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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 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
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AMERICANGREETINGS.COM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 5947 34-1897703
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
ONE AMERICAN ROAD
CLEVELAND, OHIO 44144
(216) 252-7300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JOHN M. KLIPFELL
CHIEF EXECUTIVE OFFICER
ONE AMERICAN ROAD
CLEVELAND, OHIO 44144
(216) 252-7300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
STEPHEN GOLD MARK A. BERTELSEN KEVIN P. KENNEDY
GORDON & GLICKSON LLC WILSON SONSINI SHEARMAN & STERLING
444 NORTH MICHIGAN AVENUE, SUITE GOODRICH & ROSATI 1550 EL CAMINO REAL
3600 650 PAGE MILL ROAD MENLO PARK, CALIFORNIA 94025
CHICAGO, ILLINOIS 60611 PALO ALTO, CALIFORNIA 94304 (650) 330-2200
(312) 321-1700 (650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 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 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,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
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Class A Common stock, par value $.001 per share............. $60,000,000 $16,680
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(1) Includes shares of Class A Common Stock which the Underwriters may
purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act.
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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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1999
PROSPECTUS
- ---------- SHARES
[LOGO]
CLASS A COMMON STOCK
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This is AmericanGreetings.com's initial public offering of Class A
common stock. The underwriters will offer shares of Class A common stock.
We expect the public offering price to be between $ and
$ per share. Currently, no public market exists for the shares. After
pricing of this offering, we expect that the Class A common stock will be quoted
on the Nasdaq National Market under the symbol "AGCM."
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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PER SHARE TOTAL
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Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to AmericanGreetings.com........ $ $
The underwriters may also purchase up to an additional shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
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.
The shares of Class A common stock will be ready for delivery in New
York, New York on or about , 1999.
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MERRILL LYNCH & CO.
CIBC WORLD MARKETS
VOLPE BROWN WHELAN & COMPANY
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The date of this prospectus is , 1999.
THE INFORMATION IN THIS PRELIMINARY 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 PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
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INSIDE FRONT COVER ARTWORK
[picture of people]
[rose logo]
[logo: americangreetings.com]
[text: Online Greetings and Social Expression content for All the People of the
Virtual Community]
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INSIDE GATEFOLD ARTWORK
[picture of AmericanGreetings.com's Web site]
[text: Online Greetings: Thousands of electronic animated and interactive
greetings]
[text: Create and Print: Thousands of paper greetings that you personalize and
print at home or office]
[text: Fun: Dozens of daily and weekly fun comix and cartoons that you can enjoy
yourself or print or e-mail to friends to share]
[text: Paper Cards: Thousands of paper cards that you personalize and order, and
we print and mail for you]
[text: Gifts and Services: Address books, reminder services, special discounts
and customer service]
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You should rely on the information contained in this document. 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.
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 35
Management.................................................. 49
Executive Compensation...................................... 52
Related Party Transactions.................................. 55
Principal Stockholders...................................... 61
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 67
Underwriting................................................ 69
Legal Matters............................................... 71
Experts..................................................... 72
Where You Can Find More Information......................... 72
Index to Financial Statements............................... F-1
The following are trademarks of American Greetings Corporation and its
subsidiaries: American Greetings with rose design(R), AmericanGreetings.com,
AG.com and CreataCard(R). All other trademarks and service marks are the
property of their respective owners.
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PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. You should read the entire prospectus, including the more
detailed information regarding our business and our financial statements and the
notes to such financial statements.
OUR COMPANY
We are a leading Web-based provider of greetings and other social
expression content aimed at expanding individuals' ability to communicate and
express themselves online. Our destination Web site offers users access to over
9,000 greetings and other social expression products, one of the largest
selections on the Web today. Our online products consist of static postcards,
animated and interactive online greetings, customized printable greeting cards,
cartoons and games. We are able to provide users with this comprehensive
selection through our in-house team of experienced creative specialists, third
party licensees and our relationship with our parent, American Greetings, the
world's largest publicly-traded greeting card company. Our relationship with
American Greetings provides us with access to its library of approximately one
million images and lines of verse as well as the American Greetings brand name
online. Users visiting our Web site can view, personalize and send from a
competitive selection of free greetings and social expression products while
paid subscription users have unlimited access to our complete online selection.
In addition to subscriptions, we currently generate revenues from the sale of
advertising on our Web site, and by licensing our trademark and a portion of our
content to Mindscape, a division of Mattel, for inclusion in personal creativity
software.
We began providing consumers with online greetings in 1995 when we
introduced our own Web-based service. Since then, our traffic has grown
significantly and on a combined basis, our Web properties at
www.americangreetings.com or www.ag.com and on AOL keyword: American Greetings
ranked as the seventh most visited shopping site on the Internet and in the top
50 of the Web's most heavily trafficked sites in June 1999, according to Media
Metrix, an Internet and digital media measurement company. For the month of June
1999, we had over four million unique visitors and over 32 million total page
views. At June 30, 1999, we had over 400,000 subscribers. In addition, two of
our American Greetings branded software titles were ranked in the top five of
the personal productivity category for the month of June 1999, according to PC
Data.
To help draw additional traffic to our Web site, we have entered into
preferred distribution agreements with several leading Internet service and
content providers, including AOL, Yahoo! and Lycos Network. In particular, under
our agreement with AOL, which extends through December 31, 2004, we are the
exclusive provider, with limited exceptions, of online greeting products and
services on the following AOL brands: AOL, AOL.com, ICQ, Netscape Netcenter,
Compuserve and Digital City. Our products and services will also be offered on
AOL international services in Canada, the United Kingdom, Australia, Japan,
Germany and France. Additionally, we have created a network of remote store
fronts across the Internet by creating direct links with over 13,000 affiliate
Web sites.
OUR MARKET OPPORTUNITY
Over the past 100 years, greeting cards have become almost universally
accepted as a means of social expression and communication. In 1998 alone,
approximately 24 greeting cards were received per capita in the United States,
according to the Greeting Card Association of America. With the growth of the
Internet as a medium for communications, we believe that online greetings and
other social expression content will also become a social norm for the growing
number of online users worldwide. We believe that the following are meaningful
advantages we have relative to other providers of online greetings:
- the well known American Greetings brand name and its market tested
content;
- the largest selection of online greetings and other social expression
products;
- a wide variety of types of products and delivery methods such as e-mail,
mail and print at home;
- an array of helpful and useful services, including an online address book
and reminder service; and
- an ability to provide advertisers with highly targeted online audiences.
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OUR STRATEGY
Our objective is to become the premier site worldwide for users to fulfill
their online greetings and social expression needs. Our strategy includes the
following key elements:
- continually broaden and enhance our content, product and service
offerings by targeting specific demographic and common interest groups
and continually adding current, topical content;
- strengthen our distribution partnerships with major Internet content and
service providers through close integration, co-branding and joint
marketing programs;
- aggressively build our brand and increase traffic through online and
traditional advertising;
- significantly expand the number of advertisers and e-commerce partners on
our Web sites through our own sales team as well as third party sales
organizations such as AOL and Phase2Media; and
- expand our current offerings of culturally-tailored content into other
foreign languages and cultures and create local versions of our Web site
for foreign markets.
AmericanGreetings.com, Inc. is a subsidiary of American Greetings
Corporation and was incorporated in June 1999 as a successor to American
Greetings Corporation's online greetings and social expression operations. From
July 1995 to June 1999, our operations were carried out through American
Greetings and its wholly-owned subsidiaries. The online greetings and social
expression operations of American Greetings Corporation will be transferred to
AmericanGreetings.com, Inc. pursuant to a formation agreement that we will enter
into with American Greetings prior to the closing of this offering. "We" and
"AmericanGreetings.com" in this prospectus refers to the online greetings and
social expression operations of American Greetings prior to our separation from
American Greetings. Our address is One American Road, Cleveland, Ohio 44144, and
our telephone number is (216) 252-7300. Our Web site is located at http://www.
AmericanGreetings.com. We do not intend and you should not assume that
information contained in our Web site is part of this prospectus.
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THIS OFFERING
Class A common stock
offered by us.............. shares
Common stock outstanding
after the offering:
Class A common stock..... shares(1)
Class B common stock..... shares
Use of proceeds............ For general corporate purposes, principally working
capital, capital expenditures, royalties to our
parent and payments under our agreements with our
distribution partners. A portion of the net
proceeds may also be used for acquisitions of other
companies, assets, products and technologies that
are complementary to our business, although we have
no commitments with respect to such acquisitions,
to acquire or make investments in additional
businesses, products and technologies.
Voting Rights.............. The shares of Class A common stock and Class B
common stock are identical in all respects, except:
- Shares of Class A common stock will be entitled
to one vote per share while shares of Class B
common stock will be entitled to ten votes per
share, and
- Class B common stock may be converted into
Class A common stock at any time on a
one-for-one basis.
Following the offering, our parent will own all of
the shares of our Class B common stock and will
have more than 90% of the combined voting power of
our common stock. See "Description of Capital
Stock" for more information about our Class A and
Class B common stock.
Proposed Nasdaq National
Market symbol.............. AGCM
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(1) Excludes options to purchase shares of Class A common stock reserved
under our 1999 Stock Option Plan subsequent to June 30, 1999. As of
, 1999 options for shares of Class A common stock at a
weighted average price of $ per share were outstanding under our 1999
Stock Option Plan. See "Executive Compensation -- Employee Benefit
Plans -- 1999 Stock Option Plan."
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SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus. The following tables set forth our historical summary data for
the three years ended February 28, 1999 and the unaudited financial information
for the four month and six month periods ended June 30, 1998 and 1999. Effective
March 1, 1999, we changed our fiscal year-end to a calendar year-end. The data
for the six months ended June 30 have been included to reflect the results had
our operations been reported on a calendar year basis for both of the periods
presented. See Note A of our notes to financial statements. These data, other
than the data as of and for the four and six months ended June 30, 1998 and June
30, 1999, have been derived from our financial statements, which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this prospectus.
FOUR MONTHS SIX MONTHS
FISCAL YEARS ENDED ENDED ENDED
FEBRUARY 28, JUNE 30, JUNE 30,
--------------------------- --------------- ---------------
1997 1998 1999 1998 1999 1998 1999
------- ------- ------- ------ ------ ------ ------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues.......................................... $ 1,036 $ 3,882 $12,347 $2,972 $6,247 $4,050 $9,241
Gross profit.......................................... 2 1,963 10,724 2,400 4,735 2,888 7,335
Operating expenses.................................... 3,629 3,777 8,041 1,936 4,865 2,550 6,952
Income (loss) before benefit (provision) for income
taxes............................................... (3,627) (1,814) 2,683 464 (130) 338 383
Net income (loss)..................................... (2,383) (1,179) 1,717 297 (84) 215 245
The following table sets forth a summary of our balance sheet at June 30,
1999:
- on an actual basis;
- on a pro forma basis to give effect to the contribution to capital by
American Greetings of its net advances and $50.0 million in cash; and
- on a pro forma as adjusted basis to reflect our receipt of the estimated
net proceeds from the sale of shares of Class A common stock in this
offering at an assumed initial public offering price of $ per
share.
JUNE 30, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $50,000 $
Working capital............................................. 3,319 53,319
Total assets................................................ 11,300 61,300
Stockholders' equity (deficit).............................. (2,252) 55,206
In July and August of 1999, we entered into agreements with AOL and Yahoo!
that will require us to make aggregate payments of $108.0 million to these
parties through December 31, 2004. These payments will be recognized as sales
and marketing expenses over the terms of these agreements.
The pro forma balance sheet data above is as of June 30, 1999 and therefore
excludes the net amount of $17.6 million paid to AOL and Yahoo! during August
1999 in connection with our distribution agreements with them. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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RISK FACTORS
Investing in the Class A common stock will provide you with an equity
ownership interest in us. As a stockholder of our company, you may be subject to
risks inherent in our business. The performance of your shares will reflect the
performance of our business relative to, among other things, the competition,
general economic and market conditions and industry conditions. The value of
your investment may increase or decline and could result in a loss. You should
carefully consider the risks described below before making an investment
decision.
RISKS RELATED TO OUR BUSINESS
WE HAVE NO HISTORY AS AN INDEPENDENT COMPANY AND WE MAY NOT BE SUCCESSFUL IN
OPERATING AS A SEPARATE COMPANY.
We do not have an operating history as an independent company. Our business
could suffer if American Greetings Corporation, our parent, fails to adequately
provide us services or if we fail to develop systems of our own. We currently
rely on our parent in large part to provide accounting, facilities management,
procurement, human resources, administrative, legal and other services and will
likely continue to receive such services pursuant to intercompany agreements
between us and our parent. We intend to develop the operational, administrative
and other systems and infrastructure necessary to support our current and future
business on an independent basis, but we may not be successful.
BECAUSE WE HAVE NO HISTORY AS AN INDEPENDENT COMPANY, OUR FINANCIAL STATEMENTS
ARE BASED ON ASSUMPTIONS AND ALLOCATIONS THAT MIGHT NOT BE INDICATIVE OF THE
LEVELS OF EXPENSES THAT WOULD HAVE RESULTED HAD WE BEEN OPERATING AS A SEPARATE
COMPANY.
The historical financial statements contained in this prospectus include
allocations for administrative and other expenses incurred by our parent for
services rendered to AmericanGreetings.com. While we believe such allocations to
be reasonable, they are not necessarily indicative of the levels of expenses
that would have resulted had we actually been operating as a separate company.
As a result, our estimate of our allocated share of expenses included in the
financial statements might not provide investors with accurate information
regarding our historical performance or our future financial prospects had we
been operating as a separate company. We have also relied on our parent to
provide financing for our operations. Therefore, you should not rely on our cash
flows to date as indicative of the cash flows that would have resulted had
AmericanGreetings.com been operating as an independent company during the
periods presented.
IF WE ARE UNSUCCESSFUL IN IMPLEMENTING RECENT CHANGES MADE TO OUR PRODUCT
OFFERING, OR IN DEVELOPING AND MARKETING NEW PRODUCTS WE INTEND TO OFFER, OUR
BUSINESS, PROSPECTS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED.
We have recently begun offering visitors to our Web site and Web sites
co-branded with our distribution partners an offering of online greetings and
other products and services free of charge. Our goal in making this offering is
to attract additional visitors to our Web site and co-branded sites with our
distribution partners. We intend to sell advertising on our Web site to support
our free offerings. We also intend to continue to explore opportunities to
offer, for a fee, complementary products and services of other companies on our
Web site. The lack of market acceptance of our efforts to implement changes to
our product offering, or our inability to generate satisfactory incremental
revenues from new products to offset their cost could seriously harm our
business, prospects and financial condition.
REVENUES FROM OUR SUBSCRIPTIONS MAY DECLINE AS A RESULT OF THE INTRODUCTION OF
OUR FREE PRODUCT OFFERINGS.
As result of the introduction of our free product offerings, the number of
our subscribers and revenues from such subscriptions could decline. Our
subscribers may simply elect to use our free products rather than renewing their
subscriptions. If our free product offerings do not attract a sufficient number
of additional
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visitors to our Web site and co-branded Web sites with our distribution partners
for us to derive sufficient advertising revenue to offset such decline in
revenues, our business could be harmed.
PRICES FOR PERSONAL CREATIVITY SOFTWARE ARE DECREASING. IF THE SOFTWARE COMPANY
TO WHOM WE LICENSE OUR CONTENT IS UNABLE TO EFFECTIVELY MANAGE SUCH PRICE
DECLINES AND OTHER COMPETITIVE SITUATIONS, THE ROYALTIES WE EARN FROM LICENSING
OUR CONTENT TO THIS COMPANY WILL DECREASE.
We are currently dependent on Mindscape, a subsidiary of Mattel and the
company to whom we license a portion of our content for inclusion in their
personal creativity software, for a significant portion of our revenues. Royalty
revenue from our content and trademark licensees accounted for 70% of our
revenue in fiscal year 1998, 52% of our revenue in fiscal year 1999 and 36% of
our revenue for the six months ended June 30, 1999. As a result of increased
competition among manufacturers of personal creativity software, prices have
fallen over the past several years. If Mindscape is unable to effectively manage
such price declines or other competitive situations, the royalties we earn from
licensing this content to Mindscape will decrease. Additionally, because we
recognize our revenue at the time Mindscape delivers its software to the
retailer, there is a risk that our products will build up in retail distribution
channels, resulting in a sudden decrease in orders from retailers. In addition,
we have recently introduced a number of new products, some of which allow our
online subscribers to print online greetings and personal creativity products at
home. Each of these developments may decrease demand for personal creativity
software and accordingly decrease royalties we receive for sales of such
software.
WE DERIVE A SIGNIFICANT PORTION OF OUR ONLINE VISITORS AND USERS THROUGH OUR
AGREEMENTS WITH OUR DISTRIBUTION PARTNERS. THESE AGREEMENTS REQUIRE US TO PAY
SIGNIFICANT AMOUNTS OF MONEY TO THESE PARTNERS AND THESE ARRANGEMENTS MIGHT NOT
GENERATE A SUFFICIENT AMOUNT OF REVENUE TO OFFSET THEIR EXPENSE.
We have entered into various agreements with Internet service and content
providers, including AOL, Yahoo! and Lycos, to attract users from these Internet
service and content providers. These distribution relationships resulted in 88%
of traffic to our Web site for the six months ended June 30, 1999. Our
distribution agreements with AOL and Yahoo! require us to make minimum aggregate
payments of $108 million to these parties through December 31, 2004. Our ability
to generate revenues to offset these payments will depend, in large part, on the
increased traffic, purchases, advertising and sponsorships that we expect to
generate through such distribution partners. While many of these agreements
contain exclusivity features, our exclusivity is subject to exceptions. We
entered into some of these relationships over the past few years. We entered
into others, including Yahoo! much more recently, and recently we substantially
renegotiated our relationship with AOL. Accordingly, our historical financial
statements included in this prospectus may not allow you to accurately predict
our future sales and marketing expenses and accordingly might not provide an
accurate indication of our future results of operations. In addition, we cannot
assure you that any of these agreements will be maintained beyond their initial
terms or that additional third-party agreements will be available to us on
acceptable commercial terms. The inability to enter into new agreements or to
maintain any one or more of our existing significant agreements would seriously
harm our business. In addition, we cannot assure you that our distribution
partners, especially AOL and Yahoo!, will maintain their market positions. In
the event their market positions deteriorate, we may need to partner with
additional distribution partners, to the extent available, and pay additional
funds.
IF OUR AGREEMENT WITH AOL IS TERMINATED, OUR BUSINESS WILL SUFFER.
Our agreement with AOL, or our limited exclusivity thereunder, may be
terminated by AOL under specific conditions, for example, if we do not maintain
our co-branded sites with AOL among the top three online greeting sites, as
judged by third party reviewers, with respect to a variety of criteria that
include pricing, scope, selection and quality of products. If our agreement with
AOL is terminated, our business will suffer. Our agreement may also be
terminated by AOL if we are acquired by a competitor of AOL or if we fail to
fully customize our sites in the additional AOL properties under our new
agreement with AOL by June 1, 2000.
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OUR BUSINESS RELIES ON THE PERFORMANCE OF OUR COMPUTER SYSTEMS AND THOSE OF OUR
DISTRIBUTION PARTNERS AND ANY FAILURE OR BREAKDOWN IN THOSE SYSTEMS WOULD REDUCE
THE NUMBER OF USERS ABLE TO ACCESS OUR SITE AND OUR ATTRACTIVENESS TO
ADVERTISERS.
Our success depends on the performance, reliability and availability of our
online greetings and social expression products. Our revenues depend, in large
part, on the number of users that access our content, products and services. Our
computer and communications hardware is located at our headquarters in
Cleveland, Ohio and in a hosting facility provided by Exodus Communications,
Inc. in Sterling, Virginia. In addition, our co-branded site with AOL currently
operates on AOL's servers. Our systems and operations, as well as AOL's Network
or Yahoo!'s servers, could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, Internet breakdown, break-in, earthquake and similar
events. We do not have mirror facilities at any other location or a formal
disaster recovery plan, and we do not carry business interruption insurance that
is adequate to compensate us for losses that may occur. In addition, systems
that use sophisticated software may contain bugs, which could also interrupt
service. Any interruptions to our systems or those of our distribution partners
resulting in the unavailability of our content and commerce products would
reduce the volume of users able to access our content and e-commerce products,
the attractiveness of our product offerings to our affiliates, advertisers and
content providers, and the willingness of users to pay us subscription fees, any
of which could harm our business.
We and AOL have recently experienced some system problems relating to
users' ability to access our services through AOL. For example, during July
there were several periods of one hour or longer during which AOL subscribers
were unable to send or receive electronic greetings on our co-branded AOL
property. Although we are taking steps that we believe will address these
issues, there can be no assurance that such efforts will be successful. If we
experience frequent or persistent system failures, either on our AOL co-branded
property or on any of our other properties, our reputation and brand could be
permanently harmed.
WE HAVE EXPERIENCED SIGNIFICANT NET LOSSES IN THE PAST AND EXPECT TO INCUR
SUBSTANTIAL NET LOSSES FOR THE FORESEEABLE FUTURE; SLOWER THAN ANTICIPATED
REVENUE GROWTH WOULD SERIOUSLY HARM OUR BUSINESS.
We incurred net losses of approximately $2.4 million in fiscal year 1997
and $1.2 million in fiscal year 1998 and a cumulative net loss of $2.3 million
since our inception through June 30, 1999. While we were profitable in fiscal
year 1999, we expect to make significant expenditures over the next several
years to develop and promote our business, and accordingly, we expect to record
substantial net losses for the foreseeable future. We will incur increased
expenses of at least $24 million over the next three years as described in the
caption "We are required to pay minimum royalties to our parent without regard
to the amount of our revenue" below. We will also incur significant additional
costs:
- to fund our new arrangements with our distribution partners, especially
those with AOL and Yahoo!, totalling a minimum aggregate commitment of
$108 million;
- to fund increased marketing initiatives;
- to add additional distribution partners;
- to implement enhancements to our online product offerings;
- to hire additional personnel; and
- to implement technological and hardware improvements.
Significant operating losses are anticipated for the foreseeable future and
to the extent that such expenses do not result in sufficient revenue increases,
our business, financial condition, results of operations or prospects may be
seriously harmed. In addition, revenues from our subscription-based products may
decline as a result of the introduction of our new free product offerings. The
future success of our business will increasingly depend on our ability to
generate advertising revenue. We have only begun to generate revenues from
advertising. We expect advertising will become one of our primary sources of
revenue. Slower than anticipated revenue growth or higher than expected
operating expenses would seriously harm our business.
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OUR FUTURE REVENUE IS UNPREDICTABLE AND MAY BE SEASONAL, AND FLUCTUATIONS IN OUR
QUARTERLY OPERATING RESULTS COULD CAUSE OUR COMMON STOCK PRICE TO DECLINE.
As a result of our limited operating history, rapid growth and the emerging
nature of the Internet market in which we compete, we may have difficulty
accurately forecasting our financial performance in any given period. A number
of factors, many of which are outside our control, may cause our revenue to fall
short of our expectations or cause fluctuations in our operating results,
including:
- the amount and timing of expenditures by users of our products and
services;
- the ability to convert visitors and promotional users of our Web site to
paid subscribers;
- the timeliness of payments by our e-commerce partners and software
distributors;
- the introduction and timing of implementation of new products, new
technologies and new systems by users, our distribution partners or our
competitors;
- the amount and timing of expenditures by advertisers on our site;
- unanticipated technical, legal and regulatory difficulties with respect
to use of the Internet or other online services we rely upon;
- the effectiveness and timing of promotion and integration of our
AmericanGreetings.com Web site and co-branded sites on AOL, Yahoo! and
other distribution partners' sites;
- the acceptance of online greetings and personal creativity products by
the general public; and
- the retention rate of our subscribers.
Our limited operating history and the new and rapidly evolving Internet
market make it difficult to ascertain the effects of seasonality on our
business. If seasonal and cyclical patterns emerge in Internet consumer
purchasing or in Internet advertising spending, our results of operations from
quarter to quarter will be less comparable. Sales of traditional greeting cards,
social communication and gifts are generally lower in the third calendar quarter
of each year. Similarly, advertising sales in traditional media, such as
television and radio, are generally lower in the first calendar quarter of each
year. We may experience similar seasonality in our business.
As a result of all the foregoing, period-to-period comparison of our
operating results may not be a good indication of future performance. Moreover,
our operating results in some quarters may not meet the expectations of stock
market analysts and investors. In that event, our stock price would likely
decline.
COMPETITION IN THE ONLINE GREETINGS MARKET IS INTENSE, AND IF WE ARE UNABLE TO
COMPETE EFFECTIVELY, WE MAY HAVE TO REDUCE THE PRICE FOR OUR SUBSCRIPTION
SERVICE OR THE RATES WE CHARGE FOR ADVERTISING ON OUR SITE.
We face intense competition from many competitors. Currently we face
competition from other online greetings providers such as Blue Mountain Arts. We
also face competition from other entities such as Amazon.com, Disney and
Microsoft that offer online greetings. In addition, we face competition from
providers of traditional greeting cards. In the event we are unable to compete
effectively with these or other competitors who enter our market, we may be
forced to reduce the price for our subscription service or the rates we charge
for advertising on our site or take other competitive actions which could harm
our results of operations. We believe that our ability to compete depends upon
many factors, including brand recognition, the quality and depth of content,
superior usability for consumers and multiple sources of revenue. Some of our
current and potential online and traditional competitors have or may have
greater resources and experience than we do, including financial, marketing, and
technical resources. For example, we face potential competition from Hallmark
leveraging their significant brand recognition to further their online greetings
effort. Some of these competitors, such as Amazon.com, have greater access to
Web traffic or may be able to establish relationships with companies that have
access to large amounts of Web traffic. Increased competition
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is likely to result in reduced operating margins, loss of market share and a
diminished brand franchise, any one of which could seriously harm our business,
results of operations and financial condition.
WE RELY ON SERVICES OF OUR KEY PERSONNEL, WHOSE KNOWLEDGE OF OUR BUSINESS AND
TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE. WE WILL NEED TO HIRE A NUMBER
OF ADDITIONAL TECHNOLOGY-ORIENTED PERSONNEL WHO MIGHT BE DIFFICULT TO FIND IN
THE MIDWEST WHERE WE ARE HEADQUARTERED.
Our future success depends on the continued service and performance of our
senior management team and other key employees. In addition, we will need to
employ additional personnel for certain functions that were previously performed
by employees of American Greetings. Because of the technical nature of our
business, our success will also depend on our ability to attract, integrate,
motivate and retain additional highly skilled technical, sales and marketing
personnel. Competition for senior management and technical, sales and marketing
personnel in technology-based businesses is intense and qualified candidates are
in short supply, particularly in the Midwest in which we are headquartered. The
loss of any member of our senior management team or other key employees or our
failure to attract, integrate, motivate and retain additional key employees
could seriously harm our business, operating results and financial condition.
IF WE FAIL TO EFFECTIVELY MANAGE OUR ADVERTISING SALES FORCE OR THIRD PARTIES
THAT WE HAVE RETAINED TO SELL ADVERTISING ON OUR WEB SITE OR OUR CO-BRANDED WEB
SITES, WE WILL NOT BE ABLE TO GENERATE SUFFICIENT REVENUE FROM SALES OF
ADVERTISING AND OUR BUSINESS WILL SUFFER.
We have previously generated only minimal revenue from advertising. We will
need to manage our sales force and third party providers that we have retained
to sell advertisements on our Web site. We have recently renegotiated our
distribution agreement with AOL. Under this agreement AOL's advertising sales
force will sell the advertising on our co-branded sites, and we will receive a
portion of any advertising revenue generated. We anticipate that the majority of
any advertising revenue we receive during the foreseeable future will be
generated by AOL's advertising sales force. We cannot assure you that AOL will
be able to effectively generate advertising revenue from our co-branded sites.
In addition, we have just retained the services of a third party provider to
sell our advertising on our behalf. If we fail to manage and maintain an
effective sales force or effectively manage AOL or our other third party
provider, our business prospects will suffer. Establishing a sales force
involves a number of risks, including:
- we may be unable to hire, retain, integrate and motivate sales and sales
support personnel; and
- new sales personnel may require a substantial period of time to become
productive.
Outsourcing sales of advertising on our Web site involves a number of
risks, including:
- we may not be able to maintain our third party providers at reasonable
rates; and
- we may not receive proper resources and attention from third party
providers.
WE NEED TO SPEND A SIGNIFICANT AMOUNT OF TIME AND MONEY ON DEVELOPING OUR
CONTENT AND OUR PRODUCT AND SERVICE OFFERINGS. IF WE FAIL IN ANY OF THESE
EFFORTS WE MAY NOT CONTINUE TO ATTRACT NEW USERS AND MAY BE UNABLE TO RETAIN OUR
EXISTING USERS.
