<PAGE>
As filed with the Securities and Exchange Commission on January 20, 2000
Registration No. 333-92301
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AVENUE A, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Washington 7319 91-1819567
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
506 Second Avenue, 9th Floor
Seattle, Washington 98104
(206) 521-8800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Brian P. McAndrews
Chief Executive Officer
Avenue A, Inc.
506 Second Avenue, 9th Floor
Seattle, Washington 98104
(206) 521-8800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
David F. McShea Patrick J. Schultheis
Faith Wilson Jose F. Macias
Patrick J. Devine Richard C. Sohn
PERKINS COIE LLP WILSON SONSINI GOODRICH & ROSATI,
1201 Third Avenue, 48th Floor Professional Corporation
Seattle, Washington 98101-3099 5300 Carillon Point
(206) 583-8888 Kirkland, Washington 98033-7356
(425) 576-5800
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Title of each class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered(1) per share offering price(2) fee(3)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 6,037,500 shares $10.00 $60,375,000 $15,939
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 787,500 shares that may be purchased by the underwriters to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(a) under the Securities Act.
(3) This registration fee has been previously paid.
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued January 20, 2000
5,250,000 Shares
[LOGO OF AVENUE A]
COMMON STOCK
------------
Avenue A, Inc. is offering shares of its common stock. This is our initial
public offering and no public market currently exists for our shares. We
anticipate that the initial public offering price will be between $8.00 and
$10.00 per share.
------------
We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "AVEA."
------------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.
------------
PRICE $ A SHARE
------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Avenue A, Inc.
-------- ------------- --------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total..................................... $ $ $
</TABLE>
Avenue A, Inc. has granted the underwriters the right to purchase up to an
additional 787,500 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
------------
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
THOMAS WEISEL PARTNERS LLC
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Special Note Regarding Forward-Looking Statements........................ 22
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 36
Management................................................................. 47
Related-Party Transactions................................................. 59
Principal Shareholders..................................................... 62
Description of Capital Stock............................................... 64
Shares Eligible for Future Sale............................................ 67
Underwriters............................................................... 69
Legal Matters.............................................................. 71
Experts.................................................................... 71
Where You Can Find More Information........................................ 71
Index to Consolidated Financial Statements................................. F-1
</TABLE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock.
Until , 2000, 25 days after commencement of the offering, all
dealers that buy, sell or trade shares, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Avenue A and the common stock being sold in this offering
and the consolidated financial statements and related notes appearing elsewhere
in this prospectus.
Avenue A provides technology-based Internet advertising services to
businesses. We integrate Internet media planning and buying, proprietary ad
management technology, user profiling and data analysis systems to help
advertisers increase the effectiveness and return on investment of their
Internet advertising campaigns. We have developed an extensive knowledge base
of Internet advertising strategies, targeting methods and media placements
which have proven effective. We believe this knowledge base grows richer and
more valuable with each additional campaign we execute and with each additional
client we serve. We focus on serving the needs of Internet advertisers, with
the objective of delivering the most successful advertising campaigns for our
clients. Our top four clients are Gateway, Microsoft (through its MSN
division), uBid and Uproar, based on our revenue in the fourth quarter of 1999.
The Internet is expected to grow rapidly as a medium for advertising and
commerce. Forrester Research, Inc. projects that online advertising
expenditures in the United States will grow from $2.8 billion in 1999 to
$22.0 billion in 2004. We believe that a number of factors have driven this
growth, including the increasing number of Internet users, the growth of e-
commerce and technological advances. The Internet enables the delivery of
advertisements which can be tailored for individual viewers and quickly
modified based on viewers' responses to the advertisements. Advertisers,
however, often must overcome significant challenges to take full advantage of
the potential of the Internet as an advertising medium. Some of these
challenges include the scale and complexity of the Internet, significant data
analysis and technology requirements and substantial operating costs.
Avenue A seeks to provide a solution to these challenges. We have designed
our service offering to meet the needs of buyers of Internet advertising. Our
media planning and ad management services use our database to create and
execute highly targeted advertising campaigns. Our proprietary technology
allows us to simultaneously conduct a large number of advertising campaigns
which are delivered to a broad range of Web sites and advertising networks. Our
technology and data analysis systems measure and analyze our clients'
advertising campaigns based on criteria relevant to their specific business
objectives to help increase the return on their investments. We do not design
the content of advertisements, which is provided by the client or a third party
acting on its behalf.
Our objective is to be the leading provider of Internet and other digital
media advertising services to advertisers. To achieve this goal we plan to:
. aggressively acquire new clients and develop new markets, in particular
through our Growth Markets Division, which tailors our services to
clients with smaller online advertising budgets;
. leverage our extensive database of information from prior Internet
advertising campaigns and our data analysis expertise to improve and
extend our services;
. provide superior client service through a comprehensive, integrated
offering of Internet advertising and marketing services, including our
recently launched Precision E-mail Service;
. continue to build, license and acquire technologies that will enable us
to plan and execute increasingly effective Internet advertising and
marketing campaigns;
. acquire complementary businesses and establish relationships with other
companies, including companies that provide traditional advertising and
media services, to increase our sales penetration, gain access to their
clients and become the preferred or exclusive provider of Internet
advertising and marketing services for these companies.
. extend our technology and capabilities to deliver targeted
advertisements through emerging digital media we choose to exploit,
which may include interactive television, Internet-enabled home
appliances, hand-held computers and cellular telephones; and
. expand our presence internationally in order to capitalize on the global
reach of the Internet.
4
<PAGE>
We began operations in July 1997 and were incorporated in Washington in
February 1998. To expand our presence in the Internet advertising industry and
allow us to serve a broader client base, we acquired iballs LLC, an Internet
media company located in New York City, in September 1999. Our principal
executive offices are located at 506 Second Avenue, Seattle, Washington 98104,
and our telephone number is (206) 521-8800. Our World Wide Web site is
www.avenuea.com. The information contained on our Web site is not part of, or
incorporated by reference into, this prospectus.
"AVENUE A," "AVENUE A MEDIA," "AD CLUB NETWORK," "AXIS," "PRECISION E-MAIL,"
"PRECISION TARGETING" and the Avenue A logo are service marks of Avenue A for
which service mark applications are pending. "IBALLS" and the iballs LLC logo
are service marks of iballs LLC, a wholly owned subsidiary of Avenue A, for
which service mark applications are pending. This prospectus also includes
trademarks, trade names and service marks of other companies. Use or display by
Avenue A of other parties' trademarks, trade names or service marks is not
intended to and does not imply a relationship with, or endorsement or
sponsorship of Avenue A by, these other parties.
Unless the context requires otherwise, in this prospectus the terms "Avenue
A," "we," "us" and "our" refer to Avenue A, Inc. and its subsidiaries, and
references to "iballs LLC" refer to I-Balls LLC, a wholly owned subsidiary of
Avenue A, Inc.
Risk Factors
An investment in our common stock involves a high degree of risk. We have a
history of significant losses, including net losses of $3.9 million for the
period from our inception on July 1, 1997 through December 31, 1998, and net
losses of $5.3 million for the nine months ended September 30, 1999. As of
September 30, 1999, our accumulated deficit was $8.6 million. We anticipate
incurring substantial losses and negative operating cash flow for the
foreseeable future. For more information regarding these and other risks
involved in investing in our common stock, see "Risk Factors."
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered................................ 5,250,000 shares
Common stock to be outstanding after this offering.. 53,749,555 shares
Use of proceeds..................................... For general corporate
purposes, including
working capital. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.............. AVEA
</TABLE>
The foregoing information is based upon shares outstanding as of September
30, 1999 and excludes:
. 5,496,351 shares of common stock subject to outstanding options as of
September 30, 1999, granted under our 1998 stock incentive compensation
plan at a weighted average exercise price of $1.33 per share;
. 4,986,507 shares of common stock reserved for future grants under our
1998 stock incentive compensation plan, which includes 1,650,000 shares
reserved in January 2000, subject to shareholder approval, for future
grants under that plan;
. 1,312,500 shares of common stock subject to outstanding options as of
September 30, 1999, granted outside of our stock incentive compensation
plans at a weighted average exercise price of $1.63 per share;
. 677,710 shares of common stock issuable upon exercise of an outstanding
warrant as of September 30, 1999 at an exercise price of $.55 per share;
. 5,250,000 shares of common stock reserved for issuance under our 1999
stock incentive compensation plan and 750,000 shares of common stock
reserved for issuance under our 1999 employee stock purchase plan; and
. 592,500 shares of common stock issued to executive officers, a director
and a consultant after September 30, 1999.
In addition, except as otherwise noted, all information in this prospectus
is based on the following assumptions:
. the conversion of each outstanding share of preferred stock into 1.5
shares of common stock upon the closing of this offering;
. no exercise of the underwriters' over-allotment option; and
. a 3-for-2 stock split of our common stock in the form of a common stock
dividend approved by our Board on January 18, 2000.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
The pro forma basic and diluted net loss per share data in the following
table reflects the conversion of all outstanding shares of preferred stock into
24,624,147 shares of common stock effective upon the closing of this offering.
See note 2 of notes to Avenue A's consolidated financial statements contained
elsewhere in this prospectus for an explanation of the determination of the
number of weighted average shares used to compute pro forma basic and diluted
net loss per share amounts.
<TABLE>
<CAPTION>
Period
From Inception Nine Months Ended
(July 1, 1997) Year Ended September 30,
to December 31, December 31, ---------------------
1997 1998 1998 1999
--------------- ------------ --------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Total revenue............. $ 18 $ 599 $ 276 $ 34,098
Loss from operations...... (284) (3,658) (2,096) (5,585)
Net loss.................. (284) (3,646) (2,106) (5,250)
Basic and diluted net loss
per share................ $ (.34) $ (.25) $ (.28)
Shares used in computing
basic and diluted net
loss per share........... 10,860,682 8,448,996 18,591,951
Pro forma basic and
diluted net loss per
share.................... $ (.27) $ (.21) $ (.15)
Shares used in computing
pro forma basic and
diluted net loss per
share.................... 13,387,488 9,803,127 35,748,046
</TABLE>
The following table presents consolidated balance sheet data as of September
30, 1999:
. on an actual basis; and
. on an as adjusted basis to reflect the sale of 5,250,000 shares of
common stock offered by this prospectus at an assumed initial public
offering price of $9.00 per share, and the receipt by Avenue A of the
estimated net proceeds after deducting estimated underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
As of September 30,
1999
-------------------
Actual As Adjusted
------- -----------
(unaudited)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................. $17,831 $60,224
Working capital........................................... 12,951 55,344
Total assets.............................................. 45,923 88,316
Total liabilities......................................... 23,658 23,658
Total shareholders' equity................................ 22,265 64,658
</TABLE>
7
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this prospectus before investing in our common stock. Our business,
financial condition and operating results could be seriously harmed by any of
the following risks. The trading price of our common stock could decline due
to any of these risks, and you may lose all or part of your investment.
Risks Related to Our Company and Business
We are subject to risks frequently encountered by early-stage companies in
the Internet advertising market
We began operations in July 1997 and our business model has evolved since
that time. Accordingly, our prospects for financial and operational success
must be considered in light of the risks frequently encountered by early-stage
companies in the Internet advertising market. These risks include our ability
to:
. attract new clients and maintain current client relationships;
. achieve effective advertising campaign results for our clients;
. continue to develop and upgrade our technologies to keep pace with the
growth of the Internet advertising market and changes in technology;
. continue to expand the number of services we offer;
. manage our expanding operations; and
. maintain our reputation and build trust with our clients.
If we do not successfully address these risks, our business could suffer.
We have a history of losses and anticipate continued losses
We incurred net losses of $3.9 million for the period from our inception on
July 1, 1997 through December 31, 1998, and net losses of $5.3 million for the
nine months ended September 30, 1999. As of September 30, 1999, our
accumulated deficit was $8.6 million. We have not achieved profitability and
expect to continue to incur operating losses for the foreseeable future. We
expect to continue to make significant operating and capital expenditures and,
as a result, we will need to generate significant additional revenue to
achieve and maintain profitability. We cannot assure you that we will generate
sufficient revenue to achieve profitability. Even if we do achieve
profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. If our revenue
grows more slowly than we anticipate, or if our operating expenses exceed our
expectations or cannot be reduced, we will be unable to achieve or maintain
profitability.
Our quarterly operating results are subject to fluctuations that may cause
our stock price to decline
Our quarterly operating results have fluctuated in the past and are likely
to continue to do so in the future. It is possible that in the future our
operating results in a particular quarter or quarters will not meet the
expectations of investors or, if securities analysts elect to research our
stock, the expectations of these analysts. If our operating results fail to
meet these expectations, the market price of our common stock could decline.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance and should not be relied upon
to predict the future performance of our stock price.
Our revenue, expenses and operating results could vary significantly from
quarter to quarter for several reasons, including:
. fluctuating demand for our advertising services and changes in the mix
of advertisements placed and services provided;
8
<PAGE>
. addition of new clients or loss of current clients;
. seasonal fluctuations in advertising spending;
. timing variations on the part of advertisers to implement advertising
campaigns;
. changes in the availability and pricing of advertising space;
. timing and amount of costs relating to the expansion of our operations;
and
. costs related to any possible future acquisitions of technologies or
businesses.
Our current and future expense estimates are based, in large part, on
estimates of future revenue, which is difficult to predict. In particular, we
plan to increase our operating expenses significantly in order to enhance our
proprietary technology, expand our client services, sales and marketing
operations and expand internationally. We may be unable to, or may elect not
to, adjust spending quickly enough to offset any unexpected revenue shortfall.
If our expenses are not accompanied by increased revenue in the same quarter,
our quarterly operating results would be harmed.
Our operating results may fluctuate seasonally, and these fluctuations may
cause our stock price to decline
Our stock price may decline due to seasonal fluctuations. We believe that
our operating results will fluctuate depending on the season because retail
advertisers generally purchase substantially more advertising space during the
fourth calendar quarter of each year than during other quarters, particularly
the first calendar quarter. Given our limited operating history, we cannot be
certain how pronounced these seasonal trends may be or what, if any, other
seasonal trends may emerge that would affect our business.
We rely on a limited number of clients, and the loss of a major client or a
reduction in a major client's Internet advertising budget could
significantly reduce our revenue
Our business would be harmed by the loss of any of our major clients, a
reduction in the Internet advertising budgets of any of these clients or any
significant reduction in revenue generated from these clients. A substantial
amount of our revenue to date has been derived from a limited number of
advertisers that use our services. In the fourth quarter of 1999, Gateway and
uBid each accounted for over 10% of our total revenue, and together accounted
for approximately 29% of our total revenue. In addition, our top ten clients
collectively accounted for over 65% of our total revenue in the fourth quarter
of 1999. Current clients may decide not to continue purchasing advertising
services from us or may significantly reduce their advertising spending, and
we may not be able to successfully attract additional clients. In addition,
the non-payment of amounts due to us from one or more of our significant
clients would harm our business.
Our client contracts have short terms, and the loss of a significant number
of these contracts in a short period of time could harm our business
We derive substantially all of our revenue from the sale of advertising
services under short-term advertising campaign services contracts, all of
which are cancelable upon 90 days' or less notice. In addition, these
contracts generally do not contain penalty provisions for cancellation before
the end of the contract term. The non-renewal, cancellation or deferral of a
significant number of these contracts in any one period would cause an
immediate and significant decline in our revenue and harm our business.
