<PAGE> 1
United States
Securities and Exchange Commission
Washington D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the Transition Period From ___________ to ___________.
Commission File Number: 005-57829
EGREETINGS NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3207092
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
</TABLE>
149 New Montgomery Street
San Francisco, CA 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 375-4100
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 31, 2000
----- -------------------------------
<S> <C>
Common Stock, $0.001 par value 35,552,951
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
10-Q
PART I - FINANCIAL INFORMATION
Item 1 Condensed Financial Statements (unaudited)
- Balance Sheets at September 30, 2000 and December 31, 1999
- Statements of Operations for the three months ended September 30,
2000 and 1999 and the nine months ended September 30, 2000 and
1999
- Statements of Cash Flows for the nine months ended September 30,
2000 and 1999
- Notes to Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Item 6 Exhibits and Reports
Signatures
2
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EGREETINGS NETWORK, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
UNAUDITED
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 6,600 $ 81,774
Short-term investments .................................................. 28,746 --
Accounts receivable (net of allowance for doubtful accounts of $600 as of
September 30, 2000 and $69 as of December 31, 1999) .................. 2,531 1,228
Prepaid expenses and other current assets ............................... 8,173 9,244
--------- ---------
Total current assets ............................................ 46,050 92,246
Long-term investments ..................................................... 14,909 --
Property and equipment, net ............................................... 16,725 11,800
Deferred content costs .................................................... 9,012 12,740
Restricted cash deposit ................................................... 76 2,172
Deposits and other assets ................................................. 816 1,165
--------- ---------
Total assets .................................................... $ 87,588 $ 120,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 2,378 $ 7,910
Accrued expenses and other current liabilities .......................... 2,833 4,029
Accrued royalties ....................................................... 199 290
Deferred revenue ........................................................ 1,448 581
Current portion of equipment term loan .................................. 1,814 1,764
--------- ---------
Total current liabilities ....................................... 8,672 14,574
Equipment term loan, less current portion ................................. 2,377 3,718
--------- ---------
Total liabilities ............................................... 11,049 18,292
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value: 65,000,000 shares authorized;
35,552,951 and 34,501,140 shares issued and outstanding at
September 30, 2000 and December 31, 1999 respectively ................ 165,924 159,227
Deferred stock compensation ............................................. (868) (2,195)
Notes receivable from stockholders ...................................... (7,620) (5,490)
Accumulated deficit ..................................................... (80,897) (49,711)
--------- ---------
Total stockholders' equity ...................................... 76,539 101,831
--------- ---------
Total liabilities and stockholders' equity ...................... $ 87,588 $ 120,123
========= =========
</TABLE>
See notes to condensed financial statements.
3
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EGREETINGS NETWORK, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .............................................. $ 2,289 $ 803 $ 8,163 $ 1,527
Costs and expenses:
Cost of services(1) ................................. 2,154 918 4,567 1,989
Sales and marketing(2) .............................. 3,288 2,948 13,557 8,221
Operations and development(3) ....................... 4,687 3,713 13,153 7,081
General and administrative(4) ....................... 1,926 2,045 5,599 4,051
Amortization of deferred content costs .............. 1,339 349 3,933 754
Amortization of deferred stock compensation ......... 242 807 942 1,366
-------- -------- -------- --------
Total costs and expenses ................... 13,636 10,780 41,751 23,462
-------- -------- -------- --------
Loss from operations .................................. (11,347) (9,977) (33,588) (21,935)
Interest income (expense), net ........................ 728 15 2,531 (92)
Other income (expense), net .......................... (279) -- (129) --
-------- -------- -------- --------
Net loss .............................................. $(10,898) $ (9,962) $(31,186) $(22,027)
======== ======== ======== ========
Net loss per share:
Basic and diluted ................................. $ (0.32) $ (2.66) $ (0.94) $ (6.12)
======== ======== ======== ========
Shares used in calculation of net loss per share:
Basic and diluted ................................. 33,637 3,749 33,326 3,598
======== ======== ======== ========
</TABLE>
(1) Excluding $1,339 and $349 in amortization of deferred content costs for
the three months ended September 30, 2000 and 1999, respectively, and
$3,933 and $754 in amortization of deferred content costs for the nine
months ended September 30, 2000 and 1999, respectively. Also excluding
$27 and $64 in amortization of deferred stock compensation for the three
months ended September 30, 2000 and 1999, respectively, and $90 and $95
in amortization of deferred stock compensation for the nine months ended
September 30, 2000 and 1999, respectively.
(2) Excluding $75 and $202 in amortization of deferred stock compensation for
the three months ended September 30, 2000 and 1999, respectively, and
$287 and $347 in amortization of deferred stock compensation for the nine
months ended September 30, 2000 and 1999, respectively.
(3) Excluding $101 and $436 in amortization of deferred stock compensation
for the three months ended September 30, 2000 and 1999, respectively, and
$424 and $739 in amortization of deferred stock compensation for the nine
months ended September 30, 2000 and 1999, respectively.
(4) Excluding $39 and $105 in amortization of deferred stock compensation for
the three months ended September 30, 2000 and 1999, respectively, and
$141 and $185 in amortization of deferred stock compensation for the nine
months ended September 30, 2000 and 1999, respectively.
See notes to condensed financial statements.
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EGREETINGS NETWORK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
--------- ---------
UNAUDITED UNAUDITED
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................................ $ (31,186) $ (22,027)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ...................................................................... 4,106 1,436
Loss on disposal of property and equipment ........................................ 279 --
Amortization of deferred content costs ............................................ 3,933 754
Amortization of deferred stock compensation ....................................... 942 1,366
Bad debt expense .................................................................. 513 --
Interest income accrued on investments in available for sale securities ........... (416) --
Other ............................................................................. 16 46
Changes in operating assets and liabilities:
Accounts receivable ............................................................. (1,816) (483)
Prepaid expenses and other current assets ....................................... 1,071 (1,289)
Other assets .................................................................... 2,445 (2,136)
Accounts payable and accrued liabilities ........................................ (6,819) 4,122
Deferred revenue ................................................................ 867 379
--------- ---------
Net cash used in operating activities ............................................. (26,065) (17,832)
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment ................................................. (9,732) (7,425)
Proceeds from disposals of property and equipment ................................... 422 --
Purchases of available for sale securities .......................................... (109,339) --
Proceeds from sale/maturity of available for sale securities ........................ 66,100 --
--------- ---------
Net cash used in investing activities ............................................... (52,549) (7,425)
--------- ---------
FINANCING ACTIVITIES
Borrowings under equipment term loans ............................................... -- 4,971
Payments on equipment term loans .................................................... (1,291) (461)
Advance on note receivable from stockholder ......................................... -- (200)
Borrowings on notes payable to stockholders ......................................... -- 2,100
Issuance of common stock, net ....................................................... 4,687 73
Issuance of preferred stock, net .................................................... -- 20,882
Proceeds from repayment of notes receivable from shareholders ....................... 44 --
--------- ---------
Net cash provided by financing activities ........................................... 3,440 27,365
--------- ---------
Net increase (decrease) in cash and cash equivalents ................................ (75,174) 2,108
Cash and cash equivalents at beginning of period .................................... 81,774 268
--------- ---------
Cash and cash equivalents at end of period .......................................... $ 6,600 $ 2,376
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest ............................................................ $ 340 $ 103
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for notes receivable ................................ $ 2,174 $ 5,360
========= =========
Issuance of warrants in connection with debt financing ....................... $ -- $ 428
========= =========
Issuance of common stock warrants ............................................ $ 205 $ --
========= =========
Valuation of preferred stock warrant in connection with content agreement .... $ -- $ 6,108
========= =========
Reduction in valuation of deferred stock compensation ........................ $ 385 $ --
========= =========
Conversion of notes payable to stockholders to preferred stock ............... $ -- $ 3,614
========= =========
</TABLE>
See notes to condensed financial statements.
