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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EGREETINGS NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 5947 94-3207092
(PRIOR TO REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
DELAWARE
(FOLLOWING REINCORPORATION)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
501 SECOND STREET, SUITE 114
SAN FRANCISCO, CA 94107
(415) 536-1870
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GORDON M. TUCKER
CHIEF EXECUTIVE OFFICER
EGREETINGS NETWORK, INC.
501 SECOND STREET, SUITE 114
SAN FRANCISCO, CA 94107
(415) 536-1870
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
KENNETH L. GUERNSEY JOSE F. MACIAS
KARYN R. SMITH BURKE F. NORTON
ANGELIQUE C. TREMBLE PABLO L. CHAVEZ
EDWARD A. KLEINHANS WILSON SONSINI GOODRICH & ROSATI
COOLEY GODWARD LLP PROFESSIONAL CORPORATION
ONE MARITIME PLAZA, 20TH FLOOR 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304
(415) 693-2000 (650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AGGREGATE REGISTRATION
TO BE REGISTERED OFFERING PRICE FEE
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Common Stock, $.001 par value per share..................... $75,000,000 $20,850
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(o) of the Securities Act of
1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 7, 1999
Shares
Egreetings Logo
Common Stock
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Egreetings Network, Inc. is offering shares of common stock.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$ and $ per share. We have made application to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "EGRT."
The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS EGREETINGS
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Per share................................ $ $ $
Total.................................... $ $ $
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 1999.
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[INSIDE FRONT COVER ARTWORK]
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[GATEFOLD ARTWORK]
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TABLE OF CONTENTS
PROSPECTUS SUMMARY..................... 4
RISK FACTORS........................... 7
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS........................... 23
USE OF PROCEEDS........................ 24
DIVIDEND POLICY........................ 24
CAPITALIZATION......................... 25
DILUTION............................... 26
SELECTED FINANCIAL DATA................ 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 28
BUSINESS............................... 35
MANAGEMENT............................. 51
CERTAIN TRANSACTIONS................... 66
PRINCIPAL STOCKHOLDERS................. 70
DESCRIPTION OF CAPITAL STOCK........... 74
SHARES ELIGIBLE FOR FUTURE SALE........ 81
UNDERWRITING........................... 83
NOTICE TO CANADIAN RESIDENTS........... 86
LEGAL MATTERS.......................... 88
EXPERTS................................ 88
ADDITIONAL INFORMATION................. 88
INDEX TO FINANCIAL STATEMENTS.......... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
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"E-greetings" is a registered trademark and service mark of Egreetings
Network, Inc. in the United States. All other trademarks or service marks
appearing in this prospectus are the property of their respective owners.
Unless otherwise indicated, all information contained in this prospectus
assumes:
- no exercise of the underwriters' over-allotment option;
- no exercise of outstanding options or warrants, except for the assumed
exercise of a warrant to purchase preferred stock convertible into
4,990,000 shares of common stock, which will expire upon the completion
of this offering;
- the conversion of all outstanding shares of our preferred stock into
shares of common stock upon the completion of this offering;
- our reincorporation from California to Delaware; and
- the filing of our restated certificate of incorporation.
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DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all the information you should consider before
buying shares in the offering. You should read the entire prospectus carefully.
EGREETINGS NETWORK, INC.
Egreetings offers consumers a simple and compelling solution to the problem
of finding and sending appropriate greetings and gifts. Our Web site contains
over 4,400 digital greetings incorporating rich media elements such as graphics,
animations and music that consumers can personalize and send for free. Because
our greetings are organized into content channels, consumers can quickly locate
appropriate greetings and we can offer consumers contextually merchandized gift
suggestions based on their greeting selections. In addition, our service is
"viral" in nature, as each greeting sent creates an opportunity for us to
acquire the recipient as a new user of our service. In September 1999, our Web
site was visited more than 9.6 million times, visitors to our Web site viewed
over 98 million Web pages and consumers used our service to send over 3.4
million digital greetings.
Consumers use our Web site to communicate for personal or business
purposes, typically related to an occasion, sentiment or emotion. We believe
these consumers are likely to be receptive to advertisements and gift
suggestions from our advertising and ecommerce partners related to the specific
occasions for which they are sending greetings. In addition, we are able to make
promotional and purchase offers through email to a large portion of our consumer
base, targeted according to their specific demographics and content affinity.
We provide benefits to both consumers and advertisers, including the
following:
- Superior Value and Enhanced Communications, enabling individuals to
convey personal, business and occasion-related communications in a
creative, entertaining and personalized manner.
- Convenient Communications and Gift-Giving, eliminating the
inconvenience associated with traditional paper-based communications
and retail gift stores.
- Targeted Online Opportunities, enabling advertisers and our ecommerce
partners to deliver their messages and promote their products to a
large and diverse group of consumers on a highly targeted basis.
- Viral Advertising, allowing advertisers and sponsors to establish and
build a brand image not only with the senders of the digital greetings
but also with the recipients.
The emergence of the Internet as a global medium and the rapid adoption of
email are changing the way people communicate and engage in commerce.
International Data Corporation estimates that the number of email messages sent
in the United States alone will grow from approximately 2.1 billion per day at
the end of 1998 to approximately 9.2 billion per day at the end of 2003.
Although text-based email is convenient, it does not allow consumers to express
themselves in a dynamic and entertaining fashion. As a result, enhanced email
services such as ours that provide consumers an opportunity to use engaging
graphics and imagery to express their emotions are gaining popularity. According
to a Jupiter Communications survey, sending electronic greetings was the sixth
most popular online activity in 1998.
The use of the Internet as a means for conducting commercial transactions
is also growing dramatically. Forrester Research estimates that the business to
consumer online sales market in the United States alone will increase from
approximately $20 billion in 1999 to approximately $184 billion in 2004 and that
global spending for online advertising will total $33 billion in 2004. We
believe our status as a leader in the distribution of digital greetings and our
ability to deliver highly targeted gift offers and advertisements to our
consumers put us in a strong position to capitalize on these expanding online
advertising and ecommerce opportunities.
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OTHER INFORMATION
We were incorporated in California in July 1994 under the name Virtual
Mall, Inc. We changed our name to E-greetings Network in October 1998 and to
Egreetings Network, Inc. in September 1999. Our principal executive offices are
located at 501 Second Street, Suite 114, San Francisco, California 94107, and
our telephone number is (415) 536-1870. Our Web site address is
www.egreetings.com. The information on our Web site is not incorporated by
reference into this prospectus.
THE OFFERING
Common stock offered............ shares
Common stock to be outstanding
after the offering............ shares
Use of proceeds................. To fund increased sales and marketing
activities, content acquisition, expansion
of our network architecture and
brand-building activities. The balance of
the proceeds shall be utilized for general
corporate purposes, including potential
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol........................ EGRT
SHARES OUTSTANDING AFTER THE OFFERING
The number of shares of common stock to be outstanding after this offering
includes 4,990,000 shares issuable upon exercise of a warrant that will expire
upon the completion of this offering, but does not include:
- shares of common stock issuable upon the exercise of other
outstanding options and warrants; or
- shares of common stock available for future issuance under our
equity incentive plans.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
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1996 1997 1998 1998 1999
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STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 164 $ 505 $ 317 $ 97 $ 724
Costs and expenses................. 1,952 3,530 8,115 3,090 12,910
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Loss from operations............... (1,788) (3,025) (7,798) (2,993) (12,186)
Interest income (expense), net..... 4 (68) (23) 2 (107)
Net loss........................... (1,784) (3,093) (7,821) (2,991) (12,293)
Net loss per share(1):
Basic and diluted................ $ (0.76) $ (0.67) $ (1.51) $ (0.58) $ (2.34)
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Weighted average shares.......... 2,341 4,650 5,197 5,194 5,261
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Pro forma net loss per share(1):
Basic and diluted................ $ (0.63) $ (0.68)
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Weighted average shares.......... 12,486 18,141
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JUNE 30, 1999
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PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents............... $ 6,601 $ $
Working capital......................... 4,121
Total assets............................ 20,185]
Long-term liabilities................... 764
Total stockholders' equity.............. 16,557
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(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
(2) Pro forma balance sheet data gives effect to the net proceeds of
approximately $ million received from the sale of our Series G preferred
stock in October 1999, the assumed exercise of a warrant to purchase
preferred stock convertible into 4,990,000 shares of common stock, which
will expire upon the completion of this offering and the conversion of all
outstanding shares of preferred stock into common stock upon the completion
of this offering.
(3) Pro forma as adjusted balance sheet data gives effect to the sale by us in
this offering of shares of common stock at an assumed initial public
offering price of $ per share.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
also refer to the other information in this prospectus, including our financial
statements and the related notes.
RISKS RELATED TO OUR BUSINESS
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
began to significantly change our business model in November 1998. The changes
to the business model include a shift from charging consumers for our digital
greetings to a free digital greeting service supported by the sale of
advertising and sponsorships and revenues derived from the sale of products
through our Web site. Our new business model is largely untested, and we cannot
be sure that it will yield the results that we expect. Because the Internet is
constantly changing, we may need to change our business model again to adapt to
those changes. Changes in our business model or organizational structure could
impose significant burdens on our management team and our employees and could
result in loss of productivity or increased employee attrition. When making your
investment decision, you should consider the risks, expenses and difficulties
that we may encounter 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 ecommerce merchants; and
- attract, integrate, retain and motivate qualified personnel.
We cannot be certain that our current and planned business strategies will
be successful or that we will successfully address these risks.
BECAUSE OUR METHODS OF GENERATING REVENUES ARE RELATIVELY NEW, LARGELY UNTESTED
AND CONTINUE TO CHANGE, WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES.
We recently began generating a significant portion of our revenues from sales of
advertising on our Web site. These sales may not grow at the rates we expect
because Internet advertising is still a new and largely unproven method of
advertising.
In November 1998, we stopped charging consumers for our digital greetings
and shifted to the sale of advertising on our Web site as our primary source of
revenue. During
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the six-month period ended June 30, 1999, virtually all of our revenues were
derived from Internet advertising. We expect revenues from Internet advertising
to continue to comprise a significant portion of our revenues for the
foreseeable future. Our future revenues from Internet advertising are difficult
to predict because the medium is new and rapidly evolving. In addition, the
effectiveness of Internet advertising is difficult to gauge. Advertisers may
therefore 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.
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 based on generating increased advertising and direct
marketing revenues. Even if advertising and direct marketing on the Internet
become widely accepted, the success of our business strategy will depend on the
following factors:
- our ability to provide quality content on our Web site that will attract
the numbers and types of consumers that our advertising, direct marketing
and ecommerce partners want to reach;
- our ability to provide guaranteed views of our advertisers' ads by our
consumers; and
- our ability to sell existing and future Internet advertising inventory.
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.
Although we intend to offer more ecommerce services, we may not generate
significant revenues from these services because we have very limited experience
in ecommerce.
Our future success will largely depend on our ability to generate revenues
through the facilitation of ecommerce transactions, a business area in which we
have very limited experience. We intend to facilitate these transactions both by
directing consumers to our partners and by enabling consumers to purchase
products and services directly from our Web site. We also expect third parties
to fulfill these orders and deliver to consumers the goods and services that are
purchased on or through our Web site. These methods of revenue generation are
relatively new and largely untested for us. In addition, the development and
implementation of our ecommerce services will require additional management,
financial and operational resources and may strain our existing resources. Our
expansion into ecommerce 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 ecommerce 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 ecommerce partners to
generate revenues.
We intend to increase advertising, direct marketing and ecommerce revenues
by offering to our advertisers, sponsors and ecommerce partners aggregate
information about our registered members that is often difficult to obtain, such
as their gender, age, location,
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interests and online activities. Our advertisers, sponsors and ecommerce
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 ecommerce 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 ecommerce partners will be reduced significantly,
which could harm our ability to retain and attract advertisers, sponsors and
ecommerce partners. In addition, in October 1999, we plan to eliminate 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 ecommerce merchants may decrease.
This could result in less advertising, direct marketing and reduced ecommerce
activities on or through our Web site and less advertising via our digital
greetings, which would result in reduced revenues from advertising, direct
marketing and ecommerce.
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 $6.5 million in the quarter
ended June 30, 1999. As of June 30, 1999, we had an accumulated deficit of
approximately $25.4 million. We expect to have net losses and negative operating
cash flows for the foreseeable future. The size of these net losses will depend,
in part, on the rate of growth of our revenues from our advertisers, sponsors
and ecommerce 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 September 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, 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
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reduced, traffic to our Web site may decrease, our advertising revenues may be
impaired and future ecommerce revenues may not materialize.
For the quarter ended June 30, 1999, 40% of all digital greetings sent from
our Web site contained content that we obtained pursuant to an exclusive license
agreement with Gibson that expires in December 2002. If we are unable to renew
this arrangement, the amount of content we are able to offer our consumers will
decrease significantly. In addition, if Gibson elects to enter the digital
greetings distribution market itself, or if following the termination or
expiration of our agreement, it enters into a licensing agreement with one of
our competitors, we may be unable to retain our existing consumers or gain new
consumers. This would affect our ability to attract advertisers, sponsors and
ecommerce merchants, and our business would suffer.
With the exception of our relationship with Gibson, 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, in part because of our
relative size and our limited operating history under our current business
model. 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 LICENSE AND DEVELOP
INTERESTING AND COMPELLING CONTENT, INCREASE THE VARIETY OF GIFTS AVAILABLE ON
OR THROUGH OUR WEB SITE AND ENHANCE OUR 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 ecommerce 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 ecommerce merchants may not achieve
market acceptance.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
In October 1998, we changed our name to E-greetings Network and launched a
marketing campaign to establish the brand name "Egreetings." We believe that
establishing and maintaining the Egreetings brand will be an important aspect of
our efforts to retain our current consumers, attract and expand our Internet
audience, license and create new content, and appeal to advertisers and
ecommerce merchants. We believe that the importance of brand recognition will
increase due to the growing number of Internet sites and the relatively low
barriers to entry in providing Internet content. Accordingly, we intend to
continue pursuing an aggressive brand enhancement strategy, which will include
mass market and multimedia advertising, promotional programs and public
relations activities. We intend to incur significant expenditures on these
advertising
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and promotional programs and activities in the future. These expenditures may
not result in a sufficient increase in revenues. In addition, even if our brand
recognition increases, we may not acquire new consumers and even if we do, the
amount of traffic on our Web site may not increase sufficiently to justify the
expenditures. If our brand enhancement strategy is unsuccessful, we may be
unable to increase future revenues.
OUR GROWTH WILL DEPEND SIGNIFICANTLY ON THE INCREASING ACCEPTANCE OF DIGITAL
GREETINGS AS A FORM OF ONLINE COMMUNICATIONS.
Our future success is substantially dependent on the widespread acceptance
of digital greetings as a form of online communications. While email is
increasingly affecting the way people communicate for personal and business
purposes, digital greetings as a form of communication is an evolving medium. We
cannot accurately predict the future growth rate, if any, or the ultimate size
of the consumer use of digital greetings as a form of online communication. The
failure of digital greetings to gain widespread acceptance by consumers,
advertisers, sponsors and ecommerce merchants as a form of online communication
would materially harm our business.
WE FACE INTENSE COMPETITION FROM COMPANIES THAT PROVIDE SERVICES AND PRODUCTS
THAT ARE SIMILAR 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 ecommerce revenue. We
expect this competition to increase. We compete, in particular, with the
following types of companies:
- Companies that offer digital greetings via the Internet. Companies or
their affiliates such as Blue Mountain Arts, American Greetings, Hallmark
and 123greetings.com offer digital greetings via the Internet. In
addition, some of these companies offer ecommerce merchants' products
that can be purchased at or through their Web sites. In addition, several
of these companies 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
digital greetings and gifts. Companies such as Amazon.com, America
Online, Microsoft and Yahoo! offer digital greetings as a component of
their overall product and service offerings or provide links to
electronic greeting and gift companies. The digital greetings 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 ecommerce
merchants that are partners or advertisers of the content aggregator or
Internet company.
- Internet companies that focus on gifts. Several Internet companies offer
gifts on their Web sites. Although these companies currently do not offer
electronic greetings, they may begin to do so in the near future. In
addition, they compete directly with our ecommerce 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 digital greetings to
consumers featuring their characters, logos, brand names and other
creative products.
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Many of our current and potential competitors in the Internet market,
including the companies named above, have significantly greater financial,
publishing, technical and marketing resources than we have. Many of these
companies also have longer operating histories, greater name recognition, more
traffic to their Web sites and more established relationships with advertisers
and advertising agencies than we have. These competitors may be able to
undertake more extensive marketing campaigns, adopt aggressive pricing policies
and devote substantially more resources to developing Internet content and
services than us.
We may be unable to compete successfully for advertisers.
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. Our competitors may be able to provide more desirable demographics,
higher quality content and a higher number of guaranteed impressions than we are
able to. This could make it difficult for us to obtain the advertising or direct
marketing relationships that we will need in order to generate sufficient
revenues. In addition, increased competition for advertising or direct marketing
dollars could result in price reductions, reduced margins or loss of market
share, any of which would harm our business.
We lack experience in ecommerce and we may not compete successfully for
ecommerce merchants or consumers.
Unlike many of our competitors, we have limited experience operating in the
ecommerce 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 ecommerce merchants or
consumers would harm our business significantly.
OUR FUTURE SUCCESS WILL DEPEND ON THE INCREASING USE OF THE INTERNET AND THE
GROWTH OF ECOMMERCE.
Our future success will depend heavily on the acceptance and wide use of
the Internet for ecommerce. If ecommerce does not continue to grow or grows more
slowly than expected, demand for our products and services will be reduced.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may be
unable to support the demands placed on it by increased usage. Internet service
providers, online service providers and other Web site operators have already
experienced significant outages. In addition, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, or increased governmental regulation, could cause the
Internet to lose its viability as a commercial medium. Even if the required
infrastructure, standards, protocols and complementary products, services or
facilities are developed, we may incur substantial expenses adapting to changing
or emerging technologies.
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WE RELY ON ONLINE DISTRIBUTION CHANNELS FOR TRAFFIC TO OUR WEB SITE.
We rely on distribution relationships with high traffic Internet sites and
leading Internet portals to increase the visibility of our Web site and to
generate additional traffic. Our business could be materially harmed if any of
our distribution relationships do not result in increased Web site traffic and
visibility or are not available on commercially reasonable terms. Our
distribution relationships are based on short-term agreements and may not be as
favorable as the agreements of some of our competitors. Because there is intense
competition for online distribution relationships among Web sites, we may be
unable to maintain or renew these agreements or enter into new relationships on
commercially reasonable terms or at all. In addition, our online distribution
relationships may not generate enough additional traffic to our Web site or
create sufficient visibility to justify the costs we incur for these
relationships.
AS WE EXPAND OUR ECOMMERCE 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 ecommerce activities, our success will depend in large
part on the ability of third parties to fulfill our consumers' orders and
deliver goods and services to our consumers. Failure of vendors or shippers to
fill our consumers' orders or deliver quality goods and services on time would
harm our business. In addition, strikes or other service interruptions affecting
fulfillment and delivery services would impair our ability to deliver
merchandise ordered by our consumers on a timely basis.
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 evaluate opportunities to acquire additional product or content
offerings or additional industry expertise and may in the future acquire
companies, divisions or assets of companies. Any future acquisition could result
in difficulties in assimilating acquired operations and products, diversion of
management's attention to acquisition matters and amortization of acquired
intangible assets. Our management has not had any experience in assimilating
acquired organizations and products into our operations. We may be unable to
integrate successfully any operations, personnel or products that we may acquire
in the future, which would harm our business.
EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION AND
RESOURCES AND MAY BE UNSUCCESSFUL.
To date, we have offered content and services directed at consumers in the
United States. We plan to offer localized content and services directed at
international consumers in the future in order to increase the international
traffic to our Web site. We do not have any experience in localizing our content
and services to conform to local cultures, standards and policies. We may have
to compete with local companies that are likely to understand the local market
better than we do. In addition, to achieve satisfactory performance for
consumers, advertisers and ecommerce 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 ecommerce activities. In addition,
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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 digital greetings specifically;
- fluctuations in purchases of products via the Internet generally and
through our Web site specifically;
- seasonal trends in Internet use, ecommerce 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.
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 number of
daily visits to our Web site increased approximately 123% from 112,800 for the
month of November 1998, the month we began to offer our digital greetings at no
cost, to 251,650 for the month of August 1999, and our number of employees
increased from 42 on August 31, 1998 to 131
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on August 31, 1999, with most of this growth in the areas of marketing,
engineering and operations. We expect that the number of our employees,
including management-level employees, will continue to increase for the
foreseeable future to address expected growth in our consumer base, expansion of
our product and service offerings and the pursuit of ecommerce 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 ECOMMERCE PARTNERS.
System failures and slow downs could permanently harm our reputation and
brand, and reduce our attractiveness to consumers, advertisers and ecommerce
partners. Our ability to attract consumers, advertisers and ecommerce 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 ecommerce
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 1999, we experienced a heavy increase in traffic to our Web site, which
resulted in slow response rates. We may be unable to improve our technical
infrastructure in relation to increased consumer volume generally and, in
particular, during peak capacity periods. If we experience outages, frequent or
persistent system failures or degraded response times, our reputation and brand
could be harmed permanently. In addition, we could lose advertising revenues
during these interruptions and consumer satisfaction could be negatively
impacted if our service is slow or unavailable. Furthermore, our consumers use
Internet service providers, online service providers and other Web site
operators for access to our Web site. Each of these providers has experienced
significant outages in the past and could experience outages, delays and other
difficulties due to system failures unrelated to our systems.
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
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to alleviate problems caused by these breaches. In addition, our consumers might
decide to stop using our products and services if we experience security
breaches.
We use third-party software to manage and deliver advertisements and to
provide our advertisers with advertisement performance data. The failure of
these systems to function properly could discourage advertisers from placing
advertisements on our Web site or merchants from offering their products through
our Web site. The failure of these systems also could require us to incur
additional costs or could result in interruptions in our business during the
time spent replacing these systems. Our failure to expand and upgrade our
network system, provide consumers with access to our service or timely address
any system error or failure could materially harm our business and reputation.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased facility in San Francisco, California or at the servers
that host or back-up our systems could result in interruptions or delays in our
business, loss of data or could render us unable to provide services. In
addition, our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, and similar events. Our
general liability insurance policies may not adequately compensate us for losses
that may occur due to interruption in our service.
WE MAY BE UNABLE TO EXPAND OUR MARKETING, ENGINEERING, SALES AND CUSTOMER
SUPPORT ORGANIZATIONS BECAUSE QUALIFIED PERSONNEL ARE IN SHORT SUPPLY.
We will need to substantially expand both our consumer marketing and
corporate marketing efforts and advertising sales operations to increase market
awareness and sales of our products and services. We recently expanded our sales
forces and plan to hire additional sales personnel. Competition for highly
qualified sales personnel is intense, and we may be unable to hire the type and
number of sales personnel we are targeting. To support and enhance our
technology infrastructure, we will also need to increase the personnel in our
engineering department. In addition, we will need to increase our staff to
support new consumers and the expanding needs of our existing consumers. Hiring
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 recently been hired, including our
Chief Executive Officer, Chief Financial Officer, Senior Vice President of
Sales, Vice President of Marketing and Chief Technology Officer. Many of these
individuals do not have significant experience working together or with the rest
of our management team. We cannot assure you that they will be able to work
together successfully or manage any growth we experience. The process of
integrating these individuals may detract from the operation of, and have an
adverse effect on, our business.
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 whom joined us only recently. The loss of the services of any of our
executive officers or other
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key employees could harm our business. In addition, our employees may
voluntarily terminate their employment at any time.
WE MAY BE UNABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CONSUMER
DEMANDS.
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing our products and services and introducing new services
to address our consumers' changing needs. We could incur substantial development
or acquisition costs if we need to modify our services or infrastructure to
adapt to changes affecting providers of Internet services. Our business could be
harmed if we incur significant costs to adapt to these changes. If we cannot
adapt to these changes, or do not sufficiently increase the features and
functionality of our products and services, our consumers may switch to the
product and service offerings of our competition. Furthermore, our competitors
or potential competitors may develop products or services that are more
appealing to our current and potential consumers. As a result, demand for our
services may decrease.
YEAR 2000 PROBLEMS COULD LEAD TO MALFUNCTIONS OF OUR COMPUTER AND COMMUNICATIONS
SYSTEMS AND PREVENT US FROM RUNNING OUR BUSINESS.