To remain competitive we must continue to enhance and improve the
assortment, ease of use, responsiveness, functionality and features of our
products and services. These efforts may require us to develop internally or to
license content or increasingly complex technologies. Developing and integrating
new products and services could be expensive and time consuming, and the cost of
content that we license may increase in the future. Any new features, functions
or services may not achieve market acceptance or enhance our brand loyalty. If
we fail to develop and introduce new products or acquire new features, functions
or services effectively and on a timely basis, we may not continue to attract
new users and may be unable to retain our existing users.
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WE LICENSE SOME OF OUR CONTENT AND OTHER INTELLECTUAL PROPERTY FROM THIRD
PARTIES AND THIS CONTENT COULD BE USED BY OTHERS WITHOUT OUR CONSENT BECAUSE OUR
ABILITY TO PROTECT THIS INTELLECTUAL PROPERTY IS LIMITED.
We own and license a variety of trademarks, copyrights, trade secrets,
patents and other intellectual property rights. These rights are primarily in
two areas: the art and verse content of our products and services and the
software technology that operates our Web sites. To protect our rights in our
various intellectual properties, we rely on a combination of intellectual
property law, and confidentiality and other agreements with certain of our
employees, affiliates, clients, distribution partners, and others to protect our
proprietary rights. We cannot guarantee that the protective steps we have taken
will be adequate to deter misappropriation of proprietary information or that we
will be able to detect unauthorized use and take appropriate steps to enforce
our intellectual property rights. In particular, it is technologically possible
for visitors to our Web site or users of our other products to acquire copies of
our content and to then utilize or resell it without payment to us. We have
taken and will continue to take steps to reduce this possibility, including
securing the agreement of our customers, through on screen license agreements,
to use our online greetings content only for personal uses. However, agreements
of this type are not always legally enforceable.
We also face other risks and limitations related to content and other
intellectual property that we license from third parties including, but not
limited to:
- the scope of some of our content licenses may not permit us to use the
intellectual property or content in a manner we want to use it, for
example, in cases where our licenses contemplate specific technologies,
such as a static postcard, we may not be able to use the licensed
intellectual property with newly developed technologies, such as animated
greetings. Similarly, some of our content licenses contain limitations on
how the content can be used. We cannot assure you that our recent changes
to our product offerings will permit us to continue use of such content
in all of our product offerings.
- although we enter into a license with a third party, we may still be
subject to risks if that third party does not own, or is limited in its
use or license of, the rights to the intellectual property that they
licensed to us;
- third parties may not adequately protect their intellectual property that
we license, and our license for such intellectual property will be less
valuable; and
- each license that we enter into is for a limited period of time, and at
its termination we will be required to enter into another agreement, and
we may not be able to do so on a timely or cost effective manner.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF OUR ABILITY TO USE THE DISPUTED CONTENT OR REQUIRE US TO PAY DAMAGES.
Other parties may assert patent infringement or other intellectual property
claims against us. Our expanding use of topical content such as political
cartoons increases the risk that individuals may claim we have used their name
or likeness in violation of their rights. We cannot predict whether third
parties will assert claims of patent infringement or other intellectual property
claims against us, or whether any past or future assertions or prosecutions will
harm our business. If we are forced to defend against any such claims, whether
they are with or without merit or are determined in our favor, we may face
costly litigation or diversion of technical and management personnel. As a
result of such a dispute, we may have to remove content from our site or pay
significant compensatory or punitive damages.
WE WILL INCREASINGLY RELY UPON ONLINE AND TRADITIONAL ADVERTISING TO INCREASE
TRAFFIC TO OUR WEB SITE AND GENERATE SALES AND OUR INABILITY TO MAINTAIN
EFFECTIVE ADVERTISING CAMPAIGNS COULD HARM OUR BUSINESS.
We expect to increasingly rely on online and traditional advertising to
attract users to our Web site. We currently intend to spend a significant amount
for online and traditional advertising over the next twelve months. Our
inability to develop and maintain effective advertising campaigns could harm our
business. We
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may not be able to identify and secure sufficient online and offline advertising
opportunities. We cannot assure you that our advertising will effectively
attract visitors to our Web site or convert a significant number of such
visitors to subscribers. In addition, our online advertising may include
strategic alliances that require large, long-term commitments.
WE LARGELY DEPEND ON THE AMERICAN GREETINGS BRANDS. EXPENSES WE INCUR IN
PROMOTING THE AMERICAN GREETINGS BRANDS MIGHT MORE THAN OFFSET ANY INCREASED
REVENUE WE DERIVE FROM OUR BRAND PROMOTION EFFORTS.
Our historical growth has been largely attributable to the strength of the
American Greetings brands. We believe that continuing to strengthen these brands
will be critical to achieving widespread acceptance of our products. Brand
promotion activities may not yield increased revenues, and even if they do, any
increased revenues may not offset the expenses we incurred in promoting our
brand. If we fail to promote and maintain our brands or incur substantial
expenses in an unsuccessful attempt to promote and maintain our brands, our
business would be harmed. Promoting and positioning our brands will depend
largely on the success of our marketing efforts and our parent's marketing
efforts, over which we will have no control, and our ability to provide high
quality products. Additionally, we will have to conform to requirements pursuant
to intercompany agreements with our parent on the use of the American Greetings
brands. In order to promote our brands, we will need to increase our marketing
budget and otherwise increase our financial commitment to creating and
maintaining brand loyalty among users of our products.
WE MAY BE REQUIRED TO RAISE ADDITIONAL FUNDS AND OUR ABILITY TO RAISE CAPITAL IN
THE FUTURE MAY BE LIMITED.
We believe that the cash invested in our business by American Greetings as
part of our initial capitalization and proceeds from this offering, will be
sufficient to meet our operating and capital requirements for at least the next
twelve months. However, we may in the future be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. We cannot be certain that any such financing will be available on
acceptable terms, or at all, and our failure to raise capital when needed could
harm our business, operating results and financial condition. Additional equity
financing may be dilutive to the holders of our common stock, and debt
financing, if available, may involve restrictive covenants that could limit our
ability to pay dividends or otherwise operate our business as we see fit.
Prior to our initial public offering, our funding needs were satisfied by
American Greetings. Presently, American Greetings has no obligation to assist
us, financially or otherwise, except as described in "Related Party
Transactions -- Transactions with our Parent."
EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION AND
RESOURCES AND MAY BE UNSUCCESSFUL WHICH COULD HARM OUR BUSINESS.
To date, we have only engaged in limited business outside the United
States. We plan to build local versions of our Web site for foreign companies or
expand our international operations through acquisitions or otherwise. For
example, we have committed to establishing co-branded sites on AOL-affiliated
services in Canada, the United Kingdom, Australia, Japan, Germany and France.
Our expansion plans will require management attention and resources and may be
unsuccessful. We have limited experience in localizing our service to conform to
local cultures, standards and policies. We may have to compete with local
companies which understand the local market better than we do. In addition, to
achieve satisfactory performance for end-users in international locations it may
be necessary to locate physical facilities, such as server computers in the
foreign market. We do not have experience establishing such facilities. We may
not be successful in expanding into any international markets or in generating
revenues from foreign operations. In addition, different privacy, censorship and
liability standards and regulations and different intellectual property laws in
foreign countries may cause our business to be harmed. Furthermore, once we
expand internationally we expect to incur net losses in developing foreign
markets for the foreseeable future.
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OUR YEAR 2000 COMPLIANCE EFFORTS COULD BE COSTLY AND TIME-CONSUMING, AND OUR
BUSINESS COULD SUFFER IF WE OR THOSE WE DO BUSINESS WITH, ESPECIALLY AOL, EXODUS
AND OUR PARENT, FAIL TO ADEQUATELY ADDRESS YEAR 2000 RISKS.
Known or unknown errors or defects that affect the operation of our
software and systems and those of third parties, including our distribution
partners, content providers, advertisers, affiliates, and end users as a result
of the Year 2000 problem could result in delay or loss of revenue, interruption
of services, cancellation of customer contracts, diversion of development
resources, damage to our reputation, and litigation costs, any of which could
harm our business. We are in the process of assessing and remediating any Year
2000 issues associated with our computer systems and software and other property
and equipment. Despite our testing and remediation efforts, our systems and
those of third parties, including our distribution partners, our parent, Exodus,
advertisers, affiliates, and end users may contain errors or faults with respect
to the Year 2000. Our Year 2000 compliance efforts may prove to be unsuccessful
and, if unsuccessful, may involve significant time and expense to rectify. Our
efforts to address this issue are described in more detail in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
RISKS RELATED TO OUR RELATIONSHIP WITH OUR PARENT
OUR AGREEMENTS WITH OUR PARENT COMPANY MAY TERMINATE IN THE FUTURE, RESULTING IN
THE LOSS OF A KEY STRATEGIC ADVANTAGE AND HARM TO OUR BUSINESS.
There are two main reasons that our parent could elect to end its
agreements with us. The first is if the percentage of our parent's voting
interest in AmericanGreetings.com is reduced below 20%. Our parent's voting
percentage could be reduced by our actions if we sell additional stock to third
parties, or it could be reduced by our parent's action if our parent sells its
stock in us to us or to third parties or distributes our stock to its
stockholders. We have no control over whether our parent will sell or distribute
its stock in us.
Our parent could also elect to end our agreement with us if a reversion
event, as defined in those agreements, occurs. A reversion event occurs if any
of the following happens and we do not correct it after notice from our parent:
- we derive less than 10% of our revenues from business activities
generally as described in this prospectus;
- we materially default on our payment obligations to our parent;
- we materially default on any agreements we may enter into to borrow more
than one million dollars; or
- our independent auditors determine, under generally accepted auditing
standards, that our financial position is such that we may not be able to
continue as a going concern.
If our agreements with our parent end because our parent's voting
percentage is reduced, it will have the following effects on us:
- we would no longer be entitled to use the "American Greetings" name or
logo or our "AmericanGreetings.com" corporate name, but we would retain
the rights to "ag.com" and the americangreetings.com URL;
- we would no longer have access to additional content developed by our
parent after the agreements terminate, but we would retain rights to
content developed previously; and
- all licenses will become non-exclusive and our parent would no longer be
subject to any restriction on competing with us.
If our agreements with our parent end because of a reversion event, it will
have the following effects on us:
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- we would no longer be entitled to use the "American Greetings" name or
logo or our "AmericanGreetings.com" corporate name, but we would retain
the rights to "AG.com"; and the "americangreetings.com" URL
- all licenses will become non-exclusive and our parent would no longer be
subject to any restriction on competing with us.
In addition, if a reversion event is not cured within 90 days of notice
from our parent and our parent elects, the termination would also result in all
the licenses we receive from our parent, other than for trademarks used only in
our business and not in the parent's, such as "AG.com" and "CreataCard," ending
twelve months after the notice from our parent.
Loss of any aspect of our relationship with our parent would deprive us of
our most important strategic advantage and would seriously harm our business and
financial condition.
RESTRICTIONS IN OUR AGREEMENT WITH OUR PARENT PROHIBIT US FROM COMPETING WITH
OUR PARENT, BUT OUR PARENT IS PERMITTED TO COMPETE WITH US BY PROVIDING PRODUCTS
AND SERVICES FOR ONLINE DISTRIBUTION WHEN IT IS ACTING TOGETHER WITH ITS RETAIL
CUSTOMERS.
We are not permitted to sell paper greeting cards through retailers in
their physical retail locations. Our parent is, in general, not permitted to
sell electronic social expression products direct to consumers and through
electronic media. Our parent, however, is generally not subject to this
restriction in providing products and services through Web sites maintained by
its retail customers. Our parent's customers include retail stores and chains,
including Albertson's, CVS, Eckerd, K-Mart, Rite Aid, Target and Wal-Mart. If
one or more of our parent's customers decides to enter the online greetings
business and our parent elects to cooperate directly with that customer, by
providing content or otherwise, we could face a competitor that has equal access
to our parent's brand and content. Such a competitor could severely harm our
business.
THE REQUIREMENT OF OUR AGREEMENTS WITH OUR PARENT TO PROVIDE INTERNET RELATED
SUPPORT SERVICES TO OUR PARENT OR FOR THE BENEFIT OF ITS PHYSICAL RETAIL
CUSTOMERS MAY DIVERT RESOURCES THAT WE COULD OTHERWISE USE TO SUPPORT OUR
BUSINESS STRATEGY AND MAY HELP OUR PARENT'S CUSTOMERS TO COMPETE WITH US IN THE
FUTURE.
Our agreements with our parent require that we provide our parent or for
the benefit of its physical retail customers with Internet content delivery
related services, including Web site development and maintenance. We will be
paid for these services at our cost plus 10% and will be entitled to retain
ownership of any intellectual property we develop in performing these services,
although our parent will have a license to such intellectual property. We
expect, however, that supporting the needs of our parent or those of its
physical retail customers in this area may require us to add personnel or expend
funds in a manner that may, over time, be less desirable than other
opportunities we might have to develop our business. Further, our parent is not
obligated to use any of these services, so we do not have an assured revenue
source from this activity. In addition, the Internet related support service
that we provide for the benefit of our parent's physical retail customers may be
used in the future to compete with us.
OUR PARENT WILL HAVE ACCESS TO AND THE RIGHTS TO USE ANY CONTENT THAT WE DEVELOP
IN THEIR PAPER GREETING CARDS AND THIS COMPETITION COULD SERIOUSLY HARM OUR
BUSINESS.
Our licensing relationship with our parent is reciprocal in that, just as
we will have continuing access to social expression content developed by our
parent in the future, our parent will have continuing access to social
expression content we develop. Therefore, it will be possible for our parent to
market paper greeting cards using content we are simultaneously offering through
our Web site and other offerings. If consumers prefer to obtain this content
through our parent's channels of distribution, this could seriously harm our
business.
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WE ARE REQUIRED TO PAY MINIMUM ROYALTIES TO OUR PARENT WITHOUT REGARD TO THE
AMOUNT OF OUR REVENUE.
Our agreements with our parent require us to pay royalties to our parent
for the use of its intellectual property. Over the first three years beginning
July 1, 1999, the royalty is $24.0 million. Thereafter, the royalty is 3% of our
net revenue, subject to an annual minimum of $5.0 million. Because these
royalties are either fixed in amount or subject to a minimum, they may not have
any relationship to our revenue. The requirement to pay such fixed royalties
could place us at a competitive disadvantage. In addition, the financial burden
of paying these royalties could harm our business and financial condition.
OVERLAPPING MANAGEMENT AND BOARDS OF DIRECTORS COULD CAUSE CONFLICTS OF INTEREST
BETWEEN US AND OUR PARENT AND WE CANNOT ASSURE YOU THAT THEY WILL ALWAYS PUT OUR
INTERESTS OVER THOSE OF OUR PARENT.
One of our directors serves as an officer and a director of our parent.
Service as either a director or officer of AmericanGreetings.com and a director
or officer of our parent could create or appear to create potential conflicts of
interest when those directors and officers are faced with decisions that could
have different implications for AmericanGreetings.com and our parent. We cannot
assure you that they will always put our interests over the interests of our
parent. Such decisions may relate to potential acquisitions of businesses,
business opportunities for American Greetings and AmericanGreetings.com, the
intercompany agreements, competition, the issuance or disposition of securities,
the election of new and additional directors and other matters.
OUR SEPARATION FROM AMERICAN GREETINGS MAY HARM OUR ABILITY TO NEGOTIATE FUTURE
LICENSING ARRANGEMENTS AND RESOLVE FUTURE INTELLECTUAL PROPERTY DISPUTES.
We have entered into licensing arrangements with American Greetings with
respect to its intellectual property that we use in our business. In the past,
we benefited from operating within American Greetings in our access to the
intellectual property of third parties through licensing arrangements or
otherwise, and in the negotiation of the financial and other terms of such
arrangements. The separation of our business from that of American Greetings
could adversely affect our ability to negotiate commercially attractive
intellectual property licensing arrangements with third parties in the future.
Moreover, in connection with future intellectual property infringement claims,
we will not be able to provide licenses to American Greetings' intellectual
property in order to resolve such claims.
OUR PARENT WILL OWN OVER 90% OF THE VOTING POWER OF OUR COMMON STOCK AND WILL
EXERT SIGNIFICANT CONTROL OVER OUR BUSINESS.
After the closing of this offering, our parent will own all of our Class B
shares of common stock, which will represent over 90% of the voting power of our
common stock. As a result of our parent's share ownership and the other rights
described in this prospectus, our parent will be able to elect all of the
members of our board of directors and decide the outcome of all other actions
requiring stockholder approval. This concentration of ownership and other rights
could also delay or prevent a change of control.
Our parent could elect to sell all or a substantial portion of its equity
interest in our stock to a third party. In the event of a sale of our parent's
interest to a third party, that third party may be able to control us. Such a
sale may cause the market price of our Class A common stock to decline and may
harm our business.
RISKS RELATED TO THE INTERNET INDUSTRY
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE ONLINE COMMERCE MARKET,
WHICH IS UNCERTAIN.
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Web as an effective medium of commerce and
communication by consumers. Demand for recently introduced services and products
over the Web and online services is subject to a high level of uncertainty. The
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development of the Web and online services as a viable commercial marketplace is
subject to a number of factors, including the following:
- online commerce is at an early state and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunications services or changes in
telecommunications services could result in slower response times;
- security and privacy concerns over the Internet;
- access to the Web by the general population; and
- the general population's unfamiliarity with Internet commerce.
THE MARKET FOR OUR PRODUCTS IS UNCERTAIN AND THE UNWILLINGNESS OF USERS TO USE
THE INTERNET TO EXCHANGE GREETINGS AND MAKE USE OF OTHER SOCIAL EXPRESSION
PRODUCTS COULD HARM OUR BUSINESS.
Our success will depend in large part on users' willingness to exchange
greetings and make use of other social expression products over the Internet.
Exchanging greetings over the Internet involves changing users' habits, and if
users are not willing to exchange greetings over the Internet, our revenue will
be limited and our business will be harmed. Sending online greetings is a
relatively new method of communication and its growth and market acceptance is
highly uncertain. In addition, it is not clear whether our service which allows
users to create printable greetings using the Internet will gain market
acceptance. We believe that acceptance of these methods of communication may be
subject to network capacity constraints, hardware limitations, company computer
security policies, the ability to change user habits and the quality of content
delivered.
WE MAY BE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE IN THE ONLINE
GREETINGS AND SOCIAL EXPRESSION MARKET WHICH COULD HARM OUR BUSINESS.
Material delays in introducing new technologies and enhancements to our
products and services may cause users and advertisers to make purchases from or
visit the Web sites of our competitors which could harm our business. The
Internet, e-commerce and online advertising markets, particularly the online
greetings category, are characterized by rapidly changing technologies, evolving
industry standards, frequent new product and service introductions, and changing
customer preferences. For example, we rely on Flash and Slideshow player
technologies for presentation of some of our content. In the event these
technologies become obsolete or cease to be supported by the industry, we would
be forced to expend substantial resources to convert our products and services
to utilize other technologies. We may not be able to do this in a timely or cost
effective manner, or at all. Our success will depend on our ability to adapt to
rapidly changing technologies and address our users' changing preferences. We
may experience difficulties that delay or prevent our ability to do so and any
such delays could cause our business to suffer.
WE DEPEND ON CONTINUED IMPROVEMENTS TO OUR NETWORK INFRASTRUCTURE AND THE
INFRASTRUCTURE OF THE INTERNET AND INCREASES IN THE VOLUME OF TRAFFIC COULD
STRAIN THE CAPACITY OF SUCH INFRASTRUCTURES WHICH WOULD HARM OUR BUSINESS.
Increases in the volume of our Web site traffic could strain the capacity
of our existing technical infrastructure, which could lead to slower response
times or system failures. This would cause the number of online greetings to
decline, which could hurt our revenue growth and our brand loyalty. We will need
to incur additional costs to upgrade our infrastructure in order to accommodate
increased demand if our server and networking systems cannot handle current or
higher volumes of traffic.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, requiring Internet service providers and companies doing
business on the Internet to upgrade their infrastructures. Our ability to
increase the speed with which we provide services to consumers and to increase
the scope of these services is limited by and dependent upon the speed and
reliability of the Internet. Consequently, the emergence and growth of the
market for our services is dependent on the performance of and future
improvements to the Internet.
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OUR BUSINESS COULD BE HARMED IF WE FAIL TO PREVENT ONLINE COMMERCE SECURITY
BREACHES. WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO PROTECT AGAINST
SECURITY BREACHES OR TO ADDRESS PROBLEMS CAUSED BY BREACHES.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks, and our failure
to prevent security breaches could harm our business. Currently, a significant
number of our users authorize us to bill their credit card accounts directly for
all transaction fees charged by us. We rely on encryption and authentication
technology licensed from third parties to provide the security and
authentication technology to effect secure transmission of confidential
information, including customer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments may result in a compromise or breach of the technology used by us
to protect customer transaction data. Any such compromise of our security could
harm our reputation and expose us to a risk of loss or litigation and possible
liability and, therefore, harm our business. In addition, a party who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. We may need to expend significant
resources to protect against security breaches or to address problems caused by
breaches. Security breaches could damage our reputation. Our insurance policies
carry low coverage limits, which may not be adequate to reimburse us for losses
caused by security breaches.
REGULATION OF THE INTERNET IS RELATIVELY UNCERTAIN AND THE ENACTMENT OF NEW
REGULATIONS OR THE ENFORCEMENT OF EXISTING REGULATIONS COULD HARM OUR BUSINESS.
Domestic and foreign laws related to conducting business on the Internet
are evolving and uncertain, and changes to existing laws could harm our
business. Today there are relatively few laws specifically directed towards
online services. However, due to the increasing popularity and use of the
Internet and online services, it is possible that laws and regulations will be
adopted with respect to the Internet or online services. These laws and
regulations could cover issues such as online contracts, user privacy, freedom
of expression, pricing, fraud, content and quality of products and services,
taxation, advertising, distribution, intellectual property rights and
information security. Applicability to the Internet of existing laws governing
issues such as property ownership, copyrights, encryption and other intellectual
property issues, taxation, libel, obscenity, personal privacy and export or
import matters is uncertain. The vast majority of these laws were adopted prior
to the advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Those laws that do reference the Internet, such as the recently
passed Digital Millennium Copyright Act, have not yet been interpreted by the
courts and their applicability and reach are therefore uncertain. See
"Business -- Government Regulation."
OUR BUSINESS MAY BE SUBJECT TO SALES AND OTHER TAXES WHICH COULD HARM OUR
BUSINESS.
One or more states may seek to impose sales tax collection obligations on
companies such as ours that engage in or facilitate online commerce which could
substantially impair the growth of e-commerce, and could diminish our
opportunity to derive financial benefit from our activities. Several 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. In 1998, the U.S.
federal government enacted legislation prohibiting states or other local
authorities from imposing new taxes on Internet commerce for a period of three
years. This tax moratorium will last only for a limited period and does not
prohibit states or the Internal Revenue Service from collecting taxes on our
income, if any, or from collecting taxes that are due under existing tax rules.
A successful assertion by one or more states or any foreign country that we
should collect sales or other taxes on the exchange of merchandise on our sites
could harm our business. In addition, a number of trade groups and government
entities have publicly stated their objections to this tax moratorium and have
argued for its repeal. The Federal Advisory Commission on electronic commerce is
in the process of evaluating these issues. It is expected to make its
recommendations to Congress in April 2000. There can be no assurance that future
laws will not impose taxes or other regulations on Internet commerce, or that
such three-year moratorium will not be repealed, or that it will be renewed when
it expires, any of which events could substantially impair the growth of
electronic commerce.
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RISKS RELATED TO THIS OFFERING
BECAUSE THERE HAS BEEN NO PRIOR MARKET FOR OUR STOCK, AND THE MARKET FOR STOCKS
OF INTERNET COMPANIES HAS EXPERIENCED EXTREME PRICE AND VOLUME FLUCTUATIONS, OUR
STOCK PRICE MAY BE VOLATILE, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT.
The price of our common stock that will prevail in the market after this
offering may be higher or lower than the price you pay. Prior to this offering,
there has been no public market for our common stock. If you purchase shares of
our common stock in this offering, you will pay a price that was not established
in a competitive market. Rather, you will pay the price that we negotiated with
the representatives of the underwriters.
In addition, the stock market in general, and the stocks of
Internet-related companies in particular, have experienced extreme price and
volume fluctuations that have been unrelated to these companies' operating
performance. The market price of our common stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as:
- actual or anticipated variations in our quarterly operating results;
- announcements of new product or service offerings by us or our
competitors;
- technological innovations;
- competitive developments;
- changes in financial estimates by securities analysts;
- conditions and trends in the Internet and electronic commerce industries;
and
- general economic conditions.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against that company. Litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources.
SALES OF OUR OUTSTANDING SHARES OF COMMON STOCK COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Subject to applicable law and to the contractual restriction with the
underwriters, our parent may sell any and all of the shares of common stock it
owns after completion of this offering. Intercompany agreements with our parent
provide that our parent will have the right in certain circumstances to require
us to use our reasonable best efforts to register for resale shares of common
stock held by it. In addition, our parent may make additional investments in us
prior to the consummation of this offering. Any sales of substantial amounts of
common stock in the public market, or the perception that such sales might
occur, could cause the market price of our common stock to decline. We have
agreed, for a period of 180 days after the date of this prospectus, not to offer
or sell any shares of common stock, subject to certain exceptions, without the
prior written consent of the underwriters.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and therefore
do not expect to pay any cash dividends in the foreseeable future.
WE HAVE BROAD DISCRETION TO USE THIS OFFERING'S PROCEEDS.
We have not designated any specific use for the net proceeds of this
offering. We expect to use the net proceeds for general corporate purposes,
including working capital and capital expenditures, including royalty payments
to our parent and payments to our distribution partners. We may also use a
portion of the net
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proceeds to acquire or make investments in additional businesses, products and
technologies or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific agreements or
commitments to do so. As a result, our management and board of directors will
have broad discretion in spending the proceeds of this offering.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. These statements involve known and unknown risks, uncertainties, and
other factors that may cause our or our industry's actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms.
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. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results.
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USE OF PROCEEDS
We estimate that the net proceeds to AmericanGreetings.com from the sale of
the shares of our Class A common stock offered in the offering will be
approximately $ million, or $ million if the underwriters'
over-allotment option is exercised in full, based on an initial public offering
price of $ per share, which is the midpoint of the estimated range set forth
on the cover page of this prospectus, after deducting the estimated underwriting
discount and commissions and estimated offering expenses that we will pay.
We expect to use the net proceeds for general corporate purposes, including
working capital, capital expenditures, royalties to our parent and payments
under our agreements with our distribution partners. A portion of the net
proceeds may also be used for the acquisition of other companies, assets,
products and technologies that are complementary to our business, although we
have no commitments with respect to such acquisitions, and no portion of the net
proceeds has been allocated for any specific acquisition. Pending these uses, we
expect to invest the net proceeds in investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently plan to retain all future earnings to finance
the operation and expansion of our business. If we declare any future dividends,
it will be at the discretion of our board of directors and will depend upon,
among other things, our earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions and such other factors as our
board of directors deems relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. The
pro forma column reflects the recapitalization through the contribution to
capital by American Greetings of its net advances and $50.0 million in cash for
shares of Class B common stock. The pro forma column excludes $17.6 million
paid to AOL and Yahoo! during August 1999 in connection with our distribution
agreements with them.
The pro forma as adjusted column reflects the sale of the shares of common
stock that we are offering.
JUNE 30, 1999
----------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash and cash equivalents................................... $ -- $50,000 $ --
====== ======= =======
Advances by parent.......................................... $7,458 $ -- $ --
Stockholders' equity (deficit):
Preferred Stock, $.001 par value; 150 million shares
authorized; no shares issued and outstanding -- actual,
pro forma, and pro forma as adjusted................... -- -- --
Common shares, $.001 par value, 10,000 shares authorized,
1,000 shares issued and outstanding -- actual; no
shares authorized, issued or outstanding -- pro forma
and pro forma as adjusted.............................. -- -- --
Common Stock Class A, $.001 par value; shares
authorized; no shares issued and outstanding -- actual
and pro forma; shares issued and
outstanding -- pro forma and adjusted.................. -- --
Common Stock Class B, $.001 par value; shares
authorized; no shares issued and outstanding -- actual;
shares issued and outstanding pro forma and pro
forma as adjusted...................................... --
Additional paid-in-capital................................ 1
Accumulated deficit....................................... (2,253) (2,253) (2,253)
------ ------- -------
Total stockholders' equity (deficit).............. (2,252) 55,206
------ ------- -------
Total capitalization.............................. $5,206 $55,206 $
====== ======= =======
The table above excludes options to purchase shares of Class A
common stock reserved under our 1999 Stock Option Plan subsequent to June 30,
1999. As of , 1999 options for shares at a weighted average
price of $ per share were outstanding under our 1999 Stock Option Plan. See
"Executive Compensation -- Employee Benefit Plans -- 1999 Stock Option Plan."