5
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EGREETINGS NETWORK, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
Egreetings Network, Inc. (the "Company") offers consumers and businesses
a convenient and simple integrated solution for communicating and sending gifts
online. The Company's Web site allows users to send personalized content-rich
online cards and a variety of gifts. The Company operates in one business
segment and generates revenue from corporate advertising and sponsorships,
direct marketing, and e-commerce, and by providing business communication and
platform card services. Business communication services include creating and
distributing customized, media-rich communication products for business to send
to their employees, customers and partners. The Company's platform card service
offers other Web sites a highly engaging and viral way to build and maintain
traffic.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by general accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
Certain prior period balances have been reclassified to conform to
current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues are generated primarily as a result of advertising and
sponsorship, direct marketing, e-commerce activities and business communication
services.
The duration of banner advertising and sponsorship commitments typically
range from one month to one year. The Company's advertisement obligations
typically include guarantees of a minimum number of impressions, or times that
an advertisement appears in pages viewed by consumers using the Company's Web
site. The Company recognizes revenues on the sale of banner advertisements as
the impression is delivered or displayed.
The Company recognizes revenues on the sale of sponsorship advertisements
on a straight-line basis over the period in which the sponsor's message is
displayed. To the extent minimum guaranteed impressions, if any, are not met,
revenue recognition is deferred until the remaining guaranteed impressions are
delivered.
Revenue from direct marketing activities is recognized based on the ratio
of the number of emails actually sent to the guaranteed number of emails to be
sent. In each case, revenues are recognized only if the Company has no remaining
significant obligations and collection is probable.
Revenue from e-commerce transactions is recognized on the date the
digital gift certificate code is emailed to the buyer or designated recipient
and on the date of shipment for physical goods.
Revenue from business communications services is recognized on the date
that the custom-made digital greeting is transmitted to the intended recipient.
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Deferred revenue is primarily comprised of billings in excess of
recognized revenue relating to advertising contracts and payments received
pursuant to revenue generating contracts in advance of revenue recognition.
Investments
The Company determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At September 30, 2000, the Company's investment portfolio
consisted of securities classified as available for sale. At December 31, 1999,
the Company did not hold any investments in such securities. Unrealized holding
gains and losses, if material, are included as a separate component of other
comprehensive income on the Statement of Stockholders' Equity. At September 30,
2000, unrealized holding gains and losses are not material. Realized gains and
losses are recorded in the Statement of Operations upon selling the security.
Deferred Content Costs
The Company records the value of deferred content costs as of the date of
the related content licensing agreements and amortizes these costs to expense
over the life of the contract using the straight-line method. Realization of
deferred content costs is subject to the Company generating adequate revenues
and other benefits as a result of the arrangement. Should the benefits under the
various content agreements not accrue to the Company, the carrying value of the
asset could become impaired and the Company would write down the asset value to
its net realizable value at that time. The Company continually evaluates the
realizability of its deferred content costs for impairment.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Dependence on Third Parties and Related Party Transactions
A common stockholder, Gibson Greetings, Inc. ("Gibson"), now a
wholly-owned subsidiary of American Greetings Corp., provides a significant
portion of the Company's online cards content pursuant to an agreement that
obligates the Company to pay royalties. Under this agreement, the Company
accrued royalties payable to this related party of $109,000 and $122,000 in the
three months ended September 30, 2000 and 1999, respectively, and $322,000 and
$358,000 in the nine months ended September 30, 2000 and 1999, respectively.
Royalty obligations arise as online cards containing third-party content are
sent by consumers. Royalty expenses are recorded with a charge to cost of
services in the statement of operations in the period during which the related
obligations arise.
In addition, the Company relies on an un-related third party entity for
Internet connectivity and to house and maintain its Web servers. The inability
of this party to fulfill its obligations with the Company could negatively
impact the Company's future results.
3. NET LOSS PER SHARE DATA
Basic and diluted net loss per share information for all periods is
presented under the requirement of SFAS No. 128, "Earnings per Share" ("SFAS
128"). Basic earnings per share has been computed using the weighted-average
number of common shares outstanding during the period, less shares subject to
repurchase, and excludes any dilutive effects of stock options, warrants, and
convertible securities. Potentially dilutive securities have also been excluded
from the computation of diluted net loss per share as their inclusion would be
antidilutive.
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The calculation of basic and diluted net loss per share is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss ............................... $(10,898) $ (9,962) $(31,186) $(22,027)
-------- -------- -------- --------
Weighted average shares of common stock
Outstanding ........................... 35,505 5,983 35,303 4,448
Less: weighted average shares of common
stock that may be repurchased ......... (1,868) (2,234) (1,977) (850)
-------- -------- -------- --------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share ............ 33,637 3,749 33,326 3,598
-------- -------- -------- --------
Basic and diluted net loss per share ... $ (.32) $ (2.66) $ (.94) $ (6.12)
======== ======== ======== ========
</TABLE>
4. INVESTMENTS
At September 30, 2000, all marketable debt securities were classified as
available for sale. At December 31, 1999, the Company did not hold any
investments in securities. Investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 CURRENT LONG-TERM
------------------ ------- ---------
<S> <C> <C>
Corporate Bonds 18,365 4,958
Government Agencies 4,997 9,951
Commercial Paper 4,968 --
Accrued Interest Receivable 416 --
------ ------
28,746 14,909
====== ======
</TABLE>
At September 30, 2000, maturities for long-term securities were within
one year. At September 30, 2000, the estimated fair value of each investment
approximated its amortized cost and, therefore, there were no significant
unrealized gains or losses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties that are based on our current expectations about our
company and our industry. We make such forward-looking statements under the
provisions of the "Safe Harbor" section of the Private Securities Litigation
Reform Act of 1995. Any forward-looking statements should be considered in light
of the factors described below in Item 2 under "Factors That May Affect Future
Results." Actual results may differ materially from those projected, anticipated
or indicated in any forward-looking statements. In Item 2, we use the words
"anticipates," "believes," "intends," "future," "could" and similar words and
expressions referencing future events, conditions or circumstances identify
forward-looking statements, but not all forward-looking statements include these
words. Some of these forward-looking statements relate to our strategy, the
launch of new services leveraging our Web site, our market opportunities, the
ability to meet revenue-generating milestones with our current partners, the
anticipated use of proceeds from our recent offering, our anticipated
advertising and direct marketing revenues, our ability to attract and retain
distribution partners, our competitive position, and our ability to continue to
license and develop high quality content and services on our Web site. The
section entitled "Risk Factors" appearing in this report describes those factors
that we currently consider material and that could cause actual results to
differ materially from those projected. These factors also include, but are not
limited to, those discussed in our other SEC filings, including our Registration
Statement on Form S-1 declared effective December 16, 1999 by the SEC (File No.
