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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 1, 2000, there were 34,979,605 shares of Common Stock
outstanding.
The aggregate market value of voting Common Stock held by non-affiliates of
the Registrant was approximately $89,463,326 based upon the closing price of the
Common Stock on March 1, 2000 on the NASDAQ National Market. Shares of Common
Stock held by each officer, director and holder of five percent or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1999. Portions of such proxy statement are incorporated by reference into Part
III of this Report.
As used herein, the terms "Company," "we" and "us," unless otherwise
indicated or the context requires, mean Egreetings Network, Inc.
"E-greetings(R)" is our registered trademark and service mark and
"Egreetings(TM)" is our trademark. This report may also contain other of our
trademarks, service marks and logos, including "Egreetings," "Egreetings.com,"
"There's no better way to say it" and the "E in a bubble" logo. All other
trademarks, trade names or service marks used in this report are the property of
their respective owners. The information on our Web site is not part of this
report.
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The following report 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 in this report and under Item 7 and "Risk Factors." Actual
results may differ materially from those projected, anticipated or indicated in
any forward-looking statements. In this report, we use the words "anticipates,"
"believes," "intends," "future," "could," "plan" and similar words and
expressions referencing future events, conditions or circumstances to 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 on our Web site, the rearchitecture of 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, 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. 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.
AMENDMENT AND CORRECTION TO ANNUAL REPORT ON FORM 10-KA
FOR FISCAL YEAR 1999
The following additional information has been included in this amendment and
correction on Form 10-K/A for fiscal year 1999. 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 Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, filed on
March 30, 2000 and subsequently amended on May 1, 2000.
The disclosures in Part II, Item 8, "Financial Statements and Supplementary
Data", of net loss per share has been revised on the Statement of Operations and
Note 1, "The Company and Significant Accounting Policies", to exclude
presentation of pro forma basic and diluted net loss per share.
The disclosure appearing in Part II, Item 8, "Financial Statements and
Supplementary Data", Note 1, "The Company and Significant Accounting Policies",
under the heading "Advertising", second paragraph, first sentence, was revised
to provide additional information regarding the sale of Series G preferred stock
to NBC Corporation in November 1999.
The disclosure appearing in Part II, Item 8, "Financial Statements and
Supplementary Data", Note 5, "Debt", first paragraph, is was revised to include
information regarding conversion of a promissory note to preferred stock.
Further information was added to the description of the interest rate terms of
equipment loans.
Except as noted above, information in the originally filed Annual Report on
Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 and
subsequently amended on May 1, 2000, is presented as of the original filing
date and has not been updated in this amended filing. This Form 10-K/A, as
amended, has not been updated for any subsequent events.
PART I
ITEM 1. BUSINESS
OVERVIEW
Egreetings Network, Inc. offers consumers and businesses a convenient and
simple, integrated solution to selecting and sending online cards, gifts and
invitations. Our Web site, www.egreetings.com, offers over 6,000 online cards
incorporating graphics, animations and music, that consumers can select,
personalize and send free-of-charge for personal and business occasions. Our Web
site is also merchandised with a wide selection of gifts and digital gift
certificates that consumers can select and arrange to send at the same time they
send an online card. Our Egreetings Invites service also allows our consumers to
organize and manage personal and business events online. Finally, on behalf of
our business customers we provide business-to-business services, including the
creation and distribution of customized, media-rich communication products to
their employees, customers and partners and the licensing of our software
platform to partner Web sites who wish to take advantage of the viral marketing
benefits of online cards.
Our Web site and online cards are available without charge to consumers and
generate revenue primarily through the sale of advertisements, promotions,
sponsorships, merchandising and direct marketing. Consumers and businesses use
our Web site to communicate on personal and business occasions, enabling our
advertisers and e-commerce partners to effectively reach online consumers likely
to be receptive to their advertising messages, product offerings and promotions
related to the specific occasions. Businesses also purchase our direct mail
services and other communications services to more effectively reach their own
employees, customers and business partners. Our internal records indicate that
in December 1999, our Web site was visited approximately 21 million times,
visitors to our Web site viewed approximately 184 million Web pages and
customers used our service to send approximately 10 million online cards.
PRODUCTS AND SERVICES
We are a leading provider of online cards, offering consumers and
businesses an integrated approach to communications and gift giving. Our
easy-to-use Web site allows users to send personalized, content-rich
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online cards and a wide variety of gifts. We also provide advertisers and
e-commerce partners with access to a large and readily targeted group of
consumers.
Communications Service. We enable individuals and businesses to convey
personal, business and occasion-related communications in a creative,
entertaining and personalized manner. Through compelling content and robust
technology, our Web site allows consumers to create personalized multimedia
messages free of charge. Through these enhanced electronic messages, which
include postcards, animated greetings and multimedia cards, consumers can more
vividly express their sentiments, emotions and personalities than is possible
with paper-based products or conventional text-based email. We license many
popular properties for our online cards and also develop compelling content
through our in-house creative team. Businesses also utilize our unique
multimedia online cards for direct communications campaigns, which can be
custom-made for their content and messages, to communicate more dynamically with
their employees, customers and business partners. We have also entered into a
strategic co-branding and linking agreement with TimeDance, Inc. to provide the
Egreetings Invites service, enabling our consumer and business users to send
e-mail invitations and manage events online and free of charge.
Gift-Giving Service. Our service eliminates the inconvenience associated
with traditional retail gift stores. Our Web site offers a variety of online
cards that are grouped into "channels" such as holidays, life events and
particular interests, as well as a selection of appropriate gifts that consumers
can choose to send to a recipient. Our channel format not only allows a consumer
or business user to quickly locate and customize an appropriate communication,
but also allows us to offer gift ideas targeted to a consumer's channel
selection. In March 2000, we launched a feature that enables customers to attach
digital gift certificates to our online cards. The service is now available with
our current e-commerce partners and we plan on expanding this offering to other
online retailers. Our services streamline the gift sending process and provides
a more convenient way to acknowledge occasions and maintain relationships than
is possible through retail stores and many other Web sites.
Targeted Online Opportunities for Advertisers and E-commerce Partners. We
enable advertisers and e-commerce partners to deliver their messages and promote
their products to a large and diverse group of consumers on a highly targeted
basis. Our integration of communications and gift-giving services in one Web
site provides these partners with access to consumers at a time when they may be
acknowledging an occasion and are therefore likely to be receptive to specific
advertising and relevant gift ideas. As of December 31, 1999, we had compiled
demographic and psychographic information on more than 9.2 million registered
members. Through their registration and their selection of specific online cards
and gifts, members provide us with valuable demographic and psychographic data.
We use this data to help advertisers and e-commerce partners selectively target
appropriate aggregate consumer subsets from our rapidly growing base of
registered members and recipients through strategically placed advertisements
and product offerings in specific content channels and through direct marketing
campaigns.
Viral Marketing. Our extensive content selection combined with our
technology platform provides a vehicle through which advertisers, sponsors and
e-commerce partners can increase brand awareness and expand their online
presence. Online cards, music and animations containing sponsorships, product
descriptions or pictures can be incorporated into relevant channels of our Web
site. Once made available for consumers to personalize and send, they help
advertisers establish and build brand images with senders and recipients of the
online cards. As a result, our online cards not only enable existing advertising
and product content to be more fully utilized, but also allow advertisers and
sponsors to more effectively utilize the engaging, interactive and dynamic
nature of the Web. Our service and software platform is also licensed to other
online companies who wish to take advantage of the efficient viral marketing
potential of our services. Examples of some of our partners who have used our
service to leverage their brand in this way include the National Football
League, the movie studios New Line Cinema and Paramount Pictures in connection
with the release of the films "Austin Powers: The Spy Who Shagged Me" and
"Stuart Little" and The RCA Records Label in connection with the release of
Christina Aguilera's single "What a Girl Wants."
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ONLINE CARD AND GIFT CONTENT ON OUR WEB SITE
Content Acquisition and Creation
As of December 31, 1999, our content library included over 6,000 online
cards. Of these greetings, approximately 21% were produced and owned by us,
approximately 49% were wholly produced by us but contained content licensed from
third parties and approximately 30% were created and owned by third parties.
Currently, we have 25 employees dedicated to the creation and acquisition of
content; 21 are producers, artists and sound designers focused on creating
original content and four are responsible for content acquisition.
Our content acquisition group identifies prospective content partners,
negotiates licensing arrangements, integrates content on our Web site and
manages ongoing content partners relationships. We acquire content from a
variety of sources, including traditional greeting card publishers,
entertainment and music companies, sports organizations and recognized
independent artists. Our traditional greeting card publishing partners include
Gibson Greetings, Allport Editions, Ward 1, Snafu Designs, Inc. and Portal. We
also have licensed content from entertainment companies such as New Line Cinema,
Paramount Pictures, Sony TriStar, Fox, Miramax Films, Universal Studios, BMG
Entertainment and United Media. In November 1999, we entered into a two-year
content agreement with the National Broadcasting Company, Inc. pursuant to which
we have the right to create and distribute online cards for a minimum of five
NBC television programs for each six-month television season.
The majority of our third-party content is obtained pursuant to exclusive
licensing arrangements and promotional partnerships. Under our standard
contracts, the licensor grants us an exclusive right to reproduce and distribute
the licensed property in connection with online cards and in exchange we pay
royalties. We also enter into promotional arrangements pursuant to which a third
party provides us with content at no cost in exchange for promotional
opportunities on our Web site. In addition, in some cases, a third party will
pay us to create and promote the use of online cards utilizing its content.
Our Relationship with Gibson Greetings, Inc.
In December 1997, we entered into a content distribution agreement with
Gibson Greetings, Inc. ("Gibson"), the third largest producer of paper-based
greeting cards in the United States. Pursuant to this five-year agreement, we
have the exclusive right, other than Gibson itself, to distribute Gibson's
content in the form of online cards. In exchange for this right, we pay Gibson a
royalty based on the number of online cards containing Gibson content that are
sent by our customers. We paid Gibson royalties of $504,000 and $112,000 for the
years ended December 31, 1999 and 1998, respectively, pursuant to this
agreement. Historically, Gibson also provided us with access to expertise with
respect to the marketing of content, introductions to entertainment companies
and artists that we might not otherwise have had at the time. Gibson may
terminate our rights to exclusivity if our consumers do not send at least
approximately 2.8 million online cards via our Web site in each month during the
term of the agreement and if this minimum delivery requirement is not exceeded
in any of the three months following the month in which the shortfall occurred.
In addition, this agreement could be terminated by either party prior to
December 2002 if the other party breaches a material obligation under the
agreement or by us if Gibson is acquired by one of our competitors, including
American Greetings or Hallmark.
In addition to our content provider and distribution relationship with
Gibson, as of December 31, 1999, Gibson owned approximately 19.6% of our
outstanding Common Stock, subject to a repurchase right if Gibson is acquired by
a competitor, which as defined in the agreement, includes American Greetings. In
March 2000, American Greetings completed the acquisition of Gibson by the merger
of a wholly owned acquisition subsidiary with and into Gibson, with Gibson as
the surviving corporation. With this acquisition, ownership of these shares of
our Common Stock remains with Gibson, whose sole stockholder is American
Greetings. American Greetings competes with us in the online cards market
through its affiliated company, American Greetings.com. As a competitor,
American Greetings may have interests that differ from ours, and it may take
actions that would harm our business despite its status as the controlling
corporation of our largest stockholder. If Gibson fails to perform under the
terms of our license agreement, the amount of content we are able to offer our
consumers will decrease significantly, which would harm our business. We are
unable to
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predict what impact, if any, American Greetings' acquisition of Gibson may have
on our company and its businesses.
Our Relationship with NBC
In November 1999, we sold the National Broadcasting Company, Inc. shares
that as of December 31, 1999 represented 7.2% of our outstanding Common Stock.
In connection with the purchase of shares, the Company received $7.5 million in
cash and an advertising credit of approximately $7.5 million provided to us
pursuant to a two-year advertising agreement. The advertising agreement contains
a pre-approved six-month advertising schedule, 60% of the value of which is
required to be broadcast during prime time hours. In November 1999, we also
entered into a two-year content licensing agreement with NBC pursuant to which
we have the right to create and distribute online cards for a minimum of five
NBC television programs for each six-month television season. We currently
feature online cards on our Web site under the NBC agreement for the popular
television programs "Will & Grace" and "Providence."
DISTRIBUTION PARTNERS
We also enter into relationships with various distribution partners. Our
distribution relationships with portals, online service providers, Web-based
email services and entertainment and other Web sites direct consumer traffic to
our Web site. These relationships provide us with exposure to a large and
diverse consumer base and allow consumers to easily reach our Web site by
clicking on links on our partners' Web sites. Examples of distribution partners
as of December 31, 1999 include Microsoft's Hotmail, where customers can link to
us from the Hotmail email composition page, and Microsoft's WebTV services.
ADVERTISING, SPONSORSHIP AND E-COMMERCE OPPORTUNITIES
Advertising and Sponsorship
We sell advertising and sponsorships through our direct advertising sales
department, with eight sales people located in San Francisco, nine sales people
located in New York and three sales people located in Los Angeles as of December
31, 1999. We intend to target national advertisers that are shifting advertising
dollars from offline to online advertising. We also intend to continue to pursue
sponsorship and promotional arrangements, which generally have longer terms and
higher dollar values than typical banner advertising. Revenues from advertising,
sponsorship, promotional and direct marketing activities accounted for virtually
all of our revenues for the year ended 1999. For the year ended 1999,
advertising revenues from Excite@Home Network accounted for approximately 28% of
our total revenues.
We also sponsor promotional activities for our partners. We use promotions
and engage in various other types of direct marketing activities directed at our
registered members to increase the frequency of member visits and the number of
transactions per visit. For example, in connection with our promotion with the
National Football League, consumers that sent an NFL online card were
automatically entered into a sweepstakes.
E-commerce
We began focusing on e-commerce services on our Web site in February 1999.
Although we expect to derive an increasing percentage of our revenues from
e-commerce activities in the future, our revenues from these activities to date
have been less than one percent of our total revenues. Our goal is to enter into
e-commerce relationships with leading vendors in a variety of gift categories.
As of December 31, 1999, we had six people focused on implementing our
e-commerce initiatives, in addition to our advertising sales department, which
also devotes time to managing relationships with our e-commerce partners. Our
e-commerce relationships typically have several components, including the
placement of vendors' banner advertisements in content channels on our Web site
that are relevant to their products and the placement of links containing
pictures of vendors' products in our Gift Center and relevant content channels
on our Web site. We also may send promotional emails featuring vendors' products
to our registered members who have elected to receive communications like these.
Our e-commerce partners pay us a percentage of net revenues
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received by them for transactions by consumers who have been referred to their
Web sites through links on our Web site or through links embedded in our direct
marketing emails. During 1999, we had e-commerce relationships with the
following merchants, among many others: CDNow, Flooz.com, Flowerbud.com,
FTD.com, GiftCertificates.com, Giftspot.com, Gifts24.com, Godiva.com,
GraceGourmet, Healthshop.com, Illuminations.com, iprint, Miadora, PETsMART.com,
Petstore.com, Reel.com, RedEnvelope Gifts Online, Send.com, and toysmart.com.
In addition to relationships with e-commerce partners, in November 1999 we
entered into an agreement with Escalate, Inc. to provide us with e-commerce
services that enable us to sell products and services directly through our Web
site. Under the agreement, Escalate aggregates and supplies us with access to a
wide range of products that are available directly from our Web site. Escalate
also has agreed to process orders and coordinate the fulfillment and shipment of
orders for products sold through our Web site.
OPERATIONS AND TECHNOLOGY
Infrastructure
We have invested significant resources to develop the platform that is used
to support our products and services. Our system is based on a flexible
architecture that supports rapid development and incorporates both proprietary
technology and commercially available licensed technology. Our system is also
designed to provide high degrees of availability, reliability, scalability,
extensibility and performance. We enforce carefully devised operational
procedures, high quality software development procedures and stringent quality
assurance procedures. Our system is also designed and built to provide a high
level of fault tolerance and maximum recoverability. Our system achieves a fast
response time by using efficient computer programming practices, elaborate
caching systems and an automatic load balancing system. We achieve scalability
by distributing the processing load across multiple processors while efficiently
managing and recycling system resources. Our software system is designed to be
portable across different operating systems platforms, which also allows us to
achieve such scalability in a cost-effective manner. Our open system has also
enabled us to easily interface with external systems. At the heart of the system
is a relational database management system hosting our customer, product and
transactional data. This database is supplemented by a sophisticated data
warehouse system that is a mirror copy of the production database. The
production database maintains data regarding customers' interaction with our Web
site and a number of other data points, including member data, product data and
purchase data. An online analytical processing tool is used to extract reports
from our data warehouse. Daily, weekly, monthly and ad hoc reports are produced
from our data warehouse system to support targeted marketing activities. We use
a merchandising tool to assign online cards and gifts to appropriate channels
and a content management tool that allows us to put the appropriate components
together and to process changes to the Web site in an orderly manner.
New Architecture Under Development
We are in the process of designing the next generation of our system
architecture. We expect this new system to be based on a multi-tier architecture
that utilizes component-based technologies. We believe this will allow us to
route and distribute the processing load between appropriate components and
across multiple layers of servers to achieve even higher levels of flexibility,
reliability, performance and scalability. The new architecture is expected to be
in place during the second quarter of 2000.