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third parties with whom we have
a material relationship fail to achieve year 2000 readiness, our business may be
seriously harmed. In particular, year 2000 problems could temporarily prevent us
from offering our goods and services. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."
RISKS RELATED TO CONTENT, INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION
LAWSUITS MAY BE BROUGHT AGAINST US RELATED TO CONTENT CREATED BY THIRD PARTIES
OR THE SERVICES WE PROVIDE.
We provide a wide variety of content that enables consumers to send digital
greetings and other communications, and we intend to offer services that will
allow consumers to conduct business and engage in various online activities. The
laws relating to the liability of providers of these online services for the
activities of their consumers is currently unsettled. Claims could be made
against us for negligence, defamation, libel, copyright or trademark
infringement, personal injury or other legal claims based on the content that we
license from third parties or based on information that may be posted online by
our consumers. In addition, we could be exposed to liability with respect to
third-party content on our Web site or with respect to the selection of
third-party Web sites that may be accessible through our Web site. These claims
might include, among others, that by providing access to third-party content or
by linking to Web sites operated by third parties, we may be liable for
copyright or trademark infringement or other unauthorized actions by third
parties through those Web sites. Furthermore, we could be exposed to liability
for content and materials that may be created by consumers in build-your-own
customized digital greetings. Investigating and defending claims like these is
expensive, even if the claims do not result in liability. Although we carry
general liability insurance, our
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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.
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
"Egreetings" as our trademark and service mark and the related logo as our
service mark in the United States, and we plan to file applications to register
a number of our trademarks, trade names and service marks in foreign
jurisdictions. We may be unable to obtain some or all of these foreign
registrations.
Enforcing our intellectual property rights could involve significant
expenses and could prove difficult or impossible. In addition, we may receive
claims alleging that the content published on our Web site or any software or
other intellectual property we may utilize infringes the copyright, trademark,
patent, trade secret, right of publicity, or other intellectual property,
proprietary, or contractual right of third parties. 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.
CONSUMER PRIVACY CONCERNS AND CONSUMER PROTECTION PRIVACY REGULATIONS COULD
IMPAIR OUR ABILITY TO OBTAIN OR USE INFORMATION ABOUT OUR CONSUMERS.
Privacy concerns may cause consumers to resist providing the personal data
necessary to support our ability to collect information about our consumers. Our
Web site currently uses "cookies" to track consumer preferences in order to
tailor content to them. A "cookie" is information keyed to a specific server,
file pathway or directory location that is stored on a consumer's hard drive,
possibly without the consumer's knowledge, but generally removable by the
consumer. We also capture demographic and profile information when an individual
registers with us, and we capture and retain data based on digital greetings
sent and received by our consumers. We utilize this information to assist
advertisers in targeting their online advertising campaigns to consumers with
particular demographic characteristics. Although we currently have a policy
against providing our consumers' personal information to third parties, we may
decide in the future to provide this information to our advertising and
ecommerce partners. In the past, the Federal Trade Commission has investigated
companies that have taken actions like this without permission or in violation
of the companies' stated privacy policies. If we begin providing information
like this without permission or in violation of our privacy policy, we may face
potential liability for invasion of privacy. Even the perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our Web site products and services. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
consumers that the data may be used by marketing entities to direct product
promotion and advertising to the consumer. Other countries and political
entities, such as the European Union, have adopted legislation and
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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, ecommerce 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. As a publisher and a
distributor of content on the Internet, we face potential liability for
defamation, negligence and copyright, patent, trade secret or trademark
infringement, as well as other claims based on the nature and content of the
materials that we publish or distribute. The applicability to the Internet of
existing laws governing these issues is uncertain and developing.
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 ecommerce transactions, which may impair our ability to derive financial
benefits from ecommerce 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 ecommerce and could adversely
affect our opportunity to derive financial benefits from ecommerce. 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.
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CHANGES IN REGULATION COULD REDUCE THE VALUE OF OUR DOMAIN NAME.
We own the Internet domain name "Egreetings.com" in the United States.
Domain names generally are regulated by Internet regulatory bodies, 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.
RISKS RELATED TO THIS OFFERING
THE PRICE OF OUR SHARES COULD BE SUBJECT TO EXTREME FLUCTUATIONS AND YOU COULD
HAVE DIFFICULTY TRADING YOUR SHARES.
The trading market price of our common stock may decline below the initial
public offering price. You may not be able to resell your shares at or above the
initial public offering price due to a number of factors, including the
following:
- actual or anticipated quarterly variations in our operating results;
- changes in market expectations of our future financial performance or
changes in the estimates of securities analysts;
- a limited public float;
- announcements by our competitors; and
- conditions affecting the Internet in general or our industry
specifically.
The trading price of our common stock may be volatile. The stock market in
general and the market for technology and Internet-related companies in
particular have experienced extreme volatility that often has been unrelated to
the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our common
stock, regardless of our actual operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted. If this were to happen to us,
litigation would be expensive and would divert management's attention from the
operation of our business.
The initial public offering price will be established by negotiation
between the underwriters and us. You should read the "Underwriters" section for
a more complete discussion of the factors to be considered in determining the
initial public offering price.
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OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND THEIR
USES MAY NOT YIELD A FAVORABLE RETURN.
Most of the net proceeds of this offering are not allocated for specific
uses. Our management will have broad discretion to spend the proceeds from this
offering in ways with which stockholders may not agree. The failure of our
management to apply these funds effectively could result in unfavorable returns.
This could have significant adverse effects on our financial condition and could
cause the price of our common stock to decline.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL % OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of our outstanding common stock will, in the aggregate, beneficially own
% of our outstanding common stock. As a result, these stockholders would be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership also may
have the effect of delaying, deterring or preventing a change in control of our
company and may make some transactions more difficult or impossible to complete
without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions also could discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions do the following:
- authorize us to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors without
prior stockholder approval, with rights senior to the rights attached to
the common stock;
- provide for a staggered board of directors, so that no more than [three]
directors could be replaced each year and it would take three successive
annual meetings to replace all of our current directors;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR OUR INVESTORS,
THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Public market analysts and investors have not been able to develop
consistent financial models for the Internet market because of the unpredictable
rate of growth of Internet users, the rapidly changing models of doing business
on the Internet and the Internet's
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relatively low barriers to entry. As a result, and because of the other risks
discussed in this prospectus, our operating results may not meet the
expectations of public market analysts, if any, or our investors in future
periods. If this occurs, the price of our common stock will likely fall.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES.
The assumed initial public offering price is substantially higher than the
net tangible book value of each outstanding share of common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
their shares, since these investments will be at a substantially higher per
share price than they were for our existing stockholders. The dilution will be
$ per share in the net tangible book value of the common stock from the
assumed initial public offering price of $ per share. If additional shares are
sold by the underwriters following exercise of their over-allotment option, or
if outstanding options or warrants to purchase shares of common stock are
exercised, there will be further dilution.
A SIGNIFICANT PERCENTAGE OF OUR STOCK MAY BE SOLD INTO THE PUBLIC MARKET IN THE
NEAR FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, we will have shares of common stock
outstanding. The shares offered for sale through the underwriters will
be freely tradable unless purchased by our affiliates or covered by a separate
lock-up agreement with the underwriters. Of the remaining shares of
common stock outstanding after this offering, shares will be eligible
for sale in the public market beginning 181 days after the date of this
prospectus. The remaining shares will become available at various times
thereafter upon the expiration of one-year holding periods. See "Shares Eligible
for Future Sale." We also intend to register up to additional shares of
our common stock after this offering for issuance under our equity incentive
plans.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "anticipate," "predict,"
"believe," "plan," "expect," "estimate," "future," "intend," "potential" or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described in "Risk Factors" above and in other
parts of this prospectus. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
our actual results or to changes in our expectations.
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USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately
$ million, after deducting the estimated underwriting discounts and commissions
and estimated offering expenses. If the underwriters' over-allotment option is
exercised in full, we estimate that the net proceeds will be approximately $
million.
We expect to use the net proceeds from this offering to fund increased
sales and marketing activities, content acquisition, expansion of our network
architecture and brand-building activities. We expect to utilize the balance of
the net proceeds of this offering for general corporate purposes, including
possible acquisitions. We are not currently a party to any contracts or letters
of intent with respect to any acquisitions. We have not identified specific uses
for all of the proceeds from this offering and our management will have
discretion over their use and investment. We intend to invest the net proceeds
from this offering in short-term, investment grade, interest-bearing securities
until they are used. We reserve the right to increase or decrease the size of
this offering and the price per share of the shares we are offering.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends for the foreseeable
future. In addition, our bank line of credit agreement prohibits the payment of
cash dividends.
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CAPITALIZATION
The following table sets forth our total capitalization as of June 30,
1999. The pro forma column reflects the sale of Series G preferred stock
completed in October 1999, the assumed exercise of a warrant to purchase
preferred stock convertible into 4,990,000 shares of common stock, which will
expire upon the completion of this offering, and the conversion of all
outstanding shares of preferred stock into common stock upon the completion of
this offering. The pro forma as adjusted column gives effect to the issuance and
sale by us in this offering of shares of common stock at an assumed initial
public offering price of $ per share. This table should be read in
conjunction with the financial statements and related notes thereto included
elsewhere in this prospectus.
JUNE 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
Long-term liabilities....................................... $ 764 $ 764 $ 764
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 10,000,000
shares authorized, 6,332,420 shares issued and
outstanding, actual; no shares issued and outstanding,
pro forma; and 5,000,000 shares authorized, no shares
issued and outstanding pro forma as adjusted............ $ 41,135 $ -- $ --
Common Stock, $0.001 par value; 60,000,000 shares
authorized, 8,751,568 shares issued and outstanding,
actual; 38,585,374 shares issued and outstanding, pro
forma; shares issued and outstanding, pro forma as
adjusted................................................ 8,433
Deferred stock compensation................................. (2,844)
Notes receivable from stockholders.......................... (4,805)
Accumulated deficit......................................... (25,362)
-------- -------- --------
Total stockholders' equity.............................. 16,557
-------- -------- --------
Total capitalization............................... $ 17,321 $ $
======== ======== ========
The above information excludes as of June 30, 1999:
- 3,355,639 shares of common stock issuable upon exercise of options
outstanding;
- 1,646,552 shares of common stock issuable upon conversion of preferred
stock issuable upon exercise of warrants outstanding; and
- 2,766,957 additional shares of common stock reserved for future
issuance under our equity incentive plans.
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DILUTION
Our pro forma net tangible book value at June 30, 1999 was approximately
$ million, or $ per share. Pro forma net tangible book value per share
is determined by dividing our pro forma tangible net worth (total tangible
assets less total liabilities) by the number of shares of common stock
outstanding, after giving effect to the sale of 5,846,546 shares of Series G
preferred stock in October 1999 and the conversion of all outstanding shares of
our convertible preferred stock into common stock, which will occur
automatically upon the completion of this offering. After giving effect to our
sale in this offering of shares of common stock at an assumed initial
public offering price of $ per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value at June 30, 1999 would have been
approximately $ million, or $ per share. This represents an immediate
increase in the pro forma net tangible book value per share of $ to existing
stockholders and an immediate dilution of $ per share to new investors
purchasing shares in this offering. If the initial public offering price is
higher or lower, the dilution to new investors will be greater or less,
respectively. The following table illustrates this dilution per share:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering............................................... $
Increase per share attributable to new investors..........
----
Pro forma net tangible book value per share after the
offering..................................................
----
Dilution per share to new investors......................... $
====
The following table summarizes, on a pro forma basis as of June 30, 1999,
the number of shares of common stock purchased from us, the total consideration
provided to us and the average price per share provided by existing stockholders
and new investors. The calculation is based on an assumed initial public
offering of $ per share, before deducting the estimated underwriting
discounts and commissions and estimated offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------ ---------- ------ ---------- ---------
Existing stockholders............ % $ % $
New investors....................
--- ----- ---- ------
Total.................. 100.0% $ 100.0%
=== ===== ==== ======
This discussion and table give effect to the assumed exercise of a warrant
to purchase preferred stock convertible into 4,990,000 shares of common stock,
which will expire upon the completion of this offering, but assume no exercise
of options and other warrants outstanding as of June 30, 1999. As of June 30,
1999, after giving effect to the assumed exercise described above, there were
options outstanding to purchase a total of shares of common stock at a
weighted average price of $ per share and warrants outstanding to purchase
preferred stock convertible into shares of common stock at a weighted
average exercise price of $ per share. To the extent that any of these
options or warrants are exercised, there will be further dilution to new
investors. For further information regarding options and warrants, please see
"Management -- Stock Option Plans," "-- 1996 Stock Option Plan," "-- 1999 Equity
Incentive Plan," "-- 1999 Non-Employee Directors' Plan," "-- 1999 Employee Stock
Purchase Plan," "Description of Capital Stock" and Note 5 of Notes to Financial
Statements.
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SELECTED FINANCIAL DATA
The statement of operations data for the three years in the period ended
December 31, 1998 and the related balance sheet data as of December 31, 1997 and
1998 are derived from our financial statements, which have been audited by Ernst
& Young LLP, independent auditors, and are included elsewhere in this
prospectus. The selected balance sheet data as of December 31, 1996 are derived
from audited financial statements not included in this prospectus. The selected
statement of operations data for the period from July 8, 1994 (inception) to
December 31, 1994 and the year ended December 31, 1995 and the selected balance
sheet data as of December 31, 1994 and 1995 are derived from unaudited financial
statements not included in this prospectus. The financial data for the six
months ended June 30, 1998 and 1999 and as of June 30, 1999 are derived from
unaudited financial statements included elsewhere in this prospectus. We have
prepared this unaudited information on the same basis as the audited financial
statements and have included all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of the
financial position and operating results for such date and periods. When you
read this selected financial data, it is important that you read the historical
financial statements and related notes included in this prospectus, as well as
the section of this prospectus related to "Management's Discussion and Analysis
of Financial Condition and Results of Operations". Historical results are not
necessarily indicative of future results.
PERIOD FROM
JULY 8, 1994 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
-------------- ----- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 4 $ 58 $ 164 $ 505 $ 317 $ 97 $ 724
Costs and expenses:
Cost of services..................... 1 23 256 336 610 222 884
Sales and marketing.................. -- 67 366 942 3,094 1,218 5,468
Operations and development........... 14 66 552 1,422 2,628 962 3,631
General and administrative........... 11 251 778 830 1,444 519 1,925
Amortization of deferred content
costs.............................. -- -- -- -- 138 126 444
Amortization of deferred stock
compensation and warrant
valuation.......................... -- -- -- -- 201 43 558
---- ----- ------- ------- ------- ------- --------
Total costs and expenses........... 26 407 1,952 3,530 8,115 3,090 12,910
---- ----- ------- ------- ------- ------- --------
Loss from operations................... (22) (349) (1,788) (3,025) (7,798) (2,993) (12,186)
Interest income (expense), net......... -- -- 4 (68) (23) 2 (107)
---- ----- ------- ------- ------- ------- --------
Net loss............................... $(22) $(349) $(1,784) $(3,093) $(7,821) $(2,991) $(12,293)
==== ===== ======= ======= ======= ======= ========
Net loss per share:(1)
Basic and diluted.................... $ (0.76) $ (0.67) $ (1.51) $ (0.58) $ (2.34)
======= ======= ======= ======= ========
Weighted average shares.............. 2,341 4,650 5,197 5,194 5,261
======= ======= ======= ======= ========
Pro forma net loss per share:(1)
Basic and diluted.................... $ (0.63) $ (0.68)
======= ========
Weighted average shares.............. 12,486 18,141
======= ========
DECEMBER 31,
------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ------ ------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 1 $101 $719 $3,524 $ 268 $ 6,601
Working capital (deficit).................................. 1 43 344 2,735 (2,838) 4,121
Total assets............................................... 3 128 998 5,203 2,968 20,185
Long-term liabilities...................................... 20 20 70 197 1,100 764
Total stockholders' equity (deficit)....................... (18) 50 547 4,185 (1,489) 16,557
- -------------------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the related notes and the other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by forward-looking information due to
factors discussed under "Risk Factors," "Business" and elsewhere in this
prospectus.
OVERVIEW
From our inception in July 1994 through 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 digital greetings service,
and in late 1997, we launched our own digital greetings service from our Web
site. Revenues through 1997 consisted primarily of fees from AOL and, to a
lesser extent, sales of paper and digital greetings 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 digital greetings service. Revenues in 1998 were
derived largely from the sale of advertisements, sponsorships and digital
greetings on our Web site and from content licensing fees paid to us by AOL. Our
relationship with AOL ended in late 1998.
In November 1998, we made a significant change to our business model and
began offering our digital greetings 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. Our
business model also includes ecommerce and direct marketing 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 a result, virtually all of our revenues
since November 1998 have been derived from the sale of advertisements and
sponsorships on our Web site. For the six months ended June 30, 1999, greater
than 95% of our revenues were derived from the sale of advertisements and
sponsorships. 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.
Due to the significant changes we have made to our business model, most
notably the change to the free service model adopted in November 1998, we
believe that period-to-period comparisons between any period in 1999 and the
comparable periods in 1998 would not be meaningful. Accordingly, we have not
discussed these comparisons below, nor have we included a comparative discussion
of any periods prior to 1999.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
Revenues
Revenues were $724,000 in the six months ended June 30, 1999. Revenues
increased from $103,000 in the first quarter of 1999 to $621,000 in the second
quarter of 1999. The first quarter of 1999 was the first full quarter after we
changed our business model from one in which revenues were derived from the sale
of digital greetings to one in which revenues are derived from the sale of
advertisements and sponsorships. Since making this change, we have experienced
significant growth in traffic to our Web site, which has resulted in growth in
our advertising inventory.
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. 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 and server co-location costs.
Cost of services was $884,000 in the six months ended June 30, 1999. Cost
of services increased from $226,000 in the first quarter of 1999 to $658,000 in
the second quarter of 1999. This increase primarily was due to increased content
royalty fees and Internet connectivity costs. To the extent we experience an
increase in our Web site traffic and the number of digital greetings sent, we
would expect our cost of services to increase. Cost of services is not
proportional to revenues and may increase or decrease as a percentage of
revenues.
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 were approximately $5.5 million in the six
months ended June 30, 1999. Sales and marketing expenses decreased from
approximately $3.0 million in the first quarter of 1999 to approximately $2.4
million in the second quarter of 1999. Although we increased the size of our
sales department from three sales personnel at the end of the first quarter of
1999 to 11 at the end of the second quarter, the decrease in sales and marketing
expenses primarily was due to reduced advertising activities in the second
quarter. Specifically, we conducted an advertising campaign in the first quarter
of 1999 in anticipation of Valentine's Day as consumers tend to send a large
number of greetings for this holiday. Because consumers typically send fewer
greetings and online
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traffic declines during the summer months, we reduced our advertising activities
in the months preceding the summer. We anticipate that overall sales and
marketing expense will increase significantly 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, site operations and site production departments.
Operations and development expenses were approximately $3.6 million in the
six months ended June 30, 1999. Operations and development expenses increased
from approximately $1.3 million in the first quarter of 1999 to approximately
$2.3 million in the second quarter of 1999. This increase was primarily due to
increased personnel costs. 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 were approximately $1.9 million in the
six months ended June 30, 1999. General and administrative expenses were
$953,000 in the first quarter of 1999 and $972,000 in the second quarter of
1999. We anticipate that general and administrative expense will increase in the
foreseeable future. General and administrative expense as a percentage of
revenues may fluctuate depending on the level of future revenues and the timing
of additional investments in general and administrative infrastructure.
Amortization of Deferred Content Costs
Amortization of deferred content costs consists of the amortization of the
fair value of a warrant issued to Gibson Greetings, Inc. in December 1997 in
connection with the establishment of a relationship under which Gibson purchased
850,783 shares of Series D preferred stock for $5,437,000 and we obtained the
right to distribute Gibson's content in the form of digital greetings. The fair
value of the Gibson warrant at each quarterly valuation date is being amortized
by charges to operations over the remaining life of the Gibson agreement, which
expires on December 31, 2002. Amortization of deferred content costs was
$106,000 in the first quarter of 1999 and $338,000 in the second quarter of 1999
for a total of $444,000 for the six months ended June 30, 1999. We anticipate
that amortization of deferred content costs will be approximately $656,000 in
each quarter through 2002. We will periodically review the recoverability of the
deferred content costs and will write it down to its net realizable value if we
consider it appropriate as required by
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Financial Accounting Standards Board No. 121 based on expected future revenues
(and other benefits) or as a result of this amortization.
Amortization of Deferred Stock Compensation
We recorded aggregate deferred stock compensation of approximately $488,000
in 1998, approximately $3.1 million in the first six months ended June 30, 1999
and approximately $638,000 in the third quarter of 1999. These charges were
related to the grant of stock options at exercise prices less than the deemed
fair value of our common stock on the grant date. The deferred stock
compensation is being amortized over the vesting periods of the options,
generally four years, using a graded vesting method. Of the total deferred stock
compensation, $201,000 was amortized in 1998 and $558,000 was amortized in the
first six months of 1999. We expect amortization of approximately $1.3 million
for the remainder of 1999 and amortization of approximately $1.3 million in
2000, $622,000 in 2001 and $243,000 in 2002 relating to these options.
Interest Income (Expense), Net
Net interest expense was $107,000 in the six months ended June 30, 1999. We
had net interest expense of $166,000 in the first quarter of 1999 and net
interest income of $59,000 in the second quarter of 1999. The interest income in
the second quarter resulted from increased interest generated from the net
proceeds of our sale of preferred stock in March 1999.
Income Taxes
There has been no provision made for federal or state income taxes for any
period as we have incurred operating losses to date. As of December 31, 1998, we
had net operating loss carryforwards for federal income tax purposes of
approximately $11.8 million. The federal net operating loss carryforwards will
expire at various dates from 2010 through 2018 if not utilized. Due to the
"change of ownership" provisions of the Internal Revenue Code, the availability
of our net operating loss carryforwards may be subject to an annual limitation
against taxable income in future periods if a change in ownership of more than
50% of the value of our stock should occur over a three-year period. This could
substantially limit the eventual utilization of these carryforwards. For further
information regarding income taxes, see Note 5 of Notes to Financial Statements.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of
operations for the two quarters ended June 30, 1999. You should read the
following table in conjunction with our financial statements and related notes
included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as the audited financial statements. This table
includes all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of our financial position and
results of operations for the quarters presented. We have experienced and expect
to continue to experience fluctuations in operating results from quarter to
quarter. We have incurred net
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losses in each quarter since our inception, and we expect to incur losses for
the foreseeable future.
QUARTER ENDED
-------------------------------
MARCH 31, 1999 JUNE 30, 1999
-------------- -------------
(IN THOUSANDS)
Revenues.......................................... $ 103 $ 621
Costs and expenses:
Cost of services................................ 226 658
Sales and marketing............................. 3,038 2,430
Operations and development...................... 1,289 2,342
General and administrative...................... 953 972
Amortization of deferred content costs.......... 106 338
Amortization of deferred stock compensation..... 153 405
------- -------
Total costs and expenses..................... (5,765) 7,145
------- -------
Loss from operations.............................. (5,662) (6,524)
Interest income (expense), net.................... (166) 59
------- -------
Net loss..................................... $(5,828) $(6,465)
======= =======
Our revenues and operating results are likely to vary significantly from
quarter to quarter in the future due to a number of factors, many of which are
outside of our control. These factors include:
- our ability to sell advertisements and sponsorships;
- our ability to offer compelling, original content and value-added
services;
- our ability to attract consumers of our products and services;
- new Web sites, services or products introduced by us or our competitors;
- the timing and uncertainty of sales cycles;
- seasonal fluctuations in advertising sales;
- the level of Internet usage;
- our ability to attract and retain qualified personnel;
- our ability to successfully integrate operations and technologies added
as a result of acquisitions or other business combinations;
- technical difficulties or system downtime affecting the Internet
generally or the operation of our network; and
- general economic conditions, as well as economic conditions specific to
Internet companies.
Our revenues for the near future will be substantially dependent on our
relationships with advertisers and sponsors, many of which are short-term in
nature and subject to cancellation without penalty. In addition, we derive a
significant portion of our revenues from the sale of advertisements to a limited
number of customers. Accordingly, the loss of an important advertising
relationship or the cancellation or deferral of advertising orders could harm
our results in any one quarter. As a result of these and other factors, quarter-
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to-quarter comparisons of our operating results should not be relied upon as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the sale
of preferred stock and, to a lesser degree, equipment financing facilities.