333-88595) and in our Annual Report on Form 10-K filed March 30, 2000 and
subsequently amended November 9, 2000, with the SEC. We urge you to consider
these cautionary statements carefully in evaluating our forward-looking
statements. Except as required by law, we undertake no obligation to publicly
update any forward-looking statements to reflect subsequent events and
circumstances.
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included in this report.
OVERVIEW
From our inception in July 1994 through the year ended 1996, we derived
our revenues primarily from the sale of paper greeting cards, first through
CD-ROM based catalogs and then through our Web site and our online store on
America Online (AOL). In February 1997, we implemented AOL's first online cards
service, and in late 1997, we launched our own online cards service from our
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Web site. Revenues through the year ended 1997 consisted primarily of fees from
AOL and, to a lesser extent, sales of paper and online cards through our Web
site. We discontinued the sale of paper greeting cards through our Web site in
July 1997 in order to focus on our online cards service. Revenues for the year
ended 1998 were derived largely from the sale of advertisements, sponsorships
and online cards on our Web site and from content licensing fees paid to us by
AOL. Our relationship with AOL ended in late 1998.
In November 1998, we made a significant change to our business model and
began offering our online cards for free. We made this change in order to more
rapidly build a large and active user base, which increases our ability to sell
advertisements and sponsorships on our Web site to third parties and has been
the launching pad for our online direct marketing business. Our business model
also includes e-commerce activities, primarily in the form of digital gift
certificates, and a business communications service. Business communications
services consist of developing custom-made digital greetings, announcements and
invitations for companies for their communications with their customers,
potential customers, employees or other business associates. Lastly, we are
developing and marketing a platform card service licensed to other Web sites as
a tool for customer acquisition and retention. As we develop and introduce more
products and services in the future, we anticipate that revenues from
advertisements and sponsorships will decrease as a percentage of total revenues.
On October 25, 2000, the Company announced a management restructuring and
staff reduction. In connection with this restructuring plan, the Company reduced
its work force by 60 permanent employees, representing an approximate one-third
reduction in force. The Company anticipates a restructuring charge to operating
results for the forth quarter of 2000, the amount of which has not yet been
determined.
RESULTS OF OPERATIONS
Revenues
Revenues grew to $2.3 million and $8.2 million for the three- and nine-
month periods ended September 30, 2000 from $803,000 and $1.5 million for the
corresponding periods ended September 30, 1999. The catalyst for this growth has
been the significant increase in traffic to our Web site and in registration of
members who opt in to receive sponsored email promotions, which in turn has
driven growth in our advertising inventory and direct marketing base. We have
capitalized on this growth by building our sales team steadily throughout 1999
and in the first half of 2000.
Deferred revenue increased to $1.4 million as of September 30, 2000 from
$581,000 as of December 31, 1999. This increase is primarily attributable to a
non-refundable fee of $1 million received from a platform card service customer
for which revenue recognition will commence in the fourth quarter of the year
ended December 31, 2000.
We typically guarantee advertisers a minimum number of "impressions," or
times that an advertisement appears in pages viewed by consumers using our Web
site. We recognize revenues on the sale of advertisements based on the ratio of
the number of impressions actually delivered to the guaranteed number of
impressions. We recognize revenues on the sale of sponsorships on a
straight-line basis over the period during which the sponsor's promotional
message is displayed on our Web site. Direct marketing revenues are recognized
based on the ratio of the number of emails actually sent to the guaranteed
number of emails to be sent. E-commerce revenues are recognized upon electronic
delivery of digital gift certificates or shipment of physical goods. Business
communications services revenues are recognized on the date that the custom-made
digital greeting is transmitted to the customer. In all cases, revenues are
recognized only if we have no remaining significant obligations and the
collection of the receivable is probable.
Cost of Services
Cost of services is comprised primarily of royalties paid to content
licensors, the cost of our internal content production, Internet connectivity
charges, server co-location costs, direct marketing list management costs and
the cost of goods sold from our online gift store.
Cost of services increased to $2.2 million and $4.6 million for the
three- and nine-month periods ended September 30, 2000 from $918,000 and $2.0
million for the corresponding periods ended September 30, 1999. The increase in
this cost is primarily due to increases of in-house content costs resulting from
the rise in demand for our online cards, as well as costs associated with two
growing revenue streams, namely direct marketing list management costs and
product cost from our online store which opened in late 1999. Third party
content royalty fees actually decreased as our customers sent more online cards
produced by the Company than online cards produced by third party publishers.
Cost of services is not proportional to revenues and may increase or decrease as
a percentage of revenues.
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Sales and Marketing
Sales and marketing expenses consist primarily of expenses related to
personnel and facilities, online and offline advertising, distribution,
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 $3.3 million and $13.6 million
for the three- and nine-month periods ended September 30, 2000 from $2.9 million
and $8.2 million for the corresponding periods ended September 30, 1999. This
increase is primarily attributable to increased marketing personnel and facility
costs, additional customer retention and loyalty efforts and, with respect to
the nine-month periods, an acceleration in television, radio, online and print
advertising activities in the first quarter of 2000. Sales related expenses also
increased due primarily to the growth in our sales team to 26 employees at
September 30, 2000 from 14 people at September 30, 1999. 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,
contractor and facilities costs for our site management, product management,
entertainment, business development, engineering, information systems, site
operations and site production departments.
Operations and development expenses increased to $4.7 million and $13.2
million for the three- and nine-month periods ended September 30, 2000 from $3.7
million and $7.1 million for the corresponding periods ended September 30, 1999.
These increases primarily were due to increased personnel and facility costs,
including the cost of independent contractors assisting on various engineering
projects. These projects included the re-architecture of our Web site
infrastructure and the creative redesign of our Web site. Depreciation expense
also rose due to re-architecture costs and the addition of hardware and software
to support greater levels of traffic on our Web site. These expenses as a
percentage of revenues may fluctuate depending on the level of future revenues
and the timing of new personnel hires to support and expand our site
infrastructure and traffic.
General and Administrative
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
facilities and administration, legal, human resources and fees for professional
services.
General and administrative expenses decreased to $1.9 million for the
three-month period ended September 30, 2000 from $2.0 million for the
corresponding period ended September 30, 1999. This decrease was primarily due
to decreases in professional fees and general overhead costs as we were
preparing for our public offering in the third quarter of 1999. General and
administrative expenses increased to $5.6 million for the nine-month period
ended September 30, 2000 from $4.1 million for the corresponding period ended
September 30, 1999. This increase is primarily the result of increased
personnel, facility and overhead costs necessary to support our growing business
infrastructure. We have increased our office space from approximately 14,000
square feet in the third quarter of 1999 to approximately 70,000 square feet in
the third quarter of 2000. In addition, since going public in late 1999, the
Company is now incurring costs for professional services and products inherent
to publicly-held entities. General and administrative expense as a percentage of
revenues may fluctuate depending on the level of future revenues and the timing
of additional investments in general and administrative infrastructure.
Amortization of Deferred Content Costs
Amortization of deferred content costs increased to $1.3 million and $3.9
million for the three- and nine-month periods ended September 30, 2000 from
$349,000 and $754,000 for the corresponding periods ended September 30, 1999.
This increase is primarily the result of a significant upward revaluation during
1999 of a warrant issued to Gibson Greetings, Inc. in connection with rights to
distribute Gibson's content in the form of online cards. Also in late 1999, we
incurred approximately $4.8 million of content costs in conjunction with a
content licensing agreement signed with the National Broadcasting Company, Inc.