We are substantially dependent on our ability to perform third-party ad
serving and any limitation on this ability could harm our business
We are substantially dependent on our ability to perform advertisement
delivery, or ad serving, on third-party Web sites, and any limitation on this
ability could harm our business. Our technology and advertising services have
been structured around third-party ad serving, and we currently do not plan to
shift our focus or
9
<PAGE>
diversify our services to diminish the relative importance of third-party ad
serving. Our business could suffer from a variety of factors that limit or
reduce our ability to perform third-party ad serving, including:
. refusal by Web sites or advertising networks to accept advertisements
served by us;
. technological changes that render our ad serving systems obsolete or
incompatible with the systems of Web sites or advertising networks;
. introduction of more advanced or lower-priced ad serving services by our
competitors;
. lawsuits or injunctions based on claims that our ad serving technologies
violate the proprietary rights of other parties;
. increases in ad serving directly from advertisers to Web sites; and
. interruptions, failures or defects in our ad serving systems.
Some of our competitors have obtained patents and have sued other parties
to enforce their rights under these patents, and we may also be subject to
patent infringement claims, including claims that our ad serving
technologies, processes or methods infringe these or other patents.
Other parties may claim that our technologies, processes or methods
infringe their patents. Any such claim may cause us to incur significant
expenses and, if successfully asserted against us, may cause us to pay
substantial damages and prevent us from providing some of our services,
including our core ad serving services, which would substantially harm our
business. A U.S. patent was issued to DoubleClick Inc. in September 1999 which
may cover some of the technologies, processes or methods that we use in our ad
serving systems. DoubleClick recently brought suit against L90, Inc., one of
its competitors, claiming that L90's methods and networks for delivery,
targeting and measuring advertising over the Internet infringe this patent. We
cannot assure you that we will be able to distinguish our technologies,
processes or methods from those covered under the DoubleClick patent or that
the DoubleClick patent would be invalidated if challenged. If DoubleClick were
to bring a claim against us based upon this patent and we were unable to
distinguish our technologies, processes or methods or prove that the
DoubleClick patent is invalid, we could incur significant expenses, be
required to pay substantial damages and be enjoined from providing some of our
services, including our core ad serving services.
In addition, DoubleClick and MatchLogic, Inc., a subsidiary of At Home
Corporation, have each filed patent applications that appear to cover
technologies relating to ad serving, and 24/7 Media, Inc. has announced that
it has received a notice of allowance for a U.S. patent application on its ad
delivery technology. If patents are issued pursuant to these applications, we
cannot assure you that we will be able to distinguish our technologies,
processes or methods from those covered under these patents or that the
patents would be invalidated if challenged. The patent field covering
Internet-related technologies is rapidly evolving and surrounded by a great
deal of uncertainty, and other patents or patent applications relating to the
delivery of Internet advertising may exist of which we are unaware.
Any claims that might be brought against us relating to infringement of
patents, including patents that may be issued to DoubleClick, MatchLogic or
24/7 Media, may cause us to incur significant expenses and, if successfully
asserted against us, may cause us to pay substantial damages and limit our
ability to use the intellectual property subject to these claims. Even if we
were to prevail, any litigation could be costly and time-consuming and could
divert the attention of our management and key personnel from our business
operations. Furthermore, as a result of a patent infringement suit, we may be
prevented from providing some of our services, including our core ad serving
services, unless we enter into royalty or license agreements. We may not be
able to obtain royalty or license agreements on terms acceptable to us, if at
all.
10
<PAGE>
In addition to patent infringement claims, third parties may assert other
intellectual property claims, which may cause us to incur significant
expenses, pay substantial damages and be prevented from providing our
services
In addition to patent infringement claims, third parties may claim that we
are infringing or violating their other intellectual property rights,
including their copyrights, trademarks and trade secrets, which may cause us
to incur significant expenses and, if successfully asserted against us, pay
substantial damages and be prevented from providing our services which would
substantially harm our business. Even if we were to prevail, any litigation
regarding our intellectual property could be costly and time-consuming and
divert the attention of our management and key personnel from our business
operations. Furthermore, as a result of an intellectual property infringement
suit, we may be prevented from providing some of our services or using some of
the service marks for which we have sought service mark protection, unless we
enter into royalty or license agreements. We may not be able to obtain royalty
or license agreements on terms acceptable to us, if at all.
Our use of the name "Avenue A" may result in infringement claims and other
legal challenges, which could cause us to incur significant expenses, pay
substantial damages and be prevented from using this name
Our use of the name "Avenue A" may result in infringement claims and other
legal challenges, which could cause us to incur significant expenses, pay
substantial damages and be prevented from using this name. We are aware of
third parties that use the name "Avenue A," one of which is a Canadian
advertising agency. We are also aware of a registration in France of the name
"Avenue A" for use in advertising services. There may be other third parties
using this name of whom we are unaware. We may be subject to trademark
infringement claims by these third parties as a result of our use of the name
"Avenue A." In addition, we may not receive approval of our service mark
application for the name "Avenue A," and even if the application is approved,
the service mark may be challenged by third parties or invalidated. As a
result of such infringement claims or challenges, we may incur significant
expenses, pay substantial damages and be prevented from using the name "Avenue
A" unless we enter into royalty or license agreements. We may not be able to
obtain royalty or license agreements on terms acceptable to us, if at all. Use
of the name "Avenue A" by third parties may also cause confusion to our
clients and confusion in the market, which could decrease the value of our
brand and harm our reputation.
Our intellectual property may be subject to legal challenges, unauthorized
use or infringement, which could diminish the value of our services to
existing and potential clients
If we fail to successfully enforce our intellectual property rights, the
value of our services could be diminished and our business may suffer. Our
success depends in large part on our proprietary technology. We have not been
issued any patents to date and we cannot assure you that any of our patent
applications will be approved, that any future patent issued to us will not be
challenged, invalidated or circumvented, or that the rights granted under any
future patent of ours will provide competitive advantages to us. Our success
also depends on our continuing use of our service marks. We may not receive
approval of our service mark applications, and any service marks we may be
granted may be successfully challenged by others or invalidated. If our
service mark applications are not approved or if our service marks are
invalidated because of prior third-party registrations, our use of these marks
could be restricted unless we entered into arrangements with these third
parties, which might not be available on commercially reasonable terms, if at
all.
We currently rely on a combination of copyright, trademark and trade secret
laws and confidentiality procedures to establish and protect our proprietary
rights. We may be required to spend significant resources to monitor and
enforce these rights. Third parties may obtain and use our technology without
authorization or develop similar technology independently which may infringe
our proprietary rights. We may not be able to detect such infringements or may
lose competitive position in the market before we do so. In addition,
competitors may design around our technology or develop competing technologies
substantially similar to ours. Also, unauthorized parties may attempt to
disclose, obtain or use our technology. Our precautions may not
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prevent misappropriation of our intellectual property, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
Any limitation on our ability to conduct targeted advertising could impair
our ability to retain existing clients and attract new clients
Any limitation on our ability to conduct targeted advertising for our
clients could harm our business. Targeted advertising is an essential element
of our business. As more advertisers demand targeted advertising services, we
will need to develop increasingly effective tools and larger databases that
can provide greater precision in targeted advertisement management and
delivery. The development of these tools and databases is technologically
challenging and expensive. We cannot assure you that we can develop any of
these tools or databases in a cost-effective or timely manner, if at all, and
failure to do so could limit our ability to conduct targeted advertising.
Moreover, privacy concerns may result in limitations or prohibitions on the
use of Internet user information, which could also limit our ability to
conduct targeted advertising. Any limitation or prohibition would impair our
ability to retain our existing clients and to attract new clients, which would
harm our business.
Any limitation on our ability to aggregate or use data from our clients'
advertising campaigns could decrease the value of our services, result in
significant expenditures of resources and harm our business
Any limitation on our ability to aggregate data from our clients'
advertising campaigns or to use this data could decrease the value of our
services, result in significant expenditures and harm our business. In
addition to the detailed data we collect and store for individual clients, we
aggregate non-personally identifiable data on the activity of Internet users
from the advertising campaigns of all of our clients. We rely on this data to
build user behavioral models to assist in media planning and in the targeting
of Internet advertising for our clients. Although the data we aggregate from
the campaigns of different clients is, once aggregated, not identifiable by
client, our clients might decide not to allow us to collect some or all of
this anonymous data or limit our use of this data. In addition, although our
advertising campaign services contracts generally permit us to aggregate
anonymous data from advertising campaigns, our clients might nonetheless
request that we discontinue using data from their campaigns that has already
been aggregated with other client campaign data. It would be difficult if not
impossible to comply with these requests, and such requests could result in
significant expenditures of resources. Interruptions, failures or defects in
our data collection and storage systems, as well as privacy concerns regarding
the collection of user data, could also result in limitations on our ability
to aggregate data from our clients' advertising campaigns.
Our business model is unproven and evolving and may not succeed
Our business model is new and unproven, is continually evolving, and
ultimately may not succeed. We generate revenue by providing technology-based
Internet advertising services to our clients. The Internet has not been in
existence for a sufficient period of time to demonstrate its effectiveness as
an advertising medium. Internet banner advertising, email marketing and other
types of Internet advertising and marketing, as well as technology-based
methods for targeting advertisements and tracking the results of Internet
advertising, may not achieve broad market acceptance. Also, the intense
competition among Internet advertising service providers has led to the
creation of a number of alternative service offerings and pricing structures
for Internet advertisers. Our model for generating revenue may prove
unsuccessful in light of this competition. Our ability to generate revenue
from our clients will depend, in part, on our ability to:
. demonstrate to our clients that Internet advertising and marketing
services will add value and increase advertising or marketing
effectiveness;
. attract and retain clients by differentiating the services we offer; and
. obtain advertising space at competitive prices from a large base of Web
sites and advertising networks sufficient to meet the needs of our
clients.
If we fail to effectively manage our growth, our business could suffer
Failure to manage our growth could harm our business. We have grown
significantly since our inception and expect to grow quickly in the future. We
have increased our number of employees from 46 as of
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September 30, 1998 to 232 as of December 31, 1999. In addition, we have
recently added 27 employees in New York City in connection with our
acquisition of iballs LLC, an Internet media company. Because many of our
executives, including our chief executive officer, have only recently joined
us, our management team has only worked together for a short time and may not
work together effectively.
Future expansion could be expensive and strain our management and other
resources. In order to effectively manage growth, we must:
. continue to develop an effective planning and management process to
implement our business strategy;
. hire, train and integrate new personnel in all areas of our business,
especially in our Client Service teams;
. improve our financial and managerial controls and accounting and
reporting systems and procedures; and
. expand our facilities and increase our capital investments.
We cannot assure you that we will be able to effectively accomplish these
tasks or otherwise effectively manage our growth.
The loss of any member of our management team or any inability to attract
and retain additional personnel could impair our ability to maintain or
expand our business
The loss of the services of any member of our management team could harm
our business. Our future success depends to a significant extent on the
continued service of our key management personnel. We do not maintain key
person life insurance on any of our executive officers and do not intend to
purchase any in the future. Our business could be harmed if any member of our
management team decided to join a competitor or otherwise compete with us.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. In particular, we will need to hire a
significant number of client service personnel. Competition for qualified
personnel in the Internet and technology industries is intense. If we fail to
hire and retain a sufficient number of client service personnel, as well as
engineering, sales and technical personnel, we will not be able to maintain or
expand our business.
Many of our clients have limited operating histories, are unprofitable and
may not be able to pay for our services
If any of our current or future clients is unable to pay for our services,
our business could suffer. Many of our principal clients have limited
operating histories and have not achieved profitability. In the past we have
lost clients, or have had difficulty collecting payments from clients, who
could not pay for our services because they were unable to secure ongoing
funding. The ability of many of our clients to meet their payment obligations
is affected by the risks, expenses and difficulties encountered by companies
with limited operating histories, particularly in the evolving Internet
market.
We are ultimately liable for the cost of advertising space we buy from Web
sites for sale to our clients
We are ultimately responsible for the payment to Web sites for the cost of
advertising space we buy from them for sale to our clients. If our clients
were to fail to purchase from us advertising space that we buy from Web sites,
we would nevertheless have to pay the Web sites for cost of the advertising
space and as a result our business could be harmed.
We have many competitors and may not be able to compete successfully in the
market for Internet advertising
The market for Internet advertising is relatively new, yet intensely
competitive. Our competitors include Internet media buyers that integrate ad
serving technology and Internet media buying, interactive advertising
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agencies, enabling online advertising technology providers, advertising
networks, targeted email service providers and traditional advertising
agencies that perform Internet advertising and marketing as part of their
services to clients.
In addition, we compete with other traditional advertising agencies that
use traditional advertising media, and in general we compete with television,
radio, cable and print media for a share of advertisers' budgets.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
client bases and significantly greater financial, technical and marketing
resources than we have. Also, many of our current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties. In addition, several of our competitors, including
AdForce, Inc., AdKnowledge, Inc. and Flycast Communications Corporation, have
combined with larger companies with greater resources than ours. These
competitors may:
. engage in more extensive research and development;
. undertake more far-reaching marketing campaigns;
. make more attractive offers to existing and potential employees and
clients;
. adopt more aggressive pricing policies and provide services similar to
ours at no additional cost by bundling them with their other product and
service offerings;
. develop services that are equal or superior to our services or that
achieve greater market acceptance than our services; and
. develop databases that are larger than or otherwise superior to our
databases.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share. We cannot assure you that we will be
able to compete successfully, and competitive pressures may harm our business.
Consolidation in the Internet industry may impair our ability to retain our
clients
Many of our clients may be affected by rapid consolidation in the Internet
industry. Our business would suffer if we were to lose a substantial number of
clients or any of our significant clients as a result of consolidation. These
clients may be required to use the advertising services of the companies that
acquire them or of other advertising service providers.
Consolidation of Internet advertising networks and large Internet portals
may impair our ability to serve advertisements, to acquire advertising
space at favorable rates and to collect campaign data
The consolidation of Internet advertising networks and large Internet
portals could harm our business. This type of consolidation is currently
occurring at a rapid pace and may eventually lead to a concentration of
desirable advertising space on a very small number of networks and large Web
sites. This type of concentration could substantially impair our ability to
serve advertisements if these networks or large Web sites decide not to permit
us to serve advertisements on their Web sites or if they develop ad placement
systems that are not compatible with our ad serving systems. These networks or
Web sites could also use their greater bargaining power to increase their
rates for advertising space or prohibit or limit our aggregation of
advertising campaign data. In addition, concentration of desirable advertising
space in a small number of networks and Web sites could diminish the value of
our advertising campaign databases, as the value of these databases depends on
the continuous aggregation of data from advertising campaigns on a variety of
different Web sites and advertising networks.
We may be unable to adequately protect our data warehouse information
Failure to adequately protect our data warehouse information could harm our
business. Other than typical security features in our systems, we do not take
additional steps to protect our data warehouse information. Our
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operations may be susceptible to hacker interception, break-ins and other
disruptions. These disruptions may jeopardize the security of information
stored in and transmitted through our systems. If any of these disruptions were
to happen to our systems, we might be subject to lawsuits by the affected
clients or the users we profile, damage to our reputation among our current and
potential clients and significant expenditures of capital and other resources.
Any failure of our technology to perform satisfactorily could result in lost
revenue, damage to our reputation and expenditure of significant resources
Any failure of our technology to perform satisfactorily could result in lost
revenue, damage to our reputation and expenditure of significant resources. Our
technology is relatively new and complex and has had, and may have in the
future, errors, defects or performance problems. For example, we experienced a
database outage that lasted for approximately 21 hours, and we also experienced
a defect in our proprietary software that, for approximately 2 hours, prevented
a portion of the advertisements we serve from appearing on users' Web pages. In
addition, we may encounter problems when we update our technology to expand and
enhance its capabilities. Our technology may malfunction or suffer from
currently unknown design defects that become apparent only after further use.
