<PAGE>
2,760,000 Shares
[IMPROVENET LOGO]
Common Stock
---------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "IMPV."
The underwriters have an option to purchase a maximum of 414,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See Risk Factors on page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions ImproveNet, Inc.
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................ $16.00 $1.12 $14.88
Total................................................ $44,160,000 $3,091,200 $41,068,800
</TABLE>
Delivery of the shares of common stock will be made on or about March 21,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Robertson Stephens
E*OFFERING
The date of this prospectus is March 15, 2000.
<PAGE>
DESCRIPTION OF INSIDE-COVER ARTWORK
PANEL ONE
Picture of a service provider with his arm around an older woman with the
caption, "Another beautiful relationship started on the Internet."
(INSIDE TWO-PAGE GATEFOLD SPREAD)
Reverse blueline drawing of a house depicting our information and services in
type and clip art in each room of the house under the title
"ImproveNet--America's Home Improvement Resource." The foundation of the house
includes the captions "ImproveNet.com" and "ImproveNetPro.com".
The roofline contains a counterclockwise ordering of our home improvement cycle
stages, beginning at the upper left and moving across and over the attic with:
"Dream & Design" "Plan & Budget" "Hire and Build" and "Fix and Maintain" all
connected in the triangle by directional arrows. Our logo appears in the
delineated attic.
The following text appears as a caption in each room of the house that
accompanies typed descriptions and clip art. From left to right and from top to
bottom the rooms are as follows:
"Personal Project Folder" with a subcaption "A place to compile project
elements" which relates to an image of a folder in the shape of a house
which bears our logo.
"Project Estimator" with a subcaption "Balancing the dream against reality"
which accompanies an image of a calculator whose display is our logo.
"Personal Project Advisor" with a subcaption "ImproveNet professionals take
the homeowner and service provider through a successful project" which
corresponds to a trio of people indicated as "homeowner", "advisor" and
"contractor."
"Contractor Screening, Matching & Leads" with a subcaption "Ensuring quality
service providers & fit to project" which is beneath a 5-point checklist
itemizing the following: "Credit", "License", "Legal", "Insurance" and
"Recommendations."
"Pro Site" with a subcaption "Professional services for contractors &
architects--job postings and more" which relates to an image of a drafting
table with a ruler, draftsman's triangle and folder with our logo.
"The Design Gallery" with a subcaption "Room designs organized by style"
which accompanies an image of a room with two workers, one measuring a wall
and the other installing a window, all under our logo.
"The Product Showcase" with a subcaption "Items organized by use and by
maker" which goes with an image of a showroom with an individual standing in
front of a display of different windows positioned under and beside our
logo. Three brochures with our logo are also shown to the left of the image.
"SmartLeads-TM-" with a subcaption "Targeted marketing opportunities based
on homeowner project" which ties with an image of the planet with a
satellite dish and two brochures beneath it which bear our logo.
"Powered By ImproveNet" with a subcaption "Providing our matching services
and content on third party Web sites" which goes with the image of a cloud
with our "Powered by ImproveNet" logo inside and a lightening bolt coming
out of the cloud.
"The Home Center" with a subcaption "Home & Garden, Remodeling, Real Estate,
Relocation and Financing Resources" corresponds to the image of a tool box
filled with a saw, screwdriver, ruler, hammer, rake and real estate sign
with the words "For Sale."
INSIDE BACK COVER ARTWORK:
Image depicting ImproveNet logo.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 17
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 20
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 22
</TABLE>
<TABLE>
BUSINESS.............................. 32
<CAPTION>
PAGE
--------
<S> <C>
MANAGEMENT............................ 48
RELATED PARTY TRANSACTIONS............ 58
PRINCIPAL STOCKHOLDERS................ 64
DESCRIPTION OF CAPITAL STOCK.......... 67
SHARES ELIGIBLE FOR FUTURE SALE....... 70
UNDERWRITING.......................... 72
NOTICE TO CANADIAN RESIDENTS.......... 75
LEGAL MATTERS......................... 76
EXPERTS............................... 76
WHERE YOU CAN FIND MORE INFORMATION... 76
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS IS BASED ON
THE FOLLOWING ASSUMPTIONS:
- THE CONVERSION OF ALL OUR OUTSTANDING SHARES OF PREFERRED STOCK INTO
SHARES OF COMMON STOCK IMMEDIATELY UPON THE CLOSING OF THIS OFFERING;
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND
- THE FILING, UPON APPROVAL OF OUR STOCKHOLDERS, OF OUR RESTATED CERTIFICATE
OF INCORPORATION, BEFORE THE CLOSING OF THIS OFFERING.
"ImproveNet," is a registered trademark of ImproveNet, Inc. "Powered by
ImproveNet," "ImproveNetPro" and "SmartLeads" are trademarks of
ImproveNet, Inc. This prospectus also includes trademarks owned by other
parties.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL APRIL 9, 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU
SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE
ENTIRE PROSPECTUS CAREFULLY.
IMPROVENET, INC.
We provide home improvement information and services on the Internet.
Through our ImproveNet.com and ImproveNetPro.com Web sites, matching services
and targeted advertising, we are creating a national marketplace for home
improvement products and services in which homeowners, service providers and
suppliers of home improvement products and related services benefit from an
organized and efficient online flow of information and communication.
We generate quality job leads for architects, designers and contractors, or
service providers, from highly interested homeowners within their geographic
area using our proprietary matching service. In 1999, we received approximately
106,500 job submissions, of which we matched approximately 37,500 or 35.2% with
service providers who were interested in bidding on the job. Our service
providers won approximately 3,350 jobs or 8.9% of all matched jobs and 3.1% of
all jobs submitted. We have designed our services to deliver a satisfying home
improvement experience to homeowners and to assist them through the four phases
of the home improvement process:
- DREAM AND DESIGN--We provide homeowners free online information and design
tools such as our design gallery and product showcase as well as a
personal project folder that allows homeowners to store all ideas and
information about their projects on our Web site.
- PLAN AND BUDGET--Our Web site provides interactive tools, such as our
kitchen visualization tool, that allow homeowners to plan their projects
or our kitchen estimator, that allow homeowners to calculate the expected
cost of their projects based on parameters such as physical dimensions,
styles and estimated costs for service providers within a given zip code.
- HIRE AND BUILD--Our proprietary matching process allows us to match
service providers who have passed our screening process with pre-qualified
job leads submitted by homeowners. We provide participating homeowners
free access, both online and offline, to one of our project advisors, who
assists them through the entire process.
- FIX AND MAINTAIN--Our online and offline information, services and support
personnel empower homeowners to continuously maintain and improve their
homes, from idea creation to project completion.
The home improvement industry is fragmented. Based upon a compilation of
industry sources, we believe there are up to 900,000 service providers in the
United States. Further, according to the United States Census Bureau, as of
September 30, 1999 there were 70.5 million owner-occupied homes out of a total
of 120 million housing units.
Our strategy is to become America's home improvement resource on the
Internet. The key elements of our strategy are:
- deliver a satisfying home improvement experience to homeowners, service
providers and suppliers;
- increase the number of jobs submitted to us and the percentage of those
jobs won by service providers in our network;
- expand our commercial contracts with suppliers of home improvement
products and services and related home services; and
- continue to build the ImproveNet brand.
3
<PAGE>
We generate revenues from our three constituents:
- service providers pay us lead fees and win fees for our matching service
that are included in service revenues;
- suppliers of home improvement products and services as well as other
advertisers pay us advertising fees for the purchase of advertising space
on our Web sites that are included in advertising revenues; and
- homeowners pay us fees for our premium home improvement services that are
included in service revenues and that to date have not been significant.
In 1999, service revenues represented approximately 55% of total revenues
and advertising revenues represented the remainder.
We have entered into multi-year commercial contracts with the following
providers of home improvement products and services and related home services:
Cendant, DuPont, General Electric Appliances, Microsoft and Owens Corning.
From inception through December 31, 1999, we had aggregate net losses of
approximately $42.0 million, and we anticipate incurring losses in the
foreseeable future.
Following this offering, our existing stockholders will own approximately
83.3% of our stock and therefore will have control over the election of
directors and all other matters submitted to stockholders for approval.
We were incorporated in California in January 1996 as Netelligence, Inc.,
changed our name to ImproveNet, Inc. in May 1996 and reincorporated in Delaware
in September 1998. Our principal executive offices are located at 720 Bay Road,
Suite 200, Redwood City, California 94063-2469. Our telephone number is
(650) 701-8000. Our consumer Internet address is WWW.IMPROVENET.COM and our
professional Internet address is WWW.IMPROVENETPRO.COM. The information found on
our Web sites is not part of this prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................... 2,760,000 shares
Common stock to be outstanding after the
offering..................................... 16,479,310 shares
Use of proceeds................................ For operating activities, including expansion
of our sales and marketing programs and field
support organization, capital expenditures and
other general corporate purposes.
Nasdaq National Market symbol.................. IMPV
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999, and
excludes:
- 1,858,067 shares subject to options outstanding as of December 31, 1999,
at a weighted average exercise price of $3.72 per share;
- 1,787,172 shares subject to warrants outstanding as of December 31, 1999,
at a weighted average exercise price of $6.67 per share;
- 1,179,356 additional shares that are available for issuance under our
stock option plans;
- 300,000 shares that we could issue under our employee stock purchase plan;
and
- 48,592 shares to be issued in connection with the acquisition of The J.L.
Price Corporation.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. $ 2 $ 60 $ 258 $ 2,065
Loss from operations........................................ (360) (1,239) (4,199) (36,768)
Net loss attributable to common stockholders................ (359) (1,328) (4,832) (36,490)
Basic and diluted net loss per common share................. $(0.73) $ (1.08) $ (3.49) $ (23.85)
Shares used in calculating basic and diluted net loss per
common share.............................................. 493 1,228 1,383 1,530
Pro forma basic and diluted net loss per common share
(unaudited)............................................... $ (4.40)
Shares used in calculating pro forma basic and diluted net
loss per common share (unaudited)......................... 8,234
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $45,291 $45,291 $84,960
Working capital............................................. 39,891 39,891 79,560
Total assets................................................ 51,542 51,542 91,211
Total stockholders' equity.................................. 43,862 43,862 83,531
</TABLE>
See Note 2 of the notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing per
share data.
The pro forma information gives effect to the conversion of all outstanding
shares of preferred stock into common stock upon the closing of this offering.
The pro forma as adjusted information is adjusted to give effect to the sale
of 2,760,000 shares of common stock in this offering at the initial public
offering price of $16.00 per share, after deducting the underwriting discounts
and commissions and offering expenses.
5
<PAGE>
RISK FACTORS
THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING OUR SHARES. ADDITIONAL RISKS
AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY SEE AS
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE LARGE ACCUMULATED LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses and used substantial cash to support our
operations as we have expanded our sales and marketing programs, funded the
development of our services, promoted our Web sites and matching service and
expanded our operations infrastructure. Our net losses were approximately
$1.2 million in 1997, $4.1 million in 1998 and $36.3 million in 1999 on revenues
of $60,000, $258,000 and approximately $2.1 million, respectively. As of
December 31, 1999, our accumulated loss was approximately $42.0 million. We
expect our expenditures on sales and marketing activities, support field
services and the development of new products, services and technologies to
continue to increase. We will continue to lose money unless we significantly
increase our revenues. We cannot predict when, if ever, we will operate
profitably.
WE ARE AN EARLY STAGE COMPANY WITH A NEW SENIOR MANAGEMENT TEAM AND WE HAVE
RECENTLY EXPANDED OUR BUSINESS TO OFFER NEW SERVICES. AS A RESULT, WE HAVE A
LIMITED HISTORY WHICH MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
We were incorporated in January 1996; however, we did not begin offering
home improvement services on the Internet until August 1997. In December 1998,
we began selling Web site advertising. Until March 1999, we focused primarily on
building our network of service providers and refining our matching services
processes. In March 1999, we hired our new chief executive officer and commenced
recruiting our senior management team, including our senior vice president,
partnership services; our senior vice president, engineering and development,
and chief technology officer; our senior vice president, professional services;
our senior vice president and chief financial officer; our vice presidential,
editorial; our vice president, strategic planning, acquisitions and
international; and our vice president, human resources. In April 1999, we
introduced Powered by ImproveNet, a service that allows third parties to offer
the ImproveNet matching services and content on their Web sites, for national
suppliers of home improvement and repair products. In November 1999, we launched
our customized Web site for service providers. We completed the acquisition of
two regional contractor referral companies, Contractor Referral Service, LLC and
The J.L. Price Corporation, in the fall of 1999. As a result, we have a limited
history upon which you can evaluate our business and the performance of our
senior management team. Furthermore, even if our business is successful, we may
change our business to enter into new business areas, including areas in which
we do not have extensive experience. Before investing, you should evaluate the
risks, expenses and problems frequently encountered by companies such as ours
that are in the early stages of development and that are entering new and
rapidly changing markets like the Internet.
6
<PAGE>
OUR FINANCIAL RESULTS WILL BE AFFECTED BY FLUCTUATIONS IN THE HOME IMPROVEMENT
INDUSTRY AND SEASONALITY.
Our limited operating history and rapid growth make it difficult to assess
the impact of seasonal factors on our business. However, our business is
dependent upon the home improvement industry. As a result, we expect that our
revenues may be lower during the first and fourth quarters since more homeowners
commit to home improvement projects during the spring and summer months.
According to the United States Department of Commerce, for quarterly periods in
1996 through 1998, average expenditures for the residential home improvement
industry were approximately 18% in the first quarter, 28% in the second quarter,
29% in the third quarter, and 25% in the fourth quarter. We are currently unable
to assess the effect of seasonality in the home improvement industry on our
business.
OUR MARKET IS BECOMING MORE COMPETITIVE AND WE MAY SUFFER PRICE REDUCTIONS, BE
UNABLE TO ATTRACT HOMEOWNERS TO OUR WEB SITE, BE UNABLE TO MAINTAIN OUR SERVICE
PROVIDER NETWORK OR ENTER INTO NEW MULTI-YEAR COMMERCIAL CONTRACTS IF WE DO NOT
COMPETE EFFECTIVELY.
The market for our services is intensely competitive, evolving and subject
to rapid technological change. To remain competitive, we must continue to
enhance and improve the ease of use, responsiveness, functionality and features
of our online and offline services in order to attract homeowners to our Web
site and maintain our service provider network. We expect the intensity of
competition to increase in the future. Increased competition may result in
changes in our pricing model, fewer homeowners visiting our Web site, service
providers leaving our network, less advertising revenue, reduced gross margins
and loss of market share, any one of which could significantly reduce our future
profitability. In addition, technological barriers to entry are relatively low.
As a result, current competitors, such as local referral businesses and online
referral companies such as ServiceMagic.com, iMandi, iCastle, repairnet,
HomesSpud, OurHouse.com, Handyman Online, Bid Express and Contractor.com and
potential competitors such as The Home Depot, Lowe's and Sears Roebuck & Company
could launch Web sites similar to ours that gain broader market acceptance based
on content, products and services. Remodel.com, recently launched by
HomeStore.com, offers a matching service.
Some of our competitors have more resources and broader and deeper customer
access than we do. In addition, many of these competitors have or can readily
obtain extensive knowledge of the home improvement industry. Our competitors may
be able to respond more quickly than we can to new technologies or changes in
Internet user preferences and devote greater resources than we can to the
development, promotion and sale of their services. We may not be able to
maintain our competitive position against current and future competitors,
especially those with significantly greater resources, especially offline home
improvement retail store chains such as The Home Depot, Lowe's and Sears Roebuck
& Company.
OUR FAILURE TO DEVELOP BRAND RECOGNITION COULD LIMIT OR REDUCE THE DEMAND FOR
OUR SERVICES AND RESULT IN A COMPLETE LOSS OF THE ANTICIPATED BENEFITS FROM
SIGNIFICANT MARKETING EXPENDITURES.
We believe that continuing to strengthen our brand will be critical to
increasing demand for, and achieving widespread acceptance of, our matching
services, generating additional homeowner traffic, and entering into new
multi-year commercial contracts. Some of our competitors and potential
competitors have better name recognition and powerful brands. Promoting and
positioning our brand will depend largely on the success of our marketing
efforts, our ability to deliver features on our Web site that are engaging to
our users, and our ability to provide high quality matching services and
support. To promote our brand, we will need to increase our marketing budget and
otherwise increase our financial commitment to creating and maintaining brand
loyalty among users. We expect to spend between $25 million and $35 million in
2000 on sales and marketing programs and we expect our marketing expenditures to
increase in the future. Brand promotion activities may not yield increased
7
<PAGE>
homeowner traffic, additional multi-year commercial contracts or increased
revenues and, even if they do, any increased revenues may not offset the
expenses we incur in building and maintaining our brand. If we fail to develop
sufficient brand recognition, our ability to generate advertising revenues and
service revenues may be harmed.
IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL AND DEVELOP OUR
SERVICES COULD BE HARMED.
Our growth has placed and will continue to place a significant strain on our
management systems and resources, and we may be unable to effectively manage our
growth in the future. We must plan and manage our growth effectively to offer
our services and achieve revenue growth and profitability in a rapidly evolving
market. We continue to increase the scope of our operations and have added a
number of employees recently, including employees in key management and sales
positions. We grew from 16 employees as of December 31, 1997 to 198 as of
December 31, 1999. For us to effectively manage our growth, we must continue to:
- improve our operational, financial and management systems and controls;
- install new management and information systems and controls;
- locate additional office space in a number of geographic locations; and
- hire, train and motivate our workforce.
Failure to manage our growth effectively would hinder our ability to
develop, market and sell our services and therefore harm our business.
IF WE DO NOT ATTRACT AND RETAIN A NETWORK OF HIGH QUALITY SERVICE PROVIDERS, OUR
BUSINESS COULD BE HARMED.
We expect to derive the majority of our revenues from our network of service
providers in the form of payments for each homeowner referral that we provide to
them and for each home improvement project that they win. In 1999, we derived
approximately 55% of our total revenues from our network of service providers in
the form of lead fees and win fees. Our business is highly dependent on
homeowners' use of our Web site to find service providers for their home
improvement projects so that service providers will achieve a satisfactory
return on their participation in the ImproveNet program.
A key element of the growth of our business is the pace at which service
providers adopt the ImproveNet matching process. This adoption includes
responding to homeowner inquiries within 72 hours, providing a competitive, firm
quote to homeowners quickly, and paying the service fees to ImproveNet. We
devote significant effort and resources to screening and supporting
participating service providers and to developing programs that monitor service
providers' job wins and that collect service fees from service providers for
these wins. Our inability to screen and support service providers effectively,
or the failure of our service providers to respond professionally and in a
timely manner to homeowner inquiries, could result in low homeowner satisfaction
and harm our business. In addition, the failure of our service providers to win
home improvement projects, report their wins to us, or pay us service fees could
harm our business.
We must actively recruit new service providers and retain and motivate our
current service providers to ensure that we continually have adequate national
coverage. We believe that service providers in the home improvement industry
suffer from a relatively high failure or turnover rate which makes it difficult
for us to retain service providers. Accordingly, we expect that not all of our
service providers will remain active participants in our network. If we are
unable to achieve low turnover among our network of service providers our
business could be harmed.
8
<PAGE>
IF HOMEOWNERS FAIL TO REPORT, AND SERVICE PROVIDERS FAIL TO REPORT AND TO PAY TO
US WIN FEES, DIRECTLY OR INDIRECTLY, OUR BUSINESS WOULD BE HARMED.
Our service providers are responsible for paying us a win fee for each job
that they obtain from us. We ask service providers not to pass on the cost of
the win fee to the homeowner. However, we do not currently provide any guarantee
to the homeowner that our service providers have not raised their rates to cover
the win fee nor do we audit or plan to audit our service providers to confirm
that they have not raised their rates. Homeowners may believe that they are
indirectly paying us our win fee through the higher rates of service providers
and, therefore, choose to select service providers through word-of-mouth
referrals, Yellow Pages, local contractor matching services or other means
rather than using our matching service. If homeowners choose not to use our
service, we will lose service revenues and visitors to our Web sites and our
business will be harmed.
We depend on our service providers to report that they have won a job and
pay us our win fee. We rely on personal relationships with our service providers
and the incentive to receive future leads from us to encourage service providers
to report wins and pay win fees. Currently, we do not have a control or an
oversight mechanism in place with either service providers or homeowners to
ensure that they report wins and pay win fees. If service providers do not
report wins or pay us win fees, we will lose service revenues and our business
will be harmed.
WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO ATTRACT VISITORS TO OUR WEB SITES.
We have recently entered into multi-year commercial contracts with suppliers
of home improvement products and services to generate revenues and increase the
number of visitors to our Web sites. Under these contracts, suppliers have
placed links to our Web site from their Web sites to allow their customers to
visit our Web site if the customers are interested in obtaining home improvement
information or searching for a service provider. We believe that increasing the
number of visitors to our Web sites will increase the number of job submissions.
We cannot assure you that these contracts will lead to increased visits to our
Web sites or that increased visits to our Web sites will result in increased job
submissions. If we do not maintain our existing multi-year commercial contracts
on terms as favorable as currently in effect or if we are not able to establish
new contracts on commercially reasonable terms, our business could be harmed.
In 1999, we did not derive any revenue that could be recognized on a gross
basis, directly or indirectly, from our multi-year commercial contracts with
suppliers of home improvement products and services nor did we receive any
significant increased traffic from these contracts. Companies that we may pursue
for a multi-year commercial contract may offer services competitive with
suppliers with which we currently have multi-year contracts. As a result, these
suppliers may be reluctant to enter into multi-year contracts with us.
We purchase preferential advertising placement on high-traffic Web sites. We
believe these Web sites can help us to increase the number of visitors to
ImproveNet.com. For example, in 1999 approximately 19% of our Web site traffic
originated from AltaVista, America Online, Excite@Home, Lycos, Microsoft
HomeAdvisor, Quicken.com and Yahoo! In 1999, we spent approximately 14% of our
sales and marketing expenses on direct advertising on these Web sites. There is
intense competition for preferential placements on these Web sites. If we lose
our relationships with any one of these Web sites, the traffic on ImproveNet.com
may decrease and we may not be able to enter into commercially reasonable
contracts with replacement high-traffic Web sites, if at all.
WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO PROVIDE SOFTWARE TOOLS AND
INFRASTRUCTURE.
We integrate third-party software into our service offerings on our Web
sites. We would be harmed if the providers from which we license software ceased
to deliver and support reliable products, to enhance their current products, or
to respond to emerging industry standards. In addition, third-party
9
<PAGE>
software may not continue to be available to us on commercially reasonable terms
or at all. The loss of, or inability to maintain or obtain, this software could
limit the features available on our Web sites, which could harm our business.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO COMPETE
COULD BE HARMED.
We depend on the continued service of our key technical, sales and senior
management personnel. In particular, the loss of the services of Ronald B.
Cooper, our President and Chief Executive Officer, or other senior management
personnel, individually or as a group, could cause us to incur increased
operating expenses and divert other senior management time in searching for
their replacements. We do not have employment agreements with any employee,
except Mr. Cooper, and we do not maintain any key person life insurance policies
for any of our key employees, except for Mr. Cooper and Robert L. Stevens, our
Chairman of the Board. The loss of any of our key technical, sales or senior
management personnel could harm our business.
In addition, we must attract, retain and motivate highly skilled employees.
We face significant competition for individuals with the skills required to
develop, market and support our services. We may not be able to recruit and
retain sufficient numbers of highly skilled employees, and as a result our
business could suffer.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE COULD LOSE THESE
RIGHTS AND OUR BUSINESS COULD BE HARMED.
We depend upon our ability to develop and protect our intellectual property
rights, including our databases of homeowners and service providers and our
internally-developed matching criteria and algorithms, to distinguish our
services from our competitors' services. We rely on a combination of copyright,
trademark and trade secret laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary rights. We have
no issued patents. Our databases are protected by trade secret laws and our
matching service is protected primarily by trade secret and copyright laws.
Existing laws afford only limited protection of intellectual property rights.
Attempts could be made to copy or reverse engineer aspects of our processes or
services or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to protect our intellectual property rights
against unauthorized third-party copying or use. Furthermore, policing the
unauthorized use of our intellectual property is difficult, and expensive
litigation may be necessary in the future to enforce our intellectual property
rights. The use by others of our proprietary rights could harm our business.
OUR SERVICES COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS CAUSING
COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
Third parties could claim that we have infringed their intellectual property
rights by claiming that our matching service infringes their patents, trade
secrets or copyrights. In the ordinary course of business, we have received, and
may receive in the future, notices from third parties claiming infringement of
their proprietary rights. In addition, providers of goods and services over the
Internet are increasingly subject to claims that they infringe patents that
cover basic elements of electronic commerce. The resolution of any claims could
be time-consuming, result in costly litigation, delay or prevent us from
offering our services or require us to enter into royalty or licensing
agreements, any of which could harm our business. In the event an infringement
claim against us is successful and we cannot obtain a license on acceptable
terms, license a substitute technology or redesign our services, our business
would be harmed. Furthermore, former employers of our current and future
employees may assert that our employees have improperly disclosed to us or are
using confidential or proprietary information in our business.
10
<PAGE>
IF WE EXPERIENCE SYSTEM FAILURES, OUR REPUTATION WOULD BE HARMED AND USERS MIGHT
SEEK ALTERNATIVE SERVICE PROVIDERS, CAUSING US TO LOSE REVENUES.
We depend on the efficient and uninterrupted operation of our computer and
communications hardware and software systems. Substantially all of our computer
hardware for operating our Web sites is currently located at Exodus
Communications in Santa Clara, California, with backups located at our facility
in Redwood City, California. These systems and operations are vulnerable to
damage or interruption from earthquakes, floods, fires, power loss,
telecommunication failures and similar events. They are also subject to
break-ins, sabotage, intentional acts of vandalism and similar misconduct. We do
not have fully redundant systems, a formal disaster recovery plan or alternative
providers of hosting services, and we do not carry business interruption
insurance to compensate us for losses that could occur. Despite any precautions
we may take, the occurrence of a natural disaster or other unanticipated
problems either at Exodus or at our facility could result in interruptions in
our services. Any damage to or failure of our systems could result in
interruptions in our service. In addition to placing an increased burden on our
engineering staff, any system failure could create user questions and complaints
that must be responded to by our customer support personnel. The system failures
of various third-party Internet service providers, online service providers and
other Web site operators could result in interruptions in our service to those
users who require the services of these third-party providers and operators to
access our Web sites. These interruptions could reduce our revenues and profits,
and our future revenues and profits will be harmed if our users believe that our
system is unreliable. Since we have been keeping logs of our Web sites, our
ImproveNet.com Web site has been unintentionally interrupted for periods ranging
from two minutes to one hour. On one occasion, some users experienced
interruptions in part of our service for a period of 48 hours.
WE MAY HAVE CAPACITY RESTRAINTS THAT COULD LIMIT THE GROWTH OF OR REDUCE OUR
REVENUES.
The satisfactory performance, reliability and availability of our Web sites,
processing systems and network infrastructure are critical to our reputation and
our ability to attract and retain large numbers of users. If the volume of
traffic, including at peak times, on our Web sites increases, we will need to
expand and upgrade our technology, transaction processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
these increases, if any, in the use of our services or to expand or upgrade our
systems and infrastructure in a timely manner to accommodate these increases.
We use internally developed systems for operating our services and
processing our transactions, including billing and collections processing. We
must continually improve these systems in order to accommodate the level of use
of our Web sites. In addition, if we add new features and functionality to our
services, we could be required to develop or license additional technologies.
Our inability to add additional software and hardware or upgrade our technology,
transaction processing systems or network infrastructure could cause
unanticipated system disruptions, slower response times, degradation in levels
of customer support, impaired quality of the users' experience, delays in
accounts receivable collection or losses of recorded financial information. Our
failure to provide new features or functionality also could result in these
consequences. The required hardware may not be readily available or affordable
and we may be unable to effectively upgrade and/or expand our systems in a
timely manner or to integrate smoothly any newly developed or purchased
technologies with our existing systems. These difficulties could harm or limit
our ability to expand our business.
11
<PAGE>
RISKS RELATED TO OUR INDUSTRY
HOMEOWNERS AND SERVICE PROVIDERS MAY BE RELUCTANT TO ACCEPT AN INTERNET-BASED
SERVICE PROVIDER MATCHING SERVICE.
Currently most homeowners use traditional means including word-of-mouth
referrals, Yellow Pages and local contractor matching services to obtain service
providers for their home improvement projects. In addition, many service
providers do not use the Internet for business purposes and may be reluctant to
become part of a network of service providers on an Internet-based service
provider matching service. If homeowners do not use our matching service or
service providers do not join our network, we will not be able to generate
significant revenues from either services or advertising, or be able to enter
into new multi-year commercial contracts.
IF THE HOME IMPROVEMENT INDUSTRY DECLINES, OUR REVENUES COULD DECLINE AND OUR
BUSINESS COULD BE HARMED.
Our business is dependent on the economic strength of the home improvement
industry. The home improvement industry is cyclical, with the number of home
improvement projects affected by national and global economic forces, primarily
fluctuations in interest rates and employment levels. We believe that our future
performance will be affected by the cyclical nature of the home improvement
industry and, as a result, be adversely affected from time to time by industry
downturns.
WE COULD BE HELD LIABLE FOR PRODUCTS AND SERVICES REFERRED BY MEANS OF OUR WEB
SITE.
We could be subject to claims relating to products and services that we
refer through our Web site. Homeowners may bring claims against us for referring
service providers who may have, among other things, provided them with poor
workmanship or caused bodily injury or damage to property. Our existing
insurance coverage may not cover all potential claims, may not adequately cover
all costs incurred in defense of potential claims, may not indemnify us for all
liability that may be imposed or may not be renewable in future periods or
renewable on terms and conditions satisfactory to us. In addition, claims, with
or without merit, would result in diversion of our financial resources and
management resources.
WE DEPEND ON THE INCREASING USE OF THE INTERNET. IF THE USE OF THE INTERNET DOES
NOT GROW, OUR REVENUES MAY NOT GROW AND COULD DECLINE AND OUR BUSINESS COULD BE
HARMED.
We depend on increased acceptance and use of the Internet. In particular,
our matching service depends upon service providers being willing to use the
Internet to find jobs through our service. We believe that service providers
generally have not traditionally used computers or the Internet to operate their
businesses. Demand and market acceptance for recently introduced products and
services over the Internet are subject to a high level of uncertainty. As a
result, acceptance and use of the Internet may not develop or a sufficiently
broad base of users may not adopt or continue to use the Internet as a medium of
commerce.
THE INTERNET IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES, FREQUENT NEW
PRODUCT AND SERVICE INTRODUCTIONS AND EVOLVING INDUSTRY STANDARDS.
To succeed, we will need to adapt effectively to rapidly changing
technologies and continually improve the performance features and reliability of
our services. We could incur substantial costs in modifying our products,
services or infrastructure to adapt to these changes, and we may also lose
customers and revenues if our services fail to adapt to the rapid changes
characteristic of the Internet.