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DILUTION
The pro forma net tangible book value of our common stock as of June 30,
1999 was $ , or $ per share. Pro forma net tangible book value per
share represents the amount of our stockholders' equity, less intangible assets,
divided by the pro forma shares of common stock outstanding as of June 30, 1999.
Without taking into account any changes in such pro forma net tangible book
value subsequent to June 30, 1999, other than to give effect to the issuance and
sale of shares of common stock we are selling in the offering, after
deducting the underwriting discount, commissions and estimated expenses of the
offering, our adjusted net tangible book value as of June 30, 1999 would have
been $ or $ per share. This represents an immediate increase in the
net tangible book value of $ per share to American Greetings and an
immediate dilution of $ per share to new investors. Dilution is determined
by subtracting adjusted net tangible book value per share after the offering
from the amount of cash paid by a new investor for one share of common stock.
The following table illustrates the per share dilution:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering............................................... $
Increase in net tangible book value 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 AmericanGreetings.com, the
total consideration paid by American Greetings and by new investors, (after the
sale by AmericanGreetings.com of shares in this offering, at an assumed
initial public offering price of $ per share before deducting estimated
underwriting discounts, commissions and estimated offering expenses (in
thousands):
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- -------- --------- -------------
American Greetings.................. % $ % $
New investors.......................
-------- ----- ----- ------
Total..................... 100.0% $ 100.0%
======== ===== ===== ======
The table above excludes options to purchase shares of Class A common
stock reserved under our 1999 Stock Option Plan subsequent to June 30, 1999. As
of , 1999 options for shares at a weighted average price of
$ per share were outstanding under our 1999 Stock Option Plan. See
"Executive Compensation -- Employee Benefit Plans -- 1999 Stock Option Plan."
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SELECTED FINANCIAL DATA
The selected statement of operations data presented below for each of the
three years in the period ended February 28, 1999 and the selected balance sheet
data as of February 28, 1998 and 1999 has been derived from our financial
statements, which have been audited by Ernst & Young LLP, independent auditors,
and have been included elsewhere in this prospectus. The statement of operations
data for the period from inception to February 29, 1996 and for the four month
periods ended June 30, 1998 and June 30, 1999 and for the six months ended June
30, 1998 and 1999, and the balance sheet data as of February 29, 1996, February
28, 1997 and as of June 30, 1998 and June 30, 1999, are derived from unaudited
financial statements that have been prepared on the same basis as the audited
financial statements and in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. Our historical
results are not necessarily indicative of the results of operations to be
expected in the future. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes included
elsewhere in this prospectus. The data for the six months ended June 30, 1998
and 1999 has been included to reflect the results had our operations been stated
on a calendar year basis. Effective March 1, 1999, we changed our fiscal
year-end to a calendar year-end. See Note A of our notes to financial
statements.
JULY 18,
1995 FOUR MONTHS SIX MONTHS
(INCEPTION) FISCAL YEARS ENDED ENDED ENDED
TO FEBRUARY 28, JUNE 30, JUNE 30,
FEBRUARY 29, --------------------------- --------------- ---------------
1996 1997 1998 1999 1998 1999 1998 1999
------------ ------- ------- ------- ------ ------ ------ ------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues........................ $ 5 $ 1,036 $ 3,882 $12,347 $2,972 $6,247 $4,050 $9,241
Cost of net revenues................ -- 1,034 1,919 1,623 572 1,512 1,162 1,906
----- ------- ------- ------- ------ ------ ------ ------
Gross profit........................ 5 2 1,963 10,724 2,400 4,735 2,888 7,335
Operating expenses:
Sales and marketing............... 201 1,929 1,980 5,611 1,231 3,224 1,554 4,746
Product development............... 36 1,270 959 1,090 266 845 398 1,153
General and administrative........ 92 430 838 1,340 439 796 598 1,053
----- ------- ------- ------- ------ ------ ------ ------
Total operating expenses........ (329) 3,629 3,777 8,041 1,936 4,865 2,550 6,952
Income (loss) before benefit
(provision) for income taxes...... (324) (3,627) (1,814) 2,683 464 (130) 338 383
Benefit (provision) for income
taxes............................. -- 1,244 635 (966) (167) 46 (123) (138)
----- ------- ------- ------- ------ ------ ------ ------
Net income (loss)................... $(324) $(2,383) $(1,179) $ 1,717 $ 297 $ (84) $ 215 $ 245
===== ======= ======= ======= ====== ====== ====== ======
FEBRUARY 28 (OR 29), JUNE 30,
----------------------------------- -----------------
1996 1997 1998 1999 1998 1999
----- ------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)........................ $(110) $ 21 $ 3,009 $ 7,010 $ 4,061 $ 3,319
Total assets..................................... 480 1,052 5,150 11,251 6,029 11,300
Total stockholder's deficit...................... (323) (2,706) (3,885) (2,168) (3,588) (2,252)
In July and August of 1999, we entered into agreements with AOL and Yahoo!
that will require us to make aggregate payments of $108 million to these parties
through December 31, 2004. These payments will be recognized as sales and
marketing expenses over the terms of these agreements.
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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 the financial
statements and the notes to the financial statements of AmericanGreetings.com
included elsewhere in this prospectus. The historical information included in
this prospectus does not necessarily reflect what AmericanGreetings.com's
financial condition and results of operations would have been had
AmericanGreetings.com operated as an independent entity during the periods
presented. This discussion contains certain forward-looking statements that
involve risks and uncertainties. When used in this prospectus, the words
"intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar
expressions as they relate to us are included to identify forward-looking
statements. Our actual results could differ materially from the results
discussed in the forward-looking statements as a result of certain of the risk
factors set forth below and elsewhere in this prospectus.
OVERVIEW
AmericanGreetings.com is a leading Web-based provider of greetings and
other social expression content aimed at expanding individuals' ability to
communicate and express themselves online. AmericanGreetings.com is a wholly
owned subsidiary of American Greetings and was incorporated on June 28, 1999.
Prior to the closing of this offering, American Greetings has owned all of the
outstanding capital stock of AmericanGreetings.com. AmericanGreetings.com was
formed as a successor to American Greetings' online greeting, social expression
and personal creativity operations. Therefore, the financial statements of
AmericanGreetings.com reflect the online greeting, social expression and
personal creativity operations of American Greetings and its wholly owned
subsidiaries.
Our online greetings business commenced in 1995 when we began a remote
fulfillment greeting card business, whereby a customer could create a card
through our Web site and have it printed and sent through the mail by
AmericanGreetings.com. In February 1996, we began to license our greeting and
social expression content to software vendors, signing an agreement with a third
party software vendor which provided for the development, marketing and sale of
personal creativity software products in the form of CD-ROMs. In May 1996, we
added the sale of online greetings to our Web site. In September 1997, we signed
an agreement with AOL for the sale of online greetings through the AOL service
for a fixed price per fixed number of greetings. In August 1998, we began
selling subscriptions through AOL, allowing a subscriber to send an unlimited
number of online greetings over a fixed period of time, generally six months,
for a fixed price. In November 1998, we began selling subscriptions for online
greetings over our own Web site.
In June 1999, we began to implement further enhancements to our online
content and service offerings with the inclusion of several new categories of
content, products and services. Also in June 1999, we began to sell one-month
subscriptions to supplement our six-month subscriptions, and offer a selection
of free greetings and related content. Content available to paid subscribers
includes an expanded and enhanced offering of online greetings and other social
expression products and services, such as enhanced animated and interactive
electronic greetings and an extensive offering of printable greeting cards and
other similar products. Using our service, a subscriber can create his or her
own online greeting using the site, send it electronically or print it out at a
local printer. Our users can also elect to send a greeting via remote
fulfillment, whereby they can create a card and have it printed and mailed by
AmericanGreetings.com.
We currently derive our net revenues from three primary sources: (1) the
sale of subscriptions to our online content, (2) the license of a portion of our
greetings and social expression content and copyrighted trademarks to Mindscape,
a division of Mattel, for inclusion in personal creativity software, and (3) the
sale of advertising on our Web site. We currently have agreements with Internet
service and content providers such as AOL and Yahoo! through which our online
greeting cards are marketed and made available for sale. Our agreements with AOL
and Yahoo! require us to make mimimum aggregate payments of $108.0 million over
the initial terms of these agreements which extend through December 2004. In
addition, under our agreement with AOL, AOL and American Greetings.com will
share in advertising revenues from the co-
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branded sites and AmericanGreetings.com is guaranteed to receive at least $30.0
million through July 2002 for advertising sold on our co-branded sites. We also
have agreements with over 13,000 other Web sites, referred to as affiliates. Our
affiliates are a network of Web sites owned and operated by third parties who,
for a percentage of revenues place banner ads and cross-links to our site on
their Web sites and thereby help drive traffic to our site. In addition to
sharing in this subscription revenue, AOL and a limited number of our other
online partners also share in the revenue generated from each renewal of a
subscription attributable to their respective sites. Currently, we are
particularly dependent on our agreement with AOL. For the six months ended June
30, 1999, 59% of our total net revenue was derived from the sale of products and
services through the AOL service. Although we believe that this percentage will
decrease over time as we broaden our subscriber base and our revenue sources, we
believe that we will continue to be significantly dependent on AOL for a
significant percentage of our total net revenue for the foreseeable future.
In February 1998, we entered into an agreement with Mindscape through which
we currently provide content for several different CD-ROM personal creativity
software products. These products were developed by Mindscape using content and
trademarks licensed by us and are generally distributed through retailers by
Mindscape. In addition, reduced feature and content versions of some of these
products are also distributed through original equipment manufacturers, OEM's,
such as printer companies, including Canon, Lexmark and Epson. Under our
agreement with Mindscape, we receive trademark licensing fees and a royalty for
each product sold with guaranteed minimum payments of $17.0 million over the
four-year term of the agreement ending in February 2002. If royalty payments to
us under this agreement meet specified levels, the agreement gives Mindscape the
right to extend the term. Our personal creativity business is highly dependent
on our agreement with Mindscape. For the six months ended June 30, 1999, we
derived 26% of our total net revenue from royalties earned from the licensing of
our greetings and social expression content and trademarks to Mindscape.
Although we believe that this percentage will decrease over time as we broaden
our revenue sources, we believe that we will continue to be significantly
dependent on Mindscape for a significant percentage of our total net revenue for
the foreseeable future.
Net Revenues. Revenues relating to the sale of online greetings is
recognized ratably over each subscriber's subscription period, currently either
one or six months. With respect to the sale of a fixed number of greetings for a
fixed price which have been offered in the past, revenue was recognized over the
period the greetings were used, generally ranging from four to six months, or
expired which was considered to occur after 90 days of inactivity. During June
and July of 1999, all fixed greeting users were upgraded to a three month
subscription program. Deferred revenue relating to these users, at the date of
upgrade, is being recognized ratably over the three month term of the
subscription. Revenues related to the sale of online greetings are charged to
customers' credit cards and are billed in advance. We recognize revenue from the
licensing of our content to software vendors when products are sold to the OEM
or the retailer. We recognize revenue generated by the license of our trademarks
to vendors over the term of their respective agreements. Deferred revenue, which
is reflected in the balance sheet as short-term and long-term liabilities,
include online greeting fees and licensing fees which have been collected but
for which revenue has not yet been recognized.
Cost of Net Revenues. Cost of net revenues consists of salaries, benefits,
and consulting fees related to our creative operations, depreciation of Web site
hosting equipment and royalties. Royalties consist of payments to our parent
under the intercompany agreements for the use of our parent's intellectual
property and payments to other content providers. Beginning in July 1999,
royalties payable to our parent are $8.0 million per year through June 2002.
Thereafter, the royalty is 3% of our net revenue, subject to an annual minimum
of $5.0 million. In addition, we have entered into licensing arrangements with a
variety of content providers which require us to pay royalties for the use of
such content. Costs incurred to create online greeting content are included in
cost of net revenues as incurred. Costs incurred to create content licensed for
personal creativity software are classified as deferred costs and amortized on a
straight-line basis over one year, the general period over which the software is
sold, beginning on the date when software is shipped to retailers. We expect
that cost of net revenues will increase as we continue to make investments to
enhance our product offerings and increase the capacity and speed of our Web
site, but will continue to fluctuate as a percentage of net revenues.
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Sales and Marketing. Sales and marketing expenses include salaries,
benefits, travel, and related expenses for our business development group,
customer service, marketing, and sales support functions. Sales and marketing
expenses also include advertising expenses and costs associated with
distribution agreements with major Internet content and service providers. In
July and August of 1999, we entered into agreements with AOL and Yahoo!,
respectively, that will require us to make minimum aggregate payments of $108.0
million to these partners over the initial terms of the agreements which extend
through December 2004. These payments and payments under other distribution
agreements are recognized as sales and marketing expense over the terms of such
agreements. Additional payments may also be due under these distribution
agreements consistent with revenue sharing arrangements under such agreements.
We expect sales and marketing expenses to increase both in absolute dollars and
as a percentage of net revenue over the next year due to our efforts to drive
consumer traffic to our Web site and to increase brand awareness. We also
anticipate that sales and marketing expenses may fluctuate as a percentage of
total revenues from period to period as advertising expenditures are made and as
we sign additional agreements with Internet content and service providers.
Product Development. Product development expenses include costs for the
development of new or improved technologies, features, and functionalities
designed to enhance the performance of our Web site, including salaries and
related expenses for our Web site design staff as well as costs for contracted
services, functionality, facilities and equipment. We believe that a significant
level of technology development and expense is required in order to remain
competitive with new and existing online greetings Web sites. Accordingly, we
anticipate that we will continue to devote substantial resources to technology
and product development and that the absolute dollar amount of these costs will
increase in future periods, and will continue to fluctuate as a percentage of
net revenues.
General and Administrative. General and administrative expenses include
salaries, benefits and expenses for our executive, finance, human resources and
administrative personnel. In addition, general and administrative expenses
include occupancy costs, fees for professional services, and depreciation of
fixed assets other than Web hosting equipment. We expect general and
administrative expenses to increase in absolute dollars as we continue to expand
our administrative infrastructure to support the anticipated growth of our
business and separation from American Greetings, including costs associated with
being a public company. General and administrative expenses are expected to
fluctuate as a percentage of net revenues from period to period.
Income Taxes. Prior to the closing of this offering, we were a wholly owned
subsidiary of American Greetings Corporation which files a consolidated federal
income tax return. Our taxable income or loss from our inception to February 28,
1999 was included in the consolidated tax returns of our parent. The net
operating loss generated to date has been fully utilized by American Greetings.
We did not prepare or file separate income tax returns. For all periods
presented, our provision or benefit for income taxes has been prepared as if we
had been a separate taxpayer.
We have yet to achieve significant revenue and our ability to generate
significant revenue is uncertain. Further, in view of the rapidly evolving
nature of our business and our very limited operating history, we have very
little experience forecasting our financial performance. Therefore we believe
that period-to-period comparisons of our financial results are not necessarily
meaningful, and you should not rely upon them as an indication of our future
performance. To date, we have incurred and continue to incur substantial costs
to create, introduce and enhance our services, to develop content, to build
brand awareness and to grow our business. As a result, we have incurred
operating losses in each fiscal year since we commenced operations in 1995, with
the exception of this past fiscal year when we were profitable. We expect
operating and net losses and negative cash flow to continue for the foreseeable
future as we intend to significantly increase our operating expenses and capital
investment to grow our business. We may also incur additional costs and expenses
related to acquisitions of businesses and technologies to respond to change in a
rapidly evolving industry. These costs could harm our future financial condition
or operating results.
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CHANGE OF FISCAL YEAR
Effective March 1, 1999, we changed our year-end from a fiscal year ending
February 28 or February 29 to a calendar year-end. As a result, we have included
a discussion below of the four month transitional period corresponding with our
new calendar quarter ended June 30, 1999 as compared to the four month period
ended June 30, 1998. We have also included a discussion of the results of our
operations for the six months ended June 30, 1998 and June 30, 1999 for
comparative purposes. Our 1999 transitional year financial statements to be
included in our Form 10-K filing will include the operations for the period from
March 1, 1999 through December 31, 1999. Our first full calendar year ending
December 31 will be the year ending December 31, 2000. We are undertaking a
change in our year-end in order to facilitate the comparability of our results
of operations and financial condition with that of other publicly traded
Internet companies.
RESULTS OF OPERATIONS
The following table sets forth the statements of operations for the periods
indicated. The results of operations for AmericanGreetings.com reflect the
historical results of the operations of the online greeting and personal
creativity operations of American Greetings prior to the formation of
AmericanGreetings.com. The results of operations include all revenue and costs
directly attributable to the AmericanGreetings.com business, including costs for
facilities, functions and services used by the business at shared locations and
allocations of costs for certain administrative functions and services performed
by centralized departments within American Greetings. Costs have been allocated
based on an estimate of the cost that would have been incurred if
AmericanGreetings.com had been a separate entity. However, the financial
information presented may not necessarily be indicative of the results of
operations of AmericanGreetings.com had we operated as a separate company.
FOUR MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1998 1999 1998 1999
------- ------- ------- -------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues............................................... $2,972 $6,247 $4,050 $9,241
Cost of net revenues....................................... 572 1,512 1,162 1,906
------ ------ ------ ------
Gross profit............................................. 2,400 4,735 2,888 7,335
Operating expenses:
Sales and marketing...................................... 1,231 3,224 1,554 4,746
Product development...................................... 266 845 398 1,153
General and administrative............................... 439 796 598 1,053
------ ------ ------ ------
Total operating expenses.............................. 1,936 4,865 2,550 6,952
Income (loss) before benefit (provision) for income
taxes.................................................... 464 (130) 338 383
Benefit (provision) for income taxes....................... (167) 46 (123) (138)
------ ------ ------ ------
Net income (loss).......................................... $ 297 $ (84) $ 215 $ 245
====== ====== ====== ======
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FOUR MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1998 1999 1998 1999
------- ------- ------- -------
AS A PERCENTAGE OF NET REVENUES:
Net revenues............................................... 100% 100% 100% 100%
Cost of net revenues....................................... 19 24 29 21
--- --- --- ---
Gross profit............................................. 81 76 71 79
Operating expenses:
Sales and marketing...................................... 41 51 38 51
Product development...................................... 9 14 10 13
General and administrative............................... 15 13 15 11
--- --- --- ---
Total operating expenses.............................. 65 78 63 75
Income (loss) before benefit (provision) for income
taxes.................................................... 16 (2) 8 4
Benefit (provision) for income taxes....................... (6) 1 (3) (1)
--- --- --- ---
Net income (loss).......................................... 10% (1)% 5% 3%
=== === === ===
Four and Six Months Ended June 30, 1998 Compared to Four and Six Months Ended
June 30, 1999
Net Revenues. Net revenues increased to $6.2 million and $9.2 million for
the four and six months ended June 30, 1999, respectively, from $3.0 million and
$4.1 million for the four and six months ended June 30, 1998. The increase in
net revenues for the four months ended June 30, 1999 over the corresponding
period in the prior year includes increased revenues from the sale of online
greetings and content royalty and licensing fees of $2.8 million and $464,000,
respectively. For the six months ended June 30, 1999 revenues from the sale of
online greetings and content royalty and licensing fees increased by $3.7
million and $1.4 million, respectively. The increase in 1999 reflects the launch
of our subscription programs in the Fall of 1998 and an increase in the number
of CD-ROM product releases.
Cost of Net Revenues. Cost of net revenues increased to $1.5 million and
$1.9 million for the four and six months ended June 30, 1999, respectively, from
$572,000 and $1.2 million for the four and six months ended June 30, 1998. As a
percentage of net revenues, cost of net revenues increased to 24% of net revenue
for the four months ended June 30, 1999 from 19% of net revenue for the four
months ended June 30, 1998, but decreased to 21% of net revenue for the six
months ended June 30, 1999 from 29% of net revenue for the six months ended June
30, 1998. Such changes in percentage of net revenue reflect changes in the mix
of revenues generated from the sale of online greetings versus content royalty
and licensing fees. Expenses relating to creative and production costs
associated with the creation of content licensed to personal creativity software
manufacturers was $362,000 and $540,000 for the four and six month periods ended
June 30, 1999, respectively, as compared to $410,000 and $599,000 for the
corresponding four and six months in the prior year.
Sales and Marketing. Sales and marketing expenses increased to $3.2 million
and $4.7 million for the four and six months ended June 30, 1999, from $1.2
million and $1.6 million for the four and six months ended June 30, 1998,
respectively. As a percentage of net revenues, sales and marketing expenses
increased to 51% for both the four and six months ended June 30, 1999,
respectively, from 41% and 38% for the four and six months ended June 30, 1998.
The growth in sales and marketing expenses in both absolute dollars and as a
percentage of net revenues, reflects higher costs relating to agreements with
our distribution partners. Under these agreements, partner revenue sharing
expenses increased $1.3 million and $2.3 million for the four month and six
month periods, respectively.
Product Development. Product development costs increased to $845,000 and
$1.2 million for the four and six months ended June 30, 1999, from $266,000 and
$398,000 for the four and six months ended June 30, 1998, respectively. Product
development costs as a percentage of net revenues increased to 14% and 13% of
net revenues for the four and six month periods ended June 30, 1999 from 9% and
10% of net revenues for the same periods in 1998. The increase in absolute
dollars and as a percentage of net revenues
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relates principally to an increase in personnel costs necessary to support the
growth in our business, to modify our Web site and to implement changes to our
product offering.
General and Administrative. General and administrative costs increased to
$796,000 and $1.1 million for the four and six months ended June 30, 1999, from
$439,000 and $598,000 for the four month and the six months ended June 30, 1998,
respectively. The increase in both the four and six month periods was due almost
entirely to higher personnel costs required to support our expanded operations
and significant growth. As a percentage of net revenues, general and
administrative expenses decreased to 13% and 11% for the four and six months
ended June 30, 1999, respectively, from 15% for both corresponding periods in
fiscal 1998 as general and administrative expenses were spread over a larger
revenue base.
The following table sets forth the statements of operations for the periods
indicated.
FISCAL YEARS ENDED FEBRUARY 28,
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 1,036 $ 3,882 $12,347
Cost of net revenues........................................ 1,034 1,919 1,623
------- ------- -------
Gross profit.............................................. 2 1,963 10,724
Operating expenses:
Sales and marketing....................................... 1,929 1,980 5,611
Product development....................................... 1,270 959 1,090
General and administrative................................ 430 838 1,340
------- ------- -------
Total operating expenses............................... 3,629 3,777 8,041
------- ------- -------
Income (loss) before benefit (provision) for income taxes... (3,627) (1,814) 2,683
Benefit (provision) for income taxes........................ 1,244 635 (966)
------- ------- -------
Net income (loss)........................................... $(2,383) $(1,179) $ 1,717
======= ======= =======
FISCAL YEARS ENDED FEBRUARY 28,
--------------------------------
1997 1998 1999
-------- -------- --------
AS A PERCENTAGE OF NET REVENUES:
Net revenues................................................ 100% 100% 100%
Cost of net revenues........................................ 100 49 13
------- ------- -------
Gross profit.............................................. 0 51 87
Operating expenses:
Sales and marketing....................................... 186 51 45
Product development....................................... 123 25 9
General and administrative................................ 41 22 11
------- ------- -------
Total operating expenses............................... 350 98 65
------- ------- -------
Income (loss) before benefit (provision) for income taxes... (350) (47) 22
Benefit (provision) for income taxes........................ 120 17 (8)
------- ------- -------
Net income (loss)........................................... (230)% (30)% 14%
======= ======= =======
Fiscal Years Ended February 28, 1997, 1998 and 1999
Net Revenues. Net revenues increased by $2.9 million to $3.9 million in
fiscal 1998 from $1.0 million in fiscal 1997. Revenues from the sale of online
greetings contributed $1.0 million of this increase reflecting the commencement
of sales through AOL in September 1997. In addition, revenues from trademark and
content licensing increased approximately $1.9 million to $2.7 million in fiscal
1998 from $842,000 in fiscal 1997 reflecting an increase in the number of
software product introductions and an overall increase in the level of personal
creativity software sales. Net revenues increased by $8.4 million to $12.3
million in fiscal 1999 from $3.9 million in fiscal 1998. Revenues from the sale
of online greetings increased $4.6 million in
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fiscal 1999 due principally to the commencement of the sales of subscriptions
through AOL in August 1998 and on our own Web site in November 1998. In
addition, net revenues from royalties earned on the licensing of trademarks and
content to personal creativity software publishers increased $3.8 million to
$6.5 million in fiscal 1999 from $2.7 million in fiscal 1998, reflecting an
overall increase in the level of personal creativity software sales.
Cost of Net Revenues. Cost of net revenues were $1.0 million, $1.9 million
and $1.6 million for fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
Cost of net revenues declined as a percentage of sales from 100% in fiscal 1997
to 49% in fiscal 1998 and 13% in fiscal 1999 reflecting the spreading of costs
over a higher base of revenues for each period presented. The largest component
of cost of net revenues relates to creative and production costs which were $1.0
million, $1.7 million and $1.1 million in fiscal 1997, 1998, and 1999,
respectively. Creative and production costs increased by $698,000 in fiscal 1998
as compared to fiscal 1997, reflecting an increase in the number of product
releases. The decline in creative and production costs in fiscal 1999 compared
to fiscal 1998 reflects an increase in proportionate costs deferred associated
with the creation of content licensed for personal creativity software to
Mindscape under an agreement entered into February 1998. Prior to fiscal 1999,
substantially all creative and production costs were incurred under agreements
which did not contain royalty or licensing fee guarantees and, accordingly, were
expensed as incurred.
Sales and Marketing. Sales and marketing expenses increased by $51,000 to
$2.0 million in fiscal 1998, representing 51% of net revenues, from $1.9
million, representing 186% of net revenues, in fiscal 1997. The increase in
costs from fiscal 1997 to fiscal 1998 reflects an increase in personnel and
business development costs of $35,000 an increase in partner revenue sharing
expenses associated with higher volumes of business of $407,000 partially offset
by a decrease in non-Web based advertising expenses and other promotional
expenses of approximately $391,000. Sales and marketing expenses increased by
$3.6 million to $5.6 million in fiscal 1999, representing 45% of net revenues
from $2.0 million in fiscal 1998, or 51% of net revenues. Approximately $3.4
million of this increase is attributable to higher partner revenue sharing
expenses resulting from an increase in the number of online greetings sold
through the AOL service. In addition, sales and marketing expenses increased by
$642,000 in fiscal 1999 reflecting increased staffing and related costs in
connection with the implementation of our marketing strategy and customer
service activities necessary to support our increased customer base and to
expand and develop our distribution relationships. This increase was partially
offset by a $390,000 decrease in non-Web based advertising expenses and other
promotional expenses. Advertising costs decreased as we changed focus from print
advertising to gain customers to distribution deals such as our agreements with
AOL and Yahoo!. Sales and marketing expenses as a percentage of net revenue
decreased from fiscal 1997 to fiscal 1998 and from fiscal 1998 to fiscal 1999 as
sales and marketing expenses were spread over larger revenue base.
Product Development. Product development expenses declined by $311,000 to
$959,000 in fiscal 1998 from $1.3 million in fiscal 1997. The higher level of
costs in fiscal 1997 reflects higher levels of investment necessary to support
the initial development of products and technologies during our start-up phase.
A substantial portion of these costs in fiscal 1997 were outsourced. Product
development expenses increased by $131,000 to $1.1 million in fiscal 1999 from
$959,000 in fiscal 1998 reflecting an increase in staffing and associated costs
related to enhancing the features and functionality of our Web site as well as
increased investments in computer systems and infrastructure. As a percentage of
net revenue, product development expenses decreased from 123% in fiscal 1997 to
25% in fiscal 1998 and 9% in fiscal 1999 as product development expenses were
spread over a larger revenue base.
