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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 March 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Transition Period From to .
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Commission File Number: 005-57829
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EGREETINGS NETWORK, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3207092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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.
Class Outstanding at May 10, 2000
Common Stock, $0.01 par value 34,985,429
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TABLE OF CONTENTS
10-Q
PART I - FINANCIAL INFORMATION
Item 1 Condensed Financial Statements (unaudited)
- Balance Sheets at March 31, 2000 and December 31, 1999
- Statements of Operations for the three months ended March 31, 2000
and 1999
- Statements of Cash Flows for the three months ended March 31, 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
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EGREETINGS NETWORK, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
UNAUDITED
Current assets:
Cash and cash equivalents ....................................................... $ 20,585 $ 81,774
Short-term investments .......................................................... 40,334 --
Accounts receivable (net of allowances for doubtful
accounts of $200 in 2000 and $69 in 1999) .................................... 2,629 1,228
Prepaid expenses and other current assets ....................................... 9,263 9,244
------------- -------------
Total current assets .................................................... 72,811 92,246
Long-term investments ............................................................. 4,921 --
Property and equipment, net ....................................................... 15,839 11,800
Deferred content costs ............................................................ 11,453 12,740
Restricted cash deposit ........................................................... 77 2,172
Deposits and other assets ......................................................... 1,075 1,165
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Total assets ............................................................ $ 106,176 $ 120,123
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 2,336 $ 7,910
Accrued expenses and other current liabilities .................................. 2,171 4,029
Accrued royalties ............................................................... 185 290
Deferred revenue ................................................................ 605 581
Current portion of equipment term loan .......................................... 1,769 1,764
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Total current liabilities ............................................... 7,066 14,574
Equipment term loan, less current portion ......................................... 3,270 3,718
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Total liabilities ....................................................... 10,336 18,292
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, $0.001 par value: 15,500,000 shares authorized;
2,523,546 shares issued and outstanding in 1998 .............................. -- --
Common stock, $0.001 par value: 65,000,000 shares authorized; 34,501,140
and 35,335,082 shares issued and outstanding at December 31, 1999 and
March 31, 2000, respectively ................................................. 165,409 159,227
Deferred stock compensation ..................................................... (1,551) (2,195)
Notes receivable from stockholders .............................................. (7,449) (5,490)
Accumulated deficit ............................................................. (60,569) (49,711)
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Total stockholders' equity .............................................. 95,840 101,831
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Total liabilities and stockholders' equity .............................. $ 106,176 $ 120,123
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See notes to condensed financial statements.
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EGREETINGS NETWORK, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31,
2000 1999
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UNAUDITED
Revenues ................................................ $ 2,821 $ 103
Costs and expenses:
Cost of services ...................................... 1,071 399
Sales and marketing ................................... 5,857 2,889
Operations and development ............................ 4,119 1,263
General and administrative ............................ 1,961 980
Amortization of deferred content costs ................ 1,288 153
Amortization of deferred stock compensation ........... 404 154
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Total costs and expenses ...................... 14,700 5,838
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Loss from operations .................................... (11,879) (5,735)
Interest income (expense), net .......................... 1,021 (166)
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Net loss ................................................ $ (10,858) $ (5,901)
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Net loss per share:
Pro forma basic and diluted ........................... $ (.33) $ (.69)
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Shares used in calculation of net loss per share:
Pro forma basic and diluted ........................... 33,025 8,583
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See notes to condensed financial statements.
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EGREETINGS NETWORK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2000 1999
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UNAUDITED UNAUDITED
OPERATING ACTIVITIES
Net loss ............................................................................ $ (10,858) $ (5,901)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ...................................................................... 997 356
Amortization of deferred content costs ............................................ 1,288 154
Amortization of deferred stock compensation ....................................... 404 153
Bad debt expense .................................................................. 92 --
Other ............................................................................. 46
Changes in operating assets and liabilities:
Accounts receivable ............................................................. (1,493) 180
Prepaid expenses and other current assets ....................................... (18) (331)
Other assets .................................................................... 2,185 33
Accounts payable and accrued liabilities ........................................ (7,539) 575
Deferred revenue ................................................................ 25 83
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Net cash used in operating activities ............................................. $ (14,917) $ (4,652)
INVESTING ACTIVITIES
Purchases of property and equipment, net .......................................... (5,036) (2,935)
Purchases of marketable securities ................................................ (101,355) --
Proceeds from sale/maturity of marketable securities .............................. 56,100 --
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Net cash used in investing activities ............................................. (50,291) (2,935)
FINANCING ACTIVITIES
Borrowings under equipment term loan .............................................. 499
Payments on equipment term loan ................................................... (444) (45)
Issuance of common stock, net ..................................................... 4,463 9
Issuance of preferred stock, net .................................................. 19,650
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Net cash provided by financing activities ......................................... 4,019 20,113
Net increase (decrease) in cash and cash equivalents .............................. (61,189) 12,526
Cash and cash equivalents at beginning of period .................................. 81,774 268
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Cash and cash equivalents at end of period ........................................ $ 20,585 $ 12,794
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SUPPLEMENTAL DISCLOSURES
Cash paid for interest ............................................................ $ 101 $ 13
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NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for notes receivable ................................ $ 1,959 $ 0
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Valuation of preferred stock warrant in connection with content agreement .... $ 0 $ 2,362
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Valuation of deferred stock compensation ..................................... $ 239 $ 1,635
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See notes to condensed financial statements.
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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 finding and sending online cards,
gifts and invitations. The Company's Web site allows users to send personalized
content-rich online cards and a wide variety of gifts. The Company operates in
one business segment and generates revenue from corporate advertising and
sponsorships, e-commerce and direct marketing.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by general accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
Certain prior period balances have been reclassified to conform to current
period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
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Revenue Recognition
Revenues consist primarily of advertising and sponsorship revenues and
direct marketing revenues. The duration of banner advertising and sponsorship
commitments typically range from one month to one year. The Company's
advertisement obligations typically include guarantees of a minimum number of
impressions, or times that an advertisement appears in pages viewed by consumers
using the Company's Web site. The
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Company recognizes revenues on the sale of banner advertisements as the
impression is delivered or displayed.
