand for our online cards, as well as costs associated with two growing
revenue streams, namely direct marketing list management costs and cost of goods
sold from our online store which opened in late 1999. Content royalty fees
actually decreased as our customers sent more online cards produced by the
Company than online cards produced by third party publishers. 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 to $4.4 million and $10.3 million
for the three- and six-month periods ended June 30, 2000 from $2.4 million and
$5.3 million for the corresponding periods ended June 30, 1999. This increase is
primarily attributable to an acceleration in television, radio, online and print
advertising activities as well as increased marketing personnel costs. Sales
related expenses also increased due to the growth in our sales team to 25 people
at June 30, 2000 from 11 people at June 30, 1999, which growth was planned in
order to monetize the large increase in our Web site traffic and resulting
advertising inventory. 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, user experience,
business development, engineering, information systems, site operations and site
production departments.
Operations and development expenses increased to $4.3 million and $8.5
million for the three- and six-month periods ended June 30, 2000 from $2.1
million and $3.4 million for the corresponding periods ended June 30, 1999.
These increases primarily were due to increased personnel costs, including the
cost of independent contractors assisting on various engineering projects.
Depreciation expense also rose due to the addition of hardware and software to
support greater levels of traffic on our Web site. 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.
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 to $1.7 million and $3.7
million for the three- and six-month periods ended June 30, 2000 from $1.0
million and $2.0 million for the corresponding periods ended June 30, 1999. This
increase is primarily the result of
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<PAGE> 10
increased personnel, facility and overhead costs necessary to support our
growing business infrastructure. We have increased our office space from
approximately 14,000 square feet in the second quarter of 1999 to approximately
70,000 square feet in the second quarter of 2000. 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 increased to $1.3 million and
$2.6 million for the three- and six-month periods ended June 30, 2000 from
$252,000 and $405,000 for the corresponding periods ended June 30, 1999. This
increase is primarily the result of a significant upward revaluation during 1999
of a warrant issued to Gibson Greetings, Inc. in connection with rights to
distribute Gibson's content in the form of online cards. Also in late 1999, we
incurred approximately $4.8 million of content costs in conjunction with a
content licensing agreement signed with the National Broadcasting Company, Inc.
We will periodically review the recoverability of the deferred content costs and
will write these assets down to their net realizable value if impairment is
deemed to have occurred.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation decreased to $296,000 for
the three-month period ended June 30, 2000 from $405,000 for the corresponding
period ended June 30, 1999, compared with an increase to $700,000 for the
six-month period ended June 30, 2000 from $559,000 for the corresponding period
ended June 30, 1999. These charges relate to the amortization of deferred stock
compensation over the vesting periods, generally four years, of options granted
in 1998 and 1999 at exercise prices less than the deemed fair value of our
common stock on the grant date.
Interest Income (Expense), Net
Net interest income increased to $782,000 for the three-month period
ended June 30, 2000 from $59,000 for the corresponding period ended June 30,
1999. For the six months ended June 30, 2000, net interest income was $1.8
million compared to net interest expense of $107,000 for the corresponding
period ending June 30, 1999. For the three- and six-month periods ended June 30,
2000, interest was earned primarily on proceeds from our initial public offering
in December 1999. These proceeds are invested in high quality investments,
including money market funds. Interest earned in both periods was offset by
interest expense from equipment term loans. Investment income in future periods
may fluctuate as a result of fluctuations in average cash balances maintained by
the Company and changes in the market rates of its investments.
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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
private placements of equity securities and, in December 1999, an initial public
offering of common stock. To a lesser extent we have used equipment financing
facilities to fund operations.