Customer Service
We believe that a high level of customer service and support is important
to retaining and expanding our customer base. We provide free customer support
assistance via email and telephone, and it is our policy to respond to all
customer inquiries within one business day. Customer feedback is funneled to our
data warehouse system, where it is correlated with other customer information
that we use to improve our Web site, services and customer retention and
acquisition. Our customer support operations are fully integrated with our
system architecture, and customer support personnel have access through our Web
site to the transaction
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processing components of our service, which enables them to easily trace
individual transactions and quickly identify problems. As of December 31, 1999,
we employed 14 full-time customer support representatives.
Consumer Privacy
Our Web site contains Terms of Service and a Privacy Policy that contain
information about how we use the data collected about our users and members
through their use of our service. We believe in protecting our users' privacy
and we currently do not disclose our users' information to third parties except
in very limited circumstances to protect our company, comply with law or protect
against misuse. We do share general, non-personal and non-identifiable
aggregated information about our users with third parties, including advertisers
and sponsors, for business purposes. For example, we may tell a business partner
how many customers in certain broad demographic groups may send online cards. In
addition, we do not monitor or edit the contents of the personalized portions of
online cards that are sent, except under the same limited circumstances as
described above. When we run special contests or promotions on our Web site with
third parties, we clearly indicate in such promotions that any information
provided in connection with those promotions will be provided to partners and
give our users and members the ability to opt out of such promotions. From time
to time, we also send our members, with their permission, special offers and
announcements on behalf of partners and sponsors. If personal information is
solicited by those sponsors, such as an email address, members are informed that
any information they provide goes directly to those partners and not to us. We
believe we are in compliance with all current privacy laws and regulations
relating to the use and disclosure of our users' personal information.
Nevertheless, current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure of
personal information could limit our ability to use the information in our
databases to generate revenues in the future. We continue to evaluate and review
the effects of various legislative initiatives with respect to online privacy on
our business, including the Children's Online Privacy Protection Act of 1998,
effective April 21, 2000. To the extent further legislation is enacted, this may
hamper our growth, decrease acceptance of the Internet as a medium of
communication and commerce or cause us to incur significant expense in complying
with these laws.
COMPETITION
The market for online card and gift-giving services is highly competitive.
There are no substantial barriers to entry in these markets, and we expect that
competition in the existing market will continue to intensify. Negative
competitive developments could have a material adverse affect on our business
and on the trading price of our stock. We believe the principal competitive
abilities affecting our market requires: compelling and diverse content;
value-added features, products and services; a wide range of commerce partners
and products; a large and diverse audience; and demographic and psychographic
data that is desirable to advertisers.
We compete with many other providers of online cards and gifts. As the
popularity of online communication and gift giving continues to increase, we
expect to compete directly with a greater number of Web sites and a wide range
of media companies that provide online services similar to ours. We also compete
in vertical markets where competitors may have advantages such as substantial
financial resources, brand recognition and other factors. Our market is evolving
rapidly and we compete with many Internet companies for content, consumer time
and dollars, advertising budget dollars and e-commerce revenues. We expect this
competition to increase. We compete, in particular, with the following types of
companies:
- companies or their affiliates that offer online cards via the Internet,
such as American Greetings, Hallmark and 123greetings.com;
- Internet content aggregators and other Internet companies that offer
online cards, such as Amazon.com, America Online, Excite@Home (including
Blue Mountain Arts), Microsoft and Yahoo!;
- Internet companies that focus on gifts; and
- media, entertainment and other companies offering online cards.
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Many of our current and potential competitors in the Internet market have
significantly greater financial, editorial, technical and marketing resources
than we have. Many of them also have longer operating histories, greater name
recognition, more traffic to their Web sites and more established relationships
with advertisers and advertising agencies than we have. Despite growth in online
usage and e-commerce and the Internet advertising market, we also compete with
numerous types of Web-based businesses and Web sites for a limited number of
Internet advertising dollars. In addition, competitors may also be able to
undertake more extensive marketing campaigns, adopt aggressive pricing policies
and devote substantially more resources to developing Internet content and
services than us. In addition, many of our current and potential competitors are
retailers with established brand names and consumer loyalty, and we may be
unable to attract consumers away from these competitors.
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 March 2000, American Greetings acquired Gibson as a wholly-owned
subsidiary and thereby became the controlling corporation of our largest
stockholder. Gibson supplied us with the content for approximately 34% of all
online cards sent from our Web site for 1999. American Greetings also is the
parent company of American Greetings.com, one of our competitors in the online
cards market. 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.
IMPACT OF GOVERNMENT REGULATION ON OUR BUSINESS
We are subject to the same federal, state and local laws as other
businesses on the Internet. However, it is currently unclear how our business
may be affected by the application of existing laws governing issues such as
intellectual property, taxes, libel, obscenity and export or import matters,
because the vast majority of these laws were adopted prior to the advent of the
Internet. As a result, current regulations often do not fully contemplate or
address the unique issues of the Internet and related technologies. Changes in
laws intended to address these issues could create uncertainty in the Internet
marketplace that, in turn, could reduce demand for our services or increase the
cost of doing business due to increased litigation or service delivery costs.
Furthermore, due to the increasing popularity and use of the Internet and other
online services, a number of laws and regulations are likely to be adopted with
respect to the Internet or other online services, including those related to
privacy and tax liability. Current and proposed federal, state and foreign
privacy regulations and other laws restricting the collection, use and
disclosure of personal information could limit our ability to use the
information in our databases to generate revenues. Both foreign and domestic
governments have adopted and proposed laws governing the content of material
transmitted over the Internet. These include laws relating to obscenity,
indecency, libel and defamation. We could be liable if content delivered by us
or placed on our Web site violates these regulations. We currently do not
collect sales, use or other taxes on the sale of goods and services through our
Web site. As we engage in increased e-commerce activities, states or foreign
jurisdictions may seek to impose tax collection obligations on us. If they do,
these obligations could limit the growth of electronic commerce in general and
limit our liability to profit from the sale of goods and services over the
Internet.
INTELLECTUAL PROPERTY RIGHTS
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary intellectual
property rights in our products and services. We have entered into proprietary
information and invention assignment agreements with our employees and
contractors, and nondisclosure agreements with third parties to whom we disclose
confidential information in order to limit access to and disclosure of our
proprietary information. Despite our efforts in this regard, third parties may
attempt to disclose, obtain or use our proprietary information. In addition,
third parties may infringe or misappropriate our proprietary rights, which could
harm our business. The validity,
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enforceability and scope of protection of proprietary rights in Internet-related
industries are uncertain and still evolving.
We have registered the name "E-greetings" as our trademark and service mark
in the United States. We have also filed applications in the United States and
several foreign countries to register a number of our other trademarks and
service marks and plan to file additional trademark applications both in the
United States and internationally. A substantial amount of uncertainty exists
concerning the application of copyright and trademark laws to the Internet and
other digital media, and existing laws may not provide adequate protection of
trademarks, service marks, our content or our Internet address, commonly
referred to as a "domain name." Furthermore, effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which our services are made available online.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademark or copyrighted material, to
third parties. Despite our efforts to ensure that the quality of our brand is
maintained by licensees, our current or future licensees may take actions that
might harm the value of our proprietary rights, brand or reputation, which could
harm our business.
To date, we have not been notified that our trademarks or service marks
infringe the intellectual property rights of third parties, but third parties
may claim infringement by us with respect to past, current or future
intellectual properties. Any claim like this, whether meritorious or not, could
be time consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements might not be available on terms acceptable to us or at all.
Additionally, enforcing our intellectual property rights could entail
significant expenses and could prove difficult or impossible. As a result, the
defense of infringement claims against us and the costs associated with
enforcing our intellectual property rights could harm our business.
OUR EMPLOYEES
As of December 31, 1999, we had 171 full-time employees. We believe that
our relations with our employees are good. None of our employees are represented
under collective bargaining agreements.
The following table sets forth certain information regarding our current
officers and other key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gordon M. Tucker........................ 44 Chief Executive Officer and Director
Andrew J. Moley......................... 35 Senior Vice President and Chief Financial Officer
Behrouz Arbab, Ph.D..................... 48 Senior Vice President and Chief Technology Officer
Paul Lipman............................. 30 Senior Vice President, Business Development
Kenneth W. Wallace...................... 58 Senior Vice President, Sales
Sarah S. Anderson....................... 33 Vice President, Marketing
Donald E. Chaney........................ 45 Vice President, Engineering
Nancy Levin............................. 41 Vice President, Business Development,
Entertainment
Andrew P. Missan........................ 38 Vice President and General Counsel
Scott F. Neamand........................ 36 Vice President, Finance and Controller
</TABLE>
GORDON M. TUCKER -- Gordon Tucker joined Egreetings Network in February
1999 as our Chief Executive Officer and as a director. From July 1994 to
February 1999, Mr. Tucker served as Chief Executive Officer and Chairman of the
Board of Directors of IdeaNet Management Company, a "virtual" management company
serving early-stage technology companies with venture capital financial support.
In his capacity as Chief Executive Officer of IdeaNet, from November 1996 to
March 1998, Mr. Tucker served as acting Senior Vice President of Excite Studios,
E-commerce and Communities at Excite, Inc. (now Excite@Home), an Internet media
company. From September 1993 to July 1994, Mr. Tucker was President, Chief
Executive Officer and a director of Micrografx, Inc., a graphics software
company. Earlier in his career, Mr. Tucker served as Brand Manager for The
Procter & Gamble Company, a leading consumer products company, and as
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Executive Vice President for LoJack Corporation, a wireless communications
company. Mr. Tucker holds a B.B.A. degree from the University of Michigan School
of Business Administration.
ANDREW J. MOLEY -- Andrew Moley joined Egreetings Network in July 1999 as
our Senior Vice President and Chief Financial Officer. From July 1995 to July
1999, Mr. Moley served as the Chief Financial Officer, Executive Vice President
and a director of CMC Industries, an electronic manufacturing services company.
From February 1993 to November 1994, Mr. Moley was the Chief Financial Officer
of Silicon Valley Technology, a contract manufacturing company. Mr. Moley holds
a B.S. degree in Economics from the Wharton School of the University of
Pennsylvania and an M.B.A. degree from the Stanford University Graduate School
of Business.
BEHROUZ ARBAB, PH.D. -- Behrouz Arbab joined Egreetings Network in June
1999 as our Senior Vice President and Chief Technology Officer. From May 1997 to
June 1999, Dr. Arbab served as the Vice President of Engineering at Semio
Corporation, an Internet software company. From September 1996 to May 1997, Dr.
Arbab was the Director of Server Technologies at Cisco Systems, Inc., an
Internet networking company. From January 1994 to September 1996, Dr. Arbab
served as Senior Director at Oracle Corporation, a software and information
management company. Dr. Arbab has also held management positions at Computer
Power Software Group, Database Consulting Associates and Harwell Computer Power.
Dr. Arbab holds a B.S. degree from Arya-Mehr University of Technology and a
Ph.D. degree in Computer Science from the University of Wales.
PAUL LIPMAN -- Paul Lipman joined Egreetings Network as our Vice President
of Business Development in June 1996, and is currently serving as our Senior
Vice President of Business Development. From September 1990 to July 1994, Mr.
Lipman was a systems analyst for Andersen Consulting, a management and
technology consulting firm, in Europe, where he designed and built trading
systems and advised financial institutions on the use and implementation of
information technology. Mr. Lipman holds a B.S. degree in Theoretical Physics
from Victoria University of Manchester, England and an M.B.A. degree from the
Stanford University Graduate School of Business.
KENNETH W. WALLACE -- Kenneth Wallace joined Egreetings Network in June
1999 as our Senior Vice President of Sales. From May 1993 to June 1999, Mr.
Wallace served as Vice President and Group Publisher for Rodale Press, a
magazine publishing company. From December 1987 to March 1993, Mr. Wallace was
the Vice President of Advertising at Parade Magazine, a magazine publishing
company. Mr. Wallace holds a B.B.A. degree from St. Johns University.
SARAH S. ANDERSON -- Sarah Anderson joined Egreetings Network in June 1999
as our Vice President of Marketing. From February 1997 to June 1999, Ms.
Anderson was the Vice President and General Manager of SegaSoft Inc., an
interactive game software company. From January 1996 to January 1997, Ms.
Anderson was the Director of Strategic Planning of RDA International, a
multimedia group and advertising agency. From January 1993 to December 1995, Ms.
Anderson was the Brand Manager of Sega of America, an interactive digital
entertainment media company. Ms. Anderson holds an M.B.A. degree in Marketing
from the McLaren School of Business of the University of San Francisco and a
B.F.A. degree in Graphic Design from Paier College of Art.
DONALD E. CHANEY -- Donald Chaney joined Egreetings Network in August 1998
as our Vice President of Engineering. From May 1991 to August 1998, Mr. Chaney
served as a Manager, Director, and Senior Director of Applications
Infrastructure and Tools at DHL Airways, Inc., a shipping company. Mr. Chaney
holds a B.S. degree from Virginia Polytechnic Institute and State University and
an M.S. degree in Electrical Engineering from Santa Clara University.
NANCY LEVIN -- Nancy Levin joined Egreetings Network as Vice President,
Business Development, Entertainment in April 2000 after serving as a consultant
to the Company since December 1999. From March 1999 through December 1999, Ms.
Levin served as a consultant to various entertainment companies. From August
1997 to March 1999, Ms. Levin served as Senior Vice President at MCA Records, an
entertainment company. From August 1996 to August 1997, Ms. Levin was Senior
Vice President at Red Ant Entertain-
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ment, an entertainment company. From July 1994 to August 1996, Ms. Levin was
Senior Vice President/ Promotion for Priority Records/EMI. Ms. Levin holds a BA
degree with honors from Tulane University.
ANDREW P. MISSAN -- Andrew Missan joined Egreetings Network as our General
Counsel in June 1999 and also became Vice President in February 2000. From
August 1998 to June 1999, Mr. Missan served as Corporate Counsel to WebTV
Networks, Inc., an Internet entertainment company. From August 1997 to July
1998, Mr. Missan was the Senior Business Counsel at Seagate Software, Inc., an
information technology company. From June 1994 to July 1997, Mr. Missan served
in the Business and Legal Affairs Department at The RCA Records Label, a unit of
BMG Entertainment, an entertainment company, most recently as Senior Director.
From June 1991 to June 1994, Mr. Missan served as Counsel, Law Department, of
Sony Music Entertainment Inc., an entertainment company. He holds a B.A. degree
from Oberlin College and a J.D. degree from the Northwestern University School
of Law.
SCOTT F. NEAMAND -- Scott Neamand joined Egreetings Network in June 1999 as
our Director of Finance and Controller. He became the Vice President of Finance
and Controller in February 2000. From October 1994 to June 1999, Mr. Neamand
served in a variety of positions at Universal Studios, Inc., an entertainment
company, most recently as the Vice President, Finance -- Universal Studios Japan
Project. Prior to that, Mr. Neamand worked in several positions at KPMG Peat
Marwick, an accounting firm, from September 1985 to October 1994, most recently
as Senior Manager. Mr. Neamand holds a B.A. degree from University of
California, Santa Barbara and is a Certified Public Accountant.
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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 new business model is largely untested, we cannot be sure that
it will yield expected results. Because the Internet is constantly changing, we
may also need to change our current business model again to adapt to those
changes. Changes in our business model or organizational structure could impose
significant burdens on our management team and our employees and could result in
loss of productivity or increased employee attrition. 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.
BECAUSE OUR METHODS OF GENERATING REVENUES ARE RELATIVELY NEW, LARGELY UNTESTED
AND CONTINUE TO CHANGE, WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES.
We recently began generating a significant portion of our revenues from
sales of advertising on our Web site. These sales may not grow at the rates we
expect because Internet advertising is still a new and largely unproven method
of advertising. During 1999, our revenues were derived primarily from Internet
advertising and secondarily from direct marketing activities. We expect revenues
from Internet advertising to continue to comprise a significant portion of our
revenues for the foreseeable future. The effectiveness of Internet advertising
is difficult to gauge and advertisers may be reluctant to advertise on the
Internet and may allocate only limited portions or none of their advertising
budgets to Internet advertising in the future. Our business could suffer if
Internet advertising does not continue to grow 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 views of our advertisers' ads by our consumers; and
- sell existing and future Internet advertising inventory.
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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. 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 aggregate information about our registered members that is
often difficult to obtain, such as their gender, age, location, interests and
online activities. Our advertisers, sponsors and e-commerce partners will, in
turn, use this demographic and psychographic information to tailor their
advertising campaigns, direct marketing efforts or product offerings to the
characteristics of our 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
personalization features and other benefits to our registered members that are
unavailable to unregistered consumers, our ability to collect the data desired
by advertisers, sponsors and 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.
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 $14.6 million in the quarter
ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit
of approximately $49.7 million. We expect to have net losses and negative
operating cash flows for the foreseeable future. The size of these net losses
will depend, in part, on the rate of growth of our revenues from our
advertisers, sponsors and e-commerce merchants and on our expenses. Through at
least 2002, our reported operating results will be negatively impacted by the
amortization of deferred expenses relating to warrants and stock options granted
through 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 marketing and promotion and enhancement and expansion of our products
and services. As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will need
to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we may never achieve profitability, and even
if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve, sustain or
increase profitability in the future, then we will be unable to continue our
operations.
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SOME OF OUR CONTENT MAY BECOME UNAVAILABLE IF OUR RELATIONSHIPS WITH OUR
THIRD-PARTY CONTENT PROVIDERS, PARTICULARLY GIBSON GREETINGS, EXPIRE OR ARE
TERMINATED.
