-----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, E1q+oxK3Fu4luSYDsjwsJFDNEbM65f2gkY6ZlaV0edkZsvzfFe1w5oqxu9YmSK4u MlVSJteV3g/O8LIUFo1kaw== 0000950149-01-500242.txt : 20010319 0000950149-01-500242.hdr.sgml : 20010319 ACCESSION NUMBER: 0000950149-01-500242 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010312 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010316 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: 8-K SEC ACT: SEC FILE NUMBER: 000-28479 FILM NUMBER: 1569831 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 8-K 1 f70408e8-k.txt FORM 8-K, DATE OF REPORT: MARCH 12, 2001 1 SECURITIES EXCHANGE ND COMMISSION WASHINGTON, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): March 12, 2001 EGREETINGS NETWORK, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 000-28479 94-3207092 (Commission File No.) (I.R.S. Employer Identification No.) 149 NEW MONTGOMERY STREET SAN FRANCISCO, CALIFORNIA 94105 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 375-4100 2 ITEM 5. OTHER EVENTS. This Current Report on Form 8-K includes as an exhibit a press release that contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained therein involve risks and uncertainties relating to the possible inability to complete the transaction involving Egreetings Network, Inc., a Delaware corporation ("Egreetings"), and AmericanGreetings.com, Inc., a Delaware corporation ("AmericanGreetings.com"), and its wholly owned subsidiary to be used as the acquisition vehicle, as scheduled, or at all. These forward-looking statements involve risks and uncertainties in connection with the pending proposed acquisition of Egreetings by AmericanGreetings.com, Inc., including but not limited to: a weak internet entertainment and retail environment, the stockholders of Egreetings may not approve the merger, the closing conditions for the transactions may not be met, the transactions may be delayed or not completed at all, the diversion of management time and the incurrence of transaction-related expenses, the expected synergies of the transactions may not be achieved, the viability of online advertising as a revenue generator, and the public's acceptance of online greetings products and services. Actual results may differ materially from those projected in the forward-looking statements. On March 12, 2001, Egreetings issued a press release announcing the release of financials for Egreetings' fiscal year ended December 31, 2001, which is attached hereto as Exhibit 99.1. Egreetings' complete audited financials, including the report of its independent auditors, are attached hereto as Exhibit 99.2. The audited financials are not provided in connection with a report on Form 10-K and as a result further disclosure with respect to the financial condition of the company, including management's discussion and analysis of financial condition and results of operations, is not included with Exhibit 99.2. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Not Applicable (b) Not applicable (c) Exhibits
Exhibit Description Number ----------- ------- 23.1 Consent of Ernst & Young LLP. 99.1 Press Release of Egreetings dated March 12, 2001. 99.2 Audited Financial Statements of Egreetings for year ended December 31, 2000, together with report of auditors thereon.
1. 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EGREETINGS NETWORK, INC. /s/ Kirsten Mellor Dated: March 15, 2001 By:_______________________________ Kirsten Mellor General Counsel and Secretary 4 EXHIBIT INDEX
Exhibits - -------- 23.1 Consent of Ernst & Young LLP. 99.1 Press Release of Egreetings dated March 12, 2001. 99.2 Audited Financial Statements of Egreetings for the year ended December 31, 2000, together with report of auditors thereon.
EX-23.1 2 f70408ex23-1.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-31892) of our report dated February 16, 2001, with respect to the financial statements of Egreetings Network, Inc., included in this Form 8-K of Egreetings Network, Inc. /s/ Ernst & Young Walnut Creek, California March 12, 2001 EX-99.1 3 f70408ex99-1.txt PRESS RELEASE OF EGREETINGS DATED 3/12/2001 1 EXHIBIT 99.1 FOR IMMEDIATE RELEASE EGREETINGS NETWORK RELEASES FINANCIAL STATEMENTS SAN FRANCISCO (March 12, 2001) - Egreetings Network, Inc. (NASDAQ: EGRT) today announced the release of its financial statements for the fiscal year ended December 31, 2000. Audited financial statements were provided to AmericanGreetings.com, Inc. in connection with the Agreement and Plan of Merger entered into between the companies with respect to the offer to purchase all of the outstanding shares of Egreetings' stock. Egreetings will also file this press release with its complete audited financials, including the report of its independent auditors, on a Form 8-K with the Securities and Exchange Commission as soon as it is practicable. Egreetings is providing the information in this press release and will file such Form 8-K at the request of the U.S. Securities and Exchange Commission to disseminate such information to its stockholders as soon as is practicable. The audited financials are not provided in connection with a report on Form 10-K and as a result further disclosure with respect to the financial condition of the company, including management's discussion and analysis of financial condition and results of operations, is not available at this time. Questions about the pending tender offer made by AmericanGreetings.com for the purchase for all of the outstanding shares of Egreetings' common stock may be addressed to Corporate Investor Communications, Inc., the information agent for the offer, at (888) 353-1712. ABOUT EGREETINGS NETWORK, INC. Egreetings Network, Inc. (NASDAQ: EGRT) is a rich media services company that operates an online card and entertainment Web site. Its business offerings include a content-leveraged Application Service Provider ("ASP") platform and multi-media communications tools for customer acquisition, retention and revenue generation. Egreetings website, www.egreetings.com, offers thousands of online cards for all occasions and sentiments featuring rich graphics, animations and music than can be personalized to make messages memorable and unique. E-greetings is a registered trademark and Egreetings is a trademark of Egreetings Network, Inc. EGREETINGS NETWORK, INC. CONTACT: ANDREW MOLEY CHIEF EXECUTIVE OFFICER AND PRESIDENT (415) 375-4100 FORWARD-LOOKING STATEMENTS This press release contains forward-looking statements regarding the company's expected future business and financial performance, changes to the company's executive management team, the company's expansion of market share, present and future content licensing and strategic marketing relationships, increasing site usage and future distribution partnerships that involve risks and uncertainties. Actual results may differ materially because of various risks associated with the business. These risks include expanding and enhancing our product and service offerings; revenue goals and achievement of financial performance of our business model; continually enhancing the technology we use to deliver our products and services; maintaining and enhancing our brand; increasing the 2 amount of traffic to our Web site; monetizing our services and site and selling sponsorships and advertising; increasing the value of our products and services to consumers, advertisers and e-commerce merchants; continuing to build premium content distribution deals; and attracting, integrating, retaining and motivating qualified personnel; and the risks associated with a reduction in force. Important factors, which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings with the U.S. Securities and Exchange Commissions made from time to time by Egreetings, including its annual report on Form 10-K/A for the fiscal year ended December 31, 1999 and its quarterly report for the fiscal quarter ended September 30, 2000. These forward-looking statements also involve risks and uncertainties, in connection with the pending proposed acquisition of Egreetings by AmericanGreetings.com, Inc., including but not limited to: a weak internet entertainment and retail environment, Egreetings stockholders may not approve the merger, the closing conditions for the transactions may not be met, the transactions may be delayed or not completed at all, the diversion of management time and the incurrence of transaction-related expenses, the expected synergies of the transactions may not be achieved, the viability of online advertising as a revenue generator, and the public's acceptance of online greetings products and services. Actual results may differ materially from those projected in the forward-looking statements. This release is neither an offer to purchase nor a solicitation of an offer to sell securities of Egreetings. The tender offer has been made solely by an offer to purchase and related letter of transmittal as disseminated since the commencement of the tender offer. Stockholders of Egreetings should read the tender offer documents, including the Egreetings solicitation/recommendation statement, which contain important information. You may obtain free copies of the tender offer documents, including the Egreetings solicitation/recommendation statement, through the website maintained by the Securities and Exchange Commission at http://www.sec.gov. Free copies of each of the tender offer documents filed by AmericanGreetings.com or Egreetings may also be obtained by contacting the individuals listed above. ================================================================================ 3 Egreetings Network, Inc. Balance Sheets (in thousands, except share data)
DECEMBER 31, 2000 1999 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 3,841 $ 81,774 Short-term investments 36,535 -- Accounts receivable (net of allowances for doubtful accounts of $1,330 in 2000 and $69 in 1999) 2,635 1,228 Prepaid expenses and other current assets 861 9,244 ----------- ----------- Total current assets 43,872 92,246 Property and equipment, net 10,365 11,800 Deferred content costs -- 12,740 Restricted cash deposit 76 2,172 Deposits and other assets 749 1,165 ----------- ----------- Total assets $ 55,062 $ 120,123 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,009 $ 7,910 Accrued expenses and other current liabilities 1,250 2,086 Accrued compensation and related expenses 1,807 1,943 Accrued royalties (including amounts payable to a related party of $37 in 2000 and $145 in 1999) 208 290 Deferred revenue 1,612 581 Current portion of equipment term loan 1,994 1,764 ----------- ----------- Total current liabilities 8,880 14,574 Equipment term loan, less current portion 1,759 3,718 ----------- ----------- Total liabilities 10,639 18,292 Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value: 65,000,000 shares authorized; 32,981,900 and 34,501,140 shares issued and outstanding in 2000 and 1999, respectively 160,971 159,227 Deferred stock compensation (266) (2,195) Notes receivable from stockholders -- (5,490) Accumulated deficit (116,282) (49,711) ----------- ----------- Total stockholders' equity 44,423 101,831 ----------- ----------- Total liabilities and stockholders' equity $ 55,062 $ 120,123 =========== ===========
See accompanying notes. 4 Egreetings Network, Inc. Statements of Operations (in thousands, except per share amounts)
YEAR ENDED DECEMBER 31, 2000 1999 1998 ----------------------------------------------- Revenues $ 10,437 $ 3,160 $ 317 Costs and expenses: Cost of services (1) 6,337 2,932 610 Sales and marketing (2) 16,438 17,035 3,094 Operations and development (3) 17,889 10,972 2,628 General and administrative (4) 8,113 5,437 1,444 Amortization of deferred content costs 5,272 1,371 138 Amortization of deferred stock compensation 1,119 1,992 201 Write-down for impairment of long-lived assets 19,672 -- -- Restructuring charges 5,184 -- -- ----------------------------------------------- Total costs and expenses 80,024 39,739 8,115 ----------------------------------------------- Loss from operations (69,587) (36,579) (7,798) Interest income 3,872 471 42 Interest expense (747) (534) (65) Other expense, net (109) -- -- ----------------------------------------------- Net loss $ (66,571) $ (36,642) $ (7,821) =============================================== Net loss per share: Basic and diluted $ (2.02) $ (8.02) $ (2.26) =============================================== Shares used in calculation of net loss per share: Basic and diluted 32,933 4,569 3,464 ===============================================
(1) Excluding $5,272, $1,371 and $138 in amortization of deferred content costs for the years ended December 31, 2000, 1999 and 1998, respectively, and excluding the effect of the write-down for impairment of long-lived assets for the year ended December 31, 2000 (see Note 2), and excluding $145, $158 and $20 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. (2) Excluding $280, $540 and $40 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. (3) Excluding $504, $1,033 and $111 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. (4) Excluding $190, $261 and $30 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. See accompanying notes. 5 Egreetings Network, Inc. Statements of Stockholders' Equity (Deficit) (in thousands, except share data)