Net cash used in operating activities was $19.7 million and $12.2
million for the six months ended June 30, 2000 and 1999, respectively. Cash used
in operating activities resulted primarily from net losses and decreases in
accounts payable and accrued liabilities which were somewhat offset by non-cash
charges for depreciation of furniture and equipment and amortization of deferred
content costs. Net cash used in investing activities was $47.9 million and $4.9
million for the six months ended June 30, 2000 and 1999, respectively. Of these
amounts, approximately $7.5 million and $4.9 million for the six months ended
June 30, 2000 and 1999, respectively, were used to acquire network hardware and
software and other equipment to support our growth in Web site traffic and
personnel. The remaining cash outflow of $40.4 million in 2000 represented net
investment of proceeds from our initial public offering in high quality
financial instruments. Net cash provided by financing activities was $3.7
million and $23.4 million for the six months ended June 30, 2000 and 1999,
respectively, and was generated primarily through the sale of common stock,
preferred stock, and borrowings offset by loan pay downs. Due to proceeds
received from our initial public offering in December 1999, we did not actively
pursue additional financing during the six months ended June 30, 2000 other than
the exercise by our underwriters of their right to purchase allotted shares from
the initial public offering.
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As of June 30, 2000, we had approximately $17.9 million of cash and cash
equivalents, $40.4 million of investments and working capital of $36.6 million.
As of June 30, 2000, we have a material operating lease commitment for our San
Francisco headquarters facility. Other commitments include less material
facility leases and equipment operating leases as well as our equipment term
loans. Although we have no material commitments for capital expenditures, we
anticipate that we will experience an increase in our capital expenditures
consistent with our anticipated growth in operation, infrastructure and
personnel. We currently anticipate that our operating expenses will be a
material use of our cash resources.
The Company believes that current cash and cash equivalents will be
sufficient to meet its anticipated cash needs for at least the next 12 months.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If current cash and cash equivalents and cash that may
be generated from operations are insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or obtain
additional debt financing. The sale of additional equity could result in
additional dilution to the Company's stockholders. There can be no assurance
that financing will be available in amounts or on terms acceptable to the
Company, if at all.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. Any change in the
Company's revenue recognition policy resulting from the interpretation of SAB
101 would be reported as a change in accounting principle in the quarter ending
December 31, 2000. While the Company has not fully assessed the impact of the
adoption of SAB 101, it believes that implementation of SAB 101 will not have a
material adverse impact on its existing revenue recognition policies or its
reported results of operations for fiscal 2000.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS AND PROSPECTS
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 have significantly changed our business model since November 1998. The
changes to the business model include a shift from charging consumers for our
online cards to a free online card service supported by the sale of advertising
and sponsorships and revenues derived from the sale of products through our Web
site. Because our business model is largely untested, we cannot be sure that it
will yield expected results. Because the Internet is constantly changing, we
have evolved and may also continue to change our current business model. 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. We may also encounter numerous
other risks 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 e-commerce 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.
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BECAUSE OUR METHODS OF GENERATING REVENUES ARE RELATIVELY NEW, LARGELY UNTESTED
AND CONTINUE TO CHANGE, WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES.
We only 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, among other reasons, because Internet advertising is still a new and
largely unproven method of advertising. During 1999, our revenues were derived
primarily from Internet advertising and secondarily from direct marketing
activities. We expect revenues from Internet advertising and direct marketing
activities 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
spending decreases or does not continue to grow as expected. 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 also based on generating increased advertising and
direct marketing revenues. 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.
Also, even if advertising and direct marketing on the Internet become widely
accepted, the success of our business strategy will depend on the ability to:
- provide quality content on our Web site that will continue to
attract the numbers and types of consumers that advertising,
direct marketing and e-commerce partners want to reach;
- provide guaranteed impressions of our advertisers' ads by our
consumers; and
- sell existing and future Internet advertising inventory.