General and Administrative. General and administrative expenses increased
by $408,000 to $838,000 in fiscal 1998 from $430,000 in fiscal 1997. The
increase from fiscal 1997 to fiscal 1998 reflects increased personnel costs
necessary in support of the business' expansion and higher depreciation
expenses, resulting from additional expenditures for fixed assets. General and
administrative expenses increased by $502,000 to $1.3 million in fiscal 1999
from $838,000 in fiscal 1998. Substantially all of the increase is due to higher
personnel costs in support of the growth in our business activities. As a
percentage of net revenue general and administrative expenses decreased from 41%
in fiscal 1997 to 22% in fiscal 1998 and 11% in fiscal 1999 as general and
administrative expenses were spread over a larger revenue base.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the eight calendar quarters ended June 30, 1999. This
unaudited quarterly information has been derived from financial statements of
AmericanGreetings.com and, in the opinion of management, contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. These unaudited
quarterly results should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this prospectus. The results of
operations for any quarter are not necessarily indicative of the results of any
future period.
THREE MONTHS ENDED
---------------------------------------------------------------------------------
SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- ------- ------- -------- -------- ------- ------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $1,004 $1,034 $1,777 $2,273 $2,702 $3,679 $4,501 $4,740
Cost of net revenues....................... 285 386 716 446 179 478 683 1,223
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............................. 719 648 1,061 1,827 2,523 3,201 3,818 3,517
Operating expenses:
Sales and marketing...................... 454 536 601 953 1,059 1,799 2,357 2,389
Product development...................... 259 205 194 204 233 283 432 721
General and administrative............... 194 206 275 323 322 322 415 638
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses............... 907 947 1,070 1,480 1,614 2,404 3,204 3,748
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before benefit (provision)
for income taxes......................... (188) (299) (9) 347 909 797 614 (231)
Benefit (provision) for income taxes....... 66 105 3 (126) (327) (288) (221) 83
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).......................... $ (122) $ (194) $ (6) $ 221 $ 582 $ 509 $ 393 $ (148)
====== ====== ====== ====== ====== ====== ====== ======
THREE MONTHS ENDED
---------------------------------------------------------------------------------
SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- ------- ------- -------- -------- ------- ------- --------
AS A PERCENTAGE OF NET REVENUES:
Net revenues............................... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of net revenues....................... 28 37 40 20 7 13 15 26
--- --- --- --- --- --- --- ---
Gross profit............................. 72 63 60 80 93 87 85 74
Operating expenses:
Sales and marketing...................... 45 52 34 42 39 49 52 51
Product development...................... 26 20 11 9 9 7 10 15
General and administrative............... 19 20 15 14 12 9 9 13
--- --- --- --- --- --- --- ---
Total operating expense................ 90 92 60 65 60 65 71 79
--- --- --- --- --- --- --- ---
Income (loss) before benefit (provision)
for income taxes......................... (19) (29) -- 15 33 22 14 (5)
Benefit (provision) for income taxes....... 7 10 -- (5) (12) (8) (5) 2
--- --- --- --- --- --- --- ---
Net income (loss).......................... (12)% (19)% (0)% 10% 21% 14% 9% (3)%
=== === === === === === === ===
Our results of operations could vary significantly from quarter to quarter.
We expect to incur significant sales and marketing expenses to promote our
brands and our products in the future. Therefore, our quarterly financial
performances and operating results are likely to be particularly affected by the
number of subscribers as well as sales and marketing expenses for a particular
period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our operations have been funded primarily from cash
contributed by American Greetings. American Greetings contributed cash of $7.5
million to AmericanGreetings.com during the period from inception through June
30, 1999.
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Cash used in operating activities was $2.4 million, $1.6 million and $2.6
million in fiscal 1997, 1998 and 1999, respectively. Cash used in operating
activities in fiscal 1997 was primarily attributable to a net loss of $2.4
million. Cash used in operating activities in fiscal 1998 was primarily
attributable to a net loss of $1.2 million and increases in prepaid partner
share expense and accounts receivable, partially offset by an increase in
deferred revenue. Cash used in operating activities in fiscal 1999 was primarily
attributable to increases in accounts receivable, prepaid partner share expense,
and deferred creative and production costs, partially offset by net income of
$1.7 million, an increase in deferred revenue due to a higher level of
subscriptions, and an increase in accounts payable. Cash used in investing
activities was $350,000, $228,000 and $402,000 in fiscal 1997, 1998 and 1999,
respectively, and related principally to acquisition of computers and office
equipment. Cash provided by financing activities was $2.8 million, $1.9 million
and $3.0 million in fiscal 1997, 1998 and 1999, respectively. Cash provided by
financing activities was attributable to net advances from our parent in all
fiscal years.
For the four months ended June 30, 1999 net cash provided by operating
activities was $3.6 million, reflecting a decrease in trade accounts receivable
and prepaid partner share expense. During this period, cash provided by
operating activities was used primarily to finance fixed asset additions of $2.0
million and reduce parent company advances.
We continue to be substantially dependent upon American Greetings for the
majority of our financial, administrative and operational services and related
support functions, including cash management. We believe that the implementation
of an independent accounting system, financial and operational management
controls, and reporting systems and procedures will be necessary to support the
continued expansion of our operations. As a consequence, we intend to expend
working capital to support the development of our system's infrastructure.
Following the formation of AmericanGreetings.com, American Greetings and
AmericanGreetings.com will enter into a formation agreement under which American
Greetings will, prior to the closing of this offering, contribute to capital its
net advances to AmericanGreetings.com and $50.0 million in cash, of which the
net amount of $17.6 million was paid to AOL and Yahoo! during August 1999 in
connection with our related distribution agreements, for 100% of the ownership
interest in AmericanGreetings.com. Under the formation agreement, American
Greetings and AmericanGreetings.com will also enter into, prior to the closing
of this offering, a cross-license agreement whereby American Greetings and
AmericanGreetings.com will each provide the other with use of its art and verse
libraries, as well as trademarks. The cross-license agreement will provide for
fixed royalty payments of $24.0 million to American Greetings over the three
years, beginning July 1, 1999. Thereafter, the royalties are to be computed
based on 3% of net revenues for so long as any American Greetings' trademarks
are used, with a guaranteed minimum of $5.0 million per year. Additionally,
under the formation agreement, American Greetings and AmericanGreetings.com
will, prior to the closing of this offering, enter into an administrative
services agreement, under which American Greetings will provide
AmericanGreetings.com with requested back office infrastructure and certain
operational and administrative services at American Greetings' cost plus 10%.
See "Related Party Transactions -- Transactions With Our Parent" and Note H to
our notes to our financial statements.
On July 28, 1999, we entered into an interactive marketing agreement with
AOL extending through December 2004 which provides for us to be featured as the
generally exclusive provider of online greeting products and services to the
following AOL brands: AOL, AOL.com, ICQ, Digital City, Netscape Netcenter and
CompuServe. In addition, our products and services will also be offered on AOL
International services, including such services in Canada, the United Kingdom,
Australia, Japan, Germany and France. In consideration of the marketing,
promotion, advertising and other services AOL will provide under this agreement,
we will pay AOL a minimum aggregate of $100.0 million over the term of the
agreement. The agreement also contains revenue sharing provisions for sales over
specified amounts. We expect that we will amortize the costs associated with
this agreement over the contract term of five and one-half years as sales and
marketing expenses. Of the amount payable under this agreement, $22.8 million
was paid in August 1999. The agreement may be terminated by either party upon a
material breach by the other party which is not cured within 90 days of notice,
and by AOL upon a change of control of AmericanGreetings.com resulting in our
being controlled by a competitor of AOL. Under the agreement, AOL will act as
our
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exclusive sales agent for all advertisements on the co-branded sites, and AOL
and AmericanGreetings.com will share in the advertising revenues from the
co-branded sites. In addition, under our agreement with AOL,
AmericanGreetings.com is guaranteed to receive at least $30.0 million through
June 2002 for advertising sold on our co-branded sites. Under this agreement,
$6.0 million was received from AOL in August 1999 in connection therewith.
On August 1, 1999, we entered into a license and promotion agreement for
the integration of our greetings products and services with Yahoo!'s greetings
service. The agreement is for a term of approximately two years. Under this
agreement, we are required to pay Yahoo! minimum aggregate fees of $8.0 million
over the term of the agreement. We expect that the costs associated with this
agreement will be recognized as sales and marketing expenses over the two year
contract term. We may also be required to pay Yahoo! additional fees if a
specified revenue threshold amount is attained.
Under our agreement with Mindscape, we receive trademark licensing fees and
a royalty for each product sold with guaranteed minimum payments of $17.0
million over the four-year term of the agreement ending in February 2002. If
royalty payments to us under this agreement meet specified levels, the agreement
gives Mindscape the right to extend the term.
Other than our payment obligations to our distribution partners, our
royalty obligations under our agreements with American Greetings, obligations
under operating leases and technology acquisitions, we have no material capital
commitments. We expect capital expenditures of approximately $10.0 million over
the next twelve months relating to investments in technology infrastructure
necessary to support our growth objectives.
We expect to incur significantly higher costs, particularly content
creation costs and sales and marketing costs, in the future to grow our
business. We believe that the net proceeds from this offering, together with
American Greetings cash contribution, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
twelve months. Thereafter, if cash generated from operations is insufficient to
satisfy our liquidity requirements, we may need to raise additional funds
through public or private financing, strategic relationships or other
arrangements. We cannot assure you that such additional funding, if needed, will
be available on terms attractive to us, or at all. The failure to raise capital
when needed could seriously harm our business and financial condition. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our then current stockholders will be
reduced.
YEAR 2000 COMPLIANCE
We rely primarily on American Greetings' computer, communications networks
and information systems for the processing of our accounting and administrative
information. The Year 2000 issue is the result of information technology, or IT,
systems programs being written using two digits rather than four digits to
define the application year. Any of American Greetings' IT systems that have
date-sensitive software may be unable to interpret appropriately the calendar
year 2000 and thus could cause the disruption of normal business activities. In
addition, we rely on American Greetings' IT systems in various aspects of our
business, including some of our product development and all of our
administrative functions. American Greetings is currently in the process of
working toward Year 2000 compliance. American Greetings has prioritized its IT
systems into three categories: critical, necessary or other. Failure of a
"critical" system would result in a serious disruption of revenue and would
critically impact our productivity. Failure of a "necessary" system would result
in serious processing delays and a significant reduction in productivity. We
have been informed that American Greetings believes its critical and necessary
applications are Year 2000 compliant. The remainder of the systems should be
remedied by the end of the third quarter of calendar 1999. However, given the
number of systems in the Year 2000 portfolio, slippage in the schedule could
occur.
In addition, for those few systems that we utilize only for the
AmericanGreetings.com business, we believe that we will complete validation
testing by October 1999 so that all additional business processes and components
will properly handle dates prior to, during and after the year 2000. We have
also begun the process of ensuring that all significant vendors and customers
are Year 2000 compliant. Our current estimate
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of total cost remaining to achieve Year 2000 compliance in both our IT and
non-IT systems is approximately $60,000 for testing costs, modifications to
existing software, software replacement, systems software upgrades, computing
hardware replacement and embedded systems. Through June 30, 1999, approximately
$20,000 has been cumulatively expended on Year 2000 compliance.
We believe the Year 2000 compliance issue should not have a material impact
on AmericanGreetings.com's operations. Specific factors which might cause the
Year 2000 issue to have a material adverse effect on our business include the
availability and cost of trained personnel and the ability to recruit and retain
them, as well as the ability to locate all system coding requiring correction.
Based upon information available at this time, AmericanGreetings.com believes
that the cost of modifications, replacements and related testing will not have a
material impact on its liquidity or results of operations.
We believe that our most reasonably likely worst case scenario related to
Year 2000 could include:
- disruption of our users' ability to send online greetings;
- disruption of our ability to take orders from users and to connect users
to e-commerce merchants;
- our users' inability to use their computers because they are not Year
2000 compliant; and
- our distribution partners' inability to send users to our site.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes new standards for the way companies
report information about operating segments in annual financial statements. The
disclosures prescribed by SFAS No. 131 are effective for the year ending
February 28, 1999. We believe that we currently operate in one segment.
In April 1998, The American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, 98-5, "Reporting on the Costs of
Start-up Activities". The Standard is effective for the company for its fiscal
year beginning March 1, 1999. This Standard requires that start-up costs, as
defined, be written off and any future start-up costs be expensed as incurred.
We expense start-up costs as incurred and, therefore, adoption of this Standard
is not expected to have a significant impact on our financial position, results
of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Standard, which establishes new
accounting and reporting standards for derivative financial instruments, must be
adopted for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not have any derivative instruments and, therefore, do not expect
the Standard to have a material effect on our financial position, results of
operations or cash flows.
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BUSINESS
OUR COMPANY
We are a leading Web-based provider of greetings and other social
expression content aimed at expanding individuals' ability to communicate and
express themselves online. Our destination Web site offers users access to over
9,000 greetings and other social expression products, one of the largest
selections on the Web today. Our online products consist of static postcards,
animated and interactive online greetings, customized printable greeting cards,
cartoons and games. We are able to provide users with this comprehensive
selection through our in-house team of experienced creative specialists, third
party licensees and our relationship with our parent, American Greetings, the
world's largest publicly-traded greeting card company. Our relationship with
American Greetings provides us with access to its library of approximately one
million images and lines of verse as well as the American Greetings brand name
online. Users visiting our Web site can view, personalize and send from a
competitive selection of free greetings and social expression products while
paid subscription users have unlimited access to our complete online selection.
In addition to subscriptions, we currently generate revenues from the sale of
advertising on our Web site, and by licensing our trademark and a portion of our
content to Mindscape, a division of Mattel, for inclusion in personal creativity
software.
We began providing consumers with online greetings in 1995 when we
introduced our own Web-based service. Since then, our traffic has grown
significantly and on a combined basis, our Web properties at
www.americangreetings.com or www.ag.com and AOL keyword: American Greetings
ranked as the seventh most visited shopping site on the Internet and in the top
50 of the Web's most heavily trafficked sites in June 1999, according to Media
Metrix, an Internet and digital media measurement company. For the month of June
1999, we had over four million unique visitors and over 32 million total page
views. At June 30, 1999, we had over 400,000 subscribers. In addition, two of
our American Greetings branded software titles were ranked in the top five of
the personal productivity category for the month of June 1999, according to PC
Data. Our revenues have increased from $4.1 million for the six months ended
June 30, 1998 to $9.2 million for the six months ended June 30, 1999. We believe
our success is based, in large part, upon:
- leveraging our parent, American Greetings' brand name and content;
- creating and developing our own content;
- establishing key character license relationships;
- building a robust and scalable technology infrastructure;
- establishing distribution agreements with key online sources of users;
and
- leveraging our management's significant combined experience in the
greetings and internet industry.
Our key content relationships provide our users with one of the largest
online greetings collections of licensed characters including Betty Boop,
Dilbert, The Simpsons, the World Wrestling Federation and Xena. Our distribution
agreements with major Internet content and service providers such as AOL, Yahoo!
and Lycos Network, have helped to extend our brand awareness while increasing
our user base. Through our agreement with AOL, we are the exclusive provider,
subject to limited exceptions, of greetings products and services to the
following AOL brands: AOL, AOL.com, ICQ, Digital City, Netscape Netcenter and
CompuServe. In addition, our products and services will also be offered on AOL
international services in Canada, the United Kingdom, Australia, Japan, Germany
and France. In addition, in order to extend our brand awareness and increase our
user base, we have created an affiliate program with over 13,000 affiliated
sites as of June 30, 1999. Our affiliates are a group of Web sites owned and
operated by third parties who, for a percentage of revenues, place banner ads
and cross-links to our site on their Web sites and thereby help drive traffic to
our site.
We believe the proliferation of the home computer, with enhanced
peripherals such as the color printer, will continue to support our growth as a
leading provider of online greetings and other social expression
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content. Our strategy for capitalizing on this market opportunity is to offer
online users a comprehensive online offering of greetings and other social
expression products and services. These products and services are electronically
sendable or remotely printable and are of high quality, available in a wide
variety and utilize some of the most effective technology in online greetings.
In addition, we believe that our relationship with American Greetings and the
ability to leverage its superior brand and more than 90 years of expertise and
experience in greetings and social communication provides us with a meaningful
advantage relative to our competitors.
INDUSTRY BACKGROUND
The Traditional Greeting Card Industry. Over the past 100 years, greeting
cards have become almost universally accepted as a means of social expression
and communication. People rely on greeting cards to convey sentiments and
emotions in a manner that may not be easily conveyed through letters or other
written communications. As a result, paper greeting cards have become part of
the world's social fabric, including in the United States where sales of these
cards and related products are expected to exceed $7.7 billion in 1999 alone,
according to the Greeting Card Association of America. The average person
received approximately 24 greeting cards per capita in the United States during
1998, according to the Greeting Card Association of America. Despite their wide
use and popularity, however, we believe the following factors have traditionally
acted to limit sales of paper greeting cards:
- the inconvenience of shopping for paper cards;
- failure on the consumer's part to remember that they need to buy a card;
- the inconvenience of mailing the card or mailing the card in a timely
manner; and
- the limited selection available in any one location.
Growth of the Internet as a Medium for Communications. The Internet has
become an important communications tool, advertising medium and sales channel
for consumers and businesses worldwide. International Data Corporation, or IDC,
estimates that the number of Internet users worldwide will increase from 97
million in 1998 to 320 million in 2002, representing a compound annual growth
rate of approximately 35%. According to Jupiter Communications, e-mail ranks as
the number one reason consumers access the Internet today. Forrester Research
expects the number of e-mail users in the United States alone to increase from
40 million in 1996 to 135 million in 2001. In addition, Electronic Mail &
Messaging Systems estimates that in the United States the total volume of daily
e-mail and instant messages, which allow users to communicate real-time with
each other, will increase from 0.7 billion in 1998 to 1.9 billion in 2002,
representing a compound annual growth rate of approximately 40%. Forrester
Research estimates that over one billion of the e-mail and instant messages sent
in 1998 were personal, and expects that number to increase to over 3.5 billion
in 2002. We believe that the explosive growth of e-mail and instant message
communications can largely be attributed to their ease of use and convenience.
Both methods, however, suffer from being somewhat difficult for users to
personalize in order to fully express their emotions and sentiments.
Growth of the Internet as a Medium for Commerce and Advertising. Online
purchases are expected to grow rapidly as well. IDC estimates that at the end of
1998, almost 27 million users worldwide had made at least one online purchase,
and by the end of 2002 this population is expected to grow to approximately 128
million. In addition, Simba Information estimates that online advertising
revenues will grow from approximately $2.1 billion in 1998 to approximately $7.1
billion in 2002.
Proliferation of Color Printers. According to Media Metrix, at the end of
1998 over 60% of all computer households were believed to have access to a color
printer. Furthermore, we believe that roughly 20% of all U.S. households
currently print greetings and other creativity products through the use of a
color printer. We believe that the personal creativity market has seen dramatic
growth in recent years as a result of the proliferation of color printers in
households, growing from approximately $147.3 million in 1996 to $202.7 million
in 1998, an increase of approximately 37%.
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Emergence of Online Greetings. Much as paper greetings supplement letters
as a form of social communication, we believe online greetings are beginning to
supplement e-mail as a means of more effectively communicating sentiments and
emotions. This continually evolving means of communication currently allows
users to enhance e-mail with such multi-media features as sound, graphics and
motion components to deliver dramatically higher impact online greetings.
Compared to traditional, text only e-mail, online greetings allow the sender to
better impart the expression or emotion to be delivered, thereby significantly
enhancing the level of communication between sender and recipient. According to
a recent study conducted by Jupiter Communications, nearly 60% of consumers
online cited sending online greetings as one of the reasons for going online.
THE AMERICANGREETINGS.COM SOLUTION
Our solution is to provide users with one of the largest selections of
greetings and other social expression content online in order to meet their
everyday communication, self-expression and entertainment needs. Currently, we
offer over 9,000 greetings and other social expression products online, which we
believe is the largest offering available on the Internet today. Supporting our
online selection and facilitating development of new products is a library of
approximately one million images and lines of verse that our parent, American
Greetings, has developed and market-tested over the past 90 years. We believe
that our growing and diverse library allows us to provide a broad selection of
high quality greetings and other social expression products that can be targeted
to specific audiences. By targeting specific audiences, we offer online
advertisers and retailers an opportunity to direct their products and services
more effectively to their target markets.
We currently offer users visiting our Web site and the co-branded sites of
our distribution partners an assortment of free greetings and related social
expression content as well as the opportunity to access an even broader
selection of greetings and social expression content through a subscription for
a fixed period of time. In addition, we currently offer our subscribers a
selection of high quality specialty paper for printing online greetings and
discounts on e-commerce transactions with our e-commerce partners. We believe
our free offerings will help drive traffic to our Web site and the co-branded
sites of our distribution partners while building our subscriber base as users
view and access our full range of online content.
We believe one of our principal competitive advantages results from our
relationship with American Greetings, our parent and a leader in traditional
social communication. American Greetings is the largest publicly-traded greeting
card company in the world with revenues of approximately $2.2 billion for the
twelve months ended February 28, 1999. Through this relationship we are able to
tap into and leverage over 90 years of American Greetings' industry knowledge
and expertise. Other advantages that our relationship with American Greetings
provides us relative to our competitors include:
- superior brand recognition of the American Greetings brand name;
- unlimited access to American Greetings' library of market-proven artwork
and verse;
- the ability to conduct cross-marketing and co-promotion programs; and
- the ability to serve international markets, such as the United Kingdom,
Canada and Australia, for which markets American Greetings has already
developed content.
We provide the following benefits to our users:
Broad Selection of Quality Greetings and Social Expression Content. We
believe we offer the largest selection of online greetings and other social
expression products, with over 9,000 currently available. In addition to our
proprietary library of market-tested content, we license trademarks and
copyrighted material to enhance our product offerings. We currently have over 30
licenses for such widely recognized brand names and characters as Dilbert, Power
Rangers, the Simpsons and the World Wrestling Federation. Our in-house team of
creative specialists, together with our network of freelance artists and other
professionals, coordinate, develop and deliver content that is updated daily.
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Wide Variety of Products and Delivery Available. In order to meet the
changing and diverse needs of our user base, we offer a wide variety of
greetings and other social expression products in formats which utilize a range
of technologies. Our electronic greetings range from static postcards which can
be viewed easily and downloaded quickly to animated, interactive greetings which
use industry standard technology enabling the addition of sound, graphics and
personalized text. We offer our users products which the sender can customize
with a personal message. These products provide users with the ability to
enhance their ordinary text based e-mail communication. We also offer our users
the ability to select, personalize and print directly from our Web site
thousands of high quality greeting cards and other printable personal creativity
products. These products address a need for some users who prefer the benefits
of a physical product that is accessible 24 hours a day and offers a wider
selection of greetings than is available in many retail stores. This method also
allows users to send greetings to individuals that are not online.
We provide several means of delivery from which users can transmit
greetings, allowing them to choose the method that best suits both the sender's
and the recipient's needs. Users have the option of electronic delivery,
printing a traditional greeting card at home, or having us print and mail the
greeting for them. On the back of all these printable products is our URL so the
recipient can go to our site and reciprocate the sentiment. For electronic
users, we offer the ability to receive greetings through an online pick-up
window by prompting the receiver to visit our Web site to retrieve their
greetings. This delivery method promotes traffic to our Web site and encourages
a reciprocal greeting from the recipient back to the sender, thus proliferating
the use of online greetings.
Personalized Services for Ease of Use. We offer an array of helpful and
useful services to assist our users. Some of these services include automatic
e-mail reminders of important dates and occasions, the ability to schedule the
delivery of a greeting up to a year in advance and a personalized address book
to assist users in sending online greetings. We also offer users the opportunity
to purchase items such as chocolates and gift items at discounted prices on our
site through cross-selling programs with retailers.
Targeted, Cost-effective Medium for Advertisers. Based on our ability to
track our users' browsing and sending habits, we are able to provide advertisers
with highly-targeted online audiences. Information gathered through the ordering
process and our online sales performance tracking systems allow us to target and
distribute electronic offers of products and services to users with desirable
characteristics and interests as demonstrated by their greetings usage on our
site. Additionally, users browsing particular pages on our Web site or sending
particular products are likely to be highly motivated buyers of products
consistent with the theme of that section. For example, a user on our site who
creates and sends a Valentine's Day card might be an excellent candidate to whom
to offer other holiday related gifts such as flowers or chocolates.
STRATEGY
Our objective is to become the premier site worldwide for users to fulfill
their online greetings and social expression needs. Our strategy includes the
following key elements:
Create the Broadest Selection of Enhanced Content Online. We intend to
continually broaden and enhance our content, product and service offerings. We
believe that including enhanced offerings such as categories of content directed
at and addressing specific demographic and common interest groups such as pet
owners and sports fans, and adding more multimedia content should increase the
attractiveness of our site. Furthermore, we intend to offer additional features
that will be updated frequently by our creative staff to provide the most
current topical content possible. We believe that by continually enhancing and
expanding our online offerings, we expect to draw increased traffic to our Web
site, improve our brand recognition, increase the amount of time users spend on
our site and broaden our user base. We believe many users who are initially
drawn to our site by our free content will choose to upgrade to the subscription
service to gain unlimited access to our full range of online content.
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Aggressively Build Our Brand and Increase Traffic. We intend to
aggressively build our brand and increase our traffic through the following:
- Strengthen Distribution Partnerships with Major Internet Content and
Service Providers. We believe that we can significantly increase traffic
to our Web site, increase the number of our subscribers and expand brand
recognition through our strategic alliances with major Internet content
and service providers. We intend to continue to leverage our distribution
partnerships with companies such as America Online, Yahoo!, and Lycos
Network to drive traffic to our site. Through closer integration,
co-branding and joint marketing programs, we plan to take advantage of
the significant distribution reach of each partner to increase our
exposure and contact a broader audience of potential subscribers.
- Leverage and Expand Our Affiliate Program and Our E-commerce
Relationships. We plan to grow our current affiliate base of over 13,000
sites by coupling attractive commissions and customized options with
strong technology tools and real time sales reporting. We also intend to
enter into additional cross-selling arrangements with retailers.
- Pursue Online and Traditional Advertising. While we have conducted only
limited advertising to date, we intend to further promote our brand
through a marketing campaign using a combination of online and
traditional marketing. We plan to add the address of our Web site to the
back of American Greetings' printed greeting cards which number over one
billion distributed in thousands of retail outlets in North America per
year. Pursuant to our new agreements with AOL and Yahoo!, we intend to
extensively advertise on their Web sites as well as the sites of other
select Internet content and service providers. In addition, following the
closing of this offering, we plan to initiate a national advertising
campaign through traditional print and broadcast media.
- Direct Marketing to Users. We plan to use direct e-mail marketing for
value-added products and services to increase conversion to our
subscription service and promote the sale of e-commerce products offered
on our site.
Continue to Drive Advertising Revenues. We believe that our Web site offers
advertisers highly relevant audiences for narrowly targeted advertising. We
intend to expand our internal sales team as well as use third party sales
organizations such as AOL and Phase2Media to attract advertisers based on our
ability to track our users' browsing and sending habits through the ordering
process and our online sales performance tracking system. This allows us to
target electronic offers of products and services to users with desirable
characteristics and interests. We intend to offer (1) general run-of-site
advertising that places an advertiser's banner throughout our Web site targeted
to the broad greetings user, (2) category sponsorship advertising that more
specifically targets a sending occasion, and (3) premium placement
advertisements that specifically target our users after they have indicated
their decision to view a specific greeting.
Broaden E-commerce Offerings. We believe our Web site provides an
attractive opportunity to third-party vendors to reach a highly targeted group
of online consumers. We currently have cross-selling relationships with Gorant
Chocolates, Hickory Farms and OfficeMax.com for which we receive either a fixed
commission on sales or a one-time fee for ad placement on our site. We intend to
enter into highly targeted cross-selling arrangements with additional retailers.
We also intend to promote e-commerce offerings which are complementary to our
greetings and other social expression content, such as specialty paper for
printing physical cards and personal creativity software.
Expand Internationally. We believe that significant opportunities exist to
address the global adoption of the Internet and the global demand for enhanced
electronic communication. We currently offer culturally tailored content in
British English, French, German, Spanish, Japanese and Chinese, and intend to
continually expand into other foreign languages and cultures. We intend to
create local versions of our Web site for foreign markets and we will continue
to utilize existing overseas relationships of our parent and those of our
strategic partners such as AOL. We intend to further explore international
opportunities to extend the reach of the AmericanGreetings.com brand and to
pursue additional strategic relationships in important international markets.
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OUR CONTENT-BASED PRODUCTS AND SERVICES
Content
Our in-house team of creative specialists, together with freelance artists,
coordinate and develop over 30,000 pieces of proprietary content annually,
providing a wide array of greetings and social expression products from which
our users can choose. Our content includes material tailored to specific
demographic audiences and their interests. This content is transformed into both
greetings and other social expression products designed to appeal to the
specific communication, self expression and entertainment needs of these
audiences. Targeted audiences include:
- Kids. games, crafts and activities, greetings for kids to send to kids
and adults alike, and favorite characters.