Convertible PREFERRED STOCK COMMON STOCK DEFERRED ------------------------------------------------------- STOCK SHARES AMOUNT SHARES AMOUNT COMPENSATION ------------------------------------------------------------------------- Balances at December 31, 1997 2,298,741 $ 9,417 3,466,000 $ 16 $ -- Issuance of Series D preferred stock for conversion of notes payable 224,805 1,436 -- -- -- Issuance of warrants in connection with debt financing -- 65 -- -- -- Deferred stock compensation related to grant of stock options -- -- -- 488 (488) Amortization of deferred stock compensation -- -- -- -- 201 Valuation of preferred stock warrant in connection with content agreement -- 445 -- -- -- Net loss and comprehensive loss -- -- -- -- -- ------------------------------------------------------------------------- Balances at December 31, 1998 2,523,546 11,363 3,466,000 504 (287) Issuance of Series D preferred stock for conversion of notes payable 82,381 514 -- -- -- Issuance of Series F preferred stock, net of issuance costs 3,283,636 20,871 -- -- -- Issuance of Series F preferred stock for conversion of notes payable 442,857 3,100 -- -- -- Issuance of Series G preferred stock, net of issuance costs 9,559,417 41,876 -- -- -- Issuance of Series E preferred stock pursuant to exercise of warrants 1,663,333 9,087 -- -- -- Issuance of common stock under stock option plan -- -- 2,670,690 5,529 -- Interest accrued on notes receivable from stockholders -- -- -- 130 -- Issuance of warrants in connection with debt financing -- 428 -- -- -- Deferred stock compensation related to grant of stock options -- -- -- 3,900 (3,900) Amortization of deferred stock compensation -- -- -- -- 1,992 Valuation of preferred stock warrant in connection with content agreement -- 7,744 -- -- -- Issuance of common stock, net of issuance costs -- -- 6,000,000 54,181 -- Conversion of convertible preferred stock to common stock (17,555,170) (94,983) 22,364,450 94,983 -- Net loss and comprehensive loss -- -- -- -- -- ------------------------------------------------------------------------- Balances at December 31, 1999 -- -- 34,501,140 159,227 (2,195) Issuance of common stock under stock option plan -- -- 560,732 1,949 -- Repayment of notes receivable from stockholders -- -- -- -- -- Interest accrued on notes receivable from stockholders -- -- -- 342 -- Repurchase of common stock issued under stock option plan and forgiveness of related notes receivable and accrued interest -- -- (2,755,507) (4,827) -- Issuance of common stock under stock purchase plan -- -- 196,035 187 -- Issuance of common stock, net of issuance costs -- -- 479,500 4,683 -- Deferred stock compensation related to cancellation of stock options -- -- -- (810) 810 Amortization of deferred stock compensation -- -- -- -- 1,119 Issuance of common stock warrants for content and services -- -- -- 220 -- Net loss and comprehensive loss -- -- -- -- -- ------------------------------------------------------------------------- Balances at December 31, 2000 -- $ -- 32,981,900 $ 160,971 $ (266) ------------------------------------------------------------------------- NOTES TOTAL RECEIVABLE STOCKHOLDERS' FROM ACCUMULATED EQUITY STOCKHOLDERS DEFICIT (DEFICIT) ---------------------------------------------------- Balances at December 31, 1997 $ -- $ (5,248) $ 4,185 Issuance of Series D preferred stock for conversion of notes payable -- -- 1,436 Issuance of warrants in connection with debt financing -- -- 65 Deferred stock compensation related to grant of stock options -- -- -- Amortization of deferred stock compensation -- -- 201 Valuation of preferred stock warrant in connection with content agreement -- -- 445 Net loss and comprehensive loss -- (7,821) (7,821) ------------------------------------------------- Balances at December 31, 1998 -- (13,069) (1,489) Issuance of Series D preferred stock for conversion of notes payable -- -- 514 Issuance of Series F preferred stock, net of issuance costs -- -- 20,871 Issuance of Series F preferred stock for conversion of notes payable -- -- 3,100 Issuance of Series G preferred stock, net of issuance costs -- -- 41,876 Issuance of Series E preferred stock pursuant to exercise of warrants -- -- 9,087 Issuance of common stock under stock option plan (5,360) -- 169 Interest accrued on notes receivable from stockholders (130) -- -- Issuance of warrants in connection with debt financing -- -- 428 Deferred stock compensation related to grant of stock options -- -- -- Amortization of deferred stock compensation -- -- 1,992 Valuation of preferred stock warrant in connection with content agreement -- -- 7,744 Issuance of common stock, net of issuance costs -- -- 54,181 Conversion of convertible preferred stock to common stock -- -- -- Net loss and comprehensive loss -- (36,642) (36,642) ------------------------------------------------- Balances at December 31, 1999 (5,490) (49,711) 101,831 Issuance of common stock under stock option plan (1,859) -- 90 Repayment of notes receivable from stockholders 45 -- 45 Interest accrued on notes receivable from stockholders (342) -- -- Repurchase of common stock issued under stock option plan and forgiveness of related notes receivable and accrued interest 7,646 -- 2,819 Issuance of common stock under stock purchase plan -- -- 187 Issuance of common stock, net of issuance costs -- -- 4,683 Deferred stock compensation related to cancellation of stock options -- -- -- Amortization of deferred stock compensation -- -- 1,119 Issuance of common stock warrants for content and services -- -- 220 Net loss and comprehensive loss -- (66,571) (66,571) ------------------------------------------------- Balances at December 31, 2000 $ -- $ (116,282) $ 44,423 =================================================
See accompanying notes. 6 Egreetings Network, Inc. Statements of Cash Flows (in thousands)
YEAR ENDED DECEMBER 31, 2000 1999 1998 --------------------------------------- OPERATING ACTIVITIES Net loss $ (66,571) $ (36,642) $ (7,821) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 5,840 2,352 308 Loss on disposal of property and equipment 299 59 -- Amortization of deferred content costs 5,272 1,371 138 Write-down for impairment of long-lived assets 19,672 -- -- Amortization of deferred stock compensation 1,119 1,992 201 Non-cash charges related to forgiveness of shareholder notes receivable and a grant of common shares 2,854 -- -- Interest income accrued on available for sale securities (274) -- -- Other 16 46 19 Changes in operating assets and liabilities: Accounts receivable (1,407) (1,018) (200) Prepaid expenses and other current assets 1,512 (1,703) (19) Restricted cash deposit 2,096 (2,172) -- Deposits and other assets 417 (699) (17) Accounts payable and accrued liabilities (6,729) 10,733 1,469 Deferred revenue 1,031 495 86 --------------------------------------- Net cash used in operating activities (34,853) (25,186) (5,836) INVESTING ACTIVITIES Purchases of property and equipment (10,286) (13,365) (786) Proceeds from disposals of property and equipment 453 -- -- Purchases of available for sale securities (112,360) -- -- Proceeds from sale/maturity of available for sale securities 76,100 -- -- --------------------------------------- Net cash used in investing activities (46,093) (13,365) (786) FINANCING ACTIVITIES Borrowings under equipment term loan -- 4,966 764 Payments on equipment term loan (1,729) (894) (282) Borrowings on notes payable to stockholders -- 2,100 2,950 Payments on notes payable to stockholders -- -- (22) Issuance of common stock 4,697 54,353 -- Issuance of preferred stock -- 59,532 -- Proceeds from repayment of notes receivable from stockholders 45 -- -- Other borrowings -- -- (44) --------------------------------------- Net cash provided by financing activities 3,013 120,057 3,366 --------------------------------------- Net increase (decrease) in cash and cash equivalents (77,933) 81,506 (3,256) Cash and cash equivalents at beginning of period 81,774 268 3,524 --------------------------------------- Cash and cash equivalents at end of period $ 3,841 $ 81,774 $ 268 ========================================
7 Egreetings Network, Inc. Statements of Cash Flows (continued) (in thousands)
YEAR ENDED DECEMBER 31, 2000 1999 1998 -------------------------------------- SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 489 $ 246 $ 13 ====================================== Non-cash investing and financing activities: Conversion of notes payable to stockholders to preferred stock $ -- $ 3,614 $ 1,436 ====================================== Conversions of preferred stock to common stock $ -- $ 94,983 $ -- ====================================== Valuation of common stock warrants in connection with content agreement $ 220 $ 428 $ 65 ====================================== Issuance of common stock for notes receivable $ 1,859 $ 5,360 $ -- ====================================== Interest accrued on notes receivable from stockholders, net $ 342 $ 130 $ -- ====================================== Forgiveness of shareholder notes receivable $ 4,827 $ -- $ -- ====================================== Issuance of preferred stock for prepaid advertising $ -- $ 7,500 $ -- ====================================== Valuation of preferred stock issued for content rights $ -- $ 4,802 $ -- ====================================== Valuation of preferred stock warrant in connection with content agreement $ -- $ 7,744 $ 445 ======================================
See accompanying notes. 8 Egreetings Network, Inc. Notes to Financial Statements December 31, 2000 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Egreetings Network, Inc. (the "Company") offers consumers and businesses a convenient and simple integrated solution for finding and sending online cards, gifts and invitations. The Company's Web site allows users to send personalized content-rich online cards and a wide variety of gifts. The Company operates in one business segment and generates revenue from corporate advertising and sponsorships, e-commerce and direct marketing. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS AND INVESTMENTS Cash equivalents consist of highly liquid short-term investments in money market mutual funds with insignificant interest rate risk and an original maturity from date of purchase of three months or less. The Company's short-term investments consist of investments in debt securities of government agencies, corporate bonds, market auction preferred securities and commercial paper with maturities ranging from three months to one year. Cash equivalents and short-term investments are stated at amounts that approximate fair value based on quoted market prices. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, management determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates the designation as of each balance sheet date. At December 31, 2000, the Company classified all of its debt and equity securities as available-for-sale. Unrealized gains and losses have been immaterial to date. Realized gains and losses, which have been immaterial to date, are included in interest income or expense. The following summarizes the Company's cash equivalents and investments at cost, which approximates fair value (in thousands): DECEMBER 31, 2000 1999 ------------------------- Cash equivalents: Money market mutual fund $ 3,561 $80,741 ========================= Short-term investments: Government agencies $15,268 $ -- Corporate bonds 9,924 -- Market auction preferred securities 8,385 -- Commercial paper 2,958 -- ------------------------- $36,535 $ -- ========================= 9 PROPERTY AND EQUIPMENT Property and equipment are stated at cost net of accumulated amortization and depreciation and are depreciated using the straight-line method over the estimated useful life of the related asset, which currently averages three years. Leasehold improvements are amortized over the shorter of the estimated useful life or the life of the lease. Realization of the carrying amount of property and equipment is dependent upon the Company generating sufficient future revenues. Web site infrastructure and application costs are capitalized in accordance with Emerging Issues Task Force Issue No. 00-2, "Accounting for Web Site Development Costs" and are amortized over three years. Costs to develop web site content are expensed as incurred. Depreciation and amortization expense relating to property, equipment and leasehold improvements excluding the write-down for impairment of long-lived assets (see Note 2), amounted to $5,840,000, $2,352,000, and $308,000 for the years ended December 31, 2000, 1999, and 1998, respectively. CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS Financial instruments which potentially subject the Company to concentrations of risk include cash and cash equivalents and accounts receivable. The Company maintains its cash with three high-credit quality domestic financial institutions. The Company performs ongoing credit evaluations of its customers and does not typically require collateral or guarantees. Management establishes an allowance for doubtful accounts when it appears accounts receivable will not be collectible. For the year ended December 31, 2000, 1999 and 1998, one corporate advertising sponsor accounted for 12%, 28% and 11%, respectively of the Company's revenues. There were no significant concentrations of credit risk among the Company's corporate sponsors from whom accounts receivables were due as of December 31, 2000 and 1999. An inability to demonstrate an active and growing user base to advertisers and sponsors may result in a loss of advertisement and sponsorship agreements and a decline in advertisement and sponsorship revenues. DEPENDENCE ON THIRD PARTIES AND RELATED PARTY TRANSACTIONS A common stockholder, American Greetings, formerly known as Gibson Greetings, Inc. ("Gibson"), has historically provided a significant portion of the Company's online card content pursuant to an agreement under which the Company pays royalties. Royalties paid to this related party aggregated $456,000, $504,000, and $112,000 in the years ended December 31, 2000, 1999, and 1998, respectively. Royalty obligations arise as online cards containing third-party content are sent by consumers. Royalty expenses are recorded as cost of services in the statement of operations in the period during which the related obligations arise. On January 3, 2001, the Company removed all online cards from it's website that contained content from this related party (see Note 4). The Company relies on a single entity to provide a majority of support necessary to maintain it's servers and transmit data. The inability of this party to fulfill its obligations to the Company could negatively impact the Company's future results. CHANNEL DISTRIBUTION COSTS The Company has contracted with several third party channel distribution partners whose Internet Web sites direct Internet traffic to the Egreetings.com Web site via a link from the distribution partners' Web site. The contracts are typically one year in duration. The Company charges the cost of these distribution services to sales and marketing expense over the life of the contracts. 