If our technology malfunctions or contains such defects, our systems may be
rendered incompatible with the systems used by our clients or by the Web sites
and advertising networks where we serve advertisements. Furthermore, our
services could be rendered unreliable, or be perceived as unreliable by our
clients. In such instances, we would need to expend significant resources to
address these problems, and may nonetheless be unable to adequately remedy
these problems. These problems could result in lost revenue and damage to our
reputation.
Sustained or repeated system failures could significantly impair our
operations and lead to client dissatisfaction
Sustained or repeated system failures could significantly impair our
operations and reduce the attractiveness of our services to our current and
potential clients. The continuous and uninterrupted performance of our systems
is critical to our success. Our operations depend on our ability to protect
these systems against damage from fire, power loss, water damage, earthquakes,
telecommunications failures, viruses, vandalism and other malicious acts, and
similar unexpected adverse events. Clients may become dissatisfied by any
system failure that interrupts our ability to provide our services to them. In
particular, the failure of our ad serving systems, including failures that
delay or prevent the delivery of targeted advertisements to Web sites and
advertising networks, could reduce client satisfaction and damage our
reputation.
Our services are substantially dependent on systems provided by third
parties, over whom we have little control. Interruptions in our services could
result from the failure of telecommunications providers and other third parties
to provide the necessary data communications capacity in the time frame
required. Our ad serving systems and computer hardware are primarily located in
the Seattle, Washington metropolitan area at co-location facilities operated by
Exodus Communications, Inc. and Verio Inc. We depend on these third-party
providers of Internet communication services to provide continuous and
uninterrupted service. We also depend upon Internet service providers that
provide access to our services. In the past, we have occasionally experienced
significant difficulties delivering advertisements to Web sites and advertising
networks due to system failures unrelated to our own systems. For example,
power outages at one of our co-location facilities, including one outage that
lasted for approximately five hours, have prevented us from serving
advertisements, tracking user responses and providing performance reports to
our clients. Any disruption in the Internet access provided by third-party
providers or any failure of third-party providers to handle higher volumes of
user traffic could impair our ability to deliver advertisements and harm our
business.
If we are unable to scale our technology infrastructure, we may experience
capacity constraints that could impair our ability to provide our services
to clients
If we are unable to scale our technology infrastructure, we may experience
significant capacity constraints. Our technology infrastructure may not be able
to support higher volumes of advertisements, additional clients or
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new types of Internet and digital media advertising or marketing services. The
volume of advertising delivered through our ad servers has increased from
approximately 4.1 million impressions per day in September 1998 to
approximately 85.3 million impressions per day in September 1999. Heightened
demand from existing or new clients for our services will require us to
accommodate large increases in the number of advertisements we serve, the
number of campaigns we manage and the amount of data we store. We will also
need to accommodate the introduction of new and evolving types of Internet and
digital media advertising and marketing that may require greater system
resources than current methods of Internet advertising and marketing. We may
not be able to continue to scale our technology infrastructure in a timely
manner or within budget to meet these demands. Although we believe that we are
currently using 50% or less of the capacity of our ad serving and other
systems, any significant increase in the volume of advertising services
provided through our systems could strain the capacity of our technology
infrastructure and ad serving systems. These capacity constraints could lead
to slower response times or system failures. Such delays or system failures
could reduce our ability to place advertisements, reduce our revenue, damage
our reputation and impair our ability to retain clients or acquire new
clients.
Acquisitions or strategic investments may be unsuccessful and may divert
our management's attention and consume significant resources
In September 1999, we acquired iballs LLC, an Internet media company. We
may in the future acquire or make strategic investments in other businesses as
well as products and technologies to complement our current business. Any
future acquisition or investment may require us to use significant amounts of
cash, make potentially dilutive issuances of equity securities and incur debt.
In addition, acquisitions, including the iballs LLC acquisition, involve
numerous risks, any of which could harm our business, including:
. difficulties in integrating the operations, technologies, services and
personnel of acquired businesses;
. diversion of management's attention from other business concerns;
. unavailability of favorable financing for future acquisitions;
. potential loss of key employees of acquired businesses;
. inability to maintain the key business relationships and the reputations
of acquired businesses;
. responsibility for liabilities of acquired businesses;
. inability to maintain our standards, controls, procedures and policies;
and
. increased fixed costs.
Clients may attempt to prohibit us from providing services to their
competitors, limiting our business opportunities
To use our services more effectively, clients often provide us with
confidential business and marketing information. Many companies are wary of
third parties having access to this information, because access by third
parties increases the risk that confidential business and marketing
information may become known, even if unintentionally, to these companies'
competitors. These confidentiality concerns may prompt our clients to attempt
to contractually prohibit us from managing the Internet advertising campaigns
of their competitors. Limitation of our client base in a particular industry
in this manner could limit the growth of our business.
International expansion could impose substantial burdens on our resources
and divert management's attention from domestic operations
International expansion of our operations could impose substantial burdens
on our resources, divert management's attention from domestic operations, and
otherwise harm our business. This expansion into international markets will
require extensive management attention and resources. In addition, we may need
to rely extensively on strategic partners in foreign countries to help conduct
our international operations, coordinate with foreign Web sites and conduct
sales and marketing efforts. Our success in international markets will depend
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to a large degree on the success of these strategic partners, over whom we may
have little control, and on their willingness to dedicate sufficient resources
to our relationships. Furthermore, international operations are subject to
several inherent risks, including:
. difficulties and costs of staffing and managing foreign offices;
. the impact of recessions in economies outside the United States;
. changes in regulatory requirements;
. export restrictions, including export controls relating to encryption
technology;
. more stringent rules relating to the collection and use of information
regarding Internet users;
. reduced protection of intellectual property rights;
. adverse tax consequences;
. political and economic instability;
. tariffs and other trade barriers; and
. fluctuations in currency exchange rates.
Our failure to address these risks adequately could harm our business.
Our business does not generate the cash needed to finance our operations,
and we may need additional financing in the future, which we may be unable
to obtain
Our business does not currently generate the cash needed to finance our
operations. We may need additional financing to finance our operations, as
well as to enhance our services, fund our expansion, respond to competitive
pressures or acquire complementary businesses or technologies. We may be
unable to obtain financing on terms favorable to us, if at all. Poor financial
results, unanticipated expenses or unanticipated opportunities that require
financial commitments could give rise to additional financing requirements
sooner than we expect. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our
existing shareholders would be reduced, and these securities might have
rights, preferences or privileges senior to those of our common stock. If
adequate funds are not available or are not available on acceptable terms, our
ability to enhance our services, fund our expansion, respond to competitive
pressures or take advantage of business opportunities would be significantly
limited, and we might need to significantly restrict our operations.
Potential year 2000 problems with our internal systems or third-party
systems could harm our business
Potential year 2000 problems with our internal systems or third-party
systems could harm our business. Many currently installed computer systems and
software products and systems worldwide are coded to accept only two-digit
entries to identify a year in the date code field. Consequently, after January
1, 2000, many of these systems could fail or malfunction because they are not
able to distinguish between the year 1900 and the year 2000. These system
failures or malfunctions could cause significant disruptions of our
operations.
As a company engaged in Internet advertising services, we rely on computer
programs and systems in connection with our services as well as with our
internal and external communication networks and systems and other business
functions. We have not engaged any third parties to independently verify our
year 2000 readiness, nor have we assessed potential costs associated with year
2000 risks or made any contingency plans to address these risks. Although we
have received assurances from some of the suppliers of our third-party
software, computer equipment and systems that their products are year 2000
compliant, to date we have generally relied on publicly available information
regarding the year 2000 compliance of their products. We also generally do not
have any contractual rights with these providers if their products fail to
function due to year 2000 issues. If these failures do occur, we may incur
unanticipated expenses to remedy any problems, including purchasing
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replacement software, computer equipment and systems. Any failures of our
internally developed software or the third-party software, computer equipment
and systems that we use could result in financial loss, damage to our
reputation and legal liability.
We rely on the continued operations of the Web-based computer systems of our
clients and of the vendors whose Web sites or advertising networks host our
clients' advertisements. The successful delivery of our services for our
clients depends on the satisfactory functioning of our clients' and vendors'
computer systems. If these systems fail because they are not year 2000
compliant, we may be unable to fully deliver the services that our clients have
requested, which could harm our quarterly and annual operating results.
We also rely on the satisfactory performance and reliability of the external
communication and computer networks, systems and services integral to the
Internet, such as telecommunications providers and Internet service providers.
In particular, we rely on the satisfactory performance and reliability of the
networks, systems and services of Exodus Communications and Verio, the Internet
service providers that operate our co-location facilities. Because these
external networks, systems and services are maintained or provided by third
parties, the success of our efforts to address the year 2000 problem depends in
part on parallel efforts being undertaken by these third parties. We have
initiated communications with most of these third parties to determine the
status of their year 2000 compliance efforts. We cannot, however, assure you
that they have provided accurate or complete information, or that all of their
networks, systems or services will achieve full year 2000 compliance in a
timely fashion.
The most reasonably likely worst-case scenario for us resulting from the
year 2000 problem is that disruptions of the external third-party networks,
systems or services on which we depend would reduce or eliminate for a period
of time our ability to provide our Internet advertising services to our
clients. If these disruptions were frequent or long in duration, they could
seriously harm our business. The compliance of third-party networks, systems
and services, including telecommunications providers, Internet service
providers and co-location facilities, is not within our control. Accordingly, a
contingency plan for this worst-case scenario does not exist, and we do not
believe we will be able to develop one.
Risks Related to Our Industry
Privacy concerns could lead to legislative and other limitations on our
ability to collect personal data from Internet users, including limitations
on our use of cookie technology and user profiling
Privacy concerns could lead to legislative and other limitations on our
ability to conduct targeted advertising campaigns and compile data that we use
to formulate campaign strategies for our clients. Cookies are small files of
information stored on a user's computer which allow us to recognize that user's
browser when we serve advertisements. Cookies are often placed on the user's
computer without the user's knowledge or consent. Our systems use "cookies" to
track Internet users and their online behavior to build user profiles. We are
substantially dependent on cookie technology and user profiling to target our
clients' advertising campaigns and measure their effectiveness. Any reduction
in our ability to use cookies or other means to build user profiles could harm
our business.
Governmental bodies concerned with the privacy of Internet users have
suggested limiting or eliminating the use of cookies or user profiling. United
States legislators in the past have introduced a number of bills aimed at
regulating the collection and use of personal data from Internet users and
additional similar bills may be considered during any congressional session.
Also, the Federal Trade Commission and the Department of Commerce recently held
hearings regarding user profiling, the collection of non-personally
identifiable information and online privacy. In addition, privacy concerns have
led to legal and technical limitations on the use of cookies and user profiling
in some jurisdictions. For example, the European Union recently adopted a
directive addressing data privacy that may result in limitations on the
collection and use of information regarding European Internet users. Also,
Germany has imposed its own laws limiting the use of user profiling, and other
countries may impose similar limitations. In addition, users may limit or
eliminate the placement of cookies on their computers by using third-party
software that blocks cookies, or by disabling the cookie functions of their
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Internet browser software. If our ability to use cookies or build user
profiles were substantially restricted by technology, government regulation or
any other means, we would likely have to use other technology or methods that
allow the gathering of user profile data in other ways in order to provide our
services to our clients. This change in technology or methods could require
significant reengineering time and resources, and might not be done in time to
avoid negative consequences to our business. In addition, alternative
technology or methods might not be available at all, or might be prohibitively
expensive.
Legislation or regulations may be adopted that could impair our ability to
provide our services to clients
Legislation or regulations may be adopted that could impair our ability to
provide our services to clients. The legal and regulatory environment
governing the Internet is uncertain and may change. Laws and regulations may
be adopted covering issues such as privacy, pricing, acceptable content,
taxation, consumer protection and quality of products and services on the
Internet. These laws and regulations could dampen the growth in use of the
Internet generally and decrease the acceptance of the Internet as an
advertising medium. In addition, due to the global nature of the Internet, it
is possible that multiple federal, state or foreign jurisdictions might
inconsistently regulate our activities or the activities of advertising
networks or Web sites. Any of these developments could harm our business.
We may not be able to adapt to rapidly changing Internet technology trends
and evolving industry standards
The Internet and Internet advertising markets are characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, and changing client demands. The introduction of new
products and services embodying new technologies and the emergence of new
industry standards may render our services obsolete. Our future success will
depend on our ability to adapt to rapidly changing technologies, enhance our
existing Internet advertising services and develop and introduce a variety of
new services to address our clients' changing demands. We may experience
difficulties that could delay or prevent the successful design, development,
introduction or marketing of our services. In addition, any new services or
enhancements must meet the requirements of our current clients and must
achieve significant market acceptance. Material delays in introducing new
services and enhancements may cause clients to discontinue use of our services
and use the services of our competitors.
The Internet advertising market may develop more slowly than expected,
which could impair our ability to retain our existing clients and to
attract new clients
If the market for Internet advertising develops more slowly than we expect,
our business could suffer. Our future success is highly dependent on an
increase in the use of the Internet as an advertising medium, and on the
willingness of our potential clients to outsource their Internet advertising
and marketing needs. The Internet advertising market is new and rapidly
evolving, and it cannot yet be compared with traditional advertising media to
gauge its effectiveness. As a result, demand and market acceptance for
Internet advertising services is uncertain. Many of our current or potential
clients have little or no experience using the Internet for advertising
purposes and have allocated only a limited portion of their advertising
budgets to Internet advertising. Also, we must compete with traditional
advertising media, including television, radio, cable and print, for a share
of our clients' total advertising budgets. Our current and potential clients
may find Internet advertising to be less effective than traditional
advertising media for promoting their products and services. In addition,
"filter" software programs are available that limit or prevent advertising
from being delivered to an Internet user's computer. The widespread adoption
of such software could significantly undermine the commercial viability of
Internet advertising.
We recently expanded our service offering to include email advertising and
marketing services. The market for email advertising and marketing in general
is vulnerable to the negative public perception associated with unsolicited
email. Various states have enacted legislation and several bills have been
introduced in Congress that limit or prohibit the use of unsolicited email.
Government action, public perception or press reports related to solicited or
unsolicited email could reduce the overall demand for email advertising and
marketing in general and our email services in particular.
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If the Internet infrastructure is unable to effectively support the growth
in demand placed on it, our business could suffer
We depend entirely on the Internet for revenue, and the increased use of
the Internet is essential for our business to grow. Accordingly, our success
will depend, in large part, on the maintenance of the Internet infrastructure.
We cannot assure you that the Internet infrastructure will continue to
effectively support the demands placed on it as the Internet continues to
experience increased numbers of users, frequency of use and bandwidth
requirements. Even if the necessary Internet infrastructure or technologies
are developed, we may have to spend considerable resources to adapt our
services accordingly. Furthermore, the Internet has experienced a variety of
outages and other delays due to damage to portions of its infrastructure.
Outages and delays could impair our ability to serve advertisements on Web
sites and advertising networks. Outages and delays could also adversely affect
our clients' Web sites and online operations and decrease the level of user
traffic on Web sites where our clients advertise. Such occurrences could
result in lost revenue.