Although we intend to offer more e-commerce services, we may not
generate significant revenues from these services because we have very limited
experience in e-commerce. Our future success will largely depend on our ability
to generate revenues through the facilitation of e-commerce transactions, a
business area in which we have 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. Market
pressure and increasing consolidation in the e-commerce industry may make the
creation of partnerships more difficult or the facilitation of transactions less
attractive. In addition, the development and implementation of our e-commerce
services will require additional management, financial and operational resources
and may strain our existing resources. Our expansion into e-commerce 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 e-commerce 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 e-commerce
partners to generate revenues. We intend to continue to increase advertising,
direct marketing and e-commerce revenues by offering to our advertisers,
sponsors and e-commerce partners non-personally identifiable aggregate
information about our registered members that is often difficult to obtain, such
as their gender, age, general location, interests and online activities. Our
advertisers, sponsors and e-commerce partners, in turn, use this aggregated
demographic and psychographic information to tailor their advertising campaigns,
direct marketing efforts or product offerings to the characteristics of our
registered members. The ability of our advertisers, sponsors and e-commerce
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 e-commerce partners will be reduced significantly,
which could harm our ability to retain and attract advertisers, sponsors and
e-commerce partners. In addition, in October 1999, we eliminated the requirement
that consumers become registered members to use our services. Although we offer
some features and other benefits to our registered members that are unavailable
to unregistered consumers, many consumers choose to use out site without
registering as members. Our ability to collect the data desired by advertisers,
sponsors and e-commerce merchants may decrease as a result of this change. This
could result in less advertising, direct marketing and reduced e-commerce
activities on or through our Web site and less advertising via our online cards,
which would result in reduced revenues from advertising, direct marketing and
e-commerce.
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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 $9.4 million and $20.3 million
for the three- and six-month periods ended June 30, 2000. As of June 30, 2000,
we had an accumulated deficit of approximately $70.0 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, e-commerce merchants, licensing
revenues from newly launched business services 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 December 1999. It is critical to our success that we continue to expend
financial and management resources to develop and expand our consumer base
through promotion, enhancement and expansion of all 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, now
wholly-owned by American Greetings Corp., NBC, music producers, 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 e-commerce revenues may not materialize.
For the three- and six-months ended June 30, 2000, 23% and 24%,
respectively, of all online cards 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 also terminate our rights to exclusivity if our
consumers do not send at least 2.8 million online cards 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 significantly decrease.
In March 2000, American Greetings Corp. acquired Gibson. American
Greetings also is the parent company of AmericanGreetings.com, which is one of
our competitors in the online cards market. We have not yet fully determined how
our relationship with Gibson or our rights pursuant to our license agreement
with Gibson will be affected by this acquisition. 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
could harm our business.
With the exception of our relationships with Gibson, NBC, and BMG
Entertainment, 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. 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 PROVIDE COMPELLING CONTENT,
INCREASE GIFT CENTER OFFERINGS AVAILABLE ON OUR WEB SITE AND ENHANCE OVERALL
SERVICES AND FUNCTIONALITY.
To remain competitive we must continue to license and create compelling
and entertaining content, increase the offerings of gifts and gift-giving
services 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
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loyal consumer base, we will be unable to generate advertising revenues or
e-commerce 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 e-commerce merchants may not achieve
market acceptance.
OUR CONTINUED 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
continuing to establish and maintain the Egreetings brand and associated
goodwill 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 e-commerce 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. We intend to incur significant expenditures on 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 customers for our business
services, and even if we do, our revenues may not increase sufficiently to
justify the expenditures. If our brand enhancement strategy is unsuccessful, we
also may be unable to increase future revenues.
WE FACE INTENSE COMPETITION FROM COMPANIES THAT PROVIDE SIMILAR SERVICES AND
PRODUCTS 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 e-commerce revenue.
We expect this competition to increase. We compete, in particular, with the
following types of companies:
- Companies that offer online cards via the Internet. Companies or their
affiliates such as American Greetings, Hallmark and 123greetings.com offer
online cards via the Internet. In addition, some of these companies offer
e-commerce merchants' products that can be purchased at or through their Web
sites and direct marketing sponsorship opportunities. 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
online cards and gifts. Companies such as Amazon.com, America Online,
Excite@Home and Yahoo! offer online cards as a component of their overall
product and service offerings or provide links to electronic greeting and gift
companies. The online cards 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 e-commerce 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
online cards, they may begin to do so in the near future. In addition, they
compete directly with our e-commerce business.
