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EXHIBIT 99.2
FINANCIAL STATEMENTS
Egreetings Network, Inc.
For the years ended December 31, 2000 and 1999
with Report of Independent Auditors
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Egreetings Network, Inc.
Financial Statements
For the years ended December 31, 2000 and 1999
CONTENTS
Report of Ernst & Young LLP, Independent Auditors.................................................................1
Financial Statements
Balance Sheet.....................................................................................................2
Statements of Operations..........................................................................................3
Statements of Stockholders' Equity (Deficit)......................................................................4
Statements of Cash Flows..........................................................................................5
Notes to Financial Statements.....................................................................................7
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Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Egreetings Network, Inc.
We have audited the accompanying balance sheets of Egreetings Network, Inc. as
of December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Egreetings Network, Inc. at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
Walnut Creek, California
February 16, 2001
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Egreetings Network, Inc.
Balance Sheets
(in thousands, except share data)
DECEMBER 31,
2000 1999
---------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,841 $ 81,774
Short-term investments 36,535 -
Accounts receivable (net of allowances for doubtful accounts of $1,330 in
2000 and $69 in 1999) 2,635 1,228
Prepaid expenses and other current assets 861 9,244
---------------------------------------
Total current assets 43,872 92,246
Property and equipment, net 10,365 11,800
Deferred content costs - 12,740
Restricted cash deposit 76 2,172
Deposits and other assets 749 1,165
---------------------------------------
Total assets $ 55,062 $ 120,123
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,009 $ 7,910
Accrued expenses and other current liabilities 1,250 2,086
Accrued compensation and related expenses 1,807 1,943
Accrued royalties (including amounts payable to a related party of $37 in
2000 and $145 in 1999) 208 290
Deferred revenue 1,612 581
Current portion of equipment term loan 1,994 1,764
---------------------------------------
Total current liabilities 8,880 14,574
Equipment term loan, less current portion 1,759 3,718
---------------------------------------
Total liabilities 10,639 18,292
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value: 65,000,000 shares authorized; 32,981,900
and 34,501,140 shares issued and outstanding in 2000 and 1999,
respectively 160,971 159,227
Deferred stock compensation (266) (2,195)
Notes receivable from stockholders - (5,490)
Accumulated deficit (116,282) (49,711)
---------------------------------------
Total stockholders' equity 44,423 101,831
---------------------------------------
Total liabilities and stockholders' equity $ 55,062 $ 120,123
=======================================
See accompanying notes.
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Egreetings Network, Inc.
Statements of Operations
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
2000 1999 1998
--------------------------------------------------
Revenues $ 10,437 $ 3,160 $ 317
Costs and expenses:
Cost of services (1) 6,337 2,932 610
Sales and marketing (2) 16,438 17,035 3,094
Operations and development (3) 17,889 10,972 2,628
General and administrative (4) 8,113 5,437 1,444
Amortization of deferred content costs 5,272 1,371 138
Amortization of deferred stock compensation 1,119 1,992 201
Write-down for impairment of long-lived assets 19,672 - -
Restructuring charges 5,184 - -
--------------------------------------------------
Total costs and expenses 80,024 39,739 8,115
--------------------------------------------------
Loss from operations (69,587) (36,579) (7,798)
Interest income 3,872 471 42
Interest expense (747) (534) (65)
Other expense, net (109) - -
--------------------------------------------------
Net loss $ (66,571) $ (36,642) $ (7,821)
==================================================
Net loss per share:
Basic and diluted $ (2.02) $ (8.02) $ (2.26)
==================================================
Shares used in calculation of net loss per share:
Basic and diluted 32,933 4,569 3,464
==================================================
- ------------
(1) Excluding $5,272, $1,371 and $138 in amortization of deferred content costs
for the years ended December 31, 2000, 1999 and 1998, respectively, and
excluding the effect of the write-down for impairment of long-lived assets
for the year ended December 31, 2000 (see Note 2), and excluding $145, $158
and $20 in amortization of deferred stock compensation for the years ended
December 31, 2000, 1999 and 1998, respectively.
(2) Excluding $280, $540 and $40 in amortization of deferred stock compensation
for the years ended December 31, 2000, 1999 and 1998, respectively.
(3) Excluding $504, $1,033 and $111 in amortization of deferred stock
compensation for the years ended December 31, 2000, 1999 and 1998,
respectively.
(4) Excluding $190, $261 and $30 in amortization of deferred stock compensation
for the years ended December 31, 2000, 1999 and 1998, respectively.
See accompanying notes.
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Egreetings Network, Inc.