10 REVENUE RECOGNITION Revenues are generated primarily as a result of advertising and sponsorship, direct marketing, hosting of online card functionality, e-commerce activities and business communication services. The duration of banner advertising and sponsorship commitments typically range from one month to one year. The Company's advertisement obligations typically include guarantees of a minimum number of impressions, or times that an advertisement appears in pages viewed by consumers using the Company's Web site. The Company recognizes revenues on the sale of banner advertisements based on the lower of as the impression is delivered or displayed or ratably over the term of the commitment. The Company recognizes revenues on the sale of sponsorship advertisements on a straight-line basis over the period in which the sponsor's message is displayed. To the extent minimum guaranteed impressions, if any, are not met, revenue recognition is deferred until the remaining guaranteed impressions are delivered. Revenue from the hosting of online card functionality for customers is recognized on a ratable basis over the life of the contract. Revenue from direct marketing activities is recognized based on the ratio of the number of emails actually sent to the guaranteed number of emails to be sent. Revenue from e-commerce transactions is recognized on the date a digital gift certificate code is emailed to the buyer or designated recipient or on the date of shipment for physical goods. Revenue from business communications services is recognized on the date that the custom-made digital greeting is transmitted to the intended recipient. Deferred revenue is primarily comprised of payments received pursuant to revenue generating contracts in advance of revenue recognition and billings in excess of recognized revenue relating to advertising contracts. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for employee stock option grants using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 and has adopted the disclosure-only alternative of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). ADVERTISING Advertising costs are expensed as incurred. Advertising expense was approximately $4,103,000, $9,775,000, and $478,000 for the years ended December 31, 2000, 1999, and 1998, respectively. In November 1999, the Company sold 2,475,247 shares of Series G preferred stock to the National Broadcasting Company, Inc. ("NBC") for gross proceeds of approximately $7.5 million in cash and for advertising rights with a fair value of $7.5 million. Under this agreement, advertising will be provided to the Company pursuant to the terms of the advertising agreement. The right to utilize this prepaid advertising expires on January 1, 2002. The fair value of these advertising rights was recorded as prepaid advertising has been amortized to expense as advertising is used. However, realization of the carrying amount of prepaid advertising is dependent upon the Company placing sufficient advertising with NBC prior to expiration of the agreement and upon the level of revenues generated by such advertising. Based on management's estimate of future cash flows, $6.8 million was charged to operations during the period to reflect the impairment of this asset (see Note 2). DEFERRED CONTENT COSTS The Company records the value of deferred content costs as of the date of the related content licensing agreements and amortizes these costs to expense over the life of the contract using the straight-line 11 method. Realization of deferred content costs is subject to the Company generating adequate revenues and other benefits as a result of the arrangement. The Company continually evaluates the realizability of its deferred content costs for impairment and based on management's estimate of future cash flows, $2.4 million was charged to operations during the period to reflect the impairment of this asset (see Note 2). INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. NET LOSS PER SHARE Basic and diluted net loss per share information for all periods is presented under the requirement of SFAS No. 128, "Earnings per Share" ("SFAS 128"). Basic earnings per share has been computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock options, warrants, and convertible securities. Potentially dilutive securities have also been excluded from the computation of diluted net loss per share as their inclusion would be antidilutive. The calculation of basic and diluted net loss per share is as follows (in thousands, except share and per share amounts):
YEAR ENDED DECEMBER 31, 2000 1999 1998 ------------------------------------------------ Net loss $ (66,571) $ (36,642) $ (7,821) ================================================ Weighted average shares of common stock outstanding 34,851,189 5,726,149 3,466,000 Less: weighted average shares of common stock that may be repurchased (1,917,719) (1,157,601) (1,543) ------------------------------------------------ Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share 32,933,470 4,568,548 3,464,457 ================================================ Basic and diluted net loss per share $ (2.02) $ (8.02) $ (2.26) ================================================
If the Company had reported net income, the calculation of diluted earnings per share would have included approximately 533,000, 798,000, and 424,000 common equivalent shares related to the outstanding stock options and warrants not included above (determined using the treasury stock method) for the years ended December 31, 2000, 1999, and 1998, respectively. EFFECT OF NEW ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. The Company's revenue recognition policies have been consistent with the provisions of SAB 101 and accordingly, the 12 adoption of SAB 101, effective January 1, 2000, had no impact on the Company's financial position or operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which amended FAS 133 by deferring the effective date to the fiscal year beginning after June 30, 2000. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment to FAS Statement No. 133", which amended FAS 133 with respect to four specific issues. The Company is required to adopt FAS 133, as amended, for the year ending December 31, 2001. The Company does not expect that the adoption of this statement will have a material effect on the financial position, results of operations or cash flows. 2. WRITE-DOWN FOR IMPAIRMENT OF LONG-LIVED ASSETS During the fourth quarter of 2000, the market downturn affecting internet company business models significantly increased. In recognition of this downturn and as part of management's review of impairment indicators in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", management determined that an impairment to the carrying value of certain assets existed as a result of this change in circumstances and the related reduction in cash flows from advertising and other revenues. Accordingly, an assessment of the fair value of certain assets was performed based on management's estimate of future cash flows related to these assets. This assessment resulted in the write-down of $19,672,000, with respect to prepaid advertising, deferred content costs, and property and equipment of $6,871,000, $7,673,000 and $5,128,000, respectively. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, 2000 1999 --------------------------- Furniture and fixtures $ 974 $ 743 Leasehold improvements 1,924 713 Computer equipment and purchased software 16,923 12,467 Website infrastructure and application costs 3,989 702 --------------------------- 23,810 14,625 --------------------------- Less accumulated depreciation and amortization (8,317) (2,825) Less write-down for impairment (see Note 2) (5,128) -- --------------------------- $ 10,365 $ 11,800 ===========================
Realization of the carrying amount of property and equipment is dependent upon the Company generating sufficient cash flows from advertising and other revenue in future periods. If estimated future cash flows are not achieved, additional reductions in the recorded amount of property and equipment could be required. 13 4. DEFERRED CONTENT COSTS In December 1997, the Company entered into a Series D preferred stock purchase agreement and a content provider and distribution agreement ("Content Agreement") with Gibson Greetings, Inc. In conjunction with this transaction, the Company granted to Gibson a warrant to purchase 946,925 shares of Series E preferred stock. The warrant increased to 1,663,333 shares of Series E preferred stock as a result of certain anti-dilution provisions. This warrant, exercised by Gibson Greetings, Inc. concurrent with the completion of the Company's initial offering in December 1999, was contingent on Gibson Greeting's not being in material violation of the Content Agreement and therefore was accounted for as a variable warrant. The warrant was valued by management using the Black-Scholes valuation model at each quarter end with the fair value recorded as deferred content costs in the accompanying balance sheets. The Company recorded $7,744,000, and $445,000 in deferred content costs for the years ended December 31, 1999 and 1998, respectively. No such cost related to this agreement was recorded for the year ended December 31, 2000. The assumptions used to compute the value of the warrant at each measurement date under Black-Scholes were as follows: expected volatility, 0.7; expected dividend yield, 0%; risk-free interest rate, 4.34% to 5.38%; expected life, amount of time between measurement date and expiration of warrant; and exercise price and stock price, consistent with information at each relevant date. On September 30, 1999, in connection with the execution of the first amendment to the Content Agreement, the warrant became non-forfeitable, fully exercisable and fully vested and was no longer linked to performance under the Content Agreement. The Company performed a final valuation of Black-Scholes at September 30, 1999, resulting in a final value of $9,448,000 which was being amortized over the remaining period of the Content Agreement, which extends through December 2002. On January 3, 2001, the Company removed all online cards from it's website that contained Gibson Greeting content. Accordingly, the unamortized deferred content cost relating to this agreement aggregating $5,292,000 as of December 31, 2000 has been charged to operations during the period to reflect the impairment of this asset (see Note 2). In November 1999, the Company entered into a two-year content licensing agreement with NBC pursuant to which the Company has the right to create and distribute online cards for a minimum of five NBC television programs for each six-month television season, which amount may be increased, at NBC's option, to a maximum of 30 NBC television programs for each season. The consideration for this content agreement, in addition to the promotion by the Company of digital greetings containing NBC content, is equal to the difference in NBC's per share cost of the Series G preferred stock from the deemed fair market value of the Company's common shares as of the date of the preferred stock purchase by NBC. This equates to a value of approximately $4.8 million which was recorded as deferred content costs with an offset to preferred stockholders' equity. The unamortized amount relating to this agreement aggregating $2,296,000 as of December 31, 2000 has been charged to operations during the period to reflect the impairment of this asset (see Note 2). In April 2000, the Company entered into a three-year content licensing agreement with a music entertainment entity pursuant to which the Company has the right to create and distribute online cards for a certain number of music artists. The consideration for this content agreement, in addition to the promotion by the Company of the music artists via the online cards, is a warrant to purchase 75,000 share of the Company's common stock. The warrant was valued by management using a Black-Scholes valuation model. The Company recorded $203,000 in deferred content costs for the year ended December 31, 2000. The unamortized balance relating to this agreement totaling $85,000 as of December 31, 2000 has been charged to operations during the period to reflect the impairment of this asset (see Note 2). Amortization, excluding the impairment write-down for the year ended December 31, 2000 of $7,673,000 (see Note 2), of deferred content costs was approximately $5,272,000, $1,371,000, and $138,000 for the years ended December 31, 2000, 1999, and 1998, respectively. 