- Women. family, health, work, relationships, food and travel.
- Interest Related. sports, animals, hobbies, music, spirituality and
lifestyles.
- International. multilingual greetings from international markets
including: the United Kingdom, Australia, Germany, France, Japan,
Netherlands and Canada.
We also have contract rights to licensed content for many popular brand
names, characters and photographic archives. The majority of the license
agreements are for a term of two years, and allow us rights to use the licensed
property in our online greetings and other related social expression products.
Some of our most widely recognized licensed properties include:
- Cartoons and Comics. Beavis and Butthead, Betty Boop, Dilbert, Garfield,
Marmaduke, Popeye and Rugrats.
- Television and Movies. Antz, Hercules, Power Rangers, The Simpsons, The
Three Stooges, Universal Studios' Monsters and Xena.
- Others. Care Bears, Elvis, Strawberry Shortcake and the World Wrestling
Federation.
Our content also covers a broad range of sentiments and occasions in an
attempt to meet all the needs of our users. Some such sentiments and occasions
for the sending of greetings include:
- Major Occasions. Anniversaries, Birthdays, Graduations and Weddings
- Major Holidays. Father's Day, Mother's Day and Valentine's Day
- Other Holidays. Earth Day, Groundhog Day, Halloween, New Years' Day, St.
Patrick's Day, and Thanksgiving Day
- Special Days. Kiss Your Mate Day, National Forgiveness Day, Secretaries'
Day and Teacher's Day
- International Holidays. Bastille Day, Cinco De Mayo, Pulaski Day and
Victoria Day
- Religious Holidays. Christmas, Easter, Hanukkah, Passover and Rosh
Hashanah
- Non Occasions/Sentimental. Anytime, Friendship, Get Well, Just to Say Hi,
Romance, Thank You and Thinking of You
- Celebrate-the-Date. A different greeting for each day of the year,
including International Violin Day, Limerick Day, National Programmers'
Day, National Splurge Day and Slug Day.
Content-Based Products
We believe we currently offer our users one of the largest selections of
online greetings and social expression content-based products. We have assembled
a wide variety of high-quality artwork and verse that
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we believe appeals to and is relevant to the sentiments, needs and tastes of a
broad base of Internet users. We currently offer the following products:
- Greetings Online. Printable greeting cards, electronic postcards,
animated greetings and interactive greetings
- Social Expression and Entertainment Products. Interactive jokes, stories,
comics, horoscopes and games
- Personal Creativity Products. Banners, stationery, 3-D crafts, calendars,
invitations, announcements, Web page templates, clip art and screen
savers
Delivery Methods
In order to meet the diverse needs of online users, we offer a wide variety
of delivery methods:
- E-mail. A user selects and personalizes a greeting or other social
expression content such as a cartoon and sends it to the recipient
through our service. The recipient receives an e-mail from us prompting
them to link to our electronic pick-up window in order to retrieve their
greeting. This system promotes traffic to our Web site by requiring the
receiver of the online greeting to retrieve their greeting on our Web
site. In addition, the use of a Web pick-up window encourages reciprocity
from the recipient while they are on our Web site, which proliferates the
use of our online greetings. Our electronic pick-up window system has
been implemented on our Web site and our co-branded sites, other than
AOL, and is in the process of being implemented on our AOL co-branded
site.
- Print. This option is available to all of our users and allows them to
select and personalize their greeting or social expression product. The
user then clicks the "print" or "download" button, which either downloads
the product to their computer or prints it directly to their printer.
Other printable products that we intend to introduce include 3-D crafts,
banners, stationery, calendars, invitations, announcements and other
personal creativity crafts.
- Mail. For those users who wish to send an actual paper greeting, we offer
more than 2,000 paper greeting cards that offer greater convenience than
is available through traditional retail stores. The user selects,
personalizes and then electronically sends their greeting to us. We print
the greeting at our facilities and mail it on the sender's behalf to the
addressee through regular mail.
Services
We offer a number of services in addition to our product offerings,
including e-commerce opportunities and feature enhancements to improve the
overall user experience. These services are available to all users and include
the following:
- My Account. Users can review their past transactions. In addition, users
may review, edit and re-send online greetings and other products
previously sent.
- Future Delivery. Users are able to schedule future delivery of online
greetings and other products up to one year in advance.
- Reminder Service. This service enables users to set-up e-mail reminders
in advance of special events, holidays or meetings. This service will
automatically send the user a reminder in advance of those dates,
providing purchase suggestions and special offers as appropriate.
- Address Book. Provides an address book to users, allowing them to store
e-mail and regular addresses for convenient and easy ordering on our Web
site.
- E-commerce. We offer opportunities for users to purchase products offered
by third-party vendors. For example, a user on our Web site who creates
and sends a Valentine's Day card could also purchase a related gift such
as chocolates.
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Pricing
Currently, we offer users a choice between unlimited access to our
greetings and other social expression content available by subscription and a
free offering of products and services under the following plans:
- Subscriptions. Users are able to subscribe to our service on a
semi-annual or monthly basis for a fee of $19.95 or $4.95, respectively.
Subscribers are entitled to send unlimited product and have access to all
content areas and services on our Web site. Subscriptions are
automatically renewed to provide continuous and uninterrupted service
unless we are otherwise notified. Since implementing our subscription
model, we have achieved a subscriber renewal rate of approximately 65% of
our subscribers who have come up for renewal.
- Free Offering Products. We currently offer users a competitive selection
of online greetings and other social expression content free of charge.
To access our free offering, we ask users to register and provide
valuable demographic information which in turn allows for more directed
and targeted marketing by advertisers. We also provide users with
opportunities to view our extensive product offerings for subscribers
which we believe will encourage them to purchase a subscription.
MARKETING AND PROMOTION
Our marketing and promotion strategy is designed to broaden awareness of
our brand, increase traffic to our Web site and encourage new and repeat
subscribers. We utilize distribution agreements and other alliances to market
and promote our brand.
Distribution Agreements
In order to drive traffic to our Web site, we have aggressively pursued
distribution relationships with some of the largest and most heavily trafficked
online content and service providers, including America Online, Yahoo! and Lycos
Network. We believe that our alliances with these and other partners can be a
source of a significant number of new subscribers. We have entered into the
following agreements and arrangements:
- America Online. In 1997 we entered into a three and one-half-year
agreement with AOL to offer electronic greetings on AOL's proprietary
online service. We were the exclusive provider of e-mail based greetings
for consumers on the AOL proprietary service. Links and placements on
AOL's service provided a direct link to our site, including prominent
rotational placement on the America Online Welcome Screen, the highest
trafficked site on the Internet. In July 1999, we renegotiated this
agreement to broaden our strategic alliance with AOL. According to Media
Metrix, in June 1999 AOL had a total combined reach of 65.9% in the U.S.
The new agreement, which extends through December 31, 2004, provides
significant enhancements to our previous agreement.
- Our greetings and social expression content will be promoted on the
following AOL brands: AOL, AOL.com, Netscape Netcenter, CompuServe,
CompuServe.com, ICQ, ICQ.com, Digital City and, for the first two years
of the expanded agreement, the AOL international services in the United
Kingdom, Canada, Japan, Germany, the Netherlands, France and Australia.
- We will be the exclusive provider of greetings on the AOL online
properties listed above. This exclusivity extends to both online and
printed greetings and includes both business and consumer-related
communications. These exclusivity provisions are subject to several
exceptions including AOL's ability to obtain and license greetings and
other content from third party sources that are not currently main
competitors of ours if we are not able to supply such greetings or other
content.
- Our products will be promoted in functional areas on these AOL brands
including e-mail, calendar, You've Got pictures, white pages, Love@AOL
personals, address book and instant messaging. AOL has agreed to work
with us to develop and test integration of greeting functionality into
these areas. Our goal is for greeting services to be available from a
button or icon prominently built into these AOL applications and AOL has
agreed to development and consumer testing of such features.
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- Our products will also be featured and promoted in other targeted areas
such as chat, holiday channels, for example, Christmas, Mother's Day and
Easter, the Romance channel, Sports channel and AOL Hometown, AOL's Web
page building and hosting product.
- In addition, we will receive extensive banner and promotional placement
on each of the AOL online properties covered by our agreement.
In consideration of the marketing, promotion, advertising and other
services AOL will provide under this agreement, we will pay AOL a minimum
aggregate of $100.0 million over the term of the agreement. The agreement
also contains revenue sharing provisions. Of the amount payable under this
agreement, $22.8 million was paid in August 1999. The agreement may be
terminated by either party upon a material breach by the other party which
is not cured within 90 days of notice, and by AOL upon a change of control
of AmericanGreetings.com resulting in our being controlled by a competitor
of AOL. The agreement may also be terminated by AOL if we do not maintain
our co-branded sites with AOL among the top three online greetings sites,
as judged by third party reviewers, with respect to a variety of criteria
that include pricing, scope, selection and quality of products or if we
fail to fully customize our sites in the additional AOL properties
specified in such agreement. Under the agreement, AOL will act as our
exclusive sales agent for all advertisements on the co-branded sites, and
AOL and AmericanGreetings.com will share in the advertising revenues from
the co-branded sites. In addition, under our agreement with AOL,
AmericanGreetings.com is guaranteed to receive at least $30.0 million
through June 2002 for advertising sold on our co-branded sites. Under this
agreement, $6.0 million was received from AOL in August 1999 in connection
therewith.
- Yahoo!. In August 1999, we entered into a license and promotion agreement
for the integration of our greetings products and services with the
Yahoo! Greetings greetings service for a period of two years. According
to Media Metrix, in June 1999 Yahoo! had a total combined reach of 59.2%
in the U.S. We believe this agreement will provide us with significant
branding and traffic to our Web site. Yahoo! has agreed to place
integrated links to Yahoo! Greetings and AmericanGreetings.com products
on Yahoo channels, Yahoo Mail, Yahoo Messenger, Yahoo Calendar, Yahoo
Clubs, Yahoo Home page and Yahoo Address book during the term of the
agreement. In addition, Yahoo! has agreed to place links to our site and
banner advertisements on certain targeted pages including relevant
keywords and directory pages generated from the Yahoo! service. The
agreement requires Yahoo! to deliver a minimum number of page views for a
period of two years. Yahoo! has agreed to grant us limited exclusivity
with respect to co-branded greetings services and the promotion and
marketing of printable greetings and paid electronic greetings to Yahoo!
users and provide us with similar promotional space and preferred
treatment on other Yahoo! properties. Under this agreement, we are
required to pay Yahoo! minimum aggregate fees of $8.0 million over the
term of the agreement. We may also be required to pay Yahoo! additional
fees if a specified revenue threshold amount is attained.
- Lycos Network. Our current agreement with Lycos, which will not expire
until March 2000, allows for us to be listed as the exclusive provider of
greetings products on the Lycos Network. Our products and services are
made available to Lycos users through links from Lycos' e-mail, chat
service, white pages, shopping pages and relevant keyword search pages.
In addition, our link is the first to appear under the "Greetings" option
on the Lycos shopping page. Our agreement also provides for the sharing
of revenue generated from the sale of advertising space and from the sale
of our products resulting from linking referrals. According to Media
Metrix, in June 1999 Lycos had a total combined reach of 47.8% in the
U.S.
Content Alliances
- Mindscape. In February 1998, we entered into a four-year agreement with
Mindscape giving Mindscape the right to develop and distribute personal
productivity software to its retail customers using a portion of our
greetings and social expression content. We currently publish the
following products: American Greetings CreataCard Plus and Gold, American
Greetings Print! Premium, American Greetings Crafts! and Crafts Deluxe,
American Greetings Spiritual Expressions and
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American Greetings CreataParty. In June 1999, two of these products were ranked
in the top five in terms of unit sales in the print creativity category
according to PC Data. Introduction of additional products and updated versions
of these products are planned for the Fall of 1999. Under our agreement
with Mindscape, we receive trademark licensing fees and a royalty for each
product sold with guaranteed minimum payments of $17.0 million over the
four-year term of the agreement ending in February 2002. If royalty
payments to us under this agreement meet specified levels, the agreement
gives Mindscape the right to extend the term.
We derive a significant portion of our net revenues from the sale of online
greetings and other social expression content marketed and distributed through
AOL and from royalties earned from the licensing of trademarks and a portion of
its content to Mindscape. Revenues from AOL and Mindscape accounted for
approximately 64% and 26%, respectively, of our net revenues for the four months
ended June 30, 1999 and approximately 42% and 36%, respectively, of our net
revenues for fiscal 1999.
Other Alliances
- Affiliate Network. Our affiliates are a group of over 13,000 Web sites
owned and operated by third parties, who, for a percentage of revenues,
place banner ads and cross-links to our site on their Web sites and
thereby help drive traffic to our site.
- Traditional Retailers. We have entered into various co-marketing and Web
site linking arrangements with a number of American Greeting's
traditional retailers, including Ames Department Stores, Bradlees
Department Stores, CVS.com, Duane Reed Drug Stores and Kmart. In
addition, a number of other traditional retailer relationships are
planned.
Marketing Alliances
- Phase2Media. We have entered into a one-year agreement with Phase2Media,
an Internet advertising agency, to act as our exclusive agent to sell
advertising on our www.americangreetings.com Web site to potential
advertisers and sponsors. Phase2Media will be the exclusive agent selling
advertising on our behalf on our own Web site. There are certain renewal
options that may allow Phase2Media to continue as our agent beyond the
first year if specified advertising revenue thresholds are met.
- AOL Interactive Marketing. Our agreement with AOL provides that AOL will
act as our sales agent for advertising and sponsorship sales on our
co-branded sites with AOL. Except for limited inventory we retain the
right to sell, and our right to assist in the development of advertising
sales leads, AOL will be the exclusive sales agent for a period of three
years ending July 31, 2002. After the initial three years, AOL could
extend its exclusive sales agents rights if specified revenue thresholds
are met. AOL has one of the largest advertising sales forces in the
Internet industry today.
Sales and Marketing
An important element of our strategy is to build brand recognition around
our Web site and our products and services. Our sales and marketing goals are
focused on: (1) increasing our number of subscribers; (2) increasing user
traffic to our Web site; and (3) increasing e-commerce purchases and other
transactions on our Web site. We intend to achieve these objectives through the
following:
- Direct E-Mail Marketing. We actively market to our own base of users
through e-mail broadcasts, with announcements such as new product
introductions, reminders for upcoming holidays and site and features. All
users of our products are added to our database and electronic mailing
list, which numbered over 2.8 million registrants through June 30, 1999.
A user can remove his or her name from our mailing list at any time. We
do not sell any customer information to third parties and only share
customer data in the aggregate form.
- Offline Advertising. Following the closing of this offering, we plan to
launch a national advertising campaign through print and broadcast media
to drive traffic to, and raise consumer brand awareness of, our Web site
and our products and services.
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- Internet Advertising. In addition to the advertising we receive through
our arrangement with our strategic distribution partners, we also intend
to advertise on the Web sites of niche Internet content sites.
CUSTOMER SUPPORT
We believe that a high level of customer service and support is critical to
retaining and expanding our user base. Our customer service representatives are
available 8:00 AM to 11:00 PM Eastern Standard Time on weekdays and 8:00 AM to
4:00 PM Eastern Standard Time on weekends to provide assistance via e-mail,
phone or fax. Our customer service representatives strive to answer all customer
inquiries within 24 hours. The customer service representatives are a valuable
source of feedback regarding user satisfaction.
TECHNOLOGY
We have implemented, and continue to invest in, a broad array of customer
support, transaction-processing and fulfillment systems, using a combination of
proprietary and commercially available, licensed technology. We focus our
internal development efforts on creating and enhancing our software and on
creating an integrated technology solution that can handle significant
transaction volumes. Our systems are designed to make both the customer
experience and the transaction reporting and tracking process as seamless as
possible, while maintaining scalability, security and superior processing speed.
Our systems have been designed based on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. Our system hardware is hosted at Exodus Communications' facility on
SGI Unix servers and NT servers, and we have implemented load balancing systems
and our own redundant servers to provide for fault tolerance. Our systems are
scalable, allowing us to quickly adjust to our expanding user base without
compromising the performance of our site. In addition, adopted industry
standards or widely accepted technology formats such as C++ as our base for
product development, to ensure nearly universal access to our products by
Internet users.
Partner Integration/Distribution. Our open, scalable architecture allows us
to deliver our content and services through multiple channels, either direct to
customers over our Web site through our distribution partners. We work with our
distribution partners, AOL, Yahoo! and Lycos Network to integrate our product
and services to create the best experience possible for our users. Our adoption
of BeFrees Affiliate Network technology allows affiliates to easily integrate
our content on their Web sites and to track performance on a constant basis.
Online Sales and Tracking System. We use technology that provides
sophisticated subscription and sales tracking, and have built a comprehensive
data warehouse to store and analyze customer buying patterns and online
activity. Our system allows us to segment our user population, enabling us to
further personalize our services for the individual user and to respond
effectively to the changing tastes and needs of our users, as well as allowing
our advertisers to better target their intended audience.
Direct Marketing System. We have developed scalable and intelligent
proprietary systems to create a better customer experience and generate higher
customer loyalty, and are currently evaluating third party systems to further
improve our relationship with our users. We are currently implementing a
comprehensive direct marketing system that will allow us to communicate directly
with our customers and provide them with offers and information that are most
relevant to their individual preferences.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly applicable
to electronic commerce. However, the Internet is becoming an increasingly
popular system for communicating and conducting commerce. As a result, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet or online services. These laws and regulations may cover issues
such as online contracts, user privacy, freedom of expression, pricing, fraud,
content and quality of products and services, taxation, advertising,
distribution, intellectual property rights and
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information security. Furthermore, the growth of electronic commerce may prompt
calls for more stringent consumer protection laws. We do not currently provide
personal information regarding our users to third parties. However, the adoption
of such consumer protection laws could create uncertainty in Web usage and
reduce the demand for our products and services.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity,
personal privacy, and export or import matters. The vast majority of such laws
were adopted prior to the advent of the Internet and related technologies. As a
result, they do not contemplate or address the unique issues of the Internet and
related technologies. Changes in laws intended to address such issues could
create uncertainty in the Internet marketplace. Such uncertainty could reduce
demand for our services or increase the cost of doing business as a result of
litigation costs or increased service delivery costs. Furthermore, those laws
that do reference the Internet, such as the recently passed Digital Millenium
Copyright Act, have not yet been interpreted by the courts and their
applicability and reach are therefore uncertain.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by various foreign governments to impose taxes on the sale of goods
and services and other Internet activities. In 1998, the Internet Tax
Information Act was signed into law placing a three-year moratorium on new state
and local taxes on Internet commerce. A number of trade groups and government
entities have publicly stated their objections to this tax moratorium and have
argued for its repeal. There are no assurances that future laws will not impose
taxes or other regulations on Internet commerce, or that such three-year
moratorium will not be repealed, or that it will be renewed when it expires, any
of which events could substantially impair the growth of electronic commerce.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address
these issues could directly affect the way we do business or could create
uncertainty in the marketplace. This could:
- reduce demand for our products;
- increase the cost of doing business as a result of litigation costs or
increased service delivery costs; or
- otherwise harm our business.
Also, in the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states we are actually conducting business. We
currently are qualified to do business only in Delaware and Ohio. Our failure 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 our inability to enforce contracts in those jurisdictions. Any new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to our business, could harm our
business.
COMPETITION
Both the e-commerce and a number of online greetings and social expression
businesses are new, rapidly evolving and highly competitive. We expect
competition to intensify in the future, given the ease with which new Web sites
can be developed. We believe that a number of competitive factors are important
to our business including brand recognition, site content, accessibility and
ease of use, price, fulfillment speed, customer support and reliability. We
believe that our established brand name gives us a competitive advantage in
capturing consumers of online greetings and related content. Additionally, we
believe that our creative content expertise and our ability to produce large
quantities of high quality content give us a competitive advantage. Combined
with our marketing and technical skills, and our exclusive relationships with
several key
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content and service providers, we believe that we can continue to extend our
leadership position in the market. We currently compete with a variety of
companies, including:
- Blue Mountain Arts, a publisher of poetry books and greeting cards that
has established a significant presence online as a provider of free
electronic greeting cards.
- Online affiliates of traditional greeting card companies such as Hallmark
and Gibson Greetings/E-Greetings.
- Amazon.com, an online bookseller that has recently entered the online
greetings market with free content and other entities such as Disney and
Microsoft that offer online greetings.
- Various small online providers of generally generic, free online
greetings services which attract small amounts of traffic and usage.
Some of our competitors have longer operating histories, larger customer or
user bases, greater brand recognition and greater financial, marketing and other
resources than we do. Some of these competitors can devote substantially more
resources to Web site development than we can.
Our competitors may be able to fulfill customer orders more efficiently,
reach more customers or adopt more aggressive pricing policies than we can. Our
main competitor, Blue Mountain Arts, like many other providers of online
greetings and enhanced e-mail communication, offers free products. Blue Mountain
Arts' strategy, combined with increased competitiveness among online enhanced
communication providers, may cause our operating margins to decline, cause us to
lose market share and diminish our brand franchise.
In selling advertising space, we compete with various advertising-supported
Web sites, including portal sites such as Yahoo! and Excite, content sites such
as CNET and CNN.com and interactive advertising networks and agencies such as
DoubleClick and 24/7 Media. We also compete with traditional media such as print
and television for a share of our advertisers' total advertising budgets. If
advertisers perceive the Internet to be a limited or ineffective advertising
medium or perceive us to be less effective or less desirable than other Internet
advertising vehicles, advertisers may be reluctant to advertise on our services.
To compete for Internet advertisers, we must offer effective methods of
targeting subscribers with demographic characteristics attractive to these
advertisers.
INTELLECTUAL PROPERTY
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
employees, contractors, suppliers and strategic partners. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without our authorization. In addition, we
pursue the registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property production may not be
available in every country in which our services are made available online.
We have licensed proprietary rights to third parties. We attempt to ensure
that these licensees maintain the quality of our brand. However, these licensees
may nevertheless take actions that reduce the value of our proprietary rights or
harm our reputation. We license the American Greetings trademark and other
trademarks from American Greetings. We also rely on technologies that we license
from third parties. These licenses may not continue to be available to us on
commercially reasonable terms in the future. As a result, we may be required to
obtain substitute technology of lower quality or at greater cost, which could
harm our business and results of operations.
To date, we have not been notified that our technologies infringe the
proprietary rights of third parties. However, there can be no assurance that
third parties will not claim infringement by us with respect to our current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, with or without
merit, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements might
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not be available on terms acceptable to us or at all. As a result, any such
claim of infringement against us could harm our business, results of operations
and financial condition.
EMPLOYEES
As of June 30, 1999, we had approximately 180 full- and part-time
employees. We also employ independent contractors to perform duties in various
departments, including software development, creative and editorial. None of our
employees are represented by a labor union, and we consider our relationship
with our employees to be excellent.
FACILITIES
Our principal administrative, marketing and technical facilities are
currently located in approximately 24,000 square feet of office space in
Cleveland, Ohio. This office space is allocated to us by our parent, who
assesses us with a building space allocation charge for expenses which include
building operating costs, security costs, real estate taxes, building insurance
costs, and depreciation. While our existing facilities are adequate for our
current needs, due to our recent growth, management has determined that
additional space will be required. We anticipate leasing space within an
adjacent building owned by our parent and signing a lease for at least five
years. This space is currently being built out to incorporate our space
requirements. We estimate occupying this space in late Fall 1999.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the disposition of which
would materially harm our business.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information regarding our executive
officers and directors as of the date hereof.
NAME AGE POSITION
- ---- --- --------
John M. Klipfell (1)(3).............. 49 Chief Executive Officer and Director
Ralph E. Shaffer..................... 58 Senior Vice President and Chief Creative Officer
Josef A. Mandelbaum.................. 33 Senior Vice President of Sales, Business
Development and Strategic Planning
Andrew R. Cohen...................... 38 Senior Vice President and Chief Technology
Officer
Anne C. Everhart..................... 40 Senior Vice President of Consumer Marketing
Maureen M. Spooner................... 35 Chief Financial Officer
James C. Spira (1)(3)................ 56 Chairman and Director
Herbert H. Jacobs (4)................ 76 Director
Morry Weiss(1)(4).................... 59 Director
- ---------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Nominating Committee
(4) Member of the Compensation Committee
John M. Klipfell has served as our Chief Executive Officer and a director
since the incorporation of AmericanGreetings.com, Inc. in June 1999. From March
1992 to June 1999, Mr. Klipfell was responsible for our parent's Electronic
Marketing Division. From 1990 to 1992, Mr. Klipfell was Senior Vice President --
Subsidiary Operations and had corporate responsibility for our parent's U.S. and
Canadian Retail Divisions and its "Those Characters From Cleveland" licensing
business, as well as American Greetings' Canadian greeting card division. From
1987 to 1990, Mr. Klipfell served as Vice President and Assistant to the
President of American Greetings and previously had corporate responsibility for
American Greetings' Canadian greeting card division. Additionally, Mr. Klipfell
has held various positions in financial management for American Greetings since
joining in 1975. Mr. Klipfell holds a B.S. in Business Administration from
Bowling Green State University and is a Certified Public Accountant.
Ralph E. Shaffer has served as our Senior Vice President and Chief Creative
Officer since the incorporation of AmericanGreetings.com, Inc. in June 1999.
From March 1994 to June 1999, Mr. Shaffer served as American Greetings' Vice
President, Product Concepts, where he oversaw all new product development for
our parent's Internet, personal creativity software and personal greeting card
kiosk programs. Additionally, Mr. Shaffer was responsible for new program
development for other American Greetings internal divisions and subsidiaries.
From 1981 to 1994, Mr. Shaffer was co-founder and co-President of "Those
Characters From Cleveland," a subsidiary of our parent that specialized in
character creation and licensing.
Josef A. Mandelbaum has served as our Senior Vice President of Sales,
Business Development and Strategic Planning since the incorporation of
AmericanGreetings.com, Inc. in June 1999. From January 1995 to June 1999, Mr.
Mandelbaum served in various capacities for the Electronic Marketing Division of
American Greetings, including Vice President of Interactive Marketing, Director
of Electronic Marketing and Technology Management and as Business Development
Manager. From 1993 to 1994, Mr. Mandelbaum was a partner in IMG, an interactive
direct response consulting and venture capital company specializing in
infomercials and interactive projects. Mr. Mandelbaum is a founding member and
current Chairman of the Business Practices Committee of Shop.org, an alliance of
premier Internet retailers. Mr. Mandelbaum holds a B.A. in Economics from
Yeshiva University and an M.B.A. from the Case Western Reserve University
Weatherhead School of Management.
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Andrew R. Cohen has served as our Senior Vice President and Chief
Technology Officer since July 1999. From January 1999 to July 1999, Mr. Cohen
was President of CNS Development Corporation, a technology development and
consulting company that provided services to AmericanGreetings.com. From 1992 to
1998, Mr. Cohen served in various capacities with Micrografx, Inc., a consumer
and business enterprise software development and marketing company, where he
most recently was Vice President, Technology Solutions. At Micrografx, Mr. Cohen
managed several development groups focused on consumer and Internet based
products, including the American Greetings CreataCard personal creativity
program. Prior to his employment with Micrografx, Mr. Cohen held various
software and system development positions with American Airlines/ Sabre and
United Technologies.
Anne C. Everhart has served as our Senior Vice President of Consumer
Marketing since the incorporation of AmericanGreetings.com, Inc. in June 1999.
From 1993 until June 1999, Ms. Everhart was Vice President, Sales Development
and Communications for the New York Daily News where she was responsible for
strategic circulation, including retail and direct response advertising,
ancillary product development/marketing and customer service operations. Prior
to her employment with the Daily News, Ms. Everhart held various consumer
marketing and circulation management positions with Time-Life Books,
Horticulture, Psychology Today and US News & World Report. Ms. Everhart holds
B.S. degrees in Marketing and Magazine Journalism from Syracuse University,
School of Management and the S.I. Newhouse School of Public Communications.
Maureen M. Spooner has served as our Chief Financial Officer since the
incorporation of AmericanGreetings.com, Inc. in June 1999. From September 1990
to June 1999, Ms. Spooner served in various financial management and
administrative positions with our parent, including Financial Accounting
Manager, Director of Corporate Financial Planning, and Director of Tax
Administration. Prior to her employment with American Greetings, Ms. Spooner
held various positions with Arthur Andersen & Company and Andersen Consulting.
Ms. Spooner has a B.S. degree in Business Administration from John Carroll
University and is a Certified Public Accountant.