Conversely, if the Internet experiences increased growth in number of users,
frequency of use and bandwidth requirements, the Internet infrastructure may be
unable to support the demands placed on
12
<PAGE>
it. The success of our business will rely on the Internet providing a convenient
means of interaction and commerce. Our business depends on the ability of users
to access information without significant delays or aggravation.
FUTURE GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES PERTAINING TO THE INTERNET
COULD DECREASE THE DEMAND FOR OUR SERVICES OR INCREASE THE COST OF DOING
BUSINESS.
There is, and will likely continue to be, an increasing number of laws and
regulations pertaining to the Internet. These laws and regulations may relate to
liability for information retrieved from or transmitted over the Internet,
online content, user privacy, taxes or the quality of services. Any new law or
regulation pertaining to the Internet, or the adverse application or
interpretation of existing laws, could decrease the demand for our services or
increase our cost of doing business.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws was adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues created by the Internet and related technologies. Changes in
laws intended to address these issues could create uncertainty for or adversely
affect companies doing business on the Internet. This could reduce demand for
our services or increase the cost of doing business.
LEGISLATIVE AND REGULATORY INITIATIVES REGARDING THE COLLECTION AND USE OF OUR
USERS' PERSONAL INFORMATION MAY RESULT IN LIABILITY AND EXPENSES.
Current computing and Internet technology allows us to collect personal
information about our users. In the past, the Federal Trade Commission has
investigated companies that have sold personal information to third parties
without permission or in violation of a stated privacy policy. Currently, we
collect personal information only with the user's consent and under our privacy
policy. If we begin collecting or selling personal information without
permission or in violation of our privacy policy, we could face potential
liability for compiling and providing information to third parties.
THE IMPOSITION OF ADDITIONAL STATE AND LOCAL TAXES ON INTERNET-BASED
TRANSACTIONS WOULD INCREASE OUR COST OF DOING BUSINESS AND HARM OUR ABILITY TO
BECOME PROFITABLE.
We file state tax returns as required by law based on principles applicable
to traditional businesses. However, one or more states could seek to impose
additional income tax obligations or sales and use tax collection obligations on
out-of-state companies such as ours that engage in or facilitate Internet-based
commerce. A number of proposals have been made at state and local levels that
could impose taxes on the sale of products and services through the Internet or
the income derived from those sales. These proposals, if adopted, could
substantially impair the growth of Internet-based commerce and harm our ability
to become profitable.
United States federal law limits the ability of the states to impose taxes
on Internet-based transactions. Until October 21, 2001, state and local taxes on
Internet-based commerce that are discriminatory against Internet access are
prohibited, unless the taxes were generally imposed and actually enforced before
October 1, 1998. It is possible that this tax moratorium will not be renewed by
October 21, 2001 or at all. Failure to renew this legislation would allow
various states to impose taxes on Internet-based commerce. The imposition of
state and local taxes could harm our ability to become profitable.
13
<PAGE>
RISKS RELATED TO OUR OFFERING
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR STOCKHOLDERS COULD DEPRESS OUR
STOCK PRICE.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
would likely fall. Based on shares outstanding as of December 31, 1999, upon
completion of this offering, we will have outstanding 16,479,310 shares of
common stock. Upon completion of this offering, 2,805,000 shares of common
stock, including all of the shares being sold in this offering, will be eligible
for immediate sale in the public market, unless purchased by our affiliates.
Substantially all of our stockholders will be subject to agreements with the
underwriters that restrict their ability to transfer their stock for 180 days
after the date of this prospectus without the prior written consent of Credit
Suisse First Boston Corporation. However, Credit Suisse First Boston Corporation
may, in its sole discretion, release all or any portion of the common stock from
the restrictions of these agreements. After these agreements expire, an
additional 8,197,728 shares will be eligible for sale in the public market.
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS AND SERVICES COULD
REDUCE OUR ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.
We expect that the net proceeds from this offering, together with currently
available funds, will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. If we are unable to generate
sufficient cash flows from operations to meet our anticipated needs for working
capital and capital expenditures, we will need to raise additional funds after
12 months to fund brand promotions, develop new or enhanced services or respond
to competitive pressures. We cannot be certain that we will be able to obtain
additional financing on favorable terms, or at all. If we need additional
capital and cannot raise it on acceptable terms, we may not be able, among other
things, to:
- develop or enhance our services;
- develop or acquire new technologies, products or businesses;
- expand operations in the United States or internationally;
- hire, train and retain employees; or
- respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and
could harm our business.
In addition, we may seek to raise additional funds, finance acquisitions or
develop commercial relationships by issuing equity or convertible debt
securities, which would reduce the percentage ownership of existing
stockholders. Furthermore, any new securities could have rights, preferences or
privileges senior to those of our common stock.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $10.98 per share of common
stock in net tangible book value, based on the initial public offering price of
$16.00 per share. In addition, we have issued options and warrants to acquire
common stock at prices significantly below the initial public offering price. To
the extent outstanding options or warrants are ultimately exercised, there will
be further dilution to investors in this offering.
14
<PAGE>
OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF FACTORS BEYOND OUR CONTROL, AND YOU
MAY LOSE ALL OR A PART OF YOUR INVESTMENT.
The market prices of stock for Internet and other technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the past or present operating performance of those
companies. These market prices may not be sustainable and may be subject to wide
variations. Following this offering, the market price of our common stock may
experience a substantial decline. The market price of our common stock may
fluctuate significantly in response to a number of factors, most of which are
beyond our control, including:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial performance;
- the discussion of our company or stock price in online investor
communities such as chat rooms;
- changes in market valuations of similar companies;
- announcements by us or our competitors of significant contracts, new
technologies, acquisitions, commercial relationships, joint ventures or
capital commitments;
- loss of a major customer or failure to complete significant commercial
contracts;
- additions to or subtraction from our service provider network;
- additions or departures of key personnel; and
- fluctuations in stock market prices and volumes, particularly among
securities of Internet-based companies.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of litigation of this type. Securities litigation could result in
substantial costs and divert management's attention and resources, and could
harm our business.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD DISCOURAGE OR PREVENT A
TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL IN THE OPINION OF OUR
STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation and
bylaws could make it more difficult for a third party to acquire us, even if
doing so would be beneficial in the opinion of our stockholders. These
provisions include:
- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- prohibiting cumulative voting in the election of directors, which would
allow less than a majority of stockholders to elect director candidates;
- limiting the ability of stockholders to call special meetings of
stockholders;
- prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
15
<PAGE>
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, section 203 of the Delaware General Corporation Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of ImproveNet.
EXISTING STOCKHOLDERS SIGNIFICANTLY INFLUENCE US AND COULD PREVENT NEW INVESTORS
FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Upon completion of this offering, our executive officers, directors,
principal stockholders and their affiliates will beneficially own, in the
aggregate, approximately 64.6% of our outstanding common stock. In addition,
following this offering, our existing stockholders will own approximately 83.3%
of our stock. As a result, these stockholders will be able to control all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, which could delay or prevent a
change of control of ImproveNet and will make some transactions difficult or
impossible without the support of these stockholders.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks outlined under "Risk Factors," that may cause our, or our industry's,
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results, unless
required by law.
17
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of 2,760,000 shares of
common stock in this offering will be approximately $39.7 million, approximately
$45.8 million if the underwriters' over-allotment option is exercised in full,
at the initial public offering price of $16.00 per share, after deducting the
underwriting discounts and commissions and offering expenses.
We intend to use the net proceeds from this offering for operating
activities, including approximately $18 million to expand our sales and
marketing programs, approximately $5 million to expand our field support
organization, approximately $3.5 million for capital expenditures and the
balance for other general corporate purposes, including general and
administrative operations and potential acquisitions. Our management will retain
broad discretion in the allocation of the net proceeds of this offering. The
amounts we actually spend will depend on a number of factors, including the
amount of our future revenues and other factors described elsewhere in this
prospectus. We may also use a portion of the net proceeds to invest in
additional businesses, business development, products and technologies, or to
establish joint ventures that we believe will complement our current or future
business. However, we have no specific plans, agreements or commitments to do so
and are not currently engaged in any negotiations for any acquisition or joint
venture. Pending these uses, we will invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends. We currently expect to
retain earnings for use in the operation and expansion of our business, and
therefore do not anticipate paying any cash dividends for the foreseeable
future.
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<PAGE>
CAPITALIZATION
The table below presents the following information:
- our actual capitalization as of December 31, 1999;
- our pro forma capitalization giving effect to the conversion of all
outstanding shares of preferred stock into common stock upon the closing
of this offering; and
- our pro forma as adjusted capitalization reflecting the sale of 2,760,000
shares of common stock in this offering at the initial public offering
price of $16.00 per share, after deducting the underwriting discounts and
commissions and offering expenses.
The number of shares outstanding excludes the following shares:
- 1,858,067 shares of common stock subject to options outstanding as of
December 31, 1999, at a weighted average exercise price of $3.72 per
share;
- 1,787,172 shares subject to warrants outstanding as of December 31, 1999,
at a weighted average exercise price of $6.67 per share;
- 1,179,356 additional shares of common stock that are available for
issuance under our stock option plans;
- 300,000 shares of common stock that we could issue under our employee
stock purchase plan; and
- 48,592 shares of common stock to be issued in connection with the
acquisition of The J.L. Price Corporation.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
ACTUAL (UNAUDITED) (UNAUDITED)
-------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Long-term liabilities....................................... $ 116 $ 116 $ 116
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 12,482,935
shares authorized and 11,382,694 shares issued and
outstanding, actual; 12,482,935 shares authorized and no
shares issued and outstanding, pro forma; 5,000,000
shares authorized and no shares issued and outstanding,
pro forma as adjusted................................... 12 -- --
Common stock, $0.001 par value; 34,000,000 shares
authorized and 2,336,616 shares issued and outstanding,
actual; 34,000,000 shares authorized and 13,719,310
shares issued and outstanding, pro forma; 100,000,000
shares authorized and 16,479,310 shares issued and
outstanding, pro forma as adjusted...................... 2 14 17
Additional paid-in capital................................ 108,656 108,656 148,322
Notes receivable from stockholders........................ (633) (633) (633)
Unearned stock-based compensation......................... (22,208) (22,208) (22,208)
Accumulated deficit....................................... (41,967) (41,967) (41,967)
-------- -------- --------
Total stockholders' equity.............................. 43,862 43,862 83,531
-------- -------- --------
Total capitalization.................................. $ 43,978 $ 43,978 $ 83,647
======== ======== ========
</TABLE>
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<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $43.1 million, or approximately $3.14 per share. Net tangible book
value per share represents the amount of our total tangible assets less total
liabilities divided by the number of shares of common stock outstanding after
giving effect to the conversion of all outstanding shares of preferred stock
into shares of common stock upon completion of this offering.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by new investors purchasing shares of common
stock in this offering and the net tangible book value per share immediately
after completion of this offering. Our net tangible book value as of
December 31, 1999 would have been approximately $82.8 million or $5.02 per
share, after giving effect to the sale of 2,760,000 shares of our common stock
in this offering at the initial public offering price of $16.00 per share and
after deducting the underwriting discounts and commissions and offering
expenses. This amount represents an immediate increase in net tangible book
value of $1.88 per share to existing stockholders and an immediate dilution in
net tangible book value of $10.98 per share to new investors purchasing shares
of common stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $16.00
Pro forma net tangible book value per share as of December
31, 1999................................................ $ 3.14
Increase per share attributable to new investors.......... 1.88
------
Pro forma net tangible book value per share after this
offering.................................................. 5.02
------
Dilution per share to new investors......................... $10.98
======
</TABLE>
The following table summarizes, on the pro forma basis described above, as
of December 31, 1999, the differences between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by existing stockholders and by new investors purchasing shares in
this offering. We used the initial public offering price of $16.00 per share,
before deducting the underwriting discounts and commissions and offering
expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 13,719,310 83% $ 81,722,638 65% $ 5.96
New investors........................... 2,760,000 17 44,160,000 35 16.00
---------- --- ------------ ---
Total............................... 16,479,310 100% $125,882,638 100%
========== === ============ ===
</TABLE>
As of December 31, 1999, there were outstanding options to purchase a total
of 1,858,067 shares of common stock at a weighted average exercise price of
$3.72 per share. After December 31, 1999, we issued options to purchase 260,600
shares of common stock at a weighted average exercise price of $13.56 per share.
As of December 31, 1999, there were outstanding warrants to purchase a total of
1,787,172 shares at a weighted average exercise price of $6.67 per share. To the
extent these outstanding options or warrants are exercised, there will be
further dilution to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the three years in the period ended December 31, 1999 and
the consolidated balance sheet data as of December 31, 1998 and 1999 are derived
from the audited consolidated financial statements included elsewhere in this
prospectus. The consolidated statement of operations data for the year ended
December 31, 1996 and the consolidated balance sheet data as of December 31,
1996 and 1997 are derived from audited consolidated financial statements not
included in this prospectus. Historical results are not necessarily indicative
of results to be expected for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenues.......................................... $ 2 $ 60 $ 238 $ 1,139
Advertising revenues...................................... -- -- 20 926
------ ------- ------- --------
Total revenues.......................................... 2 60 258 2,065
Cost of revenues:
Cost of service revenues (excludes stock-based
compensation of $0, $0, $55 and $610)................... 8 59 767 1,984
Cost of advertising revenues (excludes stock-based
compensation of $0, $0, $37 and $189)................... -- -- 49 567
------ ------- ------- --------
Total cost of revenues.................................. 8 59 816 2,551
------ ------- ------- --------
Gross profit (loss)......................................... (6) 1 (558) (486)
Operating expenses:
Sales and marketing (excludes stock-based compensation of
$0, $0, $155 and $2,608)................................ 38 414 1,669 25,784
Product development (excludes stock-based compensation of
$0, $0, $14 and $88).................................... 65 288 504 665
General and administrative (excludes stock-based
compensation of $0, $11, $65 and $2,124)................ 251 527 1,142 4,214
Stock-based compensation.................................. -- 11 326 5,619
------ ------- ------- --------
Total operating expenses................................ 354 1,240 3,641 36,282
------ ------- ------- --------
Loss from operations........................................ (360) (1,239) (4,199) (36,768)
Interest and other income (expense), net.................... 1 (3) 84 517
------ ------- ------- --------
Net loss.................................................... (359) (1,242) (4,115) (36,251)
Accretion of mandatorily redeemable convertible preferred
stock..................................................... -- (86) (717) (239)
------ ------- ------- --------
Net loss attributable to common stockholders.............. $ (359) $(1,328) $(4,832) $(36,490)
====== ======= ======= ========
Basic and diluted net loss per common share................. $(0.73) $ (1.08) $ (3.49) $ (23.85)
====== ======= ======= ========
Shares used in calculating basic and diluted net loss per
common share.............................................. 493 1,228 1,383 1,530
====== ======= ======= ========
Pro forma basic and diluted net loss per common share
(unaudited)............................................... $ (4.40)
========
Shares used in calculating pro forma basic and diluted net
loss per share (unaudited)................................ 8,234
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 20 $ 345 $ 1,676 $45,291
Working capital (deficit)................................... (11) (79) 697 39,891
Total assets................................................ 71 472 2,144 51,542
Long-term liabilities and mandatorily redeemable convertible
preferred stock........................................... -- 1,252 6,843 116
Total stockholders' equity (deficit)........................ 40 (1,210) (5,714) 43,862
</TABLE>
See Note 2 of the notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing per
share data.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our business started in January 1996 as a regional contractor matching
service, and we spent most of 1996 and 1997 building our service provider
database, developing new services and technology, recruiting personnel and
raising capital. We launched our Web site and homeowner/service provider
matching service on a national scale in August 1997. In December 1998, we began
selling Web site advertising, including SmartLeads services, a way for suppliers
of home improvement products to send targeted messages about their products,
including product promotions, to homeowners at the time of purchase and to our
network of service providers. In March 1999, we hired our new chief executive
officer and commenced recruiting our senior management team, including our
senior vice president, partnership services; our senior vice president,
engineering and development, and chief technology officer; our senior vice
president, professional services; our senior vice president and chief financial
officer; our vice president, editorial; our vice president, strategic planning,
acquisitions and international; and our vice president, human resources. In
April 1999, we introduced Powered by ImproveNet, a service that allows third
parties to offer the ImproveNet matching services and content on their Web
sites, for national suppliers of home improvement and repair products. We also
expanded the focus of our business model, accelerated our time horizons for
increasing traffic on our Web sites and establishing multi-year commercial
contracts with suppliers of home improvement products and related services. In
November 1999, we launched our customized Web site for service providers. We
completed the acquisition of two regional contractor referral companies,
Contractor Referral Service, LLC and The J.L. Price Corporation, in the fall of
1999. We expect these acquisitions will help us build our base of service
providers and establish new products and services for United States residential
real estate brokers. As a result, we have a limited operating history upon which
you can evaluate our business and the performance of our senior management team.
REVENUES
We generate substantially all of our revenues from service provider referral
services and advertising placed on our Web site. From our inception in January
1996 through 1998, 94% of our total revenues were service revenues and 6% were
advertising revenues. For 1999, 55% of our total revenues were service revenues
and 45% were advertising revenues.
SERVICE REVENUES
We generate service revenues primarily in the form of lead fees and win fees
from our service providers and, to a much lesser extent, in the form of
enrollment fees from service providers and premium service fees from homeowners.
For 1999, lead fees, win fees, enrollment fees and premium service fees
represented 32%, 63%, 4% and 1% of total service revenues. From inception
through October 1999, we charged to our service providers lead fees ranging from
$6 to $10 per lead. In November 1999, we standardized our lead fees at $10 per
lead for all jobs. The win fees that we charge to our service providers depend
on project size and range from 2% to 10% of the estimated cost of the job, up to
a maximum of $995 per job. We charge each new service provider who passes our
quality screens an enrollment fee of $90 to join our national network; however,
in the past we have often discounted or waived this fee. Our revenue from
premium service fees, consisting of fees charged to homeowners for bid and
contract assessment services and legal/credit reports on contractors outside the
ImproveNet database, has also been negligible.
Lead fee revenues are recognized at the time the service providers and the
homeowner are first matched, while win fee revenues are recognized at the time
the service provider or the homeowner
22
<PAGE>
notifies us that a job has been sold. For both lead fees and win fees, the
recognition of revenues coincides with the service providers' obligation to pay
us.
The revenues we generate from lead and win fees are largely a function of:
- the number of job submissions;
- the effectiveness in finding a service provider or match for each job
submission;
- the success of the service provider to win a job; and
- the amount we charge the service provider for a lead or a win.
In 1999, we received approximately 106,500 job submissions, of which we
matched approximately 37,500 or 35.2% with service providers who were interested
in bidding on the job. Our match rates increased sequentially in 1999, except in
the second quarter, and our win rates have increased sequentially from quarter
to quarter. We believe that this trend will continue for the forseeable future
as we expand our sales and marketing programs, attract more service providers
into our network and improve the efficiency of the matching and bidding process.
In 1999, our service providers won approximately 3,350 jobs or 8.9% of all
matched jobs and 3.1% of all jobs submitted.
Revenues from new service provider enrollment fees are recognized as revenue
ratably over the expected period they participate in our contractor matching
service, which is initially estimated to be between one and two years. Revenues
from premium service fees to homeowners are recognized at the time the service
is provided. We generally will refund the lead fee charged if a job is cancelled
or the homeowner cannot be reasonably contacted. We will refund a portion of the
initial enrollment fee collected in the event that the service provider does not
pass the ImproveNet screening process. We do not refund win or premium service
fees.
We establish refund reserves and allowances for bad debts at the time the
revenues are recognized. To date, the amounts of these reserves and allowances
have not been significant.
We anticipate that the mix and source of our revenues will change over time.
In the future, we anticipate that service revenues will increase at a greater
rate than advertising revenues as the anticipated number of job submissions
increases, as we attract additional homeowners through our multi-year commercial
contracts and as we expand our network of service providers. We do not expect
enrollment fees to be a significant source of service revenues in the future.
ADVERTISING REVENUES
We generate advertising revenues from the sale of banner, button and other
advertising on our Web sites, and from the sale to suppliers of SmartLeads
generated from the traffic of homeowners visiting our Web sites. Our advertising
revenues generally come from service providers and suppliers of home improvement
products. We first recognized revenues from banner and other advertising in
December 1998, from button advertising in April 1999 and from the sale of
SmartLeads services in December 1998.
Advertisers pay us to display their banner, button and other advertisements
on the Web pages we serve when a user is visiting our Web sites. Our advertising
revenues historically have been derived from short-term advertising contracts
based on either a guaranteed minimum number of impressions or a fixed fee per
thousand impressions. Revenues from banner, button and other advertising are
largely a function of:
- the number of Web pages that we serve;
- the percentage of those pages on which we are able to sell advertisements;
and
- the amount we charge per advertisement.
23
<PAGE>
Currently advertising revenues are comprised of:
- Advertising paid for in cash; and
- Advertising paid for by way of barter.
CASH ADVERTISING. Cash advertising revenues generally are derived from
short-term advertising contracts in which we typically guarantee that a minimum
number of impressions will be delivered to our Web site visitors over a
specified period of time for a fixed fee. Cash advertising revenues from banner,
button and other Web site advertisements are recognized at the lesser of the
amount recorded ratably over the period in which the advertising is delivered or
the percentage of guaranteed impressions delivered. SmartLeads are also paid for
in cash and revenues are recognized when the SmartLeads have been delivered to
the customer. Cash advertising is recognized when we have delivered the
advertising, evidence of an agreement is in place and fees are fixed,
determinable and collectible. In 1999, cash advertising totaled $746,000 and
accounted for approximately 36% of our total revenues.
BARTER ADVERTISING. Barter advertising comes from two distinct contractual
sources: short-term barter advertising similar in nature to our cash advertising
contracts and multi-year commercial contracts. Barter advertising is recognized
in accordance with EITF No. 99-17, "Accounting for Advertising Barter
Transactions", which we adopted in 1999. Under EITF No. 99-17, we record
advertising transactions at fair value only when we have an established
historical practice of selling similar advertising for cash. The characteristics
of the advertising that must be similar include the duration of the display of
the advertising, the prominence and positioning of the advertising, the intended
audience, the timing of the advertising and its circulation.
SHORT-TERM BARTER ADVERTISING. Short-term barter advertising results
from the exchange of advertising space on our Web site for reciprocal
advertising space on Web sites of third parties. Advertising revenues and sales
and marketing expenses arising from these transactions are recorded at fair
value as we have an established historical practice of receiving cash for
similar short-term advertising. We recorded no short-term barter advertising
revenue in 1997 and 1998. In 1999, we began to engage in short-term barter
advertising and recorded revenues of $180,000 in the year. Short-term barter
advertising represented approximately 9% of our total revenues for 1999. Sales
and marketing expenses arising from these barter transactions are recognized
when the advertisments are delivered on the reciprocal Web site, which is
typically the same period in which advertisements are delivered on our Web site.
We expect our short-term barter advertising to decrease as a percentage of total
revenues.
MULTI-YEAR COMMERCIAL CONTRACTS. In September 1999 and during the
fourth quarter 1999, we entered into multi-year commercial contracts, some of
which are with related parties. These contracts generally provide for a fixed
annual fee, an advertising package that includes a mix of buttons, banners,
SmartLeads and other marketing services including Powered by ImproveNet, plus a
continuous presence, as defined, on our Web sites. These commercial contracts
are for periods ranging between 3 years and 12 years, including renewal options,
and are priced at a discount to our standard rates for each product. These
commercial contracts also include cooperative marketing arrangements under which
we are committed to fund co-branded advertisements on television and in the
print media with, or on behalf of, the commercial party. In the commercial
contracts to date, we have agreed to spend 50% to 100% of the fees we expect to
receive from the commercial party on these cooperative advertisements and other
marketing services. In addition, these commercial contracts give us access to
customer databases, direct mail inserts and marketing resources. Since we only
began offering these advertising packages in September 1999, it is difficult to
predict the size of this market, market demand, cancellation rates or renewal
rates. We believe these commercial contracts provide us with significant
marketing benefits, including better advertising rates, stronger brand
recognition and access
24
<PAGE>
to customer databases and marketing resources that we could not secure or
otherwise afford in the normal course of business.
As we do not have an established historical practice of selling advertising
for cash for similar multi-year commercial contracts, we have not assigned any
value to the exchange of services or barter element of these transactions and
accordingly, we have not recorded either revenue or advertising expense for the
barter element. However, some of these multi-year commercial contracts do
generate an overall net cash component to us and in these cases, we have
recorded revenue based on the cash received or receivable under the contract,
net of the obligation to pay the commercial party for the cooperative
advertisements and other marketing services. These revenues are recognized over
the term of the commercial contract once advertising has been delivered to the
commercial party and collection of the resulting net receivable is deemed
probable.
Furthermore, in connection with certain of these multi-year commercial
contracts, we have also issued warrants to purchase shares of our common stock
to the commercial parties. We have valued these warrants using the Black Scholes
option pricing model. As the fair value of these warrants represents an
additional rebate on the revenue otherwise recorded under the contracts, the
amortization of warrant stock-based compensation is further netted against this
revenue over the term of the respective commercial contract. To the extent that
there are insufficient revenues, the remaining amortization of warrant
stock-based compensation is expensed and characterized as sales and marketing
expense. In 1999, we reduced the net cash component of revenue by $65,000 of
warrant stock-based compensation amortization. As a result, we have not
recognized revenue of $408,000 for the barter element of these commercial
contracts or for the cash component of $65,000, which has been reduced by the
warrant stock-based compensation amortization for the year ended December 31,
1999. We expect to enter into at least one multi-year commercial contract solely
for cash by the end of the first quarter of 2000. Such a multi-year commercial
contract could begin to establish the requisite criteria for an established
historical practice and the fair value for similar transactions which could
result in the recognition of revenue and the recording of marketing expenses for
future advertising packages.
NET LOSSES
We have incurred substantial losses and negative cash flows from operations
since inception as we have spent substantial amounts on advertising and other
marketing activities, funded the development of our services and expanded our
operations infrastructure. Our net losses were $359,000 in 1996, approximately
$1.2 million in 1997, approximately $4.1 million in 1998 and approximately
$36.3 million in 1999. As of December 31, 1999, we had an accumulated deficit of
approximately $42.0 million. We intend to continue to invest heavily in sales
and marketing, expansion of our support field organization and in the
development and acquisition of new content on our Web site, new products and
technologies. Thus, we will continue to lose money unless we significantly
increase our revenues, and we cannot predict when, if ever, we will operate
profitably.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUES
Total revenues increased from $258,000 in 1998 to approximately
$2.1 million in 1999, an increase of approximately $1.8 million.
Service revenues increased from $238,000 in 1998 to approximately
$1.1 million in 1999, an increase of $901,000. The increase in service revenues
was primarily due to an increased number of visitors to our Web sites and
increased job submissions and sequential quarterly improvement in the number of
jobs matched as a percentage of total job submissions and in the number of jobs
won as a
25
<PAGE>
percentage of jobs matched or our match and win rates, respectively, which led
to increased lead and win fee revenues. Our match rate, defined as the total
number of jobs matched as a percentage of total job submissions, was 37% for the
first quarter of 1999, 28% for the second quarter of 1999, 35% for the third
quarter of 1999 and 47% for the fourth quarter of 1999. Our win rate, defined as
the number of jobs won as a percentage of the number of jobs matched, was 5.5%
for the first quarter of 1999, 7.4% for the second quarter of 1999, 9.5% for the
third quarter of 1999 and 12.4% for the fourth quarter of 1999. We had not
formalized our recording of the number of jobs matched or won prior to 1999. The
decrease in the match rate for the second quarter 1999 was due to the rate of
growth in job submissions which outpaced the rate of growth of available service
providers. This condition was stabilized in the affected local markets by
expanding the number of our professional services personnel who are responsible
for recruiting and retaining local service providers. Revenues from new service
provider enrollment fees and fees charged to homeowners for premium services
were not significant in either period.
Advertising revenues increased from $20,000 in 1998 to $926,000 in 1999. Of
our 1999 advertising revenues, $180,000 constituted barter advertising revenue.
We did not sell advertising space on our Web site until December 1998. Our
advertising revenues in 1999 include amounts invoiced under advertising
arrangements of approximately $1.4 million less $473,000 for amounts invoiced
and accrued under commercial contracts with related parties and amortization of
warrant stock-based compensation. There were no adjustments to advertising
revenues in 1998.
Total revenues may be analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Service revenues............................................ $238 $1,139
Amounts invoiced under advertising and multi-year commercial
contracts................................................. 20 1,399
---- ------
258 2,538
Amounts invoiced and accrued under multi-year commercial
contracts with related parties............................ -- (408)
Amortization of warrant stock-based compensation............ -- (65)
---- ------
Total revenues.............................................. $258 $2,065
==== ======
</TABLE>
OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased from $816,000 for 1998 to
approximately $2.6 million for 1999, an increase of approximately $1.7 million.
Our cost of service revenues consists of payroll and related costs and
occupancy, telecommunications and other administrative costs for our project
service group, which is responsible for all phases of the proprietary matching
services and includes our project advisors. In addition, cost of service
revenues includes an allocation of direct Web site operations costs, consisting
of payroll and related costs, data transmission costs and equipment
depreciation. Cost of service revenues increased from $767,000 for 1998 to
approximately $2.0 million for 1999, an increase of approximately $1.2 million.
The dollar increase in cost of service revenues was attributable to direct Web
site operations costs associated with the increased volume of traffic and job
submissions and accelerated expansion and staffing of our project services
infrastructure, primarily payroll and recruiting expenses of $728,000 and
facilities and office expenses of $284,000, in advance of our expanded marketing
campaigns and expected increases in visitors to our Web sites and in job
submissions. Cost of service revenues, expressed as a percentage of service
revenues, improved from 322% in 1998 to 174% in 1999. The percentage improvement
was attributable to increased service revenues and improved utilization of our
project services group and Web site operations.
26
<PAGE>
Cost of advertising revenues includes an allocation of direct Web site
operations costs, consisting of payroll and related costs, data transmission
costs and equipment depreciation. Cost of advertising revenues increased from
$49,000 in 1998 to $567,000 in 1999, an increase of $518,000. There were few
costs associated with advertising revenues in 1998 as we did not begin
recognizing advertising revenue until December 1998.
SALES AND MARKETING. Our sales and marketing expenses include all of our
online and offline direct advertising, public relations and trade show expenses.
Sales and marketing expenses also include payroll and related costs, support
staff expenses, travel costs and other general expenses of our marketing,
professional services and partnership services departments. Sales and marketing
expenses increased from approximately $1.7 million in 1998 to approximately
$25.8 million in 1999, an increase of approximately $24.1 million. The increase
in sales and marketing expenses from 1998 to 1999 was attributable primarily to
the increase in online and offline direct advertising expenditures of
approximately $15.1 million, an increase in other marketing expenses of
approximately $3.7 million, and an increase in payroll and related costs of
approximately $3.4 million. We expect to increase our level of sales and
marketing expenditures significantly in 2000 and beyond in our effort to build
brand awareness, attract homeowners and service providers to our Web sites and
increase the number of new job submissions.