The Company recognizes revenues on the sale of sponsorship advertisements on
a straight-line basis over the period in which the sponsor's message is
displayed. To the extent minimum guaranteed impressions are not met, revenue
recognition is deferred until the remaining guaranteed impressions are
delivered. Revenue from direct marketing activities is recognized based on the
ratio of the number of emails actually sent to the guaranteed number of emails
to be sent. In each case, revenues are recognized only if the Company has no
remaining significant obligations and collection is probable.
Deferred revenue is primarily comprised of billings in excess of recognized
revenue relating to advertising contracts and payments received pursuant to
sponsorship advertising contracts in advance of revenue recognition.
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.
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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 the Company pays
royalties. Under this agreement, the Company paid royalties to this related
party of $106,000 and $67,000 in the three months ended March 31, 2000 and 1999,
respectively. Royalty obligations arise as online cards containing third-party
content are sent by consumers. Royalty expenses are recorded with a charge to
cost of services in the statement of operations in the period during which the
related obligations arise. In addition, the Company relies on another entity to
provide a majority of support necessary to maintain the server and transmit
data. The inability of any of these parties to fulfill their obligations with
the Company could negatively impact the Company's future results.
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.
Pro forma net loss per share for the three months ended March 31, 1999 has
been computed as described above and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of preferred shares not included
above that automatically converted upon completion of the Company's initial
offering, using the if-converted method.
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, expect share and per share amounts):
THREE MONTHS ENDED MARCH 31,
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2000 1999
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Historical:
Net loss .............................................................. $ (10,858) $ (5,901)
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Weighted average shares of common stock outstanding ................... 35,046 3,480
Less: weighted average shares of common stock that may be repurchased.. 2,021 0
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Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share ............. 33,025 3,480
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Basic and diluted net loss per share .................................. $ (.33) $ (1.70)
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Pro forma:
Net loss .............................................................. $ (5,901)
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Weighted average shares used in computing basic and
diluted net loss per share (from above) ............................ 3,480
Adjustment to reflect the effect of the assumed conversion of
preferred stock to common stock from the date of issuance .......... 5,103
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Weighted average shares used in computing pro forma
basic and diluted net loss per share ............................... 8,583
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Pro forma basic and diluted net loss per share ........................ $ (.69)
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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 on our Web site, the rearchitecture of our Website, our
market opportunities, the ability to meet revenue-generating milestones with our
current partners, the anticipated use of proceeds from our recent offering, our
anticipated advertising revenues, our ability to attract and retain distribution
partners, our ability to attract and retain quality e-commerce partners and
generate revenues from such partnerships, our competitive position, our ability
to continue to license and develop high quality content, our management's
discussion and analysis of our financial condition and results of operations.
The section entitled "Risk Factors" appearing in this report describes those
factors that we currently consider material and that could cause these
differences. 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 with the SEC. We urge you to
consider these cautionary statements carefully in evaluating our forward-looking
statements. Except as required by law, we undertake no obligation to publicly
update any forward-looking statements to reflect subsequent events and
circumstances.
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included in this report.
OVERVIEW
From our inception in July 1994 through the year ended 1996, we derived our
revenues primarily from the sale of paper greeting cards, first through CD-ROM
based catalogs and then through our Web site and our online store on America
Online (AOL). In February 1997, we implemented AOL's first online cards service,
and in late 1997, we launched our own online cards service from our Web site.
Revenues through the year ended 1997 consisted primarily of fees from AOL and,
to a lesser extent, sales of paper and online cards through our Web site. We
discontinued the sale of paper greeting cards through our Web site in July 1997
in order to focus on our online cards service. Revenues for the year ended 1998
were derived largely from the sale of advertisements, sponsorships and online
cards on our Web site and from content licensing fees paid to us by AOL. Our
relationship with AOL ended in late 1998.
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In November 1998, we made a significant change to our business model and
began offering our online cards for free. We made this change in order to more
rapidly build a large and active user base, which increases our ability to sell
advertisements and sponsorships on our Web site to third parties and has been
the launching pad for our online direct marketing business. Our business model
also includes e-commerce activities, although we have not yet realized any
significant revenues from these activities and are still implementing the
infrastructure and establishing the relationships required to support these
activities. As we develop and introduce more products and services in the
future, we anticipate that revenues from advertisements and sponsorships will
decrease as a percentage of total revenues.
RESULTS OF OPERATIONS
Revenues
Revenues grew to $2.8 million for the quarter ended March 31, 2000 from
$103,000 for the quarter ended March 31, 1999. The catalyst for this growth has
been the significant increase in traffic to our Web site, 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 quarter of 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. In all cases, revenues are recognized only if we
have no remaining significant obligations and the collection of the receivable
is probable.
Cost of Services
Cost of services is comprised primarily of royalties paid to content
licensors, the cost of our internal content production, Internet connectivity
charges, server co-location costs, direct marketing list management costs and
the cost of goods sold from our online gift store.
Cost of services increased to $1.1 million for the quarter ended March 31,
2000 from $399,000 for the quarter ended March 31, 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
emerging revenue streams, namely direct marketing list management costs and
cost of goods sold from our online store which opened in late 1999. Content
royalty fees actually decreased as our customers sent more on line cards
produced by the Company than online cards produced by third party publishers.
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Cost of services is not proportional to revenues and may increase or decrease as
a percentage of revenues.
Sales and Marketing
Sales and marketing expenses consist primarily of expenses related to online
and offline advertising, distribution, personnel and facilities, promotional
activities and public relations costs. Distribution costs reflect amounts paid
to online service providers, portals and other Web sites who market and provide
links to our Web site.
Sales and marketing expenses increased to $5.9 million for the quarter ended
March 31, 2000 from $2.9 million for the quarter ended March 31, 1999. This
increase is primarily attributable to increases in television, radio and online
advertising costs for our year 2000 Valentine's Day advertising campaign. Sales
related expenses also increased due to the growth in our sales team to 19 people
at March 31, 2000 from 4 people at March 31, 1999, which growth was planned in
order to monetize the large increase in our Web site traffic and resulting
advertising inventory. We anticipate that overall sales and marketing expenses
will increase in absolute dollars in the foreseeable future. Sales and marketing
expense as a percentage of total revenues may fluctuate depending on the timing
and type of new marketing programs and distribution agreements and the addition
of sales and marketing personnel.