We rely on third-party content providers, such as Gibson Greetings, movie
studios, traditional card designers, cartoonists and independent artists, for a
significant portion of our content. To be successful, we will need to maintain
our existing relationships as well as establish similar relationships with new
parties who can provide us with cross-media and promotional opportunities. If we
fail to retain our existing content relationships or enter into new
relationships, the variety and quality of the content on our Web site may be
reduced, traffic to our Web site may decrease, our advertising revenues may be
impaired and future e-commerce revenues may not materialize.
For the year ended 1999, 34% 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, Inc. acquired Gibson as a wholly-owned
subsidiary. American Greetings also is the parent company of
AmericanGreetings.com, which is one of our competitors in the online cards
market. We do not know how our relationship with Gibson or our rights pursuant
to our license agreement with Gibson will be affected by this acquisition. If
Gibson fails to perform under the terms of our license agreement, the amount of
content we are able to offer our consumers will decrease significantly, which
would harm our business.
With the exception of our relationships with Gibson and NBC, our existing
content alliances are generally 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 THE VARIETY OF GIFTS 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 variety of gifts available on or through our
Web site and enhance and improve the ease of use, responsiveness, functionality
and features of our products and services. We may be unable to anticipate,
monitor and successfully respond to rapidly changing consumer tastes so as to
attract a sufficient number of consumers to our Web site. If we are unable to
license and develop content, increase the variety of gifts available and enhance
and improve the personalized services that allow us to attract, retain and
expand a loyal consumer base, we will be unable to generate advertising revenues
or 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
establishing and maintaining the Egreetings brand will be an important aspect of
our efforts to retain our current consumers, attract and expand our Internet
audience, license and create new content, and appeal to advertisers and
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, which will include
mass market and multimedia advertising,
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promotional programs and public relations activities. We intend to incur
significant expenditures on these advertising and promotional programs and
activities in the future. These expenditures may not result in a sufficient
increase in revenues. In addition, even if our brand recognition increases, we
may not acquire new consumers and even if we do, the amount of traffic on our
Web site may not increase sufficiently to justify the expenditures. If our brand
enhancement strategy is unsuccessful, we may be unable to increase future
revenues.
OUR GROWTH WILL DEPEND SIGNIFICANTLY ON THE INCREASING ACCEPTANCE OF 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.
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. 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, Microsoft 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
electronic greetings, 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 electronic
greetings. 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. Advertising revenues from Excite@Home accounted for approximately
28% of our total revenues for the year ended 1999. Our advertising relationship
with Excite@Home ended in November 1999 and we do not anticipate receiving any
future advertising revenues from Excite@Home. In addition, the acquisition of
Gibson, as a wholly-owned subsidiary, by American Greetings was consummated in
March 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.
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Many of our current and potential competitors in the Internet market,
including the companies named above, have significantly greater financial,
publishing, technical and marketing resources than we have. Many of these
companies also have longer operating histories, greater name recognition, more
traffic to their Web sites and more established relationships with advertisers
and advertising agencies than we have. These competitors may be able to
undertake more extensive marketing campaigns, adopt aggressive pricing policies
and devote substantially more resources to developing Internet content and
services than us.
We may be unable to compete successfully for advertisers 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. 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.
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. 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 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 e-commerce. If business communications and e-commerce do not
continue to grow or grows more slowly than expected, demand for our products and
services will be reduced. Consumers and businesses may reject the Internet as a
viable commercial medium for a number of reasons, including potentially
inadequate network infrastructure, slow development of enabling technologies,
insufficient commercial support or privacy concerns. The Internet's
infrastructure may be unable to support the demands placed on it by increased
usage. Internet service providers, online service providers and other Web site
operators have already experienced significant outages. In addition, delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased governmental regulation,
could cause the Internet to lose its viability as a commercial medium. Even if
the required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
to changing or emerging technologies.
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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.
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 in the
United States. We plan to offer localized content and services directed at
international consumers in the future in order to increase the international
traffic to our Web site. We do not have any experience in localizing our content
and services to conform to local cultures, standards and policies. We may have
to compete with local companies that are likely to understand the local market
better than we do. In addition, to achieve satisfactory performance for
consumers, advertisers and 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.
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;
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- expansion in our sales and customer support staff; and
- technical difficulties or system downtime affecting the Internet
generally or the operation of our Web site specifically.
We have experienced and expect to continue to experience seasonality in our
business. Consumer traffic on our Web site generally is higher during holiday
periods such as Valentine's Day, Mother's Day, Father's Day and Christmas and is
considerably slower during the summer months. In addition, sales of traditional
greeting cards and gifts tend to be lower in the third calendar quarter of each
year. Similarly, advertising sales in traditional media, such as television and
radio, generally are lower in the first calendar quarter of each year. We may
experience similar seasonality in our business. In addition, because advertising
on the Internet is an emerging market, additional seasonal and other patterns in
the usage of our products and services may emerge as the market matures.
Seasonal patterns like this may harm our business. As a result of all of the
factors discussed above, period-to-period comparison of our operating results
may not be a good indication of our future performance.
RISKS RELATED TO OPERATIONS
TO MANAGE OUR GROWTH, WE WILL NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND
PROCEDURES.
We currently are experiencing a period of rapid expansion in our Web site
traffic, personnel, facilities and infrastructure. For example, the average
number of daily visits to our Web site increased approximately 509% from 112,800
for the month of November 1998, the month we began to offer our online cards at
no cost, to 687,200 for the month of December 1999, and our number of employees
increased from 54 on December 31, 1998 to 172 on December 31, 1999, with most of
this growth in the areas of marketing, engineering and operations. We expect
that the number of our employees, including management-level employees, will
continue to increase for the foreseeable future to address expected growth in
our consumer base, expansion of our product and service offerings and the
pursuit of 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
AND E-COMMERCE PARTNERS.
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 slow response rates. We may be unable to improve our technical
infrastructure in relation to increased consumer volume generally and, in
particular, during peak capacity periods. If we experience outages, frequent or
persistent system failures or degraded response times, our reputation and brand
could be harmed permanently. In addition, we could lose advertising revenues
during these interruptions and consumer satisfaction could be negatively
impacted if our service is slow or unavailable. Furthermore, our consumers use
Internet service providers, online service providers and other Web site
operators for access to our Web site. Each of these providers has experienced
significant outages in the past and could experience outages, delays and other
difficulties due to system failures unrelated to our systems.
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A fundamental requirement for the online communications products and
services we offer is the secure transmission of confidential information over
the Internet. The occurrence or perception of security breaches could harm our
business. Third parties may attempt to breach the security provided by our Web
site. If they are successful, they could obtain confidential information about
our consumers, including their passwords, financial account information, credit
card numbers or other personal information. Our consumers may file suits against
us for any breach in our Web site's security. If we are not held liable, a
security breach could still harm our reputation, as even the perception of
security risks, whether or not valid, could inhibit market acceptance of our
products and services. Despite our implementation of security measures, our
software is vulnerable to computer viruses, electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data. We may
be required to expend significant capital and other resources to license
encryption or other technologies to protect against security breaches or to
alleviate problems caused by these breaches. In addition, our consumers might
decide to stop using our products and services if we experience security
breaches.
We use third-party software to manage and deliver advertisements and to
provide our advertisers with advertisement performance data. The failure of
these systems to function properly could discourage advertisers from placing
advertisements on our Web site or merchants from offering their products through
our Web site. The failure of these systems also could require us to incur
additional costs or could result in interruptions in our business during the
time spent replacing these systems. Our failure to expand and upgrade our
network system, provide consumers with access to our service or timely address
any system error or failure could materially harm our business and reputation.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased facility in San Francisco, California or at the servers
that host or back-up our systems could result in interruptions or delays in our
business, loss of data or could render us unable to provide services. In
addition, our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, and similar events. Our
general liability insurance policies may not adequately compensate us for losses
that may occur due to interruption in our service.
WE MAY BE UNABLE TO EXPAND OUR MARKETING, ENGINEERING, SALES AND CUSTOMER
SUPPORT ORGANIZATIONS BECAUSE QUALIFIED PERSONNEL ARE IN SHORT SUPPLY.
We will need to substantially expand both our consumer marketing and
corporate marketing efforts and advertising sales operations to increase market
awareness and sales of our products and services. We recently expanded our sales
forces and plan to hire additional sales personnel. Competition for highly
qualified sales personnel is intense, and we may be unable to hire the type and
number of sales personnel we are targeting. To support and enhance our
technology infrastructure, we will also need to increase the personnel in our
engineering department. In addition, we will need to increase our staff to
support new consumers and the expanding needs of our existing consumers. Hiring
of highly qualified engineers, customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet.
WE RECENTLY RECRUITED MOST OF OUR SENIOR MANAGEMENT TEAM.
Many members of our senior management team have been hired in the last
year, including our Chief Financial Officer, Senior Vice President of Sales,
Vice President of Marketing and Chief Technology Officer. Many of these
individuals do not have significant experience working together or with the rest
of our management team. We cannot assure you that they will be able to work
together successfully or manage any growth we experience. The process of
integrating these individuals may detract from the operation of, and have an
adverse effect on, our business.
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OUR SENIOR MANAGEMENT TEAM AND OTHER KEY EMPLOYEES ARE CRITICAL TO OUR BUSINESS,
AND THEY MAY NOT REMAIN WITH US IN THE FUTURE.
Our success will be substantially dependent on the performance of our
senior management and key creative, technical, marketing and sales personnel,
many of who joined us only in the last year. The loss of the services of any of
our executive officers or other key employees 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
DEMANDS.
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing our products and services and introducing new services
to address our consumers' changing needs. We could incur substantial development
or acquisition costs if we need to modify our services or infrastructure to
adapt to changes affecting providers of Internet services. Our business could be
harmed if we incur significant costs to adapt to these changes. If we cannot
adapt to these changes, or do not sufficiently increase the features and
functionality of our products and services, our consumers may switch to the
product and service offerings of our competition. Furthermore, our competitors
or potential competitors may develop products or services that are more
appealing to our current and potential consumers. As a result, demand for our
services may decrease.
YEAR 2000 PROBLEMS COULD CONTINUE TO CAUSE PROBLEMS WITH COMPUTER AND
COMMUNICATIONS SYSTEMS AND COULD HAMPER THE RUNNING OUR BUSINESS.
Many existing computer programs and systems, particularly older systems,
still cannot distinguish between a year beginning with "20" and a year beginning
with "19" because they use only the last two digits to refer to a year. As a
result, these programs may continue to malfunction or fail completely. If we or
any third parties, including our suppliers, vendors or consultants, with whom we
have a material relationship fail to continue to manage and ameliorate potential
or latent year 2000 issues, our business may be harmed. In particular, year 2000
problems could temporarily slow our service or prevent us from offering our
goods and services. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Disclosure."
RISKS RELATED TO CONTENT, INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION
WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITE OR THE PRODUCTS
AND SERVICES AVAILABLE THROUGH OUR WEB SITE.
We provide a wide variety of content that enables consumers to send 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. 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 a few 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
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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 generally removable by the
consumer. We also capture demographic and profile information when an individual
registers with us, and we capture and retain data based on 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 consumers' 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 policy, we may face
potential liability for invasion of privacy. Even the perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our Web site products and services. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
consumers that the data may be used by marketing entities to direct product
promotion and advertising to the consumer. Other countries and political
entities, such as the European Union, have adopted legislation and regulatory
requirements like this. The United States may adopt similar legislation or
regulatory requirements. If we do not adequately address consumer privacy
concerns, our business could be materially harmed.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL COSTS
OF DOING BUSINESS ON THE INTERNET.
We currently are not subject to meaningful direct regulation applicable to
access to, or commerce on, the Internet by any government agency. It is possible
that in the future a number of laws and regulations may be adopted with respect
to the Internet and other digital media, covering issues such as consumer
privacy, 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.
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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
currently 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 2. PROPERTIES
We currently lease approximately 70,000 square feet of office space in San
Francisco, California pursuant to a lease that expires in August 2009. We also
have sales offices in New York, New York and Los Angeles, California, and
technical facilities in Santa Clara, California. We believe that our existing
facilities are adequate to meet our needs for the foreseeable future and that
future growth can be accommodated by leasing additional or alternative space
near our current facilities.
ITEM 3. LEGAL PROCEEDINGS
We are not presently involved in any legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On November 19, 1999, stockholders representing 19,416,486 shares of the
Company's outstanding capital stock approved the actions listed below by written
consent. Stockholders representing 5,707,322 shares did not vote on the
proposals.
- The Company's reincorporation in the State of Delaware.
- An amendment to the Company's Certificate of Incorporation that became
effective upon the closing of the Company's initial public offering.
- Indemnity Agreements with each member of the Company's Board of Directors
and each executive officer.
On November 19, 1999, stockholders representing 19,416,486 shares of the
Company's outstanding capital stock also approved the actions listed below by
written consent. Stockholders representing 5,703,883 shares did not vote on the
proposals.
- An amendment to the Company's Certificate of Incorporation to increase
the authorized number of shares of Series G Preferred Stock in connection
with the issuance and sale of the Series G Preferred Stock to National
Broadcasting Company, Inc.
- An amendment to the Company's Certificate of Incorporation to effect a
two-for-three reverse stock split of the Company's Common Stock.
- Adoption of the Company's 1999 Equity Incentive Plan, 1999 Employee Stock
Purchase Plan and 1999 Non-Employee Directors' Stock Option Plan.
On December 9, 1999, stockholders representing 21,993,766 shares of the
Company's outstanding capital stock approved amendments to specify the number of
shares reserved for the Company's 1999 Equity Incentive Plan, 1999 employee
Stock Purchase Plan and 1999 Non-Employee Directors' Stock Option Plan.
Stockholders representing 3,130,042 shares did not vote on the proposals.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is traded on the NASDAQ National Market under the symbol
"EGRT." The following table sets forth, for the periods indicated, the range of
high and low sale prices for our Common Stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
FISCAL 1999* HIGH LOW
------------ ----- ----
<S> <C> <C>
Fourth Quarter*....................................... 16.25 7.75
</TABLE>
---------------
* Our Common Stock became publicly traded on December 17, 1999
The Company has never declared or paid a cash dividend on its Common Stock,
and it is anticipated that the Company will continue to retain its earnings for
use in its business and not pay cash dividends.
As of April 27, 2000, there were approximately 71 holders of record of our
Common Stock. On April 27, 2000, the last sale price reported on the NASDAQ
National Market was $3.875 per share.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 3,160 $ 317 $ 505 $ 164 $ 58
Costs and expenses:
Cost of services................... 2,932 610 336 256 23
Sales and marketing................ 17,035 3,094 942 366 67
Operations and development......... 10,972 2,628 1,422 552 66
General and administrative......... 5,437 1,444 830 778 251
Amortization of deferred content
costs............................ 1,371 138
Amortization of deferred stock
compensation..................... 1,992 201
-------- ------- ------- ------- -------
Total costs and expenses...... 39,739 8,115 3,530 1,952 407
-------- ------- ------- ------- -------
Loss from operations.................. (36,579) (7,798) (3,025) (1,788) (349)
Interest income (expense), net........ (63) (23) (68) 4
-------- ------- ------- ------- -------
Net loss.............................. $(36,642) $(7,821) $(3,093) $(1,784) $ (349)
======== ======= ======= ======= =======
Net loss per share:(1)
Basic and diluted.................. $ (8.02) $ (2.26) $ (1.00) $ (1.14) $ (0.16)
======== ======= ======= ======= =======
Weighted average shares............ 4,569 3,464 3,100 1,561 2,144
======== ======= ======= ======= =======
Pro forma net loss per share:(1)
Basic and diluted.................. $ (2.28)
========
Weighted average shares............ 16,068
--------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 81,774 $ 268 $3,524 $719 $101
Working capital (deficit)..................... 77,672 (2,838) 2,735 344 43
Total assets.................................. 120,123 2,968 5,203 998 128
Long-term liabilities......................... 3,718 1,100 197 70 20
Total stockholders' equity (deficit).......... 101,831 (1,489) 4,185 547 50
</TABLE>
---------------
(1) See footnote 1 to the financial statements for method of calculating
earnings per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 card service,
and in late 1997, we launched our own online card 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 card 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, although we have not yet realized any
significant revenues from these activities and are still implementing the
infrastructure and establishing the relationships required to support these
activities. As 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
1999 COMPARED TO 1998
Revenues
Revenues grew to $3.1 million for the year ended 1999 from $317,000 for the
year ended 1998. The catalyst for this growth was the change in our business
model from one in which revenues were derived from the sale of online cards to
one in which revenues are derived from the sale of advertisements and
sponsorships as well as direct marketing and e-commerce activities. Since making
this change in November 1998, we have experienced significant growth in traffic
to our Web site, which has resulted in growth in our advertising inventory and
direct marketing base.
We typically guarantee advertisers a minimum number of "impressions," or
times that an advertisement appears in pages viewed by consumers using our Web
site. We recognize revenues on the sale of advertisements based on the ratio of
the number of impressions actually delivered to the guaranteed number of
impressions. We recognize revenues on the sale of sponsorships on a
straight-line basis over the period during which the sponsor's promotional
message is displayed on our Web site. Direct marketing revenues are recognized
based on the ratio of the number of emails actually sent to the guaranteed
number of emails to be sent. In all cases, revenues are recognized only if we
have no remaining significant obligations and the collection of the receivable
is probable.