PRODUCT DEVELOPMENT. Our product development costs include the payroll and
related costs of our editorial and technology staffs, fees for contract content
providers, and other costs of Web site design and new technologies required to
enhance the performance of our Web sites. Product development expenses increased
from $504,000 in 1998 to $665,000 in 1999, an increase of $161,000. The increase
in product development expenses was primarily attributable to increased payroll
and related costs offset in part by reduced consulting fees for contract content
providers. We expect to continue to add to the size of our editorial and
technology groups in anticipation of planned new product introductions, and thus
expect product development expenses to increase in the future.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses include
payroll and related costs and travel, recruiting, professional and advisory
services and other general expenses for our executive, finance and human
resource departments. General and administrative expenses increased from
approximately $1.1 million in 1998 to approximately $4.2 million in 1999, an
increase of approximately $3.1 million. The increase in general and
administrative expenses was attributable primarily to the increase in our
executive management, full-time support staff and contract support staff payroll
costs of $2.4 million and increased lease and occupancy expenses of $271,000
related to our relocation to larger office space. We expect general and
administrative expenses to increase in the future.
STOCK-BASED COMPENSATION. From our inception in January 1996 to
December 31, 1999, we have recorded unearned stock-based compensation of
approximately $28.2 million in connection with stock option and warrant grants.
Unearned stock-based compensation from option grants to employees is initially
calculated as the aggregate difference at the dates of grant between the
respective exercise prices of stock options and the deemed fair values of the
underlying stock. We amortize unearned stock-based compensation from option
grants using an accelerated method over the respective vesting periods of the
options, which are generally four years. This resulted in an expense of $326,000
for 1998 and an expense of approximately $5.2 million in 1999. The remaining
unamortized, unearned stock-based compensation for all option grants through
December 31, 1999 will be amortized as follows: approximately $5.3 million for
2000; approximately $2.4 million for 2001; $1.0 million for 2002; and $162,000
for 2003.
Unearned stock-based compensation from warrants granted is initially
calculated using the Black-Scholes pricing model. Unearned stock-based
compensation from warrants granted is amortized on a straight-line basis over
the term of the corresponding commercial agreements. Amortization of
27
<PAGE>
unearned stock-based compensation from warrants was $517,000 for 1999. There was
no warrant stock-based compensation expense for 1998. The remaining unamortized
unearned stock-based compensation for all warrants granted through December 31,
1999 will be amortized as follows: approximately $4.0 million for 2000;
approximately $4.0 million for 2001; approximately $3.7 million for 2002; and
approximately $1.6 million thereafter.
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest income increased from $84,000 in 1998 to $517,000 in 1999, an
increase of $433,000. The increase in net interest income is primarily due to
higher average invested cash balances in 1999 compared to 1998 as we received
approximately $73.2 million in cash from the sale of our preferred stock in
March 1999, September 1999 and December 1999.
INCOME TAXES
We have recorded a 100% valuation allowance against our net deferred tax
assets, which arose primarily as a result of our aggregate operating losses. The
valuation allowance will remain at this level until such time as we believe that
the realization of the net deferred tax assets is more likely than not.
Accordingly, our results of operations do not reflect any tax benefits for our
reported losses. At December 31, 1999, we had approximately $29.0 million and
approximately $17.2 million of net operating loss carryforwards available to
reduce future operating income for federal and California state tax purposes,
which expire between 2005 and 2019 if not utilized.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES
Total revenues increased from $60,000 in 1997 to $258,000 in 1998. Service
revenues increased from $60,000 in 1997 to $238,000 in 1998. The increase in
service revenues was primarily due to an increased number of visitors to our Web
site, increased job submissions and a corresponding increase in lead and win fee
revenue. Revenues from new service provider enrollment fees and fees charged to
homeowners for premium services were not significant.
Advertising revenues were $20,000 in 1998. We did not sell advertising space
on our Web site in 1997 or the first eleven months of 1998.
OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased from $59,000 in 1997 to
$816,000 in 1998. Cost of service revenues increased from $59,000 in 1997 to
$767,000 in 1998. The dollar increase in cost of service revenues was
attributable to direct Web site operations costs associated with the increased
volume of traffic and job submissions and expansion and staffing of our project
services infrastructure, primarily payroll and recruiting expenses, in advance
of our expanded marketing campaigns and expected increases in visitors to our
Web sites and in job submissions. Cost of advertising revenues was not
significant in any period.
SALES AND MARKETING. Sales and marketing expenses increased from $414,000
in 1997 to approximately $1.7 million in 1998. The increase was primarily due to
increased online and offline advertising expenses of $733,000, increased payroll
and related costs of $153,000 and increased marketing expenses of $185,000.
PRODUCT DEVELOPMENT. Product development expenses increased from $288,000
in 1997 to $504,000 in 1998. The increase was primarily due to increases in
payroll and related costs and contract content provider costs of $205,000.
28
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $527,000 in 1997 to approximately $1.1 million in 1998. The increase was
primarily due to an increase in our executive management and full-time and
contract support staff payroll and related costs of $438,000 and increased lease
and occupancy expenses of $126,000 related to the relocation to a larger office
space.
STOCK-BASED COMPENSATION. From our inception in January 1996 through
December 31, 1998, we recorded unearned stock-based compensation of
approximately $1.1 million in connection with stock option grants. We amortize
this unearned stock-based compensation using an accelerated method over the
respective vesting periods of the options, which is generally four years. This
resulted in a charge of $11,000 in 1997 and $326,000 in 1998. There was no
warrant-based stock compensation expense in 1997 or 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest income (expense) was $(3,000) in 1997 and $84,000 in 1998. The
increase in net interest income from 1997 to 1998 was primarily due to higher
average invested cash balances, as we received approximately $4.9 million in
cash from the sale of convertible preferred stock and issuance of convertible
bridge loans in 1998.
QUARTERLY RESULTS OF OPERATIONS
The following table presents statement of operations data for each of the
quarters of 1998 and 1999. This information has been derived from our unaudited
financial statements. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements included
elsewhere in this prospectus and include all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair presentation
of this information. You should read this information in conjunction with our
audited financial statements and related notes included elsewhere in this
prospectus. We expect our quarterly operating results to vary significantly from
quarter to quarter and you should not draw any conclusions about our future
results from the results of operations for any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenues..................... $ 31 $ 27 $ 86 $ 94 $ 156 $ 251 $ 312 $ 420
Advertising revenues................. -- -- -- 20 123 175 268 360
----- ------- ----- ------- ------- ------- -------- --------
Total revenues..................... 31 27 86 114 279 426 580 780
----- ------- ----- ------- ------- ------- -------- --------
Cost of revenues:
Cost of service revenues............. 155 155 207 250 192 261 638 893
Cost of advertising revenues......... -- -- -- 49 61 88 158 260
----- ------- ----- ------- ------- ------- -------- --------
Total cost of revenues............. 155 155 207 299 253 349 796 1,153
----- ------- ----- ------- ------- ------- -------- --------
Gross profit (loss).................... (124) (128) (121) (185) 26 77 (216) (373)
Operating expenses:
Sales and marketing.................. 266 413 323 667 1,745 3,748 8,870 11,421
Product development.................. 43 229 116 116 146 120 151 248
General and administrative........... 181 200 284 477 297 475 719 2,723
Stock-based compensation............. -- 109 117 100 466 909 1,460 2,784
----- ------- ----- ------- ------- ------- -------- --------
Total operating expenses........... 490 951 840 1,360 2,654 5,252 11,200 17,176
----- ------- ----- ------- ------- ------- -------- --------
Loss from operations................... (614) (1,079) (961) (1,545) (2,628) (5,175) (11,416) (17,549)
Interest and other income (expense),
net.................................. (3) 41 30 16 2 184 138 193
----- ------- ----- ------- ------- ------- -------- --------
Net loss............................. $(617) $(1,038) $(931) $(1,529) $(2,626) $(4,991) $(11,278) $(17,356)
===== ======= ===== ======= ======= ======= ======== ========
</TABLE>
29
<PAGE>
Our revenues increased sequentially each quarter after the second quarter of
1998. Sales and marketing, product development and general and administrative
expenses increased steadily in each quarter presented, except for sales and
marketing expenses in the second quarter of 1998, product development expenses
in the second quarter of 1998 and first quarter of 1999, and general and
administrative expenses in the fourth quarter of 1998. The increase in sales and
marketing expenses in the second quarter of 1998 related to increased spending
on marketing and advertising activities of $123,000. The increase in product
development expenses in the second quarter of 1998 related primarily to database
expenses of approximately $125,000. The increase in product development expenses
in the first quarter of 1999 related to an increase in consulting and other
professional services expense of $23,000. The increase in general and
administrative expenses in the fourth quarter of 1998 related primarily to
executive recruiting costs.
Factors that could affect our quarterly operating results in the future
include:
- the number of new service providers we add to our network;
- the amount of service fees we generate and our ability to collect this
revenue;
- the amount and timing of our operating expenses and capital expenditures;
- the cost of commercial relationships;
- the amount of advertising sold on our Web sites;
- the amount and timing of noncash stock-based compensation expenses;
- costs and charges related to acquisitions of businesses or technologies;
and
- seasonality of home improvement projects.
Our limited operating history and rapid growth make it difficult for us to
assess the impact of seasonal factors on our business. However, because our
business depends on the home improvement industry, we expect that our revenues
may be lower during the first and fourth quarters of each calendar year since
more homeowners commit to home improvement projects during the spring and summer
months.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund our operating losses, prepay our
large media purchases and make capital expenditures. During the three years
ended December 31, 1999, we have financed our operations through private sales
of our convertible preferred stock, convertible notes and common stock for net
proceeds of approximately $79.4 million.
Operating activities used cash of approximately $25.8 million in 1999. This
amount resulted from a net loss of approximately $30.2 million after adding back
noncash stock-based compensation and other charges of approximately
$6.0 million, offset by an increase of approximately $4.7 million in net current
liabilities, primarily increases in accounts payable and accrued liabilities.
Net cash used in operating activities was approximately $1.2 million in 1997 and
approximately $3.2 million in 1998 primarily to fund net losses of approximately
$1.2 million in 1997 and approximately $4.1 million in 1998. In 1998, our net
loss was partially offset by a $618,000 increase in accounts payable and accrued
liabilities, and noncash stock-based compensation charges of $326,000.
Investing activities used cash of $85,000 and $273,000 in the years ended
December 31, 1997 and 1998, respectively, substantially all of which was used to
acquire property and equipment. Investing activities used cash of approximately
$3.5 million in 1999. In addition to purchases of property and equipment, in
1999 our investing activities included an acquisition, an employment-related
loan to our president and chief executive officer and a lease-related security
deposit. Financing activities generated
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cash of approximately $79.4 million in the three years ended December 31, 1999
including approximately $73.0 million in 1999, primarily consisting of net
proceeds from the issuance of convertible preferred stock and common stock.
At December 31, 1999, we had approximately $45.3 million in cash and cash
equivalents excluding restricted cash balances of $449,000 related to security
deposits on our leases, approximately $39.9 million in working capital and no
outstanding debt. At December 31, 1999, we had non-cancelable commitments
aggregating approximately $4.4 million in minimum future lease payments
consisting primarily of a seven-year lease for our administrative headquarters.
We expect capital expenditures to increase commensurately with the growth of our
employee base, expansion of our professional services infrastructure into local
markets and, to a lesser extent, increased traffic to our Web sites and numbers
of job submissions. Capital expenditures for the next 12 months are currently
estimated to approximate $3.5 million, with no current material commitments for
capital expenditures. We expect our sales and marketing expenditures for 2000
will be between $25 million and $35 million depending on available cash
resources, including the net proceeds of this offering. At December 31, 1999 we
had approximately $45.3 million in available cash resources.
Our limited operating history and operating losses have limited our ability
to obtain vendor credit or extended payment terms and bank financing on
favorable terms; accordingly, we depend on our cash and cash equivalent balances
to fund our operations.
We expect to experience significant growth in our operating expenses for the
foreseeable future. Accordingly, we currently anticipate that our operating
expenses, primarily advertising and other marketing expenditures, and payroll
and related costs will constitute a material use of future cash resources. We
anticipate that our current cash and cash equivalent balances, with or without
expected net proceeds from this offering, will be adequate to meet our
foreseeable working capital and operating expense requirements for at least the
next twelve months. We do not currently have any plans for a follow-on public
offering nor do we have any predetermined future share price thresholds that
would cause us, based on share price alone, to initiate a follow-on public
offering. We will continue to evaluate our needs for funds based on our
assessment of access to public or private capital markets and the timing of our
need for funds. Although we have no present intention to conduct additional
public equity offerings, we may seek to raise these additional funds through
private or public debt or equity financings. Additional capital may not be
available or, if available, may not be on terms we deem reasonable. Any future
financings may be dilutive in ownership, preferences, rights or privileges to
our stockholders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. We do not
currently hold any derivative instruments and do not engage in hedging
activities. We will be required to adopt SFAS No. 133 for the year ending
December 31, 2001. We expect the adoption of SFAS No. 133 will not have a
material impact on our financial position, results of operations or cash flow.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to increases or decreases in the amount of interest income we can earn on our
investment portfolio and on increases or decreases in the amount of interest
expense we must pay with respect to any outstanding debt instruments. We had no
debt instruments outstanding as of December 31, 1999. The risk associated with
fluctuating interest expense is limited, however, to those debt instruments and
credit facilities that are tied to market rates. We do not plan to use
derivative financial instruments in our investment portfolio. We plan to ensure
the safety and preservation of our invested principal funds by limiting default
risk, market risk and reinvestment risk. We plan to mitigate default risk by
investing in high-credit quality securities.
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BUSINESS
OVERVIEW
We provide home improvement information and services on the Internet.
Through our ImproveNet.com and ImproveNetPro.com Web sites, matching services
and targeted advertising, we are creating a national marketplace for home
improvement products and services in which homeowners, service providers and
suppliers of home improvement products benefit from an organized and efficient
online flow of information and communication.
We generate job leads for service providers from highly interested
homeowners within their geographic area using our proprietary matching service.
In 1998, we received approximately 33,500 job submissions valued at a total of
approximately $1.1 billion, compared to the estimated total expenditures for the
residential home improvement market for 1998 of approximately $120.7 billion,
according to the United States Department of Commerce. In 1999, we received
approximately 106,500 job submissions valued at a total of approximately
$2.7 billion, compared to the estimated total expenditures for the residential
home improvement market for 1999 of approximately $126.7 billion, according to
the National Association of Home Builders. We have designed our services to
deliver a satisfying home improvement experience to homeowners and assist them
through the four phases of the home improvement process: dream and design, plan
and budget, hire and build and fix and maintain. We generate revenues from our
three constituents:
- service providers pay us lead fees and win fees for our matching service
that are included in service revenues;
- suppliers of home improvement products and services as well as other
advertisers pay us advertising fees for the purchase of advertising space
on our Web sites that are included in advertising revenues; and
- homeowners pay us fees for our premium home improvement services that are
included in service revenues and that to date have not been significant.
INDUSTRY BACKGROUND
THE HOME IMPROVEMENT INDUSTRY
The home improvement industry is fragmented. According to the National
Association of Home Builders, total expenditures for residential home
improvements for 1999 were $126.7 billion. According to the United States Census
Bureau, there are currently 70.5 million owner-occupied homes out of a total of
120 million housing units.
The participants in the home improvement industry can be grouped into three
categories: homeowners, service providers and suppliers of home improvement
products. These participants face distinct challenges in meeting their
individual objectives.
HOMEOWNERS
The appearance, care, maintenance and general working condition of a home is
highly important to a homeowner. Maintaining and improving the home involve an
ongoing financial and emotional investment in the homeowner's core asset. To
manage a home improvement project, a homeowner needs to design the project,
establish a budget for the project, find and select service providers, and guide
it to its completion. To a large extent, homeowners currently must rely upon
word-of-mouth recommendations, Yellow Pages and local newspaper advertisements,
and magazines and books to accomplish these tasks. None of these resources
provides immediate, objective, reliable and customized information. As a result,
homeowners are generally poorly informed and uncertain about how best to
identify and locate a reputable, experienced and competitively priced service
provider and to design and budget for their projects. Further, homeowners seldom
have the time to manage their home
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improvement projects or have access to an experienced home improvement advisor.
Because of all these factors, they often pay a high emotional and financial cost
to complete a home improvement project and are not always satisfied with the
results.
SERVICE PROVIDERS
Based upon a compilation of industry sources, we believe there are up to
900,000 service providers in the United States. The home improvement industry is
characterized by a high rate of turnover among local contractors. These service
providers have few channels to communicate effectively with homeowners or with
one another. There is neither an industry-wide certification based on work
quality nor a code of conduct and ethics for contractors as there is for
architects and designers. As a result, reputable contractors are often unable to
differentiate themselves based on reliability, adequate capitalization and areas
of specialization. Service providers currently rely on word-of-mouth
recommendations, the Yellow Pages and other traditional mass media advertising
that require them to pay upfront fixed costs. Therefore, service providers must
allocate significant time, money and energy to qualifying and verifying the
leads they receive. Typically, small independent contractors experience
difficulty in predicting lead flow, managing staffing and working capital
requirements and, most importantly, systematically building a stable business.
SUPPLIERS OF HOME IMPROVEMENT PRODUCTS
According to REMODELING'S 1998-1999 Buyers Guide, there are approximately
3,000 suppliers of home improvement products in the United States. Although
there are some well-known brand names supplying a wide array of home improvement
products, the broader industry is comprised of local and regional firms with
limited means to distribute and market their products effectively to homeowners.
According to ADVERTISING AGE, approximately $950 million was spent in 1998 on
advertising in the home improvement industry. Currently, the majority of
supplier advertising dollars is spent on co-marketing and co-branding
advertising and print and broadcast advertising. These traditional media lack a
centralized database of information that can be searched based on specified
terms, and the ability to conduct two-way communications. Although suppliers
have often used traditional media effectively to build brand recognition, they
have difficulty using traditional media to target homeowners who are in the
process of making time-critical purchasing decisions regarding home improvement
products.
THE INTERNET HOME IMPROVEMENT OPPORTUNITY
The Internet has fundamentally changed the way that individuals and
businesses communicate, obtain information, advertise, purchase goods and
services and transact business. International Data Corporation estimates that
the number of Internet users will grow to 177.0 million in the United States by
the end of 2003 and projects that commerce revenue on the Internet in the United
States will increase from approximately $37.2 billion in 1998 to $707.9 billion
in 2003. Forrester Research projects that advertising spending on the Internet
in the United States will exceed $2.8 billion in 1999 and grow to more than
$17.2 billion by 2003.
We believe that an opportunity exists for an online home improvement
marketplace that provides a central repository of information for the benefit of
homeowners, service providers and suppliers. This marketplace would enable
homeowners to access design and planning tools, find service providers and
obtain other project management services. This marketplace would also enable
service providers to access job leads, differentiate themselves from competitors
and communicate with fellow professionals. Finally, this marketplace would
enable suppliers to market their products to a targeted audience of homeowners
at the time they are making time-critical purchasing decisions.
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THE IMPROVENET SOLUTION
We provide home improvement information and services on the Internet. We
aggregate and organize information and design tools for homeowners, generate job
leads for service providers and provide home improvement project information to
suppliers. We independently screen and monitor contractors, designers and
architects nationwide to ensure that our homeowners' qualified job leads are
matched with pre-screened service providers. We offer suppliers coordinated
advertising to homeowners and service providers while they are making home
improvement purchasing decisions. Through our Web sites, matching and advisory
services and targeted advertising, we are creating a national online marketplace
for home improvement products and services.
Our solution offers the following benefits:
FOR HOMEOWNERS:
- ACCESS TO QUALITY SERVICE PROVIDERS. Our screening process is designed to
identify the leaders in quality and service in each of our local markets.
To pass our screening criteria, service providers must have a clean credit
and legal history, all necessary licenses, appropriate insurance and no
significant negative references from customers or other service providers.
We re-screen the service providers in our database approximately
semi-annually. By creating a national database of screened service
providers, we improve the likelihood that homeowners who contact us will
hire qualified, experienced and reputable service providers.
- COST-EFFECTIVE AND CONVENIENT SERVICES. For projects greater than $500,
our matching process solicits between two and four service providers on
behalf of homeowners who might otherwise settle for a single bid, creating
a competitive marketplace for their home improvement project. We choose
the service providers by matching their geographical, job type and job
size preferences with the homeowner's job specification. We contact
selected service providers by fax, e-mail or by posting to
ImproveNetPro.com. Our goal is to have the selected service providers
contact the homeowner directly to discuss the job in detail within
72 hours of when we provide the homeowner with the service providers'
names. Our service providers currently meet this goal approximately 50% of
the time. In addition, we offer homeowners the ability to search for home
improvement services and to plan their current projects using our
interactive planning tools from home or work 24 hours a day, seven days a
week. We assign a personal project advisor to each home improvement
project. The project advisor is available to guide and advise the
homeowner and the selected service provider throughout the project.
- ONLINE PROJECT ASSISTANCE. We believe our array of online services,
including our product showcase, our design gallery and our planning and
estimating tools, provides answers to homeowners' diverse questions and
needs regarding home improvement and repairs. Our Web site allows each
homeowner to generate ideas from the product showcase and design gallery
and access the personal project folder, an archive of previous project
ideas and communications. For a fee, we provide premium services such as
legal and credit reports on contractors outside the ImproveNet network for
$29 per report and bid and contract assessment assistance for $50 per
contract.
FOR SERVICE PROVIDERS:
- QUALITY JOB LEADS. Our project advisors call each homeowner after we
receive a job to confirm that the homeowner is interested and to assist
with refining the details of the job. Service providers who receive leads
through our proprietary matching service benefit from the likelihood that
the homeowner's interest is real and that the potential project is
correctly characterized. In addition, service providers give us
geographic, job type and job size preferences, which enable us to match
the service provider to a job that meets its preferences and expertise.
Service providers can change their preferences at any time to reflect
their changing needs and circumstances.
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Through our ImproveNetPro.com website, we have recently begun to
communicate job leads in near real-time to the selected service providers.
- COMPETITIVE DIFFERENTIATION. We believe service providers can
differentiate themselves from their competitors by successfully completing
our proprietary screening process and joining our network. We identify,
contact and recruit service providers through many public and private
sources. We have used Yellow Pages and licensing and trade association
lists to identify, contact and recruit service providers into our network.
We have not been able to screen approximately one-third of all service
providers we have identified. Approximately one-third of the service
providers who we have identified through lists or contacted through our
various sources and roughly 50% of those we have screened have met our
selection standards of professionalism and reliability. Currently, we have
approximately 33,000 eligible service providers in our network who have
indicated an interest in continuing to receive qualified job leads from
us.
- BUSINESS AND FINANCIAL EFFICIENCIES. Service providers who participate in
our matching service pay only for job leads that they accept and for jobs
that they win, allowing them to reduce their upfront marketing costs. New
job leads from our matching service supplement the flow of work that
contractors, architects and designers receive from their traditional
sources, which allows them to plan and operate their businesses more
efficiently. Furthermore, through our SmartLeads program, service
providers in our network are able to gain efficient and timely access to
the most recent product information available. In addition, service
providers often gain access to special product discounts not available to
their competitors.
FOR SUPPLIERS OF HOME IMPROVEMENT PRODUCTS:
- TARGETED ADVERTISING TO HOMEOWNERS. ImproveNet.com is designed to attract
visitors who are focused on remodeling, repairing and maintaining their
homes. We believe that this audience is a valuable target for suppliers of
home improvement products and services. Banners, buttons and other forms
of advertising allow these suppliers to target their message more
efficiently and cost-effectively to a highly responsive and focused
audience. Moreover, through our SmartLeads program, suppliers are able to
reach service providers and homeowners engaged in home improvement
projects through targeted messages.
- TARGETED ADVERTISING TO SERVICE PROVIDERS. Through our SmartLeads program,
we offer our suppliers the opportunity to run highly targeted promotions
to our network of service providers based on detailed attributes including
project type, cost, timing and location. This focused advertising offers
suppliers an effective method of selling entire lines and specific
products to highly interested service providers at the time of purchase.
- CO-BRANDED WEB SITES. We offer suppliers the opportunity to place our
content and services on their own Web sites or link to co-branded Web
sites, without having to expend development time or resources. These
co-branded Web sites allow suppliers to offer our content and services to
their customers. In many of these arrangements, the suppliers share in the
revenues from jobs referred through their site or the co-branded Web site.
THE IMPROVENET STRATEGY
Our strategy is to become America's home improvement resource on the
Internet. The key elements of our strategy are:
DELIVER A SATISFYING HOME IMPROVEMENT EXPERIENCE FOR HOMEOWNERS, SERVICE
PROVIDERS AND SUPPLIERS
The core of our strategy is to make it easy for homeowners, service
providers and suppliers to work together on a home improvement project. We
believe that achieving this goal will improve the perception of the home
improvement industry in general and improve the level of professionalism and
reliability among service providers, in particular. The independence of our
matching service allows us to
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maintain a neutral role in the home improvement process. In addition, our focus
on quick and easy access to information, improved project and market
efficiencies and the creation of a central marketplace for home improvement
products and services allows us to change the current approach and execution of
a home improvement project.
Through our online services, including our Web sites and SmartLeads program,
and our offline support services, including our project advisors and
professional services group, we seek to provide increased communication between
all parties to a home improvement project and to create new efficiencies for the
project itself. Access to this marketplace allows service providers in our
network to increase their own business and financial efficiencies and
differentiate themselves from their competitors. Similarly, this access allows
suppliers to market their home improvement products and services within a cost
effective advertising medium. We believe that the execution of our ongoing
strategy requires us to:
- expand and strengthen the pool of high quality information and content on
our Web sites;
- expand and strengthen our network of qualified and interested service
providers;
- improve our personal assistance to homeowners through our advisory
services;
- strengthen our communication with our network of service providers through
ImproveNetPro.com and an enhanced, highly knowledgeable team of local
service personnel; and
- strengthen our relationships with suppliers through enhanced co-branded
opportunities and highly targeted advertising products such as our
SmartLeads program.
INCREASE THE NUMBER OF JOBS SUBMITTED TO US AND THE PERCENTAGE OF JOBS WON
BY SERVICE PROVIDERS IN OUR NETWORK
We define our win rate as the number of jobs won by service providers in our
network divided by the total number of jobs that we match. For 1999, our win
rate was 8.9%. We intend to continue to increase our number of jobs and our job
win rate by:
- extending the breadth and depth of our content to create better quality
jobs;
- increasing participation by interested, responsive high-quality service
providers;
- building a local presence in major markets to work with our service
providers; and
- developing tracking systems and procedures to identify wins that are not
reported to us by either the service provider or the homeowner.
We have invested heavily in the development of content design tools and
services and have refined our submission process to increase the quality of the
homeowner experience and the quality and number of jobs submitted. We intend to
use the service provider databases from suppliers of home improvement products
to augment our service provider base. Our locally based professional services
group recruits service providers, monitors their interest and participation and
oversees their performance. We have embarked on an aggressive hiring program to
expand our professional services group with a goal of increasing our local
presence within the service provider community to 70 major population areas by
the end of 2000.
EXPAND EXISTING COMMERCIAL RELATIONSHIPS AND CREATE NEW ONES WITH SUPPLIERS
OF HOME IMPROVEMENT PRODUCTS AND SERVICES AND RELATED HOME SERVICES
We have recently entered into multi-year commercial contracts with Cendant,
DuPont, General Electric Appliances, Microsoft and Owens Corning. We believe
that these contracts provide these suppliers of home improvement products and
services with a new advertising and marketing opportunity with the following
benefits:
- highly targeted, cost-efficient advertising to service providers and
homeowners;
- an immediate and enhanced Internet presence in the home improvement
market; and
- a focused Internet strategy including co-branding relationships and shared
content.
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In turn, we realize the following benefits from these commercial
relationships:
- access to supplier's databases and co-branding opportunities;
- assistance in attracting homeowners to ImproveNet.com;
- increased number of job submissions, leads and wins;
- assistance in building stronger relationships with our network of service
providers; and
- additional highly targeted, fully developed content for our Web sites.
Based on the initial financial and strategic success of our existing
multi-year commercial contracts, we are aggressively pursuing additional
nationally recognized suppliers of various home improvement products and
services. Specifically, we plan to target providers of related home services
such as real estate brokers and homeowner finance and insurance companies and
have entered into relationships with Cendant's CompleteHome and Microsoft's
HomeAdvisor.
CONTINUE TO BUILD THE IMPROVENET BRAND
To enhance public awareness of our home improvement services, we are
implementing a brand development program using mass market and targeted
advertising, direct mail, word-of-mouth, promotions and public relations.
Existing and future multi-year commercial contracts with recognized home
improvement brands provide us with new opportunities to promote our brand
through promotions and co-branding initiatives such as Powered by ImproveNet. In
addition, these contracts provide us with the opportunity to use the consumer
sales and marketing infrastructure, expertise and consumer information of these
organizations which we could not otherwise access or afford in our normal course
of business. We are also focused on systematically extending relationships with
high traffic Web sites. We believe in focusing our advertising and promotions on
homeowners during the home improvement planning cycle, the time when we believe
homeowners and service providers are most receptive to brand association.
SERVICES AND INFORMATION
We offer several services including ImproveNet.com, our matching services,
ImproveNetPro.com, SmartLeads and Powered by ImproveNet co-branded services.
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This space will contain two graphics.
The first graphic depicts ImproveNet's relationship to its three principal
constituents: homeowners, service providers and suppliers.
The second graphic depicts the ImproveNet matching process from job submission
to job completion.
IMPROVENET.COM
Our consumer Web site, ImproveNet.com, enables homeowners to browse, free of
charge, our 30,000 pages of ideas and information for use in their home
improvement projects and to use our project tools to help them better understand
their home improvement project. Our design gallery on ImproveNet.com features
color images of the work of leading architects and designers. For most designs,
we provide images, comments from both the designer and our editors and a
detailed list of products used in the design. Our product showcase on
ImproveNet.com contains images of a full range of more than 5,000 distinct home
improvement products and includes brands such as Armstrong, DuPont, General
Electric Appliances, Owens Corning, Price-Pfister and Masco's Kraft Maid and
Merrillat.
We recently introduced our kitchen estimator, the first product in our
project estimator service, which is designed to assist homeowners through the
planning and budgeting stage of the home
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improvement process. This is an interactive application that allows homeowners
to calculate prices for a project based on parameters such as physical
dimensions, styles and the homeowner's zip code.