14 5. DEBT In August 1999, the Company entered into an equipment financing agreement with two leasing companies and a financial institution that provides for borrowings of up to $10.0 million, of which $4,470,000 was drawn-down. An additional interest payment of 10% of the total amount drawn-down on the facility is due upon extinguishment of the debt. Advances under the facility terminated on July 31, 2000. In connection with the financing, the Company granted a warrant that enable the holders to purchase 120,000 shares of the Company's common stock at an exercise price of $4.50 per share through November 2005. The warrant was valued by management using a Black-Scholes valuation model and is amortizing this amount to interest expense over the term of the financing agreement. The Company also has a second equipment term loan. At December 31, 2000, the outstanding loan balances on the two equipment term loans were $2,751,000 and $555,000, respectively, which mature in August 2002 and March 2002, respectively. The loans bear interest at 11.6% and prime plus 2% (11.5% at December 31, 2000), respectively. Principal and interest are payable monthly. Both equipment loans are secured by the equipment purchased under the loan agreement and a general lien against the Company's assets. Future payments relating to outstanding loans are as follows at December 31, 2000 (in thousands): 2001 $ 1,994 2002 1,759 --------- Total principal payments 3,753 Less current portion (1,994) --------- $ 1,759 ========= 6. INCOME TAXES There has been no provision for United States federal or state or foreign income taxes for any period as the Company has incurred operating losses for all periods and in all jurisdictions. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands): DECEMBER 31, 2000 1999 ---------------------------- Deferred tax assets: Net operating losses $ 31,896 $ 17,103 Stock compensation 673 1,186 Accrued expenses 4,223 1,049 Other 1,345 232 ---------------------------- Total deferred tax assets 38,137 19,570 Valuation allowance (38,137) (19,570) ---------------------------- $ -- $ -- ============================ Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $18,567,000 and $14,780,000 during the years ended December 31, 2000 and 1999, respectively. 15 As of December 31, 2000, the Company had net operating loss carryforwards for federal income tax purposes of approximately $85,294,000, which expire in the years 2010 through 2020. The Company also had net operating loss carryforwards for state income tax purposes of approximately $48,268,000 expiring in years 2003 and 2005. Utilization of the Company's net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before utilization. 7. STOCKHOLDERS' EQUITY COMMON STOCK In December 1999, the Company completed its initial public offering of 6.0 million shares of its common stock. Net proceeds to the Company totaled approximately $54.2 million. As of the closing date of the offering, all of the convertible preferred stock outstanding was converted into approximately 22.4 million shares of common stock. In January 2000, the Company's investment bank exercised its right to acquire an additional 479,000 shares of its common stock. Net proceeds to the Company from this issuance totaled approximately $4.5 million. BRIDGE FINANCINGS Between November 1998 and January 1999, the Company issued subordinated notes for an aggregate amount of $2,100,000 and an interest rate of 8.0% per annum, together with a warrant to purchase 67,139 shares of Series F preferred stock at $6.30 per share. The principal amount of these notes was converted into 300,000 shares of Series F preferred stock in March 1999 and subsequently converted into 600,000 shares of common stock upon completion of the initial public offering. In February and March 1999, the Company issued short-term notes payable with an aggregate principal amount of $1,000,000 and interest rates ranging from 4.6% to 8.0% per annum. The principal amount of these notes was converted into 142,857 shares of Series F preferred stock in March 1999 and subsequently converted into 285,714 shares of common stock upon completion of the initial public offering. WARRANTS The Company had the following outstanding warrants to purchase shares of common stock at December 31, 2000:
NUMBER EXERCISE PRICE EXPIRATION OF OF SHARES PER SHARE WARRANTS ------------------------------------------------------------------------------ 15,006 $ 1.00 March 2003 83,820 2.00 April - August 2007 10,000 2.25 June 2003 134,278 3.15 November 2005 75,000 4.23 April 2005 120,000 4.50 November 2005 500 5.00 April 2003 --------------------------- 438,604 ===========================
16 STOCK OPTIONS The Company's 1996 Stock Option Plan provides for the issuance of 6,456,109 shares of common stock to employees, officers, directors and consultants and is limited to 17.5% of fully diluted common stock equivalents as defined. The Company's 1999 Stock Option Plan provides for the issuance of 3,500,000 shares of common stock to employees, officers, directors and consultants and is limited to 17.5% of fully diluted common stock equivalents as defined. Options granted under either plan may be incentive stock options ("ISOs") or non-statutory stock options ("NSOs") to employees, officers, directors and consultants. The ISOs may be granted at a price per share not less than the fair market value at the date of grant. The NSOs may be granted at a price per share not less than 85% of the fair market value at the date of grant. If at any time the Company grants an option and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value at that date. Options granted are exercisable over a maximum term of ten years from the date of grant and generally vest over a period of four years. A summary of the Company's stock option activity for all plans is as follows:
Options Outstanding ------------------------------------------------ WEIGHTED-AVERAGE EXERCISE PRICE PER NUMBER OF SHARES SHARE ----------------------- ------------------------ Outstanding at December 31, 1997 651,929 0.09 Options granted 493,500 0.83 Options canceled (112,928) 0.03 ----------------------- ------------------------ Outstanding at December 31, 1998 1,032,501 0.05 Options granted 5,045,518 2.74 Options exercised (2,670,690) 2.07 Options canceled (744,135) 1.40 ----------------------- ------------------------ Outstanding at December 31, 1999 2,663,194 2.87 Options granted 3,024,858 3.21 Options exercised (560,732) 3.48 Options canceled (2,241,654) 3.41 ----------------------- ------------------------ Outstanding at December 31, 2000 2,885,666 $ 2.68 ======================= ======================== Exercisable at December 31, 2000 1,300,312 $ 1.96 ======================= ========================
17
OPTIONS OUTSTANDING ------------------------------------------------------ OPTIONS EXERCISABLE WEIGHTED- ------------------------------------ WEIGHTED-AVERAGE AVERAGE REMAINING WEIGHTED-AVERAGE EXERCISE NUMBER EXERCISE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE PRICE RANGE OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE - --------------------------- ---------------- ------------------ ------------------ ---------------- ------------------- $ 0.04 - 0.93 597,639 $0.28 5.58 558,417 $0.24 $ 0.93 - 1.75 313,862 $1.59 8.63 158,744 $1.60 $ 2.09 940,372 $2.09 9.42 174,011 $2.09 $ 2.10 - 4.88 662,930 $3.09 8.80 287,183 $2.65 $ 5.56 - 12.38 370,863 $8.23 9.00 121,957 $8.43 ---------------- ------------------ ---------------- ------------------- 2,885,666 $2.68 1,300,312 $1.96 ================ ================== ================ ===================
In certain cases, the Stock Option Plan allows for the early exercise of options granted subject to vesting and repurchase provisions. During the year ended December 31, 1999, the chief executive officer, chief financial officer and a director of the Company early exercised options to purchase an aggregate of 2,488,063 shares of restricted common stock at exercise prices ranging from $2.10 to $2.78 per share. During the year ended December 31, 2000, the chief executive officer of the Company early exercised options to purchase an additional 350,000 shares of restricted common stock at an exercise price of $5.31. All of these shares were purchased with promissory notes payable to the Company. In October 2000, 2,755,508 shares of vested and unvested, restricted common stock belonging to the two officers were repurchased and the resulting unpaid portion of the related promissory notes and accrued interest were forgiven. The transactions with these two officers resulted in the cancellation of $7,646,000 in promissory notes and accrued interest of which $2,283,000 was recognized as a non-cash restructuring charge (see Note 10) and $536,000 was recognized as a non-cash operating charge. EMPLOYEE STOCK PURCHASE PLAN In September 1999, the Company's Board of Directors adopted, and in November 1999 the stockholders approved, the 1999 Employee Stock Purchase Plan ("ESPP"). The Company has reserved a total of 1,000,000 shares of common stock for issuance under this plan, of which 803,965 remained available for issuance as of December 31, 2000. Eligible employees may purchase common stock at 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable six-month offering period or the fair market value of the Company's common stock at the date of purchase. Employees have purchased 196,035 shares in connection with the ESPP in the year ended December 31, 2000. DEFERRED STOCK COMPENSATION The Company recorded deferred stock compensation of $0 and $3,900,000 during the years ended December 31, 2000 and 1999, respectively, representing the difference between the exercise price and the deemed fair value for financial accounting purposes of certain of the Company's stock options granted to employees. In the absence of a public market for the Company's common stock during the period in which the options were granted, the deemed fair value of the Company's common stock was based on the price per share of recent preferred stock financings, less a discount to give effect to the superior rights of the preferred stock. These amounts are being amortized by charges to operations over the vesting periods of the individual stock options using a graded vesting method. Such amortization amounted to $1,119,000, $1,992,000 and $201,000 for the years ended December 31, 2000, 1999 and 1998, 18 respectively. In 2000, deferred stock compensation was reduced by $810,000 to reflect the cancellation of certain stock options as a result of employee terminations. SHARES RESERVED FOR FUTURE ISSUANCE At December 31, 2000, the Company has reserved shares of capital stock for future issuance as follows: Stock options outstanding 2,885,666 Stock options available for grant 6,348,529 Warrants to purchase common stock 438,604 ---------------- 9,672,799 ================ PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION Pro forma information regarding results of operations and net loss per share is required by SFAS 123, which also requires that the information be determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: a risk-free interest rate of 5.17% for the year ended December 31, 2000 and 5.5% for the years ended December 31, 1999 and 1998; no dividend yield for the years ended December 31, 2000, 1999 and 1998; a volatility factor of 1.45 for the year ended December 31, 2000 and .7 for the year ended December 31, 1999 (minimum value method used in 1998) with respect to the expected market price of the Company's common stock and a weighted average expected life of the options of 5.9 for the year ended December 31, 2000, 5.5 years for the year ended December 31, 1999 and 4.5 years for the years ended December 31, 1998. The option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value at the grant dates for awards under the plan calculated using the Black-Scholes option valuation model, the Company's net loss and pro forma basic and diluted net loss per share would have been increased to the pro forma amounts indicated below (in thousands except per share amounts):
YEAR ENDED DECEMBER 31, 2000 1999 1998 ------------------------------------------------ Net loss - as reported $ (66,571) $ (36,642) $ (7,821) Pro forma net loss $ (67,662) $ (38,871) $ (7,833) Basic and diluted net loss per share - as reported $ (2.02) $ (8.02) $ (2.26) Pro forma basic and diluted net loss per share $ (2.05) $ (8.51) $ (2.26)