Cost of Services
Cost of services is comprised primarily of royalties paid to content
licensors, the cost of our internal content production, Internet connectivity
charges, server co-location costs and the cost of goods sold from our online
gift store.
Cost of services increased to $2.9 million for the year ended 1999 from
$610,000 for the year ended 1998. The increase in this cost is primarily due to
the increase in content royalty fees, Internet connectivity costs and the number
of employees dedicated to content creation. To the extent we experience an
increase in our Web site traffic and the number of online cards sent, we would
expect our cost of services to increase. Cost of services is not proportional to
revenues and may increase or decrease as a percentage of revenues.
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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 $17.0 million for the year ended
1999 from $3.0 million for the year ended 1998. This increase is primarily
attributable to the approximate $11 million cost of developing and implementing
our marketing and branding campaigns throughout the year including a nationally
televised advertising campaign during the fourth quarter holiday season. In
addition to marketing and branding campaigns, we also drove traffic to our Web
site via online distribution partners to whom we paid approximately $2.0
million. Sales related expenses increased due to the growth in our sales team to
20 people at year ended 1999 from one person at year ended 1998, which growth
was planned in order to monetize the large increase in our Web site traffic and
resulting advertising inventory. We anticipate that overall sales and marketing
expenses will increase in absolute dollars in the foreseeable future. Sales and
marketing expense as a percentage of total revenues may fluctuate depending on
the timing and type of new marketing programs and distribution agreements and
the addition of sales and marketing personnel.
Operations and Development
Operations and development expenses consist primarily of personnel and
facilities costs for our site management, product management, business
development, engineering, information systems, site operations and site
production departments.
Operations and development expenses increased to $10.9 million for the year
ended 1999 from $2.6 million for the year ended 1998. These increases primarily
were due to increased personnel costs, including the cost of independent
contractors assisting on the re-architecture of our Web site and other
engineering projects. Depreciation expense also increased due to the addition of
hardware and software to support the increased traffic on our Web site. We
anticipate that overall operations and development expenses will increase in the
foreseeable future. These expenses as a percentage of revenues may fluctuate
depending on the level of future revenues and the timing of new personnel hires
to support and expand our site infrastructure and traffic.
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 $5.4 million for the year
ended 1999 from $1.4 million for the year ended 1998. This increase is primarily
the result of increased personnel, facility and overhead costs necessary to
support our growing business infrastructure. In order to accommodate our growth,
in October 1999 we moved to an approximate 70,000 square foot leased facility
from a 14,000 square foot facility. We anticipate that general and
administrative expenses will continue to increase in the foreseeable future.
General and administrative expense as a percentage of revenues may fluctuate
depending on the level of future revenues and the timing of additional
investments in general and administrative infrastructure.
Amortization of Deferred Content Costs
Amortization of deferred content costs consists of the amortization of the
fair value of a warrant issued to Gibson Greetings, Inc. in December 1997. The
warrant was issued in connection with the establishment of a relationship with
Gibson under which we obtained the right to distribute Gibson's content in the
form of online cards. The fair value of the Gibson warrant at each quarterly
valuation date is being amortized by charges to operations over the remaining
life of the Gibson agreement, which expires on December 31, 2002. In addition to
the Gibson deferred content cost, approximately $4.8 million of content costs
were incurred and
26
<PAGE> 27
deferred in November 1999 in conjunction with a content licensing agreement
signed with the National Broadcasting Company, Inc.
Amortization of deferred content costs increased to $1.3 million for the
year ended 1999 from $138,000 for the year ended 1998. This increase is
primarily the result of a significant upward revaluation of the Gibson warrant
for the year ended 1999. We will periodically review the recoverability of the
deferred content costs and will write it down to its net realizable value if we
consider it appropriate based on expected future revenues and other benefits.
Amortization of Deferred Stock Compensation
We recorded aggregate deferred stock compensation of $3.9 million for the
year ended 1999 and $488,000 for the year ended 1998. These amounts relate to
the grant of stock options at exercise prices less than the deemed fair value of
our common stock on the grant date. The deferred stock compensation is being
amortized over the vesting periods of the options, generally four years, using a
graded vesting method.
Amortization of deferred stock compensation increased to $1.9 million for
the year ended 1999 from $201,000 for the year ended 1998.
Interest Income (Expense), Net
Net interest expense increased to $63,000 for the year ended 1999 from
$23,000 for the year ended 1998 due to additional borrowings during the year
ended 1999 of $4.9 million, partially offset by earnings on cash and cash
equivalents.
Income Taxes
There has been no provision made for federal or state income taxes for any
period as we have incurred operating losses to date. As of December 31, 1999, we
had net operating loss carryforwards for federal income tax purposes of
approximately $45.3 million. The federal net operating loss carryforwards will
expire at various dates from 2010 through 2019 if not utilized. Due to the
"change of ownership" provisions of the Internal Revenue Code, the availability
of our net operating loss carryforwards may be subject to an annual limitation
against taxable income in future periods if a change in ownership of more than
50% of the value of our stock should occur over a three-year period. This could
substantially limit the eventual utilization of these carryforwards. For further
information regarding income taxes, see Note 5 of Notes to Financial Statements.
1998 COMPARED TO 1997
Revenues
Revenues decreased to $317,000 for the year ended 1998 from $505,000 for
the year ended 1997 due to the expiration and non-renewal of our contract with
AOL. In late 1997, we began selling online cards and advertising on our own Web
site. Revenues from these sales accounted for the majority of our revenue for
the year ended 1998.
Cost of Services
Cost of services increased to $610,000 for the year ended 1998 from
$336,000 for the year ended 1997 due to the increased cost of internal content
production, third-party content and Web site connectivity and support.
Sales and Marketing
Sales and marketing expenses increased to $3.0 million for the year ended
1998 from $942,000 for the year ended 1997. In late 1997, we ceased working on
AOL's online card service and began developing our own such service, which
resulted in increased expenses for distribution channels and marketing.
27
<PAGE> 28
Operations and Development
Operations and development expenses increased to $2.6 million for the year
ended 1998 from $1.4 million for the year ended 1997 due to increased personnel,
engineering and Web site operating costs to build and maintain our online card
service.
General and Administrative
General and administrative expenses increased to $1.4 million for the year
ended 1998 from $830,000 for the year ended 1997 due to increased personnel and
facility expenditures necessary to support our growing online card service.
Amortization of Deferred Content Costs
In December 1997, we recorded deferred content costs of approximately $1.3
million with no related amortization. For the year ended 1998, we recorded
additional deferred content costs of $445,000 and recorded amortization of
$138,000.
Amortization of Deferred Stock Compensation
We did not record any deferred stock compensation for the year ended 1997.
We recorded $488,000 of deferred stock compensation for the year ended 1998 in
connection with the grant of options during the year ended 1998 at exercise
prices less than the deemed fair value of our common stock on the grant date. Of
this amount, $201,000 was amortized for the year ended 1998.
Net Interest Income (Expense)
Net interest expense decreased to $23,000 for the year ended 1998 from
$68,000 for the year ended 1997 due to interest earned during 1998 on $4.0
million of private equity financing in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception we have financed our operations primarily through the
private placements of equity securities and, in December 1999, a 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 $25.3 million, $5.8 million and
$2.8 million for the years ended 1999, 1998 and 1997, respectively. Cash used in
operating activities resulted primarily from net losses partially offset by
increases in accounts payable and accrued liabilities and by non-cash charges
for depreciation of furniture and equipment and amortization of deferred content
and stock compensation costs. Net cash used in investing activities was $13.2
million, $786,000 and $320,000 for the years ended 1999, 1998 and 1997,
respectively. These funds were used for the purpose of acquiring network
hardware and software and other equipment to support our growth in Web site
traffic and personnel. Net cash provided by financing activities was $120.0
million, $3.3 million and $5.9 million for the years ended 1999, 1998 and 1997,
respectively. Net cash provided by financing activities consisted primarily of
net proceeds from our public offering of common stock in December 1999 and
issuances of preferred stock during 1999 and 1997. To a lesser extent, we used
borrowings under equipment term loans and stockholder loans to fund operations.
As of December 31, 1999, we had approximately $81.7 million of cash and
cash equivalents and $77.6 million of working capital. As of December 31, 1999,
we had a material operating lease commitment for our newly leased San Francisco
headquarters facility. Other commitments include several small equipment
operating leases and our equipment term loans. Although we have no material
commitments for capital expenditures, we anticipate that we will experience a
substantial increase in our capital expenditures consistent with our anticipated
growth in operation, infrastructure and personnel. We currently anticipate
growth in our operating expenses for the foreseeable future and that our
operating expenses will be a material use of our cash resources.
28
<PAGE> 29
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.
IMPACT OF YEAR 2000
In prior reports, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $50,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
EFFECT OF NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenge 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
March 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.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST
RATE RISK
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 investment
vehicles, including government and corporate obligations and money market funds.
As of December 31, 1999, all of our funds were held in money market funds and a
government obligation with a maturity of less than 30 days. We did not hold
derivative financial instruments as of December 31, 1999 and have never held
these instruments in the past.
29
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Egreetings Network, Inc.
We have audited the accompanying balance sheets of Egreetings Network, Inc.
as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Egreetings Network, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule, when considered in relation
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
January 21, 2000
30
<PAGE> 31
EGREETINGS NETWORK, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 81,774 $ 268
Accounts receivable (net of allowances for doubtful
accounts of $69 in 1999 and $0 in 1998)................ 1,228 210
Prepaid expenses and other current assets................. 9,244 41
-------- --------
Total current assets.............................. 92,246 519
Property and equipment, net................................. 11,800 845
Deferred content costs...................................... 12,740 1,566
Restricted cash deposit..................................... 2,172 --
Deposits and other assets................................... 1,165 38
-------- --------
Total assets...................................... $120,123 $ 2,968
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 7,910 $ 869
Accrued expenses and other current liabilities............ 2,086 649
Accrued compensation and related expenses................. 1,943 205
Accrued royalties (including $145 and $134 in 1999 and
1998, respectively, payable to a related party)........ 290 220
Deferred revenue.......................................... 581 86
Current portion of equipment term loan.................... 1,764 374
Notes payable to stockholders............................. -- 954
-------- --------
Total current liabilities......................... 14,574 3,357
Equipment term loan, less current portion................... 3,718 586
Notes payable to stockholders............................... -- 514
-------- --------
Total liabilities................................. 18,292 4,457
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value: 15,500,000
shares authorized; 2,523,546 shares issued and
outstanding in 1998.................................... -- 11,363
Common stock, $0.001 par value: 65,000,000 shares
authorized; 34,501,140 and 3,466,000 shares issued and
outstanding in 1999 and 1998, respectively............. 159,227 504
Deferred stock compensation............................... (2,195) (287)
Notes receivable from stockholders........................ (5,490) --
Accumulated deficit....................................... (49,711) (13,069)
-------- --------
Total stockholders' equity (deficit).............. 101,831 (1,489)
-------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $120,123 $ 2,968
======== ========
</TABLE>
See accompanying notes.
31
<PAGE> 32
EGREETINGS NETWORK, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $ 3,160 $ 317 $ 505
Costs and expenses:
Cost of services(1)....................................... 2,932 610 336
Sales and marketing(2).................................... 17,035 3,094 942
Operations and development(3)............................. 10,972 2,628 1,422
General and administrative(4)............................. 5,437 1,444 830
Amortization of deferred content costs.................... 1,371 138 --
Amortization of deferred stock compensation............... 1,992 201 --
-------- ------- -------
Total costs and expenses.......................... 39,739 8,115 3,530
-------- ------- -------
Loss from operations........................................ (36,579) (7,798) (3,025)
Interest income............................................. 471 42 --
Interest expense............................................ (534) (65) (68)
-------- ------- -------
Net loss.................................................... $(36,642) $(7,821) $(3,093)
======== ======= =======
Net loss per share:
Basic and diluted......................................... $ (8.02) $ (2.26) $ (1.00)
======== ======= =======
Shares used in calculation of net loss per share:
Basic and diluted......................................... 4,569 3,464 3,100
======== ======= =======
</TABLE>
---------------
(1) Excluding $1,371 and $138 in amortization of deferred content costs for the
years ended December 31, 1999 and 1998, respectively, and excluding $158 and
$20 in amortization of deferred stock compensation for the years ended
December 31, 1999 and 1998, respectively.
(2) Excluding $540 and $40 in amortization of deferred stock compensation for
the years ended December 31, 1999 and 1998, respectively.
(3) Excluding $1,033 and $111 in amortization of deferred stock compensation for
the years ended December 31, 1999 and 1998, respectively.
(4) Excluding $261 and $30 in amortization of deferred stock compensation for
the years ended December 31, 1999 and 1998, respectively.
See accompanying notes.
32
<PAGE> 33
EGREETINGS NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE
---------------------- --------------------- STOCK FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS DEFICIT
----------- -------- ---------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996....... 1,311,753 $ 2,687 3,466,000 $ 16 -- -- $ (2,155)
Issuance of Series C preferred
stock............................. 131,212 525 -- -- -- -- --
Issuance of Series C preferred stock
for conversion of notes payable... 229,798 919 -- -- -- -- --
Issuance of Series D preferred
stock............................. 625,978 4,000 -- -- -- -- --
Issuance of warrants in connection
with debt financing............... -- 27 -- -- -- -- --
Valuation of preferred stock warrant
in connection with content
agreement......................... -- 1,259 -- -- -- -- --
Net loss and comprehensive loss..... -- -- -- -- -- -- (3,093)
----------- -------- ---------- -------- ------- ------- --------
Balances at December 31, 1997....... 2,298,741 9,417 3,466,000 16 -- -- (5,248)
Issuance of Series D preferred stock
for conversion of notes payable... 224,805 1,436 -- -- -- -- --
Issuance of warrants in connection
with debt financing............... -- 65 -- -- -- -- --
Deferred stock compensation related
to grant of stock options......... -- -- -- 488 (488) -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 201 -- --
Valuation of preferred stock warrant
in connection with content
agreement......................... -- 445 -- -- -- -- --
Net loss and comprehensive loss..... -- -- -- -- -- -- (7,821)
----------- -------- ---------- -------- ------- ------- --------
Balances at December 31, 1998....... 2,523,546 11,363 3,466,000 504 (287) -- (13,069)
Issuance of Series D preferred stock
for conversion of notes payable... 82,381 514 -- -- -- -- --
Issuance of Series F preferred
stock, net of issuance costs...... 3,283,636 20,871 -- -- -- -- --
Issuance of Series F preferred stock
for conversion of notes payable... 442,857 3,100 -- -- -- -- --
Issuance of Series G preferred
stock, net of issuance costs...... 9,559,417 41,876 -- -- -- -- --
Issuance of Series E preferred stock
pursuant to exercise of
warrants.......................... 1,663,333 9,087 -- -- -- -- --
Issuance of common stock under stock
option plan....................... -- -- 2,670,690 5,659 -- (5,490) --
Issuance of warrants in connection
with debt financing............... -- 428 -- -- -- -- --
Deferred stock compensation related
to grant of stock options......... -- -- -- 3,900 (3,900) -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 1,992 -- --
Valuation of preferred stock warrant
in connection with content
agreement......................... -- 7,744 -- -- -- -- --
Issuance of common stock, net of
issuance costs.................... -- -- 6,000,000 54,181 -- -- --
Conversion of convertible preferred
stock to common stock............. (17,555,170) (94,983) 22,364,450 94,983 -- -- --
Net loss and comprehensive loss..... -- -- -- -- -- -- (36,642)
----------- -------- ---------- -------- ------- ------- --------
Balances at December 31, 1999....... -- $ -- 34,501,140 $159,227 $(2,195) $(5,490) $(49,711)
=========== ======== ========== ======== ======= ======= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balances at December 31, 1996....... $ 548
Issuance of Series C preferred
stock............................. 525
Issuance of Series C preferred stock
for conversion of notes payable... 919
Issuance of Series D preferred
stock............................. 4,000
Issuance of warrants in connection
with debt financing............... 27
Valuation of preferred stock warrant
in connection with content
agreement......................... 1,259
Net loss and comprehensive loss..... (3,093)
--------
Balances at December 31, 1997....... 4,185
Issuance of Series D preferred stock
for conversion of notes payable... 1,436
Issuance of warrants in connection
with debt financing............... 65
Deferred stock compensation related
to grant of stock options......... --
Amortization of deferred stock
compensation...................... 201
Valuation of preferred stock warrant
in connection with content
agreement......................... 445
Net loss and comprehensive loss..... (7,821)
--------
Balances at December 31, 1998....... (1,489)
Issuance of Series D preferred stock
for conversion of notes payable... 514
Issuance of Series F preferred
stock, net of issuance costs...... 20,871
Issuance of Series F preferred stock
for conversion of notes payable... 3,100
Issuance of Series G preferred
stock, net of issuance costs...... 41,876
Issuance of Series E preferred stock
pursuant to exercise of
warrants.......................... 9,087
Issuance of common stock under stock
option plan....................... 169
Issuance of warrants in connection
with debt financing............... 428
Deferred stock compensation related
to grant of stock options......... --
Amortization of deferred stock
compensation...................... 1,992
Valuation of preferred stock warrant
in connection with content
agreement......................... 7,744
Issuance of common stock, net of
issuance costs.................... 54,181
Conversion of convertible preferred
stock to common stock............. --
Net loss and comprehensive loss..... (36,642)
--------
Balances at December 31, 1999....... $101,831
========
</TABLE>
See accompanying notes.