Net cash used in operating activities was approximately $5.8 million in
1998 and $12.1 million in the six months ended June 30, 1999. Net cash used in
investing activities was $786,000 in 1998 and approximately $4.9 million for the
six months ended June 30, 1999. In each period, cash used in operating
activities resulted primarily from net losses in those periods offset by changes
in working capital and non-cash operating charges. Cash used in investing
activities was primarily related to the acquisition of network hardware and
software and other equipment.
Net cash provided by financing activities was approximately $3.4 million in
1998 and $23.3 million in the six months ended June 30, 1999. The primary source
of cash provided by financing activities was the sale of preferred stock and, to
a lesser extent, borrowings under equipment facilities and stockholder notes
payable. In addition, in September 1999, we secured a $10 million equipment
financing facility.
As of June 30, 1999, we had $6.6 million of cash and cash equivalents and
$5.6 million of working capital. In October 1999, we sold shares of Series G
preferred stock for net proceeds of approximately $ million. We currently
expect that the net proceeds from this offering, together with our available
funds, will be sufficient to meet our anticipated needs for working capital and
capital expenditures for at least the next 12 months. Thereafter, we anticipate
that we will require additional funding through public or private financings or
other arrangements. Adequate funds may not be available when needed or may not
be available on favorable terms. If additional funds are raised through the
issuance of equity securities, dilution to existing stockholders will result. If
insufficient funds are available, we may be unable to enhance our Web site and
brand, make strategic investments or respond to actions by competitors, any of
which could materially harm our business.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such "Year 2000" or "Y2K" requirements or
risk system failure or miscalculations causing disruptions of normal business
activities.
State of Readiness
We have made an assessment of the Y2K readiness of our operating financial
and administrative systems, including the hardware and software that support our
systems. We believe that all of our critical systems are currently Y2K
compliant. Our engineering department, however, is testing all software and
other systems that it believes might be affected by Y2K issues in order to
ensure compliance. We plan to complete this process in the fourth quarter of
1999.
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Costs
We have spent an insignificant amount of money on Y2K compliance to date
and ultimately do not expect to incur any substantial costs in connection with
identifying, evaluating and addressing Y2K compliance issues. Most of the
expenses that we have incurred or will incur are operating costs associated with
time spent by employees and consultants evaluating Y2K compliance matters. If
these expenses are significantly higher than anticipated, our business could be
harmed.
Risks
We are not currently aware of any Y2K compliance problems relating to our
systems that would have a material adverse effect on our business. We may
discover Y2K compliance problems in our systems that will require substantial
resources to remedy. Third-party software, hardware or services incorporated
into our systems may also need to be revised or replaced. Any revision or
replacement of our systems could be time consuming and costly.
Our failure to replace our software, hardware or services on a timely basis
could result in lost revenues, increased operating costs, the loss of customers
and other business interruptions, any of which could harm our business. In
addition, our failure to adequately address Y2K compliance issues could result
in claims of mismanagement, misrepresentation or breach of contract. The
resulting litigation could affect our financial and other resources.
We are dependent on vendors to provide significant network services and
equipment. A Y2K disruption of the network services and equipment provided by
vendors could cause our members and visitors to consider seeking alternate
providers or cause an unmanageable burden on our technical support staff.
Contingency Plan
Y2K contingency plans are being developed as part of our Y2K assessment.
Our Y2K assessment, including a contingency plan, will be completed during the
fourth quarter of 1999.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the exposure related to those debt instruments and credit facilities which are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at June 30, 1999 would not cause the fair value of our
short-term investments or the expense paid with respect to our outstanding debt
instruments to change by a material amount. Declines in interest rates over time
will, however, reduce our interest income while increases in interest rates over
time will increase our interest expense.
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BUSINESS
OVERVIEW
Our online greetings and gift hub offers consumers a convenient and simple,
integrated solution to selecting and sending greetings and gifts. Through our
Web site, which offers over 4,400 digital greetings incorporating rich media
features such as graphics, animations and music, consumers can select,
personalize and send greetings free-of-charge for personal and business
occasions. Our Web site is also merchandised with a wide selection of gifts that
consumers can select and arrange to send at the same time they send a digital
greeting. In September 1999, our Web site was visited more than 9.6 million
times, visitors to our Web site viewed over 98 million Web pages and customers
used our service to send over 3.4 million digital greetings. Since consumers
often use our Web site to communicate on personal and business occasions, we
enable our advertisers and ecommerce partners to effectively reach online
consumers who are likely to be receptive to advertising messages, product
offerings and promotions related to the specific occasions for which they are
sending greetings.
INDUSTRY BACKGROUND
Online Communications
The emergence of the Internet as a global medium has enabled millions of
people worldwide to share information, communicate and conduct transactions
electronically. International Data Corporation, or IDC, estimates that the
number of individuals accessing the World Wide Web will grow from approximately
142 million at the end of 1998 to more than 502 million by the end of 2003. One
of the most important developments contributing to this dramatic growth is the
rapid adoption of electronic mail, or email, as a means of communication. IDC
projects that the number of email messages sent in the United States alone will
grow from approximately 2.1 billion per day at the end of 1998 to 9.2 billion
per day at the end of 2003. We believe that the use of email is growing so
rapidly because it is a very convenient and efficient way to communicate, is
essentially free and allows people to more effectively manage personal and
business relationships.
While text-based email is convenient and inexpensive, it often fails to
express the sentiment and individuality of the sender. Consumers increasingly
are attracted to a means of communication that will allow them to express
themselves in a dynamic and entertaining fashion, while minimizing the time and
costs associated with doing so. Digital greetings provide the convenience and
ease of use of text-based email while allowing consumers to use engaging color
and imagery to express a wide range of emotions and sentiments. As a result,
enhanced email services such as ours that leverage multimedia elements such as
graphics, sound and animation are gaining popularity with online consumers.
According to a Jupiter Communications survey, in 1998 sending electronic
greetings was the sixth most popular online activity, with 55% of online users
visiting electronic greeting and postcard Web sites regularly. We believe
consumers will be attracted to a centralized Web site that aggregates
entertaining and relevant content and allows for the easy personalization and
delivery of this content in the form of a digital greeting.
Online Commerce and Gifting
Advances in technology and functionality have resulted in the increased
popularity of the Internet as a means for both businesses and consumers to
conduct transactions. This
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has led to significant growth in the volume of Internet-based electronic
commerce, or ecommerce, and this growth is expected to continue. Forrester
Research estimates that business-to-consumer sales in the United States over the
Internet will increase from approximately $20 billion in 1999 to approximately
$184 billion by 2004. While many of these ecommerce transactions represent
purchases for an individual's personal consumption, the Internet also is gaining
acceptance as a convenient and effective means of identifying and purchasing
gifts. Because of the broad selection of products and the speed and convenience
of online shopping, we believe consumers will purchase an increasing proportion
of gifts over the Internet in the future.
Online Advertising
The Internet has emerged as an important mass medium for advertising and
direct marketing. Many companies have begun to focus significant marketing
efforts on online activities, with Forrester estimating that global spending for
online advertising will total $33 billion in 2004. The Internet represents a
cost-effective advertising alternative that is more focused and measurable than
traditional methods. The Internet enables advertisers to more accurately and
effectively target consumers through the use of demographic, psychographic and
behavioral data. We believe that advertisers continue to seek a more effective
and efficient means to capture consumer dollars, build a consistent brand image
and leverage their existing traditional campaigns through advertising on the
Internet. In order to achieve these objectives, we believe that companies will
seek to advertise on Web sites that attract a broad range of consumers, more
accurately target members of this audience and allow advertisers to deliver
contextually relevant messages to consumers at the time at which they are making
purchasing decisions. We further believe that Web sites offering an effective
combination of content and commerce will be the most desirable online
destinations for consumers and the most attractive vehicles for online
advertisers.
THE EGREETINGS SOLUTION
We are a leading provider of digital greetings, offering consumers an
integrated approach to communications and gift giving. Our easy-to-use Web site
allows consumers to send personalized, content-rich digital greetings and a wide
variety of gifts. We also provide advertisers and commerce partners with access
to a large and readily targeted group of consumers.
Benefits to Consumers
Superior Value and Enhanced Communications. We enable individuals to convey
personal, business and occasion-related communications in a creative,
entertaining and personalized manner. Through a combination of compelling
content and robust technology, our Web site allows consumers to create
personalized multimedia messages free of charge. Through these enhanced
electronic messages, which include postcards, animated greetings and multimedia
greetings, consumers can more vividly express their sentiments, emotions and
personalities than is possible with paper-based products or conventional
text-based email.
Convenient Communications and Gift Giving. Our service eliminates the
inconvenience associated with traditional paper-based communications and retail
gift stores. Our Web site offers a variety of digital greetings that are grouped
into "channels" such as holidays, life events and particular interests, as well
as a selection of appropriate gifts that
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consumers can choose to send to a recipient. Our channel format not only allows
a consumer to quickly locate and customize an appropriate communication, but
also allows us to offer gift ideas targeted to a consumer's channel selection.
Our My Egreetings service allows registered members to personalize our Web site
by saving content, email addresses and occasion reminders, with reminder emails
sent to them prior to the date of specified occasions. Our service not only
streamlines the process by which individuals can communicate and send gifts, but
also provides a more convenient way for them to acknowledge occasions and
maintain relationships than is possible through retail stores and many other Web
sites.
Benefits to Advertisers and Ecommerce Partners
Targeted Online Opportunities. We enable advertisers and ecommerce partners
to deliver their messages and promote their products to a large and diverse
group of consumers on a highly targeted basis. Our integration of communications
and gift-giving services in one site provides these partners with access to
consumers at a time when they may be acknowledging an occasion and are therefore
likely to be receptive to specific advertising and relevant gift ideas. For
example, consumers who select a congratulatory greeting from our "Bouncing
Babies" channel are offered gift options and shown advertisements relevant to
this occasion. Through their registration and their selection of specific
digital greetings and gifts, members provide us with valuable demographic and
psychographic data about themselves and their recipients. We use this data to
help advertisers and ecommerce partners selectively target appropriate consumer
subsets from our rapidly growing base of registered members and recipients
through strategically placed advertisements and product offerings in specific
content channels and through direct marketing campaigns.
Viral Advertising. Our extensive content selection combined with our
technology platform provides a new vehicle through which advertisers, sponsors
and commerce partners can increase brand awareness and expand their online
presence. Digital greetings and animations containing sponsorships, product
descriptions or pictures can be incorporated into relevant channels of our Web
site and made available for consumers to personalize and send. Through
integrated digital greetings like these, consumers can send content that can
help an advertiser establish and build a brand image not only with the consumers
sending the digital greetings but also with the recipients of the digital
greetings. As a result, our digital greetings not only enable existing
advertising and product content to be more fully utilized, but also allow
advertisers and sponsors to more effectively utilize the engaging, interactive
and dynamic nature of the Web. Examples of some of our partners who have used
our service to leverage their brand in this way include the National Football
League and the movie studios New Line Cinema and Sony TriStar in connection with
the release of the films "Austin Powers: The Spy Who Shagged Me" and "Big
Daddy."
OUR STRATEGY
Our objective is to be the destination of choice on the Web for greetings
and gift-giving and to leverage that leadership position into additional revenue
opportunities. Key elements of our strategy include the following:
Create a Highly Integrated Communications and Gift-Giving Hub. We intend to
capitalize on our leadership position in the aggregation and distribution of
digital content to
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create a highly integrated communications and gift-giving center. To create this
"one-stop" service, we intend to enter into joint sponsorship and ecommerce
relationships covering a wide range of products, services and price points. We
believe that by displaying a variety of occasion-appropriate gift-giving
alternatives at the time a consumer is preparing to send a digital greeting, we
can further simplify the gift-giving process and increase the likelihood that an
ecommerce transaction will occur.
Build Brand and Increase Traffic. We intend to increase our brand awareness
and traffic to our Web site by leveraging the viral marketing qualities inherent
in our product. Each digital greeting sent represents a free advertisement for
our product and Web site because the recipient visits our Web site to receive
the digital greeting. This allows us to promote our brand, services and products
to each recipient of one of our digital greetings at no incremental cost to us.
We also intend to achieve greater offline awareness of our brand by targeting
print, television and outdoor advertising and entering into new co-promotional
arrangements such as those we have with the National Football League and major
motion picture studios. We also are continuing to increase our online presence
through integrated distribution partnerships, banner advertising, contests,
promotions and targeted marketing activities via email.
Create an Increasingly Personalized Environment for the Consumer. We intend
to offer consumers an increasingly personal and engaging experience in order to
retain our existing consumer base and attract new consumers. We currently offer
registered members features such as a personal address book, a personal calendar
of reminders for special occasions, the advanced scheduling of delivery of
digital greetings and a personal outbox that retains greetings sent by a
registered member for 30 days. We plan to allow our registered members to
further personalize their environment by saving their favorite digital greetings
to their own My Favorites area and creating their own content. In addition, we
intend to increase the amount of customized content we offer based on consumers'
interests, gender, age and location, including the development of international
Web sites that utilize a localized interface, localized content and the local
language. We believe these features will make it easier for our consumers to
access the content most relevant to their needs and thus will drive them to our
Web site and encourage them to use our services more frequently. We also intend
to allow our registered members to maintain digital greeting and gift history
profiles and to create gift "wish lists" for both recipients and senders of
gifts, thus further simplifying the process of sending, receiving and
acknowledging communications and gifts. We believe our ability to suggest an
appropriate and personalized gift for a consumer based on the content channel,
the selected greeting and the sender's and recipient's gift histories will
increase the likelihood of a gift-giving transaction.
Enhance our Consumers' Experience by Exploiting Evolving Broadband
Technologies. We expect to leverage infrastructure improvements in broadband
technologies such as cable, satellite and high speed telephone access, including
DSL, to develop products and services that are increasingly interactive and
entertaining for our consumers. As these broadband technologies continue to
evolve, the speed and quality of transmission of data-intensive content over the
Internet will enable us to incorporate richer content and advanced
functionality, including video and increased interactivity into our range of
products and services. We believe that these enhancements will allow us to
optimize the richness of our existing content and to develop new content with
increased multimedia capabilities that will improve our consumers' experience
and increase the use of our services.
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Leverage Multiple Revenue Streams. We intend to capitalize on the breadth
and diversity of our content and our consumer community to create an
advertising- and transaction-rich environment and generate multiple revenue
streams. As of August 31, 1999, we had compiled demographic and psychographic
data on more than 7 million registered members. In addition, due to the nature
of our service, we collect significant additional data on the unregistered
recipients of the digital greetings sent by our registered members. We believe
our ability to deliver large demographically, psychographically and
geographically profiled audiences will be a valuable asset in developing
additional advertising, direct marketing and ecommerce services. We anticipate
our revenues primarily will be derived from the following activities:
- Advertising -- We intend to pursue additional advertising and sponsorship
relationships across a broad range of products and services.
- Ecommerce -- We believe our service provides ecommerce partners with a
unique, timely and contextual opportunity to reach consumers. We believe
the ease and convenience of our service will encourage individuals to use
our service to purchase products that they already intended to send and
may even encourage them to purchase products and gifts they might not
otherwise have sent. Although revenues from ecommerce activities
represented less than 5% of our revenues for the six months ended June
30, 1999, we intend to significantly expand our ecommerce initiatives to
provide our consumers with a greater variety of product offerings. For
example, we recently started offering products through our Web site from
vendors such as Godiva, Mrs. Fields, ChipShot.com and PetStore.com.
- Direct marketing -- We intend to enter into more promotional
relationships in order to engage in direct marketing activities that
capitalize on the interactive nature of our service. For example, we
intend to send emails on behalf of advertisers and sponsors promoting
their products, services or special events to our consumers who have
elected to receive communications like these.
THE EGREETINGS.COM WEB SITE
Our Web site is designed to help consumers express their sentiments,
emotions and personalities and to enhance their ability to communicate and send
gifts in a timely and effective way. Consumers can choose from thousands of
content options to convey a specific message or sentiment in a highly
personalized manner. In addition, we provide consumers with access to hundreds
of gift options appropriate for a wide range of occasions and sentiments.
The Home Page
Registered members receive a personalized welcome greeting when they visit
our home page. If a registered member has selected the automatic log-in option,
either during registration or at sign-in, she does not need to re-enter an email
address and password to send a digital greeting if she is logging in from the
same computer. From the home page, a consumer might send digital greetings,
visit our Gift Center or browse other features or promotions.
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My Egreetings
To increase the value of our service as a resource for managing personal
and business communications, we offer our registered members the following
personalization features under our My Egreetings section:
- My Address Book -- Registered members can store information on individual
recipients and they can combine these individuals into mailing lists or
"groups," such as family, friends or clients. For each recipient,
registered members can store an email address, full name and reminders of
special dates such as birthdays and anniversaries.
- My Reminders -- Our reminder service allows registered members to request
advance notification by email of special dates. In addition, registered
members can link a reminder with a unique recipient in their My Address
Book.
- Perfect Memory -- This feature allows our registered members to schedule
delivery of digital greetings on a date up to three months in the future.
For example, a registered member could pre-order and schedule future
delivery of all of her year-end holiday digital greetings in October.
- My Outbox -- This feature provides registered members with a 30-day
history of their activity on our Web site, as well as a list of all
digital greetings scheduled to be delivered through Perfect Memory. After
a digital greeting has been sent, a registered member can check the
status of a digital greeting and view or resend the digital greeting for
30 days.
- My News -- Registered members can elect to receive our biweekly
newsletter and/or special promotional offerings via email.
- My Info -- Registered members can edit their account information.
Selecting a Digital Greeting
Consumers can select content by using our channels and subchannels or by
using our search feature. Most consumers elect to locate content by using our
channels, which are categorized based on holidays, life events and interests. If
a consumer does not find the desired digital greeting among our most popular
digital greetings in a particular channel, she can elect to continue searching
in one of our subchannels, which are structured to match a consumer's
sentiments. If a consumer is unable to locate the desired content through our
channels or subchannels, she may choose to use our search feature. Our search
feature allows consumers to locate content by specifying a particular
"personality" for the message to be conveyed, the type of imagery desired and
the occasion or reason for sending the greeting.
Once a consumer selects the content for a digital greeting, the content
options are presented in thumbnail at-a-glance versions, with the most popular
greetings (representing a range of sentiments appropriate to the occasion)
presented first. Consumers can choose from postcards, animated greetings and
multimedia greetings. In addition, a selection of gifts are presented
simultaneously, as well as partners' advertisements and other value-added
content.
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Personal Message
When a consumer has selected a digital greeting, a full-size view of the
digital greeting appears on the page. At this time, the consumer can choose to
write a personal message to send with the selected digital greeting or can
select a different digital greeting. Once a consumer has decided on a digital
greeting, she is prompted to address the digital greeting to one or more
recipients, either by typing in the email address or addresses or by selecting a
name or names from the consumer's My Address Book. The consumer then is prompted
to add a personal message of her own creation. The sender's message, of any
length, is incorporated directly into the artwork of the postcard or animation,
creating a high quality image that conveys the desired sentiment or emotion for
a particular relationship or occasion.
The Preview
Once the personalized message is complete, the consumer can elect to
preview the digital greeting before sending it. This allows the consumer to see
the message exactly as it will appear to the recipient. The consumer can edit
the message here or begin again with a different digital greeting. Once the
consumer is satisfied with the look and content of the digital greeting, she can
elect to send it immediately or on any date up to three months in the future.
Confirmation Page
The consumer is shown a confirmation page on our Web site when the order
has been processed. At this time, the consumer once again is presented with gift
suggestions that are appropriate to the occasion.
Confirmation Email
When the digital greeting has been sent to the recipient, the consumer
receives a confirmation email indicating that her digital greeting has been
sent. A registered member can verify whether a particular digital greeting has
been received by viewing the status of that digital greeting in her My Outbox.
Selecting a Gift
An important benefit of our service is the opportunity to communicate by
sending a gift as well as a digital greeting. We have established relationships
with numerous vendors to offer a wide variety of gifts through our Web site. We
merchandize appropriate gifts along with our digital greetings in several areas
of our Web site:
- Gift Center -- Gift selections are organized by departments such as best
sellers, seasonal occasions, business, weddings, birthdays and other
special occasions. Consumers can browse the departments to find the right
gift or they can click to the Web site of one of our ecommerce partners
for additional shopping options. We also offer consumers the opportunity
to purchase gift certificates from Flooz, Giftcertificates.com and
Sparks.com, which can be used to purchase goods over the Internet from
hundreds of vendors.
- Greeting channels -- Throughout the greeting channels on our Web site,
gifts are merchandized to complement the occasions and sentiments
associated with those
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channels. Each greeting channel provides easy access to the related Gift
Center department for convenient browsing and shopping.
- After sending a digital greeting -- Once a digital greeting has been
sent, the sender is presented with a small selection of gift
recommendations that are appropriate for the occasion.
To further increase the value and convenience of our gift-giving services,
we intend to allow our registered members to maintain gift history profiles and
to create gift "wish lists" for both recipients and senders of gifts.
Receiving a Digital Greeting
A recipient of a digital greeting receives an email message from the sender
with the subject specified by the sender in the subject field. This email
contains an announcement that the recipient has been sent a digital greeting
that can be accessed via a link to our Web site. This link takes the recipient
directly to the Egreetings viewing center, where the recipient's digital
greeting is displayed. Also appearing on this page are links that allow the
recipient not only to reply to the sender with a digital greeting of his own,
but also send a digital greeting to someone else.
PRODUCT MANAGEMENT AND DEVELOPMENT
Content Acquisition and Creation
As of September 30, 1999, our content library included over 4,800 digital
greetings. Of these greetings, approximately 26% were produced and owned by us,
approximately 40% were wholly produced by us but contained content owned by
third parties and approximately 34% were created and owned by third parties.
Currently we have 18 people dedicated to the creation and acquisition of
content, 12 of whom are producers, artists and sound designers focused on
creating original content and six of whom are responsible for content
acquisition.
The members of our content acquisition group identify prospective content
partners, negotiate licensing arrangements, integrate content into digital
greetings and our Web site and manage ongoing relationships with our content
partners. We acquire content from a variety of sources, including traditional
greeting card publishers, entertainment companies, sports organizations and
several recognized independent artists. Our traditional greeting card publishing
partners include Gibson Greetings, Allport Editions, Ward One, Snafu and Portal.
We also obtain content from entertainment companies such as New Line Cinema,
Paramount Pictures, Sony TriStar, Fox and United Media.
The majority of our third-party content is obtained pursuant to exclusive
licensing arrangements and promotional partnerships. Under our standard
licensing contracts, the licensor grants us an exclusive right to reproduce and
distribute the licensed property in connection with digital greetings and we pay
the licensor a royalty for the use of its content. We also enter into
promotional arrangements pursuant to which a third party provides us with
content at no cost in exchange for promotional opportunities on our Web site. In
addition, in some cases, a third party will pay us to create and promote the use
of digital greetings utilizing its content.
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Product Technologies -- Future Offerings
We intend to introduce several new technologies to enhance our product
offerings and personalization features within the next 12 months, including the
following:
- My Favorites -- This service will allow registered members to select
their favorite content and gift selections and store them in a single,
easy-to-access location on our Web site.
- Address book profiles -- Registered members will be able to create
profiles to specify the types of digital greetings or gifts that they
would like to send to individuals or groups within their My Address Book.
- Photo greetings -- This feature will allow consumers to upload their
personal digital photos and integrate them with digital greetings.
- Build-your-own greetings -- Consumers will be able to create their own
digital greetings by choosing from a menu of images and elements.
- Gift "wish lists" -- To further increase the value and convenience of our
gift-giving services, we intend to allow our registered members to
maintain gift history profiles and to create gift "wish lists" for both
recipients and senders of gifts.
CONSUMER MARKETING
We engage in several different marketing activities directed at consumers.
Our consumer marketing activities are designed to do the following:
- Increase consumer traffic to our Web site. We endeavor to increase the
traffic to our Web site primarily through the following means:
- Relationships with distribution partners -- Our distribution
relationships with portals, online service providers, Web-based email
services and entertainment and other Web sites direct consumer traffic
to our Web site. These relationships provide us with exposure to a
large and diverse consumer base and allow consumers to easily reach
our Web site by clicking on links on our partners' Web sites. For
example, Microsoft Hotmail customers can link to us from the Hotmail
email composition page.
