-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CCMUyOcPYUlp3bK8p8vHQfF7rrwe2I0LsfIVx8NGydE/PrdpIJIWjGX6YYjxB+ZA qMSD27PsoJQqRWIpNPFFRA== 0000950149-00-001190.txt : 20000516 0000950149-00-001190.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950149-00-001190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EGREETINGS NETWORK INC CENTRAL INDEX KEY: 0001083992 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 943207092 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28479 FILM NUMBER: 635083 BUSINESS ADDRESS: STREET 1: 149 NEW MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4153754100 MAIL ADDRESS: STREET 1: 149 NEW MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: E GREETINGS NETWORK DATE OF NAME CHANGE: 19991012 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 2000 1 United States Securities and Exchange Commission Washington D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Transition Period From to . ------- ------- Commission File Number: 005-57829 --------- EGREETINGS NETWORK, INC. (Exact name of registrant as specified in its charter) Delaware 94-3207092 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 149 New Montgomery Street San Francisco, CA 94105 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 375-4100 Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 10, 2000 Common Stock, $0.01 par value 34,985,429 1 2 TABLE OF CONTENTS 10-Q PART I - FINANCIAL INFORMATION Item 1 Condensed Financial Statements (unaudited) - Balance Sheets at March 31, 2000 and December 31, 1999 - Statements of Operations for the three months ended March 31, 2000 and 1999 - Statements of Cash Flows for the three months ended March 31, 2000 and 1999 - Notes to Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk PART II - OTHER INFORMATION Item 1 Legal Proceedings Item 6 Exhibits and Reports Signatures 2 3 EGREETINGS NETWORK, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
MARCH 31, DECEMBER 31, 2000 1999 ------------- ------------- UNAUDITED Current assets: Cash and cash equivalents ....................................................... $ 20,585 $ 81,774 Short-term investments .......................................................... 40,334 -- Accounts receivable (net of allowances for doubtful accounts of $200 in 2000 and $69 in 1999) .................................... 2,629 1,228 Prepaid expenses and other current assets ....................................... 9,263 9,244 ------------- ------------- Total current assets .................................................... 72,811 92,246 Long-term investments ............................................................. 4,921 -- Property and equipment, net ....................................................... 15,839 11,800 Deferred content costs ............................................................ 11,453 12,740 Restricted cash deposit ........................................................... 77 2,172 Deposits and other assets ......................................................... 1,075 1,165 ------------- ------------- Total assets ............................................................ $ 106,176 $ 120,123 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................................ $ 2,336 $ 7,910 Accrued expenses and other current liabilities .................................. 2,171 4,029 Accrued royalties ............................................................... 185 290 Deferred revenue ................................................................ 605 581 Current portion of equipment term loan .......................................... 1,769 1,764 ------------- ------------- Total current liabilities ............................................... 7,066 14,574 Equipment term loan, less current portion ......................................... 3,270 3,718 ------------- ------------- Total liabilities ....................................................... 10,336 18,292 Commitments and contingencies Stockholders' equity Convertible preferred stock, $0.001 par value: 15,500,000 shares authorized; 2,523,546 shares issued and outstanding in 1998 .............................. -- -- Common stock, $0.001 par value: 65,000,000 shares authorized; 34,501,140 and 35,335,082 shares issued and outstanding at December 31, 1999 and March 31, 2000, respectively ................................................. 165,409 159,227 Deferred stock compensation ..................................................... (1,551) (2,195) Notes receivable from stockholders .............................................. (7,449) (5,490) Accumulated deficit ............................................................. (60,569) (49,711) ------------- ------------- Total stockholders' equity .............................................. 95,840 101,831 ------------- ------------- Total liabilities and stockholders' equity .............................. $ 106,176 $ 120,123 ============= =============
See notes to condensed financial statements. 3 4 EGREETINGS NETWORK, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, 2000 1999 ------------- ------------- UNAUDITED Revenues ................................................ $ 2,821 $ 103 Costs and expenses: Cost of services ...................................... 1,071 399 Sales and marketing ................................... 5,857 2,889 Operations and development ............................ 4,119 1,263 General and administrative ............................ 1,961 980 Amortization of deferred content costs ................ 1,288 153 Amortization of deferred stock compensation ........... 404 154 ------------- ------------- Total costs and expenses ...................... 14,700 5,838 ------------- ------------- Loss from operations .................................... (11,879) (5,735) Interest income (expense), net .......................... 1,021 (166) ------------- ------------- Net loss ................................................ $ (10,858) $ (5,901) ============= ============= Net loss per share: Pro forma basic and diluted ........................... $ (.33) $ (.69) ============= ============= Shares used in calculation of net loss per share: Pro forma basic and diluted ........................... 33,025 8,583 ============= =============
See notes to condensed financial statements. 4 5 EGREETINGS NETWORK, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2000 1999 ---------- ---------- UNAUDITED UNAUDITED OPERATING ACTIVITIES Net loss ............................................................................ $ (10,858) $ (5,901) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation ...................................................................... 997 356 Amortization of deferred content costs ............................................ 1,288 154 Amortization of deferred stock compensation ....................................... 404 153 Bad debt expense .................................................................. 92 -- Other ............................................................................. 46 Changes in operating assets and liabilities: Accounts receivable ............................................................. (1,493) 180 Prepaid expenses and other current assets ....................................... (18) (331) Other assets .................................................................... 2,185 33 Accounts payable and accrued liabilities ........................................ (7,539) 575 Deferred revenue ................................................................ 25 83 ---------- ---------- Net cash used in operating activities ............................................. $ (14,917) $ (4,652) INVESTING ACTIVITIES Purchases of property and equipment, net .......................................... (5,036) (2,935) Purchases of marketable securities ................................................ (101,355) -- Proceeds from sale/maturity of marketable securities .............................. 56,100 -- ---------- ---------- Net cash used in investing activities ............................................. (50,291) (2,935) FINANCING ACTIVITIES Borrowings under equipment term loan .............................................. 499 Payments on equipment term loan ................................................... (444) (45) Issuance of common stock, net ..................................................... 4,463 9 Issuance of preferred stock, net .................................................. 19,650 ---------- ---------- Net cash provided by financing activities ......................................... 4,019 20,113 Net increase (decrease) in cash and cash equivalents .............................. (61,189) 12,526 Cash and cash equivalents at beginning of period .................................. 81,774 268 ---------- ---------- Cash and cash equivalents at end of period ........................................ $ 20,585 $ 12,794 ========== ========== SUPPLEMENTAL DISCLOSURES Cash paid for interest ............................................................ $ 101 $ 13 ========== ========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock for notes receivable ................................ $ 1,959 $ 0 ========== ========== Valuation of preferred stock warrant in connection with content agreement .... $ 0 $ 2,362 ========== ========== Valuation of deferred stock compensation ..................................... $ 239 $ 1,635 ========== ==========
See notes to condensed financial statements. 5 6 EGREETINGS NETWORK, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. THE COMPANY AND BASIS OF PRESENTATION Egreetings Network, Inc. (the "Company") offers consumers and businesses a convenient and simple integrated solution for finding and sending online cards, gifts and invitations. The Company's Web site allows users to send personalized content-rich online cards and a wide variety of gifts. The Company operates in one business segment and generates revenue from corporate advertising and sponsorships, e-commerce and direct marketing. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by general accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Certain prior period balances have been reclassified to conform to current period presentation. 2. SIGNIFICANT ACCOUNTING POLICIES 6 7 Revenue Recognition Revenues consist primarily of advertising and sponsorship revenues and direct marketing revenues. The duration of banner advertising and sponsorship commitments typically range from one month to one year. The Company's advertisement obligations typically include guarantees of a minimum number of impressions, or times that an advertisement appears in pages viewed by consumers using the Company's Web site. The 7 8 Company recognizes revenues on the sale of banner advertisements as the impression is delivered or displayed. The Company recognizes revenues on the sale of sponsorship advertisements on a straight-line basis over the period in which the sponsor's message is displayed. To the extent minimum guaranteed impressions are not met, revenue recognition is deferred until the remaining guaranteed impressions are delivered. Revenue from direct marketing activities is recognized based on the ratio of the number of emails actually sent to the guaranteed number of emails to be sent. In each case, revenues are recognized only if the Company has no remaining significant obligations and collection is probable. Deferred revenue is primarily comprised of billings in excess of recognized revenue relating to advertising contracts and payments received pursuant to sponsorship advertising contracts in advance of revenue recognition. Deferred Content Costs The Company records the value of deferred content costs as of the date of the related content licensing agreements and amortizes these costs to expense over the life of the contract using the straight-line method. Realization of deferred content costs is subject to the Company generating adequate revenues and other benefits as a result of the arrangement. Should the benefits under the various content agreements not accrue to the Company, the carrying value of the asset could become impaired and the Company would write down the asset value to its net realizable value at that time. The Company continually evaluates the realizability of its deferred content costs for impairment. 8 9 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Dependence on Third Parties and Related Party Transactions A common stockholder, Gibson Greetings, Inc. ("Gibson") now a wholly-owned subsidiary of American Greetings Corp., provides a significant portion of the Company's online cards content pursuant to an agreement that the Company pays royalties. Under this agreement, the Company paid royalties to this related party of $106,000 and $67,000 in the three months ended March 31, 2000 and 1999, respectively. Royalty obligations arise as online cards containing third-party content are sent by consumers. Royalty expenses are recorded with a charge to cost of services in the statement of operations in the period during which the related obligations arise. In addition, the Company relies on another entity to provide a majority of support necessary to maintain the server and transmit data. The inability of any of these parties to fulfill their obligations with the Company could negatively impact the Company's future results. 3. NET LOSS PER SHARE DATA Basic and diluted net loss per share information for all periods is presented under the requirement of SFAS No. 128, "Earnings per Share" ("SFAS 128"). Basic earnings per share has been computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock options, warrants, and convertible securities. Potentially dilutive securities have also been excluded from the computation of diluted net loss per share as their inclusion would be antidilutive. Pro forma net loss per share for the three months ended March 31, 1999 has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of preferred shares not included above that automatically converted upon completion of the Company's initial offering, using the if-converted method. The calculation of historical and pro forma basic and diluted net loss per share is as follows (in thousands, expect share and per share amounts):