Statements of Stockholders' Equity (Deficit)
(in thousands, except share data)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK DEFERRED
------------------------------------------------------- STOCK
SHARES AMOUNT SHARES AMOUNT COMPENSATION
----------------------------------------------------------------------
Balances at December 31, 1997 2,298,741 $ 9,417 3,466,000 $ 16 $ -
Issuance of Series D preferred stock for
conversion of notes payable 224,805 1,436 - - -
Issuance of warrants in connection with debt
financing - 65 - - -
Deferred stock compensation related to grant
of stock options - - - 488 (488)
Amortization of deferred stock compensation - - - - 201
Valuation of preferred stock warrant in
connection with content agreement - 445 - - -
Net loss and comprehensive loss - - - - -
----------------------------------------------------------------------
Balances at December 31, 1998 2,523,546 11,363 3,466,000 504 (287)
Issuance of Series D preferred stock for
conversion of notes payable 82,381 514 - - -
Issuance of Series F preferred stock, net of
issuance costs 3,283,636 20,871 - - -
Issuance of Series F preferred stock for
conversion of notes payable 442,857 3,100 - - -
Issuance of Series G preferred stock, net of
issuance costs 9,559,417 41,876 - - -
Issuance of Series E preferred stock pursuant
to exercise of warrants 1,663,333 9,087 - - -
Issuance of common stock under stock option
plan - - 2,670,690 5,529 -
Interest accrued on notes receivable from
stockholders - - - 130 -
Issuance of warrants in connection with debt
financing - 428 - - -
Deferred stock compensation related to grant
of stock options - - - 3,900 (3,900)
Amortization of deferred stock compensation - - - - 1,992
Valuation of preferred stock warrant in
connection with content agreement - 7,744 - - -
Issuance of common stock, net of issuance costs - - 6,000,000 54,181 -
Conversion of convertible preferred stock to
common stock (17,555,170) (94,983) 22,364,450 94,983 -
Net loss and comprehensive loss - - - - -
----------------------------------------------------------------------
Balances at December 31, 1999 - - 34,501,140 159,227 (2,195)
Issuance of common stock under stock option
plan - - 560,732 1,949 -
Repayment of notes receivable from stockholders - - - - -
Interest accrued on notes receivable from
stockholders - - - 342 -
Repurchase of common stock issued under stock
option plan and forgiveness of related notes
receivable and accrued
interest - - (2,755,507) (4,827) -
Issuance of common stock under stock purchase
plan - - 196,035 187 -
Issuance of common stock, net of issuance costs - - 479,500 4,683 -
Deferred stock compensation related to
cancellation of stock options - - - (810) 810
Amortization of deferred stock compensation - - - - 1,119
Issuance of common stock warrants for content
and services - - - 220 -
Net loss and comprehensive loss - - - - -
----------------------------------------------------------------------
Balances at December 31, 2000 - $ - 32,981,900 $ 160,971 $ (266)
======================================================================
NOTES TOTAL
RECEIVABLE STOCKHOLDERS'
FROM ACCUMULATED EQUITY
STOCKHOLDERS DEFICIT (DEFICIT)
--------------------------------------------
Balances at December 31, 1997 $ - $ (5,248) $ 4,185
Issuance of Series D preferred stock for
conversion of notes payable - - 1,436
Issuance of warrants in connection with debt
financing - - 65
Deferred stock compensation related to grant
of stock options - - -
Amortization of deferred stock compensation - - 201
Valuation of preferred stock warrant in
connection with content agreement - - 445
Net loss and comprehensive loss - (7,821) (7,821)
--------------------------------------------
Balances at December 31, 1998 - (13,069) (1,489)
Issuance of Series D preferred stock for
conversion of notes payable - - 514
Issuance of Series F preferred stock, net of
issuance costs - - 20,871
Issuance of Series F preferred stock for
conversion of notes payable - - 3,100
Issuance of Series G preferred stock, net of
issuance costs - - 41,876
Issuance of Series E preferred stock pursuant
to exercise of warrants - - 9,087
Issuance of common stock under stock option
plan (5,360) - 169
Interest accrued on notes receivable from
stockholders (130) - -
Issuance of warrants in connection with debt
financing - - 428
Deferred stock compensation related to grant
of stock options - - -
Amortization of deferred stock compensation - - 1,992
Valuation of preferred stock warrant in
connection with content agreement - - 7,744
Issuance of common stock, net of issuance costs - - 54,181
Conversion of convertible preferred stock to
common stock - - -
Net loss and comprehensive loss - (36,642) (36,642)
--------------------------------------------
Balances at December 31, 1999 (5,490) (49,711) 101,831
Issuance of common stock under stock option
plan (1,859) - 90
Repayment of notes receivable from stockholders 45 - 45
Interest accrued on notes receivable from
stockholders (342) - -
Repurchase of common stock issued under stock
option plan and forgiveness of related notes
receivable and accrued
interest 7,646 - 2,819
Issuance of common stock under stock purchase
plan - - 187
Issuance of common stock, net of issuance costs - - 4,683
Deferred stock compensation related to
cancellation of stock options - - -
Amortization of deferred stock compensation - - 1,119
Issuance of common stock warrants for content
and services - - 220
Net loss and comprehensive loss - 66,571) (66,571)
--------------------------------------------
Balances at December 31, 2000 $ - $ (116,282) $ 44,423
============================================
See accompanying notes.
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Egreetings Network, Inc.