Homeowners can register as members, without charge, which entitles them
access to additional products and services. As part of the on-site registration
process, we create a customized interface for each registered member, known as
the personal project folder. The personal project folder permanently stores all
information related to that homeowner's project and allows us to present
custom-tailored information to that homeowner. Homeowners can store ideas they
get from our design gallery, product showcase and product estimator, in addition
to their own thoughts, as they plan and design their home improvement project.
In addition, we offer premium services to homeowners for a fee. Our premium
services include screening non-ImproveNet service providers and providing bid
and contract assessment assistance.
Our Web site gives homeowners access to a community of fellow Web site
visitors and to service providers and industry professionals who can respond to
home improvement questions. Visitors may read the more than 5,600 discussions
currently on our message boards, and registered members may join in the
discussions or post a new question. This feature gives homeowners who are now in
the home improvement process a friendly environment in which to educate
themselves further and to reduce their anxiety related to home improvement.
Guiding homeowners through every stage of the home improvement process is
central to our strategy of imparting information and personal assistance. Our
project advisors are available to guide and advise the homeowner throughout the
job. By personalizing both our Web site and our interactive communications to
homeowners, we provide homeowners a user-friendly and highly productive
environment in which to manage their projects. Furthermore, we believe that this
personalization increases the likelihood that homeowners will return to us for
all their home improvement needs.
IMPROVENET'S MATCHING SERVICES
We offer homeowners the opportunity to submit to us a home improvement job
that we match with contractors, architects or designers who want to bid on the
job. We currently match approximately half of the jobs submitted to us with
interested service providers. Homeowners who are starting a home improvement
project begin the process by clicking on our homepage links to "Find a
Contractor" or "Find a Designer" and are then asked to complete a detailed
project request form that specifies the type of job the homeowner desires. Based
on the homeowner's project description, the homeowner's job request is then
categorized by size as follows:
- a large project, greater than $5,000 in value;
- a small project, between $5,000 and $500 in value; and
- a micro project, less than $500 in value.
Once a fully qualified job has been submitted to us, we assign a project
advisor to guide the homeowner through the entire home improvement process. We
also notify the homeowner immediately that we will begin our search to match
their project with potential service providers interested in bidding on the
project. Our proprietary matching service uses the homeowner's project
description to select the ImproveNet service providers in the homeowner's
geographic area who do the type of work required. We deliver job leads to
selected service providers by fax, email or by posting the leads on
ImproveNetPro.com. Currently, we have approximately 33,000 eligible service
providers in our network who have indicated an interest in continuing to receive
qualified job leads from us. The interested service providers who first contact
us get the opportunity to have their name submitted to the homeowner on the
project. We currently allow up to four service providers to be matched on a
large project, up to two service providers on a small project and one service
provider on a micro project. We then forward the selected names on a first-come,
first-served basis to the homeowner via e-mail, ideally
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within 72 hours of submission, a goal that we meet approximately 50% of the
time. The service providers who we refer to the homeowner pay us a fee for the
job lead.
Service providers contact the homeowner directly by telephone to discuss the
job in detail, ideally within 72 hours of our e-mail. Once the homeowner and
service provider have been matched, the service provider is able to bid on the
project at any time after meeting with the homeowner. If a job does not receive
a contact from an interested service provider within approximately one week of
submission, the project advisor works on behalf of the homeowner to locate
available and interested service providers. The project advisor sends a series
of messages to the homeowner that provide project management advice, offer
premium services and market supplier product offerings. The homeowner is free to
contact his or her project advisor as many times as needed by e-mail or by
telephone. Following the completion of the project, we solicit a
quality-assurance survey to determine the outcome of the matching process and
the level of homeowner satisfaction. We invoice service providers for a win fee
based on a predetermined percentage of the job's value for every job they win
through our matching service. These win fees are based on a non-negotiable,
fixed-fee schedule based on estimated job size, as follows:
<TABLE>
<CAPTION>
ESTIMATED JOB SIZE FEE MAXIMUM
- ------------------ --------------- --------
<S> <C> <C>
Less than $5,000.......................................... 10% of job size $250
$5,000 - $10,000.......................................... 5% of job size $300
$10,000 - $35,000......................................... 3% of job size $700
Greater than $35,000...................................... 2% of job size $995
</TABLE>
We ask our service providers not to charge the win fee in the bid quote to
the homeowner. We currently collect our win fees directly from service providers
once the service provider or the homeowner informs us that the homeowner has
hired a service provider through our matching service.
IMPROVENETPRO.COM
Our recently introduced commercial Web site, ImproveNetPro.com, provides new
or enhanced services to our service providers. ImproveNetPro.com allows us to
communicate in near real-time with participating service providers who are
online. ImproveNetPro.com provides our contractors, architects and designers
with immediate access to new job postings. Once a service provider enters the
password-protected section of ImproveNetPro.com, he or she is immediately
presented with the status of new jobs available to the service provider that
match their location, preferences and expertise. We believe that
ImproveNetPro.com will assist us to enhance the loyalty of our contractors,
architects and designers.
SMARTLEADS
In the course of helping homeowners manage home improvement projects, we
obtain timely and specific information from them regarding the nature of their
home improvement projects. With SmartLeads, we offer our suppliers of home
improvement products the opportunity to send direct e-mail messages about their
products to service providers and homeowners who are making purchasing decisions
during the home improvement process. Currently, our service providers cannot opt
out of the SmartLeads program, while homeowners may request that they not be
included in the SmartLeads program. We charge suppliers a fee for each message
sent. We believe this is a targeted and cost-effective means for suppliers to
reach homeowners and service providers near the time of purchase.
POWERED BY IMPROVENET AND FIND A CONTRACTOR
We provide a customized product superimposing ImproveNet.com content
including our matching services on third-party Web sites so that the content
looks like the third party's own content but is Powered by ImproveNet. This
customized product allows our logo and our products and services to be
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placed across a broad spectrum of third-party Web sites related to home
improvement, from online versions of traditional media properties to Web sites
related to manufacturing, finance, real estate and local and regional guides. If
a customer of these third parties uses our matching services, we pay the
supplier a portion of any service revenue from that match. We also advertise on
third party Web sites through our Find a Contractor service. We place a "Find a
Contractor" banner or button on third party Web sites that links the user to
ImproveNet.com. We pay these third parties either a flat fee or on a per
referral basis. Since many of the third-party Web sites that use Powered by
ImproveNet and Find a Contractor are related to the home improvement industry,
we believe these programs will deliver more qualified traffic to our Web site.
We also believe that Web sites that are related to the home improvement industry
and will participate in these programs will benefit from the access to our
matching services.
The following is a complete list of third parties who currently participate
or have agreed to participate in the Powered by ImproveNet or Find a Contractor
programs:
Armstrong World Industries, Inc.
Art on Tiles
Brandwise.com
Builder Select.com
Buildscape.com
Classified Ventures/HomeHunter
Chesapeake Precision, Inc.
ContractorGuy.com
Cox Interactive
DeGeorge, Inc.
Delta Faucets
Dow Remodel.com (Dow)
EllieMae Affiliates
FeelingRightAtHome.com
GE Appliances
GoingSouth.com
GoToWorld
Halogens
HomeCase.com, Inc.
Homematrix.com, Inc.
Homes.com, LLC
HomeServices.com
HomeSpace
HomeSpecialties
Hometime Video Publishing, Inc.
Houston Association of Realtors
Insurance Spotlight
iOwn, Inc.
Jenn-Air
Just Seconds
Las Vegas Virtual Realtor
LoanUPDATE (NetUpdate.com)
Lumbermen's Building Centers
Maytag Corporation, Inc.
Michigan Web
Microsoft HomeAdvisor
MinnesotaLink.com
MortgageDepartment.com
Move.com
MyHome.com
MyMortgageAdvisor.com
Ohio Home Search
OurHouse, Inc.
Owens Corning
Owners, Inc.
Paintright.com (Paint Right Services)
Philips Electronics
Phoenix Association of Realtors
postnet.com (St. Louis Post-Dispatch)
PruWeb.com (Prudential)
RealEstateRover.com, Inc.
realhub.com
Re/max of California & Hawaii, Inc.
RemodelingGuy.com
Schlage Lock Company
Minneapolis Star Tribune (startribune.com)
The SunRay Corporation
The Half-Assed Handyman
The Redondo Mall
Today's Homeowner
Turnhome, Inc.
Wickes Lumber
Yahoo!
MULTI-YEAR COMMERCIAL CONTRACTS
In September 1999, we entered into an Internet Development, Marketing and
Distribution Agreement with General Electric Appliances, a division of the
General Electric Company. GE purchased a package of our advertising products and
Powered by ImproveNet including a private label contractor matching service for
$3,000,000 over three years. In addition, we purchased cooperative and
co-branded advertising and access to GE's direct mail infrastructure, for
$3,000,000 over three years. Throughout the term of the agreement, GE has agreed
to pay us ten dollars for each completed sale we refer to GE, not to exceed
$2,500,000 over three years. In connection with this agreement, we issued to GE
Appliances and GE Capital Equity Investments, Inc. warrants to purchase 326,000
shares of series D preferred stock at $0.01 per share.
In October 1999, we entered into an Internet-based Services Agreement with
Owens Corning. Owens Corning purchased a package of our advertising products and
Powered by Improvenet including a private-label contractor matching service for
$3,000,000 over the first three years. In addition, we purchased cooperative and
co-branded advertising for $2,250,000 over the first three years. We pay Owens
Corning for each job Owens Corning refers to us which exceeds $500 in total job
value. As long as Owens Corning owns at least 500,000 shares of our common
stock, we are obligated to nominate one designee of Owens Corning for election
to our board of directors. The Owens Corning designee is currently Domenico
Cecere, president of Owens Corning North American Building Materials Systems.
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We cannot provide a private label contractor matching service to Owens Corning's
competitors through December 2000. In connection with this agreement, we issued
Owens Corning warrants to purchase 150,000 shares of our common stock at $0.01
per share. The term of the agreement is 12 years. Following the initial three
years of the agreement, Owens Corning may terminate the agreement upon
12 months prior written notice.
In December 1999, we entered into a Relationship Agreement with Microsoft.
We purchased a direct link on Microsoft's HomeAdvisor Web site to a co-branded
Web site Powered by ImproveNet. We will pay Microsoft a fee equal to the greater
of 25%-37 1/2% of revenues realized from the operation of the co-branded Web
site or a guaranteed minimum fee of $6,000,000 over three years. If Microsoft
agrees to host our content on the HomeAdvisor Web site, Microsoft will pay us a
minimum of 25% of all gross revenues received by Microsoft from operation of the
Web site. In addition, we have agreed that Web pages on our site visited by
users linked through the HomeAdvisor Web site will not contain any
advertisements, hyperlinks or other content from a special class of HomeAdvisor
competitors. In connection with this agreement, we issued to Microsoft warrants
to purchase 583,333 shares of our common stock at $13.50 per share and warrants
to purchase 100,000 shares of our common stock at $0.01 per share. The term of
this agreement is three years.
In December 1999, we entered into a Collaboration Agreement with DuPont.
DuPont purchased a package of our advertising products and Powered by
ImproveNet. In addition, we purchased cooperative advertising and access to
DuPont's direct mail infrastructure, the fees for which cannot exceed the fees
we collect from DuPont. Pursuant to this agreement, DuPont agreed to pay us
$1,000,000 in year one and we agreed to pay DuPont $1,000,000 in year one with
fees for subsequent years to be negotiated by the parties. We agreed to pay
DuPont a fifteen dollar fee for each direct referral to ImproveNet.com for jobs
that exceed $500 in total value. The agreement provides for an exclusive
arrangement with respect to other manufacturers of two DuPont product
categories. In connection with this agreement, we issued to DuPont warrants to
purchase 35,000 shares of our common stock at $0.01 per share. The term of this
agreement is four years. Following the initial year, either party may terminate
the agreement without cause upon 90 days prior written notice.
In December 1999, we entered into an Agreement with Move.com, an affiliate
of Cendant Corporation. We purchased a direct link on Cendant's Move.com Web
site to a co-branded Web site Powered by ImproveNet. We will pay Cendant a fee
over three years equal to the greater of a predetermined share of the revenue
realized from the operation of the co-branded Web site or a guaranteed minimum
fee of $6,000,000 over three years. In addition, we have agreed that Web pages
on our site visited by users linked through the Move.com Web site will not
contain advertisements, hyperlinks or other content from a special class of
Move.com competitors. In connection with this agreement, we issued to Cendant
warrants to purchase 259,263 shares of our common stock at $13.50 per share and
warrants to purchase 75,000 shares of our common stock at $0.01 per share.
SALES AND MARKETING
We believe that building awareness of the ImproveNet brand is critical to
our effort to be America's home improvement destination on the Internet. Our
primary means of increasing the number of homeowners who visit ImproveNet.com
and building a broad-based awareness of our brand among homeowners has been
through online advertising arrangements. We have entered into these
arrangements, which are generally one year in length or cancelable with
reasonable notice that obligate us to pay a fixed monthly fee, with:
- frequently visited portals, such as AltaVista, America Online,
Excite@Home, Lycos, Quicken.com and Yahoo!; and
- Web sites related to home improvements, such as Better Homes and Garden,
This Old House, and Microsoft HomeAdvisor.
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In addition, starting in the second half of 1999, we began supplementing our
online advertising with offline advertising in Yellow Pages, print media and
national radio and through customary public relations initiatives. We have faced
and will continue to face increased renewal charges for our advertising
arrangements.
Our five largest advertisers in 1999 were Armstrong, General Electric
Appliances, Masco's Merrillat, Owens Corning and Whirlpool. No single advertiser
accounted for more than 10% of our total revenues for any period.
PARTNERSHIP SERVICES GROUP
Our partnership services group focuses on creating commercial relationships
with companies serving the home improvement industry, including suppliers of
home improvement products and related services. Since August 1999, we have sold
these companies advertising including a continuous presence on our Web sites for
a fixed annual fee. For example, we have entered into multi-year commercial
contracts with the following third parties: Cendant, DuPont, General Electric
Appliances, Microsoft and Owens Corning. As of December 31, 1999, we had 18
professionals in our partnership services group.
PROFESSIONAL SERVICES GROUP
Our professional services group, a recently formed department within
ImproveNet, consists of professionals residing in local markets who are
responsible for recruiting and retaining service providers in their local market
and for maintaining and building business relationships with local service
providers with a view to enhance our match and win rates. We believe that a
local professional services presence will allow us to build and maintain a
strong network of service providers in each geographic area. As of December 31,
1999, we had 70 local professional advisors in our professional services group.
PROJECT SERVICES GROUP
Once a fully qualified job has been submitted to us, we assign a project
advisor to guide the homeowner through the entire home improvement process. Our
project advisors are the primary contact with the homeowner from the time the
homeowner logs in to use our matching services through the end of the entire
home improvement process. We believe that this personal interaction increases
the likelihood that homeowners will return to us for all their home improvement
needs. As of December 31, 1999, we had 49 project advisors.
PRODUCT DEVELOPMENT
We seek to maintain and advance our market position by continually enhancing
the performance of our Web sites and expanding the features that we offer
homeowners, service providers and suppliers. We expect that enhancements to our
Web sites and services will come from both internally and externally developed
technologies.
Our new product development ideas are stimulated by input from our bulletin
boards, commercial relationships, market surveys and market focus groups. Our
current development efforts focus primarily on identifying, designing and
building proprietary products, features and systems to manage the collection and
organization of information for homeowners, our network of service providers and
suppliers of home improvement products. Additionally, our product development
group is responsible for the ongoing activities related to development of
content for our Web sites and the ability of our systems to handle larger
numbers of visitors, more available pages and our Powered by ImproveNet
interfaces. Future delays or unforeseen problems in these development efforts
could delay the introduction of new products, services or features on our Web
sites.
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TECHNOLOGY INFRASTRUCTURE
Our Web sites are designed to provide fast, reliable, high quality access to
our online services. Our hardware and software systems must assimilate and
process large volumes of visitor traffic and store, process and disseminate
large amounts of user data, and process interactive applications.
We have implemented a broad array of site management, customer interaction
and processing systems using our own proprietary technologies and, where
appropriate, commercially available licensed technologies. Our systems use
Windows NT and are designed for a high level of automation and performance. We
have redundant power supplies, fail-over machines and fully clustered databases
and Web servers to optimize up-time and user experience. We monitor our network
and machines 24 hours a day for reliability. In 1997, 1998 and 1999, we spent
$288,000, $504,000 and $665,000 on research and development.
Our Web sites are operated using Microsoft tools supplemented by
ImproveNet-specific enhancements and tools to support rapid database/Web
application development. Our ability to successfully receive homeowner job
submissions online, provide high-quality homeowner service, and serve a high
volume of advertisements largely depends on the efficient and uninterrupted
operation of our computer and communications hardware systems. Our Web sites and
databases are hosted by Exodus Communications in Santa Clara, California. All of
our computer, communications systems and database back-ups are located in our
administrative headquarters in Redwood City. We estimate that we are currently
using up to approximately 20% of our Web sites' server capacity. Visitor traffic
to our Web sites varies significantly. Spikes in visitor traffic and user demand
can affect expected performance of our Web sites and could cause outages. Since
we have been keeping logs on our Web sites, we believe that our ImproveNet.com
Web site has been unintentionally interrupted for periods ranging from
two minutes to one hour, except that on one occasion, some users experienced
interruptions in part of our service for a period of 48 hours. We believe that
we have had no interruptions or outages of our ImproveNetPro.com Web site since
its inception in December 1999. The primary reason for interruptions in service
relate to new content introductions onto our Web sites, such as our visualizer
or estimator tools, which involve a complex code base. Implementation of
increased security measures, such as additional firewalls, has caused
interruptions in our Internet-based services. We have implemented
around-the-clock security, installed monitoring equipment and hired additional
personnel to minimize and diagnose service problems.
COMPETITION
We believe that the critical competitive factors in the online home
improvement industry include:
- the number of visitors to the Web sites, the number of home improvement
jobs submitted by those visitors, the time spent by those visitors at
those Web sites and the resultant loyalty created among those visitors,
the degree to which Web site content and loyalty create allegiance to the
service provider referral service at the Web site, and, ultimately, the
ability to generate repeat customers;
- the ability to recruit and retain a network of quality service providers
that have broad trade and geographical coverage so that a large number of
jobs can be matched with service providers;
- the ability to maintain loyalty of service providers and capture their
capacity for jobs; and
- the ability to generate significant traffic from online homeowners and
qualify their projects so that they can be efficiently handled by service
providers and so that suppliers can effectively market to them.
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We believe that our ability to compete depends on many different factors,
both within and outside our control, including:
- the geographical coverage and completeness of our network of service
providers and the performance of the service providers referred from that
network;
- the strength of our commercial relationships with suppliers of home
improvement products and services and their interest in entering similar
relationships with our competitors;
- the quality of our Web site content and the tools offered to both
homeowners and service providers; and
- the effectiveness of our marketing strategy and its impact on the number
of high quality home improvement projects we are able to generate from
visits to our Web site and through other means.
Our current competitors include:
- LOCAL, PRIMARILY PHONE-BASED, CONTRACTOR REFERRAL BUSINESSES. These are
generally small operations that take phone requests from homeowners that
they attract through Yellow Page advertising or direct marketing
initiatives and that refer projects to contractors with whom they often
have a personal relationship.
- ONLINE REFERRAL COMPANIES. Some of our competitors such as
ServiceMagic.com, iMandi, iCastle, repairnet, HomesSpud and OurHouse.com
offer a publicly accessible online database and other companies such as
Handyman Online, BidExpress, and Contractor.com have matching services but
do not have national coverage. Remodel.com, which was recently launched by
HomeStore.com, also offers a matching service.
- SUPPLIERS OF HOME IMPROVEMENT PRODUCTS. We expect the number of our
competitors to increase in the future. For example, retailers of home
improvement products such as The Home Depot, Lowe's and Sears Roebuck &
Co. could develop competing home improvement Web sites.
In addition, parties with which we have commercial relationships and other
suppliers of home improvement products could choose to develop their own
Internet strategies or competing home improvement Web sites. Many of our
existing and potential competitors have longer operating histories, greater name
recognition, larger homeowner bases and significantly greater financial,
technical and marketing resources than we do. We believe that we and any
competitor seeking to establish home improvement services on the Internet
confront significant challenges, including the need to:
- cost-effectively build a comprehensive network of service providers;
- possess an effective process for handling a large volume of homeowner
requests and delivering a high level of customer service;
- develop and offer project modeling tools;
- develop a communication channel between homeowners and service providers;
and
- develop relationships or alliances with suppliers of home improvement
products and services that have strong brand names and databases of
service providers.
GOVERNMENT REGULATION
Our business is subject to rapidly changing laws and regulations. Although
our operations are currently based in California, the United States government
and the governments of other states and
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foreign countries have attempted to regulate activities on the Internet. The
following are some of the evolving areas of law that are relevant to our
business:
- PRIVACY LAW. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to leverage our databases
to generate revenues; and
- BUILDING REQUIREMENTS. The activities of our service providers are subject
to various federal, state and local laws, regulations and ordinances
relating to, among other things, the licensing of home improvement
contractors, OSHA standards, building and zoning regulations and
environmental laws and regulations relating to the disposal of demolition
debris and other solid wastes. In addition, many jurisdictions require the
service provider to obtain a building permit for each home improvement
project.
Because of this rapidly evolving and uncertain regulatory environment, we
cannot predict how these laws and regulations might affect our business. In
addition, these uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do
business.
INTELLECTUAL PROPERTY RIGHTS
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual proprietary rights, including our
databases of homeowners and service providers and our matching criteria and
algorithms. We rely primarily on a combination of contractual provisions,
confidentiality procedures, trade secrets, and copyright and trademark laws to
accomplish these goals. Our databases are trade secrets, and our matching
service is protected by trade secret and copyright laws.
In addition, we seek to avoid disclosure of our trade secrets by requiring
employees, customers and others with access to our proprietary information to
execute confidentiality agreements. We also seek to protect our software,
documentation and other written materials under trade secret and copyright laws.
Despite our efforts to protect our proprietary rights, existing laws afford
only limited protection. Attempts may be made to copy or reverse engineer
aspects of our services or to obtain and use information that we regard as
proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Use by others of our proprietary rights could materially harm our business.
Furthermore, policing the authorized use of our product is difficult and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
In the ordinary course of business, we have received, and may receive in the
future, notices from third parties claiming infringement of their proprietary
rights. Any claims, with or without merit, could be time-consuming, result in
costly litigation, cause delays or require us to enter into royalty or licensing
agreements, any of which could harm our business. Patent litigation in
particular has complex technical issues and inherent uncertainties. In the event
an infringement claim against us were successful and we could not obtain a
license on acceptable terms, license a substitute technology or redesign to
avoid infringement, our business would be harmed.
FACILITIES
Our principal administrative offices and systems operations are located in
Redwood City, California in approximately 16,200 square feet of office space
under a lease that expires in 2006. We also lease approximately 5,300 square
feet of office space in Redwood City, California under a lease that expires in
2002. We operate our project services activities out of approximately 8,000
square feet of office space in Ft. Lauderdale, Florida under a lease that
expires in 2004. In addition, we have entered into leases for regional
professional support offices in Irving, Texas and Livonia, Michigan. We expect
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to enter into new leases for office space for additional professional support
offices in six other regions generally on the same terms and conditions as our
current regional office leases. We also anticipate opening an office in the
western United States for our project advisor group. We believe our current
office space including the contemplated leases of the six regional support
offices and our project advisor office is adequate for our current operations
and that additional office space, if required, can be readily obtained.
EMPLOYEES
As of December 31, 1999, we had 198 employees, including 24 in sales and
marketing, 49 in project services, 84 in professional services, 24 in product
development and technology, and 17 in general administration. We consider our
relations with our employees to be good. We have never had a work stoppage, and
no employees are represented under collective bargaining agreements. We believe
that our future success will depend in part on our continued ability to attract,
integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key technical personnel.
Competition for qualified personnel in our industry and geographical location is
intense, and we cannot assure you that we will be successful in attracting,
integrating, retaining and motivating a sufficient number of qualified personnel
to conduct our business in the future.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this prospectus, we are not
engaged in any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about our directors and
executive officers as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ----------------------- ------------------------------------------
<S> <C> <C>
Ronald B. Cooper.......................... 45 President, Chief Executive Officer and
Director
Dennis R. Galloway........................ 52 Senior Vice President, Partnership
Services
Don Gaspar................................ 36 Senior Vice President, Engineering and
Development, and Chief Technology
Officer
William A. Phillips, Jr................... 41 Senior Vice President, Professional
Services
Richard G. Reece.......................... 51 Senior Vice President and Chief Financial
Officer
Richard A. Roof........................... 46 Senior Vice President, Project Services
William E. Crosby......................... 43 Vice President, Editorial
Peter A. Schuller......................... 47 Vice President, Strategic Planning,
Acquisitions and International
Sonia Solanki............................. 35 Vice President, Human Resources
Robert L. Stevens......................... 52 Chairman of the Board of Directors
Andrew Anker(1)........................... 34 Director
Domenico Cecere(2)........................ 50 Director
Stuart Gannes(2).......................... 50 Director
Brian Graff(2)............................ 34 Director
Garrett Gruener(1)........................ 45 Director
Alex Knight(1)............................ 35 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
RONALD B. COOPER has served as our president and chief executive officer
since March 1999 and as a director since September 1999. From July 1996 to
March 1999, Mr. Cooper was president of Price Pfister, Black and Decker's
plumbing products division. From August 1992 to July 1996, Mr. Cooper was
president of three other Black and Decker divisions: Power Tool Accessories, PRC
Realty Systems and PRC Commercial Systems Group.
DENNIS R. GALLOWAY has served as our senior vice president, partnership
services since November 1999. From July 1999 to November 1999, Mr. Galloway was
our senior vice president, professional services. From February 1996 to June
1999, Mr. Galloway owned Galloway Consulting, an Internet consulting firm. From
February 1994 to January 1996, he was president and chief executive officer of
DialOne, a national network of franchised home services contractors.
DON GASPAR has served as our senior vice president, engineering and
development and chief technology officer since September 1999. From
November 1997 to September 1999, he was vice president of engineering and chief
technology officer at TelePost, an internet telecommunications company. From
March 1996 to November 1997, he was the sole owner of Gigantor Software
Development, Inc., a consulting company, and he is currently Chairman of the
Board of that company. From April 1995 to March 1996, he was project leader and
manager of engineering at Netcom, an online services company. From April 1994 to
April 1995, he was a principal engineer and project leader at Lotus Software
Development, a software company.
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WILLIAM A. PHILLIPS, JR. has served as our senior vice president,
professional services since October 1999. From May 1995 to October 1999,
Mr. Phillips was a vice president at Price Pfister. From December 1994 to
May 1995, he was vice president of sales at DAP, Inc., a caulk and sealant
manufacturer.
RICHARD G. REECE has served as our senior vice president and chief financial
officer since September 1999. From April 1996 to September 1999, Mr. Reece was
the vice president and chief financial officer of Diamond Home Services, Inc., a
home improvement products and services company. From August 1994 to April 1996,
Mr. Reece was vice president and chief financial officer of Globe Building
Materials, Inc., a manufacturer and distributor of roofing products.
RICHARD A. ROOF has served as our senior vice president, project services
since May 1999. From September 1998 to May 1999, Mr. Roof was senior vice
president of operations at QEP/Roberts, a manufacturer of home improvement
tools. From June 1997 to June 1998, he was senior vice president of operations
at Continental Datagraphics, a technical data management and publishing company.
From 1981 to June 1997, Mr. Roof served in a variety of positions, most recently
senior vice president of operations, at Interealty Corp/PRC Realty Systems, a
supplier of information systems to the real estate industry.
WILLIAM E. CROSBY has served as our vice president, editorial since June
1997. From September 1977 to August 1996, Mr. Crosby served in a variety of
positions at Sunset Magazine, most recently senior writer.
PETER A. SCHULLER has served as our vice president, strategic planning,
acquisitions and international since October 1999. From August 1994 to September
1999, Mr. Schuller was a management consultant at his own firm and at Pacific
Partners, a management consulting company.
SONIA SOLANKI has served as our vice president, human resources since July
1999. From May 1996 to January 1999, Ms. Solanki was a human resources manager
and from January 1999 to July 1999, she was a director of product development at
Price Pfister. From January 1995 to January 1996, she was a human resources team
leader at Colgate-Palmolive's Pet Nutrition division.
ROBERT L. STEVENS is one of our co-founders and has served as chairman of
the board of directors since January 1996. Mr. Stevens served as our president
and chief executive officer from January 1996 to March 1999. From January 1990
to April 1995, Mr. Stevens was president and chief executive officer of
MagicQuest, Inc., an educational software company.
ANDREW ANKER has served as a director of ImproveNet since March 1999.
Mr. Anker has been at August Capital, a venture capital company, since April
1998 and has been a partner since March 1999. From 1994 to February 1998,
Mr. Anker served as chief executive officer of Wired Digital, Inc., an
Internet-based news and media company. Mr. Anker is the designated
representative of August Capital. August Capital has a contractual right to
designate one representative for nomination to our board of directors under a
voting agreement with holders of a majority of our capital stock.
DOMENICO CECERE has served as a director of ImproveNet since December 1999.
Mr. Cecere has been senior vice president and president of Owens Corning North
America Building Materials Systems Business since January 1999. From January
1998 to December 1998, Mr. Cecere served as Chief Financial Officer of that
division. From January 1996 to December 1997, Mr. Cecere was president of Owens
Corning Roofing Systems division. From January 1994 to December 1995,
Mr. Cecere was Corporate Controller of Owens Corning. Mr. Cecere is the
designated representative of Owens Corning. Owens Corning has a contractual
right to designate one representative for nomination to our board of directors
under a voting agreement with holders of a majority of our capital stock.
STUART GANNES has served as a director of ImproveNet since August 1997.
Mr. Gannes has been employed as vice president, internet applications
organization for AT&T Corp., a telecommunications
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company, since January 1998. From June 1992 to July 1997, he was chief executive
officer of Books That Work, a consumer software company.
BRIAN GRAFF has served as a director of ImproveNet since September 1999.
Mr. Graff has been a principal of Odyssey Investment Partners, a venture capital
company, since March 2000 and was previously a senior vice president of GE
Capital Equity Investments, Inc., a financial subsidiary of General Electric,
where he had been employed since August 1997. From September 1995 to August
1997, he was a director of corporate development of Automatic Data Processing,
Inc., an information processing company. From August 1992 to September 1995, he
was a senior associate of corporate finance at Coopers & Lybrand, a public
accounting firm. Mr. Graff is the designated representative of GE Capital. GE
Capital has a contractual right to designate one representative for nomination
to our board of directors under a voting agreement with holders of a majority of
our capital stock.
GARRETT GRUENER has served as a director of ImproveNet since March 1997.
Mr. Gruener has been a general partner of Alta Partners, a venture capital
company, since 1996. Since 1992, Mr. Gruener has been a partner at Burr, Egan,
Deleage & Co., a venture capital company. Mr. Gruener is on the board of
directors of Be, Inc., Ask Jeeves, Inc., CyberGold, Inc. and ImageX.com, Inc.