- Media, entertainment and other companies using online cards. Media,
entertainment and other companies with an online presence now offer or in the
future may offer online cards 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 online cards market. This could harm our business and our ability to
compete effectively. In addition, the acquisition of Gibson, as a wholly-owned
subsidiary, by American Greetings Corp. was consummated in June 2000 and
American Greetings became the controlling corporation of our largest
stockholder. American Greetings competes with us in the online cards 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 the corporate parent of
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
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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, direct
marketing sponsors and e-commerce partners. 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. As increasing consolidation and market condition pressures affect
companies in the e-commerce and Internet industry, our current and potential
partners' budget dollars allocated to advertising and direct marketing spending
may diminish or be eliminated. 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.
We lack experience in e-commerce and we may not compete successfully for
e-commerce merchants or consumers. Unlike many of our competitors, we have
limited experience operating in the e-commerce 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 e-commerce merchants or consumers would harm our
business significantly.
OUR FUTURE SUCCESS WILL DEPEND ON THE INCREASING USE OF THE INTERNET AND THE
GROWTH OF E-COMMERCE.
Our future success will depend heavily on the acceptance and wide use of
the Internet for direct marketing and e-commerce. If Web-base commerce does not
continue to grow or grows more slowly than expected, demand for our products and
services will be reduced. Market conditions affecting e-commerce providers may
also impact our ability to grow the service and product offerings on our Web
site. 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.
AS WE EXPAND OUR E-COMMERCE 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 e-commerce 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. Increasing consolidation and pressure related to market
conditions for third party e-commerce partners could cause delays or other
problems related to delivery or orders of goods. In addition, strikes or other
service interruptions affecting fulfillment and delivery services would impair
our ability to deliver merchandise ordered by our consumers on a timely basis.
OUR GROWTH WILL DEPEND SIGNIFICANTLY ON THE INCREASING ACCEPTANCE OF ONLINE
CARDS AS A FORM OF ONLINE COMMUNICATIONS.
Our future success is substantially dependent on the widespread
acceptance of online cards as a form of online communications. As email
increasingly affects the way people communicate for personal and business
purposes, online cards evolve as a form of communication. We cannot accurately
predict the future growth rate, if any, or the ultimate size of the consumer use
of online cards as a form of online communication. The failure of online cards
to gain widespread acceptance by consumers, advertisers, sponsors and e-commerce
merchants as a form of online communication would materially harm our business.
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WE RELY ON ONLINE DISTRIBUTION CHANNELS TO GENERATE 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.
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 online cards specifically;
- fluctuations in purchases of products via the Internet generally and
through our Web site specifically;
- seasonal trends in Internet use, e-commerce 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;
- 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.
OUR STOCK PRICE HAS DECLINED IN RECENT MONTHS; CONTINUED VOLATILITY IN THE STOCK
MARKET MAY CAUSE FLUCTUATIONS AND/OR FURTHER DECLINE IN OUR STOCK PRICE
The trading price of our common stock has been and may continue to be
subject to cumulative decline and wide fluctuations. During the second quarter
of 2000, the closing sale prices of our common stock on the NASDAQ National
Market ranged from $5.00 on April 7, 2000 to $1.25 on June 23, 2000 and the sale
price of our common stock on August 10, 2000 closed at $1.375. Our stock price
may decline or fluctuate in response to any number of factors and events, such
as quarterly fluctuations in operating results, announcements of technological
innovations, strategic and content relationships, new product offerings by us or
our competitors, changes in financial estimates and recommendations of
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, particularly
with respect to technology and Internet stocks, has experienced extreme
volatility and a significant cumulative
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decline in recent months. This volatility and decline has affected many
companies, including our company, irrespective to the operating performance of
such companies. These broad market influences and fluctuations may adversely
affect the price of our stock, regardless of our operating performance.