Statements of Cash Flows
(in thousands)
YEAR ENDED DECEMBER 31,
2000 1999 1998
---------------- ---------------- ----------------
OPERATING ACTIVITIES
Net loss $ (66,571) $ (36,642) $ (7,821)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 5,840 2,352 308
Loss on disposal of property and equipment 299 59 -
Amortization of deferred content costs 5,272 1,371 138
Write-down for impairment of long-lived assets 19,672 - -
Amortization of deferred stock compensation 1,119 1,992 201
Non-cash charges related to forgiveness of shareholder notes
receivable and a grant of common shares 2,854 - -
Interest income accrued on available for sale securities (274) - -
Other 16 46 19
Changes in operating assets and liabilities:
Accounts receivable (1,407) (1,018) (200)
Prepaid expenses and other current assets 1,512 (1,703) (19)
Restricted cash deposit 2,096 (2,172) -
Deposits and other assets 417 (699) (17)
Accounts payable and accrued liabilities (6,729) 10,733 1,469
Deferred revenue 1,031 495 86
--------------- ---------------- ----------------
Net cash used in operating activities (34,853) (25,186) (5,836)
INVESTING ACTIVITIES
Purchases of property and equipment (10,286) (13,365) (786)
Proceeds from disposals of property and equipment 453 - -
Purchases of available for sale securities (112,360) - -
Proceeds from sale/maturity of available for sale securities 76,100 - -
--------------- ---------------- ----------------
Net cash used in investing activities (46,093) (13,365) (786)
FINANCING ACTIVITIES
Borrowings under equipment term loan - 4,966 764
Payments on equipment term loan (1,729) (894) (282)
Borrowings on notes payable to stockholders - 2,100 2,950
Payments on notes payable to stockholders - - (22)
Issuance of common stock 4,697 54,353 -
Issuance of preferred stock - 59,532 -
Proceeds from repayment of notes receivable from stockholders 45 - -
Other borrowings - - (44)
--------------- ---------------- ----------------
Net cash provided by financing activities 3,013 120,057 3,366
--------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (77,933) 81,506 (3,256)
Cash and cash equivalents at beginning of period 81,774 268 3,524
--------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 3,841 $ 81,774 $ 268
=============== ================ ================
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Egreetings Network, Inc.
Statements of Cash Flows (continued)
(in thousands)
YEAR ENDED DECEMBER 31,
2000 1999 1998
--------------- ---------------- ----------------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 489 $ 246 $ 13
=============== ================ ================
Non-cash investing and financing activities:
Conversion of notes payable to stockholders to preferred stock $ - $ 3,614 $ 1,436
=============== ================ ================
Conversions of preferred stock to common stock $ - $ 94,983 $ -
=============== ================ ================
Valuation of common stock warrants in connection with content
agreement $ 220 $ 428 $ 65
=============== ================ ================
Issuance of common stock for notes receivable $ 1,859 $ 5,360 $ -
=============== ================ ================
Interest accrued on notes receivable from stockholders, net $ 342 $ 130 $ -
=============== ================ ================
Forgiveness of shareholder notes receivable $ 4,827 $ - $ -
=============== ================ ================
Issuance of preferred stock for prepaid advertising $ - $ 7,500 $ -
=============== ================ ================
Valuation of preferred stock issued for content rights $ - $ 4,802 $ -
=============== ================ ================
Valuation of preferred stock warrant in connection with content
agreement $ - $ 7,744 $ 445
=============== ================ ================
See accompanying notes.
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Egreetings Network, Inc.
Notes to Financial Statements
December 31, 2000
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Egreetings Network, Inc. (the "Company") offers consumers and businesses a
convenient and simple integrated solution for finding and sending online cards,
gifts and invitations. The Company's Web site allows users to send personalized
content-rich online cards and a wide variety of gifts. The Company operates in
one business segment and generates revenue from corporate advertising and
sponsorships, e-commerce and direct marketing.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of highly liquid short-term investments in money market
mutual funds with insignificant interest rate risk and an original maturity from
date of purchase of three months or less. The Company's short-term investments
consist of investments in debt securities of government agencies, corporate
bonds, market auction preferred securities and commercial paper with maturities
ranging from three months to one year.
Cash equivalents and short-term investments are stated at amounts that
approximate fair value based on quoted market prices. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, management determines the
appropriate classification of debt and equity securities at the time of purchase
and re-evaluates the designation as of each balance sheet date. At December 31,
2000, the Company classified all of its debt and equity securities as
available-for-sale. Unrealized gains and losses have been immaterial to date.
Realized gains and losses, which have been immaterial to date, are included in
interest income or expense.
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND INVESTMENTS (CONTINUED)
The following summarizes the Company's cash equivalents and investments at cost,
which approximates fair value (in thousands):
DECEMBER 31,
2000 1999
--------------------------------------
Cash equivalents:
Money market mutual fund $ 3,561 $ 80,741
======================================
Short-term investments:
Government agencies $ 15,268 $ -
Corporate bonds 9,924 -
Market auction preferred securities 8,385 -
Commercial paper 2,958 -
--------------------------------------
$ 36,535 $ -
======================================
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of accumulated amortization and
depreciation and are depreciated using the straight-line method over the
estimated useful life of the related asset, which currently averages three
years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the life of the lease. Realization of the carrying amount of
property and equipment is dependent upon the Company generating sufficient
future revenues.