Mr. Gruener is the designated representative of Alta Partners II, L.P. Alta
Partners has a contractual right to designate one representative for nomination
to our board of directors under a voting agreement with holders of a majority of
our capital stock.
ALEX KNIGHT has served as a director of ImproveNet since February 1999.
Mr. Knight has been at ARCH Venture Partners, a venture capital company, since
February 1997, and has been a managing director of ARCH Venture Fund IV, LLC
since its formation in February 1999. From March 1996 to February 1997,
Mr. Knight was a consultant to several Internet companies. From May 1995 to
March 1996, Mr. Knight was executive vice president of News/MCI Internet
Ventures, an Internet services company. From September 1993 to May 1995,
Mr. Knight was director of business development and creative affairs at
Microsoft Corporation, a software company. Mr. Knight is the designated
representative of Arch Venture Fund III. ARCH Venture Fund III has a contractual
right to designate one representative for nomination to our board of directors
under a voting agreement with holders of a majority of our capital stock.
BOARD COMMITTEES
AUDIT COMMITTEE. Our audit committee currently consists of Messrs. Cecere,
Gannes and Graff. The audit committee reviews our internal accounting procedures
and consults with and reviews the services provided by our independent
accountants.
COMPENSATION COMMITTEE. Our compensation committee currently consists of
Messrs. Anker, Gruener and Knight. The compensation committee administers our
stock option plans, reviews and approves the compensation and benefits of all
our officers and establishes and reviews general policies relating to employee
compensation and benefits.
DIRECTOR COMPENSATION
Directors currently receive no cash compensation from us for their services
as members of the board or for attendance at committee meetings. Members of the
board are reimbursed for some expenses in connection with attendance at board
and committee meetings.
In February 2000, our board of directors implemented a program of automatic
option grants to each non-employee director. Under this program, each
non-employee director will receive options to purchase 20,000 shares of common
stock upon commencement of service as a director and 5,000 shares at each annual
meeting of stockholders thereafter. The options vest monthly over three years
for the 20,000 share option and over twelve months for the 5,000 share option.
Messrs. Anker, Cecere, Graff
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and Gruener will be eligible for these grants if they are re-elected at our
annual meeting of stockholders on February 22, 2000. In addition, in January
2000, the board of directors granted Mr. Gannes an option to purchase 20,000
shares of our common stock, 5,000 of which will vest monthly over fifteen months
and granted Mr. Knight an option to purchase 20,000 shares of our common stock,
13,333 of which will vest monthly over fifteen months.
In October 1997, Mr. Gannes received an option to purchase 20,000 shares of
our common stock at an exercise price per share of $0.10 in consideration for
consulting services. The exercise price was equal to the fair market value of
the common stock on the date of grant as determined by our board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Messrs. Anker, Gruener and Knight serve as members of the compensation
committee. Investment entities affiliated with Messrs. Anker, Gruener and Knight
have purchased shares of common stock and preferred stock. See "Related Party
Transactions."
BOARD COMPOSITION
Our bylaws currently provide for a board of directors consisting of eight
members. Following the closing of this offering, the directors will be divided
into three classes, each serving a staggered three-year term: class I, whose
term will expire at the first annual meeting of stockholders following this
offering; class II, whose term will expire at the second annual meeting of
stockholders following this offering; and class III, whose term will expire at
the third annual meeting of stockholders following this offering. As a result,
only one class of directors will be elected at each of our annual meetings of
stockholders, with the other classes continuing for the remainder of their
respective terms. Mr. Gannes, Mr. Anker and Mr. Knight have been designated as
class I directors; Mr. Gruener, Mr. Graff, and Mr. Stevens have been designated
as class II directors; and Mr. Cooper and Mr. Cecere have been designated as
class III directors. Mr. Anker, the designated representative of August Capital;
Mr. Graff, the designated representative of GE Capital; Mr. Gruener, the
designated representative of Alta Partners; Mr. Knight, the designated
representative of ARCH Venture Fund III; and Mr. Cecere, the designated
representative of Owens Corning, were elected to the board of directors pursuant
to a voting agreement with the holders of a majority of our capital stock which
obligated these holders to vote for the designated representative of each of
August Capital, ARCH Venture Fund III, Alta Partners, GE Capital and Owens
Corning. The voting agreement terminates upon the closing of this offering.
However, the agreement provides that, as long as Owens Corning owns at least
500,000 shares of our common stock, we will nominate one designee of Owens
Corning for election to our board of directors. This obligation will expire upon
the termination of the Internet-based Services Agreement that we have with Owens
Corning. The Internet-based Services Agreement has a term of twelve years but
may be cancelled at Owens Corning's option on twelve months notice at any time
following the third year it is in effect.
EXECUTIVE COMPENSATION
The following table shows information concerning compensation earned in the
fiscal years ended December 31, 1999 and 1998 for our President and Chief
Executive Officer, our former President and Chief Executive Officer and our five
other most highly compensated executive officers, whose compensation in 1999, as
defined by the Securities and Exchange Commission, exceeded $100,000. These
people are referred to as the "named executive officers." The information in the
table includes salaries, bonuses, stock options granted and other miscellaneous
compensation. We have not granted
51
<PAGE>
stock appreciation rights or restricted stock awards and have no long-term
compensation benefits other than stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES ALL
--------------------------------- UNDERLYING OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------- -------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert L. Stevens....................... 1999 $150,000 -- -- --
Chairman of the Board and former 1998 148,750 -- -- --
President and Chief Executive Officer
Ronald B. Cooper........................ 1999 228,125 -- 577,102 $ 9,637(1)
President and Chief Executive Officer 1998 -- -- -- --
Dennis R. Galloway...................... 1999 75,000 -- 75,000 48,575(2)
Senior Vice President, Partnership 1998 -- -- 30,000 26,000(2)
Services
Richard A. Roof......................... 1999 96,875 -- 125,000 --
Senior Vice President, Project 1998 -- -- -- --
Services
William E. Crosby....................... 1999 114,000 -- 25,000 --
Vice President, Editorial 1998 91,000 -- 10,000 --
Jan Sherman............................. 1999 143,335 -- -- --
Former Vice President, Strategic 1998 94,818 -- -- --
Planning
Hunter Madsen........................... 1999 192,789 -- -- 31,450(2)
Former Vice President, Marketing 1998 -- -- -- 20,400(2)
</TABLE>
- --------------------------
(1) Represents reimbursement for personal travel expenditures.
(2) Represents consulting fees.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows each grant of stock options during the fiscal year
ended December 31, 1999 to the individuals listed on the previous table.
The exercise price of each option was equal to the fair market value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash or by promissory notes.
The potential realizable value is calculated based on the ten-year term of
the option and the market value at the time of grant. Stock price appreciation
of 5% and 10% is assumed pursuant to rules promulgated by the Securities and
Exchange Commission and does not represent our prediction of our stock price
performance. The potential realizable values at 5% and 10% appreciation are
calculated by
- multiplying the number of shares of common stock subject to a given option
by the initial public offering price of $16.00 per share;
- assuming that the total stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
- subtracting from that result the total option exercise price.
The shares listed in the following table under "Number of Securities
Underlying Options Granted" are immediately exercisable at the discretion of our
board of directors. The option has a ten-year term, subject to earlier
termination if the optionee's service with us ceases.
52
<PAGE>
Percentages shown under "Percent of Total Options Granted to Employees in
Fiscal 1999" are based on a total of 2,377,302 options granted to our employees
under our stock option plans during 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED (#) FISCAL 1999 SHARE DATE 5% 10%
- ---- ----------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Stevens............... -- -- -- -- -- --
Ronald B. Cooper................ 577,102 24.3% $0.25 03/18/09 $14,334,122 $22,087,753
Dennis R. Galloway.............. 75,000 3.2 1.50 07/12/09 1,798,512 2,865,624
Richard A. Roof................. 75,000 3.2 1.50 05/03/09 1,780,714 2,811,682
50,000 2.1 7.50 11/17/09 920,993 1,677,897
William E. Crosby............... 25,000 1.1 7.50 11/17/09 460,497 838,949
Jan Sherman..................... -- -- -- -- -- --
Hunter Madsen................... -- -- -- -- -- --
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table shows information regarding shares acquired upon
exercise of options in fiscal 1999 and the number and value of securities
underlying unexercised options that are held by the named executive officers as
of December 31, 1999.
Amounts shown under the column "Value of Unexercised In-the-Money Options at
December 31, 1999" represent the positive spread between the respective exercise
prices of outstanding stock options and the initial public offering price of
$16.00 per share without taking into account any taxes that may be payable in
connection with the transaction, multiplied by the number of shares underlying
the option. Our stock option plan allows for the early exercise of options at
the discretion of our board of directors. All options exercised early are
subject to repurchase by us at the original exercise price, upon the optionee's
cessation of service before the shares vest.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999
UPON EXERCISE VALUE REALIZED ----------------------- -----------------------
NAME (#) (1) VESTED UNVESTED VESTED UNVESTED
- ---- --------------- -------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Stevens........ 71,250 $1,129,875 -- -- -- --
Ronald B. Cooper(2)...... 400,000 6,300,000 -- 177,102 -- $2,789,357
Dennis R. Galloway....... 40,000 631,500 -- 75,000 -- 1,087,500
Richard A. Roof(3)....... 13,333 113,331 -- 111,667 -- 1,399,170
William E. Crosby(3)..... 35,950 472,566 5,300 33,750 $84,109 449,325
Jan Sherman.............. 44,500 704,550 -- -- -- --
Hunter Madsen............ -- -- 35,208 -- 554,526 --
</TABLE>
(1) Based on the initial public offering price of $16.00 per share, minus the
per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
(2) Represents 400,000 shares subject to a right of repurchase in favor of
ImproveNet.
(3) Includes 13,333 shares subject to a right of repurchase in favor of
ImproveNet.
53
<PAGE>
EMPLOYEE BENEFIT PLANS
1996 STOCK OPTION PLAN
Our 1996 Stock Option Plan provides for the granting to employees of
incentive stock options within the meaning of section 422 of the Internal
Revenue Code of 1986 and for the granting to employees and consultants of
nonstatutory stock options. As of December 31, 1999, there were outstanding
options to purchase 1,727,317 shares of common stock and 10,106 shares available
for future grant. This plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, each outstanding option
must be assumed or substituted for by the successor corporation. If the
successor corporation refuses to assume or substitute for the ImproveNet
options, the ImproveNet options will accelerate as of the closing of the merger
or sale of assets. Options under this plan are subject to terms substantially
similar to those described below with respect to options to be granted under the
1999 Equity Incentive Plan. The 1996 Stock Option Plan does not provide for
issuance of restricted stock or stock bonus awards.
1999 EQUITY INCENTIVE PLAN
We adopted the 1999 Equity Incentive Plan in December 1999.
SHARE RESERVE. A total of 1,300,000 shares have been reserved for issuance
under this plan. Each year, beginning January 1, 2001, the number of shares
reserved for issuance under this plan will automatically be increased by the
lesser of (i) 5% of the total number of common stock then outstanding or
(ii) 1,300,000 shares. However, our board may designate a smaller number of
shares of common stock to be added to the share reserve as of a particular
January 1. As of December 31, 1999, there were outstanding options to purchase
130,750 shares of common stock and 1,169,250 shares available for future grant.
ADMINISTRATION. Our board administers the incentive plan unless it has
delegated administration to a committee. Our board has the authority to
construe, interpret and amend the incentive plan as well as to determine:
- the grant recipients;
- the grant dates;
- the number of shares subject to the award;
- the exercisability of the award;
- the exercise price;
- the type of consideration; and
- the other terms of the award.
ELIGIBILITY. Our board may grant incentive stock options that qualify under
section 422 of the Internal Revenue Code to our employees and officers. The
board may grant nonstatutory stock options, stock bonuses and restricted stock
purchase awards to our employees, officers, directors, consultants or
affiliates. A restricted stock purchase award is an offer to purchase our shares
at a price either at or near the fair market value of the shares. A stock bonus,
on the other hand, is a grant of our shares at no cost to the recipient in
consideration for past services rendered. We may reacquire the shares under
either type of award at the original purchase price, which is zero in the case
of a stock bonus, if the recipient's service to us or an affiliate of ours is
terminated before the shares vest.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to specific
employees in a taxable year to the extent that the compensation is more than
$1,000,000. When we become subject to section 162(m), the board may not
54
<PAGE>
grant options under the incentive plan to an employee covering a total of more
than 700,000 shares in any calendar year.
OPTIONS. The board may grant incentive stock options with an exercise price
of 100% or more of the fair market value of a share of our common stock on the
grant date. The board may not grant an incentive stock option to any person who,
at the time of the grant, owns, or is deemed to own, stock possessing more than
10% of the total combined voting power of ImproveNet or any affiliate of
ImproveNet, unless the exercise price is at least 110% of the fair market value
of the stock on the grant date. In addition, the total fair market value,
determined at the grant date, of incentive stock option shares that are
exercisable for the first time during a calendar year, under the incentive plan
and all other stock plans of ImproveNet and its affiliates, may not exceed
$100,000 for any person. We may grant nonstatutory stock options with an
exercise price as low as 85% of the fair market value of a share on the grant
date. The options may, but need not, contain provisions for early exercise.
OPTION TERMS. The maximum option term is 10 years. The option term for any
person who, at the time of grant, owns, or is deemed to own, stock possessing
more than 10% of the total combined voting power of ImproveNet or any affiliate
of ImproveNet, is a maximum of five years. The board may provide for exercise
periods of any length in individual option grants, subject to limitations.
However, generally an option terminates three months after the optionholder's
service terminates. If the termination is due to the optionholder's disability,
the exercise period generally is extended to 12 months. If the termination is
due to the optionholder's death or if the optionholder dies within three months
after his or her service terminates, the exercise period generally is extended
to 18 months following death.
OTHER PROVISIONS. The optionholder may designate a beneficiary to exercise
the option following the optionholder's death. Nonstatutory stock options may be
transferable. Otherwise, the option exercise rights will pass by the
optionholder's will or by the laws of descent and distribution.
The board determines the purchase price of other stock awards, but the
purchase price may not be less than 85% of the fair market value of our common
stock on the grant date. However, the board may award stock bonuses in
consideration of past services without a purchase payment. Shares sold or
awarded under the incentive plan may, but need not be, restricted and subject to
a repurchase option in our favor in accordance with a vesting schedule that the
board determines.
Transactions not involving receipt of consideration by ImproveNet, including
a merger, consolidation, reorganization, stock dividend or stock split, may
change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, the board will appropriately adjust the
incentive plan as to the class and the maximum number of shares subject to the
incentive plan, to the incentive stock option limitation and to the
section 162(m) limitation. It also will adjust outstanding awards as to the
class, number of shares and price per share subject to the awards.
Upon a change in control of ImproveNet, the surviving entity will either
assume or substitute outstanding awards under the incentive plan. Otherwise, the
vesting and exercisability of awards generally will accelerate in full and
terminate if not exercised, if applicable, at or before the event.
This plan will terminate in December 2009 unless the board terminates it
sooner.
1999 EMPLOYEE STOCK PURCHASE PLAN
We adopted our employee stock purchase plan in December 1999.
SHARE RESERVE. We authorized the issuance of 300,000 shares of our common
stock under purchase rights granted to our employees and to employees of our
designated affiliates subject to stockholder approval. On January 1 of each
year, beginning on January 1, 2001, the number of shares in the reserve
automatically will be increased by the lesser of (i) 1% of the total number of
common stock
55
<PAGE>
outstanding on such January 1 or (ii) 300,000 shares. However, the board may
designate a smaller number of shares to be added to the share reserve as of a
particular January 1.
ELIGIBILITY. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of section 423 of the Internal Revenue Code.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. We implement this purchase plan by offerings
of purchase rights to eligible employees. Generally, all of our employees and
the employees of any United States affiliate of ours may participate in the
purchase plan, excluding part-time and seasonal employees. However, no employee
may participate in the purchase plan if, immediately after we grant the employee
a purchase right, the employee has voting power over 5% or more of our
outstanding capital stock. As of the date of this prospectus, no shares of
common stock have been purchased under the purchase plan.
ADMINISTRATION. Under the purchase plan, the board may specify offerings of
up to 27 months. The first offering will begin on the effective date of this
initial public offering. Unless the board otherwise determines, our common stock
is purchased for accounts of participating employees at a price per share equal
to the lower of:
- 85% of the fair market value of a share on the first day of the offering,
or
- 85% of the fair market value of a share on the purchase date.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
- 85% of the fair market value of a share on the day they began
participating in the purchase plan, or
- 85% of the fair market value of a share on the purchase date.
Under the offering that will begin on the effective date of this prospectus,
employees may authorize payroll deductions of up to 15% of their base
compensation, not including sales commissions or bonuses, for the purchase of
stock under the purchase plan and may end their participation in the offering at
any time up to 10 days before a purchase date. Participation ends automatically
on termination of employment with us or our affiliates.
OTHER PROVISIONS. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established by
us or our affiliates, if any, do not permit the employee's rights to purchase
our stock to accrue at a rate that exceeds $25,000 of the fair market value of
our stock for each calendar year in which the purchase rights are outstanding.
The board also may limit the number of shares that an employee may purchase on
any purchase date.
Upon a change of control of ImproveNet, the board may provide that the
successor corporation will assume or substitute outstanding purchase rights.
Alternatively, the board may shorten the offering and provide that shares will
be purchased for participants immediately before the change in control.
The employee stock purchase plan will terminate in December 2009 unless the
board terminates it sooner.
401(k) PLAN
Effective January 1, 1999, we adopted a 401(k) plan to provide eligible
employees with a tax preferential savings and investment program. Employees
become eligible to participate in the 401(k) plan on the first day they perform
an hour of service for us, at which point we classify them as participants. They
may elect to reduce their current compensation by up to the lesser of 20% of
eligible
56
<PAGE>
compensation or the statutorily prescribed annual limit, $10,500 in 2000, and
have this reduction contributed to the 401(k) plan. At the direction of each
participant, the trustee of the 401(k) plan invests the assets of the 401(k)
plan in selected investment options. Contributions by participants or by us to
the 401(k) plan, and income earned on plan contributions, are generally not
taxable to the participants until withdrawn.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation and bylaws contain provisions permitted
under Delaware law relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except in circumstances involving wrongful acts,
including:
- for any breach of the director's duty of loyalty to ImproveNet or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for any acts under section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, including an injunction or rescission, in
the event of a breach of the director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws. In addition, we
intend to enter into separate indemnification agreements with our directors and
executive officers that provide each of them indemnification protection in the
event the amended and restated certificate of incorporation and amended and
restated bylaws are subsequently amended. We believe that these provisions and
agreements will assist us in attracting and retaining qualified individuals to
serve as directors and officers.
57
<PAGE>
RELATED PARTY TRANSACTIONS
PREFERRED STOCK FINANCINGS
In June and July of 1997, we sold 1,205,000 shares of series A preferred
stock at a purchase price of $1.00 per share and warrants to purchase 96,400
shares of series A preferred stock at an exercise price of $1.00 per share. Upon
the closing of this offering, all outstanding shares of series A preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive officers, directors, holders of more than 5% of our
securities and members of these persons' immediate families purchased shares of
series A preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES A SERIES A AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Stuart Gannes............................... 10,000 800 $ 10,000 $ 172,000
5% STOCKHOLDERS
Entities affiliated with Alta Partners...... 1,000,000 80,000 1,000,000 17,200,000
</TABLE>
- ------------------------
(1) Based on the initial public offering price of $16.00 per share and net of
the warrant exercise price.
In March 1998, we sold 1,934,526 shares of series B preferred stock at a
purchase price of $2.52 per share and warrants to purchase 47,009 shares of
series B preferred stock at an exercise price of $2.52 per share. Upon the
closing of this offering, all outstanding shares of series B preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive officers, directors, holders of more than 5% of our
securities and members of these persons' immediate families purchased shares of
series B preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES B SERIES B AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Alex Knight................................. 9,921 241 $ 25,000 $ 161,985
5% STOCKHOLDERS
Entities affiliated with Alta Partners...... 555,556 13,500 1,400,001 9,070,876
ARCH Venture Fund III, L.P.................. 813,492 19,768 2,049,999 13,282,345
Allstate Insurance Company.................. 496,032 12,054 1,250,000 8,099,000
</TABLE>
- ------------------------
(1) Based on the initial public offering price of $16.00 per share and net of
the warrant exercise price.
In March 1999, we sold 3,543,190 shares of series C preferred stock at a
purchase price of $6.53 per share. Upon the closing of this offering, all
outstanding shares of series C preferred stock will automatically convert into
shares of common stock on a one-for-one basis. The following executive
58
<PAGE>
officers, directors, holders of more than 5% of our securities and members of
these persons' immediate families purchased shares of series C preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES C AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK PURCHASE PRICE SHARES (1)
- --------- --------------- -------------- -----------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Stuart Gannes........................................ 3,829 $ 25,003 $ 61,264
Alex Knight.......................................... 7,657 50,000 122,512
5% STOCKHOLDERS
Entities affiliated with Alta Partners............... 421,134 2,750,005 6,738,144
ARCH Venture Fund III, L.P........................... 612,558 4,000,004 9,800,928
Allstate Insurance Company........................... 306,278 1,999,995 4,900,448
August Captial II, L.P............................... 1,378,255 9,000,005 22,052,080
</TABLE>
- ------------------------
(1) Based on the initial public offering price of $16.00 per share.
In September 1999, we sold 2,100,843 shares of Series D preferred stock at a
purchase price of $7.70 per share and warrants to purchase 326,000 shares of
series D preferred stock at an exercise price of $0.01. Upon the closing of this
offering, all outstanding shares of series D preferred stock will automatically
convert into shares of common stock on a one-for-one basis. The following
executive officers, directors, holders of more than 5% of our securities and
members of these persons' immediate families purchased shares of series D
preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES D SERIES D AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Alex Knight................................. 2,597 -- $ 19,997 $ 41,552
5% STOCKHOLDERS
Entities affiliated with Alta Partners...... 259,740 -- 1,999,998 4,155,840
ARCH Venture Fund III, L.P.................. 215,192 -- 1,656,978 3,443,072
August Capital II, L.P...................... 205,137 -- 1,579,555 3,282,192
Entities affiliated with GE Capital Equity
Investments, Inc.......................... 1,298,701 326,000 9,999,998 25,991,956
</TABLE>
- ------------------------
(1) Based on the initial public offering price of $16.00 per share and net of
the warrant exercise price.
In November and December 1999, we sold 2,597,135 shares of series E
preferred stock at a purchase price of $13.50 per share, warrants to purchase
420,000 shares of common stock at an exercise price of $0.01 and warrants to
purchase 842,596 shares of common stock at an exercise price of $13.50. Upon the
closing of this offering, all outstanding shares of series E preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive officers, directors,
59
<PAGE>
holders of more than 5% of our securities and members of these persons'
immediate families purchased shares of series E preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES E COMMON AGGREGATE VALUE OF
PURCHASER PREFERRED STOCK WARRANTS PURCHASE PRICE SHARES (1)
- --------- --------------- -------- -------------- -----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Alex Knight................................. 1,850 -- $ 24,975 $ 29,600
5% STOCKHOLDERS
ARCH Venture Fund III, L.P.................. 74,074 -- 999,999 1,185,184
Microsoft Corporation....................... 555,556 683,333 7,500,006 11,946,229
Owens Corning............................... 740,741 150,000 10,000,004 14,250,356
</TABLE>
- ------------------------
(1) Based on the initial public offering price of $16.00 per share and net of
the warrant exercise price.
See the notes on the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
FOURTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT. We have entered into
an agreement dated November 23, 1999 with the preferred stockholders described
above that grants these and other preferred stockholders registration rights
with respect to their shares of common stock following this offering. Upon the
completion of this offering, all shares of our outstanding preferred stock will
be automatically converted into an equal number of shares of common stock.
FOURTH AMENDED AND RESTATED VOTING AGREEMENT. We have entered into a voting
agreement dated November 23, 1999 with our preferred stockholders. Under the
voting agreement, Alta Partners, ARCH Venture Fund III, August Capital, GE
Capital and Owens Corning each have the right to designate one representative
for nomination to our board of directors and the holders of a majority of our
capital stock are obligated to vote for these representatives. Andrew Anker was
elected to our board as the designated representative of August Capital; Brian
Graff was elected to our board as the designated representative of GE Capital;
Garrett Gruener was elected to our board as the designated representative of
August Capital; Alex Knight was elected to our board as the designated
representative of ARCH Venture Fund III; and Domenico Cecere was elected to our
board as the designated representative of Owens Corning. The voting agreement
terminates upon the closing of a firmly underwritten public offering. However,
the agreement provides that, as long as Owens Corning owns at least 500,000
shares of our common stock, we will continue to nominate one designated
representative of Owens Corning for election to our board of directors but no
stockholders will be obligated to vote in favor of this representative. This
obligation will expire upon the termination of the Internet-based Services
Agreement that we have with Owens Corning. The Internet-based Services Agreement
has a term of twelve years but may be cancelled at Owens Corning's option on
twelve months notice at any time following the third year it is in effect.
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with our directors and
executive officers for the indemnification of and advancement of expenses to
these persons to the full extent permitted by law. We also intend to execute
these agreements with our future directors and officers.
EMPLOYMENT AGREEMENTS
On February 16, 1999, we entered into a letter agreement with Ronald B.
Cooper, our president and chief executive officer. It provides for an annual
base salary of $300,000 and for an annual performance bonus of up to $100,000.
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In March 1999, Mr. Cooper received an option to purchase 577,102 shares of
our common stock at an exercise price per share of $0.25. The exercise price was
equal to the fair market value of the common stock on the date of grant as
determined by the board of directors. 144,275 of the shares subject to the
options vest on the first anniversary of the date of grant with the remaining
shares vesting in equal monthly installments over the following three years. In
August 1999, we loaned Mr. Cooper $500,000. The interest on the loan is 5.25%
per year and all principal and accrued interest will become due and payable on
the earlier of the first day of the month following the one-year anniversary of
the closing of a firm commitment underwritten public offering of the Company's
common stock or within 90 days after the voluntary termination of the officer's
employment or the termination of the officer's employment for cause. If we
terminate Mr. Cooper's employment without cause before March 29, 2000, 50% of
the loan will be forgiven. If we terminate Mr. Cooper's employment without cause
after March 29, 2000 and before the first anniversary of the closing of this
offering, 75% of the loan will be forgiven.
INDEBTEDNESS OF MANAGEMENT
In December 1999, we received promissory notes from our executive officers
in connection with their exercise of stock options in the aggregate amount of
$299,785 with an interest rate of 6.2%. These promissory notes represent
$99,897.50 in principal amount from William Crosby, $99,897.50 in principal
amount from Richard Roof and $99,990.00 in principal amount from William
Phillips, Jr.
ACCELERATION OF VESTING
In February 2000, we granted acceleration of vesting to our executive
officers in the event that we are acquired. In that event, 40% of the remaining
unvested shares held by any executive officer who is terminated without cause
within 24 months following the acquisition will automatically vest.
TRANSACTIONS WITH 5% OR GREATER STOCKHOLDERS
In September 1999, we entered into an Internet Development, Marketing and
Distribution Agreement with General Electric Appliances, a division of the
General Electric Company. GE purchased a package of our advertising products and
Powered by ImproveNet including a private label contractor matching service, for
$750,000 in year one, $1,000,000 in year two and $1,250,000 in year three. In
addition, we purchased cooperative and co-branded advertising and access to GE's
direct mail infrastructure, such as inclusion in some of GE's direct mail
advertising campaigns for $750,000 in year one, $1,000,000 in year two and
$1,250,000 in year three. Throughout the term of the agreement, GE has agreed to
pay us ten dollars for each completed sale we refer to GE, not to exceed
$500,000 in year one, $750,000 in year two and $1,250,000 in year three. In
connection with this agreement, we issued to GE Appliances and GE Capital Equity
Investments, Inc. warrants to purchase 326,000 shares of series D preferred
stock at $0.01 per share. Based on the initial public offering price of $16.00
per share and net of the warrant exercise price, this warrant will have a total
value of $5,212,740. The term of the agreement is three years.
In October 1999, we entered into an Internet-based Services Agreement with
Owens Corning. Owens Corning purchased a package of our advertising products and
Powered by ImproveNet including a private-label contractor matching service for
$750,000 in year one, $1,000,000 in year two and $1,250,000 in year three. We
also agreed to charge Owens Corning fees that are the lower of the fees charged
to our similar sized customers or 20% below our prevailing market rate for such
services. In addition, we purchased cooperative and co-branded advertising, the
fees for which cannot exceed $562,500 in year one, $750,000 in year two and
$937,500 in year three. We agreed to pay Owens Corning twenty-five dollars for
each direct referral to ImproveNet.com exceeding $500 in total job value. As
long as Owens Corning owns at least 500,000 shares of our common stock, we are
obligated to nominate one designee of Owens Corning for election to our board of
directors. The Owens Corning
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designee is currently Mr. Domenico Cecere, president of Owens Corning North
American Building Materials Systems. We cannot provide a private-label
contractor matching service to Owens Corning's competitors through December
2000. In connection with this agreement, we issued Owens Corning warrants to
purchase 150,000 shares of our Common Stock at $0.01 per share. Based on the
initial public offering price of $16.00 per share and net of the warrant
exercise price, this warrant will have a total value of $2,398,500. The term of
the agreement is 12 years. Following the initial three years of the agreement,
Owens Corning may terminate the agreement upon 12 months prior written notice.
In December 1999, we entered into a Relationship Agreement with Microsoft.
We purchased a direct link on Microsoft's HomeAdvisor Web site to a co-branded
Web site Powered by ImproveNet. Microsoft agreed to provide our Web site with
nine million guaranteed impressions from a combination of HomeAdvisor's
MarketPlace and button rotation across its Web site. We will pay Microsoft a fee
equal to the greater of 25%-37 1/2% of revenues realized from the operation of
the co-branded Web site or a minimum guaranteed fee of $2,500,000 in year one,
$2,000,000 in year two and $1,500,000 in year three. If Microsoft agrees to host
our content on the HomeAdvisor Web site, Microsoft will pay us a minimum of 25%
of all gross revenues received by Microsoft from operation of the Web site. In
addition, we have agreed that Web pages on ImproveNet.com visited by users
linked through the HomeAdvisor Web site will not contain any advertisements,
hyperlinks or other content from a special class of HomeAdvisor competitors. We
also agreed to charge Microsoft 75% of our current rates for button, banner,
showcase and smart lead advertising on our Web sites. In connection with this
agreement, we issued to Microsoft warrants to purchase 583,333 shares of our
common stock at $13.50 per share and warrants to purchase 100,000 shares of
common stock at $0.01 per share. Based on the initial public offering price of
$16.00 per share and net of the warrant exercise prices, these warrants will
have a total value of $3,057,333. The term of the agreement is three years.