James C. Spira has served as Chairman of our board of directors since the
incorporation of AmericanGreetings.com, Inc. in June 1999. Mr. Spira's principal
occupation since July 1999 has been active part-time Advisory Partner of Diamond
Technology Partners, Inc., a publicly held technology management consulting
firm, where he manages specific client relationships and participates in client
development efforts. Previously, Mr. Spira served Diamond Technology Partners as
Senior Vice President from November 1995 to June 1999, and as a director from
February 1996 to June 1999. Before joining Diamond Technology Partners, Mr.
Spira was a group Vice President of the Tranzonic Companies, Inc., a
manufacturer of personal care products, from 1991 to November 1995. Prior to his
employment with the Tranzonic Companies, Mr. Spira co-founded Cleveland
Consulting Associates, serving as President and Chief Executive Officer from
1974 until 1989. Mr. Spira serves as a director of American Greetings
Corporation, our parent company, New Media, Inc., an information technology
consulting company, Copernicus, a marketing investment group, and is a member of
the advisory board of Progressive Insurance Company's National Accounts
Division, a specialty property-casualty insurer.
Herbert H. Jacobs has served as a director since the incorporation of
AmericanGreetings.com, Inc. in June 1999. From 1983 to June 1999, Dr. Jacobs
served as a director of American Greetings, our parent company. Dr. Jacobs'
principal occupation is the management of his private investments. He is also
the inventor of a number of patents relevant to our business operation that are
owned by AmericanGreetings.com. Since June 1994, he has owned and operated a
private real estate development company and a private software consulting firm.
Morry Weiss has served as a director since the incorporation of
AmericanGreetings.com, Inc. in June 1999. Since 1992, Mr. Weiss' principal
occupation is Chairman and Chief Executive Officer of American Greetings. He
also serves as a director of Barnett Inc., a manufacturer of plumbing and
electrical supplies, National City Bank, Cleveland, a bank/financial
institution, National City Corporation, a holding company of National City Bank,
Cleveland and other banks, and is a member of the advisory board of Prime
Venture Partners, an equity investor in companies requiring growth capital.
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There are no family relationships among any of our directors or executive
officers.
BOARD OF DIRECTORS
We currently have authorized nine directors and each director will hold
office until his or her term expires or until his or her successor is duly
elected and qualified. Prior to or promptly following the consummation of this
offering, two independent directors who are not affiliated with our parent or
AmericanGreetings.com will be elected to our board of directors.
The amended and restated certificate of incorporation we will adopt prior
to the completion of this offering will provide for a classified board of
directors from the date of completion of this offering. In accordance with the
terms of that amended and restated certificate of incorporation, the board of
directors will be divided into three classes, whose terms expire at different
times.
At each annual meeting of stockholders beginning with the 2000 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
Board Committees. Our board of directors has an Executive Committee, an
Audit Committee, a Compensation Committee and a Nominating Committee.
The Executive Committee has the same power and authority as the board
between meetings of the board, except that it may not fill vacancies on the
board or on committees of the board. The Executive Committee currently consists
of Messrs. Klipfell, Spira and Weiss.
The Audit Committee recommends the selection of and monitors the
independence of AmericanGreetings.com's independent auditors, reviews the audit
plan and the results of the audit engagement. Prior to the completion of this
offering, we will appoint two independent directors to the Audit Committee.
The Compensation Committee reviews the compensation packages offered to our
officers generally and develops and administers the compensation plans for the
Chairman and Chief Executive Officer. The Compensation Committee also grants
stock options and other forms of equity compensation to officers and certain key
employees pursuant to our stock plans. The Compensation Committee is composed
solely of directors who are not officers or employees of AmericanGreetings.com.
The Compensation Committee currently consists of Messrs. Jacobs and Weiss.
The Nominating Committee makes recommendations to the board regarding the
size and composition of the board and qualifications for membership. It
recommends nominees to fill board vacancies and new positions, as well as a
slate of board nominees for annual election by the stockholders. The Nominating
Committee currently consists of Messrs. Klipfell and Spira.
Director Compensation. We intend to offer board members who are not
employees of AmericanGreetings.com or our parent cash compensation and a grant
of options for serving on the board of directors. We reimburse directors for
expenses incurred in connection with attendance at board and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Jacobs and Weiss.
Mr. Jacobs performed consulting services for American Greetings in our last
fiscal year. None of the remainder 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 as a member of our board of directors or
compensation committee.
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EXECUTIVE COMPENSATION
Prior to the completion of this offering we have operated as a division of
American Greetings. Accordingly, the information below includes compensation
paid by American Greetings and includes compensation for services to American
Greetings and AmericanGreetings.com. Information set forth below regarding
option grants during fiscal 1999 and option values at February 28, 1999 are
options for shares of American Greetings' common stock. The following table sets
forth certain summary information concerning the compensation awarded to, earned
by, or paid for services rendered to AmericanGreetings.com in all capacities
during the fiscal year ended February 28, 1999 by our chief executive officer
and the two most highly compensated executive officers, other than the chief
executive officer (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(1)
- --------------------------- ------ -------- ------- ------------ ---------------
John M. Klipfell.......................... 1999 $226,895 $94,609 $ 9,106
Chief Executive Officer
Ralph E. Shaffer.......................... 1999 183,435 53,213 6,524
Senior Vice President and Chief Creative
Officer
Josef A. Mandelbaum....................... 1999 98,891 15,053 $16,701(2)
Senior Vice President of Sales, Business
Development and Strategic Planning
- ---------------
(1) Reflects contributions by American Greetings under their Retirement Profit
Sharing and Savings Plan as well as their Executive Deferred Compensation
Plan.
(2) Represents forgiveness of a portion of a loan from American Greetings to Mr.
Mandelbaum, plus accrued interest, as more fully described in "Related Party
Transactions."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options of shares of
common stock of our parent during the fiscal year ended February 28, 1999 to
each of the Named Executive Officers.
Percentages shown under "Percent of Total Options Granted to Employees in
Fiscal Year" are based on an aggregate of options granted to employees
of American Greetings under their stock option plans during the fiscal year
ended February 28, 1999.
PERCENT OF
TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
NUMBER OF GRANTED ANNUAL RATES OF STOCK
SECURITIES TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE PER EXPIRATION -----------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
John M. Klipfell............... None
Ralph E. Shaffer............... None
Josef A. Mandelbaum............ 5400 3% 40.375 09/28/08 $137,133 $347,463
Stock options previously granted to AmericanGreetings.com employees under
our parent's option plans which are scheduled to vest on or before March 3, 2001
will vest according to the option's terms, taking into account service with both
us and our parent. The exercise period for AmericanGreetings.com employees who
hold these options will be extended to March 3, 2002. Such stock options which
are scheduled to vest after March 3, 2001 will be voided. In conjunction with
this offering, the board of directors will grant
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AmericanGreetings.com stock options to the Named Executive Officers of
AmericanGreetings.com in the following amounts: John M. Klipfell: ; Ralph
E. Shaffer: ; and Josef A. Mandelbaum: .
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR END OPTION VALUES
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the Named
Executive Officers as of February 28, 1999.
Amounts shown under the column "Value Realized" are based on the difference
between the market price of American Greetings common stock at February 28, 1999
and the exercise price of the options. Amounts shown under the column "Value of
Unexercised In-the-Money Options at February 28, 1999" are based on the closing
price of American Greetings common stock as reported on the New York Stock
Exchange on February 26, 1999 of $23.6875, without taking into account any taxes
that may be payable in connection with the transaction, multiplied by the number
of shares underlying the option, less the exercise price payable for these
shares.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUES OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FEBRUARY 28, 1999 FEBRUARY 28, 1999
---------------------- -----------------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ---------------------- -----------------------
John M. Klipfell......... 5,000 $99,531 5,000/ 0/
10,000 0
Ralph E. Shaffer......... 0 0 22,750/ 62,125/
7,000 0
Josef A. Mandelbaum...... 200 3,062 600/ 0/
5,900 0
EMPLOYEE BENEFIT PLANS
1999 Stock Option Plan. Our 1999 Stock Option Plan provides for the grant
to employees, including officers and directors, of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended and for the grant to employees, nonemployees, directors and consultants
of nonstatutory stock options and stock purchase rights. The terms of our plan
were approved by our board of directors in August 1999, and by our parent in
August 1999. Unless terminated sooner, our plan will terminate automatically in
2009. A total of shares of our Class A common stock, plus an annual
increase to be added on the first day of our fiscal year commencing in 2000
equal to the lesser of:
- shares,
- 5% of the outstanding shares on that date or,
- a lesser amount determined by the board of directors, shall be reserved
for issuance under our plan.
Our plan may be administered by our board of directors or a committee of
our board. In the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code,
a committee of our board of directors will consist of two or more "outside
directors" who have no other affiliation with us. Our board of directors or this
committee has the power to determine the terms and conditions of the options or
stock purchase rights granted, including:
- the exercise price,
- the number of shares subject to each option or stock purchase rights,
- the exercisability thereof,
- and the form of consideration payable upon such exercise.
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Our board of directors has the authority to amend, suspend or terminate our
plan, provided that no such action may affect any share of common stock
previously issued and sold or any option previously granted under our plan,
unless our board of directors and the person granted the stock or option agree
otherwise.
Generally, options and stock purchase rights granted under our plan are
non-transferable. Each option and stock purchase right is generally exercisable
during the lifetime of the optionee only by the optionee. Options granted under
our plan must generally be exercised within three months of the optionee's
separation of service from AmericanGreetings.com, or within twelve months after
the optionee's termination by death or disability. In no event can an optionee
exercise his or her option later than the expiration of the option's ten year
term.
In the case of stock purchase rights, unless our board of directors or the
committee determines otherwise, the restricted stock purchase agreement will
grant AmericanGreetings.com a repurchase option. This repurchase option is
exercisable upon the voluntary or involuntary termination of the purchaser's
service for AmericanGreetings.com for any reason, including death or disability.
The purchase price for shares repurchased under the restricted stock purchase
agreement will generally be the original price paid by the purchaser and may be
paid by cancellation of any indebtedness of the purchaser to us. The repurchase
option will lapse at a rate determined by our board of directors or a committee
of our board of directors.
The exercise price of all incentive stock options granted under our plan
must be at least equal to the fair market value of our common stock on the date
of grant. The exercise price of nonstatutory stock options and stock purchase
rights granted under our plan is determined by our board of directors or the
committee. The exercise price of nonstatutory stock options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code must at least be equal to the fair market value of our
common stock on the date of grant.
The exercise price of any incentive stock option granted to any participant
who owns stock with more than 10% of the voting power of all classes of
AmericanGreetings.com's outstanding capital stock must equal at least 110% of
the fair market value of our common stock on the date of grant. The term of any
incentive stock option must not exceed five years. The term of all other options
granted under our plan may not exceed ten years.
Our plan provides that in the event of a merger of us with or into another
corporation, or the sale of substantially all of AmericanGreetings.com's assets,
each outstanding option and stock purchase right will be assumed or substituted
for by the successor corporation. If the successor corporation refuses to assume
or substitute for the option or stock purchase right, vesting of the option or
stock purchase right will accelerate. The option or stock purchase right will
also remain exercisable for a period of fifteen days prior to the closing of the
merger or sale of assets.
AmericanGreetings.com employees will continue to be eligible to participate
in our parent's health and welfare benefit plans, but will cease active
participation in American Greeting's Retirement Profit Sharing and Savings Plan,
Supplemental Executive Retirement Plan and Executive Deferred Compensation Plan
upon the consummation of this offering.
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RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH OUR PARENT
Prior to the consummation of this offering, we will enter into several
agreements with American Greetings to carry out the separation of our operations
from those of American Greetings. The principal agreement, the formation
agreement, will provide for the transfer of our ongoing business and assets from
American Greetings to AmericanGreetings.com and will require American Greetings
and us to enter into a series of related agreements providing for the licensing
of intellectual property and the provision of various services by each of
American Greetings and us to the other.
Formation Agreement. In exchange for shares of our Class B Common
Stock and our assumption of the liabilities of our business, American Greetings
will transfer ownership to us of identified assets that are used in our business
and extinguish all of our intercompany debt to American Greetings. In addition,
American Greetings will contribute to our capital an aggregate of $50.0 million,
of which the net amount of $17.6 million was previously paid to AOL and Yahoo!
on our behalf during August 1999 pursuant to our distribution agreements with
them. The assets and liabilities to be transferred will generally consist of the
assets and liabilities on our balance sheet, including computer hardware, office
furniture and other tangible personal property and our accounts receivable.
American Greetings will also assign to us rights in its contracts with third
parties that relate to our business, subject in many cases to obtaining the
consent of those third parties. The contracts to be assigned include third party
licenses of greeting content, including for example, Dilbert, The Simpsons and
the World Wrestling Federation licenses, and some of our distribution
agreements, such as the agreement with Lycos. American Greetings will agree in
the formation agreement to assist us in obtaining necessary consents of these
third parties. The intellectual property assets to be transferred to us
generally consist of software and related technology used in our business and
not in American Greetings business and certain patents relating to our business.
The art and verse content library of American Greetings will not be transferred
to us under the Formation Agreement, but rather, will be licensed pursuant to a
cross license agreement that we will also enter into.
The liabilities that we will assume include any liabilities of American
Greetings arising from the operation of our business prior to the separation,
specifically excluding identified categories of liability such as environmental
liability and certain tax and employment related liabilities.
American Greetings will transfer these assets to us on an as-is basis, with
no warranties. As a result, we will have no legal claim against American
Greetings if any of these assets is defective or otherwise unable to perform its
function. In addition, we will agree to indemnify American Greetings for any
liability arising out of contracts we assume, liabilities arising out of our
operation of our business, including for periods prior to the separation, any
breach by us of the agreements related to our formation and any liability
arising out of any misstatement or omission in this prospectus, other than
relating to American Greetings' business. We also will grant American Greetings
a release of all claims arising from any circumstances occurring on or before
the date of our separation, including in connection with the transactions and
all other activities to implement our formation and this offering.
American Greetings will terminate, and, simultaneously, we will make offers
of employment to, the employees of American Greetings who work in our business.
Under the formation agreement, American Greetings will provide for the
continuation of various employee benefit plans for the benefit of those
employees. American Greetings will also cause its supplemental retirement plan
to treat the transfer of employees as an involuntary termination event, vesting
otherwise eligible employees. As a result, John Klipfell, our chief executive
officer, will become vested under that plan.
We have agreed, pursuant to the formation agreement, to adopt the amended
and restated certificate of incorporation authorizing the shares of Class A and
Class B common stock. See "Description of Capital Stock."
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The formation agreement will also require us to use AmericanGreetings.com
as our corporate name, to use the URL AmericanGreetings.com for our U.S. Web
site and to provide a reasonably prominent one-click link from that site to an
American Greetings corporate Web site to be designated by American Greetings.
We and American Greetings will each agree to exclusive business fields in
which we will not compete. American Greetings will agree not to engage in the
AmericanGreetings.com business defined as: direct to consumer distribution or
sales through electronic media such as the Internet and online retailers on the
Internet such as AOL and Yahoo! of specified greetings products. The restricted
greeting products will consist of
- Physical greeting products such as, paper greeting cards and similar-card
like items such as thank you notes and invitations; and
- Electronic social expression products such as, electronic equivalents of
the physical greeting products and, in addition, electronic versions of
other social communication items such as templates for stationery,
banners, gift tags and award certificates.
The formation agreement will include provisions which generally, subject to
the exceptions described below, restrict American Greetings from engaging in the
AmericanGreetings.com business and from entering into agreements with other
parties that engage in the AmericanGreetings.com business. The intellectual
property licenses to us in the cross license agreement will be exclusive with
respect to the AmericanGreetings.com business. In addition, the formation
agreement will provide that if American Greetings acquires a material interest
in an entity that engages in the AmericanGreetings.com business it must offer to
sell the portion of the acquired business that engages in the
AmericanGreetings.com business to us for an appraised fair market value, and if
we decline to purchase then it may not use any of the trademarks or other
intellectual property licensed to us, or licensed from us, in the operation of
that business.
In return, we will agree in general, subject to the exceptions described
below, not to engage in the American Greetings business, defined as distribution
through, or sale to third parties, for sale at physical retail locations by
physical retailers of:
- Physical greeting products; or
- Other social expression products manufactured in physical media, such as
gift wrap, stationery, party goods, balloons, candles and reading
glasses.
The formation agreement will include parallel provisions which generally,
subject to the exceptions described below, restrict us from engaging in the
American Greetings business, from entering into agreements with other parties
that engage in the American Greetings business and from owning or, with
comparable limitations to those described above for American Greetings,
acquiring an interest in an entity that engages in the American Greetings
business. The intellectual property licenses to American Greetings in the cross
license agreement will be exclusive with respect to the American Greetings
business. These exclusivity and exclusive license provisions will be subject to
several exceptions:
- The restrictions on American Greetings will not apply to American
Greetings' relationships with its physical retailer customers. Instead,
there will be limitations on the nature of our electronic products and
services American Greetings can supply to those retailers. There is a
time limit on our obligation to provide even these if the physical
retailer using them is in direct competition with us. See "Risk
Factors -- Restriction in our agreement with our parent prohibit us from
competing with our parent, but our parent is permitted to compete with us
when it is acting together with its traditional customers;"
- Our exclusive right with respect to distribution of electronic greeting
products will not include any distribution of electronic products that
takes place within the physical confines of retail stores owned or
operated by American Greetings or its affiliates;
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- The restriction on us from doing business with third parties that are
engaged in the American Greetings business will not prevent us from
licensing greetings content from such third parties so long as we do not
promote the third parties' trademarks or use any properties licensed from
American Greetings as consideration;
- The exclusivity restrictions will not prevent either party from
distributing an otherwise prohibited product for a limited period of time
as a promotional premium for no consideration or minimal consideration;
and
- The exclusivity provisions, but not the exclusive aspects of the licenses
in the cross license agreement, are terminable by American Greetings at
any time if, because of a reduction in American Greetings' voting
interest in us, American Greetings reasonably determines that the
exclusivity provisions may be in violation of applicable law.
Cross License Agreement. In connection with the formation agreement, we
will enter into the cross license agreement with American Greetings for the
licensing primarily of trademarks, art and verse content and software
technology. In addition, the cross license will govern patents and third party
rights, such as content licenses.
The cross license agreement will provide for American Greetings to license
to us rights to use "American Greetings" and the American Greetings rose logo,
as well as other trademarks closely identified with our business, including
"americangreetings.com," "CreataCard" and other "Creata-" derivations. These
trademark licenses will be exclusive as described above, and will be
non-exclusive otherwise, except that they will not be licensed to us for the
American Greetings business described above. The cross license agreement
requires us to use our best reasonable efforts to use and promote the American
Greetings and rose logo trademarks in North America.
In addition, the cross license will grant broad reciprocal licenses to use,
copy and modify all our respective present and future social expression art and
verse. The licenses will be exclusive as described above, and will be
non-exclusive otherwise, except that they will not be licensed to us for the
American Greetings business described above and they will not be licensed to
American Greetings for the AmericanGreetings.com business described above. Both
parties will be entitled to retain ownership of derivative works of social
expression art that they create or commission.
The cross license agreement will provide for us to pay American Greetings
fixed royalty payments of $24.0 million over the three years beginning July 1,
1999. Thereafter, all licenses, other than trademark licenses, will be deemed
fully paid up. In consideration of the continuing trademark licenses granted to
us, we will pay American Greetings a royalty of 3% of our net revenue for all
subsequent periods, with a minimum royalty at an annual rate of $5.0 million
beginning for periods after June 30, 2002.
The term of the cross license agreement could end early by our parent for
two reasons. The first is if the percentage of our parent's voting interest in
AmericanGreetings.com is reduced below 20%, which, assuming our parent holds
only Class B common stock, would mean that our parent's equity interest was
below 2%. Our parent's voting percentage could be reduced by our actions if we
sell additional stock to third parties, or it could be reduced by our parent's
action if our parent sells its stock in us to us or to third parties or
distributes it to its stockholders. It could also end if a reversion event
occurs. A reversion event occurs if any of the following happens and we do not
correct it within 90 days after notice from our parent:
- We derive less than 10% of our revenues from business activities
generally as described in this prospectus;
- We materially default on our payment obligations to our parent;
- We materially default on any agreements we may enter into to borrow an
amount in excess of $1 million; or
- Our auditors determine, under generally accepted auditing standards, that
our financial position is such that we may not be able to continue as a
going concern.
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The date on which the termination becomes effective in the event of our
parent's interest falling below 20% depends on the reason that the voting
ownership fell below 20%:
- If it was due to a spin off of substantially all our parent's voting
interest in us, the termination cannot occur prior to ten years after the
date of our this offering, except that our right to use the American
Greetings name and rose logo can terminate as early as two years after
notice from American Greetings.
- If it was due to a sale of substantially all of our parent's interest in
us or a combination of sales by us and our parent, the termination cannot
occur prior to the later of two years after notice to us or five years
after the date of this offering.
If the cross license agreement terminates because our parent's voting
percentage is reduced or because of a reversion event, it will have the
following effects on us:
- We would no longer be entitled to use the "American Greetings" name or
logo or our "AmericanGreetings.com" name, but we would retain rights to
"AG.com";
- We would no longer have access to additional content developed by our
parent after the agreements terminate, but we would retain rights to
content developed previously; and
- All licenses would become non-exclusive and our parent would no longer be
subject to any restriction on competing with us.
In addition, if a reversion event is not cured within 90 days of notice
from our parent and our parent elects, the termination would also result in all
the licenses we receive from our parent, other than for trademarks used only in
our business and not in the parent's business, such as "AG.com" and
"CreataCard," ending twelve months after the notice from our parent.
Web Services Agreement. We will also enter into a web services agreement
with American Greetings. The web services agreement will require us to provide
to American Greetings various electronic and Internet content delivery related
technology development and implementation services. For example, we may assist
an affiliate of American Greetings to establish and operate a corporate
information Web Site. We may also assist American Greetings in its
noncompetitive online and electronic commerce activities that do not compete
with us. We will also have to provide assistance in competitive online
activities American Greetings engages in with its customers in the physical
retail business. In any case where American Greetings uses our services to
assist one of its physical retail customers in engaging in a business that
competes with us, American Greetings will only be able to use our services for a
period of up to one year.
American Greetings will be required to give us reasonable advance notice of
the quantity of its needs for service under this agreement and we will be
obligated to supply that quantity of services. We will be permitted to engage
subcontractors if necessary. American Greetings will not be required to engage
us for any minimum quantity of services.
American Greetings will pay us for any services provided at our cost plus
10%. We will be entitled to retain ownership of any intellectual property
developed in the course of providing these services, although any intellectual
property will be licensed to American Greetings under the terms of the cross
license agreement. The web services agreement will have a term of ninety-nine
years, subject to early termination if the cross license agreement terminates.
Administrative Services Agreement. Following the closing of this offering,
we may request that our parent continue to provide some services to us including
human resources administration, finance administration and legal services.
Furthermore, we may continue to lease office space from our parent. Our parent's
obligations to deliver services will terminate if and when the separation and
cross-license agreements with our parent are terminated. The administrative
services agreement may also be terminated by our parent if there has been a
material breach of our obligation to pay our parent's actual costs plus 10% of
the fees for the services it provides us under this agreement. In addition,
following the second anniversary of this
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agreement, our parent may terminate any and all services it provides us under
this agreement upon 120 days' prior written notice to us. We believe that the
terms of the administrative services provided by our parent are on terms no less
favorable to us than we could have negotiated with an unaffiliated third party.
Registration Rights Agreement. We will enter into a registration rights
agreement with our parent prior to the closing of this offering. Pursuant to the
agreement, at any time after 180 days following the date of this prospectus, our
parent may demand that we file a registration statement under the Securities Act
covering all or a portion of our securities held by our parent, its affiliates
and their permitted transferees. However, the securities to be registered must
have a reasonably anticipated aggregate public offering price of at least $5.0
million. Our parent can effect no more than one demand registration per year.
In addition, our parent will have certain piggyback registration rights. If
we propose to register any Class A common stock under the Securities Act, other
than pursuant to a registration on Form S-4 or any successor form or an offering
of securities in connection with an employee benefit or dividend reinvestment
plan, our parent may require us to include all or a portion of our securities it
owns in such registration. However, the managing underwriter, if any, of any
such offering will have certain rights to limit the number of registrable
securities proposed to be included in such registration.
We would bear all reasonable registration expenses incurred in connection
with the first three of these registrations. Thereafter, we would bear one-half
of such expenses.
Tax Sharing and Indemnification Agreement. Our parent is a common parent of
an affiliated group of companies within the meaning of Section 1504(a) of the
Internal Revenue Code of 1986, which includes us. The Code requires that our
parent own at least an 80% voting and economic ownership interest in
AmericanGreetings.com to continue to include AmericanGreetings.com in its U.S.
consolidated income tax returns.
Following the closing of this offering, our parent will have the exclusive
authority and responsibility to prepare and file all consolidated federal income
tax returns for the affiliated group of which our parent is the common parent,
and to pay the taxes shown as due on those returns. We will be responsible for
paying to our parent our share of the taxes shown as due on those returns, but
if the taxes of the entire group are reduced by reason of our inclusion in any
consolidated returns our parent will pay to us the amount of the reduction. The
same responsibilities as between our parent and ourselves will apply to state,
local and/or foreign tax returns that include both ourselves and our parent or
any of its affiliates other than ourselves. Subject to our responsibility to pay
our share of taxes to our parent and to provide information necessary to enable
our parent to carry out its responsibilities to file the returns and pay the
taxes described above, our parent will be liable and indemnify us for any
penalties or other damages attributable to its failure to carry out its
responsibilities.
Following the closing of this offering, we will be responsible for filing
tax returns and paying taxes relating to ourselves in all cases other than those
described above, and our parent will be responsible for filing all other returns
and paying all other taxes.
Any audits or controversies arising with respect to any taxes will be
controlled by whichever of our parent or ourselves was responsible for filing
the return, although we will have the right to participate in any audits or
controversies controlled by our parent if they relate to our tax items. We and
our parent will agree to cooperate with each other with respect to any audits or
controversies. Any tax adjustments arising out of any audits or controversies
will be paid by, or payable to, ourselves or our parent as such amounts would
have been allocated if they had been included in the tax returns as originally
filed. We will each bear our own expenses with respect to returns, audits and
controversies.
Our parent will be liable and will indemnify us for any taxes arising out
of any future distribution of our stock by our parent to its shareholders,
except for any such taxes which arise solely as a result of actions taken by
ourselves or our shareholders after such distribution, in which case we will be
liable and will indemnify our parent for such taxes.
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LOAN TO OFFICER
Josef A. Mandelbaum, our Senior Vice President of Sales, Business
Development and Strategic Planning, was granted a $60,000 loan at an annual rate
of 5.75% simple interest from our parent, American Greetings, in September 1998.
The loan was in consideration for Mr. Mandelbaum's securing his M.B.A. and was
tied to his future employment with American Greetings or its subsidiaries. The
loan and related interest are due February 28, 2002. However, one-quarter of the
original principal amount of the loan was forgiven and, if Mr. Mandelbaum
remains employed by American Greetings or any of its subsidiaries, one-quarter
of the original principal amount of the loan, together with accrued interest,
will be forgiven at the end of each of our parent's fiscal years in 2000, 2001
and 2002.
CONSULTING SERVICES PROVIDED BY A DIRECTOR
Herbert H. Jacobs, one of our directors, was paid $130,000 in the last
fiscal year for consulting services rendered to American Greetings. This
relationship ceased in February, 1999.
CNS DEVELOPMENT CORPORATION
From January through July 1999, CNS Development Corporation, performed
software development services for us. In July 1999, we agreed with CNS
Development Corporation to terminate its services for AmericanGreetings.com and
cease doing business, and we offered employment to its employees, including
Andrew R. Cohen, our Senior Vice President and Chief Technology Officer. Our
total payments to CNS Development Corporation in 1999 and 2000 will, in the
aggregate, total approximately $600,000, including payments in respect of the
software development services CNS Development Corporation performed for
AmericanGreetings.com and in respect of the termination of those services, of
which $300,000 is contingent upon the former CNS Development Corporation
employees remaining employed by AmericanGreetings.com through June 30, 2000. Mr.
Cohen was formerly the President of CNS Development Corporation and owns fifty
percent of its capital stock.
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PRINCIPAL STOCKHOLDERS
American Greetings beneficially owns all of the shares of our Class B
common stock outstanding as of the date of this prospectus. Following the
closing of this offering, American Greetings will continue to beneficially own
100% of our Class B common stock and, accordingly, will hold approximately %
of the economic interest in AmericanGreetings.com. Such ownership also gives our
parent approximately % of the combined voting power of our outstanding common
stock. If the underwriters were to fully exercise their option to purchase up to
additional shares of our Class A common stock, our parent would hold
approximately % of the economic interest in AmericanGreetings.com and % of
the combined voting power of our outstanding common stock.