19 The weighted-average fair value of options granted, which is the value assigned to the options under SFAS 123, was $3.20, $2.54 and $0.18 for options granted during the years ended December 31, 2000, 1999, and 1998, respectively. The pro forma impact of options on the net loss is not representative of the effects on net income (loss) for future years, as future years will include the effects of additional years of stock option grants. 8. RETIREMENT PLAN The Company has a defined contribution plan for all full-time employees which qualifies under Section 401(k) of the Internal Revenue Code. Under the terms of the plan, employees may contribute up to 15%, subject to Internal Revenue Service limitations, of their annual compensation. The plan provides for discretionary employer contributions. As of December 31, 2000, there have been no employer contributions to the plan. 9. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its office facilities and certain equipment under non-cancelable lease agreements that require the Company to pay operating costs, including property taxes, normal maintenance and insurance. In addition to several equipment operating leases expiring on various dates through February 2005, the Company has entered into three long-term non-cancelable leases on office buildings that expire in March 2002, November 2002 and August 2009. Rent expense amounted to approximately $2,585,000, $1,312,000, and $216,000 for the years ended December 31, 2000 1999 and 1998, respectively. Future minimum payments under the terms of non-cancelable operating lease agreements at December 31, 2000 are as follows (in thousands): 2001 $ 3,039 2002 2,967 2003 2,754 2004 2,721 2005 2,676 Thereafter 9,795 -------------------- Total minimum lease payments $ 23,952 ==================== Also under the terms of one office facility lease agreement, the Company has provided a $76,544 letter of credit supporting the minimum lease payments. The letter of credit is fully collateralized with a compensating cash balance at the issuing bank. The Company is party to a legal dispute arising from the normal course of business. The Company does not believe that the outcome of this dispute will have a material effect on the Company's financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution could have a material affect the Company's financial position, results of operations or cash flows. 20 10. RESTRUCTURING COSTS In October 2000, the Company charged $5,184,000 to operations related to a restructuring plan aimed at reducing costs. Such charges included $4,301,000 for the forgiveness of promissory notes and a severance payment related to the resignation of the Company's Chief Executive Officer and $780,000 in separation payments to sixty terminated employees. All restructuring costs were paid during the year ended December 31, 2000. 11. SUBSEQUENT EVENT On February 5, 2001, the Company entered into a merger agreement with AmericanGreetings.com, Inc., a wholly owned subsidiary of American Greetings Corporation, pursuant to which AmericanGreetings.com commenced a tender offer to purchase all of the outstanding shares of the Company's common stock for $0.85 per share in cash. Consummation of the proposed merger is subject to the tender of at least 90% of the outstanding shares or stockholder approval. No adjustments have been made to the accompanying financial statements for the effects of the transaction, if consummated, on the recorded amounts of assets and liabilities of the Company. EX-99.2 4 f70408ex99-2.txt AUDITED FINANCIAL STATEMENTS 1 EXHIBIT 99.2 FINANCIAL STATEMENTS Egreetings Network, Inc. For the years ended December 31, 2000 and 1999 with Report of Independent Auditors 2 Egreetings Network, Inc. Financial Statements For the years ended December 31, 2000 and 1999 CONTENTS Report of Ernst & Young LLP, Independent Auditors.................................................................1 Financial Statements Balance Sheet.....................................................................................................2 Statements of Operations..........................................................................................3 Statements of Stockholders' Equity (Deficit)......................................................................4 Statements of Cash Flows..........................................................................................5 Notes to Financial Statements.....................................................................................7
3 Report of Ernst & Young LLP, Independent Auditors The Board of Directors Egreetings Network, Inc. We have audited the accompanying balance sheets of Egreetings Network, Inc. as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Egreetings Network, Inc. at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Walnut Creek, California February 16, 2001 1 4 Egreetings Network, Inc. Balance Sheets (in thousands, except share data)
DECEMBER 31, 2000 1999 --------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,841 $ 81,774 Short-term investments 36,535 - Accounts receivable (net of allowances for doubtful accounts of $1,330 in 2000 and $69 in 1999) 2,635 1,228 Prepaid expenses and other current assets 861 9,244 --------------------------------------- Total current assets 43,872 92,246 Property and equipment, net 10,365 11,800 Deferred content costs - 12,740 Restricted cash deposit 76 2,172 Deposits and other assets 749 1,165 --------------------------------------- Total assets $ 55,062 $ 120,123 ======================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,009 $ 7,910 Accrued expenses and other current liabilities 1,250 2,086 Accrued compensation and related expenses 1,807 1,943 Accrued royalties (including amounts payable to a related party of $37 in 2000 and $145 in 1999) 208 290 Deferred revenue 1,612 581 Current portion of equipment term loan 1,994 1,764 --------------------------------------- Total current liabilities 8,880 14,574 Equipment term loan, less current portion 1,759 3,718 --------------------------------------- Total liabilities 10,639 18,292 Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value: 65,000,000 shares authorized; 32,981,900 and 34,501,140 shares issued and outstanding in 2000 and 1999, respectively 160,971 159,227 Deferred stock compensation (266) (2,195) Notes receivable from stockholders - (5,490) Accumulated deficit (116,282) (49,711) --------------------------------------- Total stockholders' equity 44,423 101,831 --------------------------------------- Total liabilities and stockholders' equity $ 55,062 $ 120,123 =======================================
See accompanying notes. 2 5 Egreetings Network, Inc. Statements of Operations (in thousands, except per share amounts)
YEAR ENDED DECEMBER 31, 2000 1999 1998 -------------------------------------------------- Revenues $ 10,437 $ 3,160 $ 317 Costs and expenses: Cost of services (1) 6,337 2,932 610 Sales and marketing (2) 16,438 17,035 3,094 Operations and development (3) 17,889 10,972 2,628 General and administrative (4) 8,113 5,437 1,444 Amortization of deferred content costs 5,272 1,371 138 Amortization of deferred stock compensation 1,119 1,992 201 Write-down for impairment of long-lived assets 19,672 - - Restructuring charges 5,184 - - -------------------------------------------------- Total costs and expenses 80,024 39,739 8,115 -------------------------------------------------- Loss from operations (69,587) (36,579) (7,798) Interest income 3,872 471 42 Interest expense (747) (534) (65) Other expense, net (109) - - -------------------------------------------------- Net loss $ (66,571) $ (36,642) $ (7,821) ================================================== Net loss per share: Basic and diluted $ (2.02) $ (8.02) $ (2.26) ================================================== Shares used in calculation of net loss per share: Basic and diluted 32,933 4,569 3,464 ==================================================
- ------------ (1) Excluding $5,272, $1,371 and $138 in amortization of deferred content costs for the years ended December 31, 2000, 1999 and 1998, respectively, and excluding the effect of the write-down for impairment of long-lived assets for the year ended December 31, 2000 (see Note 2), and excluding $145, $158 and $20 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. (2) Excluding $280, $540 and $40 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. (3) Excluding $504, $1,033 and $111 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. (4) Excluding $190, $261 and $30 in amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998, respectively. See accompanying notes. 3 6 Egreetings Network, Inc. Statements of Stockholders' Equity (Deficit) (in thousands, except share data) CONVERTIBLE PREFERRED STOCK COMMON STOCK DEFERRED ------------------------------------------------------- STOCK SHARES AMOUNT SHARES AMOUNT COMPENSATION ---------------------------------------------------------------------- Balances at December 31, 1997 2,298,741 $ 9,417 3,466,000 $ 16 $ - Issuance of Series D preferred stock for conversion of notes payable 224,805 1,436 - - - Issuance of warrants in connection with debt financing - 65 - - - Deferred stock compensation related to grant of stock options - - - 488 (488) Amortization of deferred stock compensation - - - - 201 Valuation of preferred stock warrant in connection with content agreement - 445 - - - Net loss and comprehensive loss - - - - - ---------------------------------------------------------------------- Balances at December 31, 1998 2,523,546 11,363 3,466,000 504 (287) Issuance of Series D preferred stock for conversion of notes payable 82,381 514 - - - Issuance of Series F preferred stock, net of issuance costs 3,283,636 20,871 - - - Issuance of Series F preferred stock for conversion of notes payable 442,857 3,100 - - - Issuance of Series G preferred stock, net of issuance costs 9,559,417 41,876 - - - Issuance of Series E preferred stock pursuant to exercise of warrants 1,663,333 9,087 - - - Issuance of common stock under stock option plan - - 2,670,690 5,529 - Interest accrued on notes receivable from stockholders - - - 130 - Issuance of warrants in connection with debt financing - 428 - - - Deferred stock compensation related to grant of stock options - - - 3,900 (3,900) Amortization of deferred stock compensation - - - - 1,992 Valuation of preferred stock warrant in connection with content agreement - 7,744 - - - Issuance of common stock, net of issuance costs - - 6,000,000 54,181 - Conversion of convertible preferred stock to common stock (17,555,170) (94,983) 22,364,450 94,983 - Net loss and comprehensive loss - - - - - ---------------------------------------------------------------------- Balances at December 31, 1999 - - 34,501,140 159,227 (2,195) Issuance of common stock under stock option plan - - 560,732 1,949 - Repayment of notes receivable from stockholders - - - - - Interest accrued on notes receivable from stockholders - - - 342 - Repurchase of common stock issued under stock option plan and forgiveness of related notes receivable and accrued interest - - (2,755,507) (4,827) - Issuance of common stock under stock purchase plan - - 196,035 187 - Issuance of common stock, net of issuance costs - - 479,500 4,683 - Deferred stock compensation related to cancellation of stock options - - - (810) 810 Amortization of deferred stock compensation - - - - 1,119 Issuance of common stock warrants for content and services - - - 220 - Net loss and comprehensive loss - - - - - ---------------------------------------------------------------------- Balances at December 31, 2000 - $ - 32,981,900 $ 160,971 $ (266) ======================================================================
NOTES TOTAL RECEIVABLE STOCKHOLDERS' FROM ACCUMULATED EQUITY STOCKHOLDERS DEFICIT (DEFICIT) -------------------------------------------- Balances at December 31, 1997 $ - $ (5,248) $ 4,185 Issuance of Series D preferred stock for conversion of notes payable - - 1,436 Issuance of warrants in connection with debt financing - - 65 Deferred stock compensation related to grant of stock options - - - Amortization of deferred stock compensation - - 201 Valuation of preferred stock warrant in connection with content agreement - - 445 Net loss and comprehensive loss - (7,821) (7,821) -------------------------------------------- Balances at December 31, 1998 - (13,069) (1,489) Issuance of Series D preferred stock for conversion of notes payable - - 514 Issuance of Series F preferred stock, net of issuance costs - - 20,871 Issuance of Series F preferred stock for conversion of notes payable - - 3,100 Issuance of Series G preferred stock, net of issuance costs - - 41,876 Issuance of Series E preferred stock pursuant to exercise of warrants - - 9,087 Issuance of common stock under stock option plan (5,360) - 169 Interest accrued on notes receivable from stockholders (130) - - Issuance of warrants in connection with debt financing - - 428 Deferred stock compensation related to grant of stock options - - - Amortization of deferred stock compensation - - 1,992 Valuation of preferred stock warrant in connection with content agreement - - 7,744 Issuance of common stock, net of issuance costs - - 54,181 Conversion of convertible preferred stock to common stock - - - Net loss and comprehensive loss - (36,642) (36,642) -------------------------------------------- Balances at December 31, 1999 (5,490) (49,711) 101,831 Issuance of common stock under stock option plan (1,859) - 90 Repayment of notes receivable from stockholders 45 - 45 Interest accrued on notes receivable from stockholders (342) - - Repurchase of common stock issued under stock option plan and forgiveness of related notes receivable and accrued interest 7,646 - 2,819 Issuance of common stock under stock purchase plan - - 187 Issuance of common stock, net of issuance costs - - 4,683 Deferred stock compensation related to cancellation of stock options - - - Amortization of deferred stock compensation - - 1,119 Issuance of common stock warrants for content and services - - 220 Net loss and comprehensive loss - 66,571) (66,571) -------------------------------------------- Balances at December 31, 2000 $ - $ (116,282) $ 44,423 ============================================