Risks Related to this Offering
The trading prices for the stock of Internet-related companies such as ours
have been volatile
The trading prices for the stock of Internet-related companies such as ours
have experienced extreme price and volume fluctuations. These fluctuations
have often been unrelated or disproportionate to the operating performance of
these particular companies. The market price for our common stock will vary
significantly from the initial public offering price after this offering and
may prove to be especially volatile. This volatility could result in
substantial losses for investors. The market price of our common stock may
fluctuate significantly in response to a number of factors, including:
. quarterly variations in our operating results;
. if securities analysts elect to research our stock, changes in financial
estimates by these analysts
. announcements by us or our competitors of new products or services,
significant contracts, acquisitions or strategic relationships;
. publicity about our company, our services, our competitors, or Internet
advertising in general;
. additions or departures of key personnel;
. any future sales of our common stock or other securities; and
. stock market price and volume fluctuations of other publicly traded
companies and, in particular, those that are Internet-related.
In the past, companies that have experienced volatility in the market price
of their stock have been subject to securities class action litigation. We may
be the target of this type of litigation in the future. Securities litigation
against us could result in substantial costs and divert our management's
attention, which could seriously harm our business.
Future sales of shares by existing shareholders could affect our stock
price
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall, potentially resulting in substantial losses to investors. These
sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate.
Based on shares outstanding as of September 30, 1999, upon completion of this
offering, we will have outstanding 53,749,555 shares of common stock, assuming
no exercise of options after September 30, 1999, no exercise of an outstanding
warrant and the conversion of all shares of outstanding preferred stock into
common stock. Holders of 46,956,558 shares are subject to agreements with the
underwriters that restrict their ability to transfer their stock for 180 days
from the date of this prospectus. After these agreements expire, an additional
25,196,989 shares will be eligible for sale in the public market assuming no
exercise of stock options after September 30, 1999.
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New shareholders will incur substantial dilution as a result of this
offering
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock. As a result,
investors purchasing common stock in this offering will incur immediate and
substantial dilution in net tangible book value per share of the common stock
from the initial public offering price in the amount of $7.91 per share, based
upon an assumed initial offering price of $9.00 per share. In addition, we
have issued options to acquire common stock at prices significantly below the
assumed initial public offering price. To the extent these outstanding options
are ultimately exercised, there will be further dilution to investors in this
offering.
Because our directors and executive officers own a large percentage of our
voting stock, your voting power may be limited
Based on the number of shares outstanding as of December 31, 1999, after
this offering, it is anticipated that our executive officers and directors
will beneficially own or control, directly or indirectly, 26,998,067 shares of
common stock, which in the aggregate will represent approximately 44.5% of the
outstanding shares of common stock. As a result, if these persons act
together, they will have the ability to exert significant control over matters
submitted to our shareholders for approval, including the election and removal
of directors and the approval of any business combination. This may delay or
prevent an acquisition or affect the market price of our stock.
Our management has discretion as to the use of the net proceeds from this
offering
Our management has broad discretion as to the use of the net proceeds that
we will receive from this offering. We intend to use these net proceeds, over
time, for general corporate purposes and working capital. We may also use a
portion of the net proceeds to expand our operations internationally or to
acquire complementary businesses or technologies, although we have no such
specific plans at this time. We cannot assure you that management will apply
these funds effectively, nor can we assure you that the net proceeds from this
offering will be invested to yield a favorable return.
We have adopted antitakeover provisions that could make the sale of Avenue
A more difficult
Our articles of incorporation and bylaws contain provisions, such as
undesignated preferred stock, which could make it more difficult for a third
party to acquire us without the consent of our board of directors. In
addition, our board of directors has approved amendments to our articles of
incorporation and bylaws, which, subject to shareholder approval, will provide
for a staggered board, removal of directors only for cause, two-thirds
shareholder approval of some types of business transactions, advance notice of
shareholder proposals and nominations and restrictions on the persons that may
call special shareholder meetings. These provisions may delay or prevent a
change of control of Avenue A even if this change of control would benefit our
shareholders.
This offering will benefit existing shareholders and option holders.
This offering will provide substantial benefits to our current shareholders
and substantial potential benefits to our current holders of stock options.
Consummation of this offering is expected to create a public market for the
common stock held by our current shareholders, and for common stock that may
be acquired on exercise of stock options held by our current option holders.
As of September 30, 1999, our shareholders had paid approximately $47,909,000
for an aggregate of approximately 53,749,555 shares of stock and our option
holders held, in the aggregate, options for 5,496,351 shares of common stock,
with an average exercise price of $1.29 per share. Based on an assumed initial
public offering price of $9.00 per share, the value of the shares held by our
shareholders as of September 30, 1999, is approximately $483,746,000 and
therefore the unrealized gain to those shareholders resulting from this
offering is approximately $435,837,000. Based on the assumed initial public
offering price of $9.00 per share, the value of the shares that may be
acquired on exercise of options held by our option holders as of September 30,
1999 is approximately $49,467,000, and therefore the in-the-money value of
these options resulting from this offering would be approximately $42,377,000.
21
<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 may, will,
should, expect, plan, intend, anticipate, believe, estimate, predict,
potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the Risk Factors
section above. These factors may cause our actual results to differ materially
from any forward-looking statement.
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 the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform such
statements to actual results or to changes in our expectations.
22
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be $42.4 million
at an assumed initial public offering price of $9.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. If the underwriters' over-allotment option is exercised in
full, we estimate that our net proceeds will be approximately $49.0 million.
The principal purposes of this offering are to obtain additional working
capital, establish a public market for our common stock and facilitate our
future access to public markets. We expect to use the net proceeds for general
corporate purposes and working capital. We have not, however, designated
specific amounts of the anticipated proceeds for any particular purpose. We
may also use a portion of the net proceeds to expand our operations
internationally or to acquire complementary businesses or technologies. While
from time to time we evaluate potential acquisitions of businesses or
technologies, we currently have no present understandings, commitments or
agreements with respect to any such transactions. Pending any of these uses,
we intend to invest the net proceeds of this offering in interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying
any cash dividends in the foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock into 24,624,147 shares of common stock effective upon
the closing of this offering; and
. on a pro forma as adjusted basis to reflect the sale of 5,250,000 shares
of common stock offered by this prospectus at an assumed initial public
offering price of $9.00 per share, and our receipt of the estimated net
proceeds after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
You should read this table in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Shareholders' equity:
Convertible preferred stock, $.01 par value
per share; 17,500,000 shares authorized;
16,416,098 shares issued and outstanding,
actual; no shares issued and outstanding, pro
forma and pro forma as adjusted.............. $ 164 $ -- $ --
Common stock, $.01 par value per share;
50,000,000 shares authorized; 23,875,408
shares issued and outstanding, actual;
48,499,555 shares issued and outstanding, pro
forma; 53,749,555 shares issued and
outstanding, pro forma as adjusted........... 239 485 538
Paid-in capital............................... 47,506 47,424 89,764
Deferred stock compensation................... (16,062) (16,062) (16,062)
Subscriptions receivable...................... (965) (965) (965)
Accumulated deficit........................... (8,617) (8,617) (8,617)
-------- -------- --------
Total shareholders' equity................. $ 22,265 $ 22,265 $ 64,658
-------- -------- --------
Total capitalization..................... $ 22,265 $ 22,265 $ 64,658
======== ======== ========
</TABLE>
The information in the table above does not include:
. 5,496,351 shares of common stock subject to outstanding options as of
September 30, 1999, granted under our 1998 stock incentive compensation
plan;
. 4,986,507 shares of common stock reserved for future grant under our
1998 stock incentive compensation plan, which includes 1,650,000 shares
reserved in January 2000 for future grants under that plan;
. 1,312,500 shares of common stock subject to outstanding options as of
September 30, 1999, granted outside of our stock incentive compensation
plans;
. 677,710 shares of common stock issuable upon exercise of an outstanding
warrant as of September 30, 1999;
. 5,250,000 shares of common stock reserved for issuance under our 1999
stock incentive compensation plan and 750,000 shares of common stock
reserved for issuance under our 1999 employee stock purchase plan; and
. 592,500 shares of common stock issued to executive officers, a director
and a consultant after September 30, 1999.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $16.6 million, or $.34 per share of common stock, assuming the
conversion of all outstanding shares of preferred stock into 24,624,147 shares
of common stock. Pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities, divided by the pro forma number of outstanding shares of common
stock. After giving effect to the sale of the 5,250,000 shares of common stock
offered by this prospectus, at an assumed initial public offering price of
$9.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma as adjusted net
tangible book value as of September 30, 1999 would have been $59.0 million, or
$1.09 per share. This represents an immediate increase in pro forma net
tangible book value of $.75 per share to existing shareholders and an
immediate dilution of $7.91 per share to investors purchasing shares in this
offering. Dilution is determined by subtracting pro forma net tangible book
value per share after this offering from the assumed initial public offering
price per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $9.00
Pro forma net tangible book value per share as of September 30,
1999........................................................... $ .34
Increase per share attributable to new investors................ .75
-----
Pro forma as adjusted net tangible book value per share after this
offering......................................................... 1.09
-----
Dilution per share to new investors............................... $7.91
=====
</TABLE>
The following table sets forth as of September 30, 1999, on the pro forma
basis described above, the difference between the number of shares of common
stock purchased from us, the total consideration paid, and the average price
per share paid by the existing shareholders and by investors purchasing shares
in this offering, based upon an assumed initial public offering price of $9.00
per share and before deducting estimated underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 48,499,555 90% $47,909,000 50.3% $ .99
New investors............... 5,250,000 10 47,250,000 49.7 9.00
---------- --- ----------- ----
Total..................... 53,749,555 100% $95,159,000 100%
========== === =========== ====
</TABLE>
As of September 30, 1999, we had outstanding options to purchase 5,496,351
shares of common stock under our 1998 stock incentive compensation plan at a
weighted average exercise price of $1.29 per share, a warrant to purchase
677,710 shares of common stock at an exercise price of $.55 per share and
options to purchase 1,312,500 shares of common stock issuable upon exercise of
outstanding options granted outside of our stock incentive compensation plans
at a weighted average exercise price of $1.63 per share. We have also reserved
4,986,507 shares of common stock for future grant under our 1998 stock
incentive compensation plan, which includes 1,650,000 shares reserved in
January 2000 for future grants under that plan. In addition, we have reserved
5,250,000 shares of common stock for issuance under our 1999 stock incentive
compensation plan and 750,000 shares of common stock reserved for issuance
under our 1999 employee stock purchase plan. To the extent these options or
the warrant are exercised, and to the extent we issue new options or rights
under our stock plans or issue additional shares of common stock in the
future, new investors will experience further dilution.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes
thereto, 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 period from inception on
July 1, 1997 to December 31, 1997 and for the year ended December 31, 1998,
and the consolidated balance sheet data as of December 31, 1997 and December
31, 1998, have been derived from our audited consolidated financial statements
and related notes thereto included elsewhere in this prospectus. The
consolidated statements of operations data for the nine-month periods ended
September 30, 1998 and 1999 and the consolidated balance sheet data as of
September 30, 1999 are derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. In the opinion of
management, such unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements
referred to above and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of results of
operations for the indicated periods. Results of operations for the nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the full fiscal year or for any future period.
<TABLE>
<CAPTION>
Period From Nine Months Ended
Inception September 30,
(July 1, 1997) to Year Ended ---------------------
December 31, 1997 December 31, 1998 1998 1999
----------------- ----------------- --------- ----------
(unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue:
Advertising services.. $ -- $ -- $ -- $ 33,425
Advertising service
fees................. 18 599 276 673
----- ---------- --------- ----------
Total revenue....... 18 599 276 34,098
Expenses:
Cost of advertising
services............. 20 125 93 28,007
Client services....... 19 382 117 2,585
Technology and
operations........... -- 1,493 973 1,796
Selling, general and
administrative....... 263 2,257 1,189 6,435
Amortization of
deferred stock
compensation......... -- -- -- 860
----- ---------- --------- ----------
Total expenses...... 302 4,257 2,372 39,683
----- ---------- --------- ----------
Loss from operations.... (284) (3,658) (2,096) (5,585)
Interest income
(expense).............. -- 12 (10) 335
----- ---------- --------- ----------
Net loss................ $(284) $ (3,646) $ (2,106) $ (5,250)
===== ========== ========= ==========
Basic and diluted net
loss per share......... $ (.34) $ (.25) $ (.28)
Shares used in computing
basic and diluted net
loss per share......... 10,860,682 8,448,996 18,591,951
Pro forma basic and
diluted net loss per
share(1)............... $ (.27) $ (.21) $ (.15)
Shares used in computing
pro forma basic and
diluted net loss per
share(1)............... 13,387,488 9,803,127 35,748,046
Other Data:
Total billings(2)....... $ 18 $ 3,626 $ 1,233 $ 37,787
</TABLE>
<TABLE>
<CAPTION>
As of
December 31,
------------- As of
1997 1998 September 30, 1999
----- ------ ------------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 3 $ 847 $17,831
Working capital (deficit)..................... (338) (30) 12,951
Total assets.................................. 75 3,441 45,923
Total liabilities............................. 359 2,431 23,658
Total shareholders' equity (deficit).......... (284) 1,010 22,265
</TABLE>
- --------
(1) See Note 2 of notes to Avenue A's consolidated financial statements for an
explanation of the method used to calculate pro forma basic and diluted
net loss per share.
(2) Total billings represents gross billings to customers for advertising
services. Although total billings is not a recognized method of revenue
recognition under generally accepted accounting principles, we believe
that total billings is a standard measure of advertising volume for the
Internet advertising industry that enables a meaningful comparison of
activity from period to period and from one company to another.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from the results contemplated by these forward-looking statements
as a result of various factors, including those discussed below and elsewhere
in this prospectus.
Overview
Avenue A provides technology-based Internet advertising services to
businesses. We integrate Internet media planning and buying, proprietary ad
management technology, user profiling and data analysis systems to help
advertisers increase the effectiveness and return on investment of their
Internet advertising campaigns. We focus on serving the needs of buyers of
Internet advertising, providing a service that harnesses the complexity,
interactivity and dynamic nature of the Internet with the objective of
delivering the most successful advertising campaigns for our clients.
Revenue
We generate revenue by providing Internet advertising services, which
include the procurement of Internet advertising space for our clients. Due to
a change in the way we structure our advertising contracts, we have changed
from accounting for our revenue primarily as advertising service fee revenue
to accounting for our revenue primarily as advertising services revenue.
Advertising service fee revenue, which is generated under advertising service
fee contracts, consists of commissions earned on services we provide to
clients. Advertising services revenue, which is generated under advertising
services contracts, consists of the gross value of our billings to clients and
includes the price of the advertising space we purchase from Web sites to sell
to clients. By contrast to advertising service fee contracts, under
advertising services contracts we recognize the cost of the advertising we
purchase for our clients as an expense and the payments we receive from our
clients for this advertising as revenue. Consequently, our shift from
advertising service fee contracts to advertising services contracts results in
our recognizing greater revenue and greater expenses for the same level of
client services and advertising.
We began operations in July 1997 and were incorporated in February 1998.
Through December 31, 1998, our primary source of revenue consisted of
advertising service fees. To generate advertising service fee revenue, we
purchase advertising space on behalf of our clients from Web sites that sell
advertising space, also called publisher Web sites. We earn fees based on the
dollar amount of advertising space we purchase. Under advertising service fee
contracts, our clients are ultimately responsible for paying the publisher Web
sites for the cost of the advertising space purchased. Cost of advertising
service fee revenue consists only of the cost of delivering advertisements
over the Internet.