The following table sets forth information as of June 30, 1999 with respect
to the outstanding common stock of AmericanGreetings.com beneficially owned by:
- each person or entity known by AmericanGreetings.com to be the beneficial
owner of more than 5% of the shares of any class of such securities,
- each of our directors individually,
- each of our named executive officers individually, and
- all of our executive officers and directors as a group.
PERCENTAGE OWNED(1)
NUMBER --------------------------------
NAME OF BENEFICIAL OWNERS OF SHARES BEFORE OFFERING AFTER OFFERING
- ------------------------- --------- --------------- --------------
Five Percent Holders:
American Greetings(2)................................
Morry Weiss(3).......................................
Directors and Executive Officers:
John M. Klipfell.....................................
Ralph E. Shaffer.....................................
Josef A. Mandelbaum..................................
Herbert H. Jacobs....................................
James C. Spira.......................................
All directors and executive officers a group (
persons)( )......................................
- ---------------
* Less than 1%.
(1) Shares that an individual or group has the right to acquire within 60 days
of June 30, 1999 pursuant to the exercise of options, warrants or conversion
privileges are deemed to be outstanding for the purpose of computing the
percentage ownership of such person or group, but are not deemed outstanding
for the purpose of computing the percentage ownership of any other person
listed in this table. Except as indicated in the footnotes to this table,
AmericanGreetings.com believes that the listed stockholders have sole voting
and investment power with respect to all of the shares shown to be
beneficially owned by them, based on information provided to us by the
stockholders.
(2) Represents shares of Class B common stock which are convertible into shares
of Class A common stock on a one-for-one basis at any time at the option of
the holder thereof.
(3) All such shares are held by American Greetings. Mr. Weiss currently serves
as its Chairman and Chief Executive Officer and is the beneficial owner of
more than 26% of its common stock. Mr. Weiss may therefore be deemed to
share voting and investment power with respect to such shares.
(4) The address for all directors and executive officers is c/o
AmericanGreetings.com, One American Road, Cleveland, Ohio 44144.
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DESCRIPTION OF CAPITAL STOCK
Immediately prior to the closing of this offering, our authorized capital
stock will consist of 150 million shares of Class A common stock, par value
$.001 per share, 60 million shares of Class B common stock, par value $.001 per
share, and 150 million shares of preferred stock, par value $.001 per share.
shares of Class A common stock are being offered by this prospectus.
shares are reserved for issuance upon conversion of Class B common stock
into Class A common stock. Immediately prior to the closing of this offering,
shares of Class B common stock will be outstanding and held by our
parent.
There is no public market for our Class B common stock. Class B common
stock holders may not transfer their shares except in accordance with their
conversion rights, which are described below.
Voting Rights. The holders of our Class A and Class B common stock
generally have identical rights. However, holders of our Class A common stock
are entitled to one vote per share, while holders of our Class B common stock
are entitled to ten votes per share on most matters to be voted on by
stockholders. Shares of Class B common stock also have conversion rights, which
are described below.
Generally, all matters to be voted on by stockholders must be approved by a
majority of the votes entitled to be cast by all shares of Class A and Class B
common stock present in person or represented by proxy, voting together as a
single class. Holders of our preferred stock might in the future be granted the
right to vote alongside holders of our common stock. When electing directors,
those candidates receiving the most votes, even if not a majority of the votes
cast, will be elected directors. Holders of shares of Class A common stock and
Class B common stock are not entitled to cumulate their votes in the election of
directors. Any holder or group of holders acting in concert, other than our
parent, which beneficially owns 10% or more of the outstanding shares of Class B
common stock and does not beneficially own at least an equivalent percentage of
the outstanding shares of Class A common stock are not entitled to exercise any
voting rights for the purposes of electing directors.
Except as otherwise provided for in our amended and restated certificate of
incorporation or by law, and after honoring any voting rights granted to holders
of any outstanding preferred stock, amendments to our amended and restated
certificate of incorporation must be approved by a two-thirds vote of the
combined voting power of all of the Class A and Class B common stock, voting
together as a single class. Any amendment to our amended and restated
certificate of incorporation to increase or decrease the authorized shares of
any class will be approved upon the affirmative vote of the holders of
two-thirds of the voting power of the common stock, voting together as a single
class. However, amendments to our amended and restated certificate of
incorporation that would alter the powers, preferences or special rights of
either the Class A or Class B common stock so as to affect them adversely also
must be approved by two-thirds of the votes entitled to be cast by the holders
of the shares affected by the amendment, voting as a separate class. For
purposes of these provisions, any provision for the voluntary, mandatory or
other conversion or exchange of the Class B common stock into or for Class A
common stock on a one-for-one basis will not be considered as adversely
affecting the rights of holders of the Class A common stock.
Conversion. Provided that a holder of Class B common stock first offers to
sell all of its Class B common stock to AmericanGreetings.com at the published
market value and such offer is either rejected or lapses, all in accordance with
the procedures set out in our amended and restated certificate of incorporation,
each share of Class B common stock is convertible into one share of Class A
common stock at the option of the holder for the 30 days following the rejection
or lapse of the offer.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will be
authorized without further stockholder approval, to issue up to an aggregate of
150 million shares of preferred stock in one or more series. The board will also
be able to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series of
preferred stock. Upon the closing of this offering, there will be no shares of
preferred stock outstanding. We have no present plans to issue any shares of
preferred stock.
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ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain 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 such stockholder became an
interested stockholder, unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon the consummation of the transaction which resulted in the
stockholder 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 for purposes
of determining the number of shares outstanding those shares owned (x) by
persons who are directors and also officers and (y) by 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 such 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 66 2/3% of the outstanding voting stock which 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 certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by 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.
In general, Section 203 defines an interested stockholder as an 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 such entity or person.
CLASSIFIED BOARD OF DIRECTORS
Our amended and restated certificate of incorporation and bylaws will
provide that our board of directors will be divided into three classes of
directors, with the classes to be nearly equal in number as possible. One class
will be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2000, another will be originally elected for a term
expiring at the annual meeting of stockholders to be held in 2001 and another
will be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2002. Each director is to hold office until his or
her successor is duly elected and qualified. Commencing with the 2000 annual
meeting of stockholders, directors elected to succeed directors whose terms then
expire will be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until such person's successor is duly elected and qualified.
Our amended and restated certificate of incorporation and bylaws will
provide that the board of directors shall initially consist of nine members. Our
amended and restated certificate of incorporation and bylaws will further
provide that, subject to any rights of holders of preferred stock to elect
additional directors under
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specified circumstances, the number of directors of AmericanGreetings.com shall
be fixed from time to time exclusively by resolution of the board of directors
adopted by the affirmative vote of directors constituting not less than a
majority of the entire board of directors, but shall consist of not more than
fifteen nor less than six directors. In addition, the amended and restated
certificate of incorporation provides that any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, even if less than a
quorum, or by a sole remaining director, or by stockholders if such vacancy was
caused by the action of stockholders, in which event such vacancy may not be
filled by the directors or a majority thereof.
Our amended and restated certificate of incorporation provides that,
subject to the rights of holders of preferred stock or any other series or class
of stock to elect directors under specified circumstances and except as provided
below, directors may be removed only for cause by the affirmative vote of
holders of at least 66 2/3% of the voting power of the then outstanding shares
of stock of AmericanGreetings.com entitled to vote generally in the election of
directors, voting together as a single class.
ADVANCE NOTICE PROCEDURES
The bylaws provide for an advance notice procedure for the nomination,
other than by or at the direction of the board of directors, of candidates for
election as directors, as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director or raise matters at such meetings will have to be received
in writing by us not less than 60 nor more than 90 days prior to the date on
which we first mail our proxy materials for the previous year's annual meeting
of stockholders, and must contain certain information concerning the person to
be nominated or the matters to be brought before the meeting and concerning the
stockholder submitting the proposal.
SPECIAL MEETINGS
The bylaws provide that special meetings of stockholders may be called only
by the chairman or secretary of AmericanGreetings.com at the request of a
majority of the total number of directors that AmericanGreetings.com would have
if there were no vacancies. Special meetings cannot be called by stockholders.
The amended and restated certificate of incorporation will provide that any
action required or permitted to be taken by stockholders may be effected only at
a duly called annual or special meeting of stockholders and may not be effected
by a written consent.
These and other provisions could have the effect of making it more
difficult to acquire AmericanGreetings.com by means of a tender offer, proxy
contest or otherwise, and to remove our incumbent officers and directors. These
provisions may discourage certain types of coercive takeover practices and
encourage persons seeking to acquire control of AmericanGreetings.com to first
negotiate with us.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breaches of directors' fiduciary duty of
care. Our amended and restated certificate of incorporation will include a
provision that eliminates the personal liability of our directors for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to 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.
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Our amended and restated certificate of incorporation and amended and
restated bylaws will generally provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware or any other applicable law;
- we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors, unless otherwise required by
law, our amended and restated certificate of incorporation, our bylaws or
other agreements; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with legal proceedings to the fullest extent
permitted by Delaware law.
Prior to the closing of this offering, we intend to obtain directors' and
officers' insurance providing indemnification for our directors, officers and
some employees. We believe that these indemnification provisions and insurance
are necessary to attract and retain qualified directors and executive officers.
The limitation of liability and indemnification provisions in our amended
and restated certificate of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against our directors for breach of their fiduciary
duty. Such provisions may also reduce the likelihood of derivative litigation
against our directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers in connection with
these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees for which indemnification is sought. We are
unaware of any threatened litigation that may result in claims for
indemnification.
CORPORATE OPPORTUNITY
AmericanGreetings.com's amended and restated certificate of incorporation
will provide that American Greetings Corporation shall have no duty to refrain
from engaging in the same or similar activities or lines of business as
AmericanGreetings.com, and neither American Greetings Corporation nor any
officer or director thereof (except as noted below) shall be liable to
AmericanGreetings.com or its stockholders for breach of any fiduciary duty by
reason of any such activities of American Greetings Corporation. In the event
that American Greetings Corporation acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for both American
Greetings Corporation and AmericanGreetings.com, American Greetings Corporation
shall have no duty to communicate or offer such corporate opportunity to
AmericanGreetings.com and shall not be liable to AmericanGreetings.com or its
stockholders for breach of any fiduciary duty as a stockholder of
AmericanGreetings.com by reason of the fact that American Greetings Corporation
pursues or acquires such corporate opportunity for itself, directs such
corporate opportunity to another person, or does not communicate information
regarding such corporate opportunity to AmericanGreetings.com.
In the event that a director or officer of AmericanGreetings.com who is
also a director or officer of American Greetings Corporation acquires knowledge
of a potential transaction or matter which may be a corporate opportunity for
both AmericanGreetings.com and American Greetings Corporation, such director or
officer of AmericanGreetings.com shall have fully satisfied and fulfilled the
fiduciary duty of such director or officer to AmericanGreetings.com and its
stockholders with respect to such corporate opportunity if such director or
officer acts in a manner consistent with the following policy:
(i) a corporate opportunity offered to any person who is an officer of
AmericanGreetings.com, and who is also a director but not an officer of
American Greetings Corporation, shall belong to AmericanGreetings.com;
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(ii) a corporate opportunity offered to any person who is a director
but not an officer of AmericanGreetings.com, and who is also a director or
officer of American Greetings Corporation, shall belong to
AmericanGreetings.com if such opportunity is expressly offered to such
person in writing solely in his or her capacity as a director of
AmericanGreetings.com, and otherwise shall belong to American Greetings
Corporation; and
(iii) a corporate opportunity offered to any person who is an officer
of both AmericanGreetings.com and American Greetings Corporation shall
belong to AmericanGreetings.com if such opportunity is expressly offered to
such person in writing solely in his or her capacity as an officer of
AmericanGreetings.com, and otherwise shall belong to American Greetings
Corporation.
For purposes of the foregoing:
(i) A director of AmericanGreetings.com who is Chairman of the board
of directors of AmericanGreetings.com or of a committee thereof shall not
be deemed to be an officer of AmericanGreetings.com by reason of holding
such position (without regard to whether such position is deemed an office
of AmericanGreetings.com under the amended and restated bylaws of
AmericanGreetings.com), unless such person is a full-time employee of
AmericanGreetings.com; and
(ii) (a) the term "AmericanGreetings.com" shall mean
AmericanGreetings.com and all corporations, partnerships, joint ventures,
associations and other entities in which AmericanGreetings.com beneficially
owns (directly or indirectly) 50% or more of the outstanding voting stock,
voting power, partnership interest or similar voting interests, and (b) the
term "American Greetings Corporation" shall mean American Greetings
Corporation and all corporations, partnerships, joint ventures,
associations and other entities (other than AmericanGreetings.com defined
in accordance with clause (a) of this section (ii) in which American
Greetings Corporation beneficially owns (directly or indirectly) 50% or
more of the outstanding voting stock, voting power, partnership interests
or similar voting interests.
The foregoing provisions of AmericanGreetings.com's amended and restated
certificate of incorporation shall expire on the date that American Greetings
Corporation ceases to own beneficially common stock representing at least 20% of
the total voting power of all classes of outstanding common stock and no person
who is a director or officer of AmericanGreetings.com is also a director or
officer of American Greetings Corporation or any of its subsidiaries (other than
AmericanGreetings.com).
In addition to any vote of the stockholders required by
AmericanGreetings.com's amended and restated certificate of incorporation, until
the time that American Greetings Corporation ceases to own beneficially common
stock representing at least 20% of the total voting power of all classes of
outstanding common stock, the affirmative vote of the holders of more than 80%
of the total voting power of all classes of outstanding common stock shall be
required to alter, amend or repeal in a manner adverse to the interests of
American Greetings Corporation and its subsidiaries (other than
AmericanGreetings.com), or adopt any provision adverse to the interests of
American Greetings Corporation and its subsidiaries (other than
AmericanGreetings.com), or inconsistent with the corporate opportunity
provisions described above. Accordingly, so long as American Greetings
Corporation beneficially owns common stock representing at least 20% of the
total voting power of all classes of outstanding common stock, it can prevent
any such alteration, amendment, repeal or adoption.
Any person purchasing or otherwise acquiring common stock will be deemed to
have notice of, and to have consented to, the foregoing provisions of
AmericanGreetings.com's amended and restated certificate of incorporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, AmericanGreetings.com will have
outstanding shares of common stock, assuming no exercise of the
underwriters' over-allotment option. Of these shares, the shares sold in
this offering will be freely tradable without restriction under the Securities
Act unless purchased by "affiliates" of AmericanGreetings.com as that term is
defined in Rule 144 under the Securities Act. On the closing date of this
offering, our parent will own all of the shares of our Class B common stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned restricted shares for at
least one year (including the holding period of any prior owner except an
affiliate) 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 offering); or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about AmericanGreetings.com. Under Rule 144(k), a person who is not deemed to
have been an affiliate of AmericanGreetings.com at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
The shares of common stock held by our parent are deemed "restricted
securities" as defined in Rule 144, and may not be sold other than through
registration under the 1933 Act or pursuant to an exemption from the regulations
thereunder, including exceptions provided by Rule 144. Subject to applicable law
and to the contractual restriction with the underwriters described below, our
parent may sell any and all of the shares of common stock it owns after
completion of this offering. The Registration Rights Agreement will provide that
our parent will have the right in certain circumstances to require us to use our
reasonable best efforts to register for resale shares of common stock held by
the parent. See "Related Party Transactions -- Transactions With Our
Parent -- Formation Agreement."
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to
AmericanGreetings.com who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144.
After the closing of this offering, we have agreed not to issue any shares
of our capital stock or any rights, warrants, or other securities to purchase or
acquire any shares of our capital stock, without the prior consent of our
parent. See "Related Party Transactions -- Transactions With Our
Parent -- Formation Agreement." Subject to the foregoing restrictions, we may
issue additional shares of common stock to raise equity or make acquisitions. We
may also issue additional shares of common stock to our parent in exchange for
additional investments of cash or other property by our parent in
AmericanGreetings.com.
In addition, subject to the prior consent of our parent, we may grant
options to purchase shares of common stock to employees, non-employee directors
and independent contractors of AmericanGreetings.com, pursuant to the 1999 Stock
Option Plan. See "Management -- Employee Benefit Plans." We currently expect to
file promptly following this offering a registration statement on Form S-8 under
the 1933 Act to register an aggregate of shares reserved for issuance under
the 1999 Stock Option Plan. Shares issued pursuant to
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the 1999 Stock Option Plan after the effective date of such registration
statement, other than shares issued to affiliates, generally will be freely
tradable without restriction or further registration under the 1933 Act.
LOCK-UP AGREEMENTS
For a period of 180 days after the date of this prospectus, we, our
executive officers, directors and our parent, have agreed, subject to certain
exceptions, not to, without approval by Merrill Lynch:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file any registration statement
under the Securities Act of 1933 relating to any shares of our common
stock,
- enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of
our common stock whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or otherwise,
or
- make any demand for, or exercise any right with respect to, the
registration of any share of common stock or any securities convertible
into or exchangeable for common stock,
provided that we may at any time and from time to time (1) grant options to
purchase shares of our Class A common stock under our 1999 Stock Option Plan and
(2) issue shares of our Class A common stock upon the exercise of outstanding
options.
As a result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rule 144, 144(k) and 701, none of
these shares can be sold until 181 days after the date of the final prospectus.
Beginning 181 days after the date of the final prospectus, of these
shares will be eligible for sale in the public market, although a portion of
such shares will be subject to certain volume limitations pursuant to Rule 144.
The remaining restricted shares will become eligible for sale from time to time
thereafter upon expiration of applicable holding periods under Rule 144 under
the Securities Act and AmericanGreetings.com's right to repurchase unvested
shares.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIBC World Markets
Corp. and Volpe Brown Whelan & Company, LLC are acting as representatives of
each of the underwriters named below. Subject to the terms and conditions set
forth in a purchase agreement between us and the underwriters, we have agreed to
sell to the underwriters, and each of the underwriters severally and not jointly
has agreed to purchase from us, the number of shares of Class A common stock set
forth opposite its name below.
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
CIBC World Markets Corp.....................................
Volpe Brown Whelan & Company, LLC...........................
--------
Total...........................................
========
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in that agreement, to purchase all of the
shares of our Class A common stock being sold pursuant to each such agreement if
any of the shares of common stock being sold pursuant to such agreement are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated. The closing with respect to the sale of shares of common stock to be
purchased by the underwriters are conditioned upon one another.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of our Class A common stock to the public at the initial
public offering price set forth on the cover page of this prospectus, and to
dealers at such price less a concession not in excess of $ per share of
Class A common stock. The underwriters may allow, and such dealers may reallow,
a discount not in excess of $ per share of Class A common stock to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional shares of our Class A common stock at the initial public
offering price set forth on the cover of this prospectus, less the underwriting
discount. The underwriters may exercise this option solely to cover
over-allotments, if any, made on the sale of our Class A common stock offered
hereby. To the extent that the underwriters exercise this option, each
underwriter will be obligated to purchase a number of additional shares of our
Class A common stock proportionate to such underwriter's initial amount
reflected in the foregoing table.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price...........................
Underwriting discount...........................
Proceeds, before expenses, to
AmericanGreetings.com.........................
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $ and are payable by us.
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The shares of Class A common stock are being offered by the several
underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of legal matters by counsel for the underwriters and
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares offered hereby to be sold
to some of our employees, directors and other persons with relationships with
us. The number of shares of Class A common stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not orally confirmed for purchase within
one day of the pricing of the offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
NO SALES OF SIMILAR SECURITIES
We, and our executive officers and directors and American Greetings have
agreed, subject to certain exceptions, not to directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file any registration statement
under the Securities Act of 1933 relating to any shares of our common
stock,
- enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of
our common stock whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or otherwise,
or
- make any demand for, or exercise any right with respect to, the
registration of any share of common stock or any securities convertible
into or exchangeable for common stock,
without the prior written consent of Merrill Lynch on behalf of the underwriters
for a period of 180 days after the date of this prospectus, provided that we may
at any time and from time to time (1) grant options to purchase shares of our
Class A common stock under our 1999 Stock Option Plan and (2) issue shares of
our Class A common stock upon the exercise of outstanding options. See "Shares
Eligible for Future Sale."
NASDAQ NATIONAL MARKET LISTING
Prior to this offering, there has been no public market for our Class A
common stock. The initial public offering price will be determined through
negotiations between us and the representatives of the underwriters. The factors
to be considered in determining the initial public offering price, in addition
to prevailing market conditions are expected to be price-revenue and discounted
price-earnings ratios, include the valuation multiples of publicly traded
companies that the representatives believe to be comparable to us, some of our
financial information, the history of, and the prospects for, us and the
industry in which we compete, and an assessment of our management, its past and
present operations, the prospects for, and timing of, our future revenues and
the present state of our development, the percentage interest of our company
being sold as compared to the valuation for our company and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to ours. There can be no assurance that an active
trading market will develop for our Class A common stock or that our Class A
common stock will trade in the public market subsequent to the offering at or
above the initial public offering price.
We have made application to list our Class A common stock on the Nasdaq
National Market under the symbol "AGCM."
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The underwriters do not expect sales of our Class A common stock to be made
to any accounts over which they exercise discretionary authority to exceed 5% of
the number of shares being offered hereby.
The underwriters do not intend to confirm sales of the common stock offered
hereby to any accounts over which they exercise discretionary authority.
We have agreed to indemnify the underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of this offering.
Volpe Brown Whelan & Company, LLC has performed in the past, and may
perform in the future, various investment banking services for us.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our Class A common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase our Class A common stock. As
an exception to these rules, the underwriters are permitted to engage in
transactions that stabilize the price of our Class A common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of our Class A common stock.
If the underwriters create a short position in our Class A common stock in
connection with the offering contemplated hereby, i.e., if they sell more shares
of our Class A common stock than are set forth on the cover page of this
prospectus, the underwriters may reduce that short position by purchasing our
Class A common stock in the open market. The underwriters may also elect to
reduce any short position by exercising all or part of the over-allotment
options described above.
PENALTY BIDS
The underwriters may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriters purchase shares of
our Class A common stock in the open market to reduce their short position or to
stabilize the price of our Class A common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our Class A common stock to the extent
that it discourages resales of our Class A common stock.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our Class A common stock. In addition,
neither we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the shares of common stock will be passed upon for us by
Gordon & Glickson LLC, Chicago, Illinois, our counsel. Certain legal matters
will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, our special counsel. Certain legal matters
relating to this offering will be passed upon for the underwriters by Shearman &
Sterling, Menlo Park, California.
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EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at February 28, 1998 and February 28, 1999, and for each of the three
years in the period ended February 28, 1999, as set forth in their report. We've
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.
WHERE YOU CAN FIND MORE INFORMATION
For more information with respect to AmericanGreetings.com and the Class A
common stock offered by this prospectus, see the registration statement and the
exhibits and schedule filed by us with the Securities and Exchange Commission on
Form S-1 under the Securities Act of 1933. This prospectus does not contain all
of the information set forth in the registration statement and the related
exhibits and schedules. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the registration.
The registration statement and its exhibits and schedules may be inspected
and copied at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Securities and Exchange Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048;
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. The public may obtain information on the operations of the public
reference facilities in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330. Copies of all or any part can also be obtained at
prescribed rates from the Public Reference Section of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The address of the site is http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Balance Sheets as of February 28, 1998 and 1999 and June 30,
1999 (unaudited).......................................... F-3
Statements of Operations for the three years ended February
28, 1999 and the four months ended June 30, 1998 and 1999
(unaudited)............................................... F-4
Statements of Cash Flows for the three years ended February
28, 1999 and the four months ended June 30, 1998 and 1999
(unaudited)............................................... F-5
Statements of Stockholder's Deficit for the three years
ended February 28, 1999 and the four months ended June 30,
1999 (unaudited).......................................... F-6
Notes to Financial Statements............................... F-7
F-1
79
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
AmericanGreetings.com, Inc.
We have audited the accompanying balance sheets of AmericanGreetings.com,
Inc., a wholly-owned subsidiary of American Greetings Corporation, as of
February 28, 1998 and 1999, and the related statements of operations,
stockholder's deficit and cash flows for each of the three years in the period
ended February 28, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AmericanGreetings.com, Inc.
at February 28, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended February 28, 1999, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Cleveland, Ohio
July 28, 1999
F-2
80
AMERICANGREETINGS.COM, INC.
BALANCE SHEETS
THOUSANDS OF DOLLARS
FEBRUARY 28,
-----------------
1998 1999 JUNE 30, 1999
------ ------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Trade accounts receivable................................... $ 932 $ 3,696 $ 2,598
Prepaid partner share expense............................... 3,523 5,211 3,731
Deferred creative and production costs...................... 98 1,634 1,755
Other current assets........................................ 23 127 142
------ ------- -------
Total current assets................................... 4,576 10,668 8,226
OTHER ASSETS................................................ -- -- 743
FIXED ASSETS -- NET......................................... 574 583 2,331
------ ------- -------
$5,150 $11,251 $11,300
====== ======= =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................... $ 278 $ 536 $ 1,144
Accrued compensation........................................ 70 136 311
Deferred revenue............................................ 1,219 2,986 3,452
------ ------- -------
Total current liabilities.............................. 1,567 3,658 4,907
DEFERRED REVENUE............................................ 2,187 1,437 1,187
ADVANCES BY PARENT.......................................... 5,281 8,324 7,458
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT
Common stock -- par value $1; 100 shares authorized, issued,
and outstanding at February 28, 1998 and 1999; par value
$0.001; 10,000 shares authorized and 1,000 shares issued and
outstanding at June 30, 1999................................ -- -- --
Additional paid-in-capital.................................. 1 1 1
Accumulated deficit......................................... (3,886) (2,169) (2,253)
------ ------- -------
Total stockholder's deficit............................ (3,885) (2,168) (2,252)
------ ------- -------
$5,150 $11,251 $11,300
====== ======= =======
See notes to financial statements.
F-3
81
AMERICANGREETINGS.COM, INC.
STATEMENTS OF OPERATIONS
THOUSANDS OF DOLLARS
FOUR MONTHS ENDED
FISCAL YEARS ENDED FEBRUARY 28, JUNE 30,
-------------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- ------- -------
(UNAUDITED)
Net revenues................................ $ 1,036 $ 3,882 $12,347 $2,972 $6,247
Cost of net revenues........................ 1,034 1,919 1,623 572 1,512
------- ------- ------- ------ ------
Gross profit................................ 2 1,963 10,724 2,400 4,735
Operating expenses:
Sales and marketing....................... 1,929 1,980 5,611 1,231 3,224
Product development....................... 1,270 959 1,090 266 845
General and administrative................ 430 838 1,340 439 796
------- ------- ------- ------ ------
Total operating expenses............... 3,629 3,777 8,041 1,936 4,865
Income (loss) before benefit (provision) for
income taxes.............................. (3,627) (1,814) 2,683 464 (130)
Benefit (provision) for income taxes........ 1,244 635 (966) (167) 46
------- ------- ------- ------ ------
Net income (loss)........................... $(2,383) $(1,179) $ 1,717 $ 297 $ (84)
======= ======= ======= ====== ======
See notes to financial statements.
F-4
82
AMERICANGREETINGS.COM, INC.
STATEMENTS OF CASH FLOWS
THOUSANDS OF DOLLARS
FOUR MONTHS ENDED
FISCAL YEARS ENDED FEBRUARY 28, JUNE 30,
------------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- ------- ------ --------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)............................. $(2,383) $(1,179) $1,717 $ 297 $ (84)
Adjustments to reconcile to net cash (used by)
provided by operating activities:
Depreciation................................ 110 358 393 118 263
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable............................. (269) (663) (2,764) (425) 1,098
(Increase) decrease in prepaid partner
share expense.......................... -- (3,523) (1,688) 128 1,480
Increase in deferred creative and
production costs....................... -- (98) (1,536) (622) (121)
(Increase) decrease in other current
assets................................. (64) 55 (104) 2 (15)
Increase (decrease) in accounts payable
and other liabilities.................. 202 21 324 (167) 783
Increase (decrease) in deferred
revenue................................ -- 3,406 1,017 (218) 216
------- ------- ------ ----- -------
Cash (Used by) Provided by Operating
Activities............................... (2,404) (1,623) (2,641) (887) 3,620
INVESTING ACTIVITIES:
Increase in other assets...................... -- -- -- -- (743)
Fixed asset additions......................... (350) (228) (402) (79) (2,011)
------- ------- ------ ----- -------
Cash Used by Investing Activities........... (350) (228) (402) (79) (2,754)
FINANCING ACTIVITIES:
Advances from (to) parent -- net.............. 2,754 1,851 3,043 966 (866)
------- ------- ------ ----- -------
Cash Provided by (Used by) Financing
Activities............................... 2,754 1,851 3,043 966 (866)
------- ------- ------ ----- -------
CHANGE IN CASH AND CASH EQUIVALENTS........... -- -- -- -- --
Cash and Cash Equivalents at Beginning of
Period................................... -- -- -- -- --
------- ------- ------ ----- -------
Cash and Cash Equivalents at End of
Period................................... $ -- $ -- $ -- $ -- $ --
======= ======= ====== ===== =======
See notes to financial statements.