- Promotional activities -- We use promotions and engage in other types
of direct marketing activities directed at our registered members to
increase the frequency of member visits and the number of transactions
per visit. For example, in connection with our promotion with the
National Football League, consumers that sent an NFL digital greeting
were automatically entered into a sweepstakes.
- Viral marketing -- Each digital greeting sent creates an opportunity
to acquire the recipient as a new consumer because the recipient must
visit our Web site to receive the digital greeting. This allows us to
promote our brand, services and products to each recipient of one of
our digital greetings at no incremental cost to us.
- Web site functionality and appeal -- We strive to make our Web site
highly appealing to and functional for consumers. We believe that
consumers will
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return to our Web site often and use our services frequently as a
result of a positive, efficient experience. To this end, we intend to
further increase the functionality and appeal of our Web site over
time.
- Increase use of our gift service. As our consumers browse for, select and
send digital greetings, we direct products and services to them based on
the category of digital greeting they are focused on at that time. We
also direct our customer acquisition efforts to target "transactors," or
consumers who are more likely to buy products on the Internet, and we use
direct member communications and promotions to encourage consumers to
visit our Gift Center.
- Build brand recognition. Our efforts to build brand awareness include a
combination of online and offline advertising activities, including print
media, Internet trade media, outdoor media and radio advertisements. We
also have focused on building relationships with a broad range of
consumer and trade press organizations. In addition to continuing to use
a combination of online and offline marketing communications, we intend
to increase our use of broad-based mass media such as television and
radio to establish a leading brand position in the electronic greeting
and online gifting market. We also intend to use promotions that
encourage our members to market and extend our brand for us by sending
multiple digital greetings to their friends, family and business
associates.
ADVERTISING AND ECOMMERCE
Advertising and Sponsorship
We sell advertising and sponsorships through our direct advertising sales
department, with eight sales people located in San Francisco, five sales people
located in New York and one sales person located in Los Angeles as of August 31,
1999. We intend to target national advertisers that are shifting advertising
dollars from offline to online advertising. We also intend to continue to pursue
sponsorship and promotional arrangements, which generally have longer terms and
higher dollar values than typical banner advertising. Revenues from advertising,
sponsorship and promotional activities accounted for virtually all of our
revenues for the six months ended June 30, 1999.
Set forth below is a list of our advertisers from whom we had derived more
than $10,000 in revenues in 1999 as of September 30, 1999:
Ask Jeeves
Baby Center
barnesandnoble.com
Calyx & Corolla
Clinique
Crossings
eFax
Excite@Home Network
Fresh Flower Source
Godiva Chocolates
GreatFood.com
Informix
KBKids.com
National Football League
Netgrocer
Omaha Steaks
Orvis
PetStore.com
RedEnvelope
Sparks.com
ThirdAge.com
Uproar
What's Hot Now
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Ecommerce
We began offering ecommerce services in February 1999. Our revenues from
ecommerce activities have been nominal to date, although we expect to derive an
increasing percentage of our revenues from ecommerce activities in the future.
Our goal is to enter into ecommerce relationships with leading vendors in a
variety of gift categories. Currently we have ten people focused on implementing
our ecommerce initiatives, in addition to our advertising sales department,
which also devotes time to managing relationships with our ecommerce partners.
Typically, we receive a percentage of revenues derived from transactions made by
consumers that have been referred to a vendor's Web site from a link on our Web
site. During the nine months ended September 30, 1999, we had ecommerce
relationships with the following merchants:
Chipshot.com
Flooz
FTD
Godiva Chocolates
GourmetMarket.com
GraceGourmet
Healthshop.com
HLH Entertainment/Monarch
iprint
Mrs. Fields
Orvis
PetStore.com
RedEnvelope
We currently are in discussions with a third-party ecommerce partner to
provide us with a comprehensive ecommerce solution by aggregating a wide range
of gifts that will be available directly from our Web site. We expect this
partner also will coordinate the fulfillment and shipment of orders to consumers
who have purchased products through our Web site.
CUSTOMER SUPPORT
We believe that a high level of customer service and support is important
to retaining and expanding our customer base. We provide free customer support
assistance via email and telephone, and it is our policy to respond to all
customer inquiries within one business day. Our customer support team handles
general questions about how to use our Web site and serves as a clearinghouse
for feedback regarding customer satisfaction. Customer feedback is funneled to
our data warehouse system, where it is correlated with other customer
information that we use to improve our Web site, services and customer retention
and acquisition. Our customer support operations are fully integrated with our
system architecture, and customer support personnel have access through our Web
site to the transaction processing components of our service, which enables them
to easily trace individual transactions and quickly identify problems. As of
August 31, 1999, we employed nine full-time customer support representatives.
RELATIONSHIP WITH GIBSON GREETINGS
In December 1997, we entered into a content provider and distribution
agreement with Gibson Greetings, Inc., the third largest producer of paper-based
greeting cards in the United States. Pursuant to this five-year agreement, we
are the only company, other than Gibson itself, with the right to distribute
Gibson's content in the form of digital greetings. In exchange for this right,
we pay Gibson a royalty based on the number of digital greetings sent that
contain Gibson's content. In addition to the content we license, our
relationship with Gibson has provided us with access to expertise in the
development and
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marketing of content, introductions to movie studios and access to artists to
whom we may not otherwise have had access.
In addition to our content provider and distribution relationship with
Gibson, as of September 30, 1999, Gibson owned a total of 5,157,825 shares of
our stock and warrants to purchase an additional 4,511,781 shares of our stock.
These shares and warrants to purchase shares represented approximately 28.0% of
our outstanding capital stock. In addition, Frank O'Connell, the Chairman,
President and Chief Executive Officer of Gibson, is a member of our Board of
Directors. Pursuant to the terms of our agreement with Gibson, Gibson's right to
elect a Board member will terminate upon the completion of this offering.
DISTRIBUTION RELATIONSHIPS
A key element of our business model is to develop relationships with a
broad range of companies that can increase our distribution and Web site
traffic. To that end, as of September 30, 1999, we had distribution
relationships with Excite@Home Network (including Web Crawler), and the
following companies affiliated with Microsoft Corporation: Hotmail, Microsoft
Network and WebTV. For the three months ended September 30, 1999, the
Microsoft-affiliated companies accounted for less than 25% of our traffic.
TECHNOLOGY
Infrastructure
We have invested significant resources to develop the platform that is used
to support our products and services. Our system is based on an open and
extensible architecture that incorporates proprietary technology as well as
commercially available licensed technology. Our system is also designed to
provide high degrees of availability, reliability, scalability, extensibility
and performance.
- Availability and Reliability. We achieve a high degree of availability
and reliability by enforcing carefully devised operational procedures,
high quality software development procedures and stringent quality
assurance procedures. Our system is designed and built to provide a high
level of fault tolerance and maximum recoverability. Our system achieves
a fast response time by using efficient computer programming practices,
elaborate caching systems and an automatic load balancing system.
- Scalability. Our system achieves scalability by distributing the
processing load across multiple processors while efficiently managing and
recycling system resources. This enables us to increase our system's
processing capacity by adding more hardware. Our software system is
designed to be portable across different operating systems platforms,
which allows us to achieve scalability in a cost-effective manner.
- Extensibility and Performance. Our open system enables us to easily
interface with external systems. At the heart of the system is a
relational database management system hosting our customer, product and
transactional data. This database is supplemented by a sophisticated data
warehouse system that is a mirror copy of the production database. The
production database maintains customers' click streams and a number of
other data points, including member data, product data and
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purchase data. An online analytical processing tool is used to extract
reports from our data warehouse. Daily, weekly, monthly and ad hoc
reports are produced from our data warehouse system to support targeted
marketing activities. We intend to use our data warehouse information to
provide fully personalized merchandising so that cards and gifts offered
to consumers actually match their expressed interests as well as their
behavior while on our Web site. We use a merchandising tool to assign
digital greetings and gifts to appropriate channels and a content
management tool that allows us to put the appropriate components together
and to process changes to the Web site in an orderly manner.
Our system is based on a Sun/Solaris platform that is hosted at Exodus
Communications in Santa Clara, California. We manage and monitor our servers and
our local area network remotely from our Santa Clara office, where our support
engineering staff resides. Our engineering department currently consists of 28
engineers organized into the following groups: core development, ecommerce,
development support, new architecture and quality assurance. We expect to
significantly increase our hiring of engineers over the next several months.
New Architecture under Development
We are in the process of designing the next generation of our system
architecture. We expect this new system to be based on a multi-tier architecture
that utilizes component-based technologies. We believe this will allow us to
route and distribute the processing load between appropriate components and
across multiple layers of servers to achieve higher levels of flexibility,
reliability, performance and scalability. The new architecture is expected to be
in place by May 2000.
COMPETITION
We believe the principal competitive factors affecting our market include
the ability to provide the following:
- compelling and diverse content;
- value-added features, products and services;
- a wide range of ecommerce partners and products;
- a large and diverse audience; and
- demographic and psychographic data that is desirable to advertisers.
We believe that we currently compete favorably with respect to these
factors. Unlike many of our largest competitors who limit themselves to offering
consumers only their own content and products, we offer consumers digital
greeting content and gift options from a wide selection of vendors. We believe
our competitors' approach reduces the appeal of these companies to potential
distribution channels, as a broader content collection is likely to appeal to a
larger and more diverse audience, thus producing higher traffic, increased
consumer activity level and more desirable demographics. In addition, many of
our largest competitors focus primarily on social expression themes
traditionally associated with paper greeting cards. We believe that our approach
to electronic greetings and online gifting as a form of interactive
communication that extends beyond specific and mainstream occasions provides us
with a much larger potential market. In addition, we are one of the few Web
sites to integrate a broad and diverse base of digital greetings and gifts. We
believe this integration will help us to attract and retain a larger and more
diverse group of consumers,
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which will increase our appeal to advertisers and commerce partners. Our more
than 7 million registered members have provided us with demographic data that
most of our competitors do not collect. Although we intend to change to a model
that does not require registration in order to use our service, we will continue
to offer personalization features that will be available only to registered
members. We believe that we will continue to collect a significant amount of
demographic data that most of our competitors do not collect. In addition,
unlike many of our competitors. Finally, we believe that our technology
infrastructure is superior to that of any of our competitors and allows us to
better address the needs of distribution, content and commerce partners.
Despite the fact that we believe we currently compete favorably with regard
to the factors discussed above, our market is evolving rapidly and we compete
with many Internet companies for content, consumer time and dollars, advertising
revenues and ecommerce revenues. We expect this competition to increase. We
compete, in particular, with the following types of companies:
- companies or their affiliates that offer digital greetings via the
Internet, such as Blue Mountain Arts, American Greetings, Hallmark and
123greetings.com;
- Internet content aggregators and other Internet companies that offer
digital greeting cards, such as Amazon.com, America Online, Microsoft and
Yahoo!;
- Internet companies that focus on gifts; and
- media, entertainment and other companies offering electronic greetings.
Many of our current and potential competitors in the Internet market have
significantly greater financial, editorial, technical and marketing resources
than we have. Many of them also have longer operating histories, greater name
recognition, more traffic to their Web sites and more established relationships
with advertisers and advertising agencies than we have. 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. 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.
GOVERNMENT REGULATION
We are subject to the same federal, state and local laws as other
businesses on the Internet. However, it is currently unclear how our business
may be affected by the application of existing laws governing issues such as
intellectual property, taxes, libel, obscenity and export or import matters,
because the vast majority of these laws were adopted prior to the advent of the
Internet. As a result, these current regulations do not fully contemplate or
address the unique issues of the Internet and related technologies. Changes in
laws intended to address these issues could create uncertainty in the Internet
marketplace which, in turn, could reduce demand for our services or increase the
cost of doing business due to increased litigation or service delivery costs.
Furthermore, due to the increasing popularity and use of the Internet and other
online services, a number of laws and regulations are likely to be adopted with
respect to the Internet or other online
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services. The following are some of the evolving areas of law that are relevant
to our business:
- Privacy Laws. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to use the information in
our databases to generate revenues.
- Content Regulation. Both foreign and domestic governments have adopted
and proposed laws governing the content of material transmitted over the
Internet. These include laws relating to obscenity, indecency, libel and
defamation. We could be liable if content delivered by us or placed on
our Web site violates these regulations.
- Sales and Use Tax. We currently do not collect sales, use or other taxes
on the sale of goods and services through our Web site. As we engage in
increased ecommerce activities, states or foreign jurisdictions may seek
to impose tax collection obligations on us. If they do, these obligations
could limit the growth of electronic commerce in general and limit our
liability to profit from the sale of goods and services over the
Internet.
Because of the rapidly evolving and uncertain Internet regulatory
environment, we cannot predict how these laws and regulations might affect our
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm us by subjecting us to liability or forcing us to change
how we do business.
Because our services are available over the Internet in multiple states and
foreign countries, other jurisdictions may claim that we are required to qualify
to do business in each such state or foreign country. We currently are qualified
to do business only in California and New York. Our failure to comply with
foreign laws or to qualify as a foreign corporation in a jurisdiction where we
are required to do so could subject us to taxes and penalties for the failure to
qualify and could result in the inability to enforce contracts in these
jurisdictions. Any new legislation or regulation like this, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to
our business, could have a negative effect on our business.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary intellectual
property rights in our products and services. We have entered into proprietary
information and invention assignment agreements with our employees and
contractors, and nondisclosure agreements with third parties to whom we disclose
confidential information in order to limit access to and disclosure of our
proprietary information. Despite our efforts in this regard, third parties may
attempt to disclose, obtain or use our proprietary information. In addition,
third parties may infringe or misappropriate our proprietary rights, which could
harm our business. The validity, enforceability and scope of protection of
proprietary rights in Internet-related industries is uncertain and still
evolving.
We have registered the name "E-greetings" as our trademark and service mark
in the United States, and we intend to register this trademark and service mark
internationally. A
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substantial amount of uncertainty exists concerning the application of copyright
and trademark laws to the Internet and other digital media, and existing laws
may not provide adequate protection of trademarks, service marks, our content or
our Internet address, commonly referred to as a "domain name." Furthermore,
effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our services are made available online.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademark or copyrighted material, to
third parties. Despite our efforts to ensure that the quality of our brand is
maintained by licensees, our current or future licensees may take actions that
might harm the value of our proprietary rights, brand or reputation, which could
harm our business.
To date, we have not been notified that our trademarks or service marks
infringe the intellectual property rights of third parties, but third parties
may claim infringement by us with respect to past, current or future
intellectual properties. Any claim like this, whether meritorious or not, could
be time consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements might not be available on terms acceptable to us or at all.
Additionally, enforcing our intellectual property rights could entail
significant expenses and could prove difficult or impossible. As a result, the
defense of infringement claims against us and the costs associated with
enforcing our intellectual property rights could harm our business.
EMPLOYEES
As of September 30, 1999, we had 135 full-time employees. We believe that
our relations with our employees are good. None of our employees is represented
under collective bargaining agreements.
FACILITIES
We currently lease approximately 14,300 square feet of office space in San
Francisco, California pursuant to a lease that expires in October 1999. We have
leased an additional approximately 56,200 square feet of office space in San
Francisco and we currently expect to move our principal offices into these
facilities in October 1999. The lease for this facility expires in August 2009.
We also have sales offices in New York, New York and Los Angeles, California,
and technical facilities in Santa Clara, California. We believe that our
existing facilities are adequate to meet our needs for the foreseeable future
and that future growth can be accommodated by leasing additional or alternative
space near our current facilities.
LEGAL PROCEEDINGS
We are not presently involved in any legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding our directors,
executive officers and other key employees as of September 30, 1999.
NAME AGE POSITION
---- --- --------
Gordon M. Tucker................... 44 Chief Executive Officer and
Director
Andrew J. Moley.................... 35 Senior Vice President and Chief
Financial Officer
Behrouz Arbab, Ph.D................ 48 Senior Vice President and Chief
Technical Officer
Paul Lipman........................ 30 Senior Vice President, Business
Development
Kenneth W. Wallace................. 57 Senior Vice President, Sales
Sarah S. Anderson.................. 32 Vice President, Marketing
Donald E. Chaney................... 45 Vice President, Engineering
Joseph T. Mangione................. 49 Vice President, Sponsorship Sales
Andrew P. Missan................... 37 General Counsel
Stewart Alsop...................... 47 Director
Charles A. Holloway, Ph.D.(2)...... 63 Director
Brendon S. Kim(1).................. 32 Director
Peter Nieh(2)...................... 33 Director
Frank J. O'Connell................. 56 Director
Lee Rosenberg(1)................... 43 Director
- -------------------------
(1) Member of compensation committee.
(2) Member of audit committee.
GORDON M. TUCKER -- Gordon Tucker joined Egreetings in February 1999 as our
Chief Executive Officer and as a director. From July 1994 to February 1999, Mr.
Tucker served as Chief Executive Officer and Chairman of the Board of Directors
of IdeaNet Management Company, a "virtual" management company serving
early-stage technology companies with venture capital financial support. In his
capacity as Chief Executive Officer of IdeaNet, from November 1996 to March
1998, Mr. Tucker served as acting Senior Vice President of Excite Studios,
Ecommerce and Communities at Excite, Inc. (now Excite@Home), an Internet media
company. From September 1993 to July 1994, Mr. Tucker was President, Chief
Executive Officer and a director of Micrografx, Inc., a graphics software
company. Earlier in his career, Mr. Tucker served as Brand Manager for The
Procter & Gamble Company, a leading consumer products company, and as Executive
Vice President for LoJack Corporation, a wireless communications company. Mr.
Tucker holds a B.B.A. degree from the University of Michigan School of Business
Administration.
ANDREW J. MOLEY -- Andrew Moley joined Egreetings in July 1999 as our
Senior Vice President and Chief Financial Officer. From July 1995 to July 1999,
Mr. Moley served as the Chief Financial Officer, Executive Vice President and a
director of CMC Industries, an electronic manufacturing services company. From
February 1993 to November 1994, Mr. Moley was the Chief Financial Officer of
Silicon Valley Technology, a contract manufacturing company. Mr. Moley holds a
B.S. degree in Economics from the Wharton
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School of the University of Pennsylvania and an M.B.A. degree from the Stanford
University Graduate School of Business.
BEHROUZ ARBAB, PH.D. -- Behrouz Arbab joined Egreetings in June 1999 as our
Senior Vice President and Chief Technology Officer. From May 1997 to June 1999,
Dr. Arbab served as the Vice President of Engineering at Semio Corporation, an
Internet software company. From September 1996 to May 1997, Dr. Arbab was the
Director of Server Technologies at Cisco Systems, Inc., an Internet networking
company. From January 1994 to September 1996, Dr. Arbab served as Senior
Director at Oracle Corporation, a software and information management company.
Dr. Arbab has also held management positions at Computer Power Software Group,
Database Consulting Associates and Harwell Computer Power. Dr. Arbab holds a
B.S. degree from Arya-Mehr University of Technology and a Ph.D. degree in
Computer Science from the University of Wales.
PAUL LIPMAN -- Paul Lipman joined Egreetings as our Vice President of
Business Development in June 1996, and is currently serving as our Senior Vice
President of Business Development. From September 1990 to July 1994, Mr. Lipman
was a systems analyst for Andersen Consulting, a management and technology
consulting firm, in Europe, where he designed and built trading systems and
advised financial institutions on the use and implementation of information
technology. Mr. Lipman holds a B.S. degree in Theoretical Physics from Victoria
University of Manchester, England and an M.B.A. degree from the Stanford
University Graduate School of Business.
KENNETH W. WALLACE -- Kenneth Wallace joined Egreetings in June 1999 as our
Senior Vice President of Sales. From May 1993 to June 1999, Mr. Wallace served
as Vice President and Group Publisher for Rodale Press, a magazine publishing
company. From December 1987 to March 1993, Mr. Wallace was the Vice President of
Advertising at Parade Magazine, a magazine publishing company. Mr. Wallace holds
a B.B.A. degree from St. Johns University.
SARAH S. ANDERSON -- Sarah Anderson joined Egreetings in June 1999 as our
Vice President of Marketing. From February 1997 to June 1999, Ms. Anderson was
the Vice President and General Manager of SegaSoft Inc., an interactive game
software company. From January 1996 to January 1997, Ms. Anderson was the
Director of Strategic Planning of RDA International, a multimedia group and
advertising agency. From January 1993 to December 1995, Ms. Anderson was the
Brand Manager of Sega of America, an interactive digital entertainment media
company. Ms. Anderson holds an M.B.A. degree in Marketing from the McLaren
School of Business of the University of San Francisco and a B.F.A. degree in
Graphic Design from Paier College of Art.
DONALD E. CHANEY -- Donald Chaney joined Egreetings in August 1998 as our
Vice President of Engineering. From May 1991 to August 1998, Mr. Chaney served
as a Manager, Director, and Senior Director of Applications Infrastructure and
Tools at DHL Airways, Inc., a shipping company. Mr. Chaney holds a B.S. degree
from Virginia Polytechnic Institute and State University and an M.S. degree in
Electrical Engineering from Santa Clara University.
JOSEPH T. MANGIONE -- Joseph Mangione joined Egreetings in July 1999 as our
Vice President, Sponsorship Sales. From 1993 to 1999, Mr. Mangione served as the
publisher of Integrated Marketing for Meredith Corporation, a diversified media
company involved in magazine and book publishing, television broadcasting and
integrated marketing programs. From 1991 to 1993, Mr. Mangione founded and
worked at Andrea Communications, a
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licensing firm. From 1986 to 1991, Mr. Mangione served as Vice President and
General Manager at Billboard Entertainment Marketing, an entertainment company.
From 1979 to 1985, Mr. Mangione served as Vice President of Promotion at Playboy
Enterprises, Inc., a publishing and media company. Mr. Mangione holds an M.B.A.
degree from Wagner College.
ANDREW P. MISSAN -- Andrew Missan joined Egreetings as our General Counsel
in June 1999. From August 1998 to June 1999, Mr. Missan served as Corporate
Counsel to WebTV Networks, Inc., an Internet entertainment company. From August
1997 to July 1998, Mr. Missan was the Senior Business Counsel at Seagate
Software, Inc., an information technology company. From June 1994 to July 1997,
Mr. Missan served in the Business and Legal Affairs Department at The RCA
Records Label, a unit of BMG Entertainment, an entertainment company, most
recently as Senior Director. From June 1991 to June 1994, Mr. Missan served as
Counsel, Law Department, of Sony Music Entertainment Inc., an entertainment
company. He holds a B.A. degree from Oberlin College and a J.D. degree from the
Northwestern University School of Law.
STEWART ALSOP -- Stewart Alsop has served as a director of Egreetings since
March 1999. Mr. Alsop has been a general partner of New Enterprise Associates, a
venture capital investment firm since 1998 and was a Venture Partner at New
Enterprise Associates from 1996 to 1998. From June 1991 to 1996, Mr. Alsop
served as Senior Vice President and Editor-in-Chief of InfoWorld Media Group,
Inc., which publishes InfoWorld, a weekly newspaper for information technology
professionals. Mr. Alsop also serves on the board of directors of Macromedia,
Inc., a publicly held Internet software company, Be Incorporated, a publicly
held operating systems software company, TiVo Inc., a privately held personal
television service company, and Netcentives, Inc., a privately held Internet
promotions and customer loyalty vendor. Mr. Alsop holds a B.A. degree in English
from Occidental College.
CHARLES A. HOLLOWAY, PH.D. -- Charles Holloway has served as a director of
Egreetings since October 1995. Dr. Holloway holds the Kleiner, Perkins, Caufield
& Byers Professorship in Management at the Stanford Graduate School of Business
and has been a faculty member of the Stanford Graduate School of Business since
1968. Dr. Holloway is also currently co-director of the Stanford Center for
Entrepreneurial Studies at the Graduate School of Business. Dr. Holloway was the
founding co-chair of the Stanford Integrated Manufacturing Association, a
cooperative effort between the Graduate School of Business and the School of
Engineering, which focuses on research and curriculum development in
manufacturing and technology. Dr. Holloway serves on the board of Kana
Communications, Inc., a publicly held communications software company, and
several private companies. Dr. Holloway holds a B.S. degree in Electrical
Engineering from the University of California at Berkeley and an M.S. degree in
Nuclear Engineering and Ph.D. in Business Administration from the University of
California, Los Angeles.