Operations and Development
Operations and development expenses consist primarily of personnel and
facilities costs for our site management, product management, business
development, engineering, information systems, site operations and site
production departments.
Operations and development expenses increased to $4.1 million for the
quarter ended March 31, 2000 from $1.3 million for the quarter ended March 31,
1999. These increases primarily were due to increased personnel costs, including
the cost of independent contractors assisting on various engineering projects.
Depreciation expense also increased due to the addition of hardware and software
to support the increased traffic on our Web site. We anticipate that overall
operations and development expenses will increase in the foreseeable future.
These expenses as a percentage of revenues may fluctuate depending on the level
of future revenues and the timing of new personnel hires to support and expand
our site infrastructure and traffic.
General and Administrative
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
facilities and administration, legal, human resources and fees for professional
services.
General and administrative expenses increased to $2.0 million for the
quarter ended March 31, 2000 from $980,000 for the quarter ended March 31, 1999.
This increase is
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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 first quarter of 1999
to approximately 70,000 square feet in the first quarter of 2000. We anticipate
that general and administrative expenses will continue to increase in the
foreseeable future. General and administrative expense as a percentage of
revenues may fluctuate depending on the level of future revenues and the timing
of additional investments in general and administrative infrastructure.
Amortization of Deferred Content Costs
Amortization of deferred content costs increased to $1.3 million for the
quarter ended March 31, 2000 from $153,000 for the quarter ended March 31, 1999.
This increase is primarily the result of a significant upward revaluation during
1999 of a warrant issued to Gibson Greetings, Inc. in connection with rights to
distribute Gibson's content in the form of online cards. Also in late 1999, we
incurred approximately $4.8 million of content costs in conjunction with a
content licensing agreement signed with the National Broadcasting Company, Inc.
We will periodically review the recoverability of the deferred content costs and
will write these assets down to their net realizable value if impairment is
deemed to have occurred.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation increased to $404,000 for the
quarter ended March 31, 2000 from $154,000 for the quarter ended March 31, 1999.
These charges relate to the amortization of deferred stock compensation over the
vesting periods, generally four years, of options granted in 1998 and 1999 at
exercise prices less than the deemed fair value of our common stock on the grant
date.
Interest Income (Expense), Net
Net interest income increased to $1.0 million for the quarter ended March
31, 2000 from an expense of $166,000 for the quarter ended March 31, 1999. For
the quarter ended March 31, 2000, interest was earned primarily on proceeds from
our initial public offering in December 1999. These proceeds are invested in
high quality, short-term investments, including money market funds. Interest
earned in both periods was offset by interest on 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
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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 $14.9 million and $4.7 million for
the quarters ended March 31, 2000 and 1999, respectively. Cash used in operating
activities resulted primarily from net losses partially offset by increases in
accounts payable and accrued liabilities and by non-cash charges for
depreciation of furniture and equipment and amortization of deferred content and
stock compensation costs. Net cash used in investing activities was $50.3
million and $2.9 million for the quarters ended March 31, 2000 and 1999,
respectively. Of these amounts, approximately $5.0 million and $2.9 million for
the quarters ended March 31, 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 $45.0 million in 2000 was used to
invest in high quality, primarily short-term financial instruments. Net cash
provided by financing activities was $4.0 million and $20.1 million for the
quarters ended March 31, 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 quarter ended March 31, 2000 other than the exercise by our
underwriters of their right to purchase allotted shares from the initial stock
offering.
As of March 31, 2000, we had approximately $20.6 million of cash and cash
equivalents, $45.3 million of investments and working capital of $65.7 million.
As of March 31, 2000, we have a material operating lease commitment for our San
Francisco headquarters facility. Other commitments include several immaterial
equipment operating leases and our equipment term loans. Although we have no
material commitments for capital expenditures, we anticipate that we will
experience a substantial increase in our capital expenditures consistent with
our anticipated growth in operation, infrastructure and personnel. We currently
anticipate growth in our operating expenses for the foreseeable future and that
our operating expenses will be a material use of our cash resources.
The Company believes that current cash and cash equivalents will be
sufficient to meet its anticipated cash needs for at least the next 12 months.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If current cash and cash equivalents and cash that may
be generated from operations are insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or
obtain additional debt financing. The sale of additional equity could result in
additional dilution to the Company's stockholders. There can be no assurance
that financing will be available in amounts or on terms acceptable to the
Company, if at all.
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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. Any change in the Company's
revenue recognition policy resulting from the interpretation of SAB 101 would be
reported as a change in accounting principle in the quarter ending June 30,
2000. While the Company has not fully assessed the impact of the adoption of SAB
101, it believes that implementation of SAB 101 will not have a material adverse
impact on its existing revenue recognition policies or its reported results of
operations for fiscal 2000.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS AND PROSPECTS
OUR BUSINESS AND OUR PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE OUR OPERATING
HISTORY UNDER OUR CURRENT BUSINESS MODEL IS UNPROVEN AND WE MAY CHANGE OUR
BUSINESS MODEL IN THE FUTURE.
Though we were incorporated in and have been operating since July 1994, we
have significantly changed our business model since November 1998. The changes
to the business model include a shift from charging consumers for our online
cards to a free online card service supported by the sale of advertising and
sponsorships and revenues derived from the sale of products through our Web
site. Because our business model is largely untested, we cannot be sure that it
will yield expected results. Because the Internet is constantly changing, we may
also need to 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
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- attract, integrate, retain and motivate qualified personnel.
We cannot be certain that our current and planned business strategies will
be successful or that we will successfully address these risks.
BECAUSE OUR METHODS OF GENERATING REVENUES ARE RELATIVELY NEW, LARGELY UNTESTED
AND CONTINUE TO CHANGE, WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES.
We recently began generating a significant portion of our revenues from
sales of advertising on our Web site. These sales may not grow at the rates we
expect because Internet advertising is still a new and largely unproven method
of advertising. During 1999, our revenues were derived primarily from Internet
advertising and secondarily from direct marketing activities. We expect revenues
from Internet advertising to continue to comprise a significant portion of our
revenues for the foreseeable future. The effectiveness of Internet advertising
is difficult to gauge and advertisers may be reluctant to advertise on the
Internet and may allocate only limited portions or none of their advertising
budgets to Internet advertising in the future. Our business could suffer if
Internet advertising does not continue to grow as expected. Even if Internet
advertising and direct marketing become widely accepted, we may be unable to
generate sufficient revenues from these activities because we have limited
experience generating revenues from Internet advertising and direct marketing.