See accompanying notes. 4 7 Egreetings Network, Inc. Statements of Cash Flows (in thousands) YEAR ENDED DECEMBER 31, 2000 1999 1998 ---------------- ---------------- ---------------- OPERATING ACTIVITIES Net loss $ (66,571) $ (36,642) $ (7,821) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 5,840 2,352 308 Loss on disposal of property and equipment 299 59 - Amortization of deferred content costs 5,272 1,371 138 Write-down for impairment of long-lived assets 19,672 - - Amortization of deferred stock compensation 1,119 1,992 201 Non-cash charges related to forgiveness of shareholder notes receivable and a grant of common shares 2,854 - - Interest income accrued on available for sale securities (274) - - Other 16 46 19 Changes in operating assets and liabilities: Accounts receivable (1,407) (1,018) (200) Prepaid expenses and other current assets 1,512 (1,703) (19) Restricted cash deposit 2,096 (2,172) - Deposits and other assets 417 (699) (17) Accounts payable and accrued liabilities (6,729) 10,733 1,469 Deferred revenue 1,031 495 86 --------------- ---------------- ---------------- Net cash used in operating activities (34,853) (25,186) (5,836) INVESTING ACTIVITIES Purchases of property and equipment (10,286) (13,365) (786) Proceeds from disposals of property and equipment 453 - - Purchases of available for sale securities (112,360) - - Proceeds from sale/maturity of available for sale securities 76,100 - - --------------- ---------------- ---------------- Net cash used in investing activities (46,093) (13,365) (786) FINANCING ACTIVITIES Borrowings under equipment term loan - 4,966 764 Payments on equipment term loan (1,729) (894) (282) Borrowings on notes payable to stockholders - 2,100 2,950 Payments on notes payable to stockholders - - (22) Issuance of common stock 4,697 54,353 - Issuance of preferred stock - 59,532 - Proceeds from repayment of notes receivable from stockholders 45 - - Other borrowings - - (44) --------------- ---------------- ---------------- Net cash provided by financing activities 3,013 120,057 3,366 --------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (77,933) 81,506 (3,256) Cash and cash equivalents at beginning of period 81,774 268 3,524 --------------- ---------------- ---------------- Cash and cash equivalents at end of period $ 3,841 $ 81,774 $ 268 =============== ================ ================
5 8 Egreetings Network, Inc. Statements of Cash Flows (continued) (in thousands) YEAR ENDED DECEMBER 31, 2000 1999 1998 --------------- ---------------- ---------------- SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 489 $ 246 $ 13 =============== ================ ================ Non-cash investing and financing activities: Conversion of notes payable to stockholders to preferred stock $ - $ 3,614 $ 1,436 =============== ================ ================ Conversions of preferred stock to common stock $ - $ 94,983 $ - =============== ================ ================ Valuation of common stock warrants in connection with content agreement $ 220 $ 428 $ 65 =============== ================ ================ Issuance of common stock for notes receivable $ 1,859 $ 5,360 $ - =============== ================ ================ Interest accrued on notes receivable from stockholders, net $ 342 $ 130 $ - =============== ================ ================ Forgiveness of shareholder notes receivable $ 4,827 $ - $ - =============== ================ ================ Issuance of preferred stock for prepaid advertising $ - $ 7,500 $ - =============== ================ ================ Valuation of preferred stock issued for content rights $ - $ 4,802 $ - =============== ================ ================ Valuation of preferred stock warrant in connection with content agreement $ - $ 7,744 $ 445 =============== ================ ================
See accompanying notes. 6 9 Egreetings Network, Inc. Notes to Financial Statements December 31, 2000 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Egreetings Network, Inc. (the "Company") offers consumers and businesses a convenient and simple integrated solution for finding and sending online cards, gifts and invitations. The Company's Web site allows users to send personalized content-rich online cards and a wide variety of gifts. The Company operates in one business segment and generates revenue from corporate advertising and sponsorships, e-commerce and direct marketing. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS AND INVESTMENTS Cash equivalents consist of highly liquid short-term investments in money market mutual funds with insignificant interest rate risk and an original maturity from date of purchase of three months or less. The Company's short-term investments consist of investments in debt securities of government agencies, corporate bonds, market auction preferred securities and commercial paper with maturities ranging from three months to one year. Cash equivalents and short-term investments are stated at amounts that approximate fair value based on quoted market prices. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, management determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates the designation as of each balance sheet date. At December 31, 2000, the Company classified all of its debt and equity securities as available-for-sale. Unrealized gains and losses have been immaterial to date. Realized gains and losses, which have been immaterial to date, are included in interest income or expense. 7 10 Egreetings Network, Inc. Notes to Financial Statements (continued) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS AND INVESTMENTS (CONTINUED) The following summarizes the Company's cash equivalents and investments at cost, which approximates fair value (in thousands):
DECEMBER 31, 2000 1999 -------------------------------------- Cash equivalents: Money market mutual fund $ 3,561 $ 80,741 ====================================== Short-term investments: Government agencies $ 15,268 $ - Corporate bonds 9,924 - Market auction preferred securities 8,385 - Commercial paper 2,958 - -------------------------------------- $ 36,535 $ - ======================================
PROPERTY AND EQUIPMENT Property and equipment are stated at cost net of accumulated amortization and depreciation and are depreciated using the straight-line method over the estimated useful life of the related asset, which currently averages three years. Leasehold improvements are amortized over the shorter of the estimated useful life or the life of the lease. Realization of the carrying amount of property and equipment is dependent upon the Company generating sufficient future revenues. Web site infrastructure and application costs are capitalized in accordance with Emerging Issues Task Force Issue No. 00-2, "Accounting for Web Site Development Costs" and are amortized over three years. Costs to develop web site content are expensed as incurred. Depreciation and amortization expense relating to property, equipment and leasehold improvements excluding the write-down for impairment of long-lived assets (see Note 2), amounted to $5,840,000, $2,352,000, and $308,000 for the years ended December 31, 2000, 1999, and 1998, respectively. 8 11 Egreetings Network, Inc. Notes to Financial Statements (continued) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS Financial instruments which potentially subject the Company to concentrations of risk include cash and cash equivalents and accounts receivable. The Company maintains its cash with three high-credit quality domestic financial institutions. The Company performs ongoing credit evaluations of its customers and does not typically require collateral or guarantees. Management establishes an allowance for doubtful accounts when it appears accounts receivable will not be collectible. For the years ended December 31, 2000, 1999 and 1998, one corporate advertising sponsor accounted for 12%, 28% and 11%, respectively of the Company's revenues. There were no significant concentrations of credit risk among the Company's corporate sponsors from whom accounts receivables were due as of December 31, 2000 and 1999. An inability to demonstrate an active and growing user base to advertisers and sponsors may result in a loss of advertisement and sponsorship agreements and a decline in advertisement and sponsorship revenues. DEPENDENCE ON THIRD PARTIES AND RELATED PARTY TRANSACTIONS A common stockholder, American Greetings, formerly known as Gibson Greetings, Inc. ("Gibson"), has historically provided a significant portion of the Company's online card content pursuant to an agreement under which the Company pays royalties. Royalties paid to this related party aggregated $456,000, $504,000, and $112,000 in the years ended December 31, 2000, 1999, and 1998, respectively. Royalty obligations arise as online cards containing third-party content are sent by consumers. Royalty expenses are recorded as cost of services in the statement of operations in the period during which the related obligations arise. On January 3, 2001, the Company removed all online cards from it's website that contained content from this related party (see Note 4). The Company relies on a single entity to provide a majority of support necessary to maintain it's servers and transmit data. The inability of this party to fulfill its obligations to the Company could negatively impact the Company's future results. 9 12 Egreetings Network, Inc. Notes to Financial Statements (continued) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CHANNEL DISTRIBUTION COSTS The Company has contracted with several third party channel distribution partners whose Internet Web sites direct Internet traffic to the Egreetings.com Web site via a link from the distribution partners' Web site. The contracts are typically one year in duration. The Company charges the cost of these distribution services to sales and marketing expense over the life of the contracts. REVENUE RECOGNITION Revenues are generated primarily as a result of advertising and sponsorship, direct marketing, hosting of online card functionality, e-commerce activities and business communication services. The duration of banner advertising and sponsorship commitments typically range from one month to one year. The Company's advertisement obligations typically include guarantees of a minimum number of impressions, or times that an advertisement appears in pages viewed by consumers using the Company's Web site. The Company recognizes revenues on the sale of banner advertisements based on the lower of as the impression is delivered or displayed or ratably over the term of the commitment. The Company recognizes revenues on the sale of sponsorship advertisements on a straight-line basis over the period in which the sponsor's message is displayed. To the extent minimum guaranteed impressions, if any, are not met, revenue recognition is deferred until the remaining guaranteed impressions are delivered. Revenue from the hosting of online card functionality for customers is recognized on a ratable basis over the life of the contract. Revenue from direct marketing activities is recognized based on the ratio of the number of emails actually sent to the guaranteed number of emails to be sent. Revenue from e-commerce transactions is recognized on the date a digital gift certificate code is emailed to the buyer or designated recipient or on the date of shipment for physical goods. Revenue from business communications services is recognized on the date that the custom-made digital greeting is transmitted to the intended recipient. Deferred revenue is primarily comprised of payments received pursuant to revenue generating contracts in advance of revenue recognition and billings in excess of recognized revenue relating to advertising contracts. 10 13 Egreetings Network, Inc. Notes to Financial Statements (continued) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for employee stock option grants using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 and has adopted the disclosure-only alternative of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). ADVERTISING Advertising costs are expensed as incurred. Advertising expense was approximately $4,103,000, $9,775,000, and $478,000 for the years ended December 31, 2000, 1999, and 1998, respectively. In November 1999, the Company sold 2,475,247 shares of Series G preferred stock to the National Broadcasting Company, Inc. ("NBC") for gross proceeds of approximately $7.5 million in cash and for advertising rights with a fair value of $7.5 million. Under this agreement, advertising will be provided to the Company pursuant to the terms of the advertising agreement. The right to utilize this prepaid advertising expires on January 1, 2002. The fair value of these advertising rights was recorded as prepaid advertising and has been amortized to expense as advertising is used. However, realization of the carrying amount of prepaid advertising is dependent upon the Company placing sufficient advertising with NBC prior to expiration of the agreement and upon the level of revenues generated by such advertising. Based on management's estimate of future cash flows, $6.9 million was charged to operations during the period to reflect the impairment of this asset (see Note 2). DEFERRED CONTENT COSTS The Company records the value of deferred content costs as of the date of the related content licensing agreements and amortizes these costs to expense over the life of the contract using the straight-line method. Realization of deferred content costs is subject to the Company generating adequate revenues and other benefits as a result of the arrangement. The Company continually evaluates the realizability of its deferred content costs for impairment and based on management's estimate of future cash flows, $7.7 million was charged to operations during the period to reflect the impairment of this asset (see Note 2). 11 14 Egreetings Network, Inc. Notes to Financial Statements (continued) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. NET LOSS PER SHARE Basic and diluted net loss per share information for all periods is presented under the requirement of SFAS No. 128, "Earnings per Share" ("SFAS 128"). Basic earnings per share has been computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock options, warrants, and convertible securities. Potentially dilutive securities have also been excluded from the computation of diluted net loss per share as their inclusion would be antidilutive. The calculation of basic and diluted net loss per share is as follows (in thousands, except share and per share amounts):