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 continually 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 and
businesses in the United States. We plan to offer localized content and services
directed at international customers 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 e-commerce 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 e-commerce activities. In addition,
different privacy, censorship and liability standards and regulations and
different intellectual property laws in foreign countries could harm our
business.
RISKS RELATED TO OPERATIONS
TO MANAGE OUR GROWTH, WE WILL NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND
PROCEDURES.
We have recently experienced 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 306% from 112,800
for the month of November 1998, the month we began to offer our online cards at
no cost, to 457,700 for the month of June 2000, and our number of employees
increased from 52 on October 30, 1998 to 172 on June 30, 2000, 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
e-commerce 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,
E-COMMERCE PARTNERS AND BUSINESS CUSTOMERS.
System failures and slow downs could permanently harm our reputation and
brand, and reduce our attractiveness to consumers, advertisers and e-commerce
partners. Our ability to attract consumers, advertisers and e-commerce 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 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 e-commerce
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, we frequently experience heavy increases in traffic to our Web site, which
result in slower response rates. While we have invested heavily in our technical
infrastructure, we may be unable to improve our technical infrastructure
sufficiently in relation to increased consumer
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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 location of 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.
WE MAY BE UNABLE TO EXPAND OUR ENGINEERING AND SALES 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. Hiring of highly qualified engineers and sales and
advertising 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.
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 and sales personnel, many of who
joined us only in the last year. The loss of the services of any of our
executive officers or other key employees, the loss of any of which could harm
our business. 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 AND
BUSINESS CUSTOMER DEMANDS.
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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.
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
online cards 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. The Digital Millennium
Copyright Act is intended to reduce the liability of online service providers
for material posted on Web sites by third parties where such materials infringe
copyrights or proprietary rights of others. The protections afforded by this
legislation have not been fully determined. 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 online cards. 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 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 is
generally removable by the consumer. We also capture demographic and
psychographic information when an individual registers as a member with us, and
we capture and retain data based on online cards 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
customers' personal information to third parties, we may decide in the future to
provide some or all of this information to our advertising and e-commerce
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
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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
April 2000, the Children's Online Privacy Protection Act of 1998 went into
effect regulating the collection and use of information with regard to children
under the age of 13. As a result, the Company has ceased collecting personal
information from children it knows to be under 13 and altered its privacy policy
to reflect compliance with the Act. In addition, other 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, e-commerce 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, 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 e-commerce transactions, which may impair our ability to derive
financial benefits from e-commerce 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 e-commerce and could adversely
affect our opportunity to derive financial benefits from e-commerce. 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.
Internet regulatory bodies generally regulate domain names, 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
RATE RISK
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The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, our policy is to maintain our
portfolio of cash equivalents and investments in marketable securities in a
variety of securities, including both government and corporate obligations and
money market funds. As of June 30, 2000, all of our funds were held in money
market funds, U.S. government and agency securities and investment grade
corporate bonds and equities. We did not hold derivative financial instruments
as of June 30, 2000 and have never held these instruments in the past.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks, copyrights and other intellectual property rights.
In addition, from time to time, third parties assert patent infringement claims
against the Company in the form of letters, lawsuits and other forms of
communication.
The Company is not currently aware of any legal proceedings or claims
that the Company believes are likely to have a material adverse effect on the
Company's financial position of results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE:
----------- ------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 9th day of
November 2000.
EGREETINGS NETWORK, INC.
By: /s/ ANDREW J. MOLEY
---------------------------------
Andrew J. Moley
Chief Executive Officer and
President
(Principal Executive Officer)
By: /s/ SCOTT F. NEAMAND
---------------------------------
Scott F. Neamand
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