We will periodically review the recoverability of the deferred content costs and
will write these assets down to their net realizable value if impairment is
deemed to have occurred.
Amortization of Deferred Stock Compensation
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<PAGE> 11
Amortization of deferred stock compensation decreased to $242,000 and
942,000 for the three- and nine-month periods ended September 30, 2000 from
$807,000 and $1.4 million for the corresponding periods ended September 30,
1999. These charges relate to the amortization of deferred stock compensation
over the vesting periods, generally four years, of options granted in 1998 and
1999 at exercise prices less than the deemed fair value of our common stock on
the grant date. These charges will continue to decrease due to the accelerated
method of amortization being utilized and due to forfeiture of options by
terminated employees.
Interest Income (Expense), Net
Net interest income increased to $728,000 for the three-month period
ended September 30, 2000 from $15,000 for the corresponding period ended
September 30, 1999. For the nine months ended September 30, 2000, net interest
income was $2.5 million compared to net interest expense of $92,000 for the
corresponding period ending September 30, 1999. For the three- and nine-month
periods ended September 30, 2000, interest was earned primarily on proceeds from
our final preferred financing round in October 1999 and our initial public
offering in December 1999. These proceeds are invested in high quality
investments, including money market funds. Interest earned in both periods was
offset by interest expense from equipment term loans. Investment income in
future periods may fluctuate as a result of fluctuations in average cash
balances maintained by the Company and changes in the market rates of its
investments.
Income Taxes
There has been no provision made for federal or state income taxes for
any period as we have incurred operating losses to date.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
private placements of equity securities and, in December 1999, an initial public
offering of common stock. To a lesser extent we have used equipment financing
facilities to fund operations.
Net cash used in operating activities was $26.1 million and $17.8 million
for the nine months ended September 30, 2000 and 1999, respectively. Cash used
in operating activities for the nine months ended September 30, 2000 was
primarily the result of net losses, decreases in accounts payable and increases
in accounts receivable, offset by non-cash charges for depreciation of furniture
and equipment and amortization of deferred content and deferred stock
compensation costs. For the nine months ended September 30, 1999, cash used in
operating activities was primarily the result of net losses and increases in
accounts receivables and other assets, offset by increases in accounts payable
and non-cash charges for depreciation of furniture and equipment and
amortization of deferred content and deferred stock compensation costs. Net cash
used in investing activities was $52.5 million and $7.4 million for the nine
months ended September 30, 2000 and 1999, respectively. Of these amounts,
approximately $9.7 million and $7.5 million for the nine months ended September
30, 2000 and 1999, respectively, were used to acquire network hardware and
software and other equipment to support our growth in Web site traffic and
personnel. The remaining cash outflow of $42.8 million in 2000 represented net
investment of proceeds from our initial public offering in high quality
financial instruments. Net cash provided by financing activities was $3.4
million and $27.9 million for the nine months ended September 30, 2000 and 1999,
respectively, and was generated primarily through the sale of common stock,
preferred stock, and borrowings offset by loan pay downs. Due to proceeds
received from our initial public offering in December 1999, we did not actively
pursue additional financing during the nine months ended September 30, 2000
other than the exercise by our underwriters of their right to purchase allotted
shares from the initial public offering.
As of September 30, 2000, we had approximately $6.6 million of cash and
cash equivalents, $43.7 million of investments and working capital of $37.4
million. As of September 30, 2000, we have a material operating lease commitment
for our San Francisco headquarters facility. Other commitments include less
material facility leases and equipment operating leases as well as our equipment
term loans. Although we have no material commitments for capital expenditures,
we anticipate that some additional capital expenditures will be required to
support our planned operations. We currently anticipate that our operating
expenses will be a material use of our cash resources.
The Company believes that current cash and cash equivalents and
investments 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,
investments 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.
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NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. All registrants are
expected to apply the accounting and disclosures described in SAB 101, and any
changes resulting from SAB 101 must be reported as a change in accounting
principle in the quarter ending December 31, 2000. The adoption of SAB 101 will
not have a material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133). Statement 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. In
June 1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amended Statement No. 133 by deferring the effective
date to the fiscal year beginning after June 30, 2000. In June, 2000, the FASB
issued Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment to FASB Statement No. 133" which
amended Statement 133 with respect to four specific issues. The Company is
required to adopt Statement 133 as amended, for the year ending December 31,
2001. The Company does not expect that the adoption of Statement 133 will have a
material effect on its consolidated financial position or results of operations.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS AND PROSPECTS
OUR BUSINESS AND OUR PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE OUR OPERATING
HISTORY UNDER OUR CURRENT BUSINESS MODEL IS UNPROVEN AND WE MAY CHANGE OUR
BUSINESS MODEL IN THE FUTURE.
Though we were incorporated in and have been operating since July 1994,
we have significantly changed our business model since November 1998. The
changes to the business model include a shift from charging consumers for our
online cards to a free online card service supported by the sale of advertising
and sponsorships and revenues derived from the sale of products through our Web
site. Because our business model is largely untested, we cannot be sure that it
will yield expected results. Because the Internet is constantly changing, we
have evolved and may also continue to change our current business model. Changes
in our business model or organizational structure could impose significant
burdens on our management team and our employees and could result in loss of
productivity or increased employee attrition. We may also encounter numerous
other risks as an early-stage company with a new and evolving business model. To
address the risks we face, we must, among other things:
- expand and enhance our product and service offerings;
- continually enhance the technology we use to deliver our products
and services;
- maintain and enhance our brand;
- increase the amount of traffic to our Web site;
- increase the value of our products and services to consumers,
advertisers and e-commerce merchants; and
- 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 only recently began generating a significant portion of our revenues
from sales of advertising on our Web site. These sales may not grow at the rates
we expect, among other reasons, because Internet advertising is still a new and
largely unproven method of advertising. During 1999, our revenues were derived
primarily from Internet advertising and secondarily from direct marketing
activities. We expect revenues from Internet advertising and direct marketing
activities to continue to comprise a significant portion of our revenues for the
foreseeable future. The effectiveness of Internet advertising is difficult to
gauge and advertisers may be reluctant to advertise on the Internet and may
allocate only limited portions or none of their advertising budgets to Internet
advertising in the future. Our business could suffer if Internet advertising
spending decreases or does not continue to grow as expected. Even if Internet
advertising and direct marketing become widely accepted, we may be unable to
generate sufficient revenues from these activities because we have limited
experience generating revenues from Internet advertising and direct marketing.
Our business model is also based on generating increased advertising and
direct marketing revenues. If we lose significant advertising or direct
marketing customers or are forced to significantly reduce advertising or direct
marketing rates in order to retain
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these customers, our business will suffer. Also, even if advertising and direct
marketing on the Internet become widely accepted, the success of our business
strategy will depend on the ability to:
- provide quality content on our Web site that will continue to
attract the numbers and types of consumers that advertising,
direct marketing and e-commerce partners want to reach;
- provide guaranteed impressions of our advertisers' ads by our
consumers; and
- sell existing and future Internet advertising inventory.