YEAR ENDED DECEMBER 31, 2000 1999 1998 ---------------------------------------------------------- Net loss $ (66,571) $ (36,642) $ (7,821) ========================================================== Weighted average shares of common stock outstanding 34,851,189 5,726,149 3,466,000 Less: weighted average shares of common stock that may be repurchased (1,917,719) (1,157,601) (1,543) ---------------------------------------------------------- Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share 32,933,470 4,568,548 3,464,457 ========================================================== Basic and diluted net loss per share $ (2.02) $ (8.02) $ (2.26) ==========================================================
If the Company had reported net income, the calculation of diluted earnings per share would have included approximately 533,000, 798,000, and 424,000 common equivalent shares related to the outstanding stock options and warrants not included above (determined using the treasury stock method) for the years ended December 31, 2000, 1999, and 1998, respectively. 12 15 Egreetings Network, Inc. Notes to Financial Statements (continued) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EFFECT OF NEW ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. The Company's revenue recognition policies have been consistent with the provisions of SAB 101 and accordingly, the adoption of SAB 101, effective January 1, 2000, had no impact on the Company's financial position or operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which amended FAS 133 by deferring the effective date to the fiscal year beginning after June 30, 2000. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment to FAS Statement No. 133", which amended FAS 133 with respect to four specific issues. The Company is required to adopt FAS 133, as amended, for the year ending December 31, 2001. The Company does not expect that the adoption of this statement will have a material effect on the financial position, results of operations or cash flows. 2. WRITE-DOWN FOR IMPAIRMENT OF LONG-LIVED ASSETS During the fourth quarter of 2000, the market downturn affecting internet company business models significantly increased. In recognition of this downturn and as part of management's review of impairment indicators in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", management determined that an impairment to the carrying value of certain assets existed as a result of this change in circumstances and the related reduction in cash flows from advertising and other revenues. Accordingly, an assessment of the fair value of certain assets was performed based on management's estimate of future cash flows related to these assets. This assessment resulted in the write-down of $19,672,000, with respect to prepaid advertising, deferred content costs, and property and equipment of $6,871,000, $7,673,000 and $5,128,000, respectively. 13 16 Egreetings Network, Inc. Notes to Financial Statements (continued) 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, 2000 1999 -------------------------------------- Furniture and fixtures $ 974 $ 743 Leasehold improvements 1,924 713 Computer equipment, software, and website costs 12,712 13,169 -------------------------------------- 15,610 14,625 Less accumulated depreciation and amortization (5,245) (2,825) -------------------------------------- $ 10,365 $ 11,800 ======================================
Realization of the carrying amount of property and equipment is dependent upon the Company generating sufficient cash flows from advertising and other revenue in future periods. If estimated future cash flows are not achieved, additional reductions in the recorded amount of property and equipment could be required. 4. DEFERRED CONTENT COSTS In December 1997, the Company entered into a Series D preferred stock purchase agreement and a content provider and distribution agreement ("Content Agreement") with Gibson Greetings, Inc. In conjunction with this transaction, the Company granted to Gibson a warrant to purchase 946,925 shares of Series E preferred stock. The warrant increased to 1,663,333 shares of Series E preferred stock as a result of certain anti-dilution provisions. This warrant, exercised by Gibson Greetings, Inc. concurrent with the completion of the Company's initial offering in December 1999, was contingent on Gibson Greeting's not being in material violation of the Content Agreement and therefore was accounted for as a variable warrant. The warrant was valued by management using the Black-Scholes valuation model at each quarter end with the fair value recorded as deferred content costs in the accompanying balance sheets. The Company recorded $7,744,000, and $445,000 in deferred content costs for the years ended December 31, 1999 and 1998, respectively. No such cost related to this agreement was recorded for the year ended December 31, 2000. The assumptions used to compute the value of the warrant at each measurement date under Black-Scholes were as follows: expected volatility, 0.7; expected dividend yield, 0%; risk-free interest rate, 4.34% to 5.38%; expected life, amount of time between measurement date and expiration of warrant; and exercise price and stock price, consistent with information at each relevant date. On September 30, 1999, in connection with the 14 17 Egreetings Network, Inc. Notes to Financial Statements (continued) 4. DEFERRED CONTENT COSTS (CONTINUED) execution of the first amendment to the Content Agreement, the warrant became non-forfeitable, fully exercisable and fully vested and was no longer linked to performance under the Content Agreement. The Company performed a final valuation of Black-Scholes at September 30, 1999, resulting in a final value of $9,448,000 which was being amortized over the remaining period of the Content Agreement, which extends through December 2002. On January 3, 2001, the Company removed all online cards from it's website that contained Gibson Greeting content. Accordingly, the unamortized deferred content cost relating to this agreement aggregating $5,292,000 as of December 31, 2000 has been charged to operations during the period to reflect the impairment of this asset (see Note 2). In November 1999, the Company entered into a two-year content licensing agreement with NBC pursuant to which the Company has the right to create and distribute online cards for a minimum of five NBC television programs for each six-month television season, which amount may be increased, at NBC's option, to a maximum of 30 NBC television programs for each season. The consideration for this content agreement, in addition to the promotion by the Company of digital greetings containing NBC content, is equal to the difference in NBC's per share cost of the Series G preferred stock from the deemed fair market value of the Company's common shares as of the date of the preferred stock purchase by NBC. This equates to a value of approximately $4.8 million which was recorded as deferred content costs with an offset to preferred stockholders' equity. The unamortized amount relating to this agreement aggregating $2,296,000 as of December 31, 2000 has been charged to operations during the period to reflect the impairment of this asset (see Note 2). In April 2000, the Company entered into a three-year content licensing agreement with a music entertainment entity pursuant to which the Company has the right to create and distribute online cards for a certain number of music artists. The consideration for this content agreement, in addition to the promotion by the Company of the music artists via the online cards, is a warrant to purchase 75,000 share of the Company's common stock. The warrant was valued by management using a Black-Scholes valuation model. The Company recorded $203,000 in deferred content costs for the year ended December 31, 2000. The unamortized balance relating to this agreement totaling $85,000 as of December 31, 2000 has been charged to operations during the period to reflect the impairment of this asset (see Note 2). Amortization, excluding the impairment write-down for the year ended December 31, 2000 of $7,673,000 (see Note 2), of deferred content costs was approximately $5,272,000, $1,371,000, and $138,000 for the years ended December 31, 2000, 1999, and 1998, respectively. 15 18 Egreetings Network, Inc. Notes to Financial Statements (continued) 5. DEBT In August 1999, the Company entered into an equipment financing agreement with two leasing companies and a financial institution that provides for borrowings of up to $10.0 million, of which $4,470,000 was drawn-down. An additional interest payment of 10% of the total amount drawn-down on the facility is due upon extinguishment of the debt. Advances under the facility terminated on July 31, 2000. In connection with the financing, the Company granted a warrant that enable the holders to purchase 120,000 shares of the Company's common stock at an exercise price of $4.50 per share through November 2005. The warrant was valued by management using a Black-Scholes valuation model and is amortizing this amount to interest expense over the term of the financing agreement. The Company also has a second equipment term loan. At December 31, 2000, the outstanding loan balances on the two equipment term loans were $2,751,000 and $555,000, respectively, which mature in August 2002 and March 2002, respectively. The loans bear interest at 11.6% and prime plus 2% (11.5% at December 31, 2000), respectively. Principal and interest are payable monthly. Both equipment loans are secured by the equipment purchased under the loan agreement and a general lien against the Company's assets. Future payments relating to outstanding loans are as follows at December 31, 2000 (in thousands): 2001 $ 1,994 2002 1,759 ------------------- Total principal payments 3,753 Less current portion (1,994) ------------------- $ 1,759 ===================
16 19 Egreetings Network, Inc. Notes to Financial Statements (continued) 6. INCOME TAXES There has been no provision for United States federal or state or foreign income taxes for any period as the Company has incurred operating losses for all periods and in all jurisdictions. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands):
DECEMBER 31, 2000 1999 ------------------------------------- Deferred tax assets: Net operating losses $ 31,896 $ 17,103 Stock compensation 673 1,186 Accrued expenses 4,223 1,049 Other 1,345 232 -------------------------------------- Total deferred tax assets 38,137 19,570 Valuation allowance (38,137) (19,570) ------------------------------------- $ - $ - =====================================
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $18,567,000 and $14,780,000 during the years ended December 31, 2000 and 1999, respectively. As of December 31, 2000, the Company had net operating loss carryforwards for federal income tax purposes of approximately $85,294,000, which expire in the years 2010 through 2020. The Company also had net operating loss carryforwards for state income tax purposes of approximately $48,268,000 expiring in years 2003 and 2005. Utilization of the Company's net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before utilization. 17 20 Egreetings Network, Inc. Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY COMMON STOCK In December 1999, the Company completed its initial public offering of 6.0 million shares of its common stock. Net proceeds to the Company totaled approximately $54.2 million. As of the closing date of the offering, all of the convertible preferred stock outstanding was converted into approximately 22.4 million shares of common stock. In January 2000, the Company's investment bank exercised its right to acquire an additional 479,000 shares of its common stock. Net proceeds to the Company from this issuance totaled approximately $4.5 million. BRIDGE FINANCINGS Between November 1998 and January 1999, the Company issued subordinated notes for an aggregate amount of $2,100,000 and an interest rate of 8.0% per annum, together with a warrant to purchase 67,139 shares of Series F preferred stock at $6.30 per share. The principal amount of these notes was converted into 300,000 shares of Series F preferred stock in March 1999 and subsequently converted into 600,000 shares of common stock upon completion of the initial public offering. In February and March 1999, the Company issued short-term notes payable with an aggregate principal amount of $1,000,000 and interest rates ranging from 4.6% to 8.0% per annum. The principal amount of these notes was converted into 142,857 shares of Series F preferred stock in March 1999 and subsequently converted into 285,714 shares of common stock upon completion of the initial public offering. 18 21 Egreetings Network, Inc. Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) WARRANTS The Company had the following outstanding warrants to purchase shares of common stock at December 31, 2000: NUMBER EXERCISE PRICE EXPIRATION OF OF SHARES PER SHARE WARRANTS --------------------------------------------------------------------------------------------------- 15,006 $ 1.00 March 2003 83,820 2.00 April - August 2007 10,000 2.25 June 2003 134,278 3.15 November 2005 75,000 4.23 April 2005 120,000 4.50 November 2005 500 5.00 April 2003 --------------------------- 438,604 ===========================