TRANSACTIONS WITH PROMOTERS
From January 1996 through March 1998, we leased office space from 125
University, a California limited partnership and 101 University, a California
limited partnership, in each of which Robert L. Stevens held an approximately
13% interest. Mr. Stevens was our president and chief executive officer from
January 1996 to March 1999. He has been a director since January 1996 and is the
chairman of the board. The total rent paid was $30,000 in 1996, $78,000 in 1997
and $23,000 in 1998. We did not pay any rent to 125 University or
101 University in 1999.
In January 1996, we issued Robert L. Stevens 200,000 shares of our common
stock at a purchase price of $0.01 per share for an aggregate purchase price of
$2,000. The purchase price was less than the per share fair market value of our
common stock of $0.25 as determined by our board on the date of issuance. Based
on the initial public offering price of $16.00 per share, these shares have an
aggregate net value of $3,198,000. In October 1996, we issued to Robert L.
Stevens and Karen L. Stevens, trustees under the Revocable Trust Agreement dated
8/9/78 as amended, FBO Robert L. Stevens and Karen L. Stevens, 225,835 shares of
our common stock at a purchase price of $0.25 per share for aggregate purchase
price of $56,459. The purchase price was equal to the fair market value of our
common stock as determined by our board on the date of issuance. Based on the
initial public offering price of $16.00 per share, these shares have an
aggregate net value of $3,556,901. In January 1996, we granted Mr. Stevens an
option to purchase 20,000 shares of common stock with an exercise price of $0.25
per share. Based on the initial public offering price of $16.00 per share, these
shares have an aggregate net value of $315,000. In June 1997, we granted
Mr. Stevens an option to purchase 51,250 shares of common stock with an exercise
price of $0.10 per share. Based on the initial public offering price of $16.00
per share, these shares have an aggregate net value of $814,875. The exercise
price for each option was equal to the fair market value of our common stock as
determined by our board on the date of the grant. In June 1997, we issued to
Mr. Stevens 40,253 shares of common stock upon conversion of a promissory note
at a purchase price of $0.50 per share for an
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aggregate purchase price of $20,127. The purchase price per share was greater
than the per share fair market value of our common stock of $0.10 as determined
by our board on the date of issuance. Based on the initial public offering price
of $16.00 per share, these shares have an aggregate net value of $623,922.
In January 1996, we issued Jan Sherman, our former senior vice president,
strategic planning, 200,000 shares of our common stock at a purchase price of
$0.01 per share for an aggregate purchase price of $2,000. The purchase price of
$0.01 per share was less than the per share fair market value of our common
stock of $0.25 as determined by our board on the date of issuance. Based on the
initial public offering price of $16.00 per share, these shares have an
aggregate net value of $3,198,000. In January 1996 we also granted Mr. Sherman
an option to purchase 20,000 shares of common stock with an exercise price of
$0.25 per share. Based on the initial public offering price of $16.00 per share,
these shares have an aggregate net value of $315,000. In June 1997 we granted
Mr. Sherman an option to purchase 24,500 shares of common stock with an exercise
price of $0.10 per share. Based on the initial public offering price of $16.00
per share, these shares have an aggregate net value of $389,550. The exercise
price of these options was equal to the fair market value of our common stock as
determined by our board on the date of the grant.
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PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of our common stock offered by this prospectus, by:
- each named executive officer;
- each of our directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially five percent or more of our common stock; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently vested or will vest within 60 days of December 31, 1999 are deemed
outstanding. These shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person.
Except as indicated in the footnotes to this table and under community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares shown as beneficially owned by them.
Percentage of ownership is based on 13,719,310 shares of common stock
outstanding on December 31, 1999 and 16,479,310 shares of common stock
outstanding after completion of this offering. This table assumes no exercise of
the underwriters' over-allotment option. Unless otherwise indicated, the address
of each of the individuals and entities named below is: c/o ImproveNet, Inc.,
720 Bay Road, Suite 200, Redwood City, CA 94063.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT BENEFICIALLY OWNED
BENEFICIALLY --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------ ---------------- --------------- --------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Ronald B. Cooper (1)............................... 400,000 2.9% 2.4%
Garrett Gruener (2)................................ 2,329,930 16.9 14.1
Andrew Anker (3)................................... 1,583,392 11.5 9.6
Robert L. Stevens (4).............................. 527,338 3.8 3.2
Alex Knight (5).................................... 22,266 * *
Stuart Gannes (6).................................. 21,851 * *
Brian Graff (7).................................... -- * *
Domenico Cecere (8)................................ -- * *
Dennis Galloway.................................... 40,000 * *
William Crosby (9)................................. 38,032 * *
Richard Roof (10).................................. 13,333 * *
Jan Sherman........................................ 244,500 1.8 1.5
Hunter Madsen...................................... 35,208 * *
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT BENEFICIALLY OWNED
BENEFICIALLY --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------ ---------------- --------------- --------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Alta California Partners, L.P. (11)................ 2,329,930 16.9% 14.1%
ARCH Venture Fund III, L.P. (12)................... 1,735,084 12.6 10.5
GE Capital Equity Investments, Inc. (13)........... 1,624,701 11.6 9.7
August Capital II, L.P............................. 1,583,392 11.5 9.6
Microsoft Corporation (14)......................... 1,238,889 8.6 7.2
Owens Corning (15)................................. 890,741 6.4 5.4
Allstate Insurance Company (16).................... 814,364 5.9 4.9
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(16 PERSONS) (17)................................ 5,051,142 36.3 30.3
ALL DIRECTORS, EXECUTIVE OFFICERS AND 5%
STOCKHOLDERS
AS A GROUP (21 PERSONS) (18)..................... 11,354,921 75.3 64.6
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Represents 400,000 shares subject to a right of repurchase at the purchase
price for such shares.
(2) Represents 2,186,473 shares held by Alta California Partners, L.P., 49,957
shares held by Alta Embarcadero Partners, L.P., 91,411 shares issuable to
Alta California Partners, L.P. at a weighted average exercise price of
$1.22 per share pursuant to warrants which vest within 60 days and 2,089
shares issuable to Alta Embarcadero Partners, L.P. at a weighted average
exercise price of $1.22 per share pursuant to warrants that vest within 60
days. Mr. Gruener is a partner of the general partner of these entities and
disclaims beneficial ownership of the shares held by these entities except
to the extent of his pecuniary interest therein.
(3) Mr. Anker is a partner of August Capital and disclaims beneficial ownership
of the shares held by August Capital II, L.P. except to the extent of his
pecuniary interest therein.
(4) Includes 297,338 shares held pursuant to the Revocable Trust Agreement
dated 8/9/78, of which Robert L. Stevens and Karen L. Stevens are trustees,
15,000 shares held by Karen L. Stevens, Trustee of the Karen L. Stevens
1999 Annuity Trust, 15,000 shares held by Robert L. Stevens, Trustee of the
Robert L. Stevens 1999 Annuity Trust. Does not include 5,000 shares held by
Jason C. Stevens and 5,000 shares held by Kevin M. Stevens, adult children
of Mr. Stevens. Does not include 25,000 shares held by G. Bickley
Stevens II and Sara J. Emerson, 110,000 shares held by G. Bickley
Stevens II, 5,000 shares issuable to G. Bickley Stevens II at a weighted
average per share exercise price of $1.00 pursuant to warrants that vest
within 60 days and 1,500 shares issuable to G. Bickley Stevens II at a
weighted average per share exercise price of $1.00 pursuant to options that
vest within 60 days. Mr. Stevens disclaims beneficial ownership of the
shares held by Jason C. Stevens, Kevin M. Stevens and G. Bickley
Stevens II. G. Bickley Stevens II is the brother of Mr. Stevens.
(5) Includes 241 shares issuable at a weighted average per share exercise price
of $2.52 pursuant to warrants that vest within 60 days. Does not include
1,735,084 shares held by entities affiliated with ARCH Venture Fund III,
L.P. Alex Knight, one of our directors, is a managing director of ARCH
Venture Fund IV, LLC, the general partner of ARCH Venture Fund IV, L.P.,
which does not own any of our shares. Mr. Knight does not have voting
control or investment power over shares held by ARCH Venture Fund III, L.P.
and therefore disclaims beneficial ownership of those shares.
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(6) Includes 800 shares issuable at a weighted average per share exercise price
of $2.52 pursuant to warrants that vest within 60 days and 7,222 shares
issuable at a weighted average per share exercise price of $0.10 pursuant
to options that vest within 60 days.
(7) Mr. Graff is a vice president of GE Capital Equity Investments, Inc. and
disclaims beneficial ownership of the shares held by GE Capital Equity
Investments, Inc., General Electric Appliances and General Electric
Company.
(8) Mr. Cecere is a vice president of Owens Corning and disclaims beneficial
ownership of the shares held by Owens Corning.
(9) Includes 2,082 shares issuable at a weighted average per share exercise
price of $0.13 pursuant to options that vest within 60 days. Includes
13,333 shares subject to a right of repurchase at the purchase price for
such shares.
(10) Represents 13,333 shares subject to a right of repurchase at the purchase
price for such shares.
(11) Includes 91,411 shares issuable upon exercise of warrants at a weighted
average exercise price of $1.22 per share that vest within 60 days, 49,957
shares held by Alta Embarcadero Partners and 2,089 shares issuable upon
exercise of warrants at a weighted average exercise price of $1.22 per
share that vest within 60 days.
(12) Includes 19,768 shares issuable at a weighted average per share exercise
price of $2.52 pursuant to warrants that vest within 60 days.
(13) Represents 1,298,701 shares held by GE Capital Equity Investments, Inc.,
117,000 shares issuable to GE Capital Equity Investments, Inc. at a
weighted average per share exercise price of $0.01 pursuant to warrants
that vest within 60 days and 209,000 shares issuable to General Electric
Appliances at a weighted average per share exercise price of $0.01
pursuant to warrants that vest within 60 days. GE Capital Equity
Investments, Inc. shares beneficial ownership with General Electric
Capital Corporation and General Electric Company with respect to 1,298,701
shares.
(14) Includes 683,333 shares issuable to Microsoft at a weighted average per
share exercise price of $12.44 pursuant to warrants that vest within
60 days.
(15) Includes 150,000 shares issuable at a weighted average per share exercise
price of $0.01 pursuant to warrants that vest within 60 days.
(16) Includes 12,054 shares issuable at a per share exercise price of $2.52
pursuant to warrants that vest within 60 days.
(17) Includes 94,541 shares issuable at a weighted average per share exercise
price of $1.22 pursuant to warrants that vest within 60 days, 9,304 shares
issuable at a weighted average per share exercise price of $0.11 pursuant
to options that vest within 60 days and 3,913,322 shares held by related
entities.
(18) Represents 5,051,142 shares held by or issuable to directors and executive
officers (see note 17), 1,735,084 shares held by or issuable to ARCH
Venture Fund III, L.P. (see note 12), 1,624,701 shares held by or issuable
to entities affiliated with GE Capital Equity Investments, Inc. (see note
13), 1,238,889 shares held by or issuable to Microsoft Corporation (see
note 14), 890,741 shares held by or issuable to Owens Corning (see note
15) and 814,364 shares held by or issuable to Allstate Insurance Company
(see note 16).
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value.
COMMON STOCK
As of December 31, 1999, there were 13,719,310 shares of common stock
outstanding that were held of record by approximately 120 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio. There will be 16,479,310 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants, after giving effect to the sale of the
shares of common stock in this offering.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders. Subject to preferences that may
apply to any preferred stock outstanding at the time, the holders of outstanding
shares of common stock are entitled to receive any dividends out of assets
legally available as our board of directors may determine. Upon liquidation,
dissolution or winding up of ImproveNet, holders of our common stock are
entitled to share in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding shares of preferred stock.
Holders of common stock have no preemptive or conversion rights or other
subscription rights. No redemption or sinking fund provisions apply to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of preferred stock
will be converted into one share of common stock. Following this offering, our
certificate of incorporation provides that our board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series. The board will be able to fix
the rights, preferences, privileges and restrictions of the preferred stock,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of this series. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock, and the likelihood that holders of preferred stock will receive dividend
payments and payments upon liquidation may have the effect of delaying,
deferring or preventing a change in control of ImproveNet, which could depress
the market price of our common stock. We have no present plan to issue any
shares of preferred stock.
WARRANTS
As of December 31, 1999, after giving effect to the conversion of all
outstanding preferred stock into common stock, warrants to purchase a total of
746,000 shares of our common stock were outstanding at an exercise price of
$0.01 per share, warrants to purchase a total of 104,400 shares of our common
stock were outstanding at an exercise price of $1.00 per share, warrants to
purchase a total of 47,009 shares of our common stock were outstanding at an
exercise price of $2.52 per share, warrants to purchase 47,167 shares of our
common stock were outstanding at an exercise price of $6.53 per share and
warrants to purchase a total of 842,596 shares of our common stock were
outstanding at an exercise price of $13.50 per share. Each warrant contains
provisions for the adjustment of the exercise price and the number of shares
issuable upon the exercise of the warrant in the event of stock dividends, stock
splits, reorganizations and reclassifications and consolidations.
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REGISTRATION RIGHTS OF STOCKHOLDERS
On the date 180 days after the completion of this offering, the holders of
11,382,694 shares of common stock and the holders of warrants exercisable for up
to 1,787,172 shares of common stock, or their transferees, will be entitled to
rights to register these shares under the Securities Act of 1933. If we propose
to register any of our securities under the Securities Act, either for our own
account or for the account of other securityholders, the holders of these shares
of common stock and warrants to purchase common stock will be entitled to notice
of the registration and will be entitled to include, at our expense, their
shares of common stock. In addition, the holders of these shares of common stock
may require us, at our expense and on not more than two occasions at any time
beginning 180 days from the date of the closing of this offering, to file a
registration statement under the Securities Act with respect to their shares of
common stock, and we will be required to use our best efforts to effect the
registration upon written request from the holders of more than a majority of
the registrable securities then outstanding, with a net aggregate public
offering price of $20,000,000. Further, the holders of these shares of common
stock may require us at our expense to register their shares on Form S-3 when we
become eligible to use this form for an aggregate public offering of at least
$500,000 of our common stock. The rights of these holders terminate on the
earlier of six years after the effective date of this offering or when the
holder is able to sell its shares pursuant to Rule 144 under the Securities Act
in any 90-day period.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
We are subject to section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- before the date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the
stockholder's becoming an interested stockholder;
- upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who are
directors and also officers, and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or after the date, the business combination is approved by the board of
directors and authorized at a meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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In general, section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our bylaws provide that candidates for director may be nominated only by the
board of directors or by a stockholder who gives written notice to us at least
90 days but not more than 120 days before the first anniversary of the last
annual meeting of stockholders. Stockholders must give similar advance notice to
raise other business at stockholders' meetings. Between stockholders' meetings,
the board may appoint new directors to fill vacancies or newly created
directorships. Our bylaws also limit the ability of stockholders to call special
meetings.
Our certificate of incorporation requires that upon completion of this
offering, any action required or permitted to be taken by our stockholders must
be taken at a duly called annual or special meeting of stockholders and may not
be effected by a consent in writing. Our certificate of incorporation also
provides that the authorized number of directors may be changed only by
resolution of the board of directors. Delaware law and these charter provisions
may have the effect of deterring hostile takeovers or delaying changes in
control of our management, which could depress the market price of our common
stock.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
NASDAQ NATIONAL MARKET
Our common stock has been approved for listing on the Nasdaq National Market
under the trading symbol "IMPV."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
16,479,310 shares of common stock, based on shares outstanding as of
December 31, 1999 assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options and warrants. Of these shares, all
of the shares sold in this offering will be freely tradable without restriction
or further registration under the Securities Act, unless these shares are
purchased by affiliates. The remaining 13,719,310 shares of common stock held by
existing stockholders are restricted securities. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration described below under Rules 144, 144(k) or 701 promulgated
under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be available
for sale in the public market as follows:
- 45,000 shares will be eligible for immediate sale on the date of this
prospectus;
- no shares will be eligible for sale 90 days from the date of this
prospectus;
- 8,197,728 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, 180 days after the date of this
prospectus; and
- 5,476,582 shares will be eligible for sale at various times after the
180-day lock-up period.
LOCK-UP AGREEMENTS. All of our officers and directors, substantially all of
our stockholders, optionholders and warrantholders have agreed not to transfer
or dispose of, directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for shares of our
common stock, for a period of 180 days after the date of this prospectus.
Transfers or dispositions can be made sooner with the prior written consent of
Credit Suisse First Boston Corporation.
RULE 144. In general, under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including the holding period of any prior owner except an affiliate, would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 164,793 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
RULE 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in
70
<PAGE>
connection with a compensatory stock purchase plan or option plan or other
written agreement will be eligible to resell their shares beginning 90 days
after the date of this prospectus, subject only to the manner of sale provisions
of Rule 144. Affiliates who purchase or receive shares from us in connection
with a compensatory stock purchase plan or option plan or other written
agreement will be eligible to sell their shares beginning 90 days after the date
of this prospectus under Rule 701 without compliance with the Rule 144 holding
period requirements.
REGISTRATION RIGHTS. On the date 180 days after the date of this
prospectus, the holders of 11,382,694 shares and the holders of warrants
exercisable for up to an aggregate of 1,787,172 shares, or their transferees,
will be entitled to rights with respect to the registration of their shares
under the Securities Act. Registration of their shares under the Securities Act
would result in the shares becoming freely tradable without restriction under
the Securities Act, except for shares purchased by affiliates, immediately upon
the effectiveness of this registration.
STOCK OPTIONS. We intend to file a registration statement under the
Securities Act covering the 3,037,423 shares reserved for issuance under our
stock option plans and 300,000 shares reserved for issuance under our employee
stock purchase plan. The registration statement is expected to be filed and
become effective as soon as practicable after the closing of this offering.
Accordingly, shares registered under the registration statement will, subject to
Rule 144 volume limitations applicable to affiliates, be available for sale in
the open market, beginning 180 days after the date of this prospectus.
WARRANTS. We have outstanding warrants to purchase 1,787,172 shares as of
December 31, 1999. All the shares issuable upon the exercise of the warrants
will be eligible for sale at various times after the 180-day lock-up period,
subject to Rule 144 volume limitations applicable to affiliates.
71
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated March 15, 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc. and E*OFFERING Corp. are acting as representatives, the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation...................... 1,399,320
FleetBoston Robertson Stephens Inc.......................... 699,660
E*OFFERING Corp. ........................................... 233,220
William Blair & Company, L.L.C.............................. 55,200
J.C. Bradford & Co. ........................................ 41,400
Chase Securities Inc. ...................................... 41,400
Deutsche Bank Securities Inc................................ 41,400
First Union Securities, Inc................................. 41,400
Invemed Associates LLC...................................... 41,400
Prudential Securities Incorporated.......................... 41,400
Salomon Smith Barney Inc.................................... 41,400
SG Cowen Securities Corporation............................. 41,400
SoundView Technology Group, Inc. ........................... 41,400
---------
Total..................................................... 2,760,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 414,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.68 per share. The
underwriters and the selling group members may allow a discount of $0.10 per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and expenses we will pay.
The underwriting discounts and commissions are equal to the initial public
offering price per share of our common stock, less the amount the underwriters
pay to us per share of our common stock. The underwriting discounts and
commissions will represent 7.0% of the initial public offering price.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................ $1.12 $1.12 $3,091,200 $3,554,800
Expenses payable by us.................. $0.51 $0.44 $1,400,000 $1,400,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
72
<PAGE>
We and our directors, officers and substantially all of our stockholders,
optionholders and warrantholders have agreed not to
- offer, sell, pledge or otherwise dispose of, directly or indirectly,
- file with the Securities and Exchange Commission a registration statement
under the Securities Act for, or
- publicly disclose the intention to make any offer, sale, pledge,
disposition or filing relating to,
any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for our common stock, without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus.
In our case we are permitted to issue securities in connection with:
- the exercise of employee stock options granted under our 1996 Stock Option
Plan;
- the grant and exercise of options under our 1999 Equity Incentive Plan;
and
- issuances under our 1999 Employee Stock Purchase Plan.
The underwriters have reserved for sale, at the initial public offering
price, up to 276,000 shares of the common stock for employees, directors and
their friends and family members who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase these reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares. These shares will not be subject to the lock-up agreement.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or to contribute to payments that the underwriters may be
required to make in that respect.
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "IMPV."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between us
and the representatives. The principal factors to be considered in determining
the public offering price include:
- the information in this prospectus or available to the representatives;
- the history of and the prospects for the industry in which we will
compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in compliance with
Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
73
<PAGE>
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed to cover syndicate
short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would be in the
absence of these transactions. These transactions may be effected on The Nasdaq
Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
In March 1999, two affiliates of Credit Suisse First Boston Corporation each
purchased 1,914 shares of our series C preferred stock for a total purchase
price of $24,996.
In November 1999, an affiliate of Credit Suisse First Boston Corporation
purchased 74,074 shares of our series E preferred stock for a total purchase
price of $999,999. If the purchase of these shares is deemed by the National
Association of Securities Dealers, Inc., to constitute underwriting compensation
in connection with this offering, these shares cannot be sold, transferred,
assigned, pledged or hypothecated by any person for a period of one year after
the effective date of this prospectus, except to officers or partners of the
underwriters or members of the selling group and their officers or partners.
A copy of the prospectus in electronic format will be made available on the
Web sites hosted by E*OFFERING Corp. and E*TRADE Securities, Inc.
A prospectus in electronic format will be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The underwriters may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the representatives of the underwriters to underwriters that may
make Internet distributions on the same basis as other allocations.
The public offering price, underwriting discount and other terms set forth
in the purchase agreement will be approved by the pricing committee of our board
of directors prior to the sale of the common stock offered.
74
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. As a result, any resale of the common stock
in Canada must comply with applicable securities laws, which will vary depending
on the relevant jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice before any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be considered to represent to us and the dealer from which the
purchase confirmation is received (A) that the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under those securities laws, (B) that, where
required by law, the purchaser is purchasing as principal and not as agent and
(C) that the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within 10 days of the sale of any common
stock acquired by the purchaser in this offering. The report must be in the form
attached to British Columbia Securities Commission Blanket Order BOR #95/17, a
copy of which may be obtained from us. Only one report must be filed for common
stock acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
75
<PAGE>
LEGAL MATTERS
Cooley Godward LLP, Palo Alto, California will pass upon the validity of the
shares of common stock offered by this prospectus. As of the date of this
prospectus, members and associates of Cooley Godward LLP beneficially own an
aggregate of 21,600 shares of common stock through an investment partnership.
Fenwick & West LLP, Palo Alto, California will pass upon the validity of the
shares of common stock offered by this prospectus for the underwriters.
EXPERTS
The consolidated financial statements for ImproveNet, Inc. as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
their authority as experts in accounting and auditing.
The financial statements for Contractor Referral Service, LLC as of
December 31, 1998 and for the year ended December 31, 1998, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered by our company. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information set forth in the registration statement, some items of which are
contained in exhibits to the registration statement as permitted by the rules
and regulations of the Commission. For further information with respect to
ImproveNet and the common stock offered, reference is made to the registration
statement, including the exhibits and the financial statements and notes filed
as a part of the registration statement. A copy of the registration statement,
including the exhibits and the financial statements and notes filed as a part of
it, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part of the registration statement may be
obtained from the Commission upon the payment of fees prescribed by it. You may
call the Commission at 1-800-SEC-0330 for more information on the operation of
the public reference facilities. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies that file electronically with it.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance with this law,
will file periodic reports, proxy statements and other information with the
Commission. These periodic reports, proxy statements and other information will
be available for inspection and copying at the Commission's public reference
room and the Web site of the SEC referred to above.