33
<PAGE> 34
EGREETINGS NETWORK, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(36,642) $(7,821) $(3,093)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 2,352 308 158
Loss on disposal of fixed assets....................... 59 -- --
Amortization of deferred content costs................. 1,371 138 --
Amortization of deferred stock compensation............ 1,992 201 --
Other.................................................. 46 19 68
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,018) (200) (10)
Prepaid expenses and other current assets............ (1,703) (19) (16)
Restricted cash deposit.............................. (2,172) -- --
Deposits and other assets............................ (699) (17) (13)
Accounts payable and accrued liabilities............. 10,733 1,469 43
Deferred revenue..................................... 495 86 --
-------- ------- -------
Net cash used in operating activities....................... (25,186) (5,836) (2,863)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (13,365) (786) (320)
-------- ------- -------
Net cash used in investing activities....................... (13,365) (786) (320)
FINANCING ACTIVITIES
Borrowings under equipment term loan........................ 4,969 764 478
Payments on equipment term loan............................. (894) (282) --
Borrowings on notes payable to stockholders................. 2,100 2,950 941
Payments on notes payable to stockholders................... -- (22) --
Issuance of common stock, net............................... 54,353 -- --
Issuance of preferred stock, net............................ 59,532 -- 4,525
Other borrowings............................................ -- (44) 44
-------- ------- -------
Net cash provided by financing activities................... 120,057 3,366 5,988
Net increase (decrease) in cash and cash equivalents........ 81,506 (3,256) 2,805
Cash and cash equivalents at beginning of period............ 268 3,524 719
-------- ------- -------
Cash and cash equivalents at end of period.................. $ 81,774 $ 268 $ 3,524
======== ======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest...................................... $ 246 $ 13 $ 10
======== ======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable to stockholders to
preferred stock...................................... $ 3,614 $ 1,436 $ 919
======== ======= =======
Conversions of preferred stock to common stock......... $ 94,983 -- --
======== ======= =======
Issuance of warrants in connection with debt
financing............................................ $ 428 $ 65 $ 27
======== ======= =======
Issuance of common stock for notes receivable.......... $ 5,490 -- --
======== ======= =======
Issuance of preferred stock for prepaid advertising.... $ 7,500 -- --
======== ======= =======
Valuation of preferred stock issued for content
rights............................................... $ 4,802 -- --
======== ======= =======
Valuation of preferred stock warrant in connection with
content agreement.................................... $ 7,744 $ 445 $ 1,259
======== ======= =======
Valuation of deferred stock compensation............... $ 3,900 -- --
======== ======= =======
</TABLE>
See accompanying notes.
34
<PAGE> 35
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Egreetings Network, Inc. (the "Company") offers consumers and businesses a
convenient and simple integrated solution for finding and sending online cards,
gifts and invitations. 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, e-commerce and direct marketing.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid short-term investments
with insignificant interest rate risk and original maturities from date of
purchase of three months or less, and are stated at amounts that approximate
fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of accumulated amortization
and depreciation and are depreciated using the straight-line method over the
estimated useful life of the related asset, which currently averages three
years. Web site application and infrastructure costs are capitalized and is
amortized over three years. Leasehold improvements are amortized over the
shorter of the estimated useful life or the life of the lease.
Depreciation and amortization expense relating to property, equipment and
leasehold improvements amounted to $2,352,000, $308,000 and $158,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which potentially subject the Company to
concentrations of risk include cash and cash equivalents and accounts
receivable. The Company maintains its cash with three high-credit quality
domestic financial institutions. The Company performs ongoing credit evaluations
of its customers and does not typically require collateral or guarantees.
Management establishes an allowance for doubtful accounts when it appears
accounts receivable will not be collectible, and such losses to date have been
within management's expectations.
For the year ended December 31, 1999, one corporate advertising sponsor,
Excite@Home, accounted for 28% of the Company's revenues. Our advertising
relationship with Excite@Home ended in November 1999 and we do not anticipate
receiving any future advertising revenues from them. There were no significant
concentrations of credit risk among the Company's corporate sponsors from whom
accounts receivables were due as of December 31, 1999. An inability to
demonstrate an active and growing user base to advertisers and sponsors may
result in a loss of advertisement and sponsorship agreements and a decline in
advertisement and sponsorship revenues.
For the year ended December 31, 1998, one corporate advertising sponsor
accounted for 11% of the Company's revenues. Three corporate sponsors accounted
for 17%, 14% and 12% of accounts receivable at December 31, 1998.
35
<PAGE> 36
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A third party accounted for approximately 90% of the Company's revenues for
the year ended December 31, 1997.
DEPENDENCE ON THIRD PARTIES AND RELATED PARTY TRANSACTIONS
A common stockholder, Gibson Greetings, Inc. ("Gibson"), provides a
significant portion of the Company's online cards content pursuant to an
agreement that the Company pays royalties. Under this agreement, the Company
paid royalties to this related party of $504,000, $112,000 and $1,000 in the
years ended December 31, 1999, 1998 and 1997, 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 to provide a majority of support
necessary to maintain the server and transmit data. The inability of any of
these parties to fulfill their obligations with the Company could negatively
impact the Company's future results.
CHANNEL DISTRIBUTION COSTS
The Company has contracted with several third party channel distribution
partners whose Internet Web sites direct Internet traffic to the Egreetings.com
Web site via a link from the distribution partners' Web site. The contracts
typically range from 12 - 24 months. The Company charges the cost of these
distribution services to sales and marketing expense over the life of the
contracts.
REVENUE RECOGNITION
Revenues consist primarily of advertising and sponsorship revenues and
direct marketing revenues. The duration of banner advertising and sponsorship
commitments typically range from one month to one year. The Company's
advertisement obligations typically include guarantees of a minimum number of
impressions, or times that an advertisement appears in pages viewed by consumers
using the Company's Web site. The Company recognizes revenues on 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 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.
Deferred revenue is primarily comprised of billings in excess of recognized
revenue relating to advertising contracts and payments received pursuant to
sponsorship advertising contracts in advance of revenue recognition.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock option grants using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25 and
has adopted the disclosure-only alternative of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
approximately $9,775,000, $478,000, and $134,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
36
<PAGE> 37
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In November 1999, the Company sold 2,475,247 shares of Series G preferred
stock to the National Broadcasting Company, Inc. for gross proceeds of
approximately $7.5 million in cash and for advertising rights with a fair value
of $7.5 million. Under the NBC agreement, advertising will be provided to the
Company pursuant to the terms of the advertising agreement. The fair value of
these advertising rights was recorded as prepaid advertising and will be
amortized to expense as advertising is used. As of December 31, 1998, no
material amounts relating to advertising were classified as assets on the
Company's balance sheets.
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 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.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirement of SFAS No. 128, "Earnings per Share" ("SFAS
128"). Basic earnings per 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.
Pro forma net loss per share for the year ended December 31, 1999 has been
computed as described above and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of preferred shares not included above
that automatically converted upon completion of the Company's initial offering,
using the if-converted method.
37
<PAGE> 38
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The calculation of basic and diluted net loss per share is as follows (in
thousands, except share and per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net loss............................................ $ (36,642) $ (7,821) $ (3,093)
=========== ========== ==========
Weighted average shares of common stock
outstanding...................................... 5,726,149 3,466,000 3,466,000
Less: weighted average shares of common stock that
may be repurchased............................... (1,157,601) (1,543) (365,925)
----------- ---------- ----------
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per
share............................................ 4,568,548 3,464,457 3,100,075
=========== ========== ==========
Basic and diluted net loss per share................ $ (8.02) $ (2.26) $ (1.00)
=========== ========== ==========
</TABLE>
If the Company had reported net income, the calculation of diluted earnings
per share would have included approximately an additional 798,000, 424,000, and
380,000 common equivalent shares related to the outstanding stock options and
warrants not included above (determined using the treasury stock method) for the
years ended December 31, 1999, 1998, and 1997, respectively.
EFFECT OF NEW ACCOUNTING STANDARDS
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
March 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.
38
<PAGE> 39
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- ------
<S> <C> <C>
Furniture and fixtures...................................... $ 743 $ 98
Computer equipment and purchased software................... 12,467 1,220
Leasehold improvements...................................... 713 34
Website application and infrastructure costs................ 702 --
------- ------
14,625 1,352
Less accumulated depreciation and amortization.............. (2,825) (507)
------- ------
$11,800 $ 845
======= ======
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1999 1998
------ ----
<S> <C> <C>
Accounts receivable......................................... $1,297 $210
Less allowance for doubtful accounts........................ (69) --
------ ----
$1,228 $210
====== ====
</TABLE>
4. DEFERRED CONTENT COSTS
In December 1997, the Company entered into a Series D preferred stock
purchase agreement and a content provider and distribution agreement ("Content
Agreement") with Gibson Greetings, Inc. In conjunction with this transaction,
the Company granted to Gibson a warrant to purchase 946,925 shares of Series E
preferred stock. The warrant increased to 1,663,333 shares of Series E preferred
stock as a result of certain anti-dilution provisions. This warrant, exercised
by Gibson Greetings, Inc. concurrent with the completion of the Company's
initial offering, was contingent on Gibson Greeting's not being in material
violation of the Content Agreement and therefore was accounted for as a variable
warrant. The warrant was valued by management using a model based on the
Black-Scholes model at each quarter end with the fair value recorded as deferred
content costs in the accompanying balance sheets. The Company recorded
$7,744,000, $445,000 and $1,259,000 in deferred content costs for the years
ended December 31, 1999, 1998 and 1997, respectively. The assumptions used to
compute the value of the warrant at each measurement date under Black-Scholes
were as follows: expected volatility, 0.7; expected dividend yield, 0%;
risk-free interest rate, 4.34% to 5.38%; expected life, amount of time between
measurement date and expiration of warrant; and exercise price and stock price,
consistent with information at each relevant date. On September 30, 1999, in
connection with the execution of the first amendment to the Content Agreement,
the warrant became non-forfeitable, fully exercisable and fully vested and was
no longer linked to performance under the Content Agreement. The Company
performed a final valuation of Black-Scholes at September 30, 1999, resulting in
a final value of $9,448,000 that is being amortized over the remaining period of
the Content Agreement, which extends through December 2002.
In November 1999, the Company entered into a two-year content licensing
agreement with NBC pursuant to which the Company has the right to create and
distribute online cards for a minimum of five NBC television programs for each
six-month television season, which amount may be increased, at NBC's option, to
a maximum of 30 NBC television programs for each season. The consideration for
this content agreement, in addition to the promotion by the Company of digital
greetings containing NBC content, is equal
39
<PAGE> 40
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to the difference in NBC's per share cost of the Series G preferred stock from
the deemed fair market value of the Company's common shares as of the date of
the preferred stock purchase by NBC. This equates to a value of approximately
$4.8 million which has been recorded as deferred content costs with an offset to
preferred stockholders' equity. The deferred content costs is being amortized
over the two-year life of the related content agreement.
As of December 31, 1999, the Company had net deferred content costs of
$7,938,000 and $4,802,000 in relation to Gibson and NBC agreements,
respectively. Amortization of deferred content costs was approximately
$1,371,000, $138,000, and $0 for the years ended December 31, 1999, 1998, and
1997, respectively.
5. DEBT
In October 1998, the Company entered into a convertible promissory note
with a preferred stockholder under which it borrowed approximately $514,000. The
notes bear interest at 5.6%, compounded semi-annually. In March 1999, principal
and accrued interest were converted into 82,831 shares of Series D preferred
stock at $6.39 per share.
The Company has three equipment term loans. At December 31, 1999, the
outstanding loan balances were $66,000, $937,000 and $4,479,000, respectively,
and mature in June 2000, March 2002 and August 2002, respectively. The loans
bear interest at prime plus 1%, prime plus 2% and 11.6%, respectively (9.5%,
10.5% and 11.6% as of December 31, 1999, respectively). Principal and interest
are payable monthly. All three equipment loans are secured by the equipment
purchased under the loan agreement and a general lien against the Company's
assets.
In August 1999, the Company entered into an equipment financing agreement
with two leasing companies and a financial institution that provides for
borrowings of up to $10.0 million, of which approximately $4.5 million is
outstanding as of December 31, 1999. Amounts funded under the agreement bear
interest at the applicable three-year treasury note rate plus 2.75% per annum,
which is 11.59% at December 31, 1999, and are payable monthly over a 36 month
period from the date of each advance. An additional interest payment of 10% of
the total amount drawn-down on the facility is due upon extinguishment of the
debt. Advances under the facility are available through July 31, 2000.
Borrowings are secured by the equipment purchased under the financing agreement.
In connection with the financing, the Company granted a warrant that enable the
holders to purchase 60,000 shares of the Company's common stock at an exercise
price of $9.00 per share through November 2005. The Company has recorded the
value of the warrant using the Black-Scholes option pricing model and is
amortizing this amount to interest expense over the term of the financing
agreement.
Future payments relating to outstanding loans are as follows at December
31, 1999 (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 1,764
2001........................................................ $ 1,855
2002........................................................ $ 1,863
-------
Total principal payments.................................... $ 5,482
Less current portion........................................ $(1,764)
-------
$ 3,718
=======
</TABLE>
6. INCOME TAXES
There has been no provision for United States federal or state or foreign
income taxes for any period as the Company has incurred operating losses for all
periods and in all jurisdictions.
40
<PAGE> 41
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets
Net operating losses.................................. $ 17,103 $ 4,710
Stock compensation.................................... 1,186 --
Accrued expenses...................................... 1,049 --
Other................................................. 232 80
-------- -------
Total deferred tax assets..................... 19,570 4,790
======== =======
Valuation allowance..................................... (19,570) (4,790)
-------- -------
$ -- $ --
======== =======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $14,780,000 and $2,875,000 during the years ended
December 31, 1999 and 1998, respectively.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $45,271,000, which expire in
the years 2010 through 2019. The Company also had net operating loss
carryforwards for state income tax purposes of approximately $28,522,000
expiring in years 2003 through 2004. Utilization of the Company's net operating
losses may be subject to substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. Such an annual limitation could result in the expiration of
the net operating losses before utilization.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1999, the Company completed its initial public offering of 6.0
million shares of its common stock. Net proceeds to the Company totaled
approximately $54.2 million. As of the closing date of the offering, all of the
convertible preferred stock outstanding was converted into approximately 22.4
million shares of common stock.
STOCK SPLITS
In May 1999, the Company completed a three-for-one stock split of issued
and outstanding shares of common stock. In November 1999, the Company completed
a two-for-three reverse stock split of issued and outstanding shares of common
stock. All common share prices, conversion rates and other amounts associated
with rights, preferences and privileges in the accompanying financial statements
have been retroactively adjusted to reflect the effect of these stock splits.
BRIDGE FINANCINGS
Between November 1998 and January 1999, the Company issued subordinated
notes for an aggregate amount of $2,100,000 and an interest rate of 8.0% per
annum, together with a warrant to purchase 67,139 shares of Series F preferred
stock at $6.30 per share. The principal amount of these notes was converted into
300,000 shares of Series F preferred stock in March 1999 and subsequently
converted into 600,000 shares of common stock upon completion of the initial
public offering.
41
<PAGE> 42
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In February and March 1999, the Company issued short-term notes payable
with an aggregate principal amount of $1,000,000 and interest rates ranging from
4.6% to 8.0% per annum. The principal amount of these notes was converted into
142,857 shares of Series F preferred stock in March 1999 and subsequently
converted into 285,714 shares of common stock upon completion of the initial
public offering.
WARRANTS
The Company had the following warrants to purchase shares of common stock
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE PER
OF SHARES SHARE EXPIRATION OF WARRANTS
--------- --------- ----------------------
<C> <C> <S>
15,006 $1.00 March 2003
83,820 2.00 April - August 2007
134,278 3.15 November 2005
120,000 4.50 November 2005
-------
353,104
=======
</TABLE>
Concurrent with the initial public offering, all outstanding warrants for
preferred stock were converted to warrants for common stock on a 2 for 1 basis.
In December 1997, the Company granted a warrant to a preferred stockholder.
Concurrent with the completion of the initial public offering in December 1999,
this warrant was exercised for 1,663,333 shares of Series G preferred stock at
$5.46 per share and immediately converted into 3,326,666 shares of common stock.
STOCK OPTIONS
The Company's 1996 Stock Option Plan provides for the issuance of 6,456,109
shares of common stock to employees, officers, directors and consultants and is
limited to 17.5% of fully diluted common stock equivalents as defined. The
Company's 1999 Stock Option Plan provides for the issuance of 3,500,000 shares
of common stock to employees, officers, directors and consultants and is limited
to 17.5% of fully diluted common stock equivalents as defined. Options granted
under either plan may be incentive stock options ("ISOs") or non-statutory stock
options ("NSOs") to employees, officers, directors and consultants. The ISOs may
be granted at a price per share not less than the fair market value at the date
of grant. The NSOs may be granted at a price per share not less than 85% of the
fair market value at the date of grant. If at any time the Company grants an
option and the optionee directly or by attribution owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, the option price shall be at least 110% of the fair value at that date.
Options granted are exercisable over a maximum term of ten years from the date
of grant and generally vest over a period of four years.