STOCK OPTIONS The Company's 1996 Stock Option Plan provides for the issuance of 6,456,109 shares of common stock to employees, officers, directors and consultants and is limited to 17.5% of fully diluted common stock equivalents as defined. The Company's 1999 Stock Option Plan provides for the issuance of 3,500,000 shares of common stock to employees, officers, directors and consultants and is limited to 17.5% of fully diluted common stock equivalents as defined. Options granted under either plan may be incentive stock options ("ISOs") or non-statutory stock options ("NSOs") to employees, officers, directors and consultants. The ISOs may be granted at a price per share not less than the fair market value at the date of grant. The NSOs may be granted at a price per share not less than 85% of the fair market value at the date of grant. If at any time the Company grants an option and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value at that date. Options granted are exercisable over a maximum term of ten years from the date of grant and generally vest over a period of four years. 19 22 Egreetings Network, Inc. Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED) A summary of the Company's stock option activity for all plans is as follows:
OPTIONS OUTSTANDING ------------------------------------------------ WEIGHTED-AVERAGE EXERCISE PRICE PER NUMBER OF SHARES SHARE ----------------------------------------------- Outstanding at December 31, 1997 651,929 0.09 Options granted 493,500 0.83 Options canceled (112,928) 0.03 ----------------------------------------------- Outstanding at December 31, 1998 1,032,501 0.05 Options granted 5,045,518 2.74 Options exercised (2,670,690) 2.07 Options canceled (744,135) 1.40 ----------------------------------------------- Outstanding at December 31, 1999 2,663,194 2.87 Options granted 3,024,858 3.21 Options exercised (560,732) 3.48 Options canceled (2,241,654) 3.41 ----------------------------------------------- Outstanding at December 31, 2000 2,885,666 $ 2.68 =============================================== Exercisable at December 31, 2000 1,300,312 $ 1.96 ===============================================
OPTIONS OUTSTANDING ------------------------------------------------------ OPTIONS EXERCISABLE WEIGHTED- ----------------------------------- WEIGHTED-AVERAGE AVERAGE REMAINING WEIGHTED-AVERAGE EXERCISE NUMBER EXERCISE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE PRICE RANGE OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE - --------------------------------------------------------------------------------------------------------------------- $ 0.04 - 0.93 597,639 $0.28 5.58 558,417 $0.24 $ 0.93 - 1.75 313,862 $1.59 8.63 158,744 $1.60 $ 2.09 940,372 $2.09 9.42 174,011 $2.09 $ 2.10 - 4.88 662,930 $3.09 8.80 287,183 $2.65 5.56 - 12.38 370,863 $8.23 9.00 121,957 $8.43 ----------------------------- -------------------------------- 2,885,666 $2.68 1,300,312 $1.96 ============================= ================================
20 23 Egreetings Network, Inc. Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED) In certain cases, the Stock Option Plan allows for the early exercise of options granted subject to vesting and repurchase provisions. During the year ended December 31, 1999, the chief executive officer, chief financial officer and a director of the Company early exercised options to purchase an aggregate of 2,488,063 shares of restricted common stock at exercise prices ranging from $2.10 to $2.78 per share. During the year ended December 31, 2000, the chief executive officer of the Company early exercised options to purchase an additional 350,000 shares of restricted common stock at an exercise price of $5.31. All of these shares were purchased with promissory notes payable to the Company. In October 2000, 2,755,508 shares of vested and unvested, restricted common stock belonging to the two officers were repurchased and the resulting unpaid portion of the related promissory notes and accrued interest were forgiven. The transactions with these two officers resulted in the cancellation of $7,646,000 in promissory notes and accrued interest of which $2,283,000 was recognized as a non-cash restructuring charge (see Note 10) and $536,000 was recognized as a non-cash operating charge. EMPLOYEE STOCK PURCHASE PLAN In September 1999, the Company's Board of Directors adopted, and in November 1999 the stockholders approved, the 1999 Employee Stock Purchase Plan ("ESPP"). The Company has reserved a total of 1,000,000 shares of common stock for issuance under this plan, of which 803,965 remained available for issuance as of December 31, 2000. Eligible employees may purchase common stock at 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable six-month offering period or the fair market value of the Company's common stock at the date of purchase. Employees have purchased 196,035 shares in connection with the ESPP in the year ended December 31, 2000. 21 24 Egreetings Network, Inc. Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) DEFERRED STOCK COMPENSATION The Company recorded deferred stock compensation of $0 and $3,900,000 during the years ended December 31, 2000 and 1999, respectively, representing the difference between the exercise price and the deemed fair value for financial accounting purposes of certain of the Company's stock options granted to employees. In the absence of a public market for the Company's common stock during the period in which the options were granted, the deemed fair value of the Company's common stock was based on the price per share of recent preferred stock financings, less a discount to give effect to the superior rights of the preferred stock. These amounts are being amortized by charges to operations over the vesting periods of the individual stock options using a graded vesting method. Such amortization amounted to $1,119,000, $1,992,000 and $201,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In 2000, deferred stock compensation was reduced by $810,000 to reflect the cancellation of certain stock options as a result of employee terminations. SHARES RESERVED FOR FUTURE ISSUANCE At December 31, 2000, the Company has reserved shares of capital stock for future issuance as follows: Stock options outstanding 2,885,666 Stock options available for grant 6,348,529 Warrants to purchase common stock 438,604 ----------------- 9,672,799 =================
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION Pro forma information regarding results of operations and net loss per share is required by SFAS 123, which also requires that the information be determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: a risk-free interest rate of 5.17% for the year ended December 31, 2000 and 5.5% for the years ended December 31, 1999 and 1998; no dividend yield for the years ended December 31, 2000, 1999 and 1998; a volatility factor of 1.45 for the year ended December 31, 2000 and .7 for the year ended December 31, 1999 (minimum value 22 25 Egreetings Network, Inc. Notes to Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION (CONTINUED) method used in 1998) with respect to the expected market price of the Company's common stock and a weighted average expected life of the options of 5.9 for the year ended December 31, 2000, 5.5 years for the year ended December 31, 1999 and 4.5 years for the year ended December 31, 1998. The option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value at the grant dates for awards under the plan calculated using the Black-Scholes option valuation model, the Company's net loss and pro forma basic and diluted net loss per share would have been increased to the pro forma amounts indicated below (in thousands except per share amounts):
YEAR ENDED DECEMBER 31, 2000 1999 1998 ---------------------------------------------------------- Net loss - as reported $ (66,571) $ (36,642) $ (7,821) Pro forma net loss $ (67,662) $ (38,871) $ (7,833) Basic and diluted net loss per share - as reported $ (2.02) $ (8.02) $ (2.26) Pro forma basic and diluted net loss per share $ (2.05) $ (8.51) $ (2.26)
The weighted-average fair value of options granted, which is the value assigned to the options under SFAS 123, was $3.20, $2.54 and $0.18 for options granted during the years ended December 31, 2000, 1999, and 1998, respectively. The pro forma impact of options on the net loss is not representative of the effects on net income (loss) for future years, as future years will include the effects of additional years of stock option grants. 23 26 Egreetings Network, Inc. Notes to Financial Statements (continued) 8. RETIREMENT PLAN The Company has a defined contribution plan for all full-time employees which qualifies under Section 401(k) of the Internal Revenue Code. Under the terms of the plan, employees may contribute up to 15%, subject to Internal Revenue Service limitations, of their annual compensation. The plan provides for discretionary employer contributions. As of December 31, 2000, there have been no employer contributions to the plan. 9. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its office facilities and certain equipment under non-cancelable lease agreements that require the Company to pay operating costs, including property taxes, normal maintenance and insurance. In addition to several equipment operating leases expiring on various dates through February 2005, the Company has entered into three long-term non-cancelable leases on office buildings that expire in March 2002, November 2002 and August 2009. Rent expense amounted to approximately $2,585,000, $1,312,000, and $216,000 for the years ended December 31, 2000 1999 and 1998, respectively. Future minimum payments under the terms of non-cancelable operating lease agreements at December 31, 2000 are as follows (in thousands): 2001 $ 3,039 2002 2,967 2003 2,754 2004 2,721 2005 2,676 Thereafter 9,795 -------------------- Total minimum lease payments $ 23,952 ====================
Also under the terms of one office facility lease agreement, the Company has provided a $76,544 letter of credit supporting the minimum lease payments. The letter of credit is fully collateralized with a compensating cash balance at the issuing bank. The Company is party to a legal dispute arising from the normal course of business. The Company does not believe that the outcome of this dispute will have a material effect on the Company's financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution could have a material affect the Company's financial position, results of operations or cash flows. 24 27 Egreetings Network, Inc. Notes to Financial Statements (continued) 10. RESTRUCTURING COSTS In October 2000, the Company charged $5,184,000 to operations related to a restructuring plan aimed at reducing costs. Such charges included $4,301,000 for the forgiveness of promissory notes and a severance payment related to the resignation of the Company's Chief Executive Officer and $780,000 in separation payments to sixty terminated employees. All restructuring costs were paid during the year ended December 31, 2000. 11. SUBSEQUENT EVENT On February 5, 2001, the Company entered into a merger agreement with AmericanGreetings.com, Inc., a majority-owned subsidiary of American Greetings Corporation, pursuant to which AmericanGreetings.com commenced a tender offer to purchase all of the outstanding shares of the Company's common stock for $0.85 per share in cash. Consummation of the proposed merger is subject to the tender of at least 90% of the outstanding shares or stockholder approval. No adjustments have been made to the accompanying financial statements for the effects of the transaction, if consummated, on the recorded amounts of assets and liabilities of the Company. 12. VALUATION AND QUALIFYING ACCOUNTS The following table sets forth the activity in the allowance for doubtful accounts for the years ended December 31, 2000, 1999, and 1998 (in thousands):
2000 1999 1998 ------------------------ Beginning balance $ 69 $ - $- Provision for losses 1,300 85 - Write-offs, net of recoveries (39) (16) - ------------------------ Ending balance $1,330 $ 69 $- ========================
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