Our business model is also based on generating increased advertising and
direct marketing revenues. If we lose significant advertising or direct
marketing customers or are forced to significantly reduce advertising or direct
marketing rates in order to retain these customers, our business will suffer.
Also, even if advertising and direct marketing on the Internet become widely
accepted, the success of our business strategy will depend on the ability to:
- provide quality content on our Web site that will continue to attract the
numbers and types of consumers that advertising, direct marketing and
e-commerce partners want to reach;
- provide guaranteed views of our advertisers' ads by our consumers; and
- sell existing and future Internet advertising inventory.
Although we intend to offer more e-commerce services, we may not generate
significant revenues from these services because we have very limited experience
in e-commerce. Our future success will largely depend on our ability to generate
revenues through the facilitation of e-commerce transactions, a business area in
which we have limited experience. We intend to facilitate these transactions
both by directing consumers to our partners and by enabling consumers to
purchase products and services directly from our Web site. We also expect third
parties to fulfill these orders and deliver to
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consumers the goods and services that are purchased on or through our Web site.
These methods of revenue generation are relatively new and largely untested for
us. Market pressure and increasing consolidation in the e-commerce industry may
make the creation of partnerships more difficult or the facilitation of
transactions less attractive. In addition, the development and implementation of
our e-commerce services will require additional management, financial and
operational resources and may strain our existing resources. Our expansion into
e-commerce may not be timely or may not generate sufficient revenues to offset
the cost of our expansion into that area.
Our Internet advertising, direct marketing and e-commerce revenues will be
negatively impacted if we are unable to collect or use data about our consumers
in ways that allow us, our advertisers, sponsors and e-commerce partners to
generate revenues. We intend to continue to increase advertising, direct
marketing and e-commerce revenues by offering to our advertisers, sponsors and
e-commerce partners aggregate information about our registered members that is
often difficult to obtain, such as their gender, age, location, interests and
online activities. Our advertisers, sponsors and e-commerce partners will, in
turn, use this demographic and psychographic information to tailor their
advertising campaigns, direct marketing efforts or product offerings to the
characteristics of our registered members. The ability of our advertisers,
sponsors and e-commerce partners to properly target their advertising and
commercial offerings will depend significantly on our ability to successfully
collect and use data about our registered members.
Privacy concerns may cause consumers to resist providing personal data. For
example, we currently allow our registered members to opt out of receiving
marketing and related communications. If a majority of our registered members
make this election, the amount of the demographic data we are able to provide to
advertisers, sponsors and e-commerce partners will be reduced significantly,
which could harm our ability to retain and attract advertisers, sponsors and
e-commerce partners. In addition, in October 1999, we eliminated the requirement
that consumers become registered members to use our services. Although we offer
personalization features and other benefits to our registered members that are
unavailable to unregistered consumers, our ability to collect the data desired
by advertisers, sponsors and e-commerce merchants may decrease as a result of
this change. This could result in less advertising, direct marketing and reduced
e-commerce activities on or through our Web site and less advertising via our
online cards, which would result in reduced revenues from advertising, direct
marketing and e-commerce.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES. OUR
BUSINESS WILL BE SERIOUSLY HARMED IF OUR REVENUES DO NOT GROW.
We have incurred significant net losses in each fiscal quarter since our
inception, including a net loss of approximately $10.9 million in the quarter
ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of
approximately $60.6 million. We expect to have net losses and negative operating
cash flows for the foreseeable future.
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The size of these net losses will depend, in part, on the rate of growth of our
revenues from our advertisers, sponsors and e-commerce merchants and on our
expenses. Through at least 2002, our reported operating results will be
negatively impacted by the amortization of deferred expenses relating to
warrants and stock options granted through December 1999. It is critical to our
success that we continue to expend financial and management resources to develop
and expand our consumer base through marketing and promotion and enhancement and
expansion of our products and services. As a result, we expect that our
operating expenses will increase significantly for the foreseeable future. With
increased expenses, we will need to generate significant additional revenues to
achieve profitability. Consequently, it is possible that we may never achieve
profitability, and even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis in the future. If we do
not achieve, sustain or increase profitability in the future, then we will be
unable to continue our operations.
SOME OF OUR CONTENT MAY BECOME UNAVAILABLE IF OUR RELATIONSHIPS WITH OUR
THIRD-PARTY CONTENT PROVIDERS, PARTICULARLY GIBSON GREETINGS, EXPIRE OR ARE
TERMINATED.
We rely on third-party content providers, such as Gibson Greetings, NBC,
music producers, movie studios, traditional card designers, cartoonists and
independent artists, for a significant portion of our content. To be successful,
we will need to maintain our existing relationships as well as establish similar
relationships with new parties who can provide us with cross-media and
promotional opportunities. If we fail to retain our existing content
relationships or enter into new relationships, the variety and quality of the
content on our Web site may be reduced, traffic to our Web site may decrease,
our advertising revenues may be impaired and future e-commerce revenues may not
materialize.
For the three months ended March 31, 2000, 24.0% of all online cards sent
from our Web site contained content that we obtained pursuant to an exclusive
license agreement with Gibson that expires in December 2002. Gibson may also
terminate our rights to exclusivity if our consumers do not send at least 2.8
million online cards via our Web site in each month during the term of the
license agreement and if this minimum delivery requirement is not exceeded in
any of the three months following the month in which the shortfall occurred. If
the license agreement terminates and we are unable to renew this arrangement,
the amount of content we are able to offer our consumers will significantly
decrease.
In March 2000, American Greetings, Inc. acquired Gibson. American Greetings
also is the parent company of AmericanGreetings.com, which is one of our
competitors in the online cards market. We have not yet fully determined how our
relationship with Gibson or our rights pursuant to our license agreement with
Gibson will be affected by this acquisition. If Gibson or American Greetings
fail to perform under the terms of our
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license agreement, the amount of content we are able to offer our consumers will
decrease significantly, which could harm our business.