During the first quarter of 1999, we began replacing many of our
advertising service fee contracts with advertising services contracts. All of
the clients we acquired during 1999 have entered into advertising services
contracts, and substantially all of the contracts with clients acquired in
1997 and 1998 have been converted to advertising services contracts. To
generate advertising services revenue, we purchase advertising space from
publisher Web sites and sell the purchased space to our clients. Under client
relationships based on advertising services contracts, we are ultimately
responsible for paying publisher Web sites for the cost of advertising space
we purchase from them. Revenue under both advertising service fee contracts
and advertising services contracts is recognized over the period that the
related advertising is delivered. Although the increase in our revenue in
recent periods is a result of an increase in our number of clients and
increased total spending by clients, revenue has increased disproportionately
relative to prior periods as a result of the recognition of gross billings to
our clients as revenue in connection with our use of advertising services
contracts.
27
<PAGE>
We changed our contract structure from advertising service fee contracts to
advertising services contracts to account for revenues and expenses relating
to the purchase and sale of Web site advertising space on a basis consistent
with industry practice. Although we currently derive some of our revenue from
advertising service fee contracts, we expect that the majority of our future
revenue will continue to be derived from advertising services contracts.
To expand our presence in the Internet advertising industry and allow us to
serve a broader client base, in September 1999 we acquired iballs LLC, an
Internet media company, for a combination of cash and common stock totaling
approximately $6.1 million. We are currently seeking to replace the
advertising service fee contracts between iballs LLC and its clients with
advertising services contracts.
Expenses
Cost of advertising services. Cost of advertising services consists of the
cost of advertising space that we purchase from publisher Web sites, including
inventory purchased by our AdClub, Inc. subsidiary, and the cost of delivering
advertisements over the Internet. AdClub, a reseller of advertising space,
sells advertising only to our clients and its operations are not material to
us as a whole.
Client services expenses. Client services expenses consist primarily of
salaries and related expenses for client service personnel. These employees
are organized into Client Service teams consisting of client strategists,
media buyers, account coordinators and media engineers. Client services
expenses also include the salaries and related expenses for personnel in our
data analysis group.
Technology and operations expenses. Technology and operations expenses
consist of salaries and related costs for information technology and software
development personnel. In addition, these expenses include the cost of housing
our ad servers and other equipment at third-party co-location facilities.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
executive, sales, finance, marketing, human resource and administrative
personnel and other general corporate expenses, including amortization of
goodwill and depreciation of property and equipment. In addition, these
expenses include marketing costs such as trade shows and the costs of
advertising our services in trade publications.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation consists of expenses related to employee stock option grants with
option exercise prices below the deemed fair value of our common stock as of
the date of grant. The amount of deferred stock compensation resulting from
these grants is being amortized on an accelerated basis over a four-year
period.
Net Losses
We incurred net losses of $284,000 for the period from our inception on
July 1, 1997 through December 31, 1997, $3.6 million for the year ended
December 31, 1998 and $5.3 million for the nine months ended September 30,
1999, and had an accumulated deficit of $8.6 million as of September 30, 1999.
We expect operating losses and negative cash flow to continue for the
foreseeable future. We anticipate our net losses will increase from current
levels, since we expect to incur additional costs and expenses related to
brand development, marketing and other promotional activities, deferred
compensation expenses, amortization of goodwill resulting from the acquisition
of iballs LLC, the expansion of our operations, increasing investment in the
systems that we use to process client orders and payments, and the expansion
of our service offering.
We believe that our operating results will continue to be subject to
seasonal fluctuations because retail advertisers generally purchase
substantially more advertising space during the fourth calendar quarter of
each year than during other quarters, particularly the first calendar quarter.
Due to this seasonal pattern, we expect our revenue in the first quarter of
2000 to be less than those in the fourth quarter of 1999.
28
<PAGE>
Results of Operations
Selected Quarterly Results of Operations
Because we have a limited operating history, we believe that year-to-year
comparisons are less meaningful than an analysis of our recent quarterly
operating results. Accordingly, we are providing a discussion and analysis of
our results of operations for the five quarters ended September 30, 1999.
The following tables present, in dollars and as a percentage of revenue,
unaudited statements of operations data for the five quarters ended September
30, 1999. This information reflects all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
such information. The results of any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1998 1998 1999 1999 1999
------------- ------------ --------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue:
Advertising
services............ $ -- $ -- $ 2,021 $11,369 $20,035
Advertising service
fees................ 245 323 436 121 116
------ ------- ------- ------- -------
Total revenue...... 245 323 2,457 11,490 20,151
Expenses:
Cost of advertising
services............ 31 32 1,766 9,498 16,743
Client services...... 64 265 460 785 1,340
Technology and
operations.......... 435 520 498 530 768
Selling, general and
administrative...... 572 1,068 1,187 2,064 3,184
Amortization of
deferred stock
compensation........ -- -- -- 3 857
------ ------- ------- ------- -------
Total expenses..... 1,102 1,885 3,911 12,880 22,892
------ ------- ------- ------- -------
Loss from operations.. (857) (1,562) (1,454) (1,390) (2,741)
Interest income
(expense)............ (6) 22 22 112 201
------ ------- ------- ------- -------
Net loss.............. $ (863) $(1,540) $(1,432) $(1,278) $(2,540)
====== ======= ======= ======= =======
<CAPTION>
Three Months Ended
--------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1998 1998 1999 1999 1999
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
As a Percentage of
Revenue:
Revenue:
Advertising
services............ -- % -- % 82.3 % 98.9 % 99.4 %
Advertising service
fees................ 100.0 100.0 17.7 1.1 .6
------ ------- ------- ------- -------
Total revenue...... 100.0 100.0 100.0 100.0 100.0
Expenses:
Cost of advertising
services............ 12.7 9.9 71.9 82.7 83.1
Client services...... 26.1 82.0 18.7 6.8 6.6
Technology and
operations.......... 177.6 161.0 20.3 4.6 3.8
Selling, general and
administrative...... 233.4 330.7 48.3 18.0 15.8
Amortization of
deferred stock
compensation........ -- -- -- -- 4.3
------ ------- ------- ------- -------
Total expenses..... 449.8 583.6 159.2 112.1 113.6
------ ------- ------- ------- -------
Loss from operations.. (349.8) (483.6) (59.2) (12.1) (13.6)
Interest income
(expense)............ (2.4) 6.8 .9 1.0 1.0
------ ------- ------- ------- -------
Net loss.............. (352.2)% (476.8)% (58.3)% (11.1)% (12.6)%
====== ======= ======= ======= =======
</TABLE>
Revenue. Revenue increased in each of the five quarters ended September 30,
1999. These increases were primarily due to the change from the use of
advertising service fee contracts to the use of advertising services contracts
and an increase in the number of our clients from 12 as of September 30, 1998
to 20 as of December 31, 1998, 27 as of March 31, 1999, 35 as of June 30, 1999
and 47 as of September 30, 1999.
29
<PAGE>
Cost of advertising services. Cost of advertising services increased in each
of the five quarters ended September 30, 1999. These increases were primarily
due to increases in the volume of advertising space we purchased in each
quarter. Cost of advertising services as a percentage of revenue also
increased during this period. These increases were primarily due to the change
from the use of advertising service fee contracts to the use of advertising
services contracts. During the quarters ended September 30, 1998 and December
31, 1998, revenue consisted of commissions derived from our advertising
service fee contracts with our clients during those periods. These commissions
have no associated cost of revenue other than the cost of delivering
advertisements over the Internet. Also, under the advertising service fee
contracts we did not incur expenses for advertising space. During the quarter
ended March 31, 1999, revenue consisted of both commissions derived from
advertising service fee contracts and revenue derived from advertising
services contracts. During the quarters ended June 30, 1999 and September 30,
1999, revenue consisted almost entirely of revenue derived from advertising
services contracts. Cost of advertising services revenue as a percentage of
revenue remained essentially unchanged at approximately 83% during the
quarters ended June 30, 1999 and September 30, 1999.
Client services. Client services expenses increased in each of the five
quarters ended September 30, 1999. These increases were primarily due to the
increase in the number of our Client Service teams during this period, which
was in response to the increase in the number of our clients from 12 as of
September 30, 1998 to 47 as of September 30, 1999. We anticipate continued
increases in our client services expenses to accommodate growth in our client
base.
Technology and operations. Technology and operations expenses increased in
each of the five quarters ended September 30, 1999, with the exception of a
decrease from the fourth quarter of 1998 to the first quarter of 1999. These
increases were primarily due to increases in the number of personnel in
software development, production systems and information systems. Due to our
increasing volume of advertisements served during this period, we have
increased our capacity for ad serving, in part by adding computer equipment to
the data centers maintained at our co-location facilities, resulting in
increased rental charges. We anticipate continued increases in our technology
and operations expenses in future periods as we add additional technology-
based services to our service offering, supply additional productivity tools
to our Client Service teams and accommodate additional clients.
Selling, general and administrative. Selling, general and administrative
expenses increased in each of the five quarters ended September 30, 1999.
These increases were primarily due to increases in the number of personnel in
executive, sales, marketing, finance, accounting and administrative positions,
and the amortization of goodwill resulting from the purchase of iballs LLC in
September 1999. During this period, we added substantially to our management
team, developed an in-house accounting function, created a marketing
department and increased our recruiting efforts. We anticipate continued
growth of our selling, general and administrative expenses as we expand our
administrative and marketing staff, add new marketing programs, incur
additional costs associated with becoming a public company and record
amortization of goodwill in connection with the acquisition of iballs LLC.
Amortization of deferred stock compensation. During the quarter ended
September 30, 1999, we recorded total deferred stock compensation of $16.9
million. We have recorded aggregate amortization of deferred stock
compensation of $860,000 through September 30, 1999. The amount is being
amortized on an accelerated basis over the four-year vesting period of the
applicable options. The remaining unamortized balance of $16.1 million will be
fully amortized by the quarter ending September 30, 2003. We expect to incur
additional deferred stock compensation and increased amortization of stock
compensation in the fourth quarter of 1999.
Interest income (expense). Interest income (expense) consists of earnings on
our cash and cash equivalents. Interest income increased for the quarter ended
June 30, 1999. This increase was primarily due to higher cash balances
resulting from our Series B preferred stock financing, which was completed in
February 1999, and our Series C preferred stock financing, which was completed
in May 1999. Interest income decreased in the quarter ended September 30, 1999
due to lower cash balances resulting from the purchase of iballs LLC in
September 1999 and the financing of our operating losses.
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Our quarterly and annual revenue, expenses and operating results have
fluctuated in the past and are likely to fluctuate significantly in the future
due to a variety of factors, many of which are beyond our control. Because of
these fluctuations, we believe that period-to-period comparisons are not a
good indication of our future financial performance. We may not be able to
sustain or increase our level of revenue or our rate of revenue growth on a
quarterly or annual basis. Our quarterly or annual operating results may not
meet the expectations of investors or, if securities analysts elect to
research our stock, the expectations of these analysts. If this happens, the
price of our stock could decline. See "Risk Factors--Our quarterly operating
results are subject to fluctuations that may cause our stock price to
decline," "--Our operating results may fluctuate seasonally, and these
fluctuations may cause our stock price to decline," "--We rely on a limited
number of clients, and the loss of a major client or a reduction in a major
client's Internet advertising budget could significantly reduce our revenue"
and "--Our business model is unproven and evolving and may not succeed."
Comparison of Nine Months Ended September 30, 1998 and 1999
The following table presents, for the periods indicated, statement of
operations data as a percentage of total revenue.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended September 30,
December 31, ----------------
1998 1998 1999
------------ ------- ------
(unaudited)
<S> <C> <C> <C>
Revenue:
Advertising services...................... -- % -- % 98.0 %
Advertising service fees.................. 100.0 100.0 2.0
------ ------- ------
Total revenue........................... 100.0 100.0 100.0
Expenses:
Cost of advertising services.............. 20.9 33.7 82.1
Client services........................... 63.8 42.4 7.6
Technology and operations................. 249.2 352.5 5.3
Selling, general and administrative....... 376.8 430.8 18.9
Amortization of deferred stock
compensation............................. -- -- 2.5
------ ------- ------
Total expenses.......................... 710.7 859.4 116.4
------ ------- ------
Loss from operations........................ (610.7) (759.4) (16.4)
Interest income (expense)................... 2.0 (3.6) 1.0
------ ------- ------
Net loss.................................... (608.7)% (763.0)% (15.4)%
====== ======= ======
</TABLE>
Revenue. We began to generate revenue during the second quarter of 1998.
Revenue increased from $276,000 for the nine months ended September 30, 1998
to $34.1 million for the nine months ended September 30, 1999. This increase
was due to the change in the majority of our contracts from advertising
service fee contracts to advertising services contracts and an increase in the
number of our clients from 12 as of September 30, 1998 to 47 as of September
30, 1999.
Cost of advertising services. Cost of advertising services increased from
$93,000, or 33.7% of revenue, for the nine months ended September 30, 1998 to
$28.0 million, or 82.1% of revenue, for the nine months ended September 30,
1999. This increase in cost of advertising services was primarily due to
increases in the volume of advertising space we purchased during this period.
The increase in cost of advertising services as a percentage of revenue was
primarily due to the change from the use of advertising service fee contracts
to the use of advertising services contracts.
Client services. Client services expenses increased from $117,000, or 42.4%
of revenue, for the nine months ended September 30, 1998 to $2.6 million, or
7.6% of revenue, for the nine months ended
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September 30, 1999. This increase was primarily due to the increase in the
number of our Client Service teams, which was in response to the increase in
the number of our clients from 12 as of September 30, 1998 to 47 as of
September 30, 1999.
Technology and operations. Technology and operations expenses increased from
$973,000, or 352.5% of revenue, for the nine months ended September 30, 1998
to $1.8 million, or 5.3% of revenue, for the nine months ended September 30,
1999. This increase was primarily due to increases in the number of personnel
in software development, production systems and information systems.
Selling, general and administrative. Selling, general and administrative
expenses increased from $1.2 million, or 430.8% of revenue, for the nine
months ended September 30, 1998 to $6.4 million, or 18.9% of revenue, for the
nine months ended September 30, 1999. This increase was primarily due to
increases in the number of personnel in executive, sales, marketing, finance,
accounting, human resources and administrative positions. The increase was
also due to increases in the amount of sales commissions and increased
marketing expenses.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation began in the quarter ended June 30, 1999. We have recorded
aggregate deferred stock compensation of $16.9 million and recorded aggregate
amortization of deferred stock compensation of $860,000 through September 30,
1999.
Comparison of Years Ended December 31, 1997 and 1998
We began operations in July 1997, but did not begin to generate significant
revenue until after we were incorporated in February 1998. Our total expenses
increased from $302,000 in 1997 to $4.3 million in 1998. The increase in
expenses was primarily due to increases in client services expenses,
technology and operations expenses, and selling, general and administrative
expenses as our business grew during this period.
Provision for Income Taxes
As of December 31, 1998, we had net operating loss carryforwards for federal
income tax reporting purposes of approximately $3.0 million, and research and
development tax credit carryforwards of approximately $40,000 which begin to
expire in 2001 if not utilized. The Internal Revenue Code contains provisions
that limit the use in any future period of net operating loss and credit
carryforwards upon the occurrence of specified events, including significant
change in ownership interests. We had deferred tax assets, including our net
operating loss carryforwards and tax credits, totaling approximately $7.7
million as of September 30, 1999. We have recorded a valuation allowance for
the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset balance. See note 5 of the notes to Avenue A's
consolidated financial statements included elsewhere in this prospectus.
Liquidity and Capital Resources
Since inception we have financed our operations primarily through the net
proceeds from the private placement of equity securities, which raised
approximately $28.1 million through September 30, 1999.
As of September 30, 1999, we had cash and cash equivalents of $17.8 million.
We have a $1.0 million equipment term loan facility with Silicon Valley Bank
which was unused as of September 30, 1999.