F-5
83
AMERICANGREETINGS.COM, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
THOUSANDS OF DOLLARS
ADDITIONAL
COMMON PAID-IN- ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- ---------- ----------- -------
BALANCE MARCH 1, 1996............................ $-- $1 $ (324) $ (323)
Net loss......................................... (2,383) (2,383)
------- ------- ------- -------
BALANCE FEBRUARY 28, 1997........................ -- 1 (2,707) (2,706)
Net loss......................................... (1,179) (1,179)
------- ------- ------- -------
BALANCE FEBRUARY 28, 1998........................ -- 1 (3,886) (3,885)
Net income....................................... 1,717 1,717
------- ------- ------- -------
BALANCE FEBRUARY 28, 1999........................ -- 1 (2,169) (2,168)
Net loss (Unaudited)............................. (84) (84)
------- ------- ------- -------
BALANCE JUNE 30, 1999 (Unaudited)................ $-- $1 $(2,253) $(2,252)
======= ======= ======= =======
See notes to financial statements.
F-6
84
AMERICANGREETINGS.COM, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1999
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE FOUR MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
THOUSANDS OF DOLLARS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY: AmericanGreetings.com, Inc. ("the Company" or
"AmericanGreetings.com, Inc.") is a leading Web-based provider of greetings and
other social expression content to consumers. AmericanGreetings.com, Inc. was
incorporated in June 1999 (See Note H) as a successor to the on-line greeting,
social expression and personal creativity operations of American Greetings
Corporation and its subsidiaries, which began in July 1995 ("Inception"). The
Company is a wholly-owned subsidiary of American Greetings Corporation ("the
Parent" or "American Greetings"), a publicly-traded corporation. The
accompanying financial statements have been prepared as if the Company operated
as a stand-alone entity since Inception. All of the accounting judgments,
estimations and allocations in the financial statements are based on assumptions
that management believes are reasonable.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION: To date, the Company has generated its revenues from
two primary sources: (1) the sale of on-line subscription programs through its
own Web site on the Internet and through co-branded sites with its distribution
partners and (2) the license of content and intellectual property.
Online Subscription Programs
The Company generates revenue from various online subscription programs.
Revenues relating to the sale of online greetings are recognized ratably over
each subscriber's subscription period, currently either one or six months. With
respect to the sale of a fixed number of online greetings for a fixed price,
which have been offered in the past, revenue was recognized over the period the
greetings were used, generally ranging from four to six months, or expired which
was considered to occur after 90 days of inactivity. During June and July of
1999, all fixed greetings users were converted to a three month subscription
program. Deferred revenue related to these users, at the date of upgrade, is
being recognized ratably over the three month term of the subscription.
Subscriptions are charged to customers' credit cards and are billed in advance
of the subscription period. Deferred revenue includes subscription fees which
have been collected, but for which revenue has not yet been recognized.
Licensing of Personal Creativity Content and Intellectual Property
The Company recognizes revenue from the licensing of personal creativity
content to software vendors when products are sold by the software vendors to
the retailer or the original equipment manufacturer (OEM). Revenue generated by
the license of intellectual property is recognized over the term of related
license agreements. Deferred revenue includes licensing fees which have been
collected, but for which revenue has not yet been recognized. Amounts to be
recognized in income in the next twelve months are classified as a current
liability in the accompanying balance sheets.
FINANCIAL INSTRUMENTS: The carrying values of the Company's financial
instruments approximate their fair values.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
subject the Company to a significant concentration of credit risk consist
principally of accounts receivable from certain computer software companies. The
Company conducts business based on periodic evaluations of its customers'
financial condition and generally does not require collateral. The accounts
receivable balance at February 28, 1999 and
F-7
85
AMERICANGREETINGS.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at June 30, 1999 was primarily (92% and 87%, respectively) composed of
receivables from the licensing of content and intellectual property to
Mindscape, a division of Mattel Inc.
RELIANCE ON CERTAIN RELATIONSHIPS: The Company derives a significant
portion of its net revenues (42% in 1999 and 64% for the four months ended June
30, 1999) from the sale of on-line greetings and personal creativity content
marketed and distributed through America Online, Inc. (AOL) under a three year
agreement, which expires February 28, 2001. In July 1999, AOL and the Company
entered into a new agreement which expanded the scope of their interactive
marketing agreement (See Note D). There can be no assurance that the Company
will maintain its relationship with AOL beyond the term of the new agreement, or
that it will be able to find an alternative distribution partner capable of
providing comparable services on terms acceptable to the Company after this
agreement expires. The Company expects that other partnerships would be
available.
The Company also derives a significant portion of its net revenues (36% in
1999 and 26% for the four months ended June 30, 1999) from royalties earned from
the licensing of trademarks and personal creativity content to Mindscape, under
a four year agreement which expires January 31, 2002. Under the terms of the
agreement, the Company is required to provide Mindscape with content (consisting
primarily of digitized artwork) and certain copyrighted material and trademarks.
In exchange for the content and trademarks, Mindscape agreed to pay certain
guaranteed licensing and royalty fees over the contract term. Additionally, the
agreement contains provisions which allow for Mindscape to extend the term if
royalty payments to the Company meet specified levels. Costs incurred to create
digitized artwork and content for Mindscape under this agreement are capitalized
and amortized on a straight-line basis over one year, the operating period that
Mindscape typically markets each new product, beginning on the date the software
is shipped to retailers or OEMs. There can be no assurance that the Company will
maintain its relationship with Mindscape beyond the term of the existing
agreement, or that it will be able to find an alternative software vendor
capable of providing comparable services. However, the Company expects that
other vendors would be available.
PRODUCT DEVELOPMENT COSTS: Product development costs associated with
products and services to be marketed through the Internet are expensed when
incurred.
FIXED ASSETS: Fixed assets are carried at cost. Depreciation is computed
using the straight-line method over the useful lives of the assets, which
generally range from two to seven years. Fixed assets are reviewed periodically
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of." Impairment of long-lived assets is
recognized when events or changes in circumstances indicate that the carrying
amount of the asset, or related groups of assets, may not be recoverable.
Measurement of the amount of impairment may be based on appraisal, market values
of similar assets or estimated discounted future cash flows resulting from the
use and ultimate disposition of the assets.
ADVERTISING EXPENSE: Advertising costs are expensed as incurred.
Advertising expense was $708, $190 and $26 in 1997, 1998, and 1999,
respectively.
RESEARCH AND DEVELOPMENT EXPENSE: Research and development costs are
expensed as incurred. Research and development costs include those expenses
incurred in the investigation and creation of new products or services, or in
significant improvements to existing products or processes, whether intended for
sale or internal use where those expenditures have certain future value. No
research and development costs were incurred in 1997 and 1998 while such costs
were $76 in 1999.
INCOME TAXES: The Company is a wholly-owned subsidiary of American
Greetings Corporation which files a consolidated federal income tax return. The
taxable income or loss of the Company from its Inception to February 28, 1999
was included in the consolidated tax returns of the Parent. Separate income tax
returns
F-8
86
AMERICANGREETINGS.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
were not filed for the Company. For all periods presented, deferred income taxes
and the related tax provision or benefit have been prepared as if the Company
had been a separate taxpayer.
NEW PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes new standards for the way
companies report information about operating segments in annual financial
statements. The disclosures prescribed by SFAS No. 131 are effective for the
year ended February 28, 1999. The Company currently operates in one segment.
In April 1998, The American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-up Activities." The Standard is effective for the Company for its fiscal
year which began March 1, 1999. This Standard requires that start-up costs, as
defined, be written off and any future start-up costs be expensed as incurred.
The Company expenses start-up costs as incurred and, therefore, adoption of this
Standard did not have a significant impact on the Company's financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Standard, which establishes new
accounting and reporting standards for derivative financial instruments, must be
adopted for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not currently have any derivative instruments and,
therefore, does not expect the Standard to have a material effect on its
financial position or results of operations.
CHANGE OF FISCAL YEAR: Effective March 1, 1999 AmericanGreetings.com, Inc.
changed from a fiscal year ending on February 28 or February 29, to a calendar
year-end. As a result, AmericanGreetings.com, Inc. has included in the
accompanying financial statements a four month transitional period corresponding
with its new calendar quarter ended June 30, 1999. The Company's 1999
transitional year financial statements to be included in its Form 10-K filing
will include its operations for the period from March 1, 1999 through December
31, 1999. AmericanGreetings.com, Inc.'s first full calendar year ending December
31 will be the year ending December 31, 2000. AmericanGreetings.com, Inc. is
undertaking this change in order to facilitate the comparability of its results
of operations and financial condition with that of other publicly traded
Internet companies.
INTERIM FINANCIAL INFORMATION: The accompanying balance sheet as of June
30, 1999, the related statements of operations and cash flows for the four
months ended June 30, 1998 and 1999, and the statement of stockholder's deficit
for the four months ended June 30, 1999 ("Interim Financial Statements") have
been prepared by the Company in accordance with generally accepted accounting
principles (GAAP) for interim financial information and with Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. The Interim
Financial Statements have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting of only normal recurring accruals, considered necessary for a fair
presentation of the results for such periods. Operating results for the four
month period ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the fiscal period ending December 31, 1999.
NOTE B -- EARNINGS PER SHARE
Prior to the reorganization described in Note H, the Company had 100 shares
of common stock outstanding and, accordingly, historical earnings per share data
is not considered meaningful.
F-9
87
AMERICANGREETINGS.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- FIXED ASSETS
FEBRUARY 28,
---------------- JUNE 30,
1998 1999 1999
------ ------ --------
Fixtures and equipment................................... $1,069 $1,471 $ 3,482
Less accumulated depreciation............................ (495) (888) (1,151)
------ ------ -------
$ 574 $ 583 $ 2,331
====== ====== =======
NOTE D -- PREPAID PARTNER SHARE EXPENSE
Prepayments relating to revenue sharing agreements with certain companies
are charged to operations over the effective period of each agreement or, if
greater, as revenue is earned.
In September 1997, the Company and AOL entered into an online distribution
relationship under an interactive marketing agreement (the AOL Contract),
pursuant to which the Company is the only party authorized by AOL to maintain an
online site offering greeting card products on AOL's service. Prepaid partner
share expense includes approximately $2.7 million and $5.0 million at February
28, 1998 and 1999, respectively, relating to unamortized prepaid revenue sharing
payments under the AOL Contract. The Company is amortizing these prepaid
expenses over the term of the agreement consistent with the contract's revenue
sharing provisions. In July 1999, the Company and AOL entered into a new
agreement which expanded the scope of their relationship.
Remaining payment obligations under the existing AOL contract were canceled
in connection with the new agreement. Under the new agreement, the Company has
committed to pay AOL $100.0 million over the 66 month term of the contract, of
which $25.0 million is required to be paid in 1999, $20.0 million in 2000, $20.0
million in 2001, $20.0 million in 2002, and $15.0 million in 2003. The Company
will amortize these costs as sales and marketing expenses on a straight line
basis over the term of the new agreement. Certain additional amounts will also
be due AOL consistent with the revenue sharing provisions of the contract. The
new contract may be renewed beyond December 2004 at the option of AOL.
In addition, the Company has entered into interactive marketing agreements
with other service providers, which permit a link from the service providers'
sites to a co-branded version of the Company's web site. These agreements
generally allow for a sharing of the gross sales revenues between the Company
and the Internet service providers. Prepaid partner share expense includes $0.8
million and $0.2 million at February 28, 1998 and 1999, respectively, relating
to these other agreements. The costs associated with these agreements are being
amortized over the lesser of the term of the agreement (generally six months to
two years) or as the sharing of revenue is earned.
The Company periodically evaluates the realizability of prepayments under
these agreements and, if necessary, recognizes a write down of these assets to
their net realizable value.
NOTE E -- RETIREMENT PLAN
The Parent has a non-contributory profit-sharing plan with a contributory
401(k) provision that covers most of its United States employees, including
employees of the Company. Contributions to the profit-sharing plan charged to
the Company were $64, $93 and $260 for 1997, 1998 and 1999, respectively. In
addition, the Parent matches a portion of 401(k) employee contributions
contingent upon meeting specified annual operating results goals. The Company's
matching costs were $9, $12 and $63 in 1997, 1998 and 1999, respectively. These
costs are included in Corporate expense allocations -- see Note F.
F-10
88
AMERICANGREETINGS.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- RELATED PARTY TRANSACTIONS
Since Inception, the Parent has provided non-interest bearing advances to
the Company for working capital and fixed asset purchases which aggregated
$5,281 and $8,324 at February 28, 1998 and 1999, respectively, and $7,458 at
June 30, 1999. The Company's operations are part of the Parent's centralized
cash management system and its centralized payroll system. Under the cash
management system, cash receipts and disbursements arising from the Company's
operations are transferred to or funded from the Parent's operating cash
accounts. Payroll costs are computed by the Parent and are paid from the
Parent's operating cash accounts. Payroll costs are recorded in the Parent's
centralized payroll system and are transferred to the Company's general ledger
system.
It is the Parent's intention to continue to fund these cash needs and to
not require repayment of these advances. It is anticipated that when the Company
completes its formation agreement in connection with its anticipated initial
public offering of common stock (see Note H), the then net advance by Parent
will be contributed to capital.
Related party expenses included in these financial statements include
corporate overhead costs allocated from the Parent (Corporate expense
allocation) and costs incurred on behalf of the Company by the Parent (Corporate
pass-through charges).
Corporate expense allocations: The Parent provides indirect management
services to the Company, including corporate management, treasury, accounting,
risk management, certain legal services, and other indirect administrative
functions. These costs have been allocated to the Company based on the Company's
total net revenue to the Parent's total net revenue. The Company is also charged
a pro-rata share, based on square footage, of the maintenance, security and
other costs to run the Parent's office building. The Company is charged a
pro-rata share, based on number of employees, of corporate benefit programs,
employee development and payroll services costs. The Company has been charged
for the retirement benefit programs relating to its employees as were incurred
by the Parent. The corporate expense allocations related to the Company included
within the accompanying statements of operations were approximately $105, $198
and $529 for 1997, 1998, and 1999, respectively.
Corporate pass-through charges: The Parent incurred costs that were
directly charged to the Company as follows:
YEARS ENDED FEBRUARY 28,
--------------------------
1997 1998 1999
------ ------ ------
Rent........................................................ $ 90 $ 23 $ 83
Payroll taxes and benefits.................................. 216 357 522
Other....................................................... 68 73 51
---- ---- ----
Total....................................................... $374 $453 $656
==== ==== ====
Management believes that the basis used for allocating corporate services
is reasonable. While the terms of these transactions may differ from those that
would result from transactions among unrelated parties, management does not
believe such differences would be material.
F-11
89
AMERICANGREETINGS.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aforementioned expenses are included in the accompanying statements of
operations as follows:
YEARS ENDED FEBRUARY 28,
----------------------------
1997 1998 1999
------- ------- ------
Sales and marketing..................................... $ 87 $ 196 $ 279
Product development..................................... 89 135 193
General and administrative.............................. 303 320 713
------- ------- ------
Total................................................... $ 479 $ 651 $1,185
======= ======= ======
One of the Company's directors also serves as an officer and director of
the Parent.
NOTE G -- INCOME TAXES
YEARS ENDED FEBRUARY 28,
----------------------------
1997 1998 1999
------- ------- ------
Income (loss) before income taxes:...................... $(3,627) $(1,814) $2,683
======= ======= ======
Provision (benefit) for income taxes:
Current................................................. $(1,236) $ (663) $ 952
Deferred................................................ (8) 28 14
------- ------- ------
Total................................................... $(1,244) $ (635) $ 966
======= ======= ======
The statutory federal income tax and the effective income tax rate are
reconciled as follows:
YEARS ENDED FEBRUARY 28,
----------------------------
1997 1998 1999
------- ------- ------
Statutory rate.......................................... 35.0% 35.0% 35.0%
Other................................................... (0.7)% -- 1.0%
------- ------- ------
Effective tax rate...................................... 34.3% 35.0% 36.0%
======= ======= ======
Significant components of the Company's deferred tax assets and liabilities
are as follows:
FEBRUARY 28,
----------------------------
1997 1998 1999
------- ------- ------
Deferred tax assets (liabilities):
Depreciation............................................ $ (8) $ 23 $ 39
Valuation reserve....................................... -- (23) (39)
------- ------- ------
Net deferred tax liability.............................. $ (8) $ -- $ --
======= ======= ======
Due to the Company's history of operating losses the realization of the
deferred tax asset is uncertain. The Company has, therefore, provided a full
valuation allowance against the deferred tax asset.
NOTE H -- SUBSEQUENT EVENTS (UNAUDITED)
AGREEMENTS WITH AMERICAN GREETINGS CORPORATION: Prior to the closing of
the Company's anticipated initial public offering, the Company and American
Greetings Corporation intend to enter into a Formation Agreement whereby
American Greetings Corporation will contribute to capital its advances and $50
million. At February 28, 1999 and June 30, 1999, advances by parent totaled
$8,324 and $7,458, respectively.
F-12
90
AMERICANGREETINGS.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cross-Licensing Agreement: In connection with the planned Formation
Agreement, American Greetings Corporation intends to grant the Company exclusive
rights to use "American Greetings" and the American Greetings rose logo in the
electronic market. American Greetings also intends to grant the Company
exclusive rights to use trademarks closely identified with the Company's
business, including "CreataCard" and other "Creata-" derivations, and
non-exclusive rights to other existing American Greetings trademarks such as
"Carlton", "Intuitions" and "Balloon Zone". AmericanGreetings.com, Inc. and
American Greetings Corporation will also agree to grant each other broad
exclusive licenses to use, copy and modify all respective present and future
social expression art, and non-exclusive license to all present and future
social expression verse. Both parties will be entitled to retain ownership of
derivative works of social expression art that they create or commission.
In the cross-license agreement the Company will agree to pay royalties to
American Greetings Corporation with respect to the American Greetings
Corporation's trademarks and licenses to all American Greetings social
expression art and verse. Pursuant to this agreement, the Company will pay
American Greetings fixed royalty charges of $24 million over a three year period
beginning July 1, 1999. Thereafter, the Company will pay American Greetings a
royalty of 3% of its net revenue for all periods after June 30, 2002, with a
minimum annual royalty payment of $5 million.
Services Agreement: The Company and American Greetings will enter into an
administrative services agreement, under which American Greetings will provide
AmericanGreetings.com, Inc. with requested back office infrastructure and
certain operational and administrative services at American Greetings
Corporation's cost plus 10% and a web services agreement under which
AmericanGreetings.com, Inc. will provide certain Internet-related technology
development and implementation services at AmericanGreetings.com, Inc.'s cost
plus 10%.
Tax Matters Agreement: Also in connection with the anticipated Formation
Agreement, the Company and American Greetings Corporation will enter into a tax
sharing and indemnification agreement. Pursuant to this agreement, for as long
as the Company remains a member of the American Greeting's consolidated tax
group, the Company will pay its proportionate share of its Parent's tax
liability computed as if the Company were filing a separate return. Further,
under the tax agreement, to the extent that American Greetings Corporation uses
any of the Company's tax losses, it will be required to reimburse the Company to
the extent of any such benefits utilized.
PURCHASE OF DOMAIN NAME: In May 1999, AmericanGreetings.com, Inc. acquired
the rights to the domain name ag.com, including the registration of the domain
name with Network Solutions, Inc., from the previous holder of these rights.
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91
INSIDE BACK COVER ARTWORK
[pictures of some of AmericanGreetings.com's products, features and services]
[text: Some of the Products, Features and Services]
[text: Electronic greetings that simply say hello]
[text: Greetings with animation, sound, music and interactivity]
[text: Animated Hi-Brow Comix that one can both enjoy and e-mail to friends]
[text: Paper greeting cards that you can personalize and print yourself]
[text: Craft, party and other print projects you can make and print yourself]
[text: Cartoons and other funny stuff that you can print yourself and share]
[text: Paper cards that you personalize and order, and we print and mail for
you]
[text: Free address book and reminder services]
[text: Both free and subscription offerings of all types of products]
92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING 1999 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
[LOGO]
CLASS A COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
CIBC WORLD MARKETS
VOLPE BROWN WHELAN & COMPANY
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
93
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1.1* Form of purchase agreement.
3.1 Certificate of incorporation of registrant.
3.2 Form of amended and restated certificate of incorporation of
registrant (included as Exhibit A to Exhibit 10.3).
3.3 Bylaws of registrant.
3.4 Form of amended and restated bylaws of registrant (included
as Exhibit A to Exhibit 10.3).
4.1* Specimen stock certificate of registrant's common stock.
5.1* Opinions of Gordon & Glickson LLC and Wilson Sonsini
Goodrich & Rosati, Professional Corporation.
10.1* Form of registrant's 1999 Stock Option Plan.
10.2* Form of indemnification agreement for directors and
officers.
10.3 Form of Formation Agreement with American Greetings.
10.4 Form of Cross-License Agreement with American Greetings.
10.5 Form of Web Services Agreement with American Greetings.
10.6 Form of Administrative Services Agreement with American
Greetings.
10.7 Form of Registration Rights Agreement with American
Greetings.
10.8 Form of Tax and Indemnification Agreement with American
Greetings.
10.9** AOL Interactive Marketing Agreement.
10.10** Yahoo! License and Promotion Agreement.
10.11** Mindscape Electronic Publishing Development Agreement.
23.1 Consent of Ernst & Young LLP.
23.2* Consents of Gordon & Glickson LLC and Wilson Sonsini
Goodrich & Rosati (included in Exhibit 5.1).
24.1 Power of Attorney (filed herewith on the signature page of
this registration statement).
27.1 Financial data schedule.
- ---------------
*To be filed by amendment.
**Confidential treatment has been requested with respect to certain portions of
this exhibit pursuant to a request for confidential treatment filed with the
Commission. Omitted portions have been filed separately with the Commission.
94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the costs and expenses, other
than underwriting discounts and commissions, incurred and to be incurred by the
registrant in connection with the issuance and distribution of the securities
registered hereby. All amounts are estimates except the Securities and Exchange
Commission registration fee and the National Association of Securities Dealers
filing fee.
SEC registration fee........................................ $16,680
NASD filing fee............................................. 6,500
Nasdaq National Market listing fee.......................... 1,000
Printing.................................................... --
Legal fees and expenses..................................... --
Accounting fees and expenses................................ --
Blue sky fees and expenses.................................. --
Custodial fees.............................................. --
Transfer agent and registrar fees........................... --
Miscellaneous............................................... --
Total.............................................
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware, or the DGCL,
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of such corporation, by
reason of the fact that any such person is or was a director, officer, employee
or agent of such corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. The indemnity may include
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided that such officer or director acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. A Delaware corporation may indemnify officers and
directors against expenses, including attorneys' fees, in connection with the
defense or settlement of an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses, including attorneys' fees, which such
officer or director actually and reasonably incurred. The foregoing description
is qualified in its entirety by reference to the more detailed provisions of
Section 145 of the DGCL.
Section 102 of the DGCL allows a Delaware corporation to eliminate or limit
the personal liability of a director to the corporation or to any of its
stockholders for monetary damage for a breach of fiduciary duty as a director,
except in the case where the director (1) breaches such person's duty of loyalty
to the corporation or its stockholders, (2) fails to act in good faith, engages
in intentional misconduct or knowingly violates a law, (3) authorizes the
payment of a dividend or approves a stock purchase or redemption in violation of
Section 174 of the DGCL or (4) obtains an improper personal benefit.
In accordance with the DGCL, the registrant's certificate of incorporation
contains a provision to limit the personal liability of its directors for
monetary damages for breach of their fiduciary duty to the fullest extent
permitted by the DGCL now, or as it may hereafter be amended.
In addition, as permitted by the DGCL, the registrant's bylaws provide that
(1) the registrant is required to indemnify its directors and officers and
persons serving in such capacities in other business enterprises at
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95
the registrant's request, to the fullest extent permitted by Delaware law; (2)
the registrant may indemnify its employees and agents to the maximum extent
permitted by Delaware law; (3) the registrant is required to advance expenses
incurred by its directors and officers in connection with defending a
proceeding, except that a director or officer must undertake to repay any
advances if it should ultimately be determined that the director or officer is
not entitled to indemnification; (4) the rights conferred in the bylaws are not
exclusive; and (5) the registrant may not retroactively amend the bylaw
provisions in a way that adversely affects any director or officer.
The purchase agreement provides for indemnification by the underwriters of
the registrant and its directors and officers who sign this registration
statement against certain liabilities, including liabilities under the
Securities Act of 1933. A form of the purchase agreement is provided as Exhibit
1.1 hereto. The registrant has entered into indemnification agreements with its
officers and directors. A form of the indemnification agreement is provided as
Exhibit 10.2 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 30, 1999 the registrant issued 1,000 shares of its common stock to
AGC Investments, Inc., a Delaware corporation and a wholly-owned subsidiary of
American Greetings, for $1,000 in a private placement. An exemption is claimed
under Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
1.1* Form of purchase agreement.
3.1 Certificate of incorporation of registrant.
3.2 Form of amended and restated certificate of incorporation of
registrant (included as Exhibit A to Exhibit 10.3).
3.3 Bylaws of registrant.
3.4 Form of amended and restated bylaws of registrant (included
as Exhibit A to Exhibit 10.3).
4.1* Specimen stock certificate of registrant's common stock.
5.1* Opinions of Gordon & Glickson LLC and Wilson Sonsini
Goodrich & Rosati, Professional Corporation.
10.1* Form of registrant's 1999 Stock Option Plan.
10.2* Form of indemnification agreement for directors and
officers.
10.3 Form of Formation Agreement with American Greetings.
10.4 Form of Cross-License Agreement with American Greetings.
10.5 Form of Web Services Agreement with American Greetings.
10.6 Form of Administrative Services Agreement with American
Greetings.
10.7 Form of Registration Rights Agreement with American
Greetings.
10.8 Form of Tax and Indemnification Agreement with American
Greetings.
10.9** AOL Interactive Marketing Agreement.
10.10** Yahoo! License and Promotion Agreement.
10.11** Mindscape Electronic Publishing Development Agreement.
23.1 Consent of Ernst & Young LLP.
23.2* Consents of Gordon & Glickson LLC and Wilson Sonsini
Goodrich & Rosati, Professional Corporation (included in
Exhibit 5.1).
24.1 Power of Attorney (filed herewith on the signature page of
this registration statement).
27.1 Financial data schedule.
- ---------------
* To be filed by amendment.
** Confidential treatment has been requested with respect to certain portions of
this exhibit pursuant to a request for confidential treatment filed with the
Commission. Omitted portions have been filed separately with the Commission.
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96
(b) Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable or the information
is contained in the financial statements and related notes and therefore have
been omitted.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing, as specified in the underwriting agreement, certificates in such
denomination 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
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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
of 1933 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 hereunder, 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 of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 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
of 1933, the information omitted from the form of the 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 of 1933 shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, 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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97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio,
on this 13th day of August 1999.
AMERICANGREETINGS.COM, INC.
By: /s/ JOHN M. KLIPFELL
----------------------------------
Name: John M. Klipfell
Title: Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of John M. Klipfell and Maureen M. Spooner or any of them, each acting
alone, his or her true and lawful attorney-in-fact and agent, with full power of
substitution, for such person in any and all capacities, to sign (1) any and all
amendments, including any and all post-effective amendments, to this
registration statement, and (2) any and all additional registration statements,
and any and all amendments thereto, relating to this registration statement that
are filed pursuant to Rule 462(b) under the Securities Act of 1933, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON AUGUST 13,
1999 IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
--------- -----
/s/ JOHN M. KLIPFELL Chief Executive Officer and Director
- ----------------------------------------------------- (principal executive officer)
John M. Klipfell
/s/ MAUREEN M. SPOONER Chief Financial Officer (principal financial
- ----------------------------------------------------- and accounting officer)
Maureen M. Spooner
/s/ HERBERT H. JACOBS Director
- -----------------------------------------------------
Herbert H. Jacobs
/s/ JAMES C. SPIRA Chairman of the Board of Directors
- -----------------------------------------------------
James C. Spira
/s/ MORRY WEISS Director
- -----------------------------------------------------
Morry Weiss
II-4