Web site infrastructure and application costs are capitalized in accordance with
Emerging Issues Task Force Issue No. 00-2, "Accounting for Web Site Development
Costs" and are amortized over three years. Costs to develop web site content are
expensed as incurred.
Depreciation and amortization expense relating to property, equipment and
leasehold improvements excluding the write-down for impairment of long-lived
assets (see Note 2), amounted to $5,840,000, $2,352,000, and $308,000 for the
years ended December 31, 2000, 1999, and 1998, respectively.
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which potentially subject the Company to concentrations of
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash with three high-credit quality domestic financial
institutions. The Company performs ongoing credit evaluations of its customers
and does not typically require collateral or guarantees. Management establishes
an allowance for doubtful accounts when it appears accounts receivable will not
be collectible.
For the years ended December 31, 2000, 1999 and 1998, one corporate advertising
sponsor accounted for 12%, 28% and 11%, respectively of the Company's revenues.
There were no significant concentrations of credit risk among the Company's
corporate sponsors from whom accounts receivables were due as of December 31,
2000 and 1999. An inability to demonstrate an active and growing user base to
advertisers and sponsors may result in a loss of advertisement and sponsorship
agreements and a decline in advertisement and sponsorship revenues.
DEPENDENCE ON THIRD PARTIES AND RELATED PARTY TRANSACTIONS
A common stockholder, American Greetings, formerly known as Gibson Greetings,
Inc. ("Gibson"), has historically provided a significant portion of the
Company's online card content pursuant to an agreement under which the Company
pays royalties. Royalties paid to this related party aggregated $456,000,
$504,000, and $112,000 in the years ended December 31, 2000, 1999, and 1998,
respectively. Royalty obligations arise as online cards containing third-party
content are sent by consumers. Royalty expenses are recorded as cost of services
in the statement of operations in the period during which the related
obligations arise. On January 3, 2001, the Company removed all online cards from
it's website that contained content from this related party (see Note 4).
The Company relies on a single entity to provide a majority of support necessary
to maintain it's servers and transmit data. The inability of this party to
fulfill its obligations to the Company could negatively impact the Company's
future results.
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANNEL DISTRIBUTION COSTS
The Company has contracted with several third party channel distribution
partners whose Internet Web sites direct Internet traffic to the Egreetings.com
Web site via a link from the distribution partners' Web site. The contracts are
typically one year in duration. The Company charges the cost of these
distribution services to sales and marketing expense over the life of the
contracts.
REVENUE RECOGNITION
Revenues are generated primarily as a result of advertising and sponsorship,
direct marketing, hosting of online card functionality, 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 based on
the lower of as the impression is delivered or displayed or ratably over the
term of the commitment.
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 the hosting of online card functionality for customers
is recognized on a ratable basis over the life of the contract. 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. Revenue from
e-commerce transactions is recognized on the date a digital gift certificate
code is emailed to the buyer or designated recipient or 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.
Deferred revenue is primarily comprised of payments received pursuant to revenue
generating contracts in advance of revenue recognition and billings in excess of
recognized revenue relating to advertising contracts.
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock option grants using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 and has
adopted the disclosure-only alternative of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
approximately $4,103,000, $9,775,000, and $478,000 for the years ended December
31, 2000, 1999, and 1998, respectively.
In November 1999, the Company sold 2,475,247 shares of Series G preferred stock
to the National Broadcasting Company, Inc. ("NBC") for gross proceeds of
approximately $7.5 million in cash and for advertising rights with a fair value
of $7.5 million. Under this agreement, advertising will be provided to the
Company pursuant to the terms of the advertising agreement. The right to utilize
this prepaid advertising expires on January 1, 2002. The fair value of these
advertising rights was recorded as prepaid advertising and has been amortized to
expense as advertising is used. However, realization of the carrying amount of
prepaid advertising is dependent upon the Company placing sufficient advertising
with NBC prior to expiration of the agreement and upon the level of revenues
generated by such advertising. Based on management's estimate of future cash
flows, $6.9 million was charged to operations during the period to reflect the
impairment of this asset (see Note 2).
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. The Company continually evaluates the
realizability of its deferred content costs for impairment and based on
management's estimate of future cash flows, $7.7 million was charged to
operations during the period to reflect the impairment of this asset (see Note
2).
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is presented
under the requirement of SFAS No. 128, "Earnings per Share" ("SFAS 128"). Basic
earnings per share has been computed using the weighted-average number of common
shares outstanding during the period, less shares subject to repurchase, and
excludes any dilutive effects of stock options, warrants, and convertible
securities. Potentially dilutive securities have also been excluded from the
computation of diluted net loss per share as their inclusion would be
antidilutive.
