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edgar-online.com Business: "We are a leading Web-based provider of greetings and other social expression content aimed at expanding individuals' ability to communicate and express themselves online. Our destination Web site offers users access to over 9,000 greetings and other social expression products, one of the largest selections on the Web today. Our online products consist of static postcards, animated and interactive online greetings, customized printable greeting cards, cartoons and games. We are able to provide users with this comprehensive selection through our in-house team of experienced creative specialists, third party licensees and our relationship with our parent, American Greetings, the world's largest publicly-traded greeting card company. Our relationship with American Greetings provides us with access to its library of approximately one million images and lines of verse as well as the American Greetings brand name online. Users visiting our Web site can view, personalize and send from a competitive selection of free greetings and social expression products while paid subscription users have unlimited access to our complete online selection. In addition to subscriptions, we currently generate revenues from the sale of advertising on our Web site, and by licensing our trademark and a portion of our content to Mindscape, a division of Mattel, for inclusion in personal creativity software. Fiscal year ends Feb. 28th. Sales growth has been good-- 97- $1mm 98- $3.8mm 99- $12.3mm Expenses until now have been low, so company was profitable, +$1.7mm, as of Feb 28, 1999. At first blush, for a web-based business to be so profitable with such a sales growth rate would imply this company's IPO will soar. HOWEVER, as you read below, you'll discover AGCM, last week entered into royalty agreements with AOL, Yahoo, etc. that create SIGNIFICANT royalty and marketing obligations of almost $30mm a year. So unless sales continue to increase EXPONENTIALLY, e.g., to ~$40mm by Feb. 28, 2000, this company will go from being profitable in 1999 to having SIGNIFICANT losses per share in 2000. Here's a description of the future Obligations - These agreements may SIGNIFICANTLY impact future marketing costs and overall profitability for years to come: "On July 28, 1999, we entered into an interactive marketing agreement with AOL extending through December 2004 which provides for us to be featured as the generally exclusive provider of online greeting products and services to the following AOL brands: AOL, AOL.com, ICQ, Digital City, Netscape Netcenter and CompuServe. In addition, our products and services will also be offered on AOL International services, including such services in Canada, the United Kingdom, Australia, Japan, Germany and France. In consideration of the marketing, promotion, advertising and other services AOL will provide under this agreement, we will pay AOL a minimum aggregate of $100.0 million over the term of the agreement. The agreement also contains revenue sharing provisions for sales over specified amounts. We expect that we will amortize the costs associated with this agreement over the contract term of five and one-half years as sales and marketing expenses. Of the amount payable under this agreement, $22.8 million was paid in August 1999. The agreement may be terminated by either party upon a material breach by the other party which is not cured within 90 days of notice, and by AOL upon a change of control of AmericanGreetings.com resulting in our being controlled by a competitor of AOL. Under the agreement, AOL will act as our exclusive sales agent for all advertisements on the co-branded sites, and AOL and AmericanGreetings.com will share in the advertising revenues from the co-branded sites. In addition, under our agreement with AOL, AmericanGreetings.com is guaranteed to receive at least $30.0 million through June 2002 for advertising sold on our co-branded sites. Under this agreement, $6.0 million was received from AOL in August 1999 in connection therewith. On August 1, 1999, we entered into a license and promotion agreement for the integration of our greetings products and services with Yahoo!'s greetings service. The agreement is for a term of approximately two years. Under this agreement, we are required to pay Yahoo! minimum aggregate fees of $8.0 million over the term of the agreement. We expect that the costs associated with this agreement will be recognized as sales and marketing expenses over the two year contract term. We may also be required to pay Yahoo! additional fees if a specified revenue threshold amount is attained. Under our agreement with Mindscape, we receive trademark licensing fees and a royalty for each product sold with guaranteed minimum payments of $17.0 million over the four-year term of the agreement ending in February 2002. If royalty payments to us under this agreement meet specified levels, the agreement gives Mindscape the right to extend the term. Other than our payment obligations to our distribution partners, our royalty obligations under our agreements with American Greetings, obligations under operating leases and technology acquisitions, we have no material capital commitments. We expect capital expenditures of approximately $10.0 million over the next twelve months relating to investments in technology infrastructure necessary to support our growth objectives. We expect to incur significantly higher costs, particularly content creation costs and sales and marketing costs, in the future to grow our business. We believe that the net proceeds from this offering, together with American Greetings cash contribution, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we may need to raise additional funds through public or private financing, strategic relationships or other arrangements. We cannot assure you that such additional funding, if needed, will be available on terms attractive to us, or at all. The failure to raise capital when needed could seriously harm our business and financial condition. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our then current stockholders will be reduced. | ||||||||||||
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