Although we also offer e-commerce services, we may not generate
significant revenues from these services because we have very limited experience
in e-commerce. We facilitate these transactions both by directing consumers to
our partners and by enabling consumers to purchase products and services
directly from our Web site. We also expect third parties to fulfill these orders
and deliver to consumers the goods and services that are purchased on or through
our Web site. These methods of revenue generation are relatively new and largely
untested for us. Market pressure and increasing consolidation in the e-commerce
industry may make the creation of partnerships more difficult or the
facilitation of transactions less attractive. In addition, further development
and implementation of our e-commerce services will require additional
management, financial and operational resources and may strain our existing
resources. E-commerce transactions may not generate sufficient revenues to
offset the cost of any further expansion into that area.
Our Internet advertising, direct marketing and e-commerce revenues will
be negatively impacted if we are unable to collect or use data about our
consumers in ways that allow us, our advertisers, sponsors and e-commerce
partners to generate revenues. We intend to continue to increase advertising,
direct marketing and e-commerce revenues by offering to our advertisers,
sponsors and e-commerce partners non-personally identifiable aggregate
information about our registered members that is often difficult to obtain, such
as their gender, age, general location, interests and online activities. Our
advertisers, sponsors and e-commerce partners, in turn, use this aggregated
demographic and psychographic information to tailor their advertising campaigns,
direct marketing efforts or product offerings to the characteristics of our
registered members. The ability of our advertisers, sponsors and e-commerce
partners to properly target their advertising and commercial offerings will
depend significantly on our ability to successfully collect and use data about
our registered members.
Privacy concerns may cause consumers to resist providing personal data.
For example, we currently allow our registered members to "opt out" of receiving
marketing and related communications. If a majority of our registered members
make this election, the amount of the demographic data we are able to provide to
advertisers, sponsors and e-commerce partners will be reduced significantly,
which could harm our ability to retain and attract advertisers, sponsors and
e-commerce partners. In addition, in October 1999, we eliminated the requirement
that consumers become registered members to use our services. Although we offer
some features and other benefits to our registered members that are unavailable
to unregistered consumers, many consumers choose to use out site without
registering as members. Our ability to collect the data desired by advertisers,
sponsors and e-commerce merchants may decrease as a result of this change. This
could result in less advertising, direct marketing and reduced e-commerce
activities on or through our Web site and less advertising via our online cards,
which would result in reduced revenues from advertising, direct marketing and
e-commerce.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES. OUR
BUSINESS WILL BE SERIOUSLY HARMED IF OUR REVENUES DO NOT GROW.
We have incurred significant net losses in each fiscal quarter since our
inception, including a net loss of approximately $10.9 million and $31.2 million
for the three- and nine-month periods ended September 30, 2000. As of September
30, 2000, we had an accumulated deficit of approximately $80.9 million. We
expect to have net losses and negative operating cash flows for the foreseeable
future.
The size of these net losses will depend, in part, on the rate of growth
of our revenues from our advertisers, sponsors, e-commerce merchants, licensing
revenues from newly launched business services and on our expenses. Through at
least 2002, our reported operating results will be negatively impacted by the
amortization of deferred expenses relating to warrants and stock options granted
through December 1999. It is critical to our success that we continue to expend
financial and management resources to develop and expand our consumer base
through promotion, enhancement and expansion of all of our products and
services. As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will need
to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we may never achieve profitability, and even
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if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve, sustain or
increase profitability in the future, then we will be unable to continue our
operations.
SOME OF OUR CONTENT MAY BECOME UNAVAILABLE IF OUR RELATIONSHIPS WITH OUR
THIRD-PARTY CONTENT PROVIDERS EXPIRE OR ARE TERMINATED.
We rely on third-party content providers, such as music producers, movie
studios, traditional card designers, cartoonists and independent artists, and
Gibson Greetings, now wholly-owned by American Greetings Corp., for a
significant portion of our content. To be successful, we will need to maintain
our existing successful relationships as well as establish other relationships
with new parties who can provide us with cross-media and promotional
opportunities. If we fail to retain our existing content relationships or enter
into new relationships, the variety and quality of the content on our Web site
may be reduced, traffic to our Web site may decrease, our advertising revenues
may be impaired and future e-commerce revenues may not materialize.
For the three- and nine-months ended September 30, 2000, 18% and 22%,
respectively, of all online cards sent from our Web site contained content that
we obtained pursuant to an exclusive license agreement with Gibson that expires
in December 2002. If the license agreement terminates and we are unable to
continue this arrangement, the amount of content we are able to offer our
consumers will decrease.
In March 2000, American Greetings Corp. acquired Gibson. American
Greetings also is the parent company of AmericanGreetings.com, which is one of
our competitors in the online cards market. Our rights pursuant to our license
agreement with Gibson have thus far been unaffected by this acquisition. If
Gibson or American Greetings fail to perform under the terms of our license
agreement, the amount of content we are able to offer our consumers will
decrease, which could harm our business.
With the exception of our relationships with NBC, BMG Entertainment and
Universal, our existing content alliances are pursuant to short-term agreements.
When these agreements expire or otherwise terminate, we may be unable to renew
them on favorable terms or at all or to obtain similar agreements with other
parties. Additionally, our competitors may enter into agreements with existing
or prospective content partners that may be or would have been integral to our
future content and brand development.
OUR SITE'S GROWTH WILL DEPEND ON OUR ABILITY TO CONTINUE TO PROVIDE COMPELLING
CONTENT AND OTHER OFFERINGS AVAILABLE ON OUR WEB SITE AND ENHANCE OVERALL
SERVICES AND FUNCTIONALITY.
To remain competitive we must continue to license and create compelling
and entertaining content, increase the offerings of gift-giving services
available 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 and direct marketing revenues or e-commerce revenues and
our business will suffer. The development and integration of new functionality
and services could be expensive and time consuming, and the cost of the content
that we license may increase in the future. Any new content, gifts, features,
functions or services that we license or develop for consumers, advertisers or
e-commerce merchants may not achieve market acceptance.
OUR CONTINUED GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
In October 1998, we changed our name to E-greetings Network and launched
a marketing campaign to establish the brand name "Egreetings." We believe that
continuing to establish and maintain the Egreetings brand and associated
goodwill will be an important aspect of our efforts to retain our current
consumers, attract and expand our Internet audience, license and create new
content, and appeal to advertisers and e-commerce merchants. We believe that the
importance of brand recognition will increase due to the growing number of
Internet sites and the relatively low barriers to entry in providing Internet
content. Accordingly, we intend to continue pursuing an aggressive brand
enhancement strategy. Expenditures associated with such strategy may not result
in a sufficient increase in revenues. In addition, even if our brand recognition
increases, we may not acquire new consumers and customers for our advertising
services, and even if we do, our revenues may not increase sufficiently to
justify the expenditures. If our brand enhancement strategy is unsuccessful, we
also may be unable to increase future revenues.
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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 and Hallmark offer
online cards via the Internet. In addition, some of these
companies offer e-commerce merchants' products that can be
purchased at or through their Web sites and direct marketing
sponsorship opportunities. Several of these companies also offer
features on their Web sites that are similar or identical to our
Web site's features.
- Internet content aggregators and other Internet companies that
offer online cards and gifts. Companies such as Amazon.com,
Excite@Home and Yahoo! offer online cards as a component of their
overall product and service offerings or provide links to
electronic greeting and gift companies. The online cards available
on or through these Web sites often are free and may be sent with
a gift purchased via the particular Web site or via the Web sites
of e-commerce merchants that are partners or advertisers of the
content aggregator or Internet company.