Cash used in operating activities was $2.7 million for the year ended
December 31, 1998 and cash provided by operating activities was $7,000 for the
nine months ended September 30, 1999.
Cash used in investing activities was $1.1 million for the year ended
December 31, 1998 and $5.8 million for the nine months ended September 30,
1999. Cash used in investing activities for the nine months ended
September 30, 1999 was primarily related to the purchase of iballs LLC and
purchases of computer equipment to expand our ad serving capacity and to equip
employees hired during that period.
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Cash provided by financing activities was $4.7 million for the year ended
December 31, 1998 and $22.8 million for the nine months ended September 30,
1999. The cash provided by financing activities during the nine months ended
September 30, 1999 primarily related to the net proceeds from private
placements of equity securities, which raised approximately $21.9 million
through September 30, 1999.
Accounts receivable has grown significantly during 1999 primarily due to
growth in our revenue during the third quarter of 1999. Third quarter revenues
accounted for approximately 60% of our total revenue for the nine months ended
September 30, 1999. In addition, through October 1999, we utilized a billing
process that frequently resulted in delayed payments due to the need to
reconcile certain advertising campaign data between our own records and those
of our clients. In November 1999, we modified our billing process and
anticipate that our days sales outstanding will decrease in future periods.
On October 1, 1999 we entered into a lease for our headquarters facility in
Seattle, Washington. This lease expires in October 2004 and contains one five-
year renewal option. We expect this facility to be fully utilized during the
second half of 2000 and we anticipate that we will require additional office
space.
We have no material commitments other than obligations under operating
leases for office space and office equipment of $6.5 million as of September
30, 1999, of which some commitments extend through 2004. Commitments under our
current facility lease are $5.6 million for the next five years. We are also
committed at September 30, 1999 to pay rent of $433,000 under our former
facility sublease which ends in June 2001. However, this commitment is offset
by rental income of $420,000 from our sublease of this facility to another
tenant.
Our operating expenses will consume a material amount of our cash
resources, including a portion of the net proceeds of this offering. We intend
to invest our cash in excess of current operating requirements in short-term,
interest-bearing, investment-grade securities. We believe that our existing
cash and cash equivalents, and available bank borrowings, will be sufficient
to meet our anticipated cash needs for working capital and capital
expenditures for the next twelve months. Thereafter, we may require additional
funds to support our working capital requirements, expand internationally,
acquire complementary businesses and technologies, or for other purposes.
Future capital requirements will depend on many factors, including increases
in the number of employees and the need to expand our ad serving capacity. We
may seek to raise additional funds in the future through public or private
equity financing or from other sources. We may not, however, be able to obtain
adequate or favorable financing. Any financing we obtain may dilute your
ownership interest in us.
Year 2000 Compliance
Many currently installed computer systems and software products and systems
worldwide are coded to accept only two-digit entries to identify a year in the
date code field. Consequently, after January 1, 2000, many of these systems
could fail or malfunction because they are not able to distinguish between the
year 1900 and the year 2000. These system failures or malfunctions could cause
significant disruptions of operations, including disruptions of our Internet
advertising services. As a company engaged in Internet advertising services,
we rely on computer programs and systems in connection with our services as
well as with our internal and external communication networks and systems and
other business functions. Any failure to provide year 2000 compliant services
to our clients could result in financial loss, damage to our reputation and
legal liability.
To date we have not experienced any problems relating to year 2000 issues.
Our internally developed software was designed to be year 2000 compliant and,
based on internal tests we have conducted, we believe that this software is
year 2000 compliant, meaning that the use or occurrence of dates after January
1, 2000 will not materially affect its performance or its ability to correctly
create, store, process and output data involving dates. Substantially all of
our third-party software, computer equipment and internal telecommunications
systems were purchased in the past twelve months. As a result, we believe that
our third-party software, computer equipment and internal telecommunications
systems are also generally year 2000 compliant. However, we cannot assure you
that our internally developed software, and the software, computer equipment
and internal telecommunications systems that we purchased from third parties,
are year 2000 compliant.
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We have not, to date, incurred any costs relating to year 2000 issues
separate from the expenditures for acquiring new third-party software,
computer equipment and systems to address year 2000 issues. We do not
anticipate incurring any material costs directly related to addressing year
2000 issues, and we have not deferred any of our ongoing development efforts
to address year 2000 issues.
We have not engaged any third parties to independently verify our year 2000
readiness, nor have we assessed potential costs associated with year 2000
risks or made any contingency plans to address these risks. Although we have
received assurances from some of the suppliers of our third-party software,
computer equipment and systems that their products are year 2000 compliant, to
date we have generally relied on publicly available information regarding the
year 2000 compliance of their products. We also generally do not have any
contractual rights with these providers if their products fail to function due
to year 2000 issues. If these failures do occur, we may incur unanticipated
expenses to remedy any problems, including purchasing replacement software,
computer equipment and systems. Any failures of our internally developed
software or the third-party software, computer equipment and systems that we
use could result in financial loss, damage to our reputation and legal
liability.
We rely on the continued operations of the Web-based computer systems of
our clients and of the vendors whose Web sites or advertising networks host
our clients' advertisements. The successful delivery of our services for our
clients depends on the satisfactory functioning of our clients' and vendors'
computer systems. If these systems fail because they are not year 2000
compliant, we may be unable to fully deliver the services that our clients
have requested, which could harm our quarterly and annual operating results.
We are not aware of any year 2000 problems experienced by our clients or
vendors to date.
We also rely on the satisfactory performance and reliability of the
external communication and computer networks, systems and services integral to
the Internet, such as telecommunications providers and Internet service
providers. In particular, we rely on the satisfactory performance and
reliability of the networks, systems and services of Exodus Communications and
Verio, the Internet service providers that operate our co-location facilities.
Because these external networks, systems and services are maintained or
provided by third parties, the success of our efforts to address the year 2000
problem depends in part on parallel efforts being undertaken by these third
parties. We have initiated communications with most of these third parties to
determine the status of their year 2000 compliance efforts. We cannot,
however, assure you that they have provided accurate or complete information,
or that all of their networks, systems or services have achieved full year
2000 compliance.
The most reasonably likely worst-case scenario for us resulting from the
year 2000 problem is that disruptions of the external third-party networks,
systems or services on which we depend would reduce or eliminate for a period
of time our ability to provide our Internet advertising services to our
clients. If these disruptions were frequent or long in duration, they could
seriously harm our business. The compliance of third-party networks, systems
and services, including telecommunications providers, Internet service
providers and co-location facilities, is not within our control. Accordingly,
a contingency plan for this worst-case scenario does not exist, and we do not
believe we will be able to develop one.
Interest Rate Risk
Our exposure to market risk is limited to interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates,
particularly because the majority of our investments are in short-term,
investment-grade debt securities issued by corporations. We place our
investments with high-quality issuers and limit the amount of credit exposure
to any one issuer. Due to the nature of our short-term investments, we believe
that we are not subject to any material market risk exposure. We do not have
any foreign currency or other derivative financial instruments.
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Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 was
effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for computer software developed
or obtained for internal use, including the requirement to capitalize specific
costs and amortization of such costs. We implemented SOP 98-1 and capitalized
approximately $242,000 of internally developed software costs. Accumulated
depreciation related to the capitalized costs was $37,000 as of September 30,
1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organizational costs. It requires costs of start-up
activities and organizational costs to be expensed as incurred. The
implementation of SOP 98-5 did not have a material impact on our financial
position or operating results.
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BUSINESS
Overview
Avenue A provides technology-based Internet advertising services to
businesses. We integrate Internet media planning and buying, proprietary ad
management technology, user profiling and data analysis systems to help
advertisers increase the effectiveness and return on investment of their
Internet advertising campaigns. Through this integrated approach we have
developed an extensive knowledge base of Internet advertising strategies,
targeting methods and media placements that perform effectively. We believe
this knowledge base grows richer and more valuable with each additional
campaign we execute and with each additional client we serve. We focus on
serving the needs of buyers of Internet advertising, providing a service that
harnesses the complexity, interactivity and dynamic nature of the Internet
with the objective of delivering the most successful advertising campaigns for
our clients. Our top four clients are Gateway, Microsoft (through its MSN
division), uBid and Uproar, based on revenues in the fourth quarter of 1999.
Our services for Internet advertisers include the following key elements:
. Internet media planning and buying. We use our proprietary database and
experience from past advertising campaigns to plan highly targeted
advertising campaigns for our clients. We negotiate and purchase
Internet advertising space for our clients using our status as a large
purchaser of advertising and our historical pricing and performance data
from past campaigns.
. Campaign management. We use our proprietary software and systems in ad
serving, user profiling, performance reporting and data collection and
analysis to manage and increase the effectiveness of our clients'
Internet advertising campaigns.
. Data warehousing and analysis. Our technology enables us to collect,
store and analyze extensive data from our previous and current Internet
advertising campaigns that we use to plan and improve current and future
advertising campaigns for all of our clients.
Our subsidiary, iballs LLC, provides Internet media planning and buying
services to its clients similar to those provided by Avenue A, and uses our ad
serving, user profiling, performance reporting and data collection and
analysis capabilities for some of its clients. We believe that our early entry
advantage in the Internet advertising market, our media planning and buying
expertise, our proprietary technology and our commitment to serving only
advertisers will enable us to continue to strengthen our leadership position
in Internet advertising.
Industry Background
Emergence of the Internet as an Advertising Medium
The Internet is expected to grow rapidly as a medium for advertising and
commerce. Forrester Research, Inc. projects that online advertising
expenditures in the United States will grow from $2.8 billion in 1999 to
$22.0 billion in 2004. We believe this growth is driven by a number of
factors, including the growing number of Internet users, the growth of e-
commerce and advances in online advertising technology. According to
International Data Corporation, the number of Web users worldwide is projected
to grow from approximately 196 million in 1999 to over 500 million by the end
of 2003, and consumer e-commerce spending in the United States is projected to
increase from approximately $71 billion in 1999 to over $200 billion by the
end of 2003.
Historically, the leading Internet advertisers have included technology
companies, Internet portals and e-commerce companies. However, many of the
largest advertisers in traditional media, including mass marketers such as
consumer products companies and automobile manufacturers, have begun
advertising online. Expenditures for online advertising currently represent a
small portion of all media spending, but these expenditures are expected to
grow at a much higher rate than expenditures for traditional advertising.
While traditional advertising spending is expected to increase by
approximately 27% from 1999 through 2004, online advertising spending is
expected to increase by over 690% during that period, based on data from
Forrester Research, Inc.
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Advantages of Internet Advertising
Unlike traditional advertising, Internet advertising involves the delivery
of messages which can be tailored for individual viewers, making the Internet
a revolutionary vehicle for advertisers. Because Internet advertisements are
generally delivered to individual viewers across a digital infrastructure, the
Internet has several advantages as an advertising medium, including:
Measurability. The Internet provides the ability to observe and record a
wide range of online activities, including the delivery of advertisements to a
browser, click-throughs on Internet advertisements, the completion of online
purchases and the downloading of software files. As a result, sophisticated
Internet advertisers can collect and measure data about a broad range of
consumer behaviors associated with a particular advertisement. Using this
data, advertisers can track, monitor and measure the effectiveness of their
Internet advertising campaigns.
Personalization and targeting capabilities. Because each Internet image or
message is generally delivered to one user at a time, specific advertisements
or emails can be tailored with the goal of addressing the interests and needs
of the user to increase the likelihood that the advertisement or email will
elicit the desired response from the user. Using the Internet, advertisers can
target advertising campaigns to specific geographic regions, specific
audiences, and individual consumers with specific demographic or behavioral
profiles. Advertisers can also control the number of times a user's browser
receives an advertisement and rotate sequentially the advertisements that are
delivered to that user's browser. In addition, advertisers can build highly
detailed user profiles for future advertising campaigns through the use of
transaction information, registration procedures and anonymous matching
techniques.
Rapid feedback and response. The Internet enables much more rapid
measurement of and response to the effectiveness of an advertising campaign
than most traditional media. Information on consumer responses to campaigns
can be provided in near real-time, allowing an advertiser to respond almost
immediately to that feedback through every stage of the online sales cycle.
Compressed sales cycle. The Internet provides advertisers the opportunity to
accelerate a consumer's progression from awareness of a product to need
recognition to purchase. A consumer can often initiate an online purchase
simply by clicking on an Internet advertisement, and can complete the purchase
with very few intermediate steps. Advertisers therefore can conduct efficient
advertising campaigns with rapid response rates.
Efficient reach. As a medium with no geographic boundaries, the Internet
enables advertisers to reach large audiences throughout the United States and
internationally. Unlike traditional print, outdoor, television or radio
broadcast advertising, which may require advance media purchases in hundreds
of markets to reach an international audience, Internet advertisers can reach
individuals worldwide in near real-time with a single Internet advertising
campaign.
Challenges of Internet Advertising
Despite the capabilities of the Internet as an advertising medium,
individual advertisers seeking to take advantage of the Internet's potential
face numerous challenges, including:
Scale and complexity. The proliferation of Web sites and the dispersed
nature of the Internet audience make it difficult for individual advertisers
and ad agencies to target, measure, analyze and optimize Internet advertising
campaigns. An advertiser seeking to conduct a campaign across a large number
of Web sites or advertising networks must be able to identify appropriate Web
sites, understand the technical capabilities of individual Web sites,
determine available inventory of desired advertisement placements, choose the
size and location of advertisements, negotiate placement pricing and prepare
its systems to deliver advertisements and track results. To determine the
overall effectiveness of its advertising, an advertiser managing campaigns
across different Web sites and advertising networks must reconcile reports
from these multiple parties, which are often based on different measurement
methodologies and therefore are not easily consolidated or compared.
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Data analysis and technology requirements. The measurement and recording of
a wide range of online advertising responses, such as click-throughs,
purchases or software downloads, can generate large amounts of data. To
evaluate and optimize their Internet advertising campaigns, advertisers must
analyze this data, which requires access to sophisticated data aggregation,
storage and mining technology and capabilities. Individual advertisers
conducting their own campaigns may not have sufficient in-house data storage
and analysis capabilities, and accordingly the data from their advertising
campaigns may often be underutilized.
Operating costs and requirements. Developing, building and operating an
Internet advertisement management and delivery system to fully exploit the
advantages of Internet advertising is costly and time-consuming. Managing and
tracking numerous advertising campaigns that reach millions of Internet users
on hundreds of Web sites requires complex networking and computing
applications, as well as one or more large, complex data centers with back-up
capabilities. These systems must be continuously maintained to ensure reliable
performance 24 hours a day, seven days a week. For most advertisers and
advertising agencies, the operating costs associated with these systems would
constitute a substantial diversion of resources from their core businesses.
Limited services for advertising buyers. The Internet advertising market is
broadly segmented into two groups: advertisers seeking to conduct the most
effective Internet advertising campaigns at the lowest possible price, and Web
sites and advertising networks seeking to maximize the revenue generated by
their advertising inventory. We believe that while selling power has been
aggregated by large portal sites and advertising networks, there are
relatively few buyers of Internet advertising that match the scale of these
aggregated sellers. In addition, because the interests of large portals and
advertising networks may conflict with those of advertisers, advertisers may
be unwilling to share data with them in order to improve the effectiveness of
their advertising campaigns. As a result, performance reports from portals and
advertising networks are often limited to metrics that may have little value
to purchasers of advertising, such as click-throughs, rather than metrics that
are meaningful to the advertiser's business, such as sales generated, leads
generated, page views and software downloads.