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ---------- ---------- Historical: Net loss .............................................................. $ (10,858) $ (5,901) ---------- ---------- Weighted average shares of common stock outstanding ................... 35,046 3,480 Less: weighted average shares of common stock that may be repurchased.. 2,021 0 ---------- ---------- Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share ............. 33,025 3,480 ---------- ---------- Basic and diluted net loss per share .................................. $ (.33) $ (1.70) ========== ========== Pro forma: Net loss .............................................................. $ (5,901) ---------- Weighted average shares used in computing basic and diluted net loss per share (from above) ............................ 3,480 Adjustment to reflect the effect of the assumed conversion of preferred stock to common stock from the date of issuance .......... 5,103 ---------- Weighted average shares used in computing pro forma basic and diluted net loss per share ............................... 8,583 ---------- Pro forma basic and diluted net loss per share ........................ $ (.69) ==========
9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements that involve risks and uncertainties that are based on our current expectations about our company and our industry. We make such forward-looking statements under the provisions of the "Safe Harbor" section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described below in Item 2 under "Factors That May Affect Future Results." Actual results may differ materially from those projected, anticipated or indicated in any forward-looking statements. In Item 2, we use the words "anticipates," "believes," "intends," "future," "could" and similar words and expressions referencing future events, conditions or circumstances identify forward-looking statements, but not all forward-looking statements include these words. Some of these forward-looking statements relate to our strategy, the launch of new services on our Web site, the rearchitecture of our Website, our market opportunities, the ability to meet revenue-generating milestones with our current partners, the anticipated use of proceeds from our recent offering, our anticipated advertising revenues, our ability to attract and retain distribution partners, our ability to attract and retain quality e-commerce partners and generate revenues from such partnerships, our competitive position, our ability to continue to license and develop high quality content, our management's discussion and analysis of our financial condition and results of operations. The section entitled "Risk Factors" appearing in this report describes those factors that we currently consider material and that could cause these differences. These factors also include, but are not limited to, those discussed in our other SEC filings, including our Registration Statement on Form S-1 declared effective December 16, 1999 by the SEC (File No. 333-88595) and in our Annual Report on Form 10-K filed March 30, 2000 with the SEC. We urge you to consider these cautionary statements carefully in evaluating our forward-looking statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements to reflect subsequent events and circumstances. You should read the following discussion and analysis in conjunction with our financial statements and related notes included in this report. OVERVIEW From our inception in July 1994 through the year ended 1996, we derived our revenues primarily from the sale of paper greeting cards, first through CD-ROM based catalogs and then through our Web site and our online store on America Online (AOL). In February 1997, we implemented AOL's first online cards service, and in late 1997, we launched our own online cards service from our Web site. Revenues through the year ended 1997 consisted primarily of fees from AOL and, to a lesser extent, sales of paper and online cards through our Web site. We discontinued the sale of paper greeting cards through our Web site in July 1997 in order to focus on our online cards service. Revenues for the year ended 1998 were derived largely from the sale of advertisements, sponsorships and online cards on our Web site and from content licensing fees paid to us by AOL. Our relationship with AOL ended in late 1998. 10 11 In November 1998, we made a significant change to our business model and began offering our online cards for free. We made this change in order to more rapidly build a large and active user base, which increases our ability to sell advertisements and sponsorships on our Web site to third parties and has been the launching pad for our online direct marketing business. Our business model also includes e-commerce activities, although we have not yet realized any significant revenues from these activities and are still implementing the infrastructure and establishing the relationships required to support these activities. As we develop and introduce more products and services in the future, we anticipate that revenues from advertisements and sponsorships will decrease as a percentage of total revenues. RESULTS OF OPERATIONS Revenues Revenues grew to $2.8 million for the quarter ended March 31, 2000 from $103,000 for the quarter ended March 31, 1999. The catalyst for this growth has been the significant increase in traffic to our Web site, which in turn has driven growth in our advertising inventory and direct marketing base. We have capitalized on this growth by building our sales team steadily throughout 1999 and in the first quarter of 2000. We typically guarantee advertisers a minimum number of "impressions," or times that an advertisement appears in pages viewed by consumers using our Web site. We recognize revenues on the sale of advertisements based on the ratio of the number of impressions actually delivered to the guaranteed number of impressions. We recognize revenues on the sale of sponsorships on a straight-line basis over the period during which the sponsor's promotional message is displayed on our Web site. Direct marketing revenues are recognized based on the ratio of the number of emails actually sent to the guaranteed number of emails to be sent. In all cases, revenues are recognized only if we have no remaining significant obligations and the collection of the receivable is probable. Cost of Services Cost of services is comprised primarily of royalties paid to content licensors, the cost of our internal content production, Internet connectivity charges, server co-location costs, direct marketing list management costs and the cost of goods sold from our online gift store. Cost of services increased to $1.1 million for the quarter ended March 31, 2000 from $399,000 for the quarter ended March 31, 1999. The increase in this cost is primarily due to increases of in-house content costs resulting from the rise in demand for our online cards, as well as costs associated with two emerging revenue streams, namely direct marketing list management costs and cost of goods sold from our online store which opened in late 1999. Content royalty fees actually decreased as our customers sent more on line cards produced by the Company than online cards produced by third party publishers. 11 12 Cost of services is not proportional to revenues and may increase or decrease as a percentage of revenues. Sales and Marketing Sales and marketing expenses consist primarily of expenses related to online and offline advertising, distribution, personnel and facilities, promotional activities and public relations costs. Distribution costs reflect amounts paid to online service providers, portals and other Web sites who market and provide links to our Web site. Sales and marketing expenses increased to $5.9 million for the quarter ended March 31, 2000 from $2.9 million for the quarter ended March 31, 1999. This increase is primarily attributable to increases in television, radio and online advertising costs for our year 2000 Valentine's Day advertising campaign. Sales related expenses also increased due to the growth in our sales team to 19 people at March 31, 2000 from 4 people at March 31, 1999, which growth was planned in order to monetize the large increase in our Web site traffic and resulting advertising inventory. We anticipate that overall sales and marketing expenses will increase in absolute dollars in the foreseeable future. Sales and marketing expense as a percentage of total revenues may fluctuate depending on the timing and type of new marketing programs and distribution agreements and the addition of sales and marketing personnel. Operations and Development Operations and development expenses consist primarily of personnel and facilities costs for our site management, product management, business development, engineering, information systems, site operations and site production departments. Operations and development expenses increased to $4.1 million for the quarter ended March 31, 2000 from $1.3 million for the quarter ended March 31, 1999. These increases primarily were due to increased personnel costs, including the cost of independent contractors assisting on various engineering projects. Depreciation expense also increased due to the addition of hardware and software to support the increased traffic on our Web site. We anticipate that overall operations and development expenses will increase in the foreseeable future. These expenses as a percentage of revenues may fluctuate depending on the level of future revenues and the timing of new personnel hires to support and expand our site infrastructure and traffic. General and Administrative General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, facilities and administration, legal, human resources and fees for professional services. General and administrative expenses increased to $2.0 million for the quarter ended March 31, 2000 from $980,000 for the quarter ended March 31, 1999. This increase is 12 13 primarily the result of increased personnel, facility and overhead costs necessary to support our growing business infrastructure. We have increased our office space from approximately 14,000 square feet in the first quarter of 1999 to approximately 70,000 square feet in the first quarter of 2000. We anticipate that general and administrative expenses will continue to increase in the foreseeable future. General and administrative expense as a percentage of revenues may fluctuate depending on the level of future revenues and the timing of additional investments in general and administrative infrastructure. Amortization of Deferred Content Costs Amortization of deferred content costs increased to $1.3 million for the quarter ended March 31, 2000 from $153,000 for the quarter ended March 31, 1999. This increase is primarily the result of a significant upward revaluation during 1999 of a warrant issued to Gibson Greetings, Inc. in connection with rights to distribute Gibson's content in the form of online cards. Also in late 1999, we incurred approximately $4.8 million of content costs in conjunction with a content licensing agreement signed with the National Broadcasting Company, Inc. We will periodically review the recoverability of the deferred content costs and will write these assets down to their net realizable value if impairment is deemed to have occurred. Amortization of Deferred Stock Compensation Amortization of deferred stock compensation increased to $404,000 for the quarter ended March 31, 2000 from $154,000 for the quarter ended March 31, 1999. These charges relate to the amortization of deferred stock compensation over the vesting periods, generally four years, of options granted in 1998 and 1999 at exercise prices less than the deemed fair value of our common stock on the grant date. Interest Income (Expense), Net Net interest income increased to $1.0 million for the quarter ended March 31, 2000 from an expense of $166,000 for the quarter ended March 31, 1999. For the quarter ended March 31, 2000, interest was earned primarily on proceeds from our initial public offering in December 1999. These proceeds are invested in high quality, short-term investments, including money market funds. Interest earned in both periods was offset by interest on equipment term loans. Investment income in future periods may fluctuate as a result of fluctuations in average cash balances maintained by the Company and changes in the market rates of its investments. Income Taxes There has been no provision made for federal or state income taxes for any period as we have incurred operating losses to date. LIQUIDITY AND CAPITAL RESOURCES 13 14 Since inception, we have financed our operations primarily through the private placements of equity securities and, in December 1999, an initial public offering of common stock. To a lesser extent we have used equipment financing facilities to fund operations. Net cash used in operating activities was $14.9 million and $4.7 million for the quarters ended March 31, 2000 and 1999, respectively. Cash used in operating activities resulted primarily from net losses partially offset by increases in accounts payable and accrued liabilities and by non-cash charges for depreciation of furniture and equipment and amortization of deferred content and stock compensation costs. Net cash used in investing activities was $50.3 million and $2.9 million for the quarters ended March 31, 2000 and 1999, respectively. Of these amounts, approximately $5.0 million and $2.9 million for the quarters ended March 31, 2000 and 1999, respectively, were used to acquire network hardware and software and other equipment to support our growth in Web site traffic and personnel. The remaining $45.0 million in 2000 was used to invest in high quality, primarily short-term financial instruments. Net cash provided by financing activities was $4.0 million and $20.1 million for the quarters ended March 31, 2000 and 1999, respectively, and was generated primarily through the sale of common stock, preferred stock, and borrowings offset by loan pay downs. Due to proceeds received from our initial public offering in December 1999, we did not actively pursue additional financing during the quarter ended March 31, 2000 other than the exercise by our underwriters of their right to purchase allotted shares from the initial stock offering. As of March 31, 2000, we had approximately $20.6 million of cash and cash equivalents, $45.3 million of investments and working capital of $65.7 million. As of March 31, 2000, we have a material operating lease commitment for our San Francisco headquarters facility. Other commitments include several immaterial equipment operating leases and our equipment term loans. Although we have no material commitments for capital expenditures, we anticipate that we will experience a substantial increase in our capital expenditures consistent with our anticipated growth in operation, infrastructure and personnel. We currently anticipate growth in our operating expenses for the foreseeable future and that our operating expenses will be a material use of our cash resources. The Company believes that current cash and cash equivalents will be sufficient to meet its anticipated cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash and cash equivalents and cash that may be generated from operations are insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or obtain additional debt financing. The sale of additional equity could result in additional dilution to the Company's stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. 