BRENDON S. KIM -- Brendon Kim has served as a director of Egreetings since
April 1996. Mr. Kim has been a general partner of Altos Ventures, a venture
capital investment firm since January 1996. From September 1994 to June 1996,
Mr. Kim worked at CSC Index, a consulting company, where he was an associate.
Mr. Kim also serves on the board of directors of several private companies,
including Branders.com, Blue Dot Software and Hearing Science. Mr. Kim also
serves on the board of directors of the Korean American Society of
Entrepreneurs, a not-for-profit organization to promote entrepreneurship. Mr.
Kim holds an A.B. degree from Princeton University and an M.B.A. degree from the
Stanford University Graduate School of Business.
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PETER NIEH -- Peter Nieh has served as a director of Egreetings since March
1999. Mr. Nieh has been a general partner of Weiss, Peck & Greer L.P., a
technology-focused venture capital investment firm since October 1995. From 1992
to 1995, Mr. Nieh held product marketing and business development roles at
General Magic, Inc., a communications software company. From 1990 to 1991, Mr.
Nieh managed the portable PC business in North America for Acer, Inc., a
personal computer manufacturer. Mr. Nieh is a director of several private
companies. Mr. Nieh holds a B.S. degree in Electrical Engineering and an A.B.
degree in Economics from Stanford University and an M.B.A. degree from the
Stanford University Graduate School of Business.
FRANK J. O'CONNELL -- Frank J. O'Connell has served as a director of
Egreetings since December 1997. Mr. O'Connell has served as President, Chief
Executive Officer and a director of Gibson Greetings, Inc., a greeting card
company, since August 1996, and has served as Chairman of the Board of Directors
of Gibson since April 1997. From May 1995 to August 1996, Mr. O'Connell was a
business consultant. From July 1991 to May 1995, he served as the President and
Chief Executive Officer of Skybox International, Inc., a trading card
manufacturer. Prior to joining Skybox International, Mr. O'Connell was a venture
capital consultant from February 1990 to July 1991 and served as President of
Reebok Brands, North America from 1988 to 1990. Mr. O'Connell is a director of
Moto Guzzi Corporation, a publicly traded manufacturer of motorcycles and
motorcycle parts.
LEE ROSENBERG -- Lee Rosenberg has served as a director of Egreetings since
November 1995. Mr. Rosenberg has been a general partner of Kettle Partners,
L.P., an Internet and technology-focused venture capital investment firm since
March 1998. Mr. Rosenberg also currently serves on the board of directors of
several private companies, including Ignite Sports Media, LLC, an Internet
sports media company, and ActiveUSA, a global registration site for active
sports communities. Over the past 15 years, Mr. Rosenberg has been President of
Rosenberg Capital and general partner of Rosy Partnership, entities involved in
a broad spectrum of venture capital and real estate investments. Previously, Mr.
Rosenberg served as a director of GRP Records. Mr. Rosenberg is a C.P.A. and
holds a B.B.A. degree from the University of Michigan School of Business
Administration.
BOARD COMPOSITION
Upon the completion of this offering, Egreetings will have authorized seven
directors. In accordance with the terms of our certificate of incorporation and
our bylaws, each of which will become effective upon the completion of this
offering, the board of directors will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. Upon
the completion of this offering, the members of the classes will be divided as
follows:
- Class I: Messrs. Alsop and O'Connell and Dr. Holloway
- Class II: Messrs. Kim and Nieh
- Class III: Messrs. Rosenberg and Tucker
The Class I directors, other than Mr. O'Connell, will stand for re-election
or election at the 2000 annual meeting of stockholders. The Class II directors
will stand for re-election or election at the 2001 annual meeting of
stockholders and the Class III directors will stand for re-election or election
at the 2002 annual meeting of stockholders. At each annual meeting of
stockholders after the initial classification, the successors to
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directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following the election
or special meeting held in lieu thereof.
Our certificate of incorporation, which will become effective upon
completion of this offering, provides that the authorized number of directors
may be changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed between the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in the control
or management of Egreetings. Notwithstanding the foregoing, so long as
Egreetings is subject to Section 2115 of the California General Corporation Law,
all directors shall be designated of the same class, and such directors shall be
elected by cumulative voting if any stockholder requests cumulative voting.
Directors of Egreetings may be removed for cause by the affirmative vote of
the holders of a majority of our voting stock and such directors may be removed
without cause by the affirmative vote of the holders of at least two-thirds of
our voting stock. Notwithstanding the foregoing, so long as Egreetings is
subject to Section 2115 of the California General Corporation Law, unless every
director is removed, no single director may be removed without cause when the
votes cast against such director's removal would be sufficient to elect that
director if voted cumulatively.
See "Description of Capital Stock -- Section 2115" for additional
information relating to the effect of Section 2115 on Egreetings.
BOARD COMMITTEES
The audit committee of the board of directors consists of Mr. Nieh and Dr.
Holloway. The audit committee reviews our financial statements and accounting
practices, makes recommendations to the board of directors regarding the
selection of independent auditors and reviews the results and scope of the audit
and other services provided by our independent auditors.
The compensation committee of the board of directors consists of Messrs.
Kim and Rosenberg. The compensation committee makes recommendations to the board
of directors concerning salaries and incentive compensation for our officers and
employees and administers our employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of the board of directors
is an officer or employee of Egreetings. None of our executive officers serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving on our board of directors or
compensation committee.
DIRECTOR COMPENSATION
Our directors receive no cash compensation for their services as directors
but are reimbursed for their reasonable expenses in attending board meetings.
All directors are eligible to participate in our 1996 Stock Option Plan, 1999
Equity Incentive Plan, employee directors will be eligible to participate in our
1999 Employee Stock Purchase
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Plan and non-employee directors will be eligible to participate in our 1999
Non-Employee Directors' Stock Option Plan. See "-- Employee Benefit Plans" for
additional information relating to these plans.
In June 1998, director Charles Holloway was granted options to purchase
15,000 shares of common stock at a price of $0.42 per share and director Lee
Rosenberg was granted options to purchase 27,000 shares of common stock at a
price of $0.42 per share.
EXECUTIVE COMPENSATION
The following table shows compensation earned during fiscal year 1998 by
Egreetings' Chief Executive Officer and our other three executive officers who
earned more than $100,000 in 1998. These people are referred to as the named
executive officers. Titles shown in the table are titles held as of December 31,
1998. As of September 15, 1999, none of Messrs. Campbell, Levitan or Katin was
serving as an employee of Egreetings. The information in the table includes
salaries, bonuses, stock options granted and other miscellaneous compensation.
We have not granted stock appreciation rights or restricted stock awards and
provide no long-term compensation benefits other than stock options.
SUMMARY COMPENSATION TABLE(1)
LONG-TERM AND
ANNUAL COMPENSATION OTHER COMPENSATION
FOR FISCAL YEAR 1998 ----------------------
----------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
--------------------------- ---------- --------- ----------------------
Fredrick L. Campbell
Chief Executive Officer(2)........ 120,000 9,000 --
Anthony Levitan
President(3)...................... 120,000 9,000 --
Neil Katin
Chief Technical Officer(4)........ 120,000 9,000 --
Paul Lipman
Senior Vice President, Business
Development.................... 120,000 -- 9,549
- -------------------------
(1) In accordance with the rules of the Commission, the compensation described
in this table does not include medical, group life insurance or other
benefits received by the named executive officers that are available
generally to all our salaried employees and certain perquisites and other
personal benefits received by the named executive officers, which do not
exceed the lesser of $50,000 or 10% of any such officer's salary and bonus
disclosed in this table.
(2) Mr. Campbell left his position as our Chief Executive Officer in February
1999. Gordon M. Tucker has been our Chief Executive Officer since then. See
"Management -- Employment and Severance Arrangements" for information
regarding Mr. Tucker's salary, stock option and other compensation
arrangements.
(3) Mr. Levitan left his position as our President in February 1999.
(4) Mr. Katin left his position as our Chief Technical Officer in June 1999.
Behrouz Arbab has been our Senior Vice President and Chief Technical Officer
since then.
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OPTION GRANTS DURING 1998
The following table sets forth each grant of stock options granted during
1998 to each of the named executive officers.
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(4)
OPTIONS EMPLOYEES PER EXPIRATION ----------------------------
NAME GRANTED(1) DURING 1998(2) SHARE(3) DATE 5% 10%
---- ---------- -------------- -------- ---------- ------------ ------------
Fredrick L.
Campbell............ -- -- -- -- -- --
Anthony Levitan....... -- -- -- -- -- --
Neil Katin............ -- -- -- -- -- --
Paul Lipman........... 22,500 2.9% $0.42 7/16/08
- -------------------------
(1) The option granted in 1998 to Paul Lipman was granted under our 1996 Stock
Option Plan. The option grant to Mr. Lipman is exercisable only as to the
vested portion of non-qualified options, to the extent permissible under
applicable IRS regulations.
(2) Based on an aggregate of 767,250 shares subject to options granted to our
employees in 1998, including named executive officers.
(3) The exercise price per share of each option granted was equal to the fair
market value of the common stock as determined by the board of directors on
the date of the grant. In determining the fair market value of the stock
granted on the grant date, our board considered, among other things, our
absolute and relative levels of revenues and other operating results and the
state of our strategic relationships.
(4) Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by an assumed initial
public offering price of $ per share, (b) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option and (c)
subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock price appreciation are mandated by the
rules of the Commission and do not represent Egreetings' estimate or
projection of future common stock prices.
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AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END VALUES AT DECEMBER 31, 1998
The following table sets forth the number of shares of common stock
acquired and the value realized upon exercise of stock options during 1998 and
the number of shares of common stock subject to exercisable and unexercisable
stock options held as of December 31, 1998 by each of the named executive
officers. Value at fiscal year end is measured as the difference between the
exercise price and the fair market value on December 31, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Fredrick L.
Campbell........... -- -- -- -- -- --
Anthony Levitan...... -- -- -- -- -- --
Neil Katin........... -- -- 107,999 94,501
Paul Lipman.......... -- -- 63,069 65,931
- -------------------------
(1) Value of unexercised in-the-money options are based on a value of
$ per share, the initial public offering price minus the per share
exercise price, multiplied by the number of shares underlying the option.
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
General. In January 1996, our board adopted and our stockholders approved
our 1996 Stock Option Plan. All options granted to our employees, independent
contractors, advisors, consultants and directors have been granted pursuant to
the stock option plan in accordance with the terms set forth below.
The stock option plan provides for the grant of:
- incentive stock options, as defined under the Internal Revenue Code of
1986, as amended, to our employees (including our officers); and
- nonstatutory stock options to employees, directors, independent
contractors, advisors and consultants.
Administration. The stock option plan is administered by our board of
directors, which, among other things, selects eligible participants to whom
options may be granted, determines the exercise price of the options, determines
the vesting schedule of the options and establishes the period of time during
which an optionee may exercise his or her option after the optionee no longer
provides services to Egreetings. The board may delegate the authority to
administer the stock option plan to a committee.
Option Grants. The exercise price for an incentive stock option cannot be
less than 100% of the fair market value of the common stock on the date of
grant. The exercise price for a nonstatutory stock option cannot be less than
85% of the fair market value of the common stock on the date of grant.
Generally, the optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death. An
optionee whose service relationship with us ceases for any reason may exercise
vested options for the term
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provided in the option agreement. The terms of stock options granted under the
stock option plan generally may not exceed 10 years.
No incentive stock options may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Egreetings or any of its affiliates unless the
following conditions are satisfied:
- the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
- the term of the incentive stock option award may not exceed five years
from the date of grant.
Vesting Schedule. Unless the optionee's stock option agreement otherwise
specifies, options granted under the stock option plan vest according to the
following schedule: 2.22% of the option vests per month after the six month
anniversary of the vesting commencement date, except that on the one year
anniversary of the vesting commencement date an additional 6.67% will vest, such
that a total of 20% of the option will be vested on the first anniversary of the
vesting commencement date and the option vests in full on the fourth anniversary
of the commencement date.
Right of First Refusal. We have a right of repurchase and first refusal
with respect to shares issued upon exercise of options granted under the stock
option plan.
Lock-Up Agreement. All shares of common stock issued under the stock option
plan are subject to a lock-up of 180 days after the completion of this offering
upon the request of the underwriters.
Change of Control. In the event of a change of control of Egreetings, our
board may, in its sole discretion, take any of the following actions with
respect to options outstanding as of the consummation of the change of control:
- cancel all such options effective as of the consummation of the change of
control and notify each optionee of the change of control reasonably
prior to its consummation so that the optionee may exercise any vested
options;
- require the acquiring company to assume the outstanding options or
substitute them with comparable options; or
- repurchase the outstanding options at a price per share equal to the fair
market value of the shares based on the board's good faith estimate of
the valuation of Egreetings implied by the total amount to be paid in
connection with the change of control.
As of September 30, 1999, options to purchase a total of shares of
our common stock were outstanding and shares remained available for
grant.
1999 Equity Incentive Plan
General. In September 1999, the Board adopted, subject to stockholder
approval, the 1999 Equity Incentive Plan.
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Types of Grants and Eligibility.
This plan provides for the grant of:
- incentive stock options, as defined under the Internal Revenue Code of
1986, as amended, to employees (including officers);
- nonstatutory stock options to employees, directors and consultants;
- restricted stock purchase awards to employees, directors and consultants;
and
- stock bonuses to employees, directors and consultants.
Administration. The stock option plan is administered by the board of
directors, which determines recipients and types of options, stock bonus awards
and restricted stock awards to be granted, including the exercise price, number
of shares subject to the grant and the exercisability thereof. The board of
directors may delegate authority to administer the stock option plan to a
committee.
Option Grants. The board of directors determines the exercise price of
options granted under the stock option plan. The exercise price for an incentive
stock option cannot be less than 100% of the fair market value of the common
stock on the date of grant. The exercise price for a nonstatutory stock option
cannot be less than 85% of the fair market value of the common stock on the date
of grant. Options granted under the stock option plan vest at the rate specified
in the option agreement signed by and between us and each optionee. Generally,
the optionee may not transfer a stock option other than by will or the laws of
descent or distribution unless the optionee holds a nonstatutory stock option
that provides otherwise. However, an optionee may designate a beneficiary who
may exercise the option following the optionee's death. An optionee whose
service relationship with us or any affiliate of ours ceases for any reason may
exercise vested options for the term provided in the optionee's option
agreement. The terms of stock options granted under the stock option plan
generally may not exceed 10 years.
No stock option may be granted to any person who, at the time of the grant,
owns (or is deemed to own) stock possessing more than 10% of the total combined
voting power of Egreetings or any of parent or subsidiary of Egreetings unless
the following conditions are satisfied:
- the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
- the term of the incentive stock option award may not exceed five years
from the date of grant.
When we become subject to Section 162(m) of the Internal Revenue Code of
1986 (which denies a deduction to publicly held corporations for certain
compensation paid to specified employees in a taxable year to the extent that
the compensation exceeds $1,000,000), no person may be granted options under the
stock option plan covering more than shares of common stock in
any calendar year. Shares subject to stock options that have expired or
otherwise terminated without having been exercised in full again become
available for the grant of awards under the stock option plan. Under its general
authority to grant options, the board of directors has the implicit authority to
reprice outstanding options or to offer optionees the opportunity to replace
outstanding
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options with new options for the same or a different number of shares. Both the
original and new options will count toward the Section 162(m) limitation.
Options granted under the stock option plan generally expire three months
after the termination of the optionee's service to Egreetings or a parent or
subsidiary of Egreetings, except in the case of death or disability, in which
case the options generally may be exercised up to 18 months following the date
of death or up to 12 months following a termination due to the optionee's
disability.
Stock Bonus Awards. The board may grant stock bonus awards for past
services rendered to Egreetings or a parent or subsidiary of Egreetings. In the
event the grantee's service to Egreetings or a parent or subsidiary of
Egreetings terminates, we may reacquire any or all of the unvested shares of
common stock held by the grantee on that date.
Restricted Stock Awards. The purchase price for each restricted stock award
granted must be at least 85% of the fair market value of the stock subject to
the option on the date of the award or at the time the purchase is consummated.
Transferability. Rights to acquire shares under a stock bonus or restricted
stock bonus agreement may not be transferred other than by will or by the laws
of descent and distribution and are exercisable during the life of the optionee
only by the optionee. Certain restricted stock awards made following the
completion of this offering may be otherwise transferable if the stock bonus
agreement so provides.
Changes in Control. In the event of the transfer of all or substantially
all of our assets or our acquisition by another company, all outstanding stock
awards under the stock option plan may either be assumed or substituted for with
similar stock awards by the acquiring company. If the acquiring company
determines not to assume or substitute for those outstanding awards, the vesting
provisions of the awards will be accelerated and exercisable in full and the
stock awards will be terminated upon the sale of assets or acquisition of
Egreetings if not previously exercised.
1999 Non-Employee Directors' Stock Option Plan
General. In September 1999, the board adopted, subject to stockholder
approval, the 1999 Non-Employee Directors' Stock Option Plan to provide for the
automatic grant of options to purchase shares of common stock to our
non-employee directors. The aggregate number of shares of Common Stock that may
be issued pursuant to options granted under the directors' plan is
shares.
Administration. The board will administer the directors' plan and may not
delegate administration to a committee.
Option Terms. Options granted under the directors' plan are generally
subject to the following terms:
- the exercise price of the options granted will be equal to the fair
market value of the common stock on the date of grant;
- no option granted under the directors' plan may be exercised after the
expiration of ten years from the date it was granted;
- options granted are not transferable other than by will or by the laws of
descent and distribution and are exercisable during the life of the
optionee only by the optionee;
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- an optionee may designate a beneficiary who may exercise the option
following the optionee's death;
- an optionee whose service relationship with Egreetings or any parent or
subsidiary of Egreetings, whether as a non-employee director of
Egreetings or, subsequently, as an employee, director or consultant of
either Egreetings or parent or subsidiary of Egreetings, terminates for
any reason other than death or disability may exercise vested options for
three months after the termination; and
- similarly, an optionee whose service relationship with Egreetings or any
parent or subsidiary of Egreetings terminates because of the optionee's
death or disability, then the optionee or the optionee's beneficiary may
exercise the vested options for 12 months after the termination, in the
case of a disability, and 18 months after the termination, in the case of
death.
Automatic Grants. Upon the completion of this offering, each non-employee
director will automatically be granted an option to purchase
shares of common stock. Any individual who becomes a non-employee director after
this offering will automatically receive this initial grant upon being elected
to the board of directors. Any person who is a non-employee director on the day
following each annual meeting of Egreetings stockholders will be granted an
additional option to purchase shares of common stock on that day.
Any director who has not served as a non-employee director for the entire period
since the preceding annual meeting of stockholders will have his or her
automatic additional grant for that year reduced pro rata for each full quarter
prior to the date of grant during which such person did not serve as a
non-employee director.
Vesting. Initial option grants to non-employee directors will vest at a
rate of 1/5 of the shares 12 months after the date of grant and 1/60 of the
shares each month thereafter. Annual grants will vest at a rate of 1/12 per
month after the date of the grant.
1999 Employee Stock Purchase Plan
General. In September 1999, the Board adopted, subject to stockholder
approval, the 1999 Employee Stock Purchase Plan, authorizing the issuance of
shares of common stock pursuant to purchase rights granted to our
employees or to employees of any parent or subsidiary of Egreetings. The
purchase plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. As of the date hereof, no shares of
common stock have been purchased under the purchase plan.
Administration. The purchase plan shall be administered by the board of
directors unless and until it delegates administration to a committee. The
administrator will generally have the power to determine when and how rights to
purchase shares of common stock will be granted and the provisions of each
offering of rights, as well as the power to construe and interpret the purchase
plan.
Offering Terms. The purchase plan provides a means by which our employees
may purchase common stock through payroll deductions. The purchase plan is
implemented by offerings of rights to eligible employees. Generally, all regular
employees, including executive officers, who are employed by Egreetings or by a
parent or subsidiary of Egreetings for a required period of time that may not
exceed two years may participate in the purchase plan and may authorize payroll
deductions of up to 15% of their base compensation for the purchase of stock
under the purchase plan. Under the plan, we may
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specify offerings with a duration of not more than 27 months, and may specify
shorter purchase periods within each offering. The first offering will begin on
the effective date of this offering and be approximately months in duration
with purchases occurring every months. Unless otherwise determined by the
plan administrator, common stock is purchased for accounts of employees
participating in the purchase plan at a price per share equal to the lower of:
- 85% of the fair market value of a share of common stock on the date of
commencement of participation in the offering; or
- 85% of the fair market value of a share of common stock on the date of
purchase.
Limitations. Eligible employees may be granted rights only if the rights
together with any other rights granted under employee stock purchase plans, do
not permit such employee's rights to purchase stock of Egreetings to accrue at a
rate which exceeds $25,000 of the fair market value of such stock for each
calendar year in which such rights are outstanding. In addition, an employee may
purchase no more than shares during any one offering. No employee
shall be eligible for the grant of any rights under the purchase plan if
immediately after such rights are granted, such employee has voting power over
5% or more of Egreetings' outstanding capital stock (measured by vote or value).
401(k) Plan
We sponsor the Egreetings Network 401(k) Plan, a defined contribution plan
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended. All employees are eligible to participate and may enter the 401(k) Plan
as of the first day of any month. Participants may make pre-tax contributions to
the 401(k) Plan of up to 15% of their eligible earnings, subject to a
statutorily prescribed annual limit. Egreetings does not make matching
contributions. Each participant's contributions, and the corresponding
investment earnings, are subject to a six-year graded vesting schedule and are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Gordon M. Tucker Employment Agreement
In February 1999, we entered into an employment agreement with Gordon M.
Tucker, our Chief Executive Officer and a director, under which Mr. Tucker is
compensated at a rate of $225,000 per year, paid on a semi-monthly basis. The
agreement also provides that Mr. Tucker's employment with us will last until the
earliest date on which any of the following events may occur:
- his death or resignation from Egreetings;
- his termination by us for cause;
- his termination by us without cause; or
- his termination due to a failure to maintain his employment conditions.
Pursuant to the employment agreement, Mr. Tucker received a non-qualified
stock option grant for the purchase of 3,401,344 shares of our common stock at
an exercise price of $1.40 per share. The option vests at a rate of 1/8 of the
total amount on the six month anniversary of the grant and 1/48 of the total
amount each month thereafter, for a total
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vesting period of four years. The employment agreement provides that, if Mr.
Tucker is terminated other than for cause, then the stock options for the month
in progress and for the twelve months thereafter shall immediately vest and
shall be exercisable for three years after his termination. In addition, Mr.
Tucker's employment agreement provides that, if Mr. Tucker is terminated other
than for cause or he terminates his employment agreement due to a failure to
maintain employment conditions and within 180 days of his termination a change
of control is announced or occurs, then all his unvested stock options will
immediately vest and will be exercisable for three years after Mr. Tucker's
termination.
If there is a change of control while Mr. Tucker is still employed by us,
the first three years of Mr. Tucker's option will accelerate, will be fully
vested and will be exercisable for three years after termination of Mr. Tucker's
employment with us. If, after a change of control, Mr. Tucker remains employed
as Chief Executive Officer and is actually or constructively terminated within
one year of the change of control or, within that period, he terminates his
employment with us, then all of his remaining unvested shares will vest fully
and will be exercisable for three years from the date of his termination.
The employment agreement also provides for an annual bonus, the target of
which is 50% of Mr. Tucker's base salary. Based on a proration for 1999, the
target bonus for Mr. Tucker is $99,554.79. We also paid Mr. Tucker a transition
allowance of $75,000 so that Mr. Tucker could be reimbursed for, or paid for the
reasonable costs and expenses of relocating from the Dallas, Texas metropolitan
area to San Francisco, California. To the extent the transition allowance was
not spent, Mr. Tucker has been paid the balance. All amounts paid under the
transition allowance will be credited against any amounts otherwise payable to
Mr. Tucker as part of his bonus for 1999. In the event Mr. Tucker is terminated
other than for cause, he is entitled to receive from us an amount equal to 12
months of his base salary and benefits.
Fredrick L. Campbell Employment and Consulting Agreement
In May 1999, we entered into an employment and consulting agreement with
Fredrick Campbell, our former Chief Executive Officer and Chief Financial
Officer. Pursuant to the agreement, Mr. Campbell agreed to serve as our Chief
Financial Officer until we hired a new Chief Financial Officer, which we did in
July 1999 when we hired Andrew J. Moley to fill that position. In addition, Mr.