42
<PAGE> 43
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity for all plans is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
WEIGHTED-AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996........................ 610,000 $0.06
Options granted....................................... 117,000 0.23
Options canceled...................................... (75,071) 0.11
---------- -----
Outstanding at December 31, 1997........................ 651,929 0.09
Options granted....................................... 493,500 0.83
Options canceled...................................... (112,928) 0.03
---------- -----
Outstanding at December 31, 1998........................ 1,032,501 0.05
Options granted....................................... 5,045,518 2.74
Options exercised..................................... (2,670,690) 2.07
Options canceled...................................... (744,135) 1.40
---------- -----
Outstanding at December 31, 1999........................ 2,663,194 $2.87
========== =====
Exercisable at December 31, 1999........................ 644,953 $0.66
========== =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ----------------------------
WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE
EXERCISE NUMBER EXERCISE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE
PRICE RANGE OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
----------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 - 0.93 704,292 $0.35 6.9 496,717 $0.21
1.25 - 4.50 1,504,307 2.04 9.4 144,470 1.97
6.06 - 10.00 454,595 9.50 9.9 3,766 9.20
--------- -------
2,663,194 644,953
========= =======
</TABLE>
In 1999, two officers and one director of the Company exercised options to
purchase an aggregate of 2,488,063 shares of restricted common stock at exercise
prices ranging from $2.10 to $2.78 per share, of which 1,965,904 shares are
subject to repurchase at December 31, 1999 at $2.10 per share in the event of
termination. The repurchase right lapses upon vesting. These shares were
purchased with promissory notes payable to the Company. These full recourse
notes bear interest at rates ranging from 5.4% to 6.0% per annum, with principal
and interest due in dates ranging from June 2003 to July 2004.
EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Company's Board of Directors adopted, and in
November 1999 the stockholders approved, the 1999 Employee Stock Purchase Plan.
The Company has reserved a total of 1,000,000 shares of common stock for
issuance under this plan. Beginning December 17, 1999 (the date of the Company's
initial public offering of its common stock), eligible employees may purchase
common stock at 85% of the lesser of the fair market value of the Company's
common stock on the first day of the applicable six-month offering period or the
fair market value of the Company's common stock at the date of purchase.
DEFERRED STOCK COMPENSATION
The Company recorded deferred stock compensation of $3,900,000 and $488,000
during the years ended December 31, 1999 and 1998, respectively, representing
the difference between the exercise price and the deemed fair value for
financial accounting purposes of certain of the Company's stock options granted
to employees. In the absence of a public market for the Company's common stock
during the period in which the
43
<PAGE> 44
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
options were granted, the deemed fair value of the Company's common stock was
based on the price per share of recent preferred stock financings, less a
discount to give effect to the superior rights of the preferred stock. These
amounts are being amortized by charges to operations over the vesting periods of
the individual stock options using a graded vesting method. Such amortization
amounted to $1,992,000 and $201,000 for the years ended December 31, 1999 and
1998, respectively.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, the Company has reserved shares of capital stock for
future issuance as follows:
<TABLE>
<S> <C>
Stock options outstanding................................... 2,663,194
Stock options available for grant........................... 4,376,225
Warrants to purchase common stock........................... 353,104
---------
7,392,523
=========
</TABLE>
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
Pro forma information regarding results of operations and net loss per
share is required by SFAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the Black-Scholes option valuation model
with the following weighted average assumptions: a risk-free interest rate of
5.5% for the years ended December 31, 1999, 1998, and 1997, no dividend yield
for the years ended December 31, 1999, 1998, and 1997, a volatility factor of .7
for the year ended December 31 1999 (minimum value method used in 1998 and 1997)
with respect to the expected market price of the Company's common stock, and a
weighted average expected life of the options of 5.5 years for the year ended
December 31, 1999 and 4.5 years for the years ended December 31, 1998 and 1997.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under the plan
calculated using the Black-Scholes option valuation model, the Company's net
loss and pro forma basic and diluted net loss per share would have been
increased to the pro forma amounts indicated below (in thousands except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net loss -- as reported.............................. $(36,642) $(7,821) $(3,093)
Pro forma net loss................................... $(38,871) $(7,833) $(3,096)
Basic and diluted net loss per share -- as
reported........................................... $ (8.02) $ (2.26) $ (1.00)
Pro forma basic and diluted net loss per share....... $ (8.51) $ (2.26) $ (1.00)
</TABLE>
The weighted-average fair value of options granted, which is the value
assigned to the options under SFAS 123, was $2.54, $0.18, and $0.05 for options
granted during the years ended December 31, 1999, 1998, and 1997, respectively.
44
<PAGE> 45
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The pro forma impact of options on the net loss is not representative of
the effects on net income (loss) for future years, as future years will include
the effects of additional years of stock option grants.
8. RETIREMENT PLAN
The Company has a defined contribution plan for all full-time employees
which qualifies under Section 401(k) of the Internal Revenue Code. Under the
terms of the plan, employees may contribute up to 15%, subject to Internal
Revenue Service limitations, of their annual compensation. The plan provides for
discretionary employer contributions. As of December 31, 1999, there have been
no employer contributions to the plan.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office facilities and certain equipment under
noncancelable lease agreements that require the Company to pay operating costs,
including property taxes, normal maintenance and insurance. In addition to an
equipment operating lease expiring in February 2001, the Company has entered
into two long-term noncancelable leases on office buildings that expire in
November 2002 and August 2009.
Rent expense amounted to approximately $1,312,191, $216,000, and $98,000
for the years ended December 31, 1999, 1998 and 1997, respectively. Future
minimum payments under the terms of noncancelable operating lease agreements at
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................... $ 2,991
2001............................................... 2,852
2002............................................... 2,842
2003............................................... 2,613
2004............................................... 2,613
Thereafter......................................... 12,193
-------
Total minimum lease payments............. $26,104
=======
</TABLE>
Also under the terms of the office facilities lease agreements, the Company
was required to provide $2,076,544 in letters of credit supporting the minimum
lease payments. The letters of credit are required to be fully collateralized
with a compensating cash balance at the issuing bank.
10. SUBSEQUENT EVENTS (UNAUDITED)
In March 2000, American Greetings completed the acquisition of Gibson by
the merger of a wholly owned acquisition subsidiary with and into Gibson, with
Gibson as the surviving corporation. With this acquisition, ownership of
Gibson's shares of our capital stock remain with Gibson, whose sole stockholder
is American Greetings. The Company does not know how its relationship with
Gibson or its rights pursuant to its license agreement with Gibson will be
affected by this acquisition.
45
<PAGE> 46
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE OFFS BALANCE AT
ALLOWANCE FOR BEGINNING COSTS AND NET OF END OF
DOUBTFUL ACCOUNTS OF YEAR EXPENSES RECOVERIES YEAR
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999 $0 $85 $16 $69
1998 $0 $ 0 $ 0 $ 0
1997 $0 $ 0 $ 0 $ 0
</TABLE>
46
<PAGE> 47
ITEM 9. DISAGREEMENTS OF ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the current
directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Alsop......................................... 48 Director
Brendon S. Kim(1)..................................... 33 Director
Peter Nieh(2)......................................... 34 Director
Frank J. O'Connell.................................... 56 Director
Gordon M. Tucker...................................... 44 Director
Lee Rosenberg(1)...................................... 43 Director
</TABLE>
---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
STEWART ALSOP -- Stewart Alsop has served as a director of Egreetings
Network since March 1999. Mr. Alsop has been a general partner of New Enterprise
Associates, a venture capital investment firm since 1998 and was a Venture
Partner at New Enterprise Associates from 1996 to 1998. From June 1991 to 1996,
Mr. Alsop served as Senior Vice President and Editor-in-Chief of InfoWorld Media
Group, Inc., which publishes InfoWorld, a weekly newspaper for information
technology professionals. Mr. Alsop also serves on the board of directors of
TiVo Inc., a publicly held personal television service company, Netcentives,
Inc., a publicly held Internet promotions and customer loyalty vendor and Be
Inc., a publicly held operating systems software vendor. Mr. Alsop holds a B.A.
degree from Occidental College.
BRENDON S. KIM -- Brendon Kim has served as a director of Egreetings
Network since April 1996. Mr. Kim has been a general partner of Altos Ventures,
a venture capital investment firm, since January 1996. From September 1994 to
June 1996, Mr. Kim worked at CSC Index, a consulting company, where he was an
associate. Mr. Kim also serves on the board of directors of several private
companies, including Branders.com, Blue Dot Software and Hearing Science. Mr.
Kim also serves on the board of directors of the Korean American Society of
Entrepreneurs, a not-for-profit organization to promote entrepreneurship. Mr.
Kim holds an A.B. degree from Princeton University and an M.B.A. degree from the
Stanford University Graduate School of Business.
PETER NIEH -- Peter Nieh has served as a director of Egreetings Network
since March 1999. Mr. Nieh has been a general partner of Weiss, Peck & Greer
L.P., a technology-focused venture capital investment firm since October 1995.
From 1992 to 1995, Mr. Nieh held product marketing and business development
roles at General Magic, Inc., a communications software company. From 1990 to
1991, Mr. Nieh managed the portable PC business in North America for Acer, Inc.,
a personal computer manufacturer. Mr. Nieh is a director of several private
companies. Mr. Nieh holds a B.S. degree in Electrical Engineering and an A.B.
degree in Economics from Stanford University and an M.B.A. degree from the
Stanford University Graduate School of Business.
FRANK J. O'CONNELL -- Frank J. O'Connell has served as a director of
Egreetings Network since December 1997. From April 1996 to March 2000, Mr.
O'Connell served as President, Chief Executive Officer and a director of Gibson
Greetings, Inc., a greeting card company, and served as Chairman of the Board of
Directors of Gibson from April 1997 to March 2000. From May 1995 to August 1996,
Mr. O'Connell was a business consultant. From July 1991 to May 1995, he served
as the President and Chief Executive Officer of Skybox International, Inc., a
trading card manufacturer. Prior to joining Skybox International, Mr. O'Connell
was a venture capital consultant from February 1990 to July 1991 and served as
President of Reebok Brands,
47
<PAGE> 48
North America from 1988 to 1990. Mr. O'Connell is a director of Moto Guzzi
Corporation, a publicly traded manufacturer of motorcycles and motorcycle parts.
GORDON M. TUCKER -- Gordon Tucker joined Egreetings Network in February
1999 as our Chief Executive Officer and as a director. From July 1994 to
February 1999, Mr. Tucker served as Chief Executive Officer and Chairman of the
Board of Directors of IdeaNet Management Company, a "virtual" management company
serving early-stage technology companies with venture capital financial support.
In his capacity as Chief Executive officer of IdeaNet, from November 1996 to
March 1998 Mr. Tucker served as acting Senior Vice President of Excite Studios,
Ecommerce and Communities at Excite, Inc. (now Excite@Home), an Internet media
company. From September 1993 to July 1994, Mr. Tucker was President, Chief
Executive Officer and a director of Micrografx, Inc., a graphics software
company. Earlier in his career, Mr. Tucker served as Brand Manager for The
Procter & Gamble Company, a leading consumer products company, and as Executive
Vice President for LoJack Corporation, a wireless communications company. Mr.
Tucker holds a B.B.A. degree from the University of Michigan School of Business
Administration.
LEE ROSENBERG -- Lee Rosenberg has served as a director of Egreetings
Network since November 1995. Mr. Rosenberg has been a general partner of Kettle
Partners, L.P., an Internet and technology-focused venture capital investment
firm since March 1998. Mr. Rosenberg also currently serves on the board of
directors of several private companies, including Ignite Sports Media, LLC, an
Internet sports media company, and ActiveUSA, a global registration site for
active sports communities. Over the past 15 years, Mr. Rosenberg has been
President of Rosenberg Capital and general partner of Rosy Partnership, entities
involved in a broad spectrum of venture capital and real estate investments.
Previously, Mr. Rosenberg served as a director of GRP Records. Mr. Rosenberg is
a C.P.A. and holds a B.B.A. degree from the University of Michigan School of
Business Administration.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that Mr.
Moley failed to file timely one report on Form 4 with respect to a stock
purchase. Mr. Moley filed such report immediately after being notified of the
failure to file timely.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Our directors receive no cash compensation for their services as directors
but are reimbursed for their reasonable expenses in attending Board meetings.
In September 1999, the Board adopted, and in December 1999 the stockholders
approved, the 1999 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") to provide for the automatic grant of options to purchase shares of
Common Stock to non-employee directors of the Company who are not employees of
or consultants to the Company or of any affiliate of the Company (a
"Non-Employee Director") to be effective upon the initial public offering of the
Company's Common Stock. The Directors' Plan is administered by the Board, unless
the Board delegates administration to a Committee comprised of members of the
Board.
The aggregate number of shares of Common Stock that may be issued pursuant
to options granted under the Directors' Plan is 500,000 shares. Pursuant to the
terms of the Directors' Plan, each person who is elected
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<PAGE> 49
or appointed for the first time to be a Non-Employee Director automatically
shall, upon the date of his or her initial election or appointment to be a
Non-Employee Director automatically shall, upon the date of his or her initial
election or appointment to be a Non-Employee Director by the Board or
stockholder of the Company, be granted an option to purchase 24,000 shares of
Common Stock. In addition, on the day following each Annual Meeting of
Stockholders of the Company ("Annual Meeting"), commencing with the Annual
Meeting in 2000, each person who is then serving as a Non-Employee Director
automatically shall be granted an option to purchase 8,000 shares of Common
Stock, which amount shall be prorated for any Non-Employee Director who has not
continuously served as a Non-Employee Director for the 12-month period prior to
the date of such Annual Meeting. Each of the directors currently serving on the
Board will be eligible for this grant.
The exercise of the options granted under the Directors' Plan will be equal
to closing sale price of the Company's Common Stock on the NASDAQ National
Market on the date of grant. No portion granted under the Directors' Plan may be
exercised after the expiration of 10 years from the date it was granted. Options
granted under the Directors' Plan vest and become exercisable as to 1/36 of the
shares on the last day of each month following the date of grant that, for
annual grants will be April 30 of each year. Options granted under the
Directors' Plan generally are non-transferable except by will or the laws of
descent. However, an optionee may designate a beneficiary who may exercise the
option following the optionee's death. An optionee whose service relationship
with the Company or any affiliate (whether as a Non-Employee Director of the
Company or subsequently as an employee, director, or consultant of either the
Company or an affiliate) ceases for any reason may exercise vested options for
the term provided in the option agreement (3 months generally, 12 months in the
event of disability and 18 months in the event of death).
In the event of certain changes in control of the Company, all outstanding
awards under the Directors' Plan either will be assumed or substituted for by
any surviving entity. If the surviving entity determines not to assume or
substitute for such awards, the vesting and time during which such options may
be exercised shall be accelerated prior to such event and the options will
terminate if not exercised after such acceleration and at or prior to such
event. Unless terminated sooner by the Board, the Directors' Plan will terminate
in September 2009.
As of March 1, 2000, no options had been exercised under the Directors'
Plan.
49
<PAGE> 50
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal year ended December 31, 1999,
compensation awarded or paid to, or earned by (i) the Company's Chief Executive
Officer; (ii) the Company's former Chief Executive Officer and Chief Financial
Officer; (iii) the Company's former President and Chief Concept Officer; and
(iv) the three most highly compensated current executive officers whose
aggregate salary and bonus earned exceeded $100,000 in the fiscal year ended
December 31, 1999 (collectively, (i) through (iv) the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------
AWARDS RESTRICTED SECURITIES
----------------------- OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) COMPENSATION($) AWARDS($) OPTIONS/SARS(#)
--------------------------- ---- --------- ----------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gordon M. Tucker........... 1999 $198,605 $74,302 $ 75,000(4) -- --
Chief Executive
Officer(3)
Frederick Campbell......... 1999 114,840 -- 136,106 -- --
Former Chief Executive
Officer and Chief
Financial Officer(5)
Paul Lipman................ 1999 146,500 37,500 -- -- --
Senior Vice President,
Business Development
Behrouz Arbab, Ph.D........ 1999 96,137 25,000 -- -- --
Senior Vice President and
Chief Technology Officer
Kenneth W. Wallace......... 1999 98,730 42,849 -- -- --
Senior Vice President,
Sales
Anthony Levitan............ 1999 116,421 -- 117,788 -- --
Former President and
Chief
Concept Officer(6)
</TABLE>
---------------
(1) As permitted by the rules promulgated by the Securities and Exchange
Commission, no amounts are shown for 1998.
(2) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(3) Mr. Tucker became our Chief Executive Officer in February 1999.
(4) Consists of reimbursement to Mr. Tucker for relocation expenses of $75,000.
(5) Mr. Campbell resigned from his position as Chief Executive Officer in
February 1999 and served as Chief Financial Officer until July 1999 when he
resigned from the Company.
(6) Mr. Levitan resigned from his position as President and Chief Concept
Officer in August 1999.
STOCK OPTION GRANTS AND EXERCISES
The Company granted options to its executive officers under its 1996 Stock
Option Plan (the "1996 Plan") and currently grants options to its executive
officers under its 1999 Equity Incentive Plan (the "1999 Plan"). As of March 15,
2000, options to purchase a total of 2,487,358 shares and 341,391 shares were
outstanding under the 1996 Plan and the 1999 Plan, respectively, 1,047,170
shares remained available for grant under the 1996 Plan and 2,308,609 shares
remained available for grant under the 1999 Plan, respectively.