With the exception of our relationships with Gibson and NBC, our existing
content alliances are pursuant to short-term agreements. When these agreements
expire or otherwise terminate, we may be unable to renew them on favorable terms
or at all or to obtain similar agreements with other parties. Additionally, our
competitors may enter into agreements with existing or prospective content
partners that may be or would have been integral to our future content and brand
development.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO CONTINUE TO PROVIDE COMPELLING CONTENT,
INCREASE THE VARIETY OF GIFTS AVAILABLE ON OUR WEB SITE AND ENHANCE OVERALL
SERVICES AND FUNCTIONALITY.
To remain competitive we must continue to license and create compelling and
entertaining content, increase the variety of gifts available on or through our
Web site and enhance and improve the ease of use, responsiveness, functionality
and features of our products and services. We may be unable to anticipate,
monitor and successfully respond to rapidly changing consumer tastes so as to
attract a sufficient number of consumers to our Web site. If we are unable to
license and develop content, increase the variety of gifts available and enhance
and improve the personalized services that allow us to attract, retain and
expand a loyal consumer base, we will be unable to generate advertising revenues
or e-commerce revenues and our business will suffer. The development and
integration of new functionality and services could be expensive and time
consuming, and the cost of the content that we license may increase in the
future. Any new content, gifts, features, functions or services that we license
or develop for consumers, advertisers or e-commerce merchants may not achieve
market acceptance.
OUR CONTINUED GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
In October 1998, we changed our name to E-greetings Network and launched a
marketing campaign to establish the brand name "Egreetings." We believe that
continuing to establish and maintain the Egreetings brand will be an important
aspect of our efforts to retain our current consumers, attract and expand our
Internet audience, license and create new content, and appeal to advertisers and
e-commerce merchants. We believe that the importance of brand recognition will
increase due to the growing number of Internet sites and the relatively low
barriers to entry in providing Internet content. Accordingly, we intend to
continue pursuing an aggressive brand enhancement strategy. We intend to incur
significant expenditures on these advertising and promotional programs and
activities in the future. These expenditures may not result in a sufficient
increase in revenues. In addition, even if our brand recognition increases, we
may not acquire new consumers and even if we do, the amount of traffic on our
Web site may not increase sufficiently to justify the expenditures. If our brand
enhancement strategy is unsuccessful, we may be unable to increase future
revenues.
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OUR GROWTH WILL DEPEND SIGNIFICANTLY ON THE INCREASING ACCEPTANCE OF ONLINE
CARDS AS A FORM OF ONLINE COMMUNICATIONS.
Our future success is substantially dependent on the widespread acceptance
of online cards as a form of online communications. As email increasingly
affects the way people communicate for personal and business purposes, online
cards evolve as a form of communication. We cannot accurately predict the future
growth rate, if any, or the ultimate size of the consumer use of online cards as
a form of online communication. The failure of online cards to gain widespread
acceptance by consumers, advertisers, sponsors and e-commerce merchants as a
form of online communication would materially harm our business.
WE FACE INTENSE COMPETITION FROM COMPANIES THAT PROVIDE SIMILAR SERVICES AND
PRODUCTS TO OURS, AND WE THEREFORE MAY BE UNABLE TO COMPETE EFFECTIVELY IN THE
INTERNET GREETING AND GIFTING BUSINESS.
We compete with many Internet companies for content, consumer attention and
time, advertising revenue, direct marketing revenue and e-commerce revenue. We
expect this competition to increase. We compete, in particular, with the
following types of companies:
- Companies that offer online cards via the Internet. Companies or their
affiliates such as American Greetings, Hallmark and 123 greetings.com offer
online cards via the Internet. In addition, some of these companies offer
e-commerce merchants' products that can be purchased at or through their Web
sites. Several of these companies also offer features on their Web sites that
are similar or identical to our Web site's features.
- Internet content aggregators and other Internet companies that offer
online cards and gifts. Companies such as Amazon.com, America Online,
Excite@Home, Microsoft and Yahoo! offer online cards as a component of their
overall product and service offerings or provide links to electronic greeting
and gift companies. The online cards available on or through these Web sites
often are free and may be sent with a gift purchased via the particular Web site
or via the Web sites of e-commerce merchants that are partners or advertisers of
the content aggregator or Internet company.
- Internet companies that focus on gifts. Several Internet companies offer
gifts on their Web sites. Although these companies currently do not offer online
cards, they may begin to do so in the near future. In addition, they compete
directly with our e-commerce business.
- Media, entertainment and other companies using electronic greetings.
Media, entertainment and other companies with an online presence now offer or in
the future may offer online cards to consumers featuring their characters,
logos, brand names and other creative products.
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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 March 2000 and
American Greetings became the controlling corporation of our largest
stockholder. American Greetings competes with us in the online cards market
through its affiliated company AmericanGreetings.com. As a competitor, American
Greetings' interests may diverge from our interests, and it may take actions
that would harm us competitively, despite its status as the corporate parent of
our largest stockholder.
Many of our current and potential competitors in the Internet market,
including the companies named above, have significantly greater financial,
publishing, technical and marketing resources than we have. Many of these
companies also have longer operating histories, greater name recognition, more
traffic to their Web sites and more established relationships with advertisers
and advertising agencies than we have. These competitors may be able to
undertake more extensive marketing campaigns, adopt aggressive pricing policies
and devote substantially more resources to developing Internet content and
services than us.
We may be unable to compete successfully for advertisers and e-commerce
partners. The increasing number of Internet content and service providers has
resulted in increased competition for advertising dollars. Internet companies
currently sell advertisements largely based on the demographics of their
audience, the quality of their content and their ability to deliver guaranteed
"impressions," or the number of times an advertisement appears in Web pages
viewed by consumers using their Web sites. Our competitors may be able to
provide more desirable demographics, higher quality content and a higher number
of guaranteed impressions than we are able to. This could make it difficult for
us to obtain the advertising or direct marketing relationships that we will need
in order to generate sufficient revenues. 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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AS WE EXPAND OUR E-COMMERCE ACTIVITIES, WE WILL DEPEND ON THIRD PARTIES TO
FULFILL ORDERS AND DELIVER GOODS AND SERVICES TO OUR CONSUMERS; THEIR FAILURE TO
PERFORM ADEQUATELY WOULD HARM OUR BUSINESS.