The calculation of basic and diluted net loss per share is as follows (in
thousands, except share and per share amounts):
YEAR ENDED DECEMBER 31,
2000 1999 1998
----------------------------------------------------------
Net loss $ (66,571) $ (36,642) $ (7,821)
==========================================================
Weighted average shares of common stock outstanding 34,851,189 5,726,149 3,466,000
Less: weighted average shares of common stock that may be
repurchased (1,917,719) (1,157,601) (1,543)
----------------------------------------------------------
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share 32,933,470 4,568,548 3,464,457
==========================================================
Basic and diluted net loss per share $ (2.02) $ (8.02) $ (2.26)
==========================================================
If the Company had reported net income, the calculation of diluted earnings per
share would have included approximately 533,000, 798,000, and 424,000 common
equivalent shares related to the outstanding stock options and warrants not
included above (determined using the treasury stock method) for the years ended
December 31, 2000, 1999, and 1998, respectively.
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements of all public registrants. The Company's revenue
recognition policies have been consistent with the provisions of SAB 101 and
accordingly, the adoption of SAB 101, effective January 1, 2000, had no impact
on the Company's financial position or operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), which establishes accounting and reporting
standards for derivative instruments and hedging activities. FAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. 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 FAS 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 FAS Statement No. 133", which amended FAS 133 with respect to
four specific issues. The Company is required to adopt FAS 133, as amended, for
the year ending December 31, 2001. The Company does not expect that the adoption
of this statement will have a material effect on the financial position, results
of operations or cash flows.
2. WRITE-DOWN FOR IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of 2000, the market downturn affecting internet
company business models significantly increased. In recognition of this downturn
and as part of management's review of impairment indicators in accordance with
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", management determined that an impairment to the
carrying value of certain assets existed as a result of this change in
circumstances and the related reduction in cash flows from advertising and other
revenues. Accordingly, an assessment of the fair value of certain assets was
performed based on management's estimate of future cash flows related to these
assets. This assessment resulted in the write-down of $19,672,000, with respect
to prepaid advertising, deferred content costs, and property and equipment of
$6,871,000, $7,673,000 and $5,128,000, respectively.
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
2000 1999
--------------------------------------
Furniture and fixtures $ 974 $ 743
Leasehold improvements 1,924 713
Computer equipment, software, and website costs 12,712 13,169
--------------------------------------
15,610 14,625
Less accumulated depreciation and amortization (5,245) (2,825)
--------------------------------------
$ 10,365 $ 11,800
======================================
Realization of the carrying amount of property and equipment is dependent upon
the Company generating sufficient cash flows from advertising and other revenue
in future periods. If estimated future cash flows are not achieved, additional
reductions in the recorded amount of property and equipment could be required.
4. DEFERRED CONTENT COSTS
In December 1997, the Company entered into a Series D preferred stock purchase
agreement and a content provider and distribution agreement ("Content
Agreement") with Gibson Greetings, Inc. In conjunction with this transaction,
the Company granted to Gibson a warrant to purchase 946,925 shares of Series E
preferred stock. The warrant increased to 1,663,333 shares of Series E preferred
stock as a result of certain anti-dilution provisions. This warrant, exercised
by Gibson Greetings, Inc. concurrent with the completion of the Company's
initial offering in December 1999, was contingent on Gibson Greeting's not being
in material violation of the Content Agreement and therefore was accounted for
as a variable warrant. The warrant was valued by management using the
Black-Scholes valuation model at each quarter end with the fair value recorded
as deferred content costs in the accompanying balance sheets. The Company
recorded $7,744,000, and $445,000 in deferred content costs for the years ended
December 31, 1999 and 1998, respectively. No such cost related to this agreement
was recorded for the year ended December 31, 2000. The assumptions used to
compute the value of the warrant at each measurement date under Black-Scholes
were as follows: expected volatility, 0.7; expected dividend yield, 0%;
risk-free interest rate, 4.34% to 5.38%; expected life, amount of time between
measurement date and expiration of warrant; and exercise price and stock price,
consistent with information at each relevant date. On September 30, 1999, in
connection with the
14
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
4. DEFERRED CONTENT COSTS (CONTINUED)
execution of the first amendment to the Content Agreement, the warrant became
non-forfeitable, fully exercisable and fully vested and was no longer linked to
performance under the Content Agreement. The Company performed a final valuation
of Black-Scholes at September 30, 1999, resulting in a final value of $9,448,000
which was being amortized over the remaining period of the Content Agreement,
which extends through December 2002. On January 3, 2001, the Company removed all
online cards from it's website that contained Gibson Greeting content.
Accordingly, the unamortized deferred content cost relating to this agreement
aggregating $5,292,000 as of December 31, 2000 has been charged to operations
during the period to reflect the impairment of this asset (see Note 2).
In November 1999, the Company entered into a two-year content licensing
agreement with NBC pursuant to which the Company has the right to create and
distribute online cards for a minimum of five NBC television programs for each
six-month television season, which amount may be increased, at NBC's option, to
a maximum of 30 NBC television programs for each season. The consideration for
this content agreement, in addition to the promotion by the Company of digital
greetings containing NBC content, is equal to the difference in NBC's per share
cost of the Series G preferred stock from the deemed fair market value of the
Company's common shares as of the date of the preferred stock purchase by NBC.
This equates to a value of approximately $4.8 million which was recorded as
deferred content costs with an offset to preferred stockholders' equity. The
unamortized amount relating to this agreement aggregating $2,296,000 as of
December 31, 2000 has been charged to operations during the period to reflect
the impairment of this asset (see Note 2).