- Media, entertainment and other companies using online cards.
Media, entertainment and other companies with an online presence
now offer or in the future may offer online cards to consumers
featuring their characters, logos, brand names and other creative
products.
In December 1999, Excite@Home Network acquired Bluemountain.com, the
online business of Blue Mountain Arts. Excite@Home has significantly greater
resources than we do, and we expect it will use some of these resources to focus
on the online cards market. This could harm our business and our ability to
compete effectively. In addition, the acquisition of Gibson, as a wholly-owned
subsidiary, by American Greetings Corp. was consummated in June 2000 and
American Greetings became the controlling corporation of our largest
stockholder. American Greetings competes with us in the online cards market
through its affiliated company AmericanGreetings.com. As a competitor, American
Greetings' interests may diverge from our interests, and it may take actions
that would harm us competitively, despite its status as the corporate parent of
our largest stockholder.
Many of our current and potential competitors in the Internet market,
including the companies named above, have significantly greater financial,
publishing, technical and marketing resources than we have. Many of these
companies also have longer operating histories, greater name recognition, more
traffic to their Web sites and more established relationships with advertisers
and advertising agencies than we have. These competitors may be able to
undertake more extensive marketing campaigns, adopt aggressive pricing policies
and devote substantially more resources to developing Internet content and
services than us.
We may be unable to compete successfully for advertisers, direct
marketing sponsors and e-commerce partners. The increasing number of Internet
content and service providers has resulted in increased competition for
advertising dollars. Internet companies currently sell advertisements largely
based on the demographics of their audience, the quality of their content and
their ability to deliver guaranteed "impressions," or the number of times an
advertisement appears in Web pages viewed by consumers using their Web sites.
Our competitors may be able to provide more desirable demographics, higher
quality content and a higher number of guaranteed impressions than we are able
to. This could make it difficult for us to obtain the advertising or direct
marketing relationships that we will need in order to generate sufficient
revenues. As increasing consolidation and market condition pressures affect
companies in the e-commerce and Internet industry, our current and potential
partners' budget dollars allocated to advertising and direct marketing spending
may diminish or be eliminated. In addition, increased competition for
advertising or direct marketing dollars could result in price reductions,
reduced margins or loss of market share, any of which would harm our business.
We lack experience in e-commerce and we may not compete successfully for
e-commerce merchants or consumers. Unlike many of our competitors, we have
limited experience operating in the e-commerce arena and we may not be
successful in doing so. In addition, many of our current and potential
competitors are retailers with established brand names and consumer loyalty, and
we may be unable to attract consumers away from these competitors. Our inability
to compete successfully for e-commerce merchants or consumers would harm our
business significantly.
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OUR FUTURE SUCCESS WILL DEPEND ON THE INCREASING USE OF THE INTERNET AND THE
GROWTH OF E-COMMERCE.
Our future success will depend heavily on the acceptance and wide use of
the Internet for direct marketing and e-commerce. If Web-based commerce does not
continue to grow or grows more slowly than expected, demand for our products and
services will be reduced. Market conditions affecting e-commerce providers may
also impact our ability to grow the service and product offerings on our Web
site. Consumers and businesses may reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may be
unable to support the demands placed on it by increased usage. Internet service
providers, online service providers and other Web site operators have already
experienced significant outages. In addition, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, or increased governmental regulation, could cause the
Internet to lose its viability as a commercial medium. Even if the required
infrastructure, standards, protocols and complementary products, services or
facilities are developed, we may incur substantial expenses adapting to changing
or emerging technologies.
WE DEPEND ON THIRD PARTIES TO FULFILL ORDERS AND DELIVER GOODS AND SERVICES TO
OUR CONSUMERS AND THEIR FAILURE TO PERFORM ADEQUATELY WOULD HARM OUR BUSINESS.
Our success in e-commerce activities 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, provide adequate customer service or deliver quality goods and services
on time would impact negatively on our company and harm our business. Increasing
consolidation and pressure related to market conditions for third party
e-commerce partners could cause delays or other problems related to delivery or
orders of goods. In addition, strikes or other service interruptions affecting
fulfillment and delivery services would impair our ability to deliver
merchandise ordered by our consumers on a timely basis.
OUR GROWTH WILL DEPEND SIGNIFICANTLY ON THE INCREASING ACCEPTANCE OF ONLINE
CARDS AS A FORM OF ONLINE COMMUNICATIONS.
Our future success is substantially dependent on the widespread
acceptance of online cards as a form of online communications. As email
increasingly affects the way people communicate for personal and business
purposes, online cards evolve as a form of communication. We cannot accurately
predict the future growth rate, if any, or the ultimate size of the consumer use
of online cards as a form of online communication. The failure of online cards
to gain widespread acceptance by consumers, advertisers, sponsors and e-commerce
merchants as a form of online communication would materially harm our business.
WE RELY ON ONLINE DISTRIBUTION CHANNELS TO GENERATE TRAFFIC TO OUR WEB SITE.
We rely on integrated 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. Because there is intense competition for online distribution
relationships among Web sites, we may be unable to maintain or renew these
agreements or enter into new relationships on commercially reasonable terms or
at all. In addition, our online distribution relationships may not generate
enough additional traffic to our Web site or create sufficient visibility to
justify the costs we incur for these relationships.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
FURTHER 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;
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- 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; 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 can be considerably slower during the summer months. In addition,
sales of gifts and general advertising revenues tend to be lower in the third
calendar quarter of each year. We also experience similar seasonality in our
business. In addition, because advertising on the Internet is an emerging
market, additional seasonal and other patterns in the usage of our products and
services may emerge as the market matures. Seasonal patterns like this may harm
our business. As a result of all of the factors discussed above,
period-to-period comparison of our operating results may not be a good
indication of our future performance.
OUR STOCK PRICE HAS DECLINED IN RECENT MONTHS; CONTINUED VOLATILITY IN THE STOCK
MARKET MAY CAUSE FLUCTUATIONS AND/OR FURTHER DECLINE IN OUR STOCK PRICE
The trading price of our common stock has been and may continue to be
subject to cumulative decline and wide fluctuations. During the third quarter of
2000, the closing sale prices of our common stock on the NASDAQ National Market
ranged from $1.00 on September 26, 2000 to $2.00 on July 21, 2000 and the sale
price of our common stock on November 8, 2000 closed at $0.34. Our stock price
may decline or fluctuate in response to any number of factors and events, such
as quarterly fluctuations in operating results, announcements of technological
innovations, strategic and content relationships, new product offerings by us or
our competitors, changes in financial estimates and recommendations of
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, particularly
with respect to technology and Internet stocks, has experienced extreme
volatility and a significant cumulative decline in recent months. This
volatility and decline has affected many companies, including our company,
irrespective to the operating performance of such companies. These broad market
influences and fluctuations may adversely affect the price of our stock, and
our ability to remain listed on the NASDAQ National Market, regardless of our
operating performance.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, AND OUR BUSINESS COULD BE MATERIALLY
HARMED IF WE FAIL TO SUCCESSFULLY INTEGRATE, USE AND DEVELOP ANY ACQUIRED
BUSINESSES OR ASSETS.
We continually evaluate opportunities to acquire additional product or
content offerings or additional industry expertise and may in the future acquire
companies, divisions or assets of companies. Any future acquisition could result
in difficulties in assimilating acquired operations and products, diversion of
management's attention to acquisition matters and amortization of acquired
intangible assets. Our management has not had any experience in assimilating
acquired organizations and products into our operations. We may be unable to
integrate successfully any operations, personnel or products that we may acquire
in the future, which would harm our business.
EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION AND
RESOURCES AND MAY BE UNSUCCESSFUL.
To date, we have offered content and services directed at consumers and
businesses in the United States. We plan to offer localized content and services
directed at international customers in the future in order to increase the
international traffic to our Web site. We do not have any experience in
localizing our content and services to conform to local cultures, standards and
policies. We may have to compete with local companies that are likely to
understand the local market better than we do. In addition, to achieve
satisfactory performance for consumers, advertisers and e-commerce partners in
international locations, it may be necessary to locate physical facilities, such
as facilities to host our server computers, in the foreign market. We do not
have experience establishing facilities in foreign countries. We may not be
successful in appealing to a larger international market or in generating
revenues from foreign advertising or e-commerce activities. In addition,
different privacy, censorship and liability standards and regulations and
different intellectual property laws in foreign countries could harm our
business.
RISKS RELATED TO OPERATIONS
TO MANAGE OUR GROWTH, WE WILL NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND
PROCEDURES.
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We continue to experience 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 466% from 112,800 for the
month of November 1998, the month we began to offer our online cards at no cost,
to 639,000 for the month of September 2000, and our number of employees
increased from 52 on October 30, 1998 to 175 on September 30, 2000, with most of
this growth in the areas of marketing, engineering and operations. This growth
and expansion placed significant strains on our management, operational and
financial resources. In October 2000, we undertook a one-third reduction in our
work force and an associated management restructuring in an effort to focus our
business and reduce expenses. In order to manage the growth of our business with
a smaller work force, we must continue to improve our operational and financial
systems and managerial controls and procedures, and we will need to continue to
motivate, 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 site's growth effectively. Our failure to
manage growth could disrupt our operations and ultimately prevent us from
generating the revenues we expect.
SYSTEM FAILURES, SLOW DOWNS OR SECURITY BREACHES WOULD HARM OUR REPUTATION AND
THUS REDUCE OUR ATTRACTIVENESS TO OUR CURRENT AND FUTURE CONSUMERS, ADVERTISERS,
E-COMMERCE PARTNERS AND BUSINESS CUSTOMERS.
System failures and slow downs could permanently harm our reputation and
brand, and reduce our attractiveness to consumers, advertisers and e-commerce
partners. Our ability to attract consumers, advertisers and e-commerce partners
will depend significantly on the performance of our network infrastructure. A
key element of our strategy is to generate a high volume of traffic on our Web
site. Accordingly, the satisfactory performance, reliability and availability of
our Web site and our computer infrastructure are critical to our reputation and
our ability to attract and retain consumers, advertisers and e-commerce
merchants. An increase in the volume of consumer traffic could strain the
capacity of our infrastructure. For example, during the week before Valentine's
Day, we frequently experience heavy increases in traffic to our Web site, which
result in slower response rates. While we have invested heavily in our technical
infrastructure, we may be unable to improve our technical infrastructure
sufficiently in relation to increased consumer volume generally and, in
particular, during peak capacity periods. If we experience outages, frequent or
persistent system failures or degraded response times, our reputation and brand
could be harmed permanently. In addition, we could lose advertising revenues
during these interruptions and consumer satisfaction could be negatively
impacted if our service is slow or unavailable. Furthermore, our consumers use
Internet service providers, online service providers and other Web site
operators for access to our Web site. Each of these providers has experienced
significant outages in the past and could experience outages, delays and other
difficulties due to system failures unrelated to our systems.
A fundamental requirement for the online communications products and
services we offer is the secure transmission of confidential information over
the Internet. The occurrence or perception of security breaches could harm our
business. Third parties may attempt to breach the security provided by our Web
site. If they are successful, they could obtain confidential information about
our consumers, including their passwords, financial account information, credit
card numbers or other personal information. Our consumers may file suits against
us for any breach in our Web site's security. If we are not held liable, a
security breach could still harm our reputation, as even the perception of
security risks, whether or not valid, could inhibit market acceptance of our
products and services. Despite our implementation of security measures, our
software is vulnerable to computer viruses, electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data. We may
be required to expend significant capital and other resources to license
encryption or other technologies to protect against security breaches or to
alleviate problems caused by these breaches. In addition, our consumers might
decide to stop using our products and services if we experience security
breaches.
We use third-party software to manage and deliver advertisements and to
provide our advertisers with advertisement performance data. The failure of
these systems to function properly could discourage advertisers from placing
advertisements on our Web site or merchants from offering their products through
our Web site. The failure of these systems also could require us to incur
additional costs or could result in interruptions in our business during the
time spent replacing these systems. Our failure to expand and upgrade our
network system, provide consumers with access to our service or timely address
any system error or failure could materially harm our business and reputation.
The occurrence of an earthquake or other natural disaster or
unanticipated problems at our leased facility in San Francisco, California or at
the location of servers that host or back-up our systems could result in
interruptions or delays in our business, loss of data or could render us unable
to provide services. In addition, our systems are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, and similar events. Our general liability insurance policies may not
adequately compensate us for losses that may occur due to interruption in our
service.
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WE MAY BE UNABLE TO EXPAND OUR SALES ORGANIZATIONS BECAUSE QUALIFIED PERSONNEL
ARE IN SHORT SUPPLY.
We may need to expand our advertising sales operations to increase
advertisers' awareness of our service and sales of our products and services. We
have expanded our sales forces and may 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. Hiring
of highly qualified sales and advertising support personnel is very competitive
in our industry due to the limited number of people available with the necessary
skills and understanding of the Internet sales environment.
OUR SENIOR MANAGEMENT TEAM AND OTHER KEY EMPLOYEES ARE CRITICAL TO OUR BUSINESS,
AND THEY MAY NOT REMAIN WITH US IN THE FUTURE.
Our success will be substantially dependent on the performance of our
senior management and key creative, technical and sales personnel, many of who
joined us only in the last eighteen months. The loss of the services of any of
our executive officers or other key employees could harm our business. With the
exception of severance and bonus agreements, we do not have employment
agreements with our executive officers, senior management or other key
personnel. In addition, our employees may voluntarily terminate their employment
at any time and for any reason.
WE MAY BE UNABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CONSUMER AND
BUSINESS CUSTOMER 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.
RISKS RELATED TO CONTENT, INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION
CONSUMER PRIVACY CONCERNS AND CONSUMER PROTECTION PRIVACY REGULATIONS COULD
IMPAIR OUR ABILITY TO OBTAIN OR USE INFORMATION ABOUT OUR CONSUMERS.