As we expand our e-commerce activities, our success will depend in large
part on the ability of third parties to fulfill our consumers' orders and
deliver goods and services to our consumers. Failure of vendors or shippers to
fill our consumers' orders or deliver quality goods and services on time would
harm our business. Increasing consolidation and pressure related to market
conditions for third party e-commerce partners could cause delays or other
problems related to delivery or orders of goods. In addition, strikes or other
service interruptions affecting fulfillment and delivery services would impair
our ability to deliver merchandise ordered by our consumers on a timely basis.
OUR FUTURE SUCCESS WILL DEPEND ON THE INCREASING USE OF THE INTERNET AND THE
GROWTH OF E-COMMERCE.
Our future success will depend heavily on the acceptance and wide use of the
Internet for e-commerce. If e-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 RELY ON ONLINE DISTRIBUTION CHANNELS TO GENERATE TRAFFIC TO OUR WEB SITE.
We rely on distribution relationships with high traffic Internet sites and
leading Internet portals to increase the visibility of our Web site and to
generate additional traffic. Our business could be materially harmed if any of
our distribution relationships do not result in increased Web site traffic and
visibility or are not available on commercially reasonable terms. Our
distribution relationships are based on short-term agreements and may not be as
favorable as the agreements of some of our competitors. Because there is intense
competition for online distribution relationships among Web sites, we may be
unable to maintain or renew these agreements or enter into new relationships on
commercially reasonable terms or at all. In addition, our online distribution
relationships
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may not generate enough additional traffic to our Web site or create sufficient
visibility to justify the costs we incur for these relationships.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, AND OUR BUSINESS COULD BE MATERIALLY
HARMED IF WE FAIL TO SUCCESSFULLY INTEGRATE, USE AND DEVELOP ANY ACQUIRED
BUSINESSES OR ASSETS.
We continually evaluate opportunities to acquire additional product or
content offerings or additional industry expertise and may in the future acquire
companies, divisions or assets of companies. Any future acquisition could result
in difficulties in assimilating acquired operations and products, diversion of
management's attention to acquisition matters and amortization of acquired
intangible assets. Our management has not had any experience in assimilating
acquired organizations and products into our operations. We may be unable to
integrate successfully any operations, personnel or products that we may acquire
in the future, which would harm our business.
EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION AND
RESOURCES AND MAY BE UNSUCCESSFUL.
To date, we have offered content and services directed at consumers 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.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
It is likely that our operating results in one or more future quarters may
be below the expectations of stock market analysts, if any, or our investors,
and this could cause our stock price to decline. We expect that our quarterly
operating results will continue to fluctuate significantly and be affected by
many factors, including the following:
- fluctuations in the demand for Internet advertising generally and
advertising on our Web site and via our online cards specifically;
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- fluctuations in purchases of products via the Internet generally and
through our Web site specifically;
- seasonal trends in Internet use, e-commerce and advertising demand;
- fluctuations in traffic on our Web site generally and as the result of
special promotions or seasonal events;
- introduction of new Web sites, products and services by competitors;
- marketing expenses and technology infrastructure costs;
- expansion in our sales and customer support staff; and
- technical difficulties or system downtime affecting the Internet generally
or the operation of our Web site specifically.
We have experienced and expect to continue to experience seasonality in our
business. Consumer traffic on our Web site generally is higher during holiday
periods such as Valentine's Day, Mother's Day, Father's Day and Christmas and is
considerably slower during the summer months. In addition, sales of traditional
greeting cards and gifts tend to be lower in the third calendar quarter of each
year. Similarly, advertising sales in traditional media, such as television and
radio, generally are lower in the first calendar quarter of each year. We may
experience similar seasonality in our business. In addition, because advertising
on the Internet is an emerging market, additional seasonal and other patterns in
the usage of our products and services may emerge as the market matures.
Seasonal patterns like this may harm our business. As a result of all of the
factors discussed above, period-to-period comparison of our operating results
may not be a good indication of our future performance.
OUR STOCK PRICE HAS DECLINED IN RECENT MONTHS; CONTINUED VOLATILITY IN THE
STOCK MARKET MAY CAUSE FLUCTUATIONS AND/OR FURTHER DECLINE IN OUR STOCK PRICE
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During the first quarter of 2000, the closing sale
prices of our common stock on the NASDAQ National Market ranged from $12.375 on
January 3, 2000 to $5.6875 on March 31, 2000 and the sale price of our common
stock on May 10, 2000 closed at $2.875. Our stock price may fluctuate in
response to any number of factors and events, such as quarterly fluctuations in
operating results, announcements of technological innovations, 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
irrespective to the operating performance
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of such companies. These broad market influences and fluctuations may adversely
affect the price of our stock, regardless of our operating performance.
RISKS RELATED TO OPERATIONS
TO MANAGE OUR GROWTH, WE WILL NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND
PROCEDURES.
We currently are experiencing a period of rapid expansion in our Web site
traffic, personnel, facilities and infrastructure. For example, the average
number of daily visits to our Web site increased approximately 448% from
112,800 for the month of November 1998, the month we began to offer our online
cards at no cost, to 618,700 for the month of March 2000, and our number of
employees increased from 52 on October 31, 1998 to 176 on March 31, 2000, with
most of this growth in the areas of marketing, engineering and operations. We
expect that the number of our employees, including management-level employees,
will continue to increase for the foreseeable future to address expected growth
in our consumer base, expansion of our product and service offerings and the
pursuit of e-commerce and other strategic opportunities. This growth and
expansion have placed, and we expect they will continue to place, a significant
strain on our management, operational and financial resources. In order to
manage our growth, we must continue to improve our operational and financial
systems and managerial controls and procedures, and we will need to continue to
expand, train and manage our work force. We cannot assure you that our systems,
procedures or controls will be adequate to support our operations or that we
will be able to manage our growth effectively. Our failure to manage growth
could disrupt our operations and ultimately prevent us from generating the
revenues we expect.
SYSTEM FAILURES, SLOW DOWNS OR SECURITY BREACHES WOULD HARM OUR REPUTATION AND
THUS REDUCE OUR ATTRACTIVENESS TO OUR CURRENT AND FUTURE CONSUMERS, ADVERTISERS
AND E-COMMERCE PARTNERS.