76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
IMPROVENET, INC.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
and Mandatorily Redeemable Convertible Preferred Stock.... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
CONTRACTOR REFERRAL SERVICE, LLC
Report of Independent Accountants........................... F-29
Balance Sheets.............................................. F-30
Statements of Operations.................................... F-31
Statements of Members' Deficit.............................. F-32
Statements of Cash Flows.................................... F-33
Notes to Financial Statements............................... F-34
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Combined Financial Information.......... F-37
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999.............................. F-38
Notes to Unaudited Pro Forma Combined Statement of
Operations................................................ F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ImproveNet, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and
mandatorily redeemable convertible preferred stock, and of cash flows present
fairly, in all material respects, the financial position of ImproveNet, Inc. and
its wholly-owned subsidiary at December 31, 1998 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 17, 2000
F-2
<PAGE>
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
AS OF DECEMBER 31, EQUITY (DEFICIT)
---------------------------- DECEMBER 31,
1998 1999 1999
------------ ------------- ----------------
(SEE NOTE 12)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,676 $ 45,291
Accounts receivable, net of allowance for doubtful
accounts of $8 and $148 in 1998 and 1999,
respectively............................................ 33 1,023
Prepaid expenses and other current assets................. 3 1,141
------- --------
Total current assets.................................... 1,712 47,455
Property and equipment, net................................. 281 1,970
Other assets................................................ 151 2,117
------- --------
Total assets............................................ $ 2,144 $ 51,542
======= ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 699 $ 7,472
Deferred revenue.......................................... -- 92
Lines of credit........................................... 316 --
------- --------
Total current liabilities............................... 1,015 7,564
Lines of credit, net of current portion..................... 19 --
Other long-term liabilities................................. -- 116
------- --------
Total liabilities....................................... 1,034 7,680
------- --------
Commitments and contingencies (Note 6)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily redeemable convertible preferred stock, $0.001
par value:
Authorized: 5,000,000 shares
Issued and outstanding: 3,139,526 shares in 1998, and none
in 1999................................................. 6,824 --
------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $0.001 par value:
Authorized: 12,482,935 shares
Issued and outstanding: none in 1998, 11,382,694 shares in
1999 and none pro forma (unaudited) (liquidation value:
$83,057)................................................ -- 12
Common stock, $0.001 par value:
Authorized: 34,000,000 shares
Issued and outstanding: 1,406,289 shares in 1998,
2,336,616 shares in 1999 and 13,719,310 shares pro forma
(unaudited)............................................. 1 2 $ 14
Additional paid-in capital.................................. 734 108,656 108,656
Notes receivable from stockholders.......................... (4) (633) (633)
Unearned stock-based compensation........................... (729) (22,208) (22,208)
Accumulated deficit......................................... (5,716) (41,967) (41,967)
------- -------- ---------
Total stockholders' equity (deficit).................... (5,714) 43,862 $ 43,862
------- -------- =========
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity (deficit).... $ 2,144 $ 51,542
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
Service revenues.......................................... $ 60 $ 238 $ 1,139
Advertising revenues...................................... -- 20 926
-------- -------- ---------
Total revenues.......................................... 60 258 2,065
Cost of revenues:
Cost of service revenues (excludes stock-based
compensation of $0, $55 and $610)....................... 59 767 1,984
Cost of advertising revenues (excludes stock-based
compensation of $0, $37 and $189)....................... -- 49 567
-------- -------- ---------
Total cost of revenues.................................. 59 816 2,551
-------- -------- ---------
Gross profit (loss)......................................... 1 (558) (486)
Operating expenses:
Sales and marketing (excludes stock-based compensation of
$0, $155 and $2,608).................................... 414 1,669 25,784
Product development (excludes stock-based compensation of
$0, $14 and $88)........................................ 288 504 665
General and administrative (excludes stock-based
compensation of $11, $65 and $2,124).................... 527 1,142 4,214
Stock-based compensation.................................. 11 326 5,619
-------- -------- ---------
Total operating expenses................................ 1,240 3,641 36,282
-------- -------- ---------
Loss from operations........................................ (1,239) (4,199) (36,768)
Interest and other income (expense), net.................... (3) 84 517
-------- -------- ---------
Net loss.................................................... (1,242) (4,115) (36,251)
Accretion of mandatorily redeemable convertible preferred
stock..................................................... (86) (717) (239)
-------- -------- ---------
Net loss attributable to common stockholders.............. $ (1,328) $ (4,832) $ (36,490)
======== ======== =========
Basic and diluted net loss per common share................. $ (1.08) $ (3.49) $ (23.85)
======== ======== =========
Shares used in calculating basic and diluted net loss per
common share.............................................. 1,228 1,383 1,530
======== ======== =========
Pro forma basic and diluted net loss per common share (Note
12) (unaudited)........................................... $ (4.40)
=========
Shares used in calculating pro forma basic and diluted net
loss per common share (unaudited)......................... 8,234
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
(IN THOUSANDS)
<TABLE>
MANDATORILY
REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED
STOCK STOCK COMMON STOCK
------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997................................... -- $ -- -- $-- 1,000 $ 1
Issuance of common stock in exchange for services
rendered.................................................. -- -- -- -- 112 --
Issuance of common stock subscribed......................... -- -- -- -- 128 --
Issuance of common stock upon conversion of bridge notes
payable................................................... -- -- -- -- 134 --
Exercise of common stock options............................ -- -- -- -- 5 --
Issuance of Series A mandatorily redeemable convertible
preferred stock, net of issuance costs of $38............. 1,205 1,166 -- -- -- --
Accretion of Series A mandatorily redeemable convertible
preferred stock........................................... -- 86 -- -- -- --
Net loss.................................................... -- -- -- -- -- --
------ ------- ------ --- ----- ---
BALANCES, DECEMBER 31, 1997................................. 1,205 1,252 -- -- 1,379 1
Exercise of common stock options............................ -- -- -- -- 27 --
Issuance of Series B mandatorily redeemable convertible
preferred stock, net of issuance costs of $20............. 1,935 4,855 -- -- -- --
Accretion of Series A mandatorily redeemable convertible
preferred stock........................................... -- 192 -- -- -- --
Accretion of Series B mandatorily redeemable convertible
preferred stock........................................... -- 525 -- -- -- --
Unearned stock-based compensation for service providers..... -- -- -- -- -- --
Amortization of stock-based compensation for service
providers................................................. -- -- -- -- -- --
Unearned employee stock-based compensation.................. -- -- -- -- -- --
Amortization of unearned employee stock-based
compensation.............................................. -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
------ ------- ------ --- ----- ---
BALANCES, DECEMBER 31, 1998................................. 3,140 6,824 -- -- 1,406 1
Exercise of common stock options............................ -- -- -- -- 706 1
Issuance of common stock in exchange for notes receivable... -- -- -- -- 225 --
Exercise of Series A convertible preferred stock warrant.... -- -- 2 -- -- --
Accretion of Series A mandatorily redeemable convertible
preferred stock........................................... -- 52 -- -- -- --
Accretion of Series B mandatorily redeemable convertible
preferred stock........................................... -- 187 -- -- -- --
Conversion of Series A mandatorily redeemable convertible
preferred stock into Series A convertible preferred
stock..................................................... (1,205) (1,496) 1,205 1 -- --
Conversion of Series B mandatorily redeemable convertible
preferred stock into Series B convertible preferred
stock..................................................... (1,935) (5,567) 1,935 2 -- --
Issuance of Series C convertible preferred stock, net of
issuance costs of $1,049.................................. -- -- 3,538 4 -- --
Issuance of Series D convertible preferred stock, net of
issuance costs of $57..................................... -- -- 2,101 2 -- --
Issuance of Series E convertible preferred stock, net of
issuance costs of $68..................................... -- -- 2,597 3 -- --
Issuance of Series C convertible preferred stock for
services.................................................. -- -- 5 -- -- --
Payment received in settlement of stockholder notes
receivable................................................ -- -- -- -- -- --
Issuance of Series D convertible preferred stock warrant to
strategic stockholders.................................... -- -- -- -- -- --
Issuance of common stock warrants to strategic
stockholders.............................................. -- -- -- -- -- --
Amortization of stock-based compensation from warrants
granted to strategic shareholders......................... -- -- -- -- -- --
Unearned employee stock-based compensation.................. -- -- -- -- -- --
Amortization of unearned employee stock-based
compensation.............................................. -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
------ ------- ------ --- ----- ---
BALANCES, DECEMBER 31, 1999................................. -- $ -- 11,383 $12 2,337 $ 2
====== ======= ====== === ===== ===
<S> <C> <C> <C> <C> <C>
NOTES
ADDITIONAL RECEIVABLE UNEARNED
PAID-IN FROM STOCK-BASED ACCUMULATED
CAPITAL STOCKHOLDERS COMPENSATION DEFICIT TOTAL
--------- ----------- ------------ ----------- --------
BALANCES, JANUARY 1, 1997................................... $ 402 $ (4) $ -- $ (359) $ 40
Issuance of common stock in exchange for services
rendered.................................................. 11 -- -- -- 11
Issuance of common stock subscribed......................... -- -- -- -- --
Issuance of common stock upon conversion of bridge notes
payable................................................... 67 -- -- -- 67
Exercise of common stock options............................ -- -- -- -- --
Issuance of Series A mandatorily redeemable convertible
preferred stock, net of issuance costs of $38............. -- -- -- -- --
Accretion of Series A mandatorily redeemable convertible
preferred stock........................................... (86) -- -- -- (86)
Net loss.................................................... -- -- -- (1,242) (1,242)
-------- ----- -------- -------- -------
BALANCES, DECEMBER 31, 1997................................. 394 (4) -- (1,601) (1,210)
Exercise of common stock options............................ 2 -- -- -- 2
Issuance of Series B mandatorily redeemable convertible
preferred stock, net of issuance costs of $20............. -- -- -- -- --
Accretion of Series A mandatorily redeemable convertible
preferred stock........................................... (192) -- -- -- (192)
Accretion of Series B mandatorily redeemable convertible
preferred stock........................................... (525) -- -- -- (525)
Unearned stock-based compensation for service providers..... 120 -- (120) -- --
Amortization of stock-based compensation for service
providers................................................. -- -- 100 -- 100
Unearned employee stock-based compensation.................. 935 -- (935) -- --
Amortization of unearned employee stock-based
compensation.............................................. -- -- 226 -- 226
Net loss.................................................... -- -- -- (4,115) (4,115)
-------- ----- -------- -------- -------
BALANCES, DECEMBER 31, 1998................................. 734 (4) (729) (5,716) (5,714)
Exercise of common stock options............................ 148 -- -- -- 149
Issuance of common stock in exchange for notes receivable... 633 (633) -- -- --
Exercise of Series A convertible preferred stock warrant.... 2 -- -- -- 2
Accretion of Series A mandatorily redeemable convertible
preferred stock........................................... (52) -- -- -- (52)
Accretion of Series B mandatorily redeemable convertible
preferred stock........................................... (187) -- -- -- (187)
Conversion of Series A mandatorily redeemable convertible
preferred stock into Series A convertible preferred
stock..................................................... 1,495 -- -- -- 1,496
Conversion of Series B mandatorily redeemable convertible
preferred stock into Series B convertible preferred
stock..................................................... 5,565 -- -- -- 5,567
Issuance of Series C convertible preferred stock, net of
issuance costs of $1,049.................................. 22,046 -- -- -- 22,050
Issuance of Series D convertible preferred stock, net of
issuance costs of $57..................................... 16,118 -- -- -- 16,120
Issuance of Series E convertible preferred stock, net of
issuance costs of $68..................................... 34,991 -- -- -- 34,994
Issuance of Series C convertible preferred stock for
services.................................................. 37 -- -- -- 37
Payment received in settlement of stockholder notes
receivable................................................ -- 4 -- -- 4
Issuance of Series D convertible preferred stock warrant to
strategic stockholders.................................... 2,507 -- (2,507) -- --
Issuance of common stock warrants to strategic
stockholders.............................................. 11,299 -- (11,299) -- --
Amortization of stock-based compensation from warrants
granted to strategic shareholders......................... -- -- 517 -- 517
Unearned employee stock-based compensation.................. 13,320 -- (13,320) -- --
Amortization of unearned employee stock-based
compensation.............................................. -- -- 5,130 -- 5,130
Net loss.................................................... -- -- -- (36,251) (36,251)
-------- ----- -------- -------- -------
BALANCES, DECEMBER 31, 1999................................. $108,656 $(633) $(22,208) $(41,967) $43,862
======== ===== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,242) $(4,115) $(36,251)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 20 52 204
Allowance for doubtful accounts......................... 3 5 140
Amortization of stock-based compensation................ 11 326 5,684
Other................................................... 2 3 --
Changes in operating assets and liabilities, net of
acquired working capital deficit:
Accounts receivable..................................... (8) (33) (1,064)
Prepaid expenses and other current assets............... (1) (94) (1,019)
Other assets............................................ (5) -- (314)
Accounts payable and accrued liabilities................ 49 618 6,663
Deferred revenue........................................ -- -- 92
Other long-term liabilities............................. -- -- 16
------- ------- --------
Net cash used in operating activities................. (1,171) (3,238) (25,849)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (85) (224) (1,828)
Increase in restricted cash............................... (49) (400)
Issuance of note receivable to related party.............. -- -- (500)
Payments for acquisitions................................. -- -- (792)
------- ------- --------
Net cash used in investing activities................. (85) (273) (3,520)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock................ -- 2 149
Proceeds from the issuance of preferred stock, net........ 1,166 4,705 73,166
Repayment of stockholder notes receivable................. -- -- 4
Proceeds from the issuance of convertible bridge notes.... 65 150 --
Borrowings under lines of credit.......................... 350 298 --
Principal payments under lines of credit.................. -- (313) (335)
------- ------- --------
Net cash provided by financing activities............. 1,581 4,842 72,984
------- ------- --------
Net increase in cash and cash equivalents................... 325 1,331 43,615
Cash and cash equivalents, beginning of period.............. 20 345 1,676
------- ------- --------
Cash and cash equivalents, end of period.................... $ 345 $ 1,676 $ 45,291
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FORMATION AND BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
ImproveNet, Inc. (the "Company") (formerly Netelligence, Inc.) was
incorporated in California in January 1996 and reincorporated in Delaware in
September 1998. The Company is a leading destination on the Internet for
residential home improvement market making activities between (1) homeowners,
(2) contractors, architects and designers, and (3) material suppliers. The
Company operates primarily in the United States. The Company aggregates and
organizes information online and ensures that the content is immediately
accessible, easy-to-use and efficient for home improvement information and
services and product buyers and sellers. The Company has a proprietary matching
service that electronically and impartially screens and monitors contractors,
architects and designers to facilitate access by homeowners to reputable,
pre-screened service providers. The Company also sells Web site advertising and
other marketing services.
During 1998, the Company emerged from the development stage. Although no
longer in the development stage, the Company continues to be subject to risks
and challenges similar to other companies in a comparable stage of development.
These risks include, but are not limited to, dependence on key individuals,
successful development and marketing of products, the ability to obtain adequate
financing to support growth, competition from larger companies with greater
financial, technical, management and marketing resources.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiary from the date of acquisition. All significant
intercompany balances and transactions have been eliminated.
CERTAIN RISKS AND UNCERTAINTIES
The Company's services are concentrated in a single segment of the Internet
commerce industry, which is characterized by rapid technological advances,
changes in customer requirements and evolving regulatory requirements and
industry standards. The success of the Company depends on management's ability
to anticipate or to respond quickly and adequately to technological developments
in the industry, changes in customer requirements and changes in regulatory
requirements or industry standards. Any significant delays in the development or
introduction of services could have a material and adverse effect on the
Company's business and operating results.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents.
F-7
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
At December 31, 1998 and 1999, cash balances of approximately $49,000 and
$449,000, respectively, were restricted from withdrawal and held by a bank in
the form of certificates of deposit. These certificates of deposit serve as
collateral supporting standby letters of credit issued to the Company's
landlords as security deposits and will not be available until the leases for
the Company's facilities expire.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of certain of the Company's financial instruments,
including cash and cash equivalents, restricted cash, accounts receivable,
accounts payable and other accrued liabilities, approximate fair value due to
their short maturities. Based on borrowing rates available to the Company for
loans with similar terms, the carrying values of the lines of credit approximate
fair value.
LONG-LIVED ASSETS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of three to seven years. Amortization of leasehold improvements is
computed on a straight-line basis over the shorter of the facility lease term or
the estimated useful lives of the improvements. Major additions and improvements
are capitalized, while replacements, maintenance and repairs that do not improve
or extend the life of the assets are charged to operations. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset are separately
identifiable and are less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved. Losses on
assets to be disposed of are determined in a similar manner, except that fair
values are reduced by the estimated disposal costs.
INTANGIBLE ASSETS
Intangible assets include goodwill and non-compete agreements, which are
amortized from the date of acquisition using the straight-line method over the
expected period to be benefited, estimated at three to five years. At
December 31, 1999, the total value assigned to goodwill and non-compete
agreements of $817,000 was offset by accumulated amortization of $65,000. The
Company assesses the recoverability of goodwill, as well as other long-lived
assets, in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires the Company to review the carrying
value of an asset for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. When
such an event occurs, the Company estimates the future
F-8
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the undiscounted expected future cash flows are less
than the carrying amount of the asset, an impairment loss is recognized.
REVENUE RECOGNITION
Revenues are derived from two sources: service provider fees and advertising
from the Company's Web sites.
SERVICE REVENUES
Service provider revenues include lead fees, win fees and enrollment fees.
Lead fees are recognized at the time a homeowner and contractor are matched by
the Company and the service provider becomes obligated to pay such fee. Win fees
are recognized at the time the service provider or the homeowner notifies the
Company that a job has been sold and the service provider becomes obligated to
pay such fee. Enrollment fees from service providers are recognized as revenue
ratably over the expected period they participate in our contractor matching
service, which is initially estimated to be between one and two years. Payments
of enrollment fees received in advance of providing services are deferred until
the period the services are provided. This deferred revenue is included in
current and long-term liabilities. The Company establishes a refund reserve and
allowance for doubtful accounts at the time of revenue recognition based on the
Company's historical experience.
ADVERTISING REVENUES
Beginning in December 1998, the Company also derived advertising revenues
from the sale of banner, SmartLeads and other Web site advertisements. For 1999,
advertising revenues represented 45% of total revenue.
Currently advertising revenues are comprised of:
- Advertising paid for in cash; and
- Advertising paid for by way of barter.
CASH ADVERTISING
Cash advertising revenues generally are derived from short-term advertising
contracts in which the Company typically guarantees that a minimum number of
impressions will be delivered to its Web site visitors over a specified period
of time for a fixed fee. Cash advertising revenues from banner, button and other
Web site advertisements are recognized at the lesser of the amount recorded
ratably over the period in which the advertising is delivered or the percentage
of guaranteed impressions delivered. SmartLeads revenues are also paid for in
cash and are recognized when the SmartLeads have been delivered to the customer.
Cash advertising is recognized when the Company has delivered the advertising,
evidence of an agreement is in place and fees are fixed, determinable and
collectible. In 1999, cash advertising totaled $746,000 and accounted for
approximately 36% of total revenues.
F-9
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BARTER ADVERTISING
Barter advertising comes from two distinct contractual sources: short-term
barter advertising similar in nature to the Company's cash advertising contracts
and multi-year commercial contracts. Barter advertising is recognized in
accordance with EITF No. 99-17, "Accounting for Advertising Barter
Transactions", which was adopted by the Company in 1999. Under EITF No. 99-17,
the Company records advertising transactions at fair value only when the Company
has an established historical practice of selling similar advertising for cash.
The characteristics of the advertising that must be similar include the duration
of the display of the advertising, the prominence and positioning of the
advertising, the intended audience, the timing of the advertising and its
circulation.
SHORT-TERM BARTER ADVERTISING
Short-term barter advertising results from the exchange by the Company of
advertising space on the Company's Web site for reciprocal advertising space on
Web sites of third parties. Advertising revenues and sales and marketing
expenses arising from these transactions are recorded at fair value as the
Company has an established historical practice of receiving cash for similar
short-term advertising. The Company recorded no short-term barter advertising
revenue in 1997 and 1998. In 1999, the Company began to engage in short-term
barter advertising and recorded revenues of $180,000 in the year. Short-term
barter advertising represented approximately 9% of total revenues for 1999.
Sales and marketing expenses arising from these barter transactions are
recognized when the Company's advertisement's are delivered on the reciprocal
Web site which is typically the same period in which advertisements are
delivered on the Company's Web site.
MULTI-YEAR COMMERCIAL CONTRACTS
In September 1999 and during the fourth quarter 1999, the Company entered
into multi-year commercial contracts some of which are with related parties.
These commercial contracts generally provide for a fixed annual fee, an
advertising package that includes a mix of buttons, banners, SmartLeads and
other marketing services, plus a continuous presence, as defined, on the
Company's Web sites. These commercial contracts are for periods ranging between
3 and 12 years, including renewal options. These commercial contracts also
include cooperative marketing arrangements under which the Company is obligated
to fund co-branded advertisements on television and in the print media, with or
on behalf of the commercial party. In the commercial contracts to date, the
Company is committed to spend 50% to 100% of the fees the Company expects to
receive. In return, the Company expects to receive significant marketing
benefits including better advertising rates, stronger brand recognition, and
access to customer databases, direct mail inserts and marketing resources.
As the Company does not have an established historical practice of selling
advertising for cash for similar multi-year commercial contracts, the Company
has not assigned any value to the exchange of services or barter element of
these transactions and accordingly, the Company has not recorded either revenue
or sales and marketing expense for the barter element. However, some of these
multi-year commercial contracts do generate an overall net cash component to the
Company and in these cases the Company has recorded revenue based on the cash
received or receivable under the contract, net of the obligation to pay the
commercial party for the cooperative advertisements and other marketing
services. These revenues are recognized over the term of the commercial contract
once advertising has
F-10
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
been delivered to the commercial party and collection of the resulting net
receivable is deemed probable.
Furthermore, in connection with certain of these multi-year commercial
contracts, the Company also issued warrants to purchase shares of the Company's
common stock to the commercial parties. These warrants have been valued by the
Company using the Black Scholes option pricing model. As the fair value of these
warrants represent an additional rebate on the revenue otherwise recorded under
the contracts, the amortization of the warrants is further netted against this
revenue over the term of the respective commercial contract. To the extent that
there is insufficient revenues, the remaining amortization of warrant
stock-based compensation is expensed and characterized as sales and marketing
expense. In 1999, the Company has further reduced the net cash component of
revenue by $65,000 for the warrant stock-based compensation amortization. As a
result, the Company has not recognized revenue of $408,000 for the barter
element amounts of these commercial contracts or for the net cash component of
$65,000, which has been reduced by the the warrant amortization amount for the
year ended December 31, 1999.
Total revenues may be analyzed as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Service revenues............................................ $60 $238 $1,139
Amounts invoiced under advertising and multi-year commercial
contracts................................................. -- 20 1,399
--- ---- ------
60 258 2,538
Amounts invoiced and accrued under multi-year commercial
contracts with related parties............................ -- -- (408)
Amortization of warrant stock-based compensation............ -- -- (65)
--- ---- ------
Total revenues.............................................. $60 $258 $2,065
=== ==== ======
</TABLE>
Total revenues are reported in the statements of operations net of the
amounts invoiced and accrued under the multi-year commercial contracts with
related parties as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Service revenues............................................ $60 $238 $1,139
Advertising revenues........................................ -- 20 926
--- ---- ------
Total revenues.............................................. $60 $258 $2,065
=== ==== ======
</TABLE>
PRODUCT DEVELOPMENT COSTS
Product development costs incurred by the Company are expensed as incurred.
Costs incurred in the design, creation and maintenance of content, graphics and
user interface of the Company's Web sites are expensed as incurred in accordance
with SOP 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Costs incurred in the development of application and
infrastructure of the Web sites are capitalized and amortized over the useful
life of the web sites. In 1999, the costs that could be capitalized were
insignificant.
F-11
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expenses for each of the years in the three year period ended December 31, 1999
were $28,000, $761,000, and $15,887,000, respectively. Of these total expenses,
barter advertising costs represented $180,000 for the year ended December 31,
1999. There were no barter advertising expenses for 1997 and 1998.
STOCK-BASED COMPENSATION
The Company follows the disclosure provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123 have been presented (see Note
9). Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price of the option. Stock, stock options and warrants for stock issued
to non-employees have been accounted for in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
The Company presents stock-based compensation expense as a separate line
item in its consolidated statements of operations for the three years ended
December 31, 1999 except to the extent that it represents a rebate of revenue
and is applied against advertising revenue.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to affect taxable income. Valuation allowances are
established when management believes there is uncertainty regarding the recovery
of deferred tax assets.
CONCENTRATION OF CREDIT RISK
The Company's cash, cash equivalents and restricted cash are held with four
banks in the United States, which management believes to be creditworthy.
Deposits with these banks may exceed the amount of insurance provided on such
deposits.
The Company's customers consist of homeowners, service providers and
suppliers of home improvement products and related services within the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition. The Company does not require collateral. Two advertising
customers accounted for 24% and 18% of aggregate accounts receivable as of
December 31, 1999. Revenues from these multi-year commercial contract customers
represented nil% and 2%, respectively, of total revenues in 1999. No revenues
from these customers were recorded in 1997 or 1998. There was no customer with a
balance that accounted for greater than 10% of aggregate accounts receivable as
of December 31, 1997 or 1998. There was no customer that accounted for greater
than 10% of total revenues for any of the periods presented in the accompanying
consolidated statements of operations.
F-12
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue segments
of the entity for which this information is available and is utilized by the
chief operating decision maker. The Company conducts its business within one
business segment primarily within the United States. Revenues from customers
outside of the United States were insignificant for all periods presented in the
accompanying consolidated statements of operations.
COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. There was no difference between the Company's net loss and
its comprehensive loss for any of the periods presented in the accompanying
consolidated statements of operations.
NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed by dividing the net loss attributable to common
stockholders for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred stock, are included in the
diluted net loss per common share calculation to the extent these shares are
dilutive. A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net loss per common share follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator
Net loss attributable to common stockholders.............. $(1,328) $(4,832) $(36,490)
======= ======= ========
Denominator
Weighted average common shares............................ 1,233 1,383 1,560
Weighted average unvested common shares subject to
repurchase.............................................. (5) -- (30)
------- ------- --------
Denominator for basic and diluted calculation............. 1,228 1,383 1,530
======= ======= ========
Basic and diluted net loss per common share............... $ (1.08) $ (3.49) $ (23.85)
======= ======= ========
</TABLE>
F-13
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes common stock equivalents that are not
included in the denominator used in the diluted net loss per common share
calculation because to do so would be antidilutive for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average effect of common stock equivalents:
Series A convertible preferred stock...................... 609 1,205 1,206
Series B convertible preferred stock...................... -- 1,536 1,935
Series C convertible preferred stock...................... -- -- 2,689
Series D convertible preferred stock...................... -- -- 645
Series E convertible preferred stock...................... -- -- 229
Options to purchase common stock.......................... 167 429 1,273
Warrants to purchase convertible preferred and common
stock................................................... 51 122 372
Common stock subject to repurchase........................ 5 -- 30
--- ----- -----
832 3,292 8,379
=== ===== =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
does not currently hold any derivative instruments and does not engage in
hedging activities. The Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flow. The Company will be required to adopt SFAS No. 133 for the year ending
December 31, 2001.
NOTE 3 - ACQUISITIONS
On September 9, 1999, the Company completed the acquisition of all the
assets and business of Contractor Referral Services, LLC ("CRS"), which operated
a toll-free telephone contractor referral service. The total acquisition cost
was $650,000 and consisted of a cash payment of $550,000 and a holdback of
$100,000 retained by the Company. The acquisition was accounted for using the
purchase method. Accordingly, the results of operations for CRS have been
included in the Company's consolidated statement of operations only from the
date of acquisition. At December 31, 1999, the $100,000 holdback was included in
other long-term liabilities as it is not payable until 2001.
The purchase price was allocated to the acquired assets based on fair values
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable and other assets........................ $ 64
Licensing right............................................. 125
Non-competition agreement................................... 50
Goodwill.................................................... 411
----
Total..................................................... $650
====
</TABLE>
F-14
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
On November 1, 1999, the Company acquired all of the outstanding shares of
The J.L. Price Corporation, a regional contractor referral service, incorporated
in California. The total acquisition cost was $249,000. The acquisition was
accounted for using the purchase method. Accordingly, the results of operations
for The J.L. Price Corporation have been included in the Company's consolidated
statement of operations only from the date of acquisition.
The purchase price was allocated to the acquired assets and liabilities
based on fair value as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current liabilities......................................... $ (107)
Non-competition agreement................................... 100
Goodwill.................................................... 256
-------
Total..................................................... $ 249
=======
</TABLE>
The following unaudited pro forma consolidated financial information
presents the combined results of operations of the Company, CRS, and The J.L.
Price Corporation as if the acquisitions had occurred on January 1, 1998, after
giving effect to certain adjustments, principally amortization of goodwill and
non-compete agreements. This unaudited pro forma consolidated financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisitions been completed on January 1, 1998 (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 687 $ 2,451
Net loss attributable to common stockholders................ (5,211) (36,850)
Basic and diluted net loss per common share................. (3.77) (24.08)
</TABLE>
NOTE 4 - BALANCE SHEET COMPONENTS
PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Prepaid advertising expenses................................ $ -- $ 595
Prepaid expenses and other current assets................... 3 546
----------- ------
$ 3 $1,141
=========== ======
</TABLE>
Prepaid advertising expenses consist of payments made in advance for online
and offline advertising for services to be delivered in the following year.
F-15
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - BALANCE SHEET COMPONENTS (CONTINUED)
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment.......................................... $188 $1,060
Software.................................................... 15 30
Furniture, fixtures and other equipment..................... 47 726
Leasehold improvements...................................... 108 370
---- ------
358 2,186
Less: accumulated depreciation and amortization............. (77) (216)
---- ------
$281 $1,970
==== ======
</TABLE>
Property and equipment depreciation and amortization expenses for each of
the years in the three year period ended December 31, 1999 were $20,000, $52,000
and $139,000, respectively.
OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill, net of amortization of nil and $38................ $ -- $ 629
Non-competition agreements, net of amortization of nil and
$27....................................................... -- 123
Restricted cash............................................. 49 449
Other assets................................................ 102 916
------ ------
$ 151 $2,117
====== ======
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable............................................ $478 $4,139
Accrued advertising expense................................. 130 1,215
Accrued payroll costs....................................... 27 1,407
Other....................................................... 64 711
---- ------
$699 $7,472
==== ======
</TABLE>
Accrued advertising expenses consist of $807,000 in online advertising
services which have been delivered prior to year end and accrued advertising and
co-marketing expenses of $408,000 arising from the multi-year commercial
contracts.
F-16
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LINES OF CREDIT
In July 1997, the Company entered into a revolving line of credit with a
financial institution under which the Company could borrow up to $350,000. In
March 1998, the Company converted approximately $50,000 of this facility into an
equipment line of credit. Borrowings for equipment purchases under the equipment
line of credit were collateralized by the equipment purchased, accrued interest
at the rate of prime plus 1.25% (9% at December 31, 1998) and were due in 36
equal monthly installments commencing on February 29, 1998. Borrowings under the
revolving line of credit accrued interest at the rate of prime plus 1.25%. The
lines of credit were paid in full and terminated on January 29, 1999.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases a facility under an operating lease agreement expiring
February 2002. In June 1999, the Company entered into a seven-year lease
agreement for another office facility in Redwood City, California. Total future
minimum lease payments for the new facility totaled $3,871,000 at the date the
agreement was signed. Under the terms of the leases, the Company provided
letters of credit as security deposits. In September 1999, the Company assumed
the lease obligation of an office facility in Santa Ana, California in
connection with the purchase of CRS. The term of the lease is two years. Total
future minimum lease payments totaled $54,000 at the date the lease obligation
was assumed. In September 1999, the Company entered into a five-year lease
agreement for an office facility in Fort Lauderdale, Florida. Total future
minimum lease payments totaled $556,000 at the date the agreement was signed.
Future minimum lease payments under operating leases as of December 31, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000........................................................ 723
2001........................................................ 724
2002........................................................ 667
2003........................................................ 673
2004........................................................ 653
Thereafter.................................................. 994
------
$4,434
======
</TABLE>
Rent expense charged to operations for each of the years in the three-year
period ended December 31, 1999 was $78,000, $80,000 and $383,000, respectively.
SALES AND MARKETING AGREEMENTS
The Company has entered into a number of agreements with Internet media
companies to purchase online advertising and linkages. The Company expenses the
amounts as sales and marketing expenses ratably over the respective terms of the
agreements.
F-17
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In September 1999, the Company began entering into advertising package
agreements under which the Company will exchange advertising services for
advertising services with investors in Series D and Series E convertible
preferred stock. The minimum future payments under sales and marketing and
multi-year commercial contracts are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31,
2000........................................................ 7,710
2001........................................................ 6,478
2002........................................................ 5,080
2003........................................................ 356
Thereafter.................................................. 352
-------
$19,976
=======
</TABLE>
401(K) PLAN
Effective January 1, 1999, the Company adopted a 401(k) savings plan under
which eligible employees may contribute the lesser of 20% of their eligible
compensation or the annual limit of $10,000 in 1999. In addition, the Company
may make discretionary contributions to the plan, although none has been made in
any of the periods presented.
NOTE 7 - CONVERTIBLE BRIDGE NOTES
During February 1997, the Company raised $65,000 through the issuance of
convertible bridge notes bearing interest at the rate of 1% per month. Total
principal plus accrued interest was converted into 133,604 shares of common
stock during June and July 1997 at a conversion rate of $0.50 per share.
During January 1998, the Company raised $150,000 through the issuance of
convertible bridge notes bearing interest at the rate of 6% per year. Total
principal plus accrued interest was converted into 59,524 shares of Series B
preferred stock in 1998 at a conversion rate of $2.52 per share, which was equal
to the issuance price.
NOTE 8 - CONVERTIBLE PREFERRED STOCK
Under the Company's Certificate of Incorporation, as amended in
November 1999, the Company is authorized to issue 12,482,935 shares of preferred
stock, of which 1,301,400 shares have been designated as Series A preferred
stock, 1,981,535 shares have been designated as Series B preferred stock,
3,700,000 shares have been designated as Series C preferred stock, 2,500,000
shares have been designated as Series D preferred stock and 3,000,000 shares
have been designated as Series E preferred
F-18
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - CONVERTIBLE PREFERRED STOCK (CONTINUED)
stock. From inception through December 31, 1999, the Company issued preferred
stock as follows (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
AMOUNT LIQUIDATION
ORIGINAL NET OF ISSUED PREFERENCE AT
ISSUE ISSUANCE CUMULATIVE TOTAL SHARES AND PAR VALUE DECEMBER 31,
PRICE COST ACCRETION AMOUNT AUTHORIZED OUTSTANDING AMOUNT 1999
-------- -------- ------------ -------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Series A.............. $ 1.00 $ 1,166 $ 330 $ 1,496 1,301,400 1,207,000 $ 1 $ 1,397
Series B.............. $ 2.52 4,855 712 5,567 1,981,535 1,934,526 2 5,413
Series C.............. $ 6.53 22,087 -- 22,087 3,700,000 3,543,190 4 24,492
Series D.............. $ 7.70 16,120 -- 16,120 2,500,000 2,100,843 2 16,462
Series E.............. $13.50 34,994 -- 34,994 3,000,000 2,597,135 3 35,293
------- ------ ------- ---------- ---------- --- -------
Total................. $79,222 $1,042 $80,264 12,482,935 11,382,694 $12 $83,057
======= ====== ======= ========== ========== === =======
</TABLE>
DIVIDENDS
All holders of preferred stock are entitled to receive, when and if declared
by the Board of Directors, non-cumulative cash dividends at the rate of 6% of
the original issue price per annum on each outstanding share of preferred stock.
As of December 31, 1999, no dividends had been declared.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
all holders of preferred stock are entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of common
stock, an amount per share equal to the original issue price, plus the greater
of (i) all declared and unpaid dividends on the shares of preferred stock or
(ii) an amount equal to 6%, compounded annually, of the original issue price per
annum from the date that the first share of the series of preferred stock was
issued until the date of payment, less the per share amount of any dividends
previously paid on such shares, for each share of preferred stock held by them.
If the funds available for distribution were insufficient to cover the
liquidation preferences of all the preferred stock, then the entire assets and
funds of the Company legally available for distribution would be distributed
ratably among the preferred stockholders in proportion to the full amounts to
which they would otherwise be entitled.
After payment of the full liquidation preferences of the preferred stock,
the common stockholders would receive, on a pro rata basis, proceeds up to a
total amount per share equal to the preference of the Series B preferred
stockholders.
After the payment of the full liquidation preferences to the preferred and
required payments to the common stockholders, as described above, the assets of
the Company legally available for distribution, if any, would be distributed
ratably to the holders of the common stock and preferred stock on an as-if
converted to common stock basis.
CONVERSION
Each share of preferred stock is convertible, at the option of the holder,
into the number of fully paid and non-assessable shares of common stock
determined by dividing the preferred stock issue price by its conversion price
in effect at the time. The initial conversion prices of Series A, Series B,
Series C, Series D and Series E preferred stock are $1.00, $2.52, $6.53, $7.70
and $13.50, respectively, and are subject to adjustment in accordance with
anti-dilution provisions contained in the Company's
F-19
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - CONVERTIBLE PREFERRED STOCK (CONTINUED)
Certificate of Incorporation. Conversion is automatic immediately upon the
closing of a firm commitment underwritten initial public offering ("IPO") in
which the per share public offering price is at least $9.80 and the aggregate
proceeds raised exceed $20,000,000.
REDEMPTION
The holders of Series A and Series B preferred stock were entitled to
certain rights of redemption until the March 29, 1999 amendment of the Company's
Certificate of Incorporation. At this time, the redemption feature was removed
and accretion to the redemption value ceased.
VOTING RIGHTS
Each holder of preferred stock is entitled to one vote for each share of
common stock into which each share of preferred stock could be converted. The
holders of Series A, B, C, D and E preferred stock are each entitled to elect
one member of the Board of Directors.