14 15 NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. Any change in the Company's revenue recognition policy resulting from the interpretation of SAB 101 would be reported as a change in accounting principle in the quarter ending June 30, 2000. While the Company has not fully assessed the impact of the adoption of SAB 101, it believes that implementation of SAB 101 will not have a material adverse impact on its existing revenue recognition policies or its reported results of operations for fiscal 2000. RISK FACTORS RISKS RELATED TO OUR BUSINESS AND PROSPECTS OUR BUSINESS AND OUR PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY UNDER OUR CURRENT BUSINESS MODEL IS UNPROVEN AND WE MAY CHANGE OUR BUSINESS MODEL IN THE FUTURE. Though we were incorporated in and have been operating since July 1994, we have significantly changed our business model since November 1998. The changes to the business model include a shift from charging consumers for our online cards to a free online card service supported by the sale of advertising and sponsorships and revenues derived from the sale of products through our Web site. Because our business model is largely untested, we cannot be sure that it will yield expected results. Because the Internet is constantly changing, we may also need to continue to change our current business model. Changes in our business model or organizational structure could impose significant burdens on our management team and our employees and could result in loss of productivity or increased employee attrition. We may also encounter numerous other risks as an early-stage company with a new and evolving business model. To address the risks we face, we must, among other things: - expand and enhance our product and service offerings; - continually enhance the technology we use to deliver our products and services; - maintain and enhance our brand; - increase the amount of traffic to our Web site; - increase the value of our products and services to consumers, advertisers and e-commerce merchants; and 15 16 - attract, integrate, retain and motivate qualified personnel. We cannot be certain that our current and planned business strategies will be successful or that we will successfully address these risks. BECAUSE OUR METHODS OF GENERATING REVENUES ARE RELATIVELY NEW, LARGELY UNTESTED AND CONTINUE TO CHANGE, WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES. We recently began generating a significant portion of our revenues from sales of advertising on our Web site. These sales may not grow at the rates we expect because Internet advertising is still a new and largely unproven method of advertising. During 1999, our revenues were derived primarily from Internet advertising and secondarily from direct marketing activities. We expect revenues from Internet advertising to continue to comprise a significant portion of our revenues for the foreseeable future. The effectiveness of Internet advertising is difficult to gauge and advertisers may be reluctant to advertise on the Internet and may allocate only limited portions or none of their advertising budgets to Internet advertising in the future. Our business could suffer if Internet advertising does not continue to grow as expected. Even if Internet advertising and direct marketing become widely accepted, we may be unable to generate sufficient revenues from these activities because we have limited experience generating revenues from Internet advertising and direct marketing. Our business model is also based on generating increased advertising and direct marketing revenues. If we lose significant advertising or direct marketing customers or are forced to significantly reduce advertising or direct marketing rates in order to retain these customers, our business will suffer. Also, even if advertising and direct marketing on the Internet become widely accepted, the success of our business strategy will depend on the ability to: - provide quality content on our Web site that will continue to attract the numbers and types of consumers that advertising, direct marketing and e-commerce partners want to reach; - provide guaranteed views of our advertisers' ads by our consumers; and - sell existing and future Internet advertising inventory. Although we intend to offer more e-commerce services, we may not generate significant revenues from these services because we have very limited experience in e-commerce. Our future success will largely depend on our ability to generate revenues through the facilitation of e-commerce transactions, a business area in which we have limited experience. We intend to facilitate these transactions both by directing consumers to our partners and by enabling consumers to purchase products and services directly from our Web site. We also expect third parties to fulfill these orders and deliver to 16 17 consumers the goods and services that are purchased on or through our Web site. These methods of revenue generation are relatively new and largely untested for us. Market pressure and increasing consolidation in the e-commerce industry may make the creation of partnerships more difficult or the facilitation of transactions less attractive. In addition, the development and implementation of our e-commerce services will require additional management, financial and operational resources and may strain our existing resources. Our expansion into e-commerce may not be timely or may not generate sufficient revenues to offset the cost of our expansion into that area. Our Internet advertising, direct marketing and e-commerce revenues will be negatively impacted if we are unable to collect or use data about our consumers in ways that allow us, our advertisers, sponsors and e-commerce partners to generate revenues. We intend to continue to increase advertising, direct marketing and e-commerce revenues by offering to our advertisers, sponsors and e-commerce partners aggregate information about our registered members that is often difficult to obtain, such as their gender, age, location, interests and online activities. Our advertisers, sponsors and e-commerce partners will, in turn, use this demographic and psychographic information to tailor their advertising campaigns, direct marketing efforts or product offerings to the characteristics of our registered members. The ability of our advertisers, sponsors and e-commerce partners to properly target their advertising and commercial offerings will depend significantly on our ability to successfully collect and use data about our registered members. Privacy concerns may cause consumers to resist providing personal data. For example, we currently allow our registered members to opt out of receiving marketing and related communications. If a majority of our registered members make this election, the amount of the demographic data we are able to provide to advertisers, sponsors and e-commerce partners will be reduced significantly, which could harm our ability to retain and attract advertisers, sponsors and e-commerce partners. In addition, in October 1999, we eliminated the requirement that consumers become registered members to use our services. Although we offer personalization features and other benefits to our registered members that are unavailable to unregistered consumers, our ability to collect the data desired by advertisers, sponsors and e-commerce merchants may decrease as a result of this change. This could result in less advertising, direct marketing and reduced e-commerce activities on or through our Web site and less advertising via our online cards, which would result in reduced revenues from advertising, direct marketing and e-commerce. WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES. OUR BUSINESS WILL BE SERIOUSLY HARMED IF OUR REVENUES DO NOT GROW. We have incurred significant net losses in each fiscal quarter since our inception, including a net loss of approximately $10.9 million in the quarter ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of approximately $60.6 million. We expect to have net losses and negative operating cash flows for the foreseeable future. 17 18 The size of these net losses will depend, in part, on the rate of growth of our revenues from our advertisers, sponsors and e-commerce merchants and on our expenses. Through at least 2002, our reported operating results will be negatively impacted by the amortization of deferred expenses relating to warrants and stock options granted through December 1999. It is critical to our success that we continue to expend financial and management resources to develop and expand our consumer base through marketing and promotion and enhancement and expansion of our products and services. As a result, we expect that our operating expenses will increase significantly for the foreseeable future. With increased expenses, we will need to generate significant additional revenues to achieve profitability. Consequently, it is possible that we may never achieve profitability, and even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. If we do not achieve, sustain or increase profitability in the future, then we will be unable to continue our operations. SOME OF OUR CONTENT MAY BECOME UNAVAILABLE IF OUR RELATIONSHIPS WITH OUR THIRD-PARTY CONTENT PROVIDERS, PARTICULARLY GIBSON GREETINGS, EXPIRE OR ARE TERMINATED. We rely on third-party content providers, such as Gibson Greetings, NBC, music producers, movie studios, traditional card designers, cartoonists and independent artists, for a significant portion of our content. To be successful, we will need to maintain our existing relationships as well as establish similar relationships with new parties who can provide us with cross-media and promotional opportunities. If we fail to retain our existing content relationships or enter into new relationships, the variety and quality of the content on our Web site may be reduced, traffic to our Web site may decrease, our advertising revenues may be impaired and future e-commerce revenues may not materialize. For the three months ended March 31, 2000, 24.0% of all online cards sent from our Web site contained content that we obtained pursuant to an exclusive license agreement with Gibson that expires in December 2002. Gibson may also terminate our rights to exclusivity if our consumers do not send at least 2.8 million online cards via our Web site in each month during the term of the license agreement and if this minimum delivery requirement is not exceeded in any of the three months following the month in which the shortfall occurred. If the license agreement terminates and we are unable to renew this arrangement, the amount of content we are able to offer our consumers will significantly decrease. In March 2000, American Greetings, Inc. acquired Gibson. American Greetings also is the parent company of AmericanGreetings.com, which is one of our competitors in the online cards market. We have not yet fully determined how our relationship with Gibson or our rights pursuant to our license agreement with Gibson will be affected by this acquisition. If Gibson or American Greetings fail to perform under the terms of our 18 19 license agreement, the amount of content we are able to offer our consumers will decrease significantly, which could harm our business. With the exception of our relationships with Gibson and NBC, our existing content alliances are pursuant to short-term agreements. When these agreements expire or otherwise terminate, we may be unable to renew them on favorable terms or at all or to obtain similar agreements with other parties. Additionally, our competitors may enter into agreements with existing or prospective content partners that may be or would have been integral to our future content and brand development. OUR GROWTH WILL DEPEND ON OUR ABILITY TO CONTINUE TO PROVIDE COMPELLING CONTENT, INCREASE THE VARIETY OF GIFTS AVAILABLE ON OUR WEB SITE AND ENHANCE OVERALL SERVICES AND FUNCTIONALITY. To remain competitive we must continue to license and create compelling and entertaining content, increase the variety of gifts available on or through our Web site and enhance and improve the ease of use, responsiveness, functionality and features of our products and services. We may be unable to anticipate, monitor and successfully respond to rapidly changing consumer tastes so as to attract a sufficient number of consumers to our Web site. If we are unable to license and develop content, increase the variety of gifts available and enhance and improve the personalized services that allow us to attract, retain and expand a loyal consumer base, we will be unable to generate advertising revenues or e-commerce revenues and our business will suffer. The development and integration of new functionality and services could be expensive and time consuming, and the cost of the content that we license may increase in the future. Any new content, gifts, features, functions or services that we license or develop for consumers, advertisers or e-commerce merchants may not achieve market acceptance. OUR CONTINUED GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND. In October 1998, we changed our name to E-greetings Network and launched a marketing campaign to establish the brand name "Egreetings." We believe that continuing to establish and maintain the Egreetings brand will be an important aspect of our efforts to retain our current consumers, attract and expand our Internet audience, license and create new content, and appeal to advertisers and e-commerce merchants. We believe that the importance of brand recognition will increase due to the growing number of Internet sites and the relatively low barriers to entry in providing Internet content. Accordingly, we intend to continue pursuing an aggressive brand enhancement strategy. We intend to incur significant expenditures on these advertising and promotional programs and activities in the future. These expenditures may not result in a sufficient increase in revenues. In addition, even if our brand recognition increases, we may not acquire new consumers and even if we do, the amount of traffic on our Web site may not increase sufficiently to justify the expenditures. If our brand enhancement strategy is unsuccessful, we may be unable to increase future revenues. 