System failures and slow downs could permanently harm our reputation and
brand, and reduce our attractiveness to consumers, advertisers and e-commerce
partners. Our ability to attract consumers, advertisers and e-commerce partners
will depend significantly on the performance of our network infrastructure. A
key element of our strategy is to generate a high volume of traffic on our Web
site. Accordingly, the satisfactory performance, reliability and availability of
our Web site and our computer infrastructure are critical to our reputation and
our ability to attract and retain consumers, advertisers and e-commerce
merchants. An increase in the volume of consumer traffic could strain the
capacity of our infrastructure. For example, during the week before Valentine's
Day, we frequently experience heavy increases in traffic to our Web site, which
result in slower response rates. We may be unable to improve our technical
infrastructure in relation to increased consumer volume generally and, in
particular, during peak capacity periods. If we experience outages, frequent or
persistent system failures or degraded response times, our reputation and brand
could be harmed
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permanently. In addition, we could lose advertising revenues during these
interruptions and consumer satisfaction could be negatively impacted if our
service is slow or unavailable. Furthermore, our consumers use Internet service
providers, online service providers and other Web site operators for access to
our Web site. Each of these providers has experienced significant outages in the
past and could experience outages, delays and other difficulties due to system
failures unrelated to our systems.
A fundamental requirement for the online communications products and
services we offer is the secure transmission of confidential information over
the Internet. The occurrence or perception of security breaches could harm our
business. Third parties may attempt to breach the security provided by our Web
site. If they are successful, they could obtain confidential information about
our consumers, including their passwords, financial account information, credit
card numbers or other personal information. Our consumers may file suits against
us for any breach in our Web site's security. If we are not held liable, a
security breach could still harm our reputation, as even the perception of
security risks, whether or not valid, could inhibit market acceptance of our
products and services. Despite our implementation of security measures, our
software is vulnerable to computer viruses, electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data. We may
be required to expend significant capital and other resources to license
encryption or other technologies to protect against security breaches or to
alleviate problems caused by these breaches. In addition, our consumers might
decide to stop using our products and services if we experience security
breaches.
We use third-party software to manage and deliver advertisements and to
provide our advertisers with advertisement performance data. The failure of
these systems to function properly could discourage advertisers from placing
advertisements on our Web site or merchants from offering their products through
our Web site. The failure of these systems also could require us to incur
additional costs or could result in interruptions in our business during the
time spent replacing these systems. Our failure to expand and upgrade our
network system, provide consumers with access to our service or timely address
any system error or failure could materially harm our business and reputation.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased facility in San Francisco, California or at the location
of servers that host or back-up our systems could result in interruptions or
delays in our business, loss of data or could render us unable to provide
services. In addition, our systems are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, and similar
events. Our general liability insurance policies may not adequately compensate
us for losses that may occur due to interruption in our service.
WE MAY BE UNABLE TO EXPAND OUR MARKETING, ENGINEERING, SALES AND CUSTOMER
SUPPORT ORGANIZATIONS BECAUSE QUALIFIED PERSONNEL ARE IN SHORT SUPPLY.
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We will need to substantially expand both our consumer marketing and
corporate marketing efforts and advertising sales operations to increase market
awareness and sales of our products and services. We recently expanded our sales
forces and plan to hire additional sales personnel. Competition for highly
qualified sales personnel is intense, and we may be unable to hire the type and
number of sales personnel we are targeting. To support and enhance our
technology infrastructure, we will also need to increase the personnel in our
engineering department. In addition, we will need to increase our staff to
support new consumers and the expanding needs of our existing consumers. Hiring
of highly qualified engineers, customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet.
WE RECENTLY RECRUITED MOST OF OUR MANAGEMENT TEAM.
Many members of our management team have been hired in the last year,
including our Chief Financial Officer, Senior Vice President of Sales, Vice
President of Marketing, Chief Technology Officer, Vice President of Business
Development, Entertainment, Vice President of Finance and Vice President and
General Counsel. Many of these individuals do not have significant experience
working together or with the rest of our management team. We cannot assure you
that they will be able to work together successfully or manage any growth we
experience. The process of integrating these individuals may detract from the
operation of, and have an adverse effect on, our business.
OUR SENIOR MANAGEMENT TEAM AND OTHER KEY EMPLOYEES ARE CRITICAL TO OUR
BUSINESS, AND THEY MAY NOT REMAIN WITH US IN THE FUTURE.
Our success will be substantially dependent on the performance of our senior
management and key creative, technical, marketing and sales personnel, many of
who joined us only in the last year. The loss of the services of any of our
executive officers or other key employees, the loss of any of which could harm
our business. We do not have employment agreements with our executive officers,
senior management or other key personnel, other than an employment agreement
with our Chief Executive Officer. In addition, our employees may voluntarily
terminate their employment at any time.
WE MAY BE UNABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CONSUMER
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
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switch to the product and service offerings of our competition. Furthermore, our
competitors or potential competitors may develop products or services that are
more appealing to our current and potential consumers. As a result, demand for
our services may decrease.
RISKS RELATED TO CONTENT, INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION
WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITE OR THE PRODUCTS
AND SERVICES AVAILABLE THROUGH OUR WEB SITE.
We provide a wide variety of content that enables consumers to send online
cards and other communications, and we intend to offer services that will allow
consumers to conduct business and engage in various online activities. The laws
relating to the liability of providers of these online services for the
activities of their consumers is currently unsettled. The Digital Millennium
Copyright Act is intended to reduce the liability of online service providers
for material posted on Web sites by third parties where such materials infringe
copyrights or proprietary rights of others. The protections afforded by this
legislation have not been fully determined. Claims could be made against us for
negligence, defamation, libel, copyright or trademark infringement, personal
injury or other legal claims based on the content that we license from third
parties or create internally or based on content that may be posted online by
our consumers. While we generally obtain written licenses to use third-party
content on our Web site, in some instances we rely only upon oral licenses. In
addition, we could be exposed to liability with respect to third-party or
internally created content on our Web site or with respect to the content of
third-party Web sites that may be accessible through our Web site. These claims
might include, among others, that by providing access to third-party content or
by linking to Web sites operated by third parties, we may be liable for
copyright or trademark infringement or other unauthorized actions by third
parties through those Web sites. Furthermore, we could be exposed to liability
for content and materials that may be created by consumers
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in build-your-own customized online cards. Any claims like these, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention, require us to enter into costly royalty or
licensing arrangements or prevent us from using important technologies, ideas or
formats, any of which could materially harm our business. Although we carry
general liability insurance, our insurance policy does not currently cover
intellectual property infringement. Obtaining adequate insurance coverage or
implementing measures to reduce our exposure to this type of liability may
require us to spend substantial resources. We currently do not have plans to
obtain insurance that would cover intellectual property infringement.