In April 2000, the Company entered into a three-year content licensing agreement
with a music entertainment entity pursuant to which the Company has the right to
create and distribute online cards for a certain number of music artists. The
consideration for this content agreement, in addition to the promotion by the
Company of the music artists via the online cards, is a warrant to purchase
75,000 share of the Company's common stock. The warrant was valued by management
using a Black-Scholes valuation model. The Company recorded $203,000 in deferred
content costs for the year ended December 31, 2000. The unamortized balance
relating to this agreement totaling $85,000 as of December 31, 2000 has been
charged to operations during the period to reflect the impairment of this asset
(see Note 2).
Amortization, excluding the impairment write-down for the year ended December
31, 2000 of $7,673,000 (see Note 2), of deferred content costs was approximately
$5,272,000, $1,371,000, and $138,000 for the years ended December 31, 2000,
1999, and 1998, respectively.
15
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
5. DEBT
In August 1999, the Company entered into an equipment financing agreement with
two leasing companies and a financial institution that provides for borrowings
of up to $10.0 million, of which $4,470,000 was drawn-down. An additional
interest payment of 10% of the total amount drawn-down on the facility is due
upon extinguishment of the debt. Advances under the facility terminated on July
31, 2000. In connection with the financing, the Company granted a warrant that
enable the holders to purchase 120,000 shares of the Company's common stock at
an exercise price of $4.50 per share through November 2005. The warrant was
valued by management using a Black-Scholes valuation model and is amortizing
this amount to interest expense over the term of the financing agreement. The
Company also has a second equipment term loan. At December 31, 2000, the
outstanding loan balances on the two equipment term loans were $2,751,000 and
$555,000, respectively, which mature in August 2002 and March 2002,
respectively. The loans bear interest at 11.6% and prime plus 2% (11.5% at
December 31, 2000), respectively. Principal and interest are payable monthly.
Both equipment loans are secured by the equipment purchased under the loan
agreement and a general lien against the Company's assets.
Future payments relating to outstanding loans are as follows at December 31,
2000 (in thousands):
2001 $ 1,994
2002 1,759
-------------------
Total principal payments 3,753
Less current portion (1,994)
-------------------
$ 1,759
===================
16
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES
There has been no provision for United States federal or state or foreign income
taxes for any period as the Company has incurred operating losses for all
periods and in all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
DECEMBER 31,
2000 1999
-------------------------------------
Deferred tax assets:
Net operating losses $ 31,896 $ 17,103
Stock compensation 673 1,186
Accrued expenses 4,223 1,049
Other 1,345 232
--------------------------------------
Total deferred tax assets 38,137 19,570
Valuation allowance (38,137) (19,570)
-------------------------------------
$ - $ -
=====================================
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased by $18,567,000 and $14,780,000 during the years ended December 31,
2000 and 1999, respectively.
As of December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $85,294,000, which expire in the
years 2010 through 2020. The Company also had net operating loss carryforwards
for state income tax purposes of approximately $48,268,000 expiring in years
2003 and 2005. Utilization of the Company's net operating losses may be subject
to substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986 and similar state provisions. Such
an annual limitation could result in the expiration of the net operating losses
before utilization.
17
20
Egreetings Network, Inc.
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1999, the Company completed its initial public offering of 6.0
million shares of its common stock. Net proceeds to the Company totaled
approximately $54.2 million. As of the closing date of the offering, all of the
convertible preferred stock outstanding was converted into approximately 22.4
million shares of common stock. In January 2000, the Company's investment bank
exercised its right to acquire an additional 479,000 shares of its common stock.
Net proceeds to the Company from this issuance totaled approximately $4.5
million.
BRIDGE FINANCINGS
Between November 1998 and January 1999, the Company issued subordinated notes
for an aggregate amount of $2,100,000 and an interest rate of 8.0% per annum,
together with a warrant to purchase 67,139 shares of Series F preferred stock at
$6.30 per share. The principal amount of these notes was converted into 300,000
shares of Series F preferred stock in March 1999 and subsequently converted into
600,000 shares of common stock upon completion of the initial public offering.
In February and March 1999, the Company issued short-term notes payable with an
aggregate principal amount of $1,000,000 and interest rates ranging from 4.6% to
8.0% per annum. The principal amount of these notes was converted into 142,857
shares of Series F preferred stock in March 1999 and subsequently converted into
285,714 shares of common stock upon completion of the initial public offering.
18
21
Egreetings Network, Inc.