19 20 OUR GROWTH WILL DEPEND SIGNIFICANTLY ON THE INCREASING ACCEPTANCE OF ONLINE CARDS AS A FORM OF ONLINE COMMUNICATIONS. Our future success is substantially dependent on the widespread acceptance of online cards as a form of online communications. As email increasingly affects the way people communicate for personal and business purposes, online cards evolve as a form of communication. We cannot accurately predict the future growth rate, if any, or the ultimate size of the consumer use of online cards as a form of online communication. The failure of online cards to gain widespread acceptance by consumers, advertisers, sponsors and e-commerce merchants as a form of online communication would materially harm our business. WE FACE INTENSE COMPETITION FROM COMPANIES THAT PROVIDE SIMILAR SERVICES AND PRODUCTS TO OURS, AND WE THEREFORE MAY BE UNABLE TO COMPETE EFFECTIVELY IN THE INTERNET GREETING AND GIFTING BUSINESS. We compete with many Internet companies for content, consumer attention and time, advertising revenue, direct marketing revenue and e-commerce revenue. We expect this competition to increase. We compete, in particular, with the following types of companies: - Companies that offer online cards via the Internet. Companies or their affiliates such as American Greetings, Hallmark and 123 greetings.com offer online cards via the Internet. In addition, some of these companies offer e-commerce merchants' products that can be purchased at or through their Web sites. Several of these companies also offer features on their Web sites that are similar or identical to our Web site's features. - Internet content aggregators and other Internet companies that offer online cards and gifts. Companies such as Amazon.com, America Online, Excite@Home, Microsoft and Yahoo! offer online cards as a component of their overall product and service offerings or provide links to electronic greeting and gift companies. The online cards available on or through these Web sites often are free and may be sent with a gift purchased via the particular Web site or via the Web sites of e-commerce merchants that are partners or advertisers of the content aggregator or Internet company. - Internet companies that focus on gifts. Several Internet companies offer gifts on their Web sites. Although these companies currently do not offer online cards, they may begin to do so in the near future. In addition, they compete directly with our e-commerce business. - Media, entertainment and other companies using electronic greetings. Media, entertainment and other companies with an online presence now offer or in the future may offer online cards to consumers featuring their characters, logos, brand names and other creative products. 20 21 In December 1999, Excite@Home Network acquired Bluemountain.com, the online business of Blue Mountain Arts. Excite@Home has significantly greater resources than we do, and we expect it will use some of these resources to focus on the online cards market. This could harm our business and our ability to compete effectively. In addition, the acquisition of Gibson, as a wholly-owned subsidiary, by American Greetings Corp. was consummated in March 2000 and American Greetings became the controlling corporation of our largest stockholder. American Greetings competes with us in the online cards market through its affiliated company AmericanGreetings.com. As a competitor, American Greetings' interests may diverge from our interests, and it may take actions that would harm us competitively, despite its status as the corporate parent of our largest stockholder. Many of our current and potential competitors in the Internet market, including the companies named above, have significantly greater financial, publishing, technical and marketing resources than we have. Many of these companies also have longer operating histories, greater name recognition, more traffic to their Web sites and more established relationships with advertisers and advertising agencies than we have. These competitors may be able to undertake more extensive marketing campaigns, adopt aggressive pricing policies and devote substantially more resources to developing Internet content and services than us. We may be unable to compete successfully for advertisers and e-commerce partners. The increasing number of Internet content and service providers has resulted in increased competition for advertising dollars. Internet companies currently sell advertisements largely based on the demographics of their audience, the quality of their content and their ability to deliver guaranteed "impressions," or the number of times an advertisement appears in Web pages viewed by consumers using their Web sites. Our competitors may be able to provide more desirable demographics, higher quality content and a higher number of guaranteed impressions than we are able to. This could make it difficult for us to obtain the advertising or direct marketing relationships that we will need in order to generate sufficient revenues. As increasing consolidation and market condition pressures affect companies in the e-commerce and Internet industry, our current and potential partners' budget dollars allocated to advertising and direct marketing spending may diminish or be eliminated. In addition, increased competition for advertising or direct marketing dollars could result in price reductions, reduced margins or loss of market share, any of which would harm our business. We lack experience in e-commerce and we may not compete successfully for e-commerce merchants or consumers. Unlike many of our competitors, we have limited experience operating in the e-commerce arena and we may not be successful in doing so. In addition, many of our current and potential competitors are retailers with established brand names and consumer loyalty, and we may be unable to attract consumers away from these competitors. Our inability to compete successfully for e-commerce merchants or consumers would harm our business significantly. 21 22 AS WE EXPAND OUR E-COMMERCE ACTIVITIES, WE WILL DEPEND ON THIRD PARTIES TO FULFILL ORDERS AND DELIVER GOODS AND SERVICES TO OUR CONSUMERS; THEIR FAILURE TO PERFORM ADEQUATELY WOULD HARM OUR BUSINESS. As we expand our e-commerce activities, our success will depend in large part on the ability of third parties to fulfill our consumers' orders and deliver goods and services to our consumers. Failure of vendors or shippers to fill our consumers' orders or deliver quality goods and services on time would harm our business. Increasing consolidation and pressure related to market conditions for third party e-commerce partners could cause delays or other problems related to delivery or orders of goods. In addition, strikes or other service interruptions affecting fulfillment and delivery services would impair our ability to deliver merchandise ordered by our consumers on a timely basis. OUR FUTURE SUCCESS WILL DEPEND ON THE INCREASING USE OF THE INTERNET AND THE GROWTH OF E-COMMERCE. Our future success will depend heavily on the acceptance and wide use of the Internet for e-commerce. If e-commerce does not continue to grow or grows more slowly than expected, demand for our products and services will be reduced. Market conditions affecting e-commerce providers may also impact our ability to grow the service and product offerings on our Web site. Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of enabling technologies, insufficient commercial support or privacy concerns. The Internet's infrastructure may be unable to support the demands placed on it by increased usage. Internet service providers, online service providers and other Web site operators have already experienced significant outages. In addition, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or increased governmental regulation, could cause the Internet to lose its viability as a commercial medium. Even if the required infrastructure, standards, protocols and complementary products, services or facilities are developed, we may incur substantial expenses adapting to changing or emerging technologies. WE RELY ON ONLINE DISTRIBUTION CHANNELS TO GENERATE TRAFFIC TO OUR WEB SITE. We rely on distribution relationships with high traffic Internet sites and leading Internet portals to increase the visibility of our Web site and to generate additional traffic. Our business could be materially harmed if any of our distribution relationships do not result in increased Web site traffic and visibility or are not available on commercially reasonable terms. Our distribution relationships are based on short-term agreements and may not be as favorable as the agreements of some of our competitors. Because there is intense competition for online distribution relationships among Web sites, we may be unable to maintain or renew these agreements or enter into new relationships on commercially reasonable terms or at all. In addition, our online distribution relationships 22 23 may not generate enough additional traffic to our Web site or create sufficient visibility to justify the costs we incur for these relationships. WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, AND OUR BUSINESS COULD BE MATERIALLY HARMED IF WE FAIL TO SUCCESSFULLY INTEGRATE, USE AND DEVELOP ANY ACQUIRED BUSINESSES OR ASSETS. We continually evaluate opportunities to acquire additional product or content offerings or additional industry expertise and may in the future acquire companies, divisions or assets of companies. Any future acquisition could result in difficulties in assimilating acquired operations and products, diversion of management's attention to acquisition matters and amortization of acquired intangible assets. Our management has not had any experience in assimilating acquired organizations and products into our operations. We may be unable to integrate successfully any operations, personnel or products that we may acquire in the future, which would harm our business. EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION AND RESOURCES AND MAY BE UNSUCCESSFUL. To date, we have offered content and services directed at consumers and businesses in the United States. We plan to offer localized content and services directed at international customers in the future in order to increase the international traffic to our Web site. We do not have any experience in localizing our content and services to conform to local cultures, standards and policies. We may have to compete with local companies that are likely to understand the local market better than we do. In addition, to achieve satisfactory performance for consumers, advertisers and e-commerce partners in international locations, it may be necessary to locate physical facilities, such as facilities to host our server computers, in the foreign market. We do not have experience establishing facilities in foreign countries. We may not be successful in appealing to a larger international market or in generating revenues from foreign advertising or e-commerce activities. In addition, different privacy, censorship and liability standards and regulations and different intellectual property laws in foreign countries could harm our business. FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE. It is likely that our operating results in one or more future quarters may be below the expectations of stock market analysts, if any, or our investors, and this could cause our stock price to decline. We expect that our quarterly operating results will continue to fluctuate significantly and be affected by many factors, including the following: - fluctuations in the demand for Internet advertising generally and advertising on our Web site and via our online cards specifically; 23 24 - fluctuations in purchases of products via the Internet generally and through our Web site specifically; - seasonal trends in Internet use, e-commerce and advertising demand; - fluctuations in traffic on our Web site generally and as the result of special promotions or seasonal events; - introduction of new Web sites, products and services by competitors; - marketing expenses and technology infrastructure costs; - expansion in our sales and customer support staff; and - technical difficulties or system downtime affecting the Internet generally or the operation of our Web site specifically. We have experienced and expect to continue to experience seasonality in our business. Consumer traffic on our Web site generally is higher during holiday periods such as Valentine's Day, Mother's Day, Father's Day and Christmas and is considerably slower during the summer months. In addition, sales of traditional greeting cards and gifts tend to be lower in the third calendar quarter of each year. Similarly, advertising sales in traditional media, such as television and radio, generally are lower in the first calendar quarter of each year. We may experience similar seasonality in our business. In addition, because advertising on the Internet is an emerging market, additional seasonal and other patterns in the usage of our products and services may emerge as the market matures. Seasonal patterns like this may harm our business. As a result of all of the factors discussed above, period-to-period comparison of our operating results may not be a good indication of our future performance. OUR STOCK PRICE HAS DECLINED IN RECENT MONTHS; CONTINUED VOLATILITY IN THE STOCK MARKET MAY CAUSE FLUCTUATIONS AND/OR FURTHER DECLINE IN OUR STOCK