OUR BUSINESS DEPENDS ON OUR PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, AND
WE MAY BE UNABLE TO ADEQUATELY PROTECT THEM.
Our success will depend on the protection of and the goodwill associated
with our trademarks and other intellectual property rights to our products and
services. A substantial amount of uncertainty exists concerning the application
of copyright and trademark laws to the Internet and other digital media, and
existing laws may not provide adequate protection of our content or our Internet
addresses, commonly referred to as "domain names." We have registered the name
"E-greetings" as our trademark and service mark in the United States. We also
have filed and plan to file applications to register a number of our other
trademarks, trade names and service marks in the United States and foreign
jurisdictions. We may be unable to obtain some or all of these registrations.
CONSUMER PRIVACY CONCERNS AND CONSUMER PROTECTION PRIVACY REGULATIONS COULD
IMPAIR OUR ABILITY TO OBTAIN OR USE INFORMATION ABOUT OUR CONSUMERS.
Privacy concerns may cause consumers to resist providing the personal data
necessary to support our ability to collect information about our consumers. Our
Web site currently uses "cookies" to track consumer preferences in order to
tailor content to them. A "cookie" is information keyed to a specific server,
file pathway or directory location that is stored on a consumer's hard drive,
possibly without the consumer's knowledge, but generally removable by the
consumer. We also capture demographic and profile 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
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invasion of privacy. Even the perception of security and privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of our Web site
products and services. In April 2000, the Children's Online Privacy Protection
Act of 1998 went into effect regulating the collection and use of information
with regard to children under the age of 13. As a result, the Company has ceased
collecting personal information from children it knows to be under 13 and
altered its privacy policy to reflect compliance with the Act. In addition,
other legislative or regulatory requirements may heighten these concerns if
businesses must notify Internet consumers that the data may be used by marketing
entities to direct product promotion and advertising to the consumer. Other
countries and political entities, such as the European Union, have adopted
legislation and regulatory requirements like this. The United States may adopt
similar legislation or regulatory requirements. If we do not adequately address
consumer privacy concerns, our business could be materially harmed.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL COSTS
OF DOING BUSINESS ON THE INTERNET.
We currently are not subject to meaningful direct regulation applicable to
access to, or commerce on, the Internet by any government agency. It is possible
that in the future a number of laws and regulations may be adopted with respect
to the Internet and other digital media, covering issues such as consumer
privacy, e-commerce and the pricing, characteristics and quality of products and
services. By conducting business via the Internet, we may be subject to the laws
of foreign jurisdictions in an unpredictable manner.
Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and providers
of online services in a manner similar to long distance telephone carriers and
to impose access fees on these companies. This could increase the cost of
transmitting data over the Internet. Moreover, the applicability of existing
laws relating to issues such as property ownership, defamation and personal
privacy on the Internet is uncertain. Any new laws or regulations relating to
the Internet could harm our business.
We also could be exposed to liability arising from the activities of
consumers of our content or services or with respect to the unauthorized
duplication or insertion of material (such as material deemed obscene or
inappropriate for children) accessed directly or indirectly through our
services. Several private lawsuits seeking to impose such liability upon content
providers, online services companies and Internet access providers currently are
pending. In addition, legislation has been enacted that imposes, and further
legislation may be proposed that may impose liability for, or prohibit the
transmission over the Internet of, certain types of information and content. Any
legislation or regulation like this, or the application of existing laws to the
Internet, could expose us to significant liabilities associated with our content
or services.
There is also uncertainty regarding the imposition of sales and other taxes
on e-commerce transactions, which may impair our ability to derive financial
benefits from e-
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commerce activities. Although the Internet Tax Freedom Act precludes, for a
period of three years ending January 2002, the imposition of state and local
taxes that discriminate against or single out the Internet, it does not
currently impact existing taxes. However, one or more states may seek to impose
sales tax collection obligations on out-of-state companies, such as us, which
engage in or facilitate online commerce. A number of proposals have been made at
the state and local level that would impose additional taxes on the sale of
goods and services through the Internet. Proposals like these, if adopted, could
substantially impair the growth of e-commerce and could adversely affect our
opportunity to derive financial benefits from e-commerce. Moreover, if any state
or foreign country were to successfully assert that we should collect sales or
other taxes on the sale of merchandise on or through our Web site, it could
affect our cost of doing business.
CHANGES IN REGULATION COULD REDUCE THE VALUE OF OUR DOMAIN NAME.
We own the Internet domain name "Egreetings.com" in the United States.
Internet regulatory bodies generally regulate domain names, and the regulation
of domain names is subject to change. Regulatory bodies could establish new
domain name systems, appoint additional domain name registrars or modify the
requirements for holding domain names. In addition, regulations regarding
foreign domain name registration vary from jurisdiction to jurisdiction and are
subject to change. As a result, we might not acquire or maintain the
"Egreetings.com" or comparable domain names in any of the countries in which we
conduct business, which could harm our business. Furthermore, the relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear and still evolving. Therefore, we might be
unable to prevent third parties from acquiring domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary rights. If
we are unable to protect our domain names, our business would suffer.
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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 March 31, 2000, all of our funds were held in money
market funds, U.S. government and agency securities and investment grade
corporate bonds and equities. We did not hold derivative financial instruments
as of March 31, 2000 and have never held these instruments in the past.
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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
EXHIBIT NO. TITLE:
- ----------- ------
10.16 Stock Option Grant Notice dated February 23, 2000 and Early Exercise Stock Purchase Agreement
dated February 23, 2000
27.1 Financial Data Schedule
(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 15th day of May
2000.
EGREETINGS NETWORK, INC.
By: /s/ ANDREW J. MOLEY
---------------------------------------------
Andrew J. Moley
Chief Financial Officer and Senior Vice President
(Principal Financial Officer)
By: /s/ SCOTT F. NEAMAND
---------------------------------------------
Scott F. Neamand
Vice President, Finance
(Principal Accounting Officer)