Campbell agreed to provide consulting services to us until August 2000. For his
services as our Chief Financial Officer, Mr. Campbell received an annual base
salary of $175,000. For his services as a consultant, Mr. Campbell received a
one-time payment of $250,000.
Severance Arrangements for Senior Executives
In June 1999, the Egreetings board approved "double-trigger" change of
control acceleration for options granted to employees at the senior director
level and above, such as Andrew J. Moley, Behrouz Arbab, Paul Lipman, Kenneth W.
Wallace, Sarah S. Anderson, Joseph T. Margione, Allen Chin, Scott Neamand and
Andrew P. Missan. This acceleration would occur in the event that, after the
acquisition of Egreetings, any such employee is actually or constructively
terminated by the acquiring company. Upon such a termination, a senior vice
president's option would accelerate by one year, a vice president's option would
accelerate by nine months and a senior director's option would accelerate by six
months. In addition, the board resolved that, upon such a termination, a senior
vice president would receive a cash severance payment equal to six months of
such
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officer's base salary, a vice president would receive a cash severance payment
equal to three months of such officer's base salary and a senior director would
receive a cash severance payment equal to three months of such employee's base
salary.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation, which will become effective upon the
completion of this offering, includes a provision that eliminates the personal
liability of our directors for monetary damages resulting from breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; and
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws, which will become effective upon the completion of this
offering, provide that:
- we must indemnify our directors and executive officers to the fullest
extent permitted by Delaware law, subject to very limited exception;
- we may indemnify our other employees and agents to the same extent that
we indemnify our directors and executive officers, unless otherwise
required by law, our certificate of incorporation, bylaws or agreements;
and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and executive
officers to give them additional contractual assurances regarding the scope of
the indemnification provided in our certificate of incorporation and bylaws and
to provide additional procedural protections. Currently, there is no pending
litigation or proceeding involving any of our directors, executive officers or
employees for which indemnification is sought, nor are we aware of any
threatened litigation that may result in claims for indemnification.
We plan to obtain directors' and officers' liability insurance prior to the
effectiveness of this offering.
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CERTAIN TRANSACTIONS
Other than the employment agreements described in "Management -- Employment
and Severance Arrangements," and the transactions described below, since January
1996 there has not been nor is there currently proposed any transaction or
series of similar transactions to which we were or will be a party:
- in which the amount involved exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% or our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
PREFERRED STOCK FINANCINGS
In May 1996, we issued and sold an aggregate of 450,000 shares of Series B
preferred stock, each of which is presently convertible into three shares of
common stock, at a purchase price of $2.00 per share, including shares of Series
B preferred stock issued upon the conversion of convertible promissory notes
having an aggregate principal amount of $150,000 that were issued by us from
April to May 1995.
From December 1996 to October 1997, we issued and sold an aggregate of
702,763 shares of Series C preferred stock, each of which is presently
convertible into three shares of common stock, at an exercise price of $4.00 per
share, including shares of Series C preferred stock issued upon the conversion
of convertible promissory notes having an aggregate principal amount of $900,000
that were issued from October to November 1996.
From December 1997 to July 1998, we issued and sold an aggregate of 850,783
shares of Series D preferred stock, each of which is presently convertible into
three shares of common stock, at a purchase price of $6.39 per share.
From March to April 1999, we issued and sold an aggregate of 3,726,493
shares of Series F preferred stock, each of which is presently convertible into
three shares of common stock, at an exercise price of $7.00 per share, including
shares of Series F preferred stock issued upon conversion of convertible
promissory notes having an aggregate principal amount of $3,100,000 that were
issued from November 1998 to March 1999.
In October 1999, we issued and sold an aggregate of 5,846,546 shares of
Series G preferred stock, each of which is presently convertible into one share
of common stock, at a purchase price of $4.04 per share.
Purchasers of our preferred stock include, among others, the following
directors, holders of more than 5% of our outstanding stock and a trust of which
the father of one of our executive officers is the sole trustee. All of the
share numbers in the following table reflect the conversion of each outstanding
share of the Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock and Series F preferred
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stock into three shares of common stock, and the Series G preferred stock into
one share of common stock.
SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF
SERIES B SERIES C SERIES D SERIES F SERIES G
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
-------- ---------- ---------- ---------- ---------- ----------
Lee Rosenberg(1).......................... 70,374 46,899 -- 289,287 144,307
Neil Katin................................ -- -- -- --
Entities affiliated with Altos
Ventures(2)............................. 873,261 945,621 -- 728,571 618,811
Gibson Greetings, Inc.(3)................. -- -- 2,799,492 1,752,000 618,340
New Enterprises Associates(4)............. -- -- -- 2,100,000 396,039
Vulcan Ventures, Inc...................... -- -- -- 1,671,429 217,326
Entities affiliated with Weiss, Peck &
Greer Venture Partners(5)............... -- -- -- 2,957,142 523,066
Richard M. Moley Annuity Trust U/A dated
May 12, 1998(6)......................... 250,000
- -------------------------
(1) Includes 214,287 shares of Series F preferred stock and 123,762 shares of
Series G preferred stock held by Kettle Partners, L.P. for which Mr.
Rosenberg, a director of Egreetings, serves as a principal.
(2) Consists of 17,142 shares of Series F preferred stock held by Altos Partners
I and 873,261 shares of Series B preferred stock, 945,621 shares of Series C
preferred stock, 711,429 shares of Series F preferred stock, and 618,811
shares of Series G preferred stock held by Altos Ventures II, L.P. Brendon
Kim, a director of Egreetings, is affiliated with the Altos entities.
(3) Frank O'Connell, a director of Egreetings, is the Chairman of the Board,
President and Chief Executive Officer of Gibson Greetings, Inc.
(4) Stewart Alsop, a director of Egreetings, is affiliated with New Enterprise
Associates.
(5) Consists of 1,478,541 shares of Series F preferred stock and 223,364 shares
of Series G preferred stock held by Weiss, Peck & Greer Venture Associates
V, L.L.C., 634,011 shares of Series F preferred stock and 116,434 shares of
Series G preferred stock held by WPG Enterprise Fund III, L.L.C., 725,091
shares of Series F preferred stock and 133,160 shares of Series G preferred
stock held by Weiss, Peck & Greer Venture Associates, IV, L.L.C., 28,092
shares of Series F preferred stock and 5,159 shares of Series G preferred
stock held by WPG Information Sciences Entrepreneur Fund, L.P., 91,407
shares of Series F preferred stock and 16,780 shares of Series G preferred
stock held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P.,
1,202,646 shares of Series F preferred stock and 1,900 shares of Series G
preferred stock held by WPG Venture Associates V-A, L.L.C., and 263,475
shares of Series F preferred stock and 46,269 shares of Series G preferred
stock held by WPG Venture Associates V, Cayman L.P. Peter Nieh, a director
of Egreetings, is a general partner of Weiss, Peck & Greer Venture Partners
and a member or a general partner of the above-named funds.
(6) Mr. Moley, the sole trustee of this trust, is the father of Andrew J. Moley,
our Chief Financial Officer.
WARRANTS
In March 1996, in connection with a loan financing, we issued warrants to
purchase an aggregate amount of 7,503 shares of Series B preferred stock, each
of which is presently
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convertible for three shares of common stock, at an exercise price of $2.00 per
share to investors including Lee Rosenberg, a director of Egreetings, who
acquired a warrant to purchase 1,821 shares of Series B preferred stock, each of
which is presently convertible for three shares of common stock, that expires on
March 19, 2003.
From October to November 1996, in connection with a loan financing, we
issued warrants to purchase an aggregate amount of 41,910 shares of Series C
preferred stock, each of which is presently convertible into three shares of
common stock, at an exercise price of $4.00 per share to investors including Lee
Rosenberg, who acquired a warrant to purchase 1,313 shares of Series C preferred
stock, and Altos Ventures, a holder of more than 5% of our common stock, which
acquired a warrant to purchase 9,781 shares of Series C preferred stock, each of
which is presently convertible into three shares of common stock. Each of Mr.
Rosenberg's and Altos Ventures' warrants expires in April 2007.
In December 1997, we issued a warrant to purchase 946,925 shares of Series
E preferred stock, at a purchase price of $9.60 per share, to Gibson Greetings,
Inc., a holder of more than 5% of our common stock. As a result of anti-dilution
adjustments in connection with sales of our Series F preferred stock and Series
G preferred stock, the number of shares of Series E preferred stock issuable
pursuant to this warrant was increased to 1,470,000 in March 1999 and 1,663,333
in October 1999. Pursuant to the terms of the warrant, there was no adjustment
to the aggregate exercise price of the warrant in connection with these
adjustments. Each share of Series E preferred stock is presently convertible
into three shares of common stock.
From November 1998 to January 1999, in connection with loan financings, we
issued warrants to purchase an aggregate amount of 67,139 shares of Series F
preferred stock, each of which is presently convertible into three shares of
common stock at an exercise price of $6.30 per share to investors including
holders of more than 5% of our outstanding stock as set forth in the table
below.
All of the share numbers in the following table reflect the conversion of
each outstanding share of Series B preferred stock, Series C preferred stock and
Series F preferred stock into three shares of common stock.
NUMBER OF SHARES
WARRANT HOLDER SUBJECT TO WARRANT EXPIRATION DATE
-------------- ------------------ ---------------
Gibson Greetings, Inc.(1)........ 80,355 November 2005
Gibson Greetings, Inc.(1)........ 21,426 January 2006
Altos Ventures I, L.P.(2)........ 26,784 November 2005
Altos Ventures I, L.P.(2)........ 21,426 January 2006
Kettle Partners, L.P.(3)......... 42,855 January 2006
- -------------------------
(1) Frank O'Connell, a director of Egreetings, is the President, Chief Executive
Officer and Chairman of the Board of Gibson Greetings, Inc.
(2) Brendon Kim, a director of Egreetings, is a general partner of Altos
Ventures I, L.P.
(3) Lee Rosenberg, a director of Egreetings, is a principal of Kettle Partners,
L.P.
TRANSACTION WITH EXECUTIVE OFFICERS AND DIRECTORS
In February 1999, we entered into an employment agreement with Gordon M.
Tucker, our Chief Executive Officer. This agreement is discussed in more detail
in "Management -- Employment and Severance Arrangements."
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In June 1999, Mr. Tucker exercised in full the option granted to Mr. Tucker
pursuant to his employment agreement and acquired 3,401,344 shares of common
stock. However, as of September 30, 1999, 2,905,315 shares held by Mr. Tucker
may be repurchased at $1.40 per share by Egreetings, subject to certain
acceleration provisions in Mr. Tucker's employment agreement. Mr. Tucker paid
the $1.40 exercise price per share for such shares by delivery of a promissory
note bearing a simple interest rate of 5.37% per annum. The full principal and
interest payable under the note are due in June 2003 or, if Mr. Tucker's
employment is terminated prior to that time, 60 days after the termination. The
note is secured by the shares of common stock purchased by Mr. Tucker. As of
September 30, 1999, approximately $4,761,882 in unpaid principal and interest
was outstanding in the aggregate under the note.
In July 1999, Andrew J. Moley, our Chief Financial Officer, exercised an
option grant to purchase an aggregate of 300,000 shares of common stock and
entered into an early exercise stock purchase agreement under the 1996 Stock
Option Plan regarding the shares. However, we have a right to repurchase any of
the unvested 300,000 shares within 90 days upon Mr. Moley's termination of
employment. As of September 30, 1999, all 300,000 shares held by Mr. Moley
remain subject to repurchase at $1.85 per share. Mr. Moley paid the $1.85
purchase price per share for such shares by delivery of a promissory note
bearing a simple interest rate of 6.00% per annum. The full principal and
interest payable under the note are due in July 2004 or, if Mr. Moley's
employment is terminated prior to that time, the date of Mr. Moley's
termination. The note is secured by the shares of common stock purchased by Mr.
Moley. As of September 30, 1999, approximately $555,000 in unpaid principal and
interest was outstanding in the aggregate under the note.
CONTENT PROVIDER AND DISTRIBUTION AGREEMENT WITH GIBSON GREETINGS, INC.
In December 1997, we entered into a content provider and distribution
agreement with Gibson Greetings, Inc. Pursuant to this five-year agreement, we
are the only company, other than Gibson itself, that may distribute Gibson's
content in the form of digital greetings. In exchange for this right, we pay
Gibson a royalty based on the number of digital greetings sent via our Web site
that contain Gibson's content. Gibson may terminate our rights to exclusivity if
our consumers do not send at least approximately 2.8 million Gibson digital
greetings via our Web site -- the number sent in August 1999 -- in each month
during the term of the agreement and if this minimum delivery requirement is not
exceeded in any of the three months following the month in which the shortfall
occurred.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of September 30, 1999 and as advised
to reflect the sale of the common stock in this offering by:
- each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
- each of our directors;
- each of the executive officers named in the Summary Compensation Table;
and
- all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise indicated below, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Percentage ownership is based on 28,105,693 shares of common
stock outstanding as of September 30, 1999, assuming the conversion of all
outstanding shares of preferred stock into common stock, and
shares of common stock outstanding immediately following the completion of this
offering. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of September 30, 1999 are deemed to be
outstanding and to be beneficially owned by the person holding such options for
the purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.
Unless otherwise indicated, the address for each stockholder named below
is: c/o Egreetings Network, Inc., 501 Second Street, Suite 114, San Francisco,
California 94107.
PERCENTAGE OWNED
---------------------------------
NAME OF BENEFICIAL OWNER SHARES BEFORE OFFERING AFTER OFFERING
------------------------ ---------- --------------- --------------
Gibson Greetings, Inc.(1)............. 9,063,273 27.8%
2100 Section Road
Cincinnati, OH 45326
Entities Affiliated with Weiss, Peck &
Greer Venture Partners(2)............. 2,957,142 10.5
555 California St., Suite 3130
San Francisco, CA 94194
Entities Affiliated with Altos
Partners(3)........................... 2,625,006 9.3
2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Entities Affiliated with New
Enterprises Associates(4)............. 2,100,000 7.5
2490 Sand Hill Road
Menlo Park, CA 94025
Vulcan Ventures Inc................... 1,671,429 5.9
110-110th Ave. NE, Suite 550
Bellevue, WA 98004
Anthony Levitan(5)(6)................. 2,458,750 8.7
Fredrick L. Campbell(6)............... 2,415,000 8.6
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PERCENTAGE OWNED
---------------------------------
NAME OF BENEFICIAL OWNER SHARES BEFORE OFFERING AFTER OFFERING
------------------------ ---------- --------------- --------------
Frank O'Connell(1).................... 9,063,273 27.8%
c/o Gibson Greetings, Inc.
2100 Section Road
Cincinnati, OH 45326
Peter Nieh(2)......................... 2,957,142 10.5
c/o Weiss, Peck & Greer Venture
Partners
555 California Street, Suite 3130
San Francisco, CA 94194
Brendon Kim(3)........................ 2,625,006 9.3
c/o Altos Ventures
2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Stewart Alsop(4)...................... 2,100,000 7.5
c/o New Enterprise Associates, Inc.
2490 Sand Hill Road
Menlo Park, CA 94025
Lee Rosenberg(7)...................... 837,579 3.0
Gordon M. Tucker(8)................... 3,401,344 12.1
Charles A. Holloway(9)................ 110,375 *
Neil Katin(10)........................ 461,856 1.6
Paul S. Lipman(11).................... 116,518 *
All directors and executive officers
as a group (12 persons)(11)......... 21,321,091 64.7
- -------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) All of these shares are owned by Gibson Greetings, Inc. Includes warrants
held by Gibson Greetings, Inc. to purchase 4,511,781 shares that are
currently exercisable. Mr. O'Connell is the Chairman of the Board,
President and Chief Executive Officer of Gibson. Mr. O'Connell disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934.
(2) Consists of 634,011 shares held by WPG Enterprise Fund III, L.L.C., 725,091
shares held by Weiss, Peck & Greer Venture Associates IV, L.L.C., 28,092
shares held by WPG Information Sciences Entepreneur Fund, L.P., 91,407
shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P.,
1,202,646 shares held by Weiss, Peck & Greer Venture Associates V, L.L.C.,
12,420 shares held by WPG Venture Associates V-A, L.L.C. and 263,475 shares
held by WPG Venture Associates V, Cayman L.P. Mr. Nieh, a director of
Egreetings, is a Managing Member of WPG VC Fund Adviser, L.L.C., the Fund
Investment Advisory Member of WPG Enterprise Fund III, L.L.C., and Weiss,
Peck & Greer Venture Associates IV, L.L.C., and the General Partner of WPG
Information Sciences Entrepreneur Fund, L.P. In addition, Mr. Nieh is a
Managing Member of WPG VC Fund Adviser II, L.L.C., the Fund Investment
Advisory Member of Weiss, Peck & Greer
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Venture Associates V, L.L.C., Weiss Peck & Greer Venture Associates V-A,
L.L.C., and the Fund Investment Advisory Partner of Weiss, Peck & Greer
Venture Associates V Cayman, L.P. In such capacities, Mr. Nieh may be
deemed to have an indirect pecuniary interest in an indeterminate portion
of the shares beneficially owned by the Weiss Peck & Greer funds. Mr. Nieh
disclaims beneficial ownership of the shares held by the Weiss Peck & Greer
funds within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934.
(3) Includes 17,142 shares held by Altos Partners I and 2,530,311 shares held
by Altos Ventures I, L.P. Also includes warrants to purchase 77,553 shares
that are currently exercisable. Mr. Kim, a director of Egreetings, is a
general partner of Altos Partners and, as such, may be deemed to have an
indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by the Altos funds. Mr. Kim disclaims beneficial
ownership of these shares within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934.
(4) Includes 25,713 shares held by NEA Presidents Fund, L.P., 2,142 shares held
by NEA Ventures 1999, L.P., and 2,072,145 shares held by New Enterprise
Associates VIII, L.P. Mr. Alsop, a director of Egreetings, is a general
partner of New Enterprise Associates and, as such, may be deemed to have an
indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by the NEA funds. Mr. Alsop disclaims beneficial
ownership of these shares within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934.
(5) Includes 12,500 shares issuable upon exercise of options exercisable within
60 days of September 30, 1999.
(6) Included in the number of shares that Messrs. Levitan and Campbell
beneficially own in the aggregate are 240,000 shares pledged by each of
them to Information Technology Ventures II, L.P. and ITV Affiliates Fund
II, L.P. to secure a $520,000 full recourse loan made to Messrs. Levitan
and Campbell pursuant to a Loan and Pledge Agreement dated June 1999. All
of the shares pledged by Messrs. Levitan and Campbell are also subject to
an immediately exercisable call option pursuant to a Call Option Agreement
dated June 1999 among Information Technology Ventures II, L.P., ITV
Affiliates Fund II, L.P. and Messrs. Levitan and Campbell and are covered
by a put option pursuant to a Put Option Agreement dated June 1999 among
the same parties.
(7) Includes 5,400 shares issuable upon exercise of options exercisable within
60 days of September 30, 1999. Includes 214,287 shares held by Kettle
Partners L.P. Also includes warrants to purchase 52,269 shares that are
currently exercisable. Mr. Rosenberg, a director of Egreetings, is a
principal of Kettle Partners L.P. and, as such, may be deemed to have an
indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by Kettle Partners L.P. Mr. Rosenberg disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934.
(8) Includes 2,905,315 shares subject to repurchase by us as of September 30,
1999.
(9) Includes 10,625 shares issuable upon exercise of options exercisable within
60 days of September 30, 1999 and 26,907 shares subject to repurchase by us
as of September 30, 1999.
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(10) Includes 53,999 shares issuable upon exercise of options exercisable within
60 days of September 30, 1999.
(11) Includes 116,518 shares issuable upon exercise of options exercisable
within 60 days of September 30, 1999.
(12) See footnotes 1 through 4 and 7 through 11 above, as applicable.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and material provisions of
our certificate of incorporation and bylaws, which will become effective upon
the completion of this offering, is a summary only and is qualified in its
entirety by the complete provisions of the certificate of incorporation and
bylaws, which have been filed as exhibits to the registration statement, of
which this prospectus is a part.
Upon the closing of this offering, our authorized capital stock will
consist of 75,000,000 shares of common stock, $0.001 par value per share, and
5,000,000 shares of preferred stock, $0.001 par value per share.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Unless Section
2115 of the California Corporations Code is applicable to us, holders of common
stock are not entitled to cumulative voting rights with respect to the election
of directors and, as a consequence, minority stockholders will not be able to
elect directors on the basis of their votes alone. Upon a liquidation,
dissolution or winding-up of Egreetings, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
common stock and any participating preferred stock outstanding at that time
after payment of liquidation preferences, if any, on any outstanding preferred
stock and payment of other claims of creditors. Each outstanding share of common
stock is, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, the board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series, to establish from time to time
the number of shares to be included in each such series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding). The board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
have the effect of delaying, deferring or preventing a change in control of
Egreetings and may adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock.
WARRANTS
As of September 30, 1999, warrants to purchase an aggregate of 7,503 shares
of Series B preferred stock were outstanding at an exercise price of $2.00 per
share. Each warrant contains provisions for the adjustment of the exercise price
and the aggregate
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number of shares issuable upon the exercise of the warrant in the event of stock
dividends, stock splits, reorganizations and reclassifications and
consolidations.
As of September 30, 1999, warrants to purchase an aggregate of 41,910
shares of Series C preferred stock were outstanding at an exercise price of
$4.00 per share. Each warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. Upon the closing of this offering, all
warrants to purchase Series C referred stock will become exercisable for common
stock at the conversion rate that the Series C preferred stock converts into
common stock.
As of September 30, 1999, a warrant to purchase an aggregate of 1,470,000
shares of Series E preferred stock was outstanding at an exercise price of $6.18
per share to Gibson Greetings, Inc. Upon closing of this offering, this warrant
will expire unless earlier exercised.
As of September 30, 1999, warrants to purchase an aggregate of 67,139
shares of Series F preferred stock were outstanding at an exercise price of
$6.30 per share. Each warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. Upon the closing of this offering, all
warrants to purchase Series F preferred stock will become exercisable for common
stock at the conversion rate that the Series F preferred stock converts into
common stock.
As of September 30, 1999, warrants to purchase an aggregate of 60,000
shares of Series F preferred stock were outstanding at an exercise price of
$9.00 per share. Each warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. Upon the closing of this offering, all
warrants to purchase Series F preferred stock will become exercisable for common
stock at the conversion rate that the Series F preferred stock converts into
common stock.
REGISTRATION RIGHTS
Holders of 30,116,319 shares of stock held by them, or subject to
acquisition upon exercise of warrants, have registration rights and can require
that we file a registration statement under the Securities Act of 1933 covering
all or a portion of the investors' registrable securities. These registration
rights are subject to our right to delay the filing of a registration statement
for a period not to exceed 180 days. We cannot delay the filing of a
registration statement more than once in a 12-month period after receiving the
registration demand. The managing underwriter, if any, of any offering pursuant
to a registration has certain rights to limit the number of the registrable
securities proposed to be included in such registration. In addition, these
registration rights are no longer effective once we have effected two
registrations pursuant to these provisions.
The investors also have certain "piggyback" registration rights. If we
propose to register any of our securities under the Securities Act of 1933
(other than pursuant to the investors' demand registration rights noted above),
the investors may require us to use our best efforts to include all or a portion
of their registrable securities in such registration.
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The managing underwriter, if any, of any such offering will have the right to
limit or exclude registrable securities from such registration.
All registration expenses incurred in connection with the above
registrations would be borne by us, including, without limitation, all fees and
disbursements of a single counsel for the selling investors, except for expenses
incurred in connection with more than two registrations of Form S-3 per year.
Each selling investor would pay all underwriting discounts and selling
commissions applicable to the sale of his or its registrable securities, as well
as any fees and disbursements of counsel beyond those of a single counsel for
the selling investors.
All registration rights described above will terminate on the earlier of
four years after the date of this offering or the date on which an investor may
sell all of its or his shares under Rule 144(k) of the Securities Act or during
any 90-day period under Rule 144 of the Securities Act.
SECTION 2115
We currently are subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, certain provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of record
by persons having addresses in California and the majority of the company's
operations occur in California.
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The following table sets forth some of the effects on our corporate
governance of Section 2115:
SECTION 2115 NON-SECTION 2115
------------ ----------------
Election of Cumulative voting is allowed No cumulative voting is
Directors which allows each shareholder allowed; accordingly a holder
to vote the number of votes of 50% or more of voting stock
equal to the number of controls election of all
candidates multiplied by the directors.
number of votes to which the
shareholders' shares are
normally entitled in favor of
one candidate. This potentially
allows minority stockholders to
elect some members of the
board.