PRICE The trading price of our common stock has been and may continue to be subject to wide fluctuations. During the first quarter of 2000, the closing sale prices of our common stock on the NASDAQ National Market ranged from $12.375 on January 3, 2000 to $5.6875 on March 31, 2000 and the sale price of our common stock on May 10, 2000 closed at $2.875. Our stock price may fluctuate in response to any number of factors and events, such as quarterly fluctuations in operating results, announcements of technological innovations, content relationships, new product offerings by us or our competitors, changes in financial estimates and recommendations of securities analysts, the operating and stock price performance of other companies that investors may deem comparable, and news reports relating to trends in our markets. In addition, the stock market in general, particularly with respect to technology and Internet stocks, has experienced extreme volatility and a significant cumulative decline in recent months. This volatility and decline has affected many companies irrespective to the operating performance 24 25 of such companies. These broad market influences and fluctuations may adversely affect the price of our stock, regardless of our operating performance. RISKS RELATED TO OPERATIONS TO MANAGE OUR GROWTH, WE WILL NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND PROCEDURES. We currently are experiencing a period of rapid expansion in our Web site traffic, personnel, facilities and infrastructure. For example, the average number of daily visits to our Web site increased approximately 448% from 112,800 for the month of November 1998, the month we began to offer our online cards at no cost, to 618,700 for the month of March 2000, and our number of employees increased from 52 on October 31, 1998 to 176 on March 31, 2000, with most of this growth in the areas of marketing, engineering and operations. We expect that the number of our employees, including management-level employees, will continue to increase for the foreseeable future to address expected growth in our consumer base, expansion of our product and service offerings and the pursuit of e-commerce and other strategic opportunities. This growth and expansion have placed, and we expect they will continue to place, a significant strain on our management, operational and financial resources. In order to manage our growth, we must continue to improve our operational and financial systems and managerial controls and procedures, and we will need to continue to expand, train and manage our work force. We cannot assure you that our systems, procedures or controls will be adequate to support our operations or that we will be able to manage our growth effectively. Our failure to manage growth could disrupt our operations and ultimately prevent us from generating the revenues we expect. SYSTEM FAILURES, SLOW DOWNS OR SECURITY BREACHES WOULD HARM OUR REPUTATION AND THUS REDUCE OUR ATTRACTIVENESS TO OUR CURRENT AND FUTURE CONSUMERS, ADVERTISERS AND E-COMMERCE PARTNERS. System failures and slow downs could permanently harm our reputation and brand, and reduce our attractiveness to consumers, advertisers and e-commerce partners. Our ability to attract consumers, advertisers and e-commerce partners will depend significantly on the performance of our network infrastructure. A key element of our strategy is to generate a high volume of traffic on our Web site. Accordingly, the satisfactory performance, reliability and availability of our Web site and our computer infrastructure are critical to our reputation and our ability to attract and retain consumers, advertisers and e-commerce merchants. An increase in the volume of consumer traffic could strain the capacity of our infrastructure. For example, during the week before Valentine's Day, we frequently experience heavy increases in traffic to our Web site, which result in slower response rates. We may be unable to improve our technical infrastructure in relation to increased consumer volume generally and, in particular, during peak capacity periods. If we experience outages, frequent or persistent system failures or degraded response times, our reputation and brand could be harmed 25 26 permanently. In addition, we could lose advertising revenues during these interruptions and consumer satisfaction could be negatively impacted if our service is slow or unavailable. Furthermore, our consumers use Internet service providers, online service providers and other Web site operators for access to our Web site. Each of these providers has experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our systems. A fundamental requirement for the online communications products and services we offer is the secure transmission of confidential information over the Internet. The occurrence or perception of security breaches could harm our business. Third parties may attempt to breach the security provided by our Web site. If they are successful, they could obtain confidential information about our consumers, including their passwords, financial account information, credit card numbers or other personal information. Our consumers may file suits against us for any breach in our Web site's security. If we are not held liable, a security breach could still harm our reputation, as even the perception of security risks, whether or not valid, could inhibit market acceptance of our products and services. Despite our implementation of security measures, our software is vulnerable to computer viruses, electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to license encryption or other technologies to protect against security breaches or to alleviate problems caused by these breaches. In addition, our consumers might decide to stop using our products and services if we experience security breaches. We use third-party software to manage and deliver advertisements and to provide our advertisers with advertisement performance data. The failure of these systems to function properly could discourage advertisers from placing advertisements on our Web site or merchants from offering their products through our Web site. The failure of these systems also could require us to incur additional costs or could result in interruptions in our business during the time spent replacing these systems. Our failure to expand and upgrade our network system, provide consumers with access to our service or timely address any system error or failure could materially harm our business and reputation. The occurrence of an earthquake or other natural disaster or unanticipated problems at our leased facility in San Francisco, California or at the location of servers that host or back-up our systems could result in interruptions or delays in our business, loss of data or could render us unable to provide services. In addition, our systems are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, and similar events. Our general liability insurance policies may not adequately compensate us for losses that may occur due to interruption in our service. WE MAY BE UNABLE TO EXPAND OUR MARKETING, ENGINEERING, SALES AND CUSTOMER SUPPORT ORGANIZATIONS BECAUSE QUALIFIED PERSONNEL ARE IN SHORT SUPPLY. 26 27 We will need to substantially expand both our consumer marketing and corporate marketing efforts and advertising sales operations to increase market awareness and sales of our products and services. We recently expanded our sales forces and plan to hire additional sales personnel. Competition for highly qualified sales personnel is intense, and we may be unable to hire the type and number of sales personnel we are targeting. To support and enhance our technology infrastructure, we will also need to increase the personnel in our engineering department. In addition, we will need to increase our staff to support new consumers and the expanding needs of our existing consumers. Hiring of highly qualified engineers, customer service and support personnel is very competitive in our industry due to the limited number of people available with the necessary technical skills and understanding of the Internet. WE RECENTLY RECRUITED MOST OF OUR MANAGEMENT TEAM. Many members of our management team have been hired in the last year, including our Chief Financial Officer, Senior Vice President of Sales, Vice President of Marketing, Chief Technology Officer, Vice President of Business Development, Entertainment, Vice President of Finance and Vice President and General Counsel. Many of these individuals do not have significant experience working together or with the rest of our management team. We cannot assure you that they will be able to work together successfully or manage any growth we experience. The process of integrating these individuals may detract from the operation of, and have an adverse effect on, our business. OUR SENIOR MANAGEMENT TEAM AND OTHER KEY EMPLOYEES ARE CRITICAL TO OUR BUSINESS, AND THEY MAY NOT REMAIN WITH US IN THE FUTURE. Our success will be substantially dependent on the performance of our senior management and key creative, technical, marketing and sales personnel, many of who joined us only in the last year. The loss of the services of any of our executive officers or other key employees, the loss of any of which could harm our business. We do not have employment agreements with our executive officers, senior management or other key personnel, other than an employment agreement with our Chief Executive Officer. In addition, our employees may voluntarily terminate their employment at any time. WE MAY BE UNABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CONSUMER DEMANDS. To be successful, we must adapt to rapidly changing Internet technologies by continually enhancing our products and services and introducing new services to address our consumers' changing needs. We could incur substantial development or acquisition costs if we need to modify our services or infrastructure to adapt to changes affecting providers of Internet services. Our business could be harmed if we incur significant costs to adapt to these changes. If we cannot adapt to these changes, or do not sufficiently increase the features and functionality of our products and services, our consumers may 27 28 switch to the product and service offerings of our competition. Furthermore, our competitors or potential competitors may develop products or services that are more appealing to our current and potential consumers. As a result, demand for our services may decrease. RISKS RELATED TO CONTENT, INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITE OR THE PRODUCTS AND SERVICES AVAILABLE THROUGH OUR WEB SITE. We provide a wide variety of content that enables consumers to send online cards and other communications, and we intend to offer services that will allow consumers to conduct business and engage in various online activities. The laws relating to the liability of providers of these online services for the activities of their consumers is currently unsettled. The Digital Millennium Copyright Act is intended to reduce the liability of online service providers for material posted on Web sites by third parties where such materials infringe copyrights or proprietary rights of others. The protections afforded by this legislation have not been fully determined. Claims could be made against us for negligence, defamation, libel, copyright or trademark infringement, personal injury or other legal claims based on the content that we license from third parties or create internally or based on content that may be posted online by our consumers. While we generally obtain written licenses to use third-party content on our Web site, in some instances we rely only upon oral licenses. In addition, we could be exposed to liability with respect to third-party or internally created content on our Web site or with respect to the content of third-party Web sites that may be accessible through our Web site. These claims might include, among others, that by providing access to third-party content or by linking to Web sites operated by third parties, we may be liable for copyright or trademark infringement or other unauthorized actions by third parties through those Web sites. Furthermore, we could be exposed to liability for content and materials that may be created by consumers 28 29 in build-your-own customized online cards. Any claims like these, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention, require us to enter into costly royalty or licensing arrangements or prevent us from using important technologies, ideas or formats, any of which could materially harm our business. Although we carry general liability insurance, our insurance policy does not currently cover intellectual property infringement. Obtaining adequate insurance coverage or implementing measures to reduce our exposure to this type of liability may require us to spend substantial resources. We currently do not have plans to obtain insurance that would cover intellectual property infringement. OUR BUSINESS DEPENDS ON OUR PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, AND WE MAY BE UNABLE TO ADEQUATELY PROTECT THEM. Our success will depend on the protection of and the goodwill associated with our trademarks and other intellectual property rights to our products and services. A substantial amount of uncertainty exists concerning the application of copyright and trademark laws to the Internet and other digital media, and existing laws may not provide adequate protection of our content or our Internet addresses, commonly referred to as "domain names." We have registered the name "E-greetings" as our trademark and service mark in the United States. We also have filed and plan to file applications to register a number of our other trademarks, trade names and service marks in the United States and foreign jurisdictions. We may be unable to obtain some or all of these registrations. CONSUMER PRIVACY CONCERNS AND CONSUMER PROTECTION PRIVACY REGULATIONS COULD IMPAIR OUR ABILITY TO OBTAIN OR USE INFORMATION ABOUT OUR CONSUMERS. Privacy concerns may cause consumers to resist providing the personal data necessary to support our ability to collect information about our consumers. Our Web site currently uses "cookies" to track consumer preferences in order to tailor content to them. A "cookie" is information keyed to a specific server, file pathway or directory location that is stored on a consumer's hard drive, possibly without the consumer's knowledge, but generally removable by the consumer. We also capture demographic and profile information when an individual registers as a member with us, and we capture and retain data based on online cards sent and received by our consumers. We utilize this information to assist advertisers in targeting their online advertising campaigns to consumers with particular demographic characteristics. Although we currently have a policy against providing our customers' personal information to third parties, we may decide in the future to provide some or all of this information to our advertising and e-commerce partners. In the past, the Federal Trade Commission has investigated companies that have taken actions like this without permission or in violation of the companies' stated privacy policies. If we begin providing information like this without permission or in violation of our privacy policy, we may face potential liability for 29 30 invasion of privacy. Even the perception of security and privacy concerns, whether or not valid, may indirectly inhibit market acceptance of our Web site products and services. In April 2000, the Children's Online Privacy Protection Act of 1998 went into effect regulating the collection and use of information with regard to children under the age of 13. As a result, the Company has ceased collecting personal information from children it knows to be under 13 and altered its privacy policy to reflect compliance with the Act. In addition, other legislative or regulatory requirements may heighten these concerns if businesses must notify Internet consumers that the data may be used by marketing entities to direct product promotion and advertising to the consumer. Other countries and political entities, such as the European Union, have adopted legislation and regulatory requirements like this. The United States may adopt similar legislation or regulatory requirements. If we do not adequately address consumer privacy concerns, our business could be materially harmed. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL COSTS OF DOING BUSINESS ON THE INTERNET. We currently are not subject to meaningful direct regulation applicable to access to, or commerce on, the Internet by any government agency. It is possible that in the future a number of laws and regulations may be adopted with respect to the Internet and other digital media, covering issues such as consumer privacy, e-commerce and the pricing, characteristics and quality of products and services. By conducting business via the Internet, we may be subject to the laws of foreign jurisdictions in an unpredictable manner. Several telecommunications companies have petitioned the Federal Communications Commission to regulate Internet service providers and providers of online services in a manner similar to long distance telephone carriers and to impose access fees on these companies. This could increase the cost of transmitting data over the Internet. Moreover, the applicability of existing laws relating to issues such as property ownership, defamation and personal privacy on the Internet is uncertain. Any new laws or regulations relating to the Internet could harm our business. We also could be exposed to liability arising from the activities of consumers of our content or services or with respect to the unauthorized duplication or insertion of material (such as material deemed obscene or inappropriate for children) accessed directly or indirectly through our services. Several private lawsuits seeking to impose such liability upon content providers, online services companies and Internet access providers currently are pending. In addition, legislation has been enacted that imposes, and further legislation may be proposed that may impose liability for, or prohibit the transmission over the Internet of, certain types of information and content. Any legislation or regulation like this, or the application of existing laws to the Internet, could expose us to significant liabilities associated with our content or services. There is also uncertainty regarding the imposition of sales and other taxes on e-commerce transactions, which may impair our ability to derive financial benefits from e- 30 31 commerce activities. Although the Internet Tax Freedom Act precludes, for a period of three years ending January 2002, the imposition of state and local taxes that discriminate against or single out the Internet, it does not currently impact existing taxes. However, one or more states may seek to impose sales tax collection obligations on out-of-state companies, such as us, which engage in or facilitate online commerce. A number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. Proposals like these, if adopted, could substantially impair the growth of e-commerce and could adversely affect our opportunity to derive financial benefits from e-commerce. Moreover, if any state or foreign country were to successfully assert that we should collect sales or other taxes on the sale of merchandise on or through our Web site, it could affect our cost of doing business. CHANGES IN REGULATION COULD REDUCE THE VALUE OF OUR DOMAIN NAME. We own the Internet domain name "Egreetings.com" in the United States. Internet regulatory bodies generally regulate domain names, and the regulation of domain names is subject to change. Regulatory bodies could establish new domain name systems, appoint additional domain name registrars or modify the requirements for holding domain names. In addition, regulations regarding foreign domain name registration vary from jurisdiction to jurisdiction and are subject to change. As a result, we might not acquire or maintain the "Egreetings.com" or comparable domain names in any of the countries in which we conduct business, which could harm our business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear and still evolving. Therefore, we might be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. If we are unable to protect our domain names, our business would suffer. 31 32 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST RATE RISK The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, our policy is to maintain our portfolio of cash equivalents and investments in marketable securities in a variety of securities, including both government and corporate obligations and money market funds. As of March 31, 2000, all of our funds were held in money market funds, U.S. government and agency securities and investment grade corporate bonds and equities. We did not hold derivative financial instruments as of March 31, 2000 and have never held these instruments in the past. 32 33 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights. In addition, from time to time, third parties assert patent infringement claims against the Company in the form of letters, lawsuits and other forms of communication. The Company is not currently aware of any legal proceedings or claims that the Company believes are likely to have a material adverse effect on the Company's financial position of results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NO. TITLE: - ----------- ------ 10.16 Stock Option Grant Notice dated February 23, 2000 and Early Exercise Stock Purchase Agreement dated February 23, 2000 27.1 Financial Data Schedule
(b) Reports on Form 8-K None. 33 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of May 2000. EGREETINGS NETWORK, INC. By: /s/ ANDREW J. MOLEY --------------------------------------------- Andrew J. Moley Chief Financial Officer and Senior Vice President (Principal Financial Officer) By: /s/ SCOTT F. NEAMAND --------------------------------------------- Scott F. Neamand Vice President, Finance (Principal Accounting Officer) EX-10.16 2 STOCK OPTION GRANT NOTICE - FEB 23, 2000 1 EXHIBIT 10.16 EGREETINGS NETWORK, INC. STOCK OPTION GRANT NOTICE 1999 AMENDED AND RESTATED EQUITY INCENTIVE PLAN Egreetings Network, Inc. (the "Company"), pursuant to its 1999 Amended and Restated Equity Incentive Plan (the "Plan"), hereby grants to Optionholder an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Optionholder: Gordon M. Tucker Date of Grant: February 23, 2000 Vesting Commencement Date: February 23, 2000 Number of Shares Subject to Option: 350,000 Exercise Price (Per Share): $5.3125 Total Exercise Price: $1,859,375.00 Expiration Date: February 22, 2010 TYPE OF GRANT: [ ] Incentive Stock Option [X] Nonstatutory Stock Option EXERCISE SCHEDULE: [ ] Same as Vesting Schedule [X] Early Exercise Permitted VESTING SCHEDULE: 1/48th of the shares vest monthly over the next four years. PAYMENT: By one or a combination of the following items (described in the Stock Option Agreement): By cash or check or promissory note Pursuant to a Regulation T Program if the Shares are publicly traded By delivery of already-owned shares if the Shares are publicly traded ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only: OTHER AGREEMENTS: Employment Agreement entered into between Gordon M. Tucker and E-Greetings Network, Inc. on February 12, 1999. EGREETINGS NETWORK, INC. OPTIONHOLDER By: /s/ ANDREW MOLEY /s/ GORDON M. TUCKER ---------------------------------- ------------------------------------ Signature Signature Title: Chief Financial Officer Date: 2/23/00 ------------------------------ ------------------------------- Date: 2/23/00 -------------------------------- ATTACHMENTS: Stock Option Agreement, 1999 Amended and Restated Equity Incentive Plan and Notice of Exercise 2 ATTACHMENT I STOCK OPTION AGREEMENT 3 ATTACHMENT II 1999 AMENDED AND RESTATED EQUITY INCENTIVE PLAN 4 ATTACHMENT III NOTICE OF EXERCISE 5 EGREETINGS NETWORK, INC. EARLY EXERCISE STOCK PURCHASE AGREEMENT UNDER THE 1999 AMENDED AND RESTATED EQUITY INCENTIVE PLAN THIS AGREEMENT is made by and between Egreetings Network, Inc., a Delaware corporation (the "Company"), and Gordon M. Tucker ("Purchaser"). WITNESSETH: WHEREAS, Purchaser holds a stock option dated February 23, 2000, to purchase three hundred fifty thousand (350,000) shares of common stock ("Common Stock") of the Company (the "Option") pursuant to the Company's 1999 Amended and Restated Equity Incentive Plan (the "Plan"); and WHEREAS, the Option consists of a Stock Option Grant Notice and a Stock Option Agreement; and WHEREAS, Purchaser desires to exercise the Option on the terms and conditions contained herein; and WHEREAS, Purchaser wishes to take advantage of the early exercise provision of the Purchaser's Option and therefore to enter into this Agreement; NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. INCORPORATION OF PLAN AND OPTION BY REFERENCE. This Agreement is subject to all of the terms and conditions as set forth in the Plan and the Option. If there is a conflict between the terms of this Agreement and/or the Option and the terms of the Plan, the terms of the Plan shall control. If there is a conflict between the terms of this Agreement and the terms of the Option, the terms of the Option shall control. Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. Defined terms not explicitly defined in this Agreement or the Plan but defined in the Option shall have the same definitions as in the Option. 2. PURCHASE AND SALE OF COMMON STOCK. (a) AGREEMENT TO PURCHASE AND SELL COMMON STOCK. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Purchaser, shares of the Common Stock of the Company in accordance with the Notice of Exercise duly executed by Purchaser and attached hereto as Exhibit A. In accordance with the terms of the Option, the purchase price for the shares of Common Stock is payable by a Promissory Note substantially in the form set forth in Exhibit D, subject to a Pledge Agreement substantially in the form set forth in Exhibit E. 1. 6 (b) CLOSING. The closing hereunder, including payment for and delivery of the Common Stock, shall occur at the offices of the Company immediately following the execution of this Agreement, or at such other time and place as the parties may mutually agree; provided, however, that if stockholder approval of the Plan is required before the Option may be exercised, then the Option may not be exercised, and the closing shall be delayed, until such stockholder approval is obtained. If such stockholder approval is not obtained within the time limit specified in the Plan, then this Agreement shall be null and void. 3. UNVESTED SHARE REPURCHASE OPTION (a) REPURCHASE OPTION. In the event Purchaser's Continuous Service terminates, then the Company shall have an irrevocable option (the "Repurchase Option") for a period of ninety (90) days after said termination (or in the case of shares issued upon exercise of the Option after such date of termination, within ninety (90) days after the date of the exercise), or such longer period as may be agreed to by the Company and the Purchaser, to repurchase from Purchaser or Purchaser's personal representative, as the case may be, those shares that Purchaser received pursuant to the exercise of the Option that have not as yet vested as of such termination date in accordance with the Vesting Schedule indicated on Purchaser's Stock Option Grant Notice (the "Unvested Shares"). (b) SHARES REPURCHASABLE AT PURCHASER'S ORIGINAL EXERCISE PRICE. The Company may repurchase all or any of the Unvested Shares at a price ("Option Price") equal to the Purchaser's Exercise Price for such shares as indicated on Purchaser's Stock Option Grant Notice. 4. EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be exercised by written notice signed by an Officer of the Company and delivered or mailed as provided herein. Such notice shall identify the number of shares of Common Stock to be purchased and shall notify Purchaser of the time, place and date for settlement of such purchase, which shall be scheduled by the Company within the term of the Repurchase Option set forth above. The Company shall be entitled to pay for any shares of Common Stock purchased pursuant to its Repurchase Option at the Company's option in cash or by offset against any indebtedness owing to the Company by Purchaser (including without limitation any Note given in payment for the Common Stock), or by a combination of both. Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Common Stock being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the Common Stock being repurchased by the Company, without further action by Purchaser. 