NOTE 9 - COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 34,000,000 shares of common stock. Each share of common stock
has the right to one vote. The holders of common stock are also entitled to
receive dividends whenever funds are legally available and when declared by the
Board of Directors, subject to the prior rights of holders of preferred stock at
the time outstanding.
At December 31, 1999, the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<CAPTION>
<S> <C>
Conversion of Series A convertible preferred stock.......... 1,207,000
Conversion of Series B convertible preferred stock.......... 1,934,526
Conversion of Series C convertible preferred stock.......... 3,543,190
Conversion of Series D convertible preferred stock.......... 2,100,843
Conversion of Series E convertible preferred stock.......... 2,597,135
Exercise of options......................................... 3,037,423
Warrants.................................................... 1,787,172
-----------
16,207,289
===========
</TABLE>
Holders of more than a majority of registrable securities may demand that
the Company file a registration statement having a net aggregate offering price
to the public in excess of $20,000,000, subject to certain limitations.
The Company had not declared or paid cash dividends as of December 31, 1999.
In December 1999, certain employees exercised stock options to purchase
650,381 shares of the Company's common stock at the weighted average exercise
price of $0.99. Under the terms of the options, the Company has the right to
repurchase the unvested shares of common stock at the original issue price. In
the event the employees terminate their employment with the Company, the
repurchase rights lapse 90 days after the date of termination. At December 31,
1999, 630,416 shares of common stock were subject to repurchase rights. As
consideration for the exercise of these options, the Company accepted promissory
notes in the amount of $633,000 from certain officers and employees.
F-20
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
These non-recourse promissory notes accrue interest at a rate of 6.2% per annum,
and are payable in full in 2002.
STOCK PLANS
1996 STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan, as amended, the Company may
issue incentive stock options or non-statutory stock options to purchase up to
2,700,000 shares of common stock. Incentive stock options may be granted to
employees at exercise prices not lower than fair market value at the date of
grant, as determined by the Board of Directors. Non-statutory stock options may
be granted to employees, directors and consultants, at exercise prices not lower
than 85% of fair market value at the date of grant, as determined by the Board
of Directors. The Board also has the authority to set the term of the options up
to a maximum of ten years. Options granted generally vest over four years.
Unexercised options expire three months after termination of employment with the
Company.
1999 EQUITY INCENTIVE PLAN
The Company's Board of Directors adopted the 1999 Equity Incentive Plan (the
"Incentive Plan") on December 3, 1999 under which 1,300,000 shares have been
reserved for issuance. The number of shares reserved under the Incentive Plan
will automatically increase on January 1 of each year by the lesser of 5% of the
total number of shares outstanding or 1,300,000 shares. The Board of Directors
implemented a program of automatic option grants to each non-employee director
such that each non-employee director will receive options to purchase 20,000
shares of common stock upon commencement of service as a director, which will
vest monthly over three years and 5,000 shares annually thereafter, which will
vest monthly over twelve months.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors adopted the Employee Stock Purchase Plan
(the "Purchase Plan") on December 3, 1999 under which 300,000 shares have been
reserved for issuance. The Purchase Plan will be effective upon the effective
date of the Company's initial public offering ("IPO"). The number of shares
reserved under the Purchase Plan will automatically increase on January 1 of
each year by the lesser of an amount equal to 1% of the total number of shares
outstanding, or 300,000 shares. Under the Purchase Plan, eligible employees may
purchase common stock valued at the lesser of $25,000 or 15% of their
compensation. The purchase price per share will be 85% of the common stock fair
value at the lower of certain plan defined dates.
F-21
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
Activity under the 1996 stock option plan and the 1999 stock incentive plan
("the Plans") is as follows (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE AGGREGATE EXERCISE
FOR GRANT OF SHARES PRICE PRICE PRICE
---------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997..... 1,500 78,500 $0.25-$1.00 $ 33 $0.43
Additional shares
authorized.................. 520,000
Options granted............... (458,433) 458,433 $ 0.10 46 $0.10
Options exercised............. -- (5,000) $ 0.10 -- $0.10
Options canceled.............. 87,778 (87,778) $0.10-$1.00 (27) $0.31
---------- --------- ------
Balances, December 31, 1997... 150,845 444,155 $0.10-$1.00 52 $0.12
Additional shares
authorized.................. 400,000
Options granted............... (643,000) 643,000 $ 0.25 161 $0.25
Options exercised............. -- (27,250) $ 0.10 (2) $0.10
Options canceled.............. 295,937 (295,937) $0.10-$0.25 (50) $0.17
---------- --------- ------
Balances, December 31, 1998... 203,782 763,968 $0.10-$1.00 161 $0.21
Additional shares
authorized.................. 3,000,000
Options granted............... (2,377,302) 2,377,302 $0.25-$12.00 7,698 $3.24
Options exercised............. -- (930,327) $0.10-$12.00 (782) $0.84
Options canceled.............. 352,876 (352,876) $0.25-$4.00 (161) $0.46
---------- --------- ------
Balances, December 31, 1999... 1,179,356 1,858,067 $0.10-$12.00 $6,916 $3.72
========== ========= ======
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.10 28,980 7.62 $ 0.10 27,105 $ 0.10
$ 0.25 344,053 9.06 $ 0.25 280,924 $ 0.25
$ 1.00 1,500 6.75 $ 1.00 1,500 $ 1.00
$ 1.50 534,750 9.52 $ 1.50 151,905 $ 1.50
$ 4.00 539,200 9.77 $ 4.00 167,000 $ 4.00
$ 7.50 233,334 9.88 $ 7.50 123,334 $ 7.50
$ 12.00 176,250 9.96 $12.00 - $12.00
--------- ---- ------ ------- ------
$0.10-12.00 1,858,067 9.56 $ 3.72 751,768 $ 2.52
========= ==== ====== ======= ======
</TABLE>
F-22
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
As of December 31, 1997 and 1998, the number of options exercisable was
168,181 and 248,386, respectively, at weighted average exercise prices of $0.14
and $0.17, respectively.
In December 1999, we amended the terms of our stock options plans to permit
early exercise of the options. Unvested options exercised pursuant to the
foregoing amendment are subject to repurchase until they have vested based on
the original vesting schedule. At December 31, 1999, options to purchase
751,768 shares were outstanding and exercisable, of which 641,541 shares would
be subject to repurchase if the options were exercised.
FAIR VALUE DISCLOSURES
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Weighted average fair values................. $ 0.21 $ 2.06 $ 7.06
Assumptions:
Risk-free interest rates................... 6.12% 4.30-5.59% 4.30-5.99%
Expected lives............................. 4 years 4 years 4 years
Dividend yield............................. -- -- --
</TABLE>
Had compensation cost for the Company's stock option plan been determined
based on the fair market values of these stock options at the grant dates
consistent with the provisions of SFAS No. 123, the Company's net loss would
have changed to the pro forma amounts as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders............. $(1,328) $(4,832) $(36,490)
Net loss attributable to common stockholders--pro
forma.................................................. $(1,328) $(4,837) $(36,826)
Basic and diluted net loss per common share.............. $ (1.08) $ (3.49) $ (23.85)
Basic and diluted net loss per common share--pro forma... $ (1.08) $ (3.50) $ (24.07)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future years are anticipated.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain employee and non-employee stock option grants
during 1998 and 1999, the Company recorded unearned stock-based compensation
totaling $13,835,000, which is being amortized over the vesting periods of the
related options, generally four years using the method set out in FASB
Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each vested tranche
of options is accounted for as a separate option grant awarded for past
services. Accordingly, the compensation expense is recognized over the period
during which the services have been provided. This method results in higher
compensation expense in the earlier vesting periods of the related options.
Amortization of this stock-based compensation recognized during the years ended
December 31, 1998 and 1999 totaled approximately $326,000 and $4,968,000,
respectively.
F-23
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK (CONTINUED)
The total unearned stock-based compensation recorded to date will be
amortized as follows: $4,970,000 in 2000; $2,418,000 in 2001; $1,028,000 in
2002; and $162,000 in 2003.
In connection with the acquisition of the J.L. Price Corporation, the
Company will issue 48,592 shares of common stock, of which 24,296 shares will be
issued on November 1, 2000 and 24,296 shares will be issued on November 1, 2001,
subject to the continued employment of the selling stockholder. The Company
recorded $540,000 in unearned stock-based compensation. Amortization of this
stock-based compensation in the year ended December 31, 1999 totaled $199,000.
The remaining balance will be amortized as follows: $312,000 in 2000, and
$29,000 in 2001.
NOTE 10 - WARRANTS
In June 1997, the Company issued warrants to purchase 10,000 shares of
common stock, at $1.00 per share, to members of the Board of Directors. In June
1997, the Company also issued warrants to purchase 95,600 shares of series A
convertible preferred stock to non-employees and warrants to purchase 800 shares
of series A convertible preferred stock to a member of the Board of Directors,
at $1.00 per share, in connection with the series A financing.
In March 1998, the Company issued warrants to purchase 47,009 shares of
series B convertible preferred stock to holders of series B convertible
preferred stock, in connection with the series B financing.
In connection with the series C convertible preferred stock financing in
March 1999, the Company issued a warrant to purchase 47,167 shares of series C
convertible preferred stock as consideration for stock issuance costs. In
September 1999, the Company granted a customer and its affiliate warrants to
purchase 209,000 and 117,000 shares of series D convertible preferred stock,
respectively, as consideration for sales and marketing expense.
In connection with the series E convertible stock financing and the
advertising purchase agreements in November and December 1999, the Company
issued warrants to the investors to purchase 420,000 shares of common stock at
$0.01 per share and 842,596 shares of common stock at $13.50 per share.
In 1999, warrants to purchase 2,000 shares of Series A convertible preferred
stock were exercised for cash proceeds of $2,000.
F-24
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - WARRANTS (CONTINUED)
The following summarizes the warrants outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER
OF EXERCISE TERM
SHARES PRICE (YEARS) EXPIRATION DATE
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Series A convertible preferred stock......... 94,400 $ 1.00 4 June 30, 2001
Series B convertible preferred stock......... 47,009 $ 2.52 6 March 28, 2004
Series C convertible preferred stock......... 47,167 $ 6.53 5 March 28, 2004
Series D convertible preferred stock......... 326,000 $ 0.01 3 September 9, 2002
Common stock................................. 10,000 $ 1.00 10 June 16, 2007
Common stock................................. 245,000 $ 0.01 5 November 23, 2004
Common stock................................. 100,000 $ 0.01 5 December 6, 2004
Common stock................................. 583,333 $13.50 5 December 6, 2004
Common stock................................. 75,000 $ 0.01 5 December 12, 2004
Common stock................................. 259,263 $13.50 5 December 12, 2004
</TABLE>
Upon an IPO, the warrants to purchase convertible preferred stock will
automatically convert to warrants to purchase common stock of the Company under
the same terms.
The Company has determined the estimated fair market value of the warrants
issued in the three years ended December 31, 1999 to be $48,000, $80,000 and
$13,806,000, respectively. The Company believes that the fair value of the
warrants issued is a more reliable measure than the services received because it
has recent issuances of its preferred stock to third party investors to indicate
fair value. The fair value of the warrants was estimated using the Black-Scholes
model and was charged to operating expenses and stock issuance costs in 1997 and
1998. The fair value of the warrants for series C convertible preferred stock
issued in 1999 is simultaneously recorded in additional paid-in capital and also
charged to stock issue costs. The fair value of warrants for series D
convertible preferred stock and for common stock issued in 1999 is approximately
$2.5 million and approximately $11.3 million, respectively.
The amortization of warrant stock-based compensation was nil, nil and
$517,000 for the years ended December 31, 1997, 1998 and 1999, respectively. The
remaining unearned stock-based compensation from preferred and common warrants
granted in 1999 is being charged over the periods of the related co-marketing
agreements, which expire between 2001 and 2011 as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31,
2000........................................................ $ 3,990
2001........................................................ 3,990
2002........................................................ 3,717
2003........................................................ 334
2004........................................................ 223
Thereafter.................................................. 1,035
-------
$13,289
=======
</TABLE>
F-25
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - WARRANTS (CONTINUED)
The fair value of each warrant has been estimated on the date of issuance
using the term of the warrant and the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate.................................. 6.12% 5.36% 5.87%
Expected dividends....................................... -- -- --
Volatility............................................... 70% 70% 70%
</TABLE>
NOTE 11 - RELATED PARTY TRANSACTIONS
During 1997 and 1998, the Company leased office space from a company in
which an executive officer held an ownership interest. The rent paid under this
lease was $78,000 and $23,000 for the years ended December 31, 1997 and 1998,
respectively.
In May 1999, the Company entered into an employment related promissory note
agreement with its Chief Executive Officer, whereby the Company agreed to loan
the officer up to $500,000. The full amount was loaned in August 1999. The note
accrues interest at 5.25% per annum and is due and payable on the earlier of the
first day of the month following the one-year anniversary of the closing of a
firm commitment underwritten public offering of the Company's common stock or
within 90 days after the voluntary termination of the officer's employment or
the termination of the officer's employment for cause. The note is
collateralized by the officer's shares of stock and options to purchase shares
of stock. At December 31, 1999, $500,000 was outstanding under the note. If the
Company terminates the officer's employment without cause prior to March 29,
2000, 50% of the loan will be forgiven. If the Company terminates the officer's
employment without cause after March 29, 2000 and prior to the first anniversary
of the closing of the Company's IPO, 75% of the loan will be forgiven.
Certain strategic investors who participated in the Company's series D and E
convertible preferred stock offerings are also advertising customers of the
Company. In connection with purchase of the convertible preferred stock and the
consummation of the advertising package agreements, the Company issued warrants
to these customers to purchase 326,000 shares of convertible preferred and
1,262,596 shares of common stock.
Six of these strategic stockholders were advertising customers of the
Company during the year ended December 31, 1999. The Company also purchased
services, primarily advertising, from three of these strategic stockholders
during 1999 under multi-year commercial contracts.
These commercial contracts also include cooperative marketing arrangements
under which the Company is obligated to fund co-branded advertisements on
television and in the print media, with or on behalf of the related commercial
party. In the commercial contracts to date, the Company has committed to spend
between 50% to 100% of the fees it expects to receive under these commercial
contracts with the related commercial party. These commitments are disclosed in
Note 6 to Notes to the Consolidated Financial Statements.
The accounts payable and accrued liabilities balances due to related parties
reflects the advertising and co-marketing services provided by related parties
under the multi-year commercial contracts. These balances are settled by the
Company on a gross basis without set-off.
F-26
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company recognized the following amounts in advertising revenues, sales
and marketing expense, accounts receivable and accounts payable and accrued
liabilities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
------------------------------------- ---------------------------------
SALES AND ACCOUNTS ACCOUNTS PAYABLE AND
REVENUES MARKETING EXPENSE RECEIVABLE ACCRUED LIABILITIES
----------------- ----------------- ---------- --------------------
<S> <C> <C> <C> <C>
General Electric and affiliates.......... $ -- $217 $250 $ 28
Dow Chemical............................. -- -- 35 18
Masco.................................... 168 12 71 --
Owens Corning............................ 48 -- 185 141
Armstrong................................ 50 -- 11 --
Microsoft................................ 20 991 -- 597
</TABLE>
Included in the revenue from Masco was barter revenue of $12,000 for which
the Company recorded an equal amount in sales and marketing expenses. All
revenues from Microsoft were barter revenues for which the Company recorded an
equal amount in sales and marketing expenses. The Company recorded advertising
expenses of nil and $2,000 in the years ended December 31, 1997 and 1998,
respectively, for advertising services purchased from Microsoft and its
affiliate.
NOTE 12 - UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
STOCKHOLDERS' EQUITY
Upon the closing of the Company's IPO, all outstanding convertible preferred
stock will be converted automatically into common stock. The pro forma effect of
this conversion has been presented as a separate column in the Company's
consolidated balance sheet, assuming the conversion had occurred as of
December 31, 1999.
Pro forma basic and diluted net loss per common share have been computed as
described in Note 2 and also give effect to common equivalent shares from
preferred stock that will automatically convert upon the closing of the
Company's IPO (using the as-if-converted method) for 1999.
A reconciliation of the numerator and denominator used in the calculation of
pro forma basic and fully diluted net loss per common share follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
-------------
(UNAUDITED)
<S> <C>
Net loss.................................................... $(36,251)
========
Shares used in computing basic and diluted net loss per
common
share..................................................... 1,530
Adjusted to reflect the effect of the assumed conversion of
convertible preferred stock from
the date of issuance:
Series A convertible preferred stock...................... 1,206
Series B convertible preferred stock...................... 1,935
Series C convertible preferred stock...................... 2,689
Series D convertible preferred stock...................... 645
Series E convertible preferred stock...................... 229
--------
Weighted average shares used in computing pro forma basic
and diluted net loss per common share..................... 8,234
========
Pro forma basic and diluted net loss per common share....... $ (4.40)
========
</TABLE>
F-27
<PAGE>
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards
available to offset future regular and alternative minimum taxable income of
approximately $29,023,000 and $17,187,000 for federal and California purposes,
respectively. These carryforwards expire between 2005 and 2019, if not utilized
before these dates. At December 31, 1999, the Company had approximately $67,000
of federal and $52,000 of state research and development credit carryforwards
available to offset future taxable income, which expire in varying amounts
beginning in 2013 and indefinitely, respectively. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amounts of net operating losses that the Company may utilize in any year
include, but are not limited to, a cumulative ownership change of more than 50%
as defined, over a three-year period.
The Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets (current):
Net operating losses...................................... $ 2,079 $ 11,387
Allowance for doubtful accounts........................... 3 34
Accrued liabilities....................................... 11 1,946
Research and development credit carryforwards............. 89 119
-------- --------
Deferred tax assets..................................... 2,182 13,486
Deferred tax liabilities (non-current):
Depreciation.............................................. (14) (78)
-------- --------
Deferred tax liabilities................................ (14) (78)
-------- --------
Net deferred tax assets................................. 2,168 13,408
Valuation allowance..................................... (2,168) (13,408)
-------- --------
$ -- $ --
======== ========
</TABLE>
Due to uncertainty surrounding the realization of favorable tax attributes
in future tax returns, the Company has placed a valuation allowance against all
of its net deferred tax assets. At such time as it is determined that it is more
likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
NOTE 14 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of convertible bridge notes into common
stock................................................... $65 $ -- $ --
Issuance of preferred stock/common stock in exchange for
services rendered....................................... $11 $ -- $ 37
Unearned stock-based compensation relating to employee
stock option grants..................................... $-- $1,055 $13,320
Unearned stock-based compensation relating to Series D
warrant grant to strategic stockholders................. $-- $ -- $ 2,507
Unearned stock-based compensation relating to common stock
warrant grant to strategic stockholders................. $-- $ -- $11,299
Accretion of Series A mandatorily redeemable convertible
preferred stock......................................... $86 $ 192 $ 52
Accretion of Series B mandatorily redeemable convertible
preferred stock......................................... $-- $ 525 $ 187
Issuance of common stock in exchange for stockholder notes
receivable.............................................. $-- $ -- $ 633
Accrued interest converted to common stock................ $ 2 $ -- $ --
Conversion of convertible notes into convertible preferred
stock................................................... $-- $ 150 $ --
Exchange of advertising services for advertising
services................................................ -- -- $ 653
Working capital acquired in acquisitions.................. -- -- $ 17
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $14 $ 15 $ 5
Cash paid during the period for taxes..................... $ 1 $ 1 $ 2
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Contractor Referral Service, LLC
In our opinion, the accompanying balance sheet and the related statements of
operations, of members' deficit and of cash flows present fairly, in all
material respects, the financial position of Contractor Referral Service, LLC at
December 31, 1998 and the results of its operations and its cash flows for the
year ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recently sold its revenue producing assets
and intangibles and may not be able to generate cash flows from operations which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 1. The
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
November 24, 1999
F-29
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5 $ 8
Accounts receivable, net of allowance for doubtful
accounts of $43 in 1998 and $58 in 1999................. 42 60
Prepaid expenses and other current assets................. 2 4
------- -------
Total current assets.................................. 49 72
Property and equipment, net................................. 2 1
Other assets................................................ 2 2
------- -------
Total assets.......................................... $ 53 $ 75
======= =======
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 43 $ 77
Accrued liabilities....................................... 2 3
Line of credit............................................ 9 7
Related party loans payable............................... 62 88
------- -------
Total current liabilities............................. 116 175
------- -------
Commitments (Note 5)
MEMBERS' DEFICIT
Shares issued and outstanding: 3,056,827 in 1998 and
1999.................................................... (63) (100)
------- -------
Total liabilities and members' deficit................ $ 53 $ 75
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 271 $ 168
Cost of revenues............................................ 63 41
------ ------
Gross profit................................................ 208 127
Costs and expenses:
Sales and marketing....................................... 175 98
General and administrative................................ 65 46
------ ------
Total operating expenses................................ 240 144
------ ------
Loss from operations........................................ (32) (17)
Interest and other income (expense)......................... (12) (20)
------ ------
Net loss................................................ $ (44) $ (37)
====== ======
Basic and diluted net loss per share........................ $ (.01) $ (.01)
====== ======
Shares used in calculating basic and diluted net loss per
share..................................................... 3,048 3,057
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
STATEMENTS OF MEMBERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES
------------------- TOTAL MEMBERS'
NUMBER VALUE CAPITAL (DEFICIT)
-------- -------- -----------------
<S> <C> <C> <C>
Balances, January 1, 1998................................... 3,022 $ (26) $ (26)
Issuance of shares to members............................... 35 $ 7 $ 7
Net loss.................................................... -- (44) (44)
----- ----- -----
Balances, December 31, 1998................................. 3,057 (63) (63)
Net loss (unaudited)........................................ -- (37) (37)
----- ----- -----
Balances, June 30, 1999 (unaudited)......................... 3,057 $(100) $(100)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(44) $(37)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... -- 1
Provision for doubtful accounts....................... 24 15
Changes in operating assets and liabilities:
Accounts receivable................................... (31) (33)
Prepaid expenses and other current assets............. (1) (2)
Accounts payable...................................... 15 34
Accrued liabilities................................... 14 1
---- ----
Net cash used in operating activities............. (23) (21)
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ 4 --
---- ----
Net cash used in investing activities............. 4 --
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contributions.................................... 7 --
Borrowings under line of credit........................... 9 --
Principal payments under line of credit................... -- (2)
Related party loans payable............................... -- 26
---- ----
Net cash provided by financing activities......... 16 24
---- ----
Net increase (decrease) in cash and cash equivalents........ (3) 3
Cash and cash equivalents, beginning of period.............. 8 5
---- ----
Cash and cash equivalents, end of period.................... $ 5 $ 8
==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED
NOTE 1 - GOING CONCERN:
These financial statements are prepared on a going concern basis, which
assumes that Contractor Referral Service, LLC ("CRS") will realize its assets
and discharge its liabilities in the normal course of business. The Company
incurred an operating loss of $44,000 for the year ended December 31, 1998 and
$37,000 for the six months ended June 30, 1999 and reported a deficit on member
capital accounts at December 31, 1998 of $63,000 and $100,000 at June 30, 1999.
The ability of the Company to continue as a going concern is dependent upon
obtaining adequate sources of financing and developing new operations.
On September 9, 1999, the assets and certain intangible assets of the
Company were acquired by ImproveNet, Inc. (Note 7). As required by the asset
purchase agreement, the Company will maintain its legal status and maintain
minimum levels of general liability insurance. Management anticipates that this
transaction will provide sufficient funding to discharge its liabilities.
Nevertheless, there are no assurances that they will be sufficient to meet its
obligations as they become due.
NOTE 2 - FORMATION AND BUSINESS OF THE COMPANY:
Contractor Referral Service, LLC (the "Company") was formed as a Limited
Liability Company under the laws of the state of Illinois. The Company operates
a telephone contractor referral business under the name "1-800 Contractor."
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of the lines of credit approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a straight
line basis over their estimated useful lives of three to seven years. Major
additions and improvements are capitalized, while replacements, maintenance, and
repairs that do not improve or extend the life of the assets are charged to
operations. In the period assets are retired or otherwise disposed of, the costs
and related
F-34
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED
(CONTINUED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accumulated depreciation and amortization are removed from the accounts, and any
gain or loss on disposal is included in results of operations.
REVENUE RECOGNITION
Revenues are derived from contractor referral fees that are recognized once
the homeowner and contractor are matched by the Company. Payments received in
advance of providing services are deferred until the period such services are
provided. The Company establishes a sales reserve at the time of revenue
recognition based on the Company's historical experience.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the years ended December 31, 1998 and the six months ended June 30,
1999 was $91,000 and $48,000 (unaudited), respectively.
INCOME TAXES
The Company is treated as a partnership for federal and state income tax
purposes. Consequently federal income taxes are not payable or provided for by
the Company. Members are taxed individually on their share of the Company's
earnings. The Company's net income or loss is allocated among the members in
accordance with the Company's articles of organization.
CONCENTRATION OF CREDIT RISK
The Company's cash and cash equivalents are held with one major bank in the
United States. The Company's customers consist of contractors in southern
California. The Company performs ongoing credit evaluations of its customers'
financial condition. The Company does not require collateral.
NOTE 4 - BANK LINE OF CREDIT:
On January 22, 1997 the Company obtained a $25,000 line of credit from a
bank, bearing interest at a fluctuating interest rate per annum equal to the
Bank's Reference Rate plus 5.75 percentage points (14.0% at December 31, 1998).
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE
The Company leases a facility under an operating lease agreement expiring
April 2001. In March 1999, the Company entered into a two year lease agreement
for a new office facility in Santa Ana, California. Total future minimum lease
payments totaled $54,000 at the date the agreement was signed. Under the terms
of the lease, the Company is required to pay $2,000 as a security deposit.
F-35
<PAGE>
CONTRACTOR REFERRAL SERVICE, LLC
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED
(CONTINUED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum lease payments under the operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
<S> <C>
1999........................................................ $20
2000........................................................ 27
2001........................................................ 7
---
$54
===
</TABLE>
NOTE 6 - RELATED PARTY TRANSACTIONS:
At December 31, 1998 the Company owed a total of $62,000 to the founders and
directors. These amounts represent loans to the Company which include interest
of $12,000 that has been compounded annually at a weighted average rate of 17%.
At June 30, 1999 the Company owed a total of $88,000 (unaudited) to the
founders and directors. These amounts represent loans to the Company which
include interest of $31,000 (unaudited) that has been compounded annually at a
weighted average rate of 40% (unaudited).
NOTE 7 - SUBSEQUENT EVENTS:
On August 27, 1999, the Company entered into an agreement to sell
substantially all the assets and business of the Company to ImproveNet, Inc. The
acquisition was consummated on September 9, 1999, for total consideration of
$650,000 payable in cash. A holdback of $100,000 will be released in fiscal
2000.
F-36
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On September 9, 1999, ImproveNet, Inc. (the "Company") acquired
substantially all of the assets and business of Contractor Referral Service, LLC
("CRS"), in exchange for total cash consideration of $650,000. The transaction
was accounted for using the purchase method of accounting and the results of CRS
were included in the results of the Company from September 9, 1999, the closing
date of the transaction.
The following unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999 gives effect to the acquisition by the Company of
CRS as if it had occurred on January 1, 1999. The statement has been derived
from the statement of operations of the Company for the year ended December 31,
1999 appearing elsewhere in this Prospectus and the unaudited statement of
operations of CRS for the nine months ended September 30, 1999. The unaudited
pro forma financial data are not necessarily indicative of the results of
operations of the Company had the transactions assumed therein occurred at the
beginning of the period presented, nor are they necessarily indicative of the
results of operations which may be expected to occur in the future. The
unaudited Pro Forma Combined Statement of Operations should be read in
conjunction with the historical financial statements and notes thereto of the
Company and CRS included elsewhere in this Prospectus.
F-37
<PAGE>
IMPROVENET INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CRS
IMPROVENET FOR THE
FOR THE YEAR PERIOD FROM PRO FORMA
ENDED JANUARY 1, 1999 ----------------------
DECEMBER 31, TO ACQUISITION
1999 SEPTEMBER 30, 1999 ADJUSTMENTS COMBINED
------------- ------------------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Service revenues......................... $ 1,139 $ 215 $ -- $ 1,354
Advertising revenues..................... 926 -- -- 926
-------- ------ ---- --------
Total revenues......................... 2,065 215 -- 2,280
Cost of revenues:
Cost of service revenues................. 1,984 66 -- 2,050
Cost of advertising revenues............. 567 -- -- 567
-------- ------ ---- --------
Total cost of revenues................. 2,551 66 -- 2,617
-------- ------ ---- --------
Gross profit (loss).................. (486) 149 -- (337)
Operating expenses:
Sales and marketing...................... 25,784 144 -- 25,928
Product development...................... 665 -- -- 665
General and administrative............... 4,214 84 -- 4,298
Amortization of goodwill................. -- -- 82(A) 82
Stock-based compensation................. 5,619 -- -- 5,619
-------- ------ ---- --------
Total operating expenses............. 36,282 228 82 36,592
-------- ------ ---- --------
Loss from operations....................... (36,768) (79) (82) (36,929)
Interest and other income (expense), net... 517 (41) -- 476
-------- ------ ---- --------
Net loss................................... (36,251) (120) (82) (36,453)
Accretion of mandatorily redeemable
preferred convertible stock.............. (239) -- -- (239)
-------- ------ ---- --------
Net loss attributable to common
stockholders............................. $(36,490) $ (120) $(82) $(36,692)
======== ====== ==== ========
Basic and diluted net loss per share....... $ (23.85) $ (23.98)
======== ========
Shares used in calculating basic and
diluted net loss per share:.............. 1,530 1,530
======== ========
</TABLE>
See accompanying notes to unaudited Pro Forma Statement of Operations
for explanation of Pro Forma acquisition adjustments.
F-38
<PAGE>
IMPROVENET INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NOTE A - GOODWILL AMORTIZATION
Reflects additional goodwill amortization expense related to the acquisition
of CRS. Goodwill is being amortized over a period of five years.
NOTE B - ALLOCATION OF PURCHASE PRICE TO INTANGIBLE ASSETS
The purchase price of CRS was allocated to tangible net assets and
identifiable intangible assets with the remaining unallocated purchase price
attributed to goodwill. The fair value of tangible assets approximated their
historical book value at September 9, 1999. The identifiable intangible assets
and goodwill, along with their estimated lives for amortization, are as follows
(in thousands):
<TABLE>
<CAPTION>
FAIR
VALUE LIFE (YEARS)
-------- -------------
<S> <C> <C>
Licensing right........................................ $ 125 1.2
Non-competition agreement.............................. 50 2
Goodwill............................................... 411 5
</TABLE>
NOTE C - UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE
Pro forma net loss reflects the impact of the adjustments above. Basic and
diluted net loss per common share (pro forma) is computed using ImproveNet's
weighted-average number of shares of common stock outstanding.
F-39
<PAGE>
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