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The Company had the following outstanding warrants to purchase shares of common
stock at December 31, 2000:
NUMBER EXERCISE PRICE EXPIRATION OF
OF SHARES PER SHARE WARRANTS
---------------------------------------------------------------------------------------------------
15,006 $ 1.00 March 2003
83,820 2.00 April - August 2007
10,000 2.25 June 2003
134,278 3.15 November 2005
75,000 4.23 April 2005
120,000 4.50 November 2005
500 5.00 April 2003
---------------------------
438,604
===========================
STOCK OPTIONS
The Company's 1996 Stock Option Plan provides for the issuance of 6,456,109
shares of common stock to employees, officers, directors and consultants and is
limited to 17.5% of fully diluted common stock equivalents as defined. The
Company's 1999 Stock Option Plan provides for the issuance of 3,500,000 shares
of common stock to employees, officers, directors and consultants and is limited
to 17.5% of fully diluted common stock equivalents as defined. Options granted
under either plan may be incentive stock options ("ISOs") or non-statutory stock
options ("NSOs") to employees, officers, directors and consultants. The ISOs may
be granted at a price per share not less than the fair market value at the date
of grant. The NSOs may be granted at a price per share not less than 85% of the
fair market value at the date of grant. If at any time the Company grants an
option and the optionee directly or by attribution owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, the option price shall be at least 110% of the fair value at that date.
Options granted are exercisable over a maximum term of ten years from the date
of grant and generally vest over a period of four years.
19
22
Egreetings Network, Inc.
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity for all plans is as follows:
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED-AVERAGE
EXERCISE PRICE PER
NUMBER OF SHARES SHARE
-----------------------------------------------
Outstanding at December 31, 1997 651,929 0.09
Options granted 493,500 0.83
Options canceled (112,928) 0.03
-----------------------------------------------
Outstanding at December 31, 1998 1,032,501 0.05
Options granted 5,045,518 2.74
Options exercised (2,670,690) 2.07
Options canceled (744,135) 1.40
-----------------------------------------------
Outstanding at December 31, 1999 2,663,194 2.87
Options granted 3,024,858 3.21
Options exercised (560,732) 3.48
Options canceled (2,241,654) 3.41
-----------------------------------------------
Outstanding at December 31, 2000 2,885,666 $ 2.68
===============================================
Exercisable at December 31, 2000 1,300,312 $ 1.96
===============================================
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- -----------------------------------
WEIGHTED-AVERAGE AVERAGE REMAINING WEIGHTED-AVERAGE
EXERCISE NUMBER EXERCISE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE
PRICE RANGE OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ---------------------------------------------------------------------------------------------------------------------
$ 0.04 - 0.93 597,639 $0.28 5.58 558,417 $0.24
$ 0.93 - 1.75 313,862 $1.59 8.63 158,744 $1.60
$ 2.09 940,372 $2.09 9.42 174,011 $2.09
$ 2.10 - 4.88 662,930 $3.09 8.80 287,183 $2.65
5.56 - 12.38 370,863 $8.23 9.00 121,957 $8.43
----------------------------- --------------------------------
2,885,666 $2.68 1,300,312 $1.96
============================= ================================
20
23
Egreetings Network, Inc.
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
In certain cases, the Stock Option Plan allows for the early exercise of options
granted subject to vesting and repurchase provisions. During the year ended
December 31, 1999, the chief executive officer, chief financial officer and a
director of the Company early exercised options to purchase an aggregate of
2,488,063 shares of restricted common stock at exercise prices ranging from
$2.10 to $2.78 per share. During the year ended December 31, 2000, the chief
executive officer of the Company early exercised options to purchase an
additional 350,000 shares of restricted common stock at an exercise price of
$5.31. All of these shares were purchased with promissory notes payable to the
Company. In October 2000, 2,755,508 shares of vested and unvested, restricted
common stock belonging to the two officers were repurchased and the resulting
unpaid portion of the related promissory notes and accrued interest were
forgiven. The transactions with these two officers resulted in the cancellation
of $7,646,000 in promissory notes and accrued interest of which $2,283,000 was
recognized as a non-cash restructuring charge (see Note 10) and $536,000 was
recognized as a non-cash operating charge.
EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Company's Board of Directors adopted, and in November
1999 the stockholders approved, the 1999 Employee Stock Purchase Plan ("ESPP").
The Company has reserved a total of 1,000,000 shares of common stock for
issuance under this plan, of which 803,965 remained available for issuance as of
December 31, 2000. Eligible employees may purchase common stock at 85% of the
lesser of the fair market value of the Company's common stock on the first day
of the applicable six-month offering period or the fair market value of the
Company's common stock at the date of purchase. Employees have purchased 196,035
shares in connection with the ESPP in the year ended December 31, 2000.
21
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Egreetings Network, Inc.
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
DEFERRED STOCK COMPENSATION
The Company recorded deferred stock compensation of $0 and $3,900,000 during the
years ended December 31, 2000 and 1999, respectively, representing the
difference between the exercise price and the deemed fair value for financial
accounting purposes of certain of the Company's stock options granted to
employees. In the absence of a public market for the Company's common stock
during the period in which the options were granted, the deemed fair value of
the Company's common stock was based on the price per share of recent preferred
stock financings, less a discount to give effect to the superior rights of the
preferred stock. These amounts are being amortized by charges to operations over
the vesting periods of the individual stock options using a graded vesting
method. Such amortization amounted to $1,119,000, $1,992,000 and $201,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. In 2000,
deferred stock compensation was reduced by $810,000 to reflect the cancellation
of certain stock options as a result of employee terminations.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 2000, the Company has reserved shares of capital stock for
future issuance as follows:
Stock options outstanding 2,885,666
Stock options available for grant 6,348,529
Warrants to purchase common stock 438,604
-----------------
9,672,799
=================
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
Pro forma information regarding results of operations and net loss per share is
required by SFAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using the Black-Scholes option valuation model with the following
weighted average assumptions: a risk-free interest rate of 5.17% for the year
ended December 31, 2000 and 5.5% for the years ended December 31, 1999 and 1998;
no dividend yield for the years ended December 31, 2000, 1999 and 1998; a
volatility factor of 1.45 for the year ended December 31, 2000 and .7 for the
year ended December 31, 1999 (minimum value
22
25
Egreetings Network, Inc.