5. CAPITALIZATION ADJUSTMENTS TO COMMON STOCK. In the event of a "Capitalization Adjustment" affecting the Company's outstanding Common Stock as a class as designated in the Plan, then any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Common Stock shall be immediately subject to the Repurchase Option and be included in the word "Common Stock" for all purposes of the Repurchase Option with the same force and effect as the shares of the Common Stock presently subject to the Repurchase Option, but only to the extent the Common 2. 7 Stock is, at the time, covered by such Repurchase Option. While the total Option Price shall remain the same after each such event, the Option Price per share of Common Stock upon exercise of the Repurchase Option shall be appropriately adjusted. 6. CHANGE IN CONTROL. In the event of a "Change in Control" as designated in Section 11(c) of the Plan, then the Repurchase Option may be assigned by the Company to the successor of the Company (or such successor's parent company), if any, in connection with such Change in Control. To the extent the Repurchase Option remains in effect following such Change in Control, it shall apply to the new capital stock or other property received in exchange for the Common Stock in consummation of the Change in Control, but only to the extent the Common Stock was at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Option to reflect the Change in Control upon the Company's capital structure; provided, however, that the aggregate Option Price shall remain the same. 7. ESCROW OF UNVESTED COMMON STOCK. As security for Purchaser's faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Common Stock upon exercise of the Repurchase Option herein provided for, Purchaser agrees, at the closing hereunder, to deliver to and deposit with the Secretary of the Company or the Secretary's designee ("Escrow Agent"), as Escrow Agent in this transaction, three (3) stock assignments duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit B, together with a certificate or certificates evidencing all of the Common Stock subject to the Repurchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit C, attached hereto and incorporated by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder. 8. RIGHTS OF PURCHASER. Subject to the provisions of the Option, Purchaser shall exercise all rights and privileges of a stockholder of the Company with respect to the shares deposited in escrow. Purchaser shall be deemed to be the holder of the shares for purposes of receiving any dividends that may be paid with respect to such shares and for purposes of exercising any voting rights relating to such shares, even if some or all of such shares have not yet vested and been released from the Company's Repurchase Option. 9. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not sell, assign, hypothecate, donate, encumber or otherwise dispose of any interest in the Common Stock while the Common Stock is subject to the Repurchase Option. After any Common Stock has been released from the Repurchase Option, Purchaser shall not sell, assign, hypothecate, donate, encumber or otherwise dispose of any interest in the Common Stock except in compliance with the provisions herein and applicable securities laws. Furthermore, the Common Stock shall be subject to any right of first refusal in favor of the Company or its assignees that may be contained in the Company's Bylaws. 3. 8 10. RESTRICTIVE LEGENDS. All certificates representing the Common Stock shall have endorsed thereon legends in substantially the following forms (in addition to any other legend which may be required by other agreements between the parties hereto): (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPTION SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS COMPANY. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY SHARES SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF THE COMPANY." (b) Any legend required by appropriate blue sky officials. 11. SECTION 83(b) ELECTION. Purchaser understands that Section 83(a) of the Code, taxes as ordinary income the difference between the amount paid for the Common Stock and the fair market value of the Common Stock as of the date any restrictions on the Common Stock lapse. In this context, "restriction" includes the right of the Company to buy back the Common Stock pursuant to the Repurchase Option set forth above. Purchaser understands that Purchaser may elect to be taxed at the time the Common Stock is purchased, rather than when and as the Repurchase Option expires, by filing an election under Section 83(b) (an "83(b) Election") of the Code with the Internal Revenue Service within thirty (30) days from the date of purchase. Even if the fair market value of the Common Stock at the time of the execution of this Agreement equals the amount paid for the Common Stock, the 83(b) Election must be made to avoid income under Section 83(a) in the future. Purchaser understands that failure to file such an 83(b) Election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that Purchaser must file an additional copy of such 83(b) Election with his or her federal income tax return for the calendar year in which the date of this Agreement falls. Purchaser acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to purchase of the Common Stock hereunder, and does not purport to be complete. Purchaser further acknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which Purchaser may reside, and the tax consequences of Purchaser's death. Purchaser assumes all responsibility for filing an 83(b) Election and paying all taxes resulting from such election or the lapse of the restrictions on the Common Stock. 12. REFUSAL TO TRANSFER. The Company shall not be required (a) to transfer on its books any shares of Common Stock of the Company which shall have been transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 13. NO EMPLOYMENT RIGHTS. This Agreement is not an employment contract and nothing in this Agreement shall affect in any manner whatsoever the right or power of the 4. 9 Company (or a parent or subsidiary of the Company) to terminate Purchaser's employment for any reason at any time, with or without cause and with or without notice. 14. MISCELLANEOUS. (a) NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or sent by telegram or fax or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at such party's address hereinafter shown below its signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. (b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, Purchaser's successors, and assigns. The Company may assign the Repurchase Option hereunder at any time or from time to time, in whole or in part. (c) ATTORNEYS' FEES; SPECIFIC PERFORMANCE. Purchaser shall reimburse the Company for all costs incurred by the Company in enforcing the performance of, or protecting its rights under, any part of this Agreement, including reasonable costs of investigation and attorneys' fees. It is the intention of the parties that the Company, upon exercise of the Repurchase Option and payment of the Option Price, pursuant to the terms of this Agreement, shall be entitled to receive the Common Stock, in specie, in order to have such Common Stock available for future issuance without dilution of the holdings of other stockholders. Furthermore, it is expressly agreed between the parties that money damages are inadequate to compensate the Company for the Common Stock and that the Company shall, upon proper exercise of the Repurchase Option, be entitled to specific enforcement of its rights to purchase and receive said Common Stock. (d) GOVERNING LAW; VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. The parties agree that any action brought by either party to interpret or enforce any provision of this Agreement shall be brought in, and each party agrees to, and does hereby, submit to the jurisdiction and venue of, the appropriate state or federal court for the district encompassing the Company's principal place of business. (e) FURTHER EXECUTION. The parties agree to take all such further action(s) as may reasonably be necessary to carry out and consummate this Agreement as soon as practicable, and to take whatever steps may be necessary to obtain any governmental approval in connection with or otherwise qualify the issuance of the securities that are the subject of this Agreement. (f) INDEPENDENT COUNSEL. Purchaser acknowledges that this Agreement has been prepared on behalf of the Company by Cooley Godward LLP, counsel to the Company and that Cooley Godward LLP does not represent, and is not acting on behalf of, Purchaser. 5. 10 Purchaser has been provided with an opportunity to consult with Purchaser's own counsel with respect to this Agreement. (g) ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and merges all prior agreements or understandings, whether written or oral. This Agreement may not be amended, modified or revoked, in whole or in part, except by an agreement in writing signed by each of the parties hereto. (h) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (i) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of February 23, 2000. EGREETINGS NETWORK, INC. By: /s/ Andrew Moley Title: Chief Financial Officer Address: 149 New Montgomery Street San Francisco, CA 94105 /s/ Gordon M. Tucker ------------------------------------ Purchaser Address: ---------------------------- ---------------------------- ATTACHMENTS: Exhibit A Notice of Exercise Exhibit B Assignment Separate from Certificate Exhibit C Joint Escrow Instructions Exhibit D Promissory Note Exhibit E Pledge Agreement 6. 11 EXHIBIT A NOTICE OF EXERCISE 12 NOTICE OF EXERCISE Egreetings Network, Inc. 149 New Montgomery Street San Francisco, CA 94105 Date of Exercise: February 23, 2000 Ladies and Gentlemen: This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below. Type of option (check one): Incentive [ ] Nonstatutory [X] Stock option dated: February 23, 2000 Number of shares as to which option is exercised: 350,000 Certificates to be issued in name of: Gordon M. Tucker Total exercise price: $1,859,375.00 Cash payment delivered herewith: $350.00 Promissory note delivered herewith: $1,859,025.00
By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 1999 Amended and Restated Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such shares of Common Stock are issued upon exercise of this option. Very truly yours, /s/ Gordon M. Tucker ------------------------------------ 1. 13 EXHIBIT B STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE 14 STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, Gordon M. Tucker hereby sells, assigns and transfers unto Egreetings Network, Inc., a Delaware corporation (the "Company"), pursuant to the Repurchase Option under that certain Early Exercise Stock Purchase Agreement, dated February 23, 2000 by and between the undersigned and the Company (the "Agreement"), _______________ (_______________) shares of Common Stock of the Company standing in the undersigned's name on the books of the Company represented by Certificate No(s). _______________ and does hereby irrevocably constitute and appoint the Company's Secretary attorney to transfer said Common Stock on the books of the Company with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Repurchase Option under the Agreement. Dated: _______________ /s/ Gordon M. Tucker ------------------------------------ (Signature) Gordon M. Tucker ------------------------------------ (Print Name) INSTRUCTION: Please do not fill in any blanks other than the "Signature" line and the "Print Name" line. The purpose of this Assignment is to enable the Company to exercise its Repurchase Option set forth in the Agreement without requiring additional signatures on the part of Purchaser. 15 EXHIBIT C JOINT ESCROW INSTRUCTIONS 16 JOINT ESCROW INSTRUCTIONS Secretary Egreetings Network, Inc. 149 New Montgomery Street San Francisco, CA 94105 Dear Sir or Madam: As Escrow Agent for both Egreetings Network, Inc., a Delaware corporation ("Company"), and the undersigned purchaser of Common Stock of the Company ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Early Exercise Stock Purchase Agreement ("Agreement"), dated February 23, 2000 to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Company or an assignee shall elect to exercise the Repurchase Option set forth in the Agreement, the Company or its assignee will give to Purchaser and you a written notice specifying the number of shares of Common Stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of Common Stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (which may include suitable acknowledgment of cancellation of indebtedness) of the number of shares of Common Stock being purchased pursuant to the exercise of the Repurchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of Common Stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as the Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated. 4. This escrow shall terminate upon expiration or exercise in full of the Repurchase Option, whichever occurs first. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that the property 1. 17 subject to this escrow is the subject of a pledge or other security agreement, you shall deliver all such property to the pledgeholder or other person designated by the Company. 6. Except as otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Purchaser hereby confirms the appointment of such successor or successors as the Purchaser's attorney-in-fact and agent to the full extent of your appointment. 12. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 13. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties 2. 18 concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, including delivery by express courier or five days after deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto: COMPANY: Egreetings Network, Inc. 149 New Montgomery Street San Francisco, CA 94105 PURCHASER: Gordon M. Tucker ------------------------- ------------------------- ESCROW AGENT: Secretary Egreetings Network, Inc. 149 New Montgomery Street San Francisco, CA 94105 15. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 16. You shall be entitled to employ such legal counsel and other experts (including without limitation the firm of Cooley Godward LLP) as you may deem necessary properly to advise you in connection with your obligations hereunder. You may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Company shall be responsible for all fees generated by such legal counsel in connection with your obligations hereunder. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Company may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. 3. 19 18. This Agreement shall be governed by and interpreted and determined in accordance with the laws of the State of Delaware, as such laws are applied by Delaware courts to contracts made and to be performed entirely in Delaware by residents of that state. Very truly yours, EGREETINGS NETWORK, INC. By: /s/ Andrew Moley Title: Chief Financial Officer PURCHASER: Gordon M. Tucker ------------------------------------ ESCROW AGENT: - ----------------------------- 4. 20 EXHIBIT D PROMISSORY NOTE 21 PROMISSORY NOTE $1,859,025.00 San Francisco, California 94105 Date: February 23, 2000 FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay to the order of Egreetings Network, Inc., a Delaware corporation (the "Company"), at 149 New Montgomery Street, San Francisco, California 94105, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of One Million Eight Hundred Fifty Nine Thousand Twenty-Five Dollars ($1,859,025.00) together with interest accrued from the date hereof on the unpaid principal at the rate of 6.69% per annum, or the maximum rate permissible by law (which under the laws of the State of Delaware shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less, as follows: PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be due and payable in full on the fourth (4th) anniversary of the date hereof. INTEREST PAYMENTS. Interest shall be payable in arrears on each Principal Repayment Date and shall be calculated on the basis of a 360-day year for the actual number of days elapsed; provided, however, that in the event that the undersigned's employment by or association with the Company or its Affiliate is terminated for any reason prior to payment in full of this Note, this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable immediately after such termination. If the undersigned fails to pay any of the principal and accrued interest when due, the Company, at its sole option, shall have the right to accelerate this Note, in which event the entire principal balance and all accrued interest shall become immediately due and payable, and immediately collectible by the Company pursuant to applicable law. This Note may be prepaid at any time without penalty. All money paid toward the satisfaction of this Note shall be applied first to the payment of interest as required hereunder and then to the retirement of the principal. The full amount of this Note is secured by a pledge of shares of Common Stock of the Company, and is subject to all of the terms and provisions of the Early Exercise Stock Purchase Agreement and Stock Pledge Agreement of even date herewith between the undersigned and the Company. The undersigned hereby represents and agrees that the amounts due under this Note are not consumer debt, and are not incurred primarily for personal, family or household purposes, but are for business and commercial purposes only. 1. 22 The undersigned hereby waives presentment, protest and notice of protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The holder hereof shall be entitled to recover, and the undersigned agrees to pay when incurred, all costs and expenses of collection of this Note, including without limitation, reasonable attorneys' fees. This Note shall be governed by, and construed, enforced and interpreted in accordance with, the laws of the State of Delaware, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. Signed: /s/ Gordon M. Tucker ----------------------------- Printed Name: Gordon M. Tucker Date: February 23, 2000 2. 23 EXHIBIT E PLEDGE AGREEMENT 24 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT ("Pledge Agreement") is made by Gordon M. Tucker ("Pledgor"), in favor of Egreetings Network, Inc., a Delaware corporation with its principal place of business at 149 New Montgomery Street, San Francisco, CA 94105 ("Pledgee"). WHEREAS, Pledgor has concurrently herewith executed that certain Promissory Note (the "Note") in favor of Pledgee in the amount of One Million Eight Hundred Fifty Nine Thousand Twenty-Five Dollars ($1,859,025.00) in payment of the purchase price of three hundred fifty thousand (350,000) shares of the Common Stock of Pledgee; and WHEREAS, Pledgee is willing to accept the Note from Pledgor, but only upon the condition, among others, that Pledgor shall have executed and delivered to Pledgee this Pledge Agreement and the Collateral (as defined below): NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Pledgor hereby agrees as follows: 1. As security for the full, prompt and complete payment and performance when due (whether by stated maturity, by acceleration or otherwise) of all indebtedness of Pledgor to Pledgee created under the Note (all such indebtedness being the "Liabilities"), together with, without limitation, the prompt payment of all expenses, including, without limitation, reasonable attorneys' fees and legal expenses, incidental to the collection of the Liabilities and the enforcement or protection of Pledgee's lien in and to the collateral pledged hereunder, Pledgor hereby pledges to Pledgee, and grants to Pledgee, a first priority security interest in all of the following (collectively, the "Pledged Collateral"): (a) Three hundred fifty thousand (350,000) shares of Common Stock of Pledgee represented by Certificates numbered _______________ (the "Pledged Shares"), and all dividends, cash, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) all voting trust certificates held by Pledgor evidencing the right to vote any Pledged Shares subject to any voting trust; and (c) all additional shares and voting trust certificates from time to time acquired by Pledgor in any manner (which additional shares shall be deemed to be part of the Pledged Shares), and the certificates representing such additional shares, and all dividends, cash, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such shares. The term "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and Liabilities heretofore, now or hereafter made, incurred or 1. 25 created, whether voluntary or involuntary and whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether recovery upon such indebtedness may be or hereafter becomes unenforceable. 2. At any time, without notice, and at the expense of Pledgor, Pledgee in its name or in the name of its nominee or of Pledgor may, but shall not be obligated to: (1) collect by legal proceedings or otherwise all dividends (except cash dividends other than liquidating dividends), interest, principal payments and other sums now or hereafter payable upon or on account of said Pledged Collateral; (2) enter into any extension, reorganization, deposit, merger or consolidation agreement, or any agreement in any wise relating to or affecting the Pledged Collateral, and in connection therewith may deposit or surrender control of such Pledged Collateral thereunder, accept other property in exchange for such Pledged Collateral and do and perform such acts and things as it may deem proper, and any money or property received in exchange for such Pledged Collateral shall be applied to the indebtedness or thereafter held by it pursuant to the provisions hereof; (3) insure, process and preserve the Pledged Collateral; (4) cause the Pledged Collateral to be transferred to its name or to the name of its nominee; (5) exercise as to such Pledged Collateral all the rights, powers and remedies of an owner, except that so long as no default exists under the Note or hereunder Pledgor shall retain all voting rights as to the Pledged Shares. 3. Pledgor agrees to pay prior to delinquency all taxes, charges, liens and assessments against the Pledged Collateral, and upon the failure of Pledgor to do so, Pledgee at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. 4. At the option of Pledgee and without necessity of demand or notice, all or any part of the indebtedness of Pledgor shall immediately become due and payable irrespective of any agreed maturity, upon the happening of any of the following events: (1) failure to keep or perform any of the terms or provisions of this Pledge Agreement; (2) failure to pay any installment of principal or interest on the Note when due; (3) the levy of any attachment, execution or other process against the Pledged Collateral; or (4) the insolvency, commission of an act of bankruptcy, general assignment for the benefit of creditors, filing of any petition in bankruptcy or for relief under the provisions of Title 11 of the United States Code of, by, or against Pledgor. 5. In the event of the nonpayment of any indebtedness when due, whether by acceleration or otherwise, or upon the happening of any of the events specified in the last preceding section, Pledgee may then, or at any time thereafter, at its election, apply, set off, collect or sell in one or more sales, or take such steps as may be necessary to liquidate and reduce to cash in the hands of Pledgee in whole or in part, with or without any previous demands or demand of performance or notice or advertisement, the whole or any part of the Pledged Collateral in such order as Pledgee may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery; provided, however, that if such disposition is at private sale, then the purchase price of the Pledged Collateral shall be equal to the public market price then in effect, or, if at the time of sale no public market for the Pledged Collateral 2. 26 exists, then, in recognition of the fact that the sale of the Pledged Collateral would have to be registered under the Securities Act of 1933 and that the expenses of such registration are commercially unreasonable for the type and amount of collateral pledged hereunder, Pledgee and Pledgor hereby agree that such private sale shall be at a purchase price mutually agreed to by Pledgee and Pledgor or, if the parties cannot agree upon a purchase price, then at a purchase price established by a majority of three independent appraisers knowledgeable of the value of such collateral, one named by Pledgor within ten (10) days after written request by the Pledgee to do so, one named by Pledgee within such 10-day period, and the third named by the two appraisers so selected, with the appraisal to be rendered by such body within thirty (30) days of the appointment of the third appraiser. The cost of such appraisal, including all appraiser's fees, shall be charged against the proceeds of sale as an expense of such sale. Pledgee may be the purchaser of any or all Pledged Collateral so sold and hold the same thereafter in its own right free from any claim of Pledgor or right of redemption. Demands of performance, notices of sale, advertisements and presence of property at sale are hereby waived, and Pledgee is hereby authorized to sell hereunder any evidence of debt pledged to it. Any officer or agent of Pledgee may conduct any sale hereunder. 6. The proceeds of the sale of any of the Pledged Collateral and all sums received or collected by Pledgee from or on account of such Pledged Collateral shall be applied by Pledgee to the payment of expenses incurred or paid by Pledgee in connection with any sale, transfer or delivery of the Pledged Collateral, to the payment of any other costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the indebtedness or any part hereof, all in such order and manner as Pledgee in its discretion may determine. Pledgee shall then pay any balance to Pledgor. 7. Upon the transfer of all or any part of the indebtedness Pledgee may transfer all or any part of the Pledged Collateral and shall be fully discharged thereafter from all liability and responsibility with respect to such Pledged Collateral so transferred, and the transferee shall be vested with all the rights and powers of Pledgee hereunder with respect to such Pledged Collateral so transferred; but with respect to any Pledged Collateral not so transferred Pledgee shall retain all rights and powers hereby given. 8. Until all indebtedness shall have been paid in full the power of sale and all other rights, powers and remedies granted to Pledgee hereunder shall continue to exist and may be exercised by Pledgee at any time and from time to time irrespective of the fact that the indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Pledgor may have ceased. 9. Pledgee agrees that so long as no default exists under the Note or hereunder, the Pledged Shares shall, upon the request of Pledgor, be released from pledge as the indebtedness is paid. Such releases shall be at the rate of one share for each $5.3115 of principal amount of indebtedness paid. Release from pledge, however, shall not result in release from the provisions of those certain Joint Escrow Instructions, if any, of even date herewith among the parties to this Pledge Agreement and the Escrow Agent named therein. 3. 27 10. Pledgee may at any time deliver the Pledged Collateral or any part thereof to Pledgor and the receipt of Pledgor shall be a complete and full acquittance for the Pledged Collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 11. The rights, powers and remedies given to Pledgee by this Pledge Agreement shall be in addition to all rights, powers and remedies given to Pledgee by virtue of any statute or rule of law. Any forbearance or failure or delay by Pledgee in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Pledgee. 12. If any provision of this Pledge Agreement is held to be unenforceable for any reason, it shall be adjusted, if possible, rather than voided in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Pledge Agreement shall be deemed valid and enforceable to the full extent possible. 13. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware as applied to contracts made and performed entirely within the State of Delaware by residents of such State. Dated: February 23, 2000 PLEDGOR /s/ Gordon M. Tucker ------------------------------------ Printed Name: Gordon M. Tucker 4. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 20,585 40,334 2,829 (200) 0 72,811 19,659 (3,820) 106,176 7,066 0 0 0 165,409 (9,000) 106,176 0 2,821 0 14,700 0 0 (1,021) 0 0 0 0 0 0 (10,858) (.33) (.33)
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