50
<PAGE> 51
The following tables show for the fiscal year ended December 31, 1999,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
NUMBER OF
SECURITIES POTENTIAL REALIZABLE VALUE AT ASSUMED
UNDERLYING % OF TOTAL ANNUAL RATES OF STOCK PRICE
OPTION OPTIONS GRANTED EXERCISE OR APPRECIATION FOR OPTION TERM(4)
GRANTED TO EMPLOYEES IN BASE PRICE -------------------------------------
(#)(1) FISCAL YEAR(2) ($/SH)(3) EXPIRATION DATE 5%($) 10%($)
---------- --------------- ----------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Gordon M. Tucker(5)....... 2,267,563 44.9% $2.10 6/17/09 $ 2,993,183 $ 7,596,336
Frederick R. Campbell..... -- -- -- -- --
Kenneth W. Wallace(6)..... 133,333 2.6% 2.10 6/30/09 176,000 446,666
Behrouz Arbab, Ph.D.(6)... 250,000 5.0% 2.10 6/14/09 330,000 837,500
Paul Lipman(6)............ 106,366 2.1% 1.55 / 1.75 3/23/09/3/25/09 8,276/77,000 14,451/279,000
Anthony Levitan........... 200,000 4.0% 1.75 3/25/09 220,000 558,000
</TABLE>
---------------
(1) Options generally vest at a rate 1/8th on the date six months from the
vesting commencement date and 1/48 each month thereafter. The term of each
option granted is generally the earlier of (1) ten years or (ii) 90 days
after termination of the optionee's services to the Company. Options are
immediately exercisable; however, the unvested shares purchasable under such
options are subject to repurchase by the Company at the original exercise
price paid per share upon the optionee's cessation of service prior to the
vesting of such shares.
(2) Based on an aggregate of 5,045,518 options granted to employees, consultants
and directors of the Company, including the Named Executive Officers, during
the fiscal year ended December 31, 1999.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
after consideration of a number of factors, including, but not limited to,
the development life cycle of the Company's products, the Company's
financial performance, market conditions, the price preferred rights and
privileges of shares of equity securities sold to or purchased by outside
investors, and third-party appraisals.
(4) The potential realizable value is calculated based on the terms of the
option at its time of grant (ten years). It is calculated assuming that the
fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the entire
term of the option is exercised and sold on the last day of its term for the
appreciated stock price. There can be no assurance that the amounts
reflected in the table will be achieved.
(5) In the event of certain change of control events, the vesting of options
held by Mr. Tucker shall accelerate 100% pursuant to Mr. Tucker's employment
agreement.
(6) In the event of certain change of control events and a termination in
connection with such change of control, the Board has implemented a policy
whereby certain executives, including Messrs. Arbab, Wallace and Lipman
shall have the remaining unvested option accelerate vesting by up to one
year.
51
<PAGE> 52
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END VALUES AT DECEMBER 31, 1999
The following table sets forth the number of shares of common stock
acquired and the value realized upon exercise of stock options during 1999 and
the number of shares of common stock subject to exercisable and unexercisable
stock options held as of December 31, 1999 by each of the named executive
officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999(3) DECEMBER 31, 1999($)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gordon M. Tucker.......... 2,267,563 -- -- -- -- --
Frederick R. Campbell..... -- -- -- -- -- --
Paul Lipman............... 5,500 $ 49,500 80,202 106,664 $771,016 $ 922,471
Behrouz Arbab, Ph.D....... 6,667 52,669 24,583 218,750 197,279 1,755,469
Kenneth W. Wallace........ -- -- 16,666 116,667 133,745 936,253
Anthony Levitan........... 20,833 57,289 -- -- -- --
</TABLE>
---------------
(1) The value realized is based on the fair market value of the Company's Common
Stock on the date of exercise minus the exercise price.
(2) Value of unexercised in-the-money option are based on the fair market value
of the Company's Common Stock on December 31, 1999 of $10.125 per share,
minus the per share exercise price of the options.
EMPLOYMENT AGREEMENTS
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Gordon M. Tucker Employment Agreement
In February 1999, we entered into an employment agreement with Gordon M.
Tucker, our Chief Executive Officer and a director, under which Mr. Tucker is
compensated at a rate of $225,000 per year, paid on a semi-monthly basis. The
agreement also provides that Mr. Tucker's employment with us will last until the
earliest date on which any of the following events may occur:
- his death or resignation from Egreetings Network;
- his termination by us for cause;
- his termination by us without cause; or
- his termination due to a failure to maintain his employment conditions.
Pursuant to the employment agreement, Mr. Tucker received a non-qualified
stock option grant for the purchase of 2,267,563 shares of our common stock at
an exercise price of $2.10 per share. The option vests at a rate of 1/8 of the
total number of shares subject to the option on the six-month anniversary of the
grant and 1/48 of the total number each month thereafter, for a total vesting
period of four years. The employment agreement provides that, if Mr. Tucker is
terminated other than for cause, then the stock options for the month in
progress and for the twelve months thereafter shall immediately vest and shall
be exercisable for three years after his termination. In addition, Mr. Tucker's
employment agreement provides that, if Mr. Tucker is terminated other than for
cause or he terminates his employment agreement due to a failure to maintain
employment conditions and within 180 days of his termination a change of control
is announced or occurs, then all his unvested stock options will immediately
vest and will be exercisable for three years after Mr. Tucker's termination.
If there is a change of control while Mr. Tucker is still employed by us,
the vesting that was scheduled to occur during the first three years of Mr.
Tucker's option will accelerate and become fully vested and will be exercisable
for three years after termination of Mr. Tucker's employment with us. If, after
a change of control,
52
<PAGE> 53
Mr. Tucker remains employed as Chief Executive Officer and is actually or
constructively terminated within one year of the change of control or, within
that period, he terminates his employment with us, then all of his remaining
unvested shares will vest fully and will be exercisable for three years from the
date of his termination.
The employment agreement also provides for a prorated annual bonus, the
target of which was 50% of Mr. Tucker's base salary. We also paid Mr. Tucker a
transition allowance of $75,000 so that Mr. Tucker could be reimbursed for, or
paid for the reasonable costs and expenses of relocating from the Dallas, Texas
metropolitan area to San Francisco, California. To the extent the transition
allowance was not spent, Mr. Tucker has been paid the balance. All amounts paid
under the transition allowance will be credited against any amounts otherwise
payable to Mr. Tucker as a part of his bonus for 1999. In the event Mr. Tucker
is terminated other than for cause, he is entitled to receive from us an amount
equal to 12 months of his base salary and benefits.
Frederick L. Campbell Employment and Consulting Agreement
In May 1999, we entered into an employment and consulting agreement with
Frederick Campbell, our former Chief Executive Officer and Chief Financial
Officer. Pursuant to the agreement, Mr. Campbell agreed to serve as our Chief
Financial Officer until we hired a new Chief Financial Officer, which we did in
July 1999 when we hired Andrew J. Moley to fill that position. In addition, Mr.
Campbell agreed to provide consulting services to us until August 2000. For his
services as our Chief Financial Officer, Mr. Campbell received an annual base
salary of $175,000. For his services as a consultant, Mr. Campbell received a
payment of $125,000 in August 1999 and he will receive a final payment of
$125,000 in January 2000.
Anthony Levitan Employment and Consulting Agreement
In August 1999, we entered into an employment and consulting agreement with
Anthony Levitan, our former President and Chief Concept Officer. Pursuant to the
agreement, Mr. Levitan agreed to serve as our Chief Concept Officer until August
31, 1999. In addition, Mr. Levitan agreed to provide consulting services to us
until August 31, 2001. For his services as our Chief Concept Officer, Mr.
Levitan received an annual base salary of $175,000. For his services as a
consultant, Mr. Levitan will receive payments totaling $214,500 from November
1999 through August 2001. Under the agreement, Mr. Levitan received a severance
payment of $87,500 and will receive an additional severance payment of $87,500
on January 1, 2000. Mr. Levitan will also receive an additional payment of
$3,625 pursuant to the agreement.
Severance Arrangements for Senior Executives
In June 1999, the Board approved "double-trigger" change of control
acceleration for options granted to employees at the senior director level and
above, such as Andrew J. Moley, Behrouz Arbab, Paul Lipman, Kenneth E. Wallace,
Sarah S. Anderson, Nancy Levin, Donald E. Chaney, Scott Neamand and Andrew P.
Missan. This acceleration would occur in the event that, after the change of
control event involving Egreetings, any such employee is actually or
constructively terminated. Upon such a termination, a senior vice president's
options would accelerate by one year, a vice president's options would
accelerate by nine months and a senior director's options would accelerate by
six months. In addition, the Board resolved that, upon such a termination, a
senior vice president would receive a cash severance payment equal to six months
of such officer's base salary, a vice president would receive a cash severance
payment equal to three months of such officer's base salary and a senior
director would receive a cash severance payment equal to three months of such
employee's base salary.
53
<PAGE> 54
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION(1)
The Compensation Committee of the Board of Directors ("Committee") consists
of Messrs. Kim and Rosenberg, neither of whom are currently officers or
employees of the Company. The Committee is responsible for establishing the
Company's compensation programs for all employees, including executives. For
executive officers, the Committee evaluates performance and determines
compensation policies and levels.
COMPENSATION PHILOSOPHY
The goals of the compensation program are to align compensation with
business objectives and performance and to enable the Company to attract, retain
and reward executive officers and other key employees who contribute to the
long-term success of the Company and to motivate them to enhance long-term
stockholder value. Key elements of this philosophy are:
- The Company pays competitively compared to leading technology companies
with which the Company competes for talent. To ensure that pay is
competitive, the Company regularly compares its pay practices with these
companies and establishes its pay parameters based on this review.
- The Company maintains annual incentive opportunities sufficient to
provide motivation to achieve specific operating goals and to generate
rewards that bring total compensation to competitive levels.
- The Company provides significant equity-based incentives for executives
and other key employees to ensure that they are motivated over the
long-term to respond to the Company's business challenges and
opportunities as owners and not just as employees.
PHILOSOPHY REGARDING SECTION 162(m) OF THE INTERNAL REVENUE CODE. Section
162(m) of the Internal Revenue Code (the "Code") limits the Company to a
deduction for federal income tax purposes of no more than $1 million of
compensation paid to certain Named Executive Officers in a taxable year.
Compensation above $1 million may be deducted if it is "performance-based
compensation" within the meaning of the Code.
The Compensation Committee has determined that stock options granted under
the Company's 1999 Equity Incentive Plan with an exercise price at least equal
to the fair market value of the Company's common stock on the date of grant
shall be treated as "performance-based compensation."
BASE SALARY. The Committee annually reviews each executive officer's base
salary. When reviewing-base salaries, the Committee considers individual and
corporate performance, levels of responsibility, prior experience, breadth of
knowledge and competitive pay practices.
1999 INCENTIVE BONUS PLAN
LONG-TERM INCENTIVES. The Company's long-term incentive program consists of
the 1999 Equity Incentive Plan. The option program utilizes vesting periods
(generally four years) to encourage key employees to continue in the employ of
the Company. Through option grants, executives receive significant equity
incentives to build long-term stockholder value. Grants are made at 100% of fair
market value on the date of grant. Executives receive value from these grants
only if the value of the Company's Common Stock appreciates over the long-term.
The size of option grants is determined based on competitive practices at
leading companies in the technology industry and the Company's philosophy of
significantly linking executive compensation with stockholder interests. In 1999
the Committee granted to executives stock options that will vest over a
four-year period. These grants were intended to provide incentive to maximize
stockholder value
---------------
(1) The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after
the late hereof and irrespective of any general incorporation language
contained in such filing."
54
<PAGE> 55
over the next several years. The Committee believes this approach creates an
appropriate focus on longer term objectives and promotes executive retention.
The Compensation Committee
Lee Rosenberg
Brendon Kim
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to September 1999, the Company did not have a Compensation Committee
of the Board, and the entire Board participated in all compensation decisions.
In September 1999, the Board formed the Company's Compensation Committee to
review and recommend to the Board compensation and benefits for the Company's
officers and administer the Company's stock purchase and stock option plans.
Each of the Company's directors, or an affiliated entity, holds securities of
the Company.
55
<PAGE> 56
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph shows the total stockholder return of an investment of
$100 in cash on December 16, 1999 for the Company's Common Stock and an
investment of $100 in cash on December 31, 1999 for (i) the Standards & Poor's
500 Stock Index (the "S&P 500 Stock Index") and (ii) the Chicago Board Options
Exchange Internet Index (the "CBOE Internet Index"). All values assume
reinvestment of the full amount of all dividends and are calculated as of last
day of each month:
COMPARISON OF 3 MONTH CUMULATIVE TOTAL RETURN ON INVESTMENT
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
EGREETINGS NETWORK S&P 500 STOCK INDEX CBOE INTERNET INDEX
------------------ ------------------- -------------------
<S> <C> <C> <C>
December 16, 1999 100.00 100.00 100.00
December 31, 2000 101.25 103.557 95.634
January 2000 73.75 98.286 93.795
February 2000 56.563 96.310 100.266
March 2000 56.875 105.625 109.698
</TABLE>
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date hereof and
irrespective of any general incorporation language in any such filing.
56
<PAGE> 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 1, 2000 by: (i) each director and
nominee for director; (ii) each of the Named Executive Officers; (iii) all
executive officers and directors of the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five percent of its
Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- ---------------- ----------------
<S> <C> <C>
Gibson Greetings, Inc.(2)................................... 6,841,074 19.5%
100 East River Center Blvd.
Covington, KY 41011-1635
NBC-EGRT Holding, Inc. ..................................... 2,475,247 7.1%
30 Rockefeller Plaza
New York, NY 10112
Entities Affiliated with Weiss, Peck & Greer Venture 2,333,469 6.7%
Partners(3)...............................................
555 San Hill Road, Suite 100
San Francisco, CA 94194
Entities Affiliated with Altos Ventures(4).................. 2,162,544 6.2%
2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Entities Affiliated with New Enterprises Associates(5)...... 1,664,026 4.8%
2490 Sand Hill Road
Menlo Park, CA 94025
Frank O'Connell(6).......................................... 6,841,074 19.5%
Peter Nieh(3)............................................... 2,333,469 6.7%
Brendon Kim(4).............................................. 2,162,544 6.2%
Stewart Alsop(5)............................................ 1,664,026 4.8%
Lee Rosenberg(7)............................................ 671,089 1.9%
Gordon M. Tucker(8)......................................... 2,627,563 7.5%
Frederick R. Campbell....................................... 1,610,000 4.6%
Anthony Levitan............................................. 1,630,833 4.7%
Paul Lipman(9).............................................. 103,096 *
Behrouz Arbab, Ph.D(10)..................................... 52,083 *
Kenneth W. Wallace(11)...................................... 27,777 *
All directors and executive officers as a group (10 16,523,392 46.8%
persons)(12)..............................................
</TABLE>
---------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants exercisable within 60
days of March 1, 2000 are deemed outstanding. Unless otherwise indicated in
the footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
34,979,605 shares outstanding on March 1, 2000, adjusted as required by
rules promulgated by the SEC.
(2) Includes warrants to purchase 67,854 shares that are currently exercisable.
On March 9, 2000, American Greetings Corp. completed its acquisition,
pursuant to a cash tender offer, of all of the outstanding shares of Gibson
Greetings Inc.
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<PAGE> 58
(3) Consists of 500,296 shares held by WPG Enterprise Fund III, L.L.C., 572,167
shares held by Weiss, Peck & Greer Venture Associates IV, L.L.C., 22,167
shares held by WPG Information Sciences Entrepreneur Fund, L.P., 72,124
shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P.,
1,134,603 shares held by Weiss, Peck & Greer Venture Associates V, L.L.C.,
1,266 shares held by WPG Venture Associates V-A, L.L.C. and 30,846 shares
held by WPG Venture Associates V, Cayman L.P. Mr. Nieh, a director of
Egreetings Network, is a Managing Member of WPG VC Fund Adviser, L.L.C.,
the Fund Investment Advisory Member of WPG Enterprise Fund III, L.L.C. and
Weiss, Peck & Greer Venture Associates IV, L.L.C., and the General Partner
of WPG Information Sciences Entrepreneur Fund, L.P. In addition, Mr. Neih
is a Managing Member of WPG VC Fund Adviser II, L.L.C., Weiss Peck & Greer
Venture Associates V-A, L.L.C., and the Fund Investment Advisory Partner of
Weiss, Peck & Greer Venture Associates V Cayman, L.P. In such capacities,
Mr. Nieh may be deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares beneficially owned by the Weiss Peck &
Greer funds. Mr. Nieh disclaims beneficial ownership of the shares held by
the Weiss Peck & Greer funds within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934.
(4) Includes 11,428 shares held by Altos Partners 1, 1,686,874 shares held by
Altos Ventures I, L.P. and 412,540 shares held by Altos Ventures II, L.P.
Also includes warrants to purchase 51,702 shares that are currently
exercisable. Mr. Kim, a director of Egreetings Network, is a general
partner of Altos Partners and, as such, may be deemed to have an indirect
pecuniary interest in an indeterminate portion of the shares beneficially
owned by the Altos funds. Mr. Kim disclaims beneficial ownership of these
shares within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934.
(5) Includes 17,142 shares held by NEA Presidents Fund, L.P., 1,428 shares held
by NEA Ventures 1999, L.P., and 1,645,456 shares held by New Enterprise
Associates VIII, L.P. Mr. Alsop, a director of Egreetings Network, is a
general partner of New Enterprise Associates and, as such, may be deemed to
have an indirect pecuniary interest in an indeterminate portion of the
shares beneficially owned by the NEA funds. Mr. Alsop disclaims beneficial
ownership of these shares within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934.