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION (CONTINUED)
method used in 1998) with respect to the expected market price of the Company's
common stock and a weighted average expected life of the options of 5.9 for the
year ended December 31, 2000, 5.5 years for the year ended December 31, 1999 and
4.5 years for the year ended December 31, 1998.
The option valuation models were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected life of the option. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under the plan
calculated using the Black-Scholes option valuation model, the Company's net
loss and pro forma basic and diluted net loss per share would have been
increased to the pro forma amounts indicated below (in thousands except per
share amounts):
YEAR ENDED DECEMBER 31,
2000 1999 1998
----------------------------------------------------------
Net loss - as reported $ (66,571) $ (36,642) $ (7,821)
Pro forma net loss $ (67,662) $ (38,871) $ (7,833)
Basic and diluted net loss per share - as reported $ (2.02) $ (8.02) $ (2.26)
Pro forma basic and diluted net loss per share $ (2.05) $ (8.51) $ (2.26)
The weighted-average fair value of options granted, which is the value assigned
to the options under SFAS 123, was $3.20, $2.54 and $0.18 for options granted
during the years ended December 31, 2000, 1999, and 1998, respectively.
The pro forma impact of options on the net loss is not representative of the
effects on net income (loss) for future years, as future years will include the
effects of additional years of stock option grants.
23
26
Egreetings Network, Inc.
Notes to Financial Statements (continued)
8. RETIREMENT PLAN
The Company has a defined contribution plan for all full-time employees which
qualifies under Section 401(k) of the Internal Revenue Code. Under the terms of
the plan, employees may contribute up to 15%, subject to Internal Revenue
Service limitations, of their annual compensation. The plan provides for
discretionary employer contributions. As of December 31, 2000, there have been
no employer contributions to the plan.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office facilities and certain equipment under
non-cancelable lease agreements that require the Company to pay operating costs,
including property taxes, normal maintenance and insurance. In addition to
several equipment operating leases expiring on various dates through February
2005, the Company has entered into three long-term non-cancelable leases on
office buildings that expire in March 2002, November 2002 and August 2009. Rent
expense amounted to approximately $2,585,000, $1,312,000, and $216,000 for the
years ended December 31, 2000 1999 and 1998, respectively.
Future minimum payments under the terms of non-cancelable operating lease
agreements at December 31, 2000 are as follows (in thousands):
2001 $ 3,039
2002 2,967
2003 2,754
2004 2,721
2005 2,676
Thereafter 9,795
--------------------
Total minimum lease payments $ 23,952
====================
Also under the terms of one office facility lease agreement, the Company has
provided a $76,544 letter of credit supporting the minimum lease payments. The
letter of credit is fully collateralized with a compensating cash balance at the
issuing bank.
The Company is party to a legal dispute arising from the normal course of
business. The Company does not believe that the outcome of this dispute will
have a material effect on the Company's financial position, results of
operations or cash flows. However, depending on the amount and timing, an
unfavorable resolution could have a material affect the Company's financial
position, results of operations or cash flows.
24
27
Egreetings Network, Inc.
Notes to Financial Statements (continued)
10. RESTRUCTURING COSTS
In October 2000, the Company charged $5,184,000 to operations related to a
restructuring plan aimed at reducing costs. Such charges included $4,301,000
for the forgiveness of promissory notes and a severance payment related to the
resignation of the Company's Chief Executive Officer and $780,000 in separation
payments to sixty terminated employees. All restructuring costs were paid
during the year ended December 31, 2000.
11. SUBSEQUENT EVENT
On February 5, 2001, the Company entered into a merger agreement with
AmericanGreetings.com, Inc., a majority-owned subsidiary of American Greetings
Corporation, pursuant to which AmericanGreetings.com commenced a tender offer to
purchase all of the outstanding shares of the Company's common stock for $0.85
per share in cash. Consummation of the proposed merger is subject to the tender
of at least 90% of the outstanding shares or stockholder approval. No
adjustments have been made to the accompanying financial statements for the
effects of the transaction, if consummated, on the recorded amounts of assets
and liabilities of the Company.
12. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth the activity in the allowance for doubtful
accounts for the years ended December 31, 2000, 1999, and 1998 (in thousands):
2000 1999 1998
------------------------
Beginning balance $ 69 $ - $-
Provision for losses 1,300 85 -
Write-offs, net of recoveries (39) (16) -
------------------------
Ending balance $1,330 $ 69 $-
========================
25