Removal of Removal with or without cause If the Board is classified,
Directors by the affirmative vote of the removal is only allowed for
holders of a majority of cause upon the affirmative vote
outstanding voting stock is of a majority of the
allowed. outstanding voting stock
entitled to vote in the
election of directors.
Supermajority In order to institute a Simple majority may adopt
Vote supermajority provision, the amendment providing for
Requirement amendment must be approved by supermajority.
at least as large a proportion
as would be required under the
amendment.
Dividend Dividends are only payable (a) Dividends are payable out of
Distribution out of the surplus of retained either the surplus of retained
earnings and (b) if, earnings or out of its net
immediately after the profits for the year the
distribution, a company's distribution takes place, or
assets are at least equal to the preceding year.
its liabilities.
Dissenters' Generally available in any type Generally only available in a
Rights of reorganization, including a merger. No rights so long as
merger, sale of assets or our common stock is quoted on
sale/exchange of shares. If the the Nasdaq National Market or
shares are listed on an traded on an exchange.
exchange, 5% of the
stockholders must assert their
right for any stockholder to
have these rights.
In addition to these differences, Section 2115 also provides for information
rights and required filings in the event a company effects a sale of assets or
completes a merger.
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2000 annual meeting of
stockholders. See "-- Common Stock" and "Management -- Board Composition" for
additional information relating to the effects of Section 2115 on Egreetings.
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DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Delaware Law
Upon our reincorporation in Delaware, we will be subject to Section 203 of
the Delaware General Corporation Law regulating corporate takeovers. Section
203, subject to exceptions, prohibits a Delaware corporation from engaging in
any "business combination" with any "interested stockholder" for a period of
three years following the date that the stockholder became an interested
stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Section 203 defines an "interested stockholder" as:
- any entity or person beneficially owning 15% or more of the outstanding
voting stock of the corporation; and
- any entity or person affiliated with or controlling or controlled by the
entity or person.
A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. We
have not "opted out" of the provisions of the Section 203. The statute could
prohibit or delay mergers or other takeover or change-in-control
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attempts with respect to Egreetings and, accordingly, may discourage attempts to
acquire Egreetings.
Charter Provisions
Our bylaws, which will become effective upon the closing of this offering,
divide the board of directors into three classes as nearly equal in size as
possible with staggered three-year terms. The classification of the board of
directors could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of Egreetings.
In addition, the bylaws provide that any action required or permitted to be
taken by our stockholders at an annual meeting or a special meeting of the
stockholders may be taken only if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The bylaws also provide
that special meetings of the stockholders may be called only by the chairman of
the board, the chief executive officer or the holders of 50% or more of our
outstanding stock. See "Management -- Board Composition" for additional
information relating to the classification of the board of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation, which will become effective upon the
closing of this offering, contains provisions permitted under Delaware law
relating to the liability of directors. These provisions eliminate a director's
personal liability for monetary damages resulting from a breach of fiduciary
duty, except in circumstances involving wrongful acts, such as:
- any breach of the director's duty of loyalty;
- acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law;
- payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law; or
- any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
Our bylaws, which will become effective upon the closing of this offering,
require us to indemnify our directors and executive officers to the fullest
extent not prohibited by the Delaware law. We may limit the extent of such
indemnification by individual contracts with our directors and executive
officers. Further, we may decline to indemnify any director or executive officer
in connection with any proceeding initiated by such person or any proceeding by
such person against us or our directors, officers, employees or other agents,
unless indemnification is expressly required to be made by law or the proceeding
was authorized by our board of directors.
Prior to completion of this offering, we intend to enter into indemnity
agreements with each of our current directors and certain of our executive
officers to give such directors and officers additional contractual assurances
regarding the scope of the indemnification set
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forth in our certificate of incorporation and bylaws and to provide additional
procedural protections. At present, there is no pending litigation or proceeding
involving any of our directors, officers or employees for which indemnification
is sought, nor are we aware of any threatened litigation that may result in
claims for indemnification.
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
We plan to obtain directors' and officers' liability insurance prior to the
completion of this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be
.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock may
not develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this offering
due to certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding
shares of common stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, all of the
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, unless these shares are purchased
by affiliates.
The remaining shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- shares will have been held long enough to be sold under
Rule 144 or Rule 701 beginning 181 days after the date of this
prospectus; and
- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.
Lock-Up Agreements. Most of our stockholders have agreed not to transfer or
dispose of, directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for shares of our
common stock, for a period of 180 days after the date the registration statement
of which this prospectus is a part is declared effective. Transfers or
dispositions can be made sooner with the prior written consent of Credit Suisse
First Boston Corporation.
Rule 144. In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding which
will equal approximately shares immediately after this
offerings; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also limited by manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
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Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us under a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the date of this prospectus.
Non-affiliates will be able to sell their shares subject only to the
manner-of-sale provisions of Rule 144. Affiliates will be able to sell their
shares without compliance with the holding period requirements of Rule 144.
Registration Rights. Upon completion of this offering, holders of
30,116,319 shares of our common stock will be entitled to rights with respect to
the registration of their shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Except for shares purchased by
affiliates, registration of their shares under the Securities Act would result
in these shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration.
Stock Options. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance upon exercise of outstanding options. The
registration statement is expected to be filed and become effective as soon as
practicable after the closing of this offering. Accordingly, shares registered
under the registration statement will be available for sale in the open market
beginning 180 days after the effective date of the registrant statement of which
this prospectus is a part, except with respect to Rule 144 volume limitations
that apply to our affiliates.
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UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
BancBoston Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc. are
acting as representatives, the following respective number of shares of common
stock:
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Credit Suisse First Boston Corporation......................
BancBoston Robertson Stephens Inc...........................
U.S. Bancorp Piper Jaffray Inc..............................
-------
Total.............................................
=======
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the representatives.
The following table summarizes the compensation and expenses we will pay.
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us... $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our officers and directors and most of our stockholders have agreed
that we and they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to any
additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common
83
86
stock or publicly disclose the intention to make any such offer, sale, pledge
disposition or filing without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus,
except, in our case, issuances pursuant to the exercise of employee stock
options outstanding on the date hereof.
At our request, the underwriters have reserved up to shares of
common stock offered hereby for sale at the initial public offering price to our
customers, consultants and others with whom we do business, existing
stockholders and friends of Egreetings. This group may include entities related
to that have expressed an interest in acquiring up to shares.
As a result, the number of shares available for sale to the general public will
be reduced to the extent that persons purchase these reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares of common stock offered
hereby.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in respect to those liabilities.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "EGRT."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information set forth in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
84
87
- Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
85
88
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as agent,
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions of
the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
86
89
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
87
90
LEGAL MATTERS
Cooley Godward LLP, San Francisco, California, will pass for us upon the
validity of the shares of common stock offered in this prospectus. The
underwriters have been represented by Wilson Sonsini Goodrich & Rosati, Palo
Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement, does
not contain all of the information, exhibits, schedules and undertakings
included in the registration statement. For further information pertaining to us
and the common stock offered by this prospectus, reference is made to the
registration statement and the attached exhibits and schedules. Although
required material information has been presented in this prospectus, statements
contained in this prospectus as to the contents or provisions of any contract or
other document referred to in this prospectus may be summary in nature, and in
each instance reference is made to the copy of this contract or other document
filed as an exhibit to the registration statement, and each statement is
qualified in all respects by this reference. A copy of the registration
statement, including all exhibits and schedules thereto, may be inspected
without charge at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of all or any part of the registration statement may be obtained
from the Commission offices upon the payment of the fees prescribed by the
Commission. In addition, registration statements and certain other filings made
with the Commission through its Electronic Data Gathering, Analysis and
Retrieval system, including our registration statement and all exhibits and
amendments to our registration statement, are publicly available without charge
through the Commission's Web site at http://www.sec.gov.
After this offering, we will have to provide the information and reports
required by the Exchange Act and we will file periodic reports, proxy statements
and other information with the Securities and Exchange Commission. Upon approval
of the common stock for listing on Nasdaq, these reports, proxy and information
statements and other information may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
88
91
EGREETINGS NETWORK, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
CONTENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
F-1
92
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, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Walnut Creek, California
October , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon approval of
the certificate of incorporation in the state of Delaware as described in Note 8
to the financial statements.
/s/ ERNST & YOUNG, LLP
--------------------------------------
Walnut Creek, California
October 1, 1999
F-2
93
EGREETINGS NETWORK, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................. $ 3,524 $ 268 $ 6,601
Accounts receivable....................... 10 210 116
Prepaid expenses and other current
assets.................................. 22 41 268
------- -------- --------
Total current assets............... 3,556 519 6,985
Furniture and equipment, net................ 367 845 4,640
Restricted cash deposit..................... -- -- 2,000
Deferred content costs...................... 1,259 1,566 6,297
Deposits and other assets................... 21 38 263
------- -------- --------
Total assets....................... $ 5,203 $ 2,968 $ 20,185
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..... $ 423 $ 1,518 $ 1,486
Accrued compensation and related
expenses................................ 48 205 110
Accrued royalties (including $0, $108 and
$169, respectively, payable to a related
party).................................. 3 220 271
Deferred revenue.......................... -- 86 449
Current portion of equipment term loan.... 325 374 548
Notes payable to stockholders............. 22 954 --
------- -------- --------
Total current liabilities.......... 821 3,357 2,864
Equipment term loan, less current portion... 197 586 764
Notes payable to stockholders............... -- 514 --
------- -------- --------
Total liabilities.................. 1,018 4,457 3,628
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par
value: 10,000,000 shares authorized;
2,298,741 shares issued and outstanding
in 1997; 2,523,546 in 1998 and 6,332,420
in 1999 (none pro forma)................ 9,417 11,363 41,135
Common stock, $.001 par value; 20,000,000
shares authorized in 1997 and 1998 and
60,000,000 in 1999; 5,199,000 shares
issued and outstanding in 1997 and 1998;
8,751,568 in 1999 and 27,748,828 (pro
forma).................................. 16 504 8,433 $ 49,568
Deferred stock compensation............... -- (287) (2,844) (2,844)
Notes receivable from stockholders........ -- -- (4,805) (4,805)
Accumulated deficit....................... (5,248) (13,069) (25,362) (25,362)
------- -------- -------- --------
Total stockholders' equity
(deficit)........................ 4,185 (1,489) 16,557 $ 16,557
------- -------- -------- --------
Total liabilities and stockholders'
equity (deficit)................. $ 5,203 $ 2,968 $ 20,185
======= ======== ========
See accompanying notes.
F-3
94
EGREETINGS NETWORK, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ----------- -----------
(UNAUDITED)
Revenues........................... $ 164 $ 505 $ 317 $ 97 $ 724
Costs and expenses:
Cost of services................. 256 336 610 222 884
Sales and marketing.............. 366 942 3,094 1,218 5,468
Operations and development....... 552 1,422 2,628 962 3,631
General and administrative....... 778 830 1,444 519 1,925
Amortization of deferred content
costs......................... -- -- 138 126 444
Amortization of deferred stock
compensation.................. -- -- 201 43 558
--------- --------- ---------- --------- ----------
Total costs and expenses......... 1,952 3,530 8,115 3,090 12,910
--------- --------- ---------- --------- ----------
Loss from operations............... (1,788) (3,025) (7,798) (2,993) (12,186)
Interest income.................... 11 -- 42 36 122
Interest expense................... (7) (68) (65) (34) (229)
--------- --------- ---------- --------- ----------
Net loss........................... $(1,784) $(3,093) $(7,821) $(2,991) $(12,293)
========= ========= ========== ========= ==========
Net loss per share:
Basic and diluted................ $ (0.76) $ (0.67) $ (1.51) $ (0.58) $ (2.34)
========= ========= ========== ========= ==========
Pro forma basic and diluted
(unaudited)................... $ (0.63) $ (0.68)
========== ==========
Shares used in calculation of net
loss per share:
Basic and diluted............. 2,341 4,650 5,197 5,194 5,261
========= ========= ========== ========= ==========
Pro forma basic and diluted
(unaudited)................. 12,486 18,141
========== ==========
See accompanying notes.
F-4
95
EGREETINGS NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE NOTES TOTAL
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE STOCKHOLDERS'
-------------------- ------------------ STOCK FROM ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT COMPENSATION SHAREHOLDERS DEFICIT (DEFICIT)
---------- ------- --------- ------ ------------ ------------ ----------- -------------
Balances at December 31,
1995.................... 520,000 $ 416 4,830,000 $ 5 $ -- $ -- $ (371) $ 50
Issuance of common
stock................. -- -- 369,000 11 -- -- -- 11
Issuance of Series B
preferred stock....... 450,000 900 -- -- -- -- -- 900
Issuance of warrants in
connection with debt
financing............. -- 4 -- -- -- -- -- 4
Issuance of Series C
preferred stock....... 341,753 1,367 -- -- -- -- -- 1,367
Net loss and
comprehensive loss.... -- -- -- -- -- -- (1,784) (1,784)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at December 31,
1996.................... 1,311,753 2,687 5,199,000 16 -- -- (2,155) 548
Issuance of Series C
preferred stock....... 361,010 1,444 -- -- -- -- -- 1,444
Issuance of Series D
preferred stock....... 625,978 4,000 -- -- -- -- -- 4,000
Issuance of warrants in
connection with debt
financing............. -- 27 -- -- -- -- -- 27
Valuation of preferred
stock warrant in
connection with
content agreement..... -- 1,259 -- -- -- -- -- 1,259
Net loss and
comprehensive loss.... -- -- -- -- -- -- (3,093) (3,093)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at December 31,
1997.................... 2,298,741 9,417 5,199,000 16 -- -- (5,248) 4,185
Issuance of Series D
preferred stock for
conversion of notes
payable............... 224,805 1,436 -- -- -- -- -- 1,436
Issuance of warrants in
connection with debt
financing............. -- 65 -- -- -- -- -- 65
Deferred stock
compensation related
to grant of stock
options............... -- -- -- 488 (488) -- -- --
Amortization of deferred
stock compensation.... -- -- -- -- 201 -- -- 201
Valuation of preferred
stock warrant in
connection with
content agreement..... -- 445 -- -- -- -- -- 445
Net loss and
comprehensive loss.... -- -- -- -- -- -- (7,821) (7,821)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at December 31,
1998.................... 2,523,546 11,363 5,199,000 504 (287) -- (13,069) (1,489)
Issuance of Series D
preferred stock for
conversion of notes
payable (unaudited)... 82,381 514 -- -- -- -- -- 514
Issuance of Series F
preferred stock, net
of issuance costs
(unaudited)........... 3,283,636 20,912 -- -- -- -- -- 20,912
Issuance of Series F
preferred stock for
conversion of notes
payable (unaudited)... 442,857 3,100 -- -- -- -- -- 3,100
Issuance of common stock
under stock option
plan (unaudited)...... -- -- 3,552,568 4,814 -- (4,805) -- 9
Issuance of warrants in
connection with debt
financing
(unaudited)........... -- 71 -- -- -- -- -- 71
Deferred stock
compensation related
to grant of stock
options (unaudited)... -- -- -- 3,115 (3,115) -- -- --
Amortization of deferred
stock compensation
(unaudited)........... -- -- -- -- 558 -- -- 558
Valuation of preferred
stock warrant in
connection with
content agreement
(unaudited)........... -- 5,175 -- -- -- -- -- 5,175
Net loss and
comprehensive loss
(unaudited)........... -- -- -- -- -- -- (12,293) (12,293)
---------- ------- --------- ------ ------- ------- -------- --------
Balances at June 30, 1999
(unaudited)............. 6,332,420 $41,135 8,751,568 $8,433 $(2,844) $(4,805) $(25,362) $ 16,557
========== ======= ========= ====== ======= ======= ======== ========
See accompanying notes.
F-5
96
EGREETINGS NETWORK, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss.................................................. $(1,784) $(3,093) $(7,821) $(2,991) $(12,293)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 70 158 308 81 1,075
Amortization of deferred content costs.................. -- -- 138 126 444
Amortization of deferred stock compensation............. -- -- 202 43 558
Other................................................... -- 59 19 -- 118
Changes in operating assets and liabilities:
Accounts receivable................................... -- (10) (201) (42) 94
Prepaid expenses and other current assets............. (7) (16) (20) 16 (227)
Other assets.......................................... (7) (13) (18) -- (2,225)
Accounts payable and accrued liabilities.............. 373 43 1,558 471 360
------- ------- ------- ------- --------
Net cash used in operating activities..................... (1,355) (2,872) (5,835) (2,296) (12,096)
------- ------- ------- ------- --------
INVESTING ACTIVITIES
Purchases of furniture and equipment, net................. (309) (320) (786) (312) (4,870)
------- ------- ------- ------- --------
Net cash used in investing activities..................... (309) (320) (786) (312) (4,870)
------- ------- ------- ------- --------
FINANCING ACTIVITIES
Borrowings under equipment term loan...................... -- 478 763 -- 279
Payments on equipment term loan........................... -- -- (282) (216) --
Borrowings on notes payable to stockholders............... -- 22 2,950 -- 2,100
Payments on notes payable to stockholders................. -- -- (22) (22) --
Issuance of common stock.................................. 11 -- -- -- 9
Other borrowings.......................................... -- 44 (44) (44) --
Issuance of preferred stock, net.......................... 2,271 5,453 -- (27) 20,911
------- ------- ------- ------- --------
Net cash provided by financing activities................. 2,282 5,997 3,365 (309) 23,299
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash equivalents...... 618 2,805 (3,256) (2,917) 6,333
Cash and cash equivalents at beginning of period.......... 101 719 3,524 3,524 268
------- ------- ------- ------- --------
Cash and cash equivalents at end of period................ $ 719 $ 3,524 $ 268 $ 607 $ 6,601
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest.................................... $ -- $ 10 $ 13 $ 18 $ 62
======= ======= ======= ======= ========
Conversion of notes payable to stockholders to preferred
stock................................................... $ 325 $ 920 $ 2,436 $ 1,000 $ 3,614
======= ======= ======= ======= ========
Issuance of warrants in connection with debt financing.... $ 4 $ 27 $ 65 $ -- $ 71
======= ======= ======= ======= ========
Issuance of common stock for notes receivable............. $ -- $ -- $ -- $ -- $ 4,805
======= ======= ======= ======= ========
Valuation of preferred stock warrant in connection with
content agreement....................................... $ -- $ 1,259 $ 445 $(1,153) $ 5,175
======= ======= ======= ======= ========
See accompanying notes.
F-6
97
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Egreetings Network, Inc. (the "Company"), formerly The Virtual Mall (dba
Greet Street), was incorporated in California in 1994. The Company offers
consumers a solution for finding and sending appropriate greetings and gifts.
The Company's Web site allows consumers to send personalized content-rich
digital greetings and a wide variety of gifts. The Company operates in one
business segment and generates revenue from corporate advertising and
sponsorships, ecommerce 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.
INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for such periods. Operating results for the
six months ended June 30, 1999 are not necessarily indicative of results that
may be expected for any future periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid short-term investments
with insignificant interest rate risk and original maturities from date of
purchase of three months or less.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost 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
life of the lease.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of risk include cash and cash equivalents and accounts
receivable.
For the year ended December 31, 1998, one corporate advertising sponsor
accounted for 11% of the Company's revenues. Three corporate sponsors accounted
for 17%, 14% and
F-7
98
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
12% of accounts receivable at December 31, 1998. 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.
A third party accounted for approximately 80% and 90% of the Company's
revenues for the years ended December 31, 1996 and 1997, respectively. This
relationship accounted for 100% of accounts receivable at December 31, 1997.
DEPENDENCE ON THIRD PARTIES
A preferred stockholder provides a significant portion of the Company's
digital greetings content pursuant to an agreement which the Company pays
royalties. Under this agreement, the Company paid royalties of $1,000, $112,000
and $236,000 in 1997, 1998 and for the six months ended June 30, 1999,
respectively (none in 1996). In addition, the Company relies on two other
entities, one to provide a majority of support necessary to maintain the server
and transmit data; the other party serves as a channel distribution partner. The
inability of any of these parties to fulfill their obligations with the Company
could negatively impact the Company's future results.
CHANNEL DISTRIBUTION COSTS
Amounts paid to channel partners are capitalized and amortized to marketing
expense straight-line over the term of the distribution agreements.
REVENUE RECOGNITION
Revenues consist primarily of advertising and sponsorship revenues. The
duration of banner advertising and sponsorship commitments typically range from
one month to one year. The Company's advertisement obligations typically include
guarantees of a minimum number of impressions, or times that an advertisement
appears in pages viewed by consumers using the Company's Web site. The Company
recognizes revenues on sale of banner advertisements as the impression is
delivered or displayed. To the extent minimum guaranteed impressions are not
met, revenue recognition is deferred until the remaining guaranteed impressions
are delivered. 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. In each case, revenues are recognized only if the Company
has no remaining significant obligations and the collection of the receivable is
probable.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of
F-8
99
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS (CONTINUED)
Computer Software to be Sold, Leased, or Otherwise Marketed," under which
certain software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated lives
of the related products. Technological feasibility is established upon
completion of a working model. To date, costs incurred subsequent to the
establishment of technological feasibility have not been significant, and all
software development costs have been charged to product development expense in
the accompanying statements of operations.
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 $80,000, $134,000 and $478,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
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.
COMPREHENSIVE INCOME
In June 1998, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which established new standards
for reporting and displaying comprehensive income and its components in a full
set of general purpose financial statements. There is no difference in the
Company's historical net losses as reported and the comprehensive net losses
under the provisions of SFAS 130 for all periods presented. Accordingly, the
adoption of SFAS 130 had no effect on the Company's reported results of
operations.
F-9
100
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 been excluded from
the computation of diluted net loss per share as their inclusion would be
antidilutive.
Pro forma net loss per share 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 will automatically
convert 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):
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- -----------
(UNAUDITED)
Historical:
Net loss................................ $ (1,784) $ (3,093) $ (7,821) $ (2,991) $ (12,293)
=========== ========== =========== ========== ===========
Weighted average shares of common stock
outstanding........................... 5,070,000 5,199,000 5,199,000 5,199,000 5,505,527
Less: weighted average shares of common
stock that may be repurchased......... (2,728,919) (548,887) (2,314) (4,628) (244,295)
----------- ---------- ----------- ---------- -----------
Weighted average shares of common stock
outstanding used in computing basic
and diluted net loss per share........ 2,341,081 4,650,113 5,196,686 5,194,372 5,261,232
=========== ========== =========== ========== ===========
Basic and diluted net loss per share.... $ (0.76) $ (0.67) $ (1.51) $ (0.58) $ (2.34)
=========== ========== =========== ========== ===========
Pro forma (unaudited):
Net loss............................ $ (7,821) $ (12,293)
=========== ===========
Weighted average shares used in
computing basic and diluted net loss
per share (from above)................ 5,196,686 5,261,232
Adjustment to reflect the effect of the
assumed conversion of preferred stock
to common stock from the date of
issuance.............................. 7,289,632 12,879,371
----------- -----------
Weighted average shares used in
computing pro forma basic and diluted
net loss per share.................... 12,486,318 18,140,603
=========== ===========
Pro forma basic and diluted net loss per
share................................. $ (0.63) $ (0.68)
=========== ===========
F-10
101
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 334,000, 570,000, 636,000, 617,000, and 869,000 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,
1996, 1997 and 1998, and for the six months ended June 30, 1998 and 1999,
respectively.