(6) Mr. O'Connell is the former Chairman, Chief Executive Officer and President
of Gibson Greetings, Inc. Effective March 8, 2000, Mr. O'Connell retired in
connection with the acquisition of Gibson Greetings, Inc. by American
Greetings Corp. As of March 1, 2000, but terminating on March 9, 2000, Mr.
O'Connell may have been deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares beneficially owned by Gibson Greetings
Inc. Mr. O'Connell disclaims beneficial ownership of these shares within
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934.
(7) Consists of 394,378 shares held by Mr. Rosenberg personally, 16,499 shares
issuable upon exercise of options to Mr. Rosenberg exercisable within 60
days of March 1, 2000, 225,366 shares held by Kettle Partners L.P. and
warrants to purchase 34,846 shares that are currently exercisable held by
Kettle Partners L.P. and, as such, may be deemed to have an indirect
pecuniary interest in an indeterminate portion of the shares beneficially
owned by Kettle Partners L.P. Mr. Rosenberg disclaims beneficial ownership
of these shares within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934.
(8) Includes 1,913,238 shares subject to repurchase by us within 60 days of
March 1, 2000.
(9) Includes 97,596 shares issuable upon exercise of options exercisable within
60 days of March 1, 2000.
(10) Includes 45,416 shares issuable upon exercise of options exercisable within
60 days of March 1, 2000.
(11) Consists of 27,777 shares issuable upon exercise of options exercisable
within 60 days of March 1, 2000.
(12) See footnotes 2 through 11 above, as applicable. Includes 3,000 shares held
by Andrew Moley and 162,329 shares subject to repurchase by us within 60
days of March 1, 2000.
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<PAGE> 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the transaction described below, since January 1999 there has
not been nor is there currently proposed any transaction or series of similar
transactions to which we were or will be a party:
- in which the amount involved exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
PREFERRED STOCK FINANCINGS
From March to April 1999, we issued and sold an aggregate of 3,726,493
shares of Series F preferred stock for gross proceeds of approximately $26.1
million including 442,857 shares issued upon conversion of convertible
promissory notes having an aggregate principal amount of approximately $3.1
million that were issued between November 1998 and March 1999. Each of these
shares converted into two shares of Common Stock in December 1999.
In October 1999, we issued and sold an aggregate of 5,846,546 shares of
Series G preferred stock for gross proceeds of approximately $23.6 million,
which converted into two-thirds of one share of Common stock in December 1999.
In November 1999, we issued and sold 3,712,871 shares of Series G preferred
stock for gross proceeds of approximately $7.5 million in cash and an
advertising credit of approximately $7.5 million. Each of these shares converted
into two-thirds of one share of Common stock in December 1999.
Purchasers of our preferred stock include, among others, the following
directors, holders of more than 5% of our outstanding stock and a trust of which
the father of one of our executive officers is the sole trustee. All of the
share numbers in the following table reflect the conversion of each outstanding
share of Series F Preferred stock into two shares of common stock, and each
outstanding share of Series G preferred stock into two-thirds of one share of
common stock.
<TABLE>
<CAPTION>
SHARES OF SERIES F SHARES OF SERIES G
INVESTOR PREFERRED STOCK PREFERRED STOCK
-------- ------------------ ------------------
<S> <C> <C>
Lee Rosenberg(1)............................................ 192,858 96,204
Entities affiliated with Altos Ventures(2).................. 485,714 512,540
Gibson Greetings, Inc.(3)................................... 1,168,000 412,226
National Broadcasting Company, Inc.(4)...................... -- 3,712,871
New Enterprises Associates(5)............................... 1,400,000 264,026
Vulcan Ventures, Inc........................................ 1,114,286 144,884
Entities affiliated with Weiss, Peck & Greer Venture
Partners(6)............................................... 1,971,428 362,041
Richard M. Moley Annuity Trust U/A dated May 12, 1998(7).... -- 166,666
</TABLE>
---------------
(1) Includes 142,858 shares of Series F preferred stock and 82,508 shares of
Series G preferred stock held by Kettle Partners, L.P. for which Mr.
Rosenberg, a director of Egreetings Network, serves as a principal.
(2) Consists of 11,428 shares of Series F preferred stock held by Altos Partners
I, 474,286 shares of Series F preferred stock held by Altos Ventures I,
L.P., and 512,540 shares of Series G preferred stock held by Altos Ventures
II, L.P. Brendon Kim, a director of Egreetings Network, is affiliated with
the Altos entities.
(3) Frank O'Connell, a director of Egreetings, is the Former Chairman of the
Board, President and Chief Executive Officer of Gibson Greetings, Inc.
(4) National Broadcasting Company, Inc. subsequently transferred its shares of
Series G preferred stock to NBC-EGRT Holding, Inc., a wholly owned
subsidiary of NBC.
(5) Stewart Alsop, a director of Egreetings Network, is affiliated with New
Enterprise Associates.
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<PAGE> 60
(6) Consists of 148,909 shares of Series G preferred stock held by Weiss, Peck &
Greer Venture Associates V, L.L.C., 422,674 shares of Series F preferred
stock and 77,622 shares of Series G preferred stock held by WPG Enterprise
Fund III, L.L.C., 483,394 shares of Series F preferred stock and 88,773
shares of Series G preferred stock held by Weiss, Peck & Greer Venture
Associates, IV, L.L.C., 18,728 shares of Series F preferred stock and 3,439
shares of Series G preferred stock held by WPG Information Sciences
Entrepreneur Fund, L.P., 60,938 shares of Series F preferred stock and
11,186 shares of Series G preferred stock held by Weiss, Peck & Greer
Venture Associates IV Cayman, L.P., 801,764 shares of Series F preferred
stock held by WPG Venture Associates V, L.L.C. 8,280 shares of Series F
preferred stock and 1,266 shares of Series G preferred stock held by WPG
Venture Associates V-A, L.L.C., and 175,650 shares of Series F preferred
stock and 30,846 shares of Series G preferred stock held by WPG Venture
Associates V, Cayman L.P. Peter Nieh, a director of Egreetings Network, is a
general partner of Weiss, Peck & Greer Venture Partners and a member or a
general partner of the above-named funds.
(7) Mr. Moley, the sole trustee of this trust, is the father of Andrew J. Moley,
our Chief Financial Officer.
In connection with the promissory note issued in connection with the Series
F financing, the following 5% stockholders received warrants. All of the share
numbers in the following table reflect the conversion of each outstanding share
of Series F preferred stock into two shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
WARRANT HOLDER SUBJECT TO WARRANT EXPIRATION DATE
-------------- ------------------ ---------------
<S> <C> <C>
Gibson Greetings, Inc..................... 53,570 November 2005
Gibson Greetings, Inc..................... 14,284 January 2006
Altos Ventures I, L.P.(2)................. 17,856 November 2005
Altos Ventures I, L.P.(2)................. 14,284 January 2006
Kettle Partners, L.P.(3).................. 28,570 January 2006
</TABLE>
---------------
(2) Brendon Kim, a director of Egreetings Network, is a general partner of Altos
Ventures I, L.P.
(3) Lee Rosenberg, a director of Egreetings Network, is a principal of Kettle
Partners, L.P.
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
In February 1999, we entered into an employment agreement with Gordon M.
Tucker to serve as our Chief Executive Officer. The employment agreement is not
for a specified term and is terminable at will or without cause at any time upon
written notice. Mr. Tucker's employment agreement further provides that the
Company's Board will set Mr. Tucker's salary in accordance with the payroll
policies of the Company as constituted from time to time.
In June 1999, Mr. Tucker exercised in full the option granted to him
pursuant to his employment agreement and acquired 2,267,563 shares of common
stock. However, as of December 31, 1999, 1,967,457 shares held by Mr. Tucker may
be repurchased at $2.10 per share by the Company, subject to certain
acceleration provisions in Mr. Tucker's employment agreement. Mr. Tucker paid
the $2.10 exercise price per share for such shares by delivery of a promissory
note bearing a simple interest rate of 5.37% per annum. The full principal and
interest payable under the note are due in June 2003 or, if Mr. Tucker's
employment is terminated prior to that time, 60 days after the termination. The
note is secured by the shares of common stock purchased by Mr. Tucker. As of
December 31, 1999, approximately $4,891,177 in unpaid principal and interest was
outstanding in the aggregate under the note.
In July 1999, Andrew J. Moley, our Chief Financial Officer, exercised an
option grant to purchase an aggregate of 200,000 shares of common stock and
entered into an early exercise stock purchase agreement under the 1996 Stock
Option Plan regarding the shares. However, we have a right to repurchase any
unvested portion of the 200,000 shares within 90 days upon Mr. Moley's
termination of employment. As of December 31, 1999, 200,000 shares held by Mr.
Moley remain subject to repurchase at $2.78 per share. Mr. Moley paid the $2.78
purchase price per share for such shares by delivery of a promissory note
bearing a simple interest rate of 6.00% per annum. The full principal and
interest payable under the note are due in July 2003 or, if Mr. Moley's
employment is terminated prior to that time, the date of Mr. Moley's
termination. The
60
<PAGE> 61
note is secured by the shares of common stock purchased by Mr. Moley. As of
December 31, 1999, approximately $569,014 in unpaid principal and interest was
outstanding in the aggregate under the note. In October of 1999, Mr. Moley's
father also purchased approximately 166,666 shares of Series G preferred stock
at $6.06 per share.
In July 1999, we loaned $200,000 to Anthony Levitan, our former President
and Chief Concept Officer and then a holder of more than 5% of our outstanding
stock, in exchange for a promissory note bearing a simple interest rate of 6%
per annum. Principal payments of $25,000, plus interest thereon, will become due
quarterly, on the last day of February, May, August and November of each year
such that the full principal and interest payable under the note will be repaid
no later than August 31, 2001. As of December 31, 1999, approximately $175,875
in unpaid principal and interest remained outstanding under the note.
In May 1999, we entered into an employment and consulting agreement with
Fredrick R. Campbell, our former Chief Financial Officer and then a holder of
more than 5% of our outstanding stock. In August 1999, we also entered into an
employment and consulting agreement with Mr. Levitan, our former President and
Chief Concept Officer and then a holder of more than 5% of our outstanding
stock.
ADVERTISING AND CONTENT PROVIDER AGREEMENTS WITH NATIONAL BROADCASTING COMPANY,
INC.
In November 1999 in addition to a $7.5 million purchase of Series G
Preferred Stock, we entered into a two-year advertising agreement with National
Broadcasting Company, Inc. for approximately $7.5 million in advertising credit.
The agreement contains a pre-approved six-month advertising schedule and
provides that no less than 60% of the value of the advertising provided to us
will be broadcast during prime time hours. In November 1999, we also entered
into a two-year content licensing agreement with NBC pursuant to which we have
the right to create and distribute digital greetings for a minimum of five NBC
television programs for each six-month television season, which amount may be
increased, at NBC's option, to a maximum of 30 NBC television programs for each
season.
In December 1999, the Company also entered into indemnification agreements
with each of its directors and executive officers. The agreements require the
Company to indemnify such individuals to the fullest extent permitted by
Delaware law for certain liabilities to which they may become subject as a
result of their affiliation with the Company.
We believe that the foregoing transactions were in our best interest and
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future transactions between us and any of our
officers, directors or principal stockholders will be approved by a majority of
the disinterested members of the Board, will be on terms no less favorable to us
than could be obtained from unaffiliated third parties and will be in connection
with our bona fide business purposes.
The Company believes that the terms of the transactions described above
were no less favorable to the Company than would have been obtained from an
unaffiliated third party. Any future transactions between the Company and any of
its officers, directors or principal stockholders will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the independent and disinterested members
of the Board.
TRANSACTIONS INVOLVING COOLEY GODWARD LLP
The Company retains the law firm of Cooley Godward LLP as its primary
outside corporate counsel. Mr. Tucker is married to a partner of Cooley Godward
LLP. The Company paid Cooley Godward LLP approximately $301,770 in fees for the
year ended December 31, 1999.
61
<PAGE> 62
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements of the Company are filed with this
report, on the pages indicated below:
<TABLE>
<S> <C>
Report of Independent Auditors.............................. 30
Balance Sheets -- December 31, 1999 and 1998................ 31
Statements of Operations -- Years Ended December 31, 1999,
1998 and 1997............................................. 32
Statements of Stockholders' Equity (Deficit) -- Years Ended
December 31, 1999, 1998 and 1997.......................... 33
Statements of Cash Flows -- Years Ended December 31, 1999,
1998 and 1997............................................. 34
Notes to Financial Statements............................... 35
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of the Company is filed with
this report:
Schedule II -- Valuation and Qualifying Accounts and Reserves.
All other schedules are omitted because they are either not required or not
applicable.
(a)(3) Exhibits are incorporated herein by reference or are filed with this
report as indicated below (numbered in accordance with Item 601 of Regulation
S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.01* Amended and Restated Certificate of Incorporation.
3.02* Bylaws.
4.01* Form of Specimen Stock Certificate.
24.02* Fifth Amended and Restated Investors' Rights Agreement dated
November 19, 1999.
10.01* Form of Indemnity Agreement.
10.02* 1999 Equity Incentive Plan.
10.03* Form of Grant Notice and Stock Option Agreement under the
1999 Equity Incentive Plan.
10.04* 1999 Non-Employee Directors' Stock Option Plan.
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06* 1999 Employee Stock Purchase Plan.
10.07* Form of 1999 Employee Stock Purchase Plan Offering.
10.08* Office Lease between South Beach Development Company and
Registrant dated October 1999.
10.09* Lease between Jonathan Parker, Thomas M. Monahan, Harold
Parker Properties, L.P., Harold A. Parker, Trustee, Gertrud
V. Parker, Trustee of the Harold A. Parker Company Trust and
Registrant dated August 1999.
10.10* Content Provider and Distribution Agreement between
Registrant and Gibson Greetings, Inc., as amended on
September 30, 1999.
10.11* Agreement between Hotmail Corporation and Registrant, as
amended through August 1998.
10.12* Employment Agreement between Gordon M. Tucker and Registrant
dated February 12, 1999 and Promissory Note and Pledge
Agreement between Gordon M. Tucker and Registrant dated June
18, 1999.
10.13* Early Exercise Stock Purchase Agreement, Promissory Note and
Pledge Agreement between Andrew J. Moley and Registrant
dated July 30, 1999.
10.14* 1996 Stock Option Plan, as amended.
</TABLE>
62
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.15* 1999 Egreetings Network Incentive Bonus Plan.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
24.01+ Power of Attorney.
27.01+ Financial Data Schedules.
</TABLE>
---------------
* Previously filed and incorporated by reference from the Company's Registration
Statement on Form S-1
+ Previously filed and incorporated by reference from the Company's Report on
Form 10-K dated as of March 30, 2000.
63
<PAGE> 64
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, as amended 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
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Andrew J. Moley and Gordon M. Tucker, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with Exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or substitute or substitutes may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* Chief Executive Officer March 30, 2000
----------------------------------------------------- and Director
Gordon M. Tucker (Principal Executive Officer)
* Senior Vice President and March 30, 2000
----------------------------------------------------- Chief Financial Officer
Andrew J. Moley (Principal Financial Officer
and
Principal Accounting Officer)
* Director March 30, 2000
-----------------------------------------------------
Stewart Alsop
* Director March 30, 2000
-----------------------------------------------------
Brendon S. Kim
* Director March 30, 2000
-----------------------------------------------------
Peter Nieh
* Director March 30, 2000
-----------------------------------------------------
Frank J. O'Connell
* Director March 30, 2000
-----------------------------------------------------
Lee Rosenberg
As Attorney-in-Fact
By: /s/ ANDREW J. MOLEY
----------------------------------------------------
Andrew J. Moley
</TABLE>
64
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.01* Amended and Restated Certificate of Incorporation.
3.02* Bylaws.
4.01* Form of Specimen Stock Certificate.
24.02* Fifth Amended and Restated Investors' Rights Agreement dated
November 19, 1999.
10.01* Form of Indemnity Agreement.
10.02* 1999 Equity Incentive Plan.
10.03* Form of Grant Notice and Stock Option Agreement under the
1999 Equity Incentive Plan.
10.04* 1999 Non-Employee Directors' Stock Option Plan.
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06* 1999 Employee Stock Purchase Plan.
10.07* Form of 1999 Employee Stock Purchase Plan Offering.
10.08* Office Lease between South Beach Development Company and
Registrant dated October 1999.
10.09* Lease between Jonathan Parker, Thomas M. Monahan, Harold
Parker Properties, L.P., Harold A. Parker, Trustee, Gertrud
V. Parker, Trustee of the Harold A. Parker Company Trust and
Registrant dated August 1999.
10.10* Content Provider and Distribution Agreement between
Registrant and Gibson Greetings, Inc., as amended on
September 30, 1999.
10.11* Agreement between Hotmail Corporation and Registrant, as
amended through August 1998.
10.12* Employment Agreement between Gordon M. Tucker and Registrant
dated February 12, 1999 and Promissory Note and Pledge
Agreement between Gordon M. Tucker and Registrant dated June
18, 1999.
10.13* Early Exercise Stock Purchase Agreement, Promissory Note and
Pledge Agreement between Andrew J. Moley and Registrant
dated July 30, 1999.
10.14* 1996 Stock Option Plan, as amended.
10.15* 1999 Egreetings Network Incentive Bonus Plan.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
24.01+ Power of Attorney.
27.01+ Financial Data Schedules.
</TABLE>
---------------
* Previously filed and incorporated by reference from the Company's Registration
Statement on Form S-1
+ Previously filed and incorporated by reference from the Company's Form 10-K
filed on March 30, 2000.