Need for an Outsourced Internet Advertising Service
The rapid growth and complexity of the Internet as an advertising medium
have made the management and delivery of effective advertising extremely
important to advertisers but expensive and difficult to implement. The
technical, operational and resource challenges faced by an advertiser seeking
to independently plan, deliver and optimize its own Internet advertising
campaigns can divert the advertiser's resources and attention away from its
core business. The costs of aggregating and analyzing the large volume of data
necessary to plan, execute and dynamically refine an Internet advertising
campaign can diminish the return on the advertiser's investment. In addition,
individual advertisers may have little power to negotiate lower prices for
their advertising or obtain meaningful data from Web sites on metrics that
measure the effectiveness of their campaigns. We believe advertisers can
benefit from an outsourced advertising service that integrates strategic media
planning expertise, media buying power, ad management technology, user
profiling, and data collection and analysis systems, and that achieves
economies of scale, to enable them to effectively and efficiently conduct
Internet advertising campaigns. By using this outsourced service, advertisers
can focus on their core businesses while realizing the potential benefits of
Internet advertising.
The Avenue A Solution
The Avenue A solution integrates proprietary technology and media planning
and buying to help advertisers realize the potential of Internet advertising,
providing the following benefits:
Comprehensive Internet advertising management services. We provide a full
range of services to conduct and increase the effectiveness of Internet
advertising campaigns, including media planning and buying, ad serving, ad
management and data analysis. We have designed our services to enable
advertisers to easily and cost-effectively conduct multiple advertising
campaigns across a broad range of Web sites and advertising networks.
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Technology-enabled analysis, monitoring, tracking and optimization. We
collect and analyze data about hundreds of publisher Web sites, numerous
advertising campaigns and tens of millions of Web user profiles, so that our
client strategists can structure targeted advertising campaigns to achieve our
clients' desired business results. To improve campaign performance, we use our
proprietary technology and data analysis capabilities to track, store and
measure data on Web users' online responses to Internet advertisements
promptly after they occur. Based on this data, we generate detailed
performance reports which clients can view over the Internet at any time.
Using these reports, we can refine and improve our clients' advertising
campaigns while they are being conducted to increase their efficiency and
effectiveness.
Proprietary knowledge base. Because we have executed a substantial number
of Internet advertising campaigns for our clients, we have captured a large
quantity of data regarding the efficacy of online advertising campaigns and
techniques. We believe that the more data we accumulate and analyze, the
faster our rate of learning about Internet advertising grows. Our Client
Service teams draw upon our dynamically updated databases to help improve the
results of our clients' advertising campaigns. In particular, these teams use
our proprietary knowledge base to more accurately predict and understand which
techniques are the most effective, what pricing for placements is appropriate
and which targeting efforts are best suited for a particular client's needs.
Focus on Internet advertisers. Because we serve a large number of Internet
advertisers, we are a large and frequent purchaser of Internet advertising
space. We believe that our status as a large purchaser of Internet
advertising, together with our extensive knowledge of historical pricing and
performance information, enables us to negotiate efficient, cost-effective
advertising purchases for Internet advertisers.
Cost savings through economies of scale. Because we serve numerous Internet
advertisers, we are able to spread the substantial costs of developing,
building and operating Internet ad management and delivery systems and
database technologies across a large base of clients. As a result, we are able
to deliver cost-effective services to our clients.
Business Strategy
Our objective is to be the leading provider of Internet and other digital
media advertising services to advertisers. We plan to achieve this goal
through the following key strategies:
Aggressively acquire new clients and develop new markets. We intend to
expand our client base by aggressively pursuing new clients that focus their
advertising efforts on the Internet as well as clients that have historically
relied on traditional media for advertising. Our sales force is dedicated to
acquiring new clients by converting them from traditional advertising to
Internet advertising, and by demonstrating to online advertisers the benefits
of our Internet advertising services. In addition, although we currently
provide a service tailored primarily to the needs of companies with
significant online advertising budgets, we plan to expand our services to new
markets. In particular, we plan to aggressively expand our Growth Markets
Division, which tailors our services to clients with smaller online
advertising budgets.
Leverage our proprietary knowledge base. We seek to build upon and further
leverage our extensive database and our data analysis expertise to attract
additional clients and improve the quality of our services. We believe that by
increasing the scale and diversity of our client base as well as the number
and type of advertising campaigns we conduct, we will aggregate more
statistically significant data and relevant analysis to improve our clients'
campaigns. We aggregate non-personally identifiable data from our clients'
campaigns on a client anonymous basis for use in conducting media planning for
all of our clients' campaigns. By sharing our expertise with our clients, we
believe we can provide greater value to Internet advertisers than they would
be able to obtain by conducting advertising campaigns independently. We intend
to use our proprietary knowledge base as a platform to enhance our current
services as well as to develop new services for our clients.
Provide superior client service through a comprehensive service offering. As
part of our goal to provide our clients with superior Internet advertising and
marketing services, we plan to continue to add services that
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expand our clients' abilities to advertise and market on the Internet. We
recently launched our Strategic Partnership Program, in which we negotiate and
manage exclusive or complex partnership arrangements between our clients and
Web sites or advertising networks that generally have terms ranging from six
months to a year. As of December 31, 1999, we had entered into 21 Strategic
Partnership Program contracts. In addition, we recently initiated our
Precision E-mail Service. We also intend to add services over time based on
advances in online marketing technology to provide a comprehensive, fully
integrated Internet advertising and marketing service for our clients.
Continue to improve technology. We plan to continue to build, license and
acquire technologies, including enhanced ad serving and media measurement
technologies, that will enable us to plan and execute more effective Internet
advertising and marketing campaigns for our clients. In addition, we intend to
continue to increase our investment in data analysis technology and expertise
in our efforts to realize the full potential of the data that these campaigns
generate.
Acquire complementary businesses and establish relationships with
traditional advertising and media services providers. In September 1999, we
acquired iballs LLC, an Internet media company located in New York City. We
intend to continue to aggressively pursue opportunities to acquire
complementary businesses to expand and enhance our capabilities and services
and increase our number of clients. We also intend to seek to establish
relationships with companies that provide traditional advertising and media
services, which relationships may include joint marketing arrangements and
preferred provider agreements. Through these relationships we intend to
increase our sales penetration, gain access to their clients and become the
preferred or exclusive provider of Internet advertising and marketing services
for these companies.
Exploit emerging digital media opportunities. We believe that in the future,
advertisements may be delivered through a number of digital media in addition
to the Internet, including interactive television, Internet-enabled home
appliances, hand-held computers, cellular telephones, pagers and automobile
personal computers. We plan to extend our technology and capabilities to be
able to deliver targeted advertisements through those emerging digital media
that we determine present the best business opportunities.
Expand internationally. We plan to expand our presence internationally in
order to capitalize on the global reach of the Internet. We believe there is a
significant opportunity to provide our services to companies based outside of
the United States. In addition, we intend to expand our service offering for
our domestic clients to include advertising and marketing on Web sites
operated in foreign markets.
The Avenue A Experience
We have structured our service offering to provide a smooth, efficient,
positive experience for our clients during the entire advertising campaign
process. When a client enlists our services, the client first meets with a
client strategist to discuss the client's campaign objectives. Using our
publisher Web site and user profile databases, the strategist works with the
client to determine target user groups and develop an online media strategy.
Once the client and the strategist have agreed on a media strategy, our media
buyers create a media plan by identifying appropriate placements for the
client's advertisements on a variety of Web sites and advertising networks.
The buyers negotiate placement rates and, upon authorization from the client,
purchase the advertising space. Our media engineers and account coordinators
work with the client to obtain the client's advertisements for delivery by our
ad serving systems.
When the campaign begins, the Web sites and advertising networks on which
our media buyers have purchased space automatically request advertisements
from our ad servers. Before we serve an advertisement, our ad serving systems
can search the Web user's computer for an Avenue A "cookie," an anonymous
registration file placed by our systems on a computer the first time we serve
an advertisement to that computer. If we find a cookie when we search the Web
user's computer, our ad serving systems query our data warehouse, which might
contain data regarding prior actions conducted on that Web user's computer
that relate to our client, including responses to our client's previous
advertising campaigns and actions taken by that user on our client's Web site.
This query process generally takes less than one second. Using this
information, our systems can serve a specific, targeted advertisement to the
user based on our client's advertising objectives.
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As the campaign progresses, our systems can collect data regarding users'
interactions with the advertisements served to them, e.g., banners served,
click-throughs and Web sites visited, and, if the user clicks through and
visits the Web site of the advertiser, the user's behavior on that Web site,
e.g., what sections of the Web site the user visited, whether the user got to
an order page and whether the user bought something. Using the data collected,
our systems generate comprehensive, easy-to-read performance reports that
permit both Avenue A and the client to track the progress of the campaign in
light of the client's campaign objectives. The reports are available online to
the client 24 hours a day, seven days a week, and are updated throughout the
day to provide timely statistics on the performance of the campaign.
The Client Service team reviews the performance reports with the client and,
based on the reports, adjusts the campaign to improve its performance. For
example, if the client's advertisements were initially served to 50 Web sites,
but only 40 Web sites are generating favorable cost per customer acquisition
rates, the Client Service team can take a number of actions to improve the
campaign, including narrowing the scope of the campaign to focus on the 40 Web
sites with favorable performance or negotiating lower rates for continuing
advertisement placements on the other sites. Our ad serving systems enable the
Client Service team to control the frequency with which each advertisement is
displayed, program the sequence with which advertisements are viewed and
target specific advertisements to specific browsers.
Once the campaign is concluded, we provide performance reports to the client
indicating the success of the campaign and recommendations for future
campaigns. Because our systems have automatically stored data collected from
the campaign, we can use this data in additional advertising campaigns for the
client. Using cookie technology, we can anonymously profile Web users so that
future advertisements delivered to those users' browsers in the client's
future advertising campaigns can be customized based on their user profiles.
Avenue A's Services
Core services. Our core services include strategic media planning and
buying, ad serving, campaign analysis, optimization and data collection and
aggregation.
. Strategic media planning and buying. Our strategic media planning and
buying services are performed by Client Service teams, which evaluate
the client's needs and objectives, outline a media strategy for the
client, develop a media plan by identifying appropriate media
placements, and execute this plan by negotiating the rates for these
placements.
. Ad serving. Our media engineers coordinate and monitor the ad serving
process once an advertising campaign begins. Our ad servers receive
billions of advertisement requests each month, and process a majority of
these requests at sub-millisecond speed. Our ad serving systems allow us
to adjust advertising campaigns quickly and efficiently because changes
required to the advertisements are made on our ad serving systems rather
than on each individual Web site where the advertisements appear.
. Campaign analysis. Our proprietary ad serving systems enable us to
evaluate advertising campaigns along any dimension important to the
client, e.g., sales, leads, registrations, software downloads, etc. We
provide this campaign data to our clients in comprehensive online
performance reports generated by our system, which our client
strategists review with the clients.
. Optimization. Our Client Service teams can quickly adjust an advertising
campaign in progress to improve its performance. If a Web site is
generating unacceptably low response rates, we can remove that Web site
from the campaign, reduce the number of impressions allocated to that
site, or negotiate a lower rate for advertisement placements on that
site. If a Web site is generating high responses, we can serve more
advertisements to that Web site.
. Data collection and aggregation. As we conduct advertising campaigns, we
collect and store data on these campaigns in our data warehouse. We
aggregate data with the data from all our advertising campaigns as we
continue to expand our data warehouse and build our user profiles.
Precision Targeting Program(TM). Our Precision Targeting Program enables us
to target tailored advertisements to the browsers of users which have
previously visited our clients' Web sites. The program is
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designed to strengthen the clients' relationship with the user, improve
response rates and accelerate the sales cycle. This targeting is based on data
acquired from prior interactions conducted through that computer on the
client's Web site. For example, if the information in our data warehouse
indicates that the computer of a particular Web user was previously used to
purchase a backpack from our client, our ad serving systems can serve an
advertisement to that user's computer recommending additional, complementary
purchases, such as hiking boots, tents or fleece jackets.
Strategic Partnership Program(TM). Through our Strategic Partnership
Program, we manage exclusive or complex partnerships between our clients and
Web sites or advertising networks, such as exclusive sponsorships of specific
locations or features of a Web site, or advertising campaigns based on several
complex measurement criteria or methods of advertising. These arrangements
typically have terms ranging from six months to one year. Managers in the
Strategic Partnership Program consult with clients to determine their
objectives and to negotiate the terms of the advertising relationships with
appropriate Web sites and advertising networks. We then help manage the
partnership by providing advertising campaign analysis and ongoing campaign
optimization services to participants in the program.
Precision E-mail Service(TM). We recently launched our Precision E-mail
Service and plan to make it commercially available to our clients in early
2000. We plan to use this service to deliver targeted emails to specific
customer segments based on their shopping and browsing behavior. We intend to
integrate precision email campaigns with our online advertising campaigns to
enhance the overall effectiveness of our clients' Internet advertising and
marketing campaigns.
Our subsidiary, iballs LLC, provides Internet media planning and buying
services to its clients similar to those provided by Avenue A, and uses our ad
serving, user profiling, performance reporting and data collection and
analysis capabilities for some of its clients. In addition, iballs LLC's
clients can participate in our Precision Targeting Program and Strategic
Partnership Program and use our Precision E-mail Services.
Sales, Marketing and Client Service
We acquire clients primarily through our field sales force, which works in
sales offices in Seattle, New York City and Chicago. As we continue to launch
additional services, including our Precision E-mail Service, we plan to
augment the general sales force with sales specialists that focus on those
particular services. We generate sales leads primarily through field sales,
client referrals, our Web site and responses to our public relations and
marketing efforts.
In addition, we market our services through our Client Service teams as the
services become appropriate for an individual advertiser's evolving needs. For
example, if a client has achieved its initial goal of acquiring customers
through our advertising services, the client might begin using our Precision
Targeting Program to retain these customers or use our Precision E-mail
Service to expand into email marketing.
We use a variety of marketing methods to build awareness of Avenue A and
our service offerings within our target market and to establish credibility
and leadership in the marketplace. These methods include marketing materials,
advertising, press coverage and other public relations efforts, direct
marketing, trade shows, seminars and conferences, relationships with
recognized industry analysts, and the Avenue A Web site.
Avenue A's client service organization provides all of our primary services
to our clients. As of December 31, 1999, we had 138 employees in our Client
Service teams. Our team-focused approach is designed to encourage an
entrepreneurial spirit and greater accountability to clients' needs.
We have implemented an intensive training program and have built
information systems that are designed to enable employees to draw from our
existing knowledge base. This knowledge base includes both the historical
performance of a given client's campaigns and an aggregated knowledge base of
results from all advertising campaigns. The training program and information
systems are intended to enable new employees to quickly achieve a high
performance level by utilizing institutional knowledge and experience.
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Our Clients
The number of our active clients has grown from 12 as of September 30, 1998
to 47 as of September 30, 1999. In the fourth quarter of 1999, Gateway and
uBid each accounted for over 10% of our total revenue. Our top fifteen
currently active clients, based on revenue in this same period, are:
. MTV Networks
. Bolt.com, Inc.
. Onvia.com, Inc.
. The Brodia Group
. Creative Computers, . ProFlowers.com, Inc.
Inc.
. Snowball.com, Inc.
. eBags Inc.
. Ticketmaster Online-City Search,
Inc.
. Expedia, Inc.
. uBid, Inc.
. Family Wonder, Inc.
. Uproar Ltd.
. Gateway, Inc.
. Microsoft Corporation
(through its MSN
division)
We provide each of these clients with a number of services, including media
planning and buying, ad serving and campaign analysis. We have historically
sought clients that are large, sophisticated Internet advertisers spending at
least $1 million annually on Internet advertising. We plan to aggressively
expand our Growth Markets Division to provide a service offering designed for
advertisers with smaller Internet advertising budgets.