Privacy concerns may cause consumers to resist providing the personal
data necessary to support our ability to collect information about our
consumers. Our Web site currently uses "cookies" to track consumer preferences
in order to tailor content to them. A "cookie" is information keyed to a
specific server, file pathway or directory location that is stored on a
consumer's hard drive, possibly without the consumer's knowledge, but is
generally removable by the consumer. We also capture demographic and
psychographic information when an individual registers as a member with us, and
we capture and retain data based on online cards sent and received by our
consumers. We utilize this information to assist advertisers in targeting their
online advertising campaigns to consumers with particular demographic
characteristics. Although we currently have a policy against providing our
customers' personal information to third parties, we may decide in the future to
provide some or all of this information to our advertising and e-commerce
partners. In the past, the Federal Trade Commission has investigated companies
that have taken actions like this without permission or in violation of the
companies' stated privacy policies. If we begin providing information like this
without permission or in violation of our privacy policy, we may face potential
liability for invasion of privacy. Even the perception of security and privacy
concerns, whether or not valid, may indirectly inhibit market acceptance of our
Web site products and services. In April 2000, the Children's Online Privacy
Protection Act of 1998 went into effect regulating the collection and use of
information with regard to children under the age of 13. As a result, the
Company ceased collecting personal information from children it knows to be
under 13 and altered its privacy policy to reflect compliance with that Act. In
addition, other legislative or regulatory requirements may heighten these
concerns if businesses must notify Internet consumers that the data may be used
by marketing entities to direct product promotion and advertising to the
consumer. Other countries and political entities, such as the European Union,
have adopted legislation and regulatory requirements like this. The United
States may adopt similar legislation or regulatory requirements. If we do not
adequately address consumer privacy concerns, our business could be materially
harmed.
WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITE OR THE PRODUCTS
AND SERVICES AVAILABLE THROUGH OUR WEB SITE.
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We provide a wide variety of content that enables consumers to send
online cards and other communications, and we intend to offer services that will
allow consumers to conduct business and engage in various online activities. The
laws relating to the liability of providers of these online services for the
activities of their consumers is currently unsettled. The Digital Millennium
Copyright Act is intended to reduce the liability of online service providers
for material posted on Web sites by third parties where such materials infringe
copyrights or proprietary rights of others. The protections afforded by this
legislation have not been fully determined. Claims could be made against us for
negligence, defamation, libel, copyright or trademark infringement, personal
injury or other legal claims based on the content that we license from third
parties or create internally or based on content that may be posted online by
our consumers. While we generally obtain written licenses to use third-party
content on our Web site, in some instances we rely only upon oral licenses. In
addition, we could be exposed to liability with respect to third-party or
internally created content on our Web site or with respect to the content of
third-party Web sites that may be accessible through our Web site. These claims
might include, among others, that by providing access to third-party content or
by linking to Web sites operated by third parties, we may be liable for
copyright or trademark infringement or other unauthorized actions by third
parties through those Web sites. Furthermore, we could be exposed to liability
for content and materials that may be created by consumers in our build-your-own
customized online cards. Any claims like these, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention, require us to enter into costly royalty or licensing arrangements or
prevent us from using important technologies, ideas or formats, any of which
could materially harm our business. Although we carry general liability
insurance, our insurance policy does not currently cover intellectual property
infringement. Obtaining adequate insurance coverage or implementing measures to
reduce our exposure to this type of liability may require us to spend
substantial resources. We currently do not have plans to obtain insurance that
would cover intellectual property infringement.
OUR BUSINESS DEPENDS ON OUR PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, AND
WE MAY BE UNABLE TO ADEQUATELY PROTECT THEM.
Our success will depend on the protection of and the goodwill associated
with our trademarks and other intellectual property rights to our products and
services. A substantial amount of uncertainty exists concerning the application
of copyright and trademark laws to the Internet and other digital media, and
existing laws may not provide adequate protection of our content or our Internet
addresses, commonly referred to as "domain names." We have registered the name
"E-greetings" as our trademark and service mark in the United States. We also
have filed and plan to file applications to register a number of our other
trademarks, trade names and service marks in the United States and foreign
jurisdictions. We may be unable to obtain some or all of these registrations.
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 or taxation
applicable to access to, or commerce on, the Internet by any government agency.
It is possible that in the future a number of laws and regulations may be
adopted with respect to the Internet and other digital media, covering issues
such as consumer privacy, e-commerce and the pricing, characteristics and
quality of products and services. By conducting business via the Internet, we
may be subject to the laws of foreign jurisdictions in an unpredictable manner.
Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and providers
of online services in a manner similar to long distance telephone carriers and
to impose access fees on these companies. This could increase the cost of
transmitting data over the Internet. Moreover, the applicability of existing
laws relating to issues such as property ownership, defamation and personal
privacy on the Internet is uncertain. Any new laws or regulations relating to
the Internet could harm our business.
We also could be exposed to liability arising from the activities of
consumers of our content or services or with respect to the unauthorized
duplication or insertion of material (such as material deemed obscene or
inappropriate for children) accessed directly or indirectly through our
services. Several private lawsuits seeking to impose such liability upon content
providers, online services companies and Internet access providers currently are
pending. In addition, legislation has been enacted that imposes, and further
legislation may be proposed that may impose liability for, or prohibit the
transmission over the Internet of, certain types of information and content. Any
legislation or regulation like this, or the application of existing laws to the
Internet, could expose us to significant liabilities associated with our content
or services.
There is also uncertainty regarding the imposition of sales and other
taxes on e-commerce transactions, which may impair our ability to derive
financial benefits from e-commerce activities. Although the Internet Tax Freedom
Act precludes, for a period of three years ending January 2002, the imposition
of state and local taxes that discriminate against or single out the Internet,
it does not
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currently impact existing taxes. However, one or more states may seek to impose
sales tax collection obligations on out-of-state companies, such as us, which
engage in or facilitate online commerce. A number of proposals have been made at
the state and local level that would impose additional taxes on the sale of
goods and services through the Internet. Proposals like these, if adopted, could
substantially impair the growth of e-commerce and could adversely affect our
opportunity to derive financial benefits from e-commerce. Moreover, if any state
or foreign country were to successfully assert that we should collect sales or
other taxes on the sale of merchandise on or through our Web site, it could
affect our cost of doing business.
CHANGES IN REGULATION COULD REDUCE THE VALUE OF OUR DOMAIN NAME.
We own the Internet domain name "Egreetings.com" in the United States.
Internet regulatory bodies generally regulate domain names, and the regulation
of domain names is subject to change. Regulatory bodies could establish new
domain name systems, appoint additional domain name registrars or modify the
requirements for holding domain names. In addition, regulations regarding
foreign domain name registration vary from jurisdiction to jurisdiction and are
subject to change. As a result, we might not acquire or maintain the
"Egreetings.com" or comparable domain names in any of the countries in which we
conduct business, which could harm our business. Furthermore, the relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear and still evolving. Therefore, we might be
unable to prevent third parties from acquiring domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary rights. If
we are unable to protect our domain names, our business would suffer.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
RATE RISK
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, our policy is to maintain our
portfolio of cash equivalents and investments in marketable securities in a
variety of securities, including both government and corporate obligations and
money market funds. As of September 30, 2000, all of our funds were held in
money market funds, U.S. government and agency securities and investment grade
corporate bonds and debt securities. We did not hold derivative financial
instruments as of September 30, 2000 and have never held these instruments in
the past.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights. In addition, from
time to time, third parties assert patent infringement claims against the
Company in the form of letters, lawsuits and other forms of communication.
The Company is not currently aware of any legal proceedings or claims
that the Company believes are likely to have a material adverse effect on the
Company's financial position of results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE:
----------- ------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 14th day of
November 2000.
EGREETINGS NETWORK, INC.
By: /s/ ANDREW J. MOLEY
----------------------------------------------------
Andrew J. Moley
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ SCOTT F. NEAMAND
----------------------------------------------------
Scott F. Neamand
Chief Financial Officer and
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
23