EFFECT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 131 ("SFAS 131"),
"Disclosure about Segments of an Enterprise and Related Information,"
establishes standards for the way public business enterprises report information
in annual statements and interim financial reports regarding operating segments,
products and services, geographic areas, and major customers. The Company
adopted SFAS 131 in the year ended December 31, 1998, and operates in one
business segment which is, providing digital greetings.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following (in thousands):
DECEMBER 31,
--------------
1997 1998
----- ------
Furniture and fixtures...................................... $ 49 $ 98
Computer equipment and purchased software................... 502 1,220
Leasehold improvements...................................... 14 34
----- ------
565 1,352
Less accumulated depreciation and amortization.............. (198) (507)
----- ------
$ 367 $ 845
===== ======
3. COMMITMENTS
The Company leases its office facilities and certain office equipment under
noncancelable lease agreements which require the Company to pay operating costs,
including property taxes, normal maintenance and insurance. Rent expense
amounted to approximately $35,000, $98,000, and $216,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-11
102
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. COMMITMENTS (CONTINUED)
Future minimum payments under the Company's operating leases as of December
31, 1998 are as follows (in thousands):
1999.................................................... $421
2000.................................................... 60
2001.................................................... 3
----
Total minimum lease payments.......................... $484
====
In April 1999, the Company entered into a long-term noncancelable lease on
an office building which expires August 2009. Future minimum payments under the
terms of the agreement are $722,000, $2,166,000, $2,166,000, $2,166,000, and
$2,166,000 for the years ended December 31, 1999, 2000, 2001, 2002, and 2003,
respectively. Also under the terms of the agreement, the Company is required to
provide a $2,000,000 letter of credit supporting the minimum lease payments. The
letter of credit is fully collateralized with a compensating cash balance at the
issuing bank.
4. DEBT
The Company has two equipment term loans. The loans bear interest at the
prime rate plus 1% and the prime rate plus 2%, respectively and mature in June
2000 and March 2002, respectively. Principal and interest are payable monthly.
At December 31, 1998, the outstanding loan balance was $210,000 and $750,000,
respectively. In February, 1999, the Company received an additional $500,000 to
its equipment term loans. These loans are secured by a general lien against the
Company's assets and require the Company to comply with certain financial
covenants. Future payments are as follows (in thousands):
1999................................................... $ 441
2000................................................... 358
2001................................................... 265
2002................................................... 21
------
Total payments....................................... 1,085
Less amount representing interest.................... (125)
------
Total principal payments............................. 960
Less current portion................................. (374)
------
$ 586
======
NOTE PAYABLE TO STOCKHOLDER
In October 1998, the Company entered into a subordinated promissory note
with a preferred stockholder under which it borrowed approximately $514,000. The
note bears interest at 5.6%, compounded semi-annually. In March 1999, principal
and accrued interest were converted into 82,381 shares of Series D preferred
stock at $6.39 per share.
F-12
103
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. 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,
-----------------
1997 1998
------- -------
Deferred tax assets:
Net operating loss carryforwards................... $ 1,898 $ 4,710
Other.............................................. 17 80
------- -------
Total deferred tax assets............................ 1,915 4,790
Valuation allowance.................................. (1,915) (4,790)
------- -------
Net deferred tax assets.............................. $ -- $ --
======= =======
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 $1,215,000 and $2,875,000 during the years ended December
31, 1997 and 1998, respectively.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $11,776,000, which expire in
the years 2010 through 2018. The Company also had net operating loss
carryforwards for state income tax purposes of approximately $11,775,000
expiring in 2003. 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.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In May 1999, the Company completed a three-for-one stock split of issued
and outstanding shares of common stock. All common share prices, conversion
rates and other amounts associated with rights, preferences and privileges in
the accompanying financial statements have been retroactively adjusted to
reflect the effect of this stock split.
F-13
104
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock is as follows by series:
SHARES ISSUED AND OUTSTANDING
-------------------------------------
DECEMBER 31, AGGREGATE LIQUIDATION
DESIGNATED ---------------------- JUNE 30, PREFERENCE AT
SERIES SHARES 1997 1998 1999 DECEMBER 31, 1998
------ ---------- --------- --------- ----------- ---------------------
(UNAUDITED)
A.................... 520,000 520,000 520,000 520,000 $ 416,000
B.................... 457,500 450,000 450,000 450,000 900,000
C.................... 808,257 702,763 702,763 702,763 2,811,000
D.................... 933,200 625,978 850,783 933,164 5,437,000
E.................... 1,500,000 -- -- -- --
F.................... 3,800,000 -- -- 3,726,493 --
---------- --------- --------- ---------- ----------
8,018,957 2,298,741 2,523,546 6,332,420 $9,564,000
========== ========= ========= ========== ==========
Each share of preferred stock is convertible at any time, at the option of
the holder, into three shares of the Company's common stock, subject to
anti-dilution provisions. Each share of preferred stock will automatically
convert into three shares of common stock upon the earlier of the completion of
an initial public offering of the Company's common stock with proceeds to the
Company of at least $7,500,000 for Series A through E and $15,000,000 for Series
F at a per share price of $2.50, $5.00, $6.00 and $15.00 for Series A, B, C and
F, respectively, or the date on which the number of shares of Series A, B, C, D,
E or F preferred stock outstanding is less than 50% of the greatest number of
Series A, B, C, D, E or F, respectively, that has been outstanding at any time
on a series-by-series basis. The holders of Series A through D and F preferred
stock are entitled to the number of votes equal to the number of shares of
common stock into which their preferred stock is convertible. The holders of
Series E do not have voting rights.
The holders of preferred stock, in preference to the holders of any other
capital stock of the Company, are entitled to receive non-cumulative dividends,
when and if the Board of Directors declares and pays a dividend on shares of
common stock, in such amount pro rata, on an as-converted basis. No dividends
had been declared as of December 31, 1998.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A, Series B, Series C, Series D, Series E and Series F
preferred stock have a liquidation preference of $0.80, $2.00, $4.00, $6.39,
$9.60 and $7.00 per share, respectively, over the holders of common stock plus
any declared but unpaid dividends. To the extent that additional funds are
available after distribution to the holders of Series A through D preferred
stock and common stock, the holders of Series A, Series B and Series C preferred
stock will receive additional distributions not to exceed $1.00, $2.52 and $5.00
per share, respectively, along with the holders of common stock.
F-14
105
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
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% per
annum, together with warrants to purchase 67,139 shares of Series F preferred
stock. The principal amount of these notes was converted into 300,000 shares of
Series F preferred stock in March 1999.
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
4.59% to 8.00% per annum. The principal amount of these notes was converted into
142,857 shares of Series F preferred stock in March 1999.
WARRANTS
The Company had the following warrants to purchase shares of stock
outstanding at December 31, 1998:
EXERCISE
NUMBER OF PREFERRED PRICE PER EXPIRATION OF
SHARES STOCK SHARE WARRANTS
- --------- ---------- --------- -------------------
7,503 Series B $2.00 March 2003
41,910 Series C 4.00 April - August 2007
946,925 Series E 9.60 June 2000
31,746 Series F 6.30 November 2005
- ---------
1,028,084
=========
In connection with the sale of the Series D preferred stock and a content
provider and distribution agreement ("Content Agreement") which expires in
December 2002, the Company granted the purchaser of these shares the right to
purchase 946,925 shares of Series E preferred stock at a price of $9.60 per
share in December 1997. This right originally expired in September 1998, but in
September 1998, the warrant expiration date was amended to expire upon the
earlier of June 5, 2000 or the completion of an initial public offering of the
Company's common stock with proceeds to the Company of at least $7,500,000;
provided, however, that if the Company's initial public offering has not
occurred by January 5, 2000, the right expires as to one-half of the shares
subject to this warrant if the warrant has not been exercised by that date. The
number of shares subject to this warrant was increased in March 1999 pursuant to
certain anti-dilution provisions that were triggered by the Company's sale of
its Series F preferred stock. As a result, as of September 30, 1999, the warrant
was exercisable for 1,470,000 shares of Series E preferred stock at an exercise
price per share equal to the lesser of (i) $6.18 per share and (ii) the price
per share to the public in an initial public offering.
F-15
106
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
Exercise of this warrant was contingent on the preferred stockholder not
being in material violation of the Content Agreement and therefore was accounted
for as a variable warrant. The warrant was valued by management using a model
based on the Black-Scholes model at each relevant measurement date with the fair
value recorded as deferred content costs expense in the accompanying balance
sheets. On September 30, 1999, in connection with the execution of the first
amendment to the Content Agreement, the warrant became non-forfeitable, fully
exercisable and fully vested and was no longer linked to performance under the
Content Agreement. The warrant value at September 30, 1999 of $8,408,000 will be
amortized over the remaining period of the Content Agreement. Realization of the
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
Content Agreement not accrue to the Company, the carrying value of the asset may
be impaired and the Company would be required to write down the asset value to
its net realizable value at that time. The Company will evaluate the
realizability of this asset at each reporting date in the future in accordance
with FASB 121.
STOCK OPTIONS
The Company's 1996 Stock Option Plan provides for the issuance of 9,675,164
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 the 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.
F-16
107
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity is as follows:
OPTIONS OUTSTANDING
---------------------------------
WEIGHTED-
AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
---------------- --------------
Outstanding at December 31, 1995.................. 622,500 $0.03
Options granted................................. 298,500 0.07
Options canceled................................ (6,000) 0.07
---------- -----
Outstanding at December 31, 1996.................. 915,000 0.04
Options granted................................. 176,250 0.15
Options canceled................................ (120,706) 0.07
---------- -----
Outstanding at December 31, 1997.................. 970,544 0.06
Options granted................................. 767,250 0.55
Options canceled................................ (489,044) 0.09
---------- -----
Outstanding at December 31, 1998.................. 1,248,750 0.34
Options granted (unaudited)..................... 6,176,963 1.32
Options exercised (unaudited)................... (3,552,568) 1.35
Options canceled (unaudited).................... (517,506) 0.73
---------- -----
Outstanding at June 30, 1999 (unaudited).......... 3,355,639 $1.02
========== =====
Exercisable at December 31, 1998.................. 313,207 $0.10
========== =====
Exercisable at June 30, 1999 (unaudited).......... 372,843 $0.39
========== =====
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE
EXERCISE NUMBER EXERCISE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE
PRICE RANGE OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ----------- --------- ---------------- ---------------- --------- ----------------
$0.03-0.22 545,250 $0.07 7.4 282,788 $0.07
0.42-0.62 642,000 0.53 9.5 30,223 0.38
0.83-1.03 61,500 0.85 9.8 196 1.03
--------- -------
1,248,750 313,207
========= =======
In June 1999, an officer of the Company exercised an option to purchase
3,401,344 shares of restricted common stock at an exercise price of $1.40 per
share. All unvested shares are subject to repurchase at June 30, 1999 at $1.40
per share in the event of termination. The repurchase right lapses upon vesting.
These shares were purchased with a $4.8 million promissory note payable to the
Company. This full recourse note bears interest at 5.37% per annum, with
principal and interest due February 2003.
F-17
108
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
DEFERRED STOCK COMPENSATION
The Company recorded deferred stock compensation of $488,000 and $3,115,000
during the year ended December 31, 1998 and the six months ended June 30, 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, 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 $201,000 and $558,000 for the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively.
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 minimum value method with the following
weighted average assumptions: a risk-free interest rate of 5.5% for the years
ended December 31, 1996, 1997 and 1998, no dividend yield or volatility factors
with respect to the expected market price of the Company's common stock, and a
weighted average expected life of the options of 4.5 years.
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 minimal value method of SFAS 123, 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:
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
Pro forma net loss (in thousands).................... $(1,786) $(3,096) $(7,833)
======= ======= =======
Pro forma basic and diluted net loss per share....... $ (0.76) $ (0.67) $ (1.51)
======= ======= =======
F-18
109
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION (CONTINUED)
The weighted-average fair value of options granted, which is the value
assigned to the options under SFAS 123, was $0.01, $0.03, and $0.12 for options
granted during the years ended December 31, 1996, 1997, 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.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company has reserved shares of capital stock for
future issuance as follows:
COMMON PREFERRED
---------- ---------
Convertible preferred stock, including effect of
preferred stock warrants............................... 10,654,890 --
Stock options outstanding................................ 1,248,750 --
Stock options available for grant........................ 8,426,414 --
Warrants to purchase preferred stock..................... -- 1,028,084
---------- ---------
19,330,054 1,028,084
========== =========
7. 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, 1998, there have been
no employer contributions to the plan.
8. SUBSEQUENT EVENTS
In August 1999, the Company entered into an equipment financing agreement
with two leasing companies and a financial institution which provides for
borrowings of up to $10.0 million. Amounts due bear interest at a rate of 10.0%
per annum and are payable monthly over a 36 month period from the date of each
advance. Advances under the facility are available through July 31, 2000.
Borrowings are secured by the equipment purchased under the financing agreement.
In connection with the financing, the Company granted warrants to purchase
60,000 shares of the Company's Series F preferred stock at an exercise price of
$9.00 per share.
F-19
110
EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
PROPOSED PUBLIC OFFERING OF COMMON STOCK
In September 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, each share of outstanding preferred stock
will automatically convert into three shares of common stock. The unaudited pro
forma stockholders' equity at June 30, 1999 gives effect to the conversion of
all outstanding shares of convertible preferred stock at that date into
18,997,260 shares of common stock upon the completion of the offering.
REINCORPORATION
In connection with the Company's reincorporation in the State of Delaware,
the Board of Directors authorized an increase in the number of authorized shares
of common stock to 75,000,000 and an increase in the number of authorized shares
of preferred stock to 15,500,000 shares, subject to stockholder approval.
Effective immediately prior to the completion of the initial public offering of
its common stock, the Board of Directors authorized, subject to stockholder
approval, a decrease in the number of authorized shares of preferred stock to
5,000,000.
1999 EQUITY INCENTIVE PLAN
In September 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Equity Incentive Plan. There are
shares of common stock authorized for issuance under the plan.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Non-Employee Directors' Stock Option Plan and
reserved an aggregate of shares of common stock for grants of stock
options under such plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Employee Stock Purchase Plan . The Company has
reserved a total of shares of common stock for issuance under this plan.
Beginning with the date of the Company's initial public offering of its common
stock, eligible employees may purchase common stock at 85% of the lesser of the
fair market value of the Company's common stock on the first day of the
applicable six-month offering period or the fair market value of the Company's
common stock at the date of purchase.
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EGREETINGS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
SERIES G PREFERRED STOCK
In October 1999, the Company entered into a stock purchase agreement
pursuant to which it issued to investors an aggregate of 5,846,546 shares of
Series G convertible preferred stock for gross proceeds to the Company of
approximately $23,600,000. The Company's sale of this stock resulted in a
further adjustment to the warrant to purchase Series E preferred stock described
in Note 6 such that the warrant entitled the holder to purchase an aggregate of
1,663,333 shares of Series E preferred stock at a per share price of $5.46.
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[INSIDE BACK COVER ARTWORK]
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Egreetings Logo
114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by us in
connection with the sale of the shares of common stock being registered hereby.
All amounts are estimates except for the SEC registration fee, the NASD filing
fee and the Nasdaq National Market filing fee.
Securities and Exchange Commission registration fee......... $20,850
NASD filing fee............................................. 30,500
Nasdaq National Market filing fee........................... 95,000
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Printing and engraving expenses............................. *
Blue sky fees and expenses.................................. 10,000
Transfer agent and registrar fees and expenses.............. 15,000
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
- -------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our amended and restated certificate of incorporation, which will become
effective upon the closing of this offering, contains provisions permitted under
Delaware law relating to the liability of directors. These provisions eliminate
a director's personal liability for monetary damages resulting from a breach of
fiduciary duty, except in circumstances involving wrongful acts, such as:
- any breach of the director's duty of loyalty
- acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law
- any transaction from which the director derives an improper personal
benefit
- payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
Our bylaws require us to indemnify our directors and executive officers to
the fullest extent not prohibited by the Delaware law. We may limit the extent
of such indemnification by individual contracts with our directors and executive
officers. Further, we may decline to indemnify any director or executive officer
in connection with any proceeding initiated by such person or any proceeding by
such person against Egreetings or
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its directors, officers, employees or other agents, unless such indemnification
is expressly required to be made by law or the proceeding was authorized by our
board of directors.
We intend to enter into indemnity agreements with each of our current
directors and certain of our executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of Egreetings
for which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
Egreetings plans to obtain directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth information regarding all securities sold by
the Registrant since October 1, 1996;
1. From December 1996 to October 1997, we issued and sold an aggregate of
702,763 shares of Series C preferred stock, each of which will convert
into three shares of common stock upon completion of this offering, at
$4.00 per share to eight investors, 330,840 of which were sold to three
of our executive officers and/or directors (and related entities).
2. From October to November 1996, in connection with a loan financing, we
issued warrants to purchase an aggregate of 41,910 shares of Series C
preferred stock, each of which will convert into three shares of common
stock upon completion of this offering, at an exercise price of $4.00
per share to five investors, 11,094 of which were sold to two of our
executive officers and/or directors (and related entities).
3. From December 1997 to July 1998, we issued and sold an aggregate of
850,783 shares of Series D preferred stock, each of which will convert
into three shares of common stock upon completion of this offering, at
$6.39 per share in cash to one investor, 850,783 of which were sold to
one of our executive officers and/or directors (and related entities).
4. In December 1997, we issued a warrant to purchase 946,925 shares of
Series E preferred stock, each of which will convert into three shares
of common stock upon the completion of this offering, at an exercise
price of $9.60 per share to one investor, which is an affiliate of one
of our directors. In March 1999, the number of shares of Series E
preferred stock issuable pursuant to this warrant was increased to
1,470,000 shares as an anti-dilution adjustment in connection with the
sale of our Series F preferred stock. In October 1999, the number of
shares of Series E preferred stock issuable pursuant to this warrant
was increased to 1,663,333 shares as an anti-dilution adjustment in
connection with the sale of our Series G preferred stock. There was no
additional consideration paid in connection with these adjustments, and
there was no adjustment to the aggregate exercise price of the warrant.
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5. From March to April 1999, we issued and sold an aggregate of 3,726,493
shares of Series F preferred stock at $7.00 per share to ten investors,
2,609,000 of which were sold to five of our executive officers and/or
directors (and related entities).
6. From November 1998 to January 1999, we issued warrants to purchase an
aggregate of 67,139 shares of Series F preferred stock, each of which
will convert into three shares of common stock upon completion of this
offering, at an exercise price of $6.30 per share to four investors,
all of which were sold to four of our executive officers and/or
directors (and related entities).
7. In August 1999, we issued warrants to purchase an aggregate of 60,000
shares of Series F preferred stock, each of which will convert into
three shares of common stock upon completion of this offering, at an
exercise price of $9.00 per share to three investors, none of which
were sold to our executive officers and/or directors (and related
entities).
8. In October 1999, we issued and sold an aggregate of 5,846,546 shares of
Series G preferred stock at $4.04 per share to 17 investors, 2,330,562
of which were sold to five of our executive officers and/or directors
(and related entities).
9. Between October 1, 1996 and October 1, 1999, we granted options to
purchase an aggregate of shares of common stock at
exercise prices ranging from $0.03 to $1.85 per share with a weighted
average exercise price of $ per share.
All sales of common stock made pursuant to the exercise of stock options
granted under the 1996 Stock Option Plan to our officers, directors, employees
and consultants were made in reliance on Rule 701 under the Securities Act or on
Section 4(2) of the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to the Registrant that the shares were being acquired
for investment.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
1.01* Form of Underwriting Agreement.
3.01 Amended and Restated Articles of Incorporation
3.02 Bylaws, as amended.
3.03 Form of Amended and Restated Certificate of Incorporation to
be in effect upon Egreetings' reincorporation in Delaware.
3.04 Form of Bylaws to be in effect upon Egreetings'
reincorporation in Delaware.
4.01 Reference is made to Exhibits 3.01 to 3.04
4.02* Form of Specimen Stock Certificate.
4.03 Fourth Amended and Restated Investors' Rights Agreement
dated October 1, 1999.
5.01* Opinion of Cooley Godward LLP.
10.01 Form of Indemnity Agreement.
10.02 1999 Equity Incentive Plan.
10.03* Form of Grant Notice and Stock Option Agreement under the
1999 Equity Incentive Plan.
10.04 1999 Non-Employee Directors' Stock Option Plan.
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06 1999 Employee Stock Purchase Plan.
10.07* Form of 1999 Employee Stock Purchase Plan Offering.
10.08 Office Lease between South Beach Development Company and
Egreetings dated October 1999.
10.09 Lease between Jonathan Parker, Thomas M. Monahan, Harold
Parker Properties, L.P., Harold A. Parker, Trustee, Gertrud
V. Parker, Trustee of the Harold A. Parker Company Trust and
Egreetings dated August 1999.
10.10* Content Provider and Distribution Agreement between
Egreetings and Gibson Greetings, Inc., as amended on
September 30, 1999.
10.11* Agreement between Hotmail Corporation and Egreetings, as
amended through August 1998.
10.12 Employment Agreement between Gordon M. Tucker and Egreetings
dated February 12, 1999 and Promissory Note and Pledge
Agreement between Gordon M. Tucker and Egreetings dated June
18, 1999.
10.13 Early Exercise Stock Purchase Agreement, Promissory Note and
Pledge Agreement between Andrew J. Moley and Egreetings
dated July 30, 1999.
10.14 1996 Stock Option Plan, as amended.
23.01* Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, independent accountants.
24.01 Power of Attorney. Reference is made to page II-6.
27.01 Financial Data Schedules.
- -------------------------
* To be filed by amendment
(b) No financial statement schedules are provided because the information
called for is not required or is shown either in the consolidated financial
statements or the notes thereto.
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ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and County of San Francisco,
State of California, on the 6th day of October, 1999.
Egreetings Network, Inc.
By: /s/ GORDON M. TUCKER
--------------------------------------
Gordon M. Tucker
Chief Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints
Andrew Moley and Andrew Missan, and each of them, his or her true and lawful
attorneys-in-fact and agents with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by the Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his,
her or their substitute or substitutes, may lawfully do or cause to be done or
by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ GORDON M. TUCKER Chief Executive Officer, October 6, 1999
- ------------------------------ Principal Executive Officer
Gordon M. Tucker and Director
/s/ ANDREW J. MOLEY Senior Vice President and October 6, 1999
- ------------------------------ Chief Financial Officer,
Andrew J. Moley Principal Financial Officer
and Principal Accounting
Officer
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SIGNATURES TITLE DATE
---------- ----- ----
/s/ STEWART ALSOP Director October 6, 1999
- ------------------------------
Stewart Alsop
/s/ CHARLES A. HOLLOWAY Director October 6, 1999
- ------------------------------
Charles A. Holloway
/s/ BRENDON S. KIM Director October 6, 1999
- ------------------------------
Brendon S. Kim
/s/ PETER NIEH Director October 6, 1999
- ------------------------------
Peter Nieh
/s/ FRANK J. O'CONNELL Director October 6, 1999
- ------------------------------
Frank J. O'Connell
/s/ LEE ROSENBERG Director October 6, 1999
- ------------------------------
Lee Rosenberg
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
1.01* Form of Underwriting Agreement.
3.01 Amended and Restated Articles of Incorporation
3.02 Bylaws, as amended.
3.03 Form of Amended and Restated Certificate of Incorporation to
be in effect upon Egreetings' reincorporation in Delaware.
3.04 Form of Bylaws to be in effect upon Egreetings'
reincorporation in Delaware.
4.01 Reference is made to Exhibits 3.01 to 3.04
4.02* Form of Specimen Stock Certificate.
4.03 Fourth Amended and Restated Investors' Rights Agreement
dated October 1, 1999.
5.01* Opinion of Cooley Godward LLP.
10.01 Form of Indemnity Agreement.
10.02 1999 Equity Incentive Plan.
10.03* Form of Grant Notice and Stock Option Agreement under the
1999 Equity Incentive Plan.
10.04 1999 Non-Employee Directors' Stock Option Plan.
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06 1999 Employee Stock Purchase Plan.
10.07* Form of 1999 Employee Stock Purchase Plan Offering.
10.08 Office Lease between South Beach Development Company and
Egreetings dated October 1999.
10.09 Lease between Jonathan Parker, Thomas M. Monahan, Harold
Parker Properties, L.P., Harold A. Parker, Trustee, Gertrud
V. Parker, Trustee of the Harold A. Parker Company Trust and
Egreetings dated August 1999.
10.10* Content Provider and Distribution Agreement between
Egreetings and Gibson Greetings, Inc., as amended on
September 30, 1999.
10.11* Agreement between Hotmail Corporation and Egreetings, as
amended through August 1998.
10.12 Employment Agreement between Gordon M. Tucker and Egreetings
dated February 12, 1999 and Promissory Note and Pledge
Agreement between Gordon M. Tucker and Egreetings dated June
18, 1999.
10.13 Early Exercise Stock Purchase Agreement, Promissory Note and
Pledge Agreement between Andrew J. Moley and Egreetings
dated July 30, 1999.
10.14 1996 Stock Option Plan, as amended.
23.01* Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, independent accountants.
24.01 Power of Attorney. Reference is made to page II-6.
27.01 Financial Data Schedules.
- -------------------------
* To be filed by amendment