Technology
Our proprietary technology, which consists of software applications, Web-
based applications, systems and databases, delivers advertisements, tracks
users' responses, aggregates data and provides standardized reporting and data
processing support to the Client Service teams, to the Data Analytics group
and to our clients. Our systems and applications consist of several
independently scalable components: data warehousing, technological
applications for media planning, campaign management and trafficking, and ad
serving. In building these systems and applications, we have developed a
significant amount of proprietary software and techniques, and have also
leveraged leading industry-standard software and hardware.
Data warehousing. Our data warehouse is the foundation of our campaign
management, ad serving, targeting, data collection, data analysis and
performance reporting systems. These systems feed into or utilize the
warehouse for a significant portion of their overall system functionality. We
have developed a number of proprietary technologies for managing and
compressing data that allow us to keep billions of pieces of historical
campaign information online and immediately available to our other systems. We
also utilize industry-standard database technology to aggregate and store
information.
Media planning. Our client strategists and media buyers use media planning
tools, such as historical cost databases and campaign management software
programs, to keep track of Web sites and select sites and placements during
initial media planning activities. After an advertising campaign is underway,
these tools support ongoing planning and optimization activities.
Campaign management and trafficking. Each month our media buyers make
thousands of advertisement purchases on behalf of our clients and initiate
hundreds of advertising campaigns, which are defined as advertising on one Web
site for one month on behalf of one client. We typically conduct anywhere from
10 to 25 advertising campaigns for a particular client at any given time. We
use our campaign management and trafficking tools to manage the information
from these campaigns and to assist in or automate the process of communicating
with our clients and with the Web sites on which we serve advertisements.
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Ad serving. Our ad serving systems are multi-tiered applications that were
built for reliability and scalability. The systems receive billions of
advertisement requests each month and process a majority of these requests at
sub-millisecond speed. Each response to an advertisement request is based on
several factors, which may include the advertising viewing history of a user's
browser. We use standard cookie technology to anonymously track Internet
users' activity on our clients' Web sites, and on each Web site on which the
users' computers receive advertisements served by our systems. The modular
design of our ad serving systems allows us to grow capacity incrementally by
adding a single server at a time, or scale substantially by adding several
servers at a time.
Our ad serving systems are designed to operate 24 hours a day, 7 days a
week. These systems are located in two data centers in Seattle: an Exodus
Communications co-location site and a Verio co-location site. The two data
centers give us redundant capabilities in the event of a hardware failure or
loss of connectivity at one data center.
Competition
The market for Internet advertising is relatively new, yet intensely
competitive. We compete most directly with Internet media buyers that
integrate ad serving technology and Internet media buying, such as AppNet Inc.
(through its i33 Communications division) and MediaPlex, Inc. We also compete
with:
. Interactive advertising agencies, such as Modem Media . Poppe Tyson
Inc., Ogilvy & Mather Worldwide through its OgilvyOne division, and
Saatchi & Saatchi Advertising, through its Darwin Digital Media Services
division;
. Enabling online advertising technology providers, such as At Home
Corporation, through its MatchLogic, Inc. subsidiary, CMGI, Inc.,
through its AdForce, Inc., AdKnowledge, Inc. and Engage Technologies,
Inc. subsidiaries, and DoubleClick Inc.;
. Advertising networks, such as DoubleClick Inc., CMGI, Inc., through its
Flycast Communications Corporation subsidiary, L90, Inc. and 24/7 Media,
Inc.;
. Targeted email service providers, such as At Home Corporation, through
its MatchLogic, Inc. subsidiary, ClickAction Inc., Digital Impact, Inc.
DoubleClick Inc. and E-Dialog, Inc.; and
. Traditional advertising agencies that perform Internet advertising and
marketing as part of their services to clients, such as Ogilvy & Mather
Worldwide and Saatchi & Saatchi Advertising.
In addition, we compete with other traditional advertising agencies that
use traditional advertising media, and in general we compete with television,
radio, cable and print media for a share of advertisers' budgets.
We believe that the principal competitive factors affecting our market are
ad serving technology and functionality, data analysis capabilities, client
service and price. Although we believe we currently compete adequately with
respect to these factors, our continued ability to compete depends on a number
of circumstances, such as:
. our capability to plan advertising campaigns and serve advertisements
across a broad range of Web sites;
. our ability to respond to rapid technological change and provide feature
enhancements and expanded service offerings;
. the quality and reliability of our operations and client service and
support organizations; and
. the effectiveness of our sales and marketing efforts.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
client bases and significantly greater financial, technical and marketing
resources than we have. Also, many of our current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties. In addition, several of our competitors, including
AdForce, Inc., AdKnowledge, Inc. and Flycast Communications Corporation, have
combined or are in the process of combining with larger companies with greater
resources than ours. These competitors may engage in more extensive research
and development, undertake more far-reaching marketing campaigns and make more
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attractive offers to existing and potential employees and clients than we do.
They could also adopt more aggressive pricing policies and may even provide
services similar to ours at no additional cost by bundling them with their
other product and service offerings. They may also develop services that are
equal or superior to our services or that achieve greater market acceptance
than our services. In addition, our competitors may develop databases that are
larger than or otherwise superior to our databases. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share. We cannot assure you that we will be able to compete successfully, and
competitive pressures may harm our business.
Intellectual Property
To protect our proprietary rights, we rely generally on copyright,
trademark and trade secret laws, and confidentiality agreements with employees
and many of our consultants. Despite these protections, third parties might
obtain and use our technology without authorization or develop similar
technology independently. The steps we have taken may not prevent
misappropriation of our intellectual property, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
We have applied for registration of the following service marks: "AVENUE
A," "AVENUE A MEDIA," "AD CLUB NETWORK," "AXIS," "IBALLS," "PRECISION E-MAIL,"
"PRECISION TARGETING," the Avenue A logo and the iballs LLC logo. We cannot
assure you that any of our service mark applications will be approved. Even if
these applications are approved, any service marks may be successfully
challenged by others or invalidated. We are aware of third parties that use
the name "Avenue A," one of which is a Canadian advertising agency. We are
also aware of a registration in France of the term "Avenue A" for use in
advertising services. There may be other third parties using this name of whom
we are unaware. If our service mark applications are not approved or if our
service marks are invalidated because of prior third-party registrations, our
use of these marks could be restricted unless we entered into arrangements
with these third parties, which might not be available on commercially
reasonable terms, if at all.
We recently filed eight provisional patent applications in the United
States for aspects of our technology, processes and methods, but we have not
been issued any patents to date. We cannot assure you that our provisional
patent applications, or any future patent applications, will be granted, that
any future patent of ours will not be challenged, invalidated or circumvented,
or that the rights granted under any future patent of ours will provide
competitive advantages to us. If a blocking patent has issued or issues in the
future to a third party, and we are not able to distinguish our technologies,
processes or methods from those covered under the patent, we may need to
either obtain a license or develop noninfringing technologies, processes or
methods with respect to that patent. We may not be able to obtain a license on
commercially reasonable terms, if at all, or design around the patent, which
could impair our ability to provide our services. We also cannot assure you
that any proprietary rights with respect to our technology will be viable or
of value in the future since the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries are uncertain
and still evolving.
Other persons may claim that our technologies, processes or methods
infringe their patents. Any such claims may cause us to incur significant
expenses and, if successfully asserted against us, may cause us to pay
substantial damages and prevent us from providing some of our services,
including our core ad serving services, which would substantially harm our
business.
A U.S. patent was issued to DoubleClick in September 1999 relating to a
method of delivery, targeting and measuring of advertising over networks. This
patent may cover some of the technologies, processes or methods we use in our
ad serving systems. DoubleClick recently brought suit against L90, one of its
competitors, claiming that L90's methods and networks for delivery, targeting
and measuring advertising over the Internet infringe this patent. We have
purchased advertising space from DoubleClick in the past and expect to do so
in the future. We are currently evaluating the patent as it pertains to our
technologies. We cannot assure you that we will be able to distinguish our
technologies, processes or methods from those covered under the DoubleClick
patent or that the DoubleClick patent would be invalidated if challenged.
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In addition, DoubleClick and MatchLogic, a subsidiary of At Home
Corporation, have each filed U.S. patent applications and related applications
under the Patent Cooperation Treaty that appear to cover technologies relating
to ad serving. In addition, 24/7 Media has announced that it has received a
notice of allowance for a U.S. patent application on its ad delivery
technology that 24/7 Media asserts relates to enabling technology currently in
use by a number of ad serving systems. If patents are issued pursuant to these
applications, we cannot assure you that we will be able to distinguish our
technologies, processes or methods from those covered under these patents or
that the patents would be invalidated if challenged.
Any claims that might be brought against us relating to intellectual
property infringement, including claims of infringement of the DoubleClick
patent and other patents that may be issued to DoubleClick, MatchLogic or 24/7
Media, may cause us to incur significant expenses and, if successfully
asserted against us, may cause us to pay substantial damages and limit our
ability to use the intellectual property subject to these claims. Even if we
were to prevail, such litigation could be costly and time-consuming and could
divert the attention of our management and key personnel from our business
operations. Furthermore, as a result of a patent infringement suit, we may be
prevented from providing some of our services, including our core ad serving
services, unless we enter into royalty or license agreements. We may not be
able to obtain royalty or license agreements on terms acceptable to us, if at
all.
Our technology enables us to collect and use data derived from user
activity on the Internet. Although we believe that we generally have the right
to use this information and to compile it in our databases, we cannot assure
you that any trade secret, copyright or other protection will be available for
this information. In addition, our clients and other parties may claim rights
to this information.
Employees
As of December 31, 1999, we had 232 employees, including 138 in client
services and support, 53 in engineering and technology, 15 in sales and
marketing, and 26 in general and administrative. In addition, as of December
31, 1999, our iballs LLC subsidiary had 27 employees. We believe that we have
good relationships with our employees. We have never had a significant work
stoppage, and none of our employees is represented under a collective
bargaining agreement or by a union. We believe that our future success will
depend in part on our ability to attract, integrate, retain and motivate
highly qualified technical and managerial personnel and upon the continued
service of our senior management and key technical personnel. Competition for
qualified personnel in our industry and geographical locations is intense, and
we cannot assure you that we will succeed in attracting, integrating,
retaining and motivating a sufficient number of qualified personnel to conduct
our business in the future.
Facilities
Our principal executive, administrative, engineering, marketing and sales
facility currently occupies approximately 33,000 square feet of office space
in Seattle and will increase to approximately 44,000 square feet in March
2000. The lease for this facility expires in October 2004, with an option to
renew for an additional five-year term. We expect this facility will be
adequate to meet our requirements through the second quarter of 2000, but
anticipate that we will need additional space thereafter as more personnel are
hired. We also lease other sales and services office space in offices in New
York City and Chicago. In addition, our iballs LLC subsidiary leases
approximately 6,400 square feet of office space in New York City under a lease
that expires in August 2001 with an option to renew for an additional one-year
term. We use network facilities to house our ad servers and other systems at
two locations in Seattle under agreements with Exodus Communications and
Verio. Our agreement with Exodus Communications expires in January 2000 with
automatic renewal for one-year terms. Our agreement with Verio is on a month-
to-month basis.
Legal Proceedings
From time to time, we may become involved in litigation relating to claims
arising in the ordinary course of our business. We believe that there are no
claims or actions pending or threatened against us that, if adversely
determined, would have a material adverse effect on us.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of January 8, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Brian P. McAndrews...... 41 President, Chief Executive Officer and Director
Nicolas J. Hanauer(1)... 40 Chairman of the Board
Bruce Allenbaugh........ 43 Vice President, Marketing
Anna R. Collins......... 35 Vice President, Media
Michael T. Galgon....... 32 Senior Vice President, Marketing and Business Development
Clark M. Kokich......... 48 Vice President, General Manager, Growth Markets Division
Scott E. Lipsky......... 35 Chief Technology Officer and Vice President, Engineering
Robert M. Littauer...... 51 Chief Financial Officer, Vice President, Finance & Administration,
Secretary and Treasurer
Jamison F. Marra........ 34 Vice President, Information Technology
Jeffrey J. Miller....... 52 Vice President, Corporate Development and Legal Affairs
Neve R. Savage.......... 55 President, Avenue A International Division
Sumit T. Sen............ 31 Chief Analytics Officer
Jason Green(2).......... 32 Director
Fredric W.
Harman(1)(2)........... 39 Director
Gregory B.
Maffei(1)(2)........... 39 Director
</TABLE>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Brian P. McAndrews has served as our Chief Executive Officer and a director
since September 1999, and as our President since January 2000. From July 1990
to September 1999, Mr. McAndrews worked for ABC, Inc., holding executive
positions at ABC Sports, ABC Entertainment and ABC Television Network; most
recently he served as Executive Vice President and General Manager of ABC
Sports. From 1984 to 1989, Mr. McAndrews served as a product manager for
General Mills, Inc., a leading consumer products manufacturer. He holds an
M.B.A. degree from Stanford University and a B.A. degree from Harvard
University.
Nicolas J. Hanauer, a cofounder of Avenue A, has served as our Chairman of
the Board since June 1998 and as a director since Avenue A was incorporated.
He also served as our Chief Executive Officer from June 1998 to September
1999. Since January 1990, Mr. Hanauer has been the Executive Vice President,
Sales and Marketing of Pacific Coast Feather Company, a pillow and bedding
manufacturing company. Mr. Hanauer holds a B.A. degree from the University of
Washington. In addition to serving as a director of Avenue A, Mr. Hanauer
currently serves as a director of Gear.com, Inc., Museum Quality Discount
Framing, Inc. and Pacific Coast Feather Company.
Bruce Allenbaugh has served as our Vice President, Marketing since October
1999. From December 1994 to October 1999, Mr. Allenbaugh served as Vice
President, Marketing Services for NEXTLINK Communications, Inc., a
telecommunications company. From August 1985 to October 1994, he served in
various capacities for The Pepsi Cola Company, most recently as Director, New
Products. Mr. Allenbaugh holds an M.B.A. degree from Northwestern University
and a B.A. degree from the University of Washington.
Anna R. Collins has served as our Vice President, Media since August 1999.
From July 1996 to July 1999, Ms. Collins worked at CVS/Pharmacy, Inc., a
healthcare and pharmacy company, serving as a manager of New Business
Development and most recently as Director of New Business Development. From
July 1995 to June 1996, Ms. Collins served as Director of Business Development
& Eastern Operations for Vivra Orthopaedics, Inc., an orthopedics practice
management company. In 1994, she served as a consultant with APM Incorporated,
a healthcare management consulting firm. Ms. Collins holds an M.B.A. degree
from the Harvard Business School and a B.A. degree from Harvard University.
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Michael T. Galgon, a cofounder of Avenue A, has served as our Senior Vice
President, Marketing and Business Development since October 1999. From October
1998 to October 1999, he served as our President, and from October 1997 to
October 1998, he served as our General Manager. From October 1995 to
October 1997, Mr. Galgon attended the Harvard Business School. From October
1994 to October 1995, he served as a full-time volunteer with Volunteers In
Service To America. From 1990 to 1994, Mr. Galgon served as an officer in the
U.S. Navy. Mr. Galgon holds an M.B.A. degree from the Harvard Business School
and a B.A. degree from Duke University.
Clark M. Kokich has served as our Vice President, General Manager, Growth
Markets Division since July 1999. From April 1996 to October 1998, Mr. Kokich
served as President and Chief Executive Officer of Calla Bay, Inc., an apparel
retailer. From January 1992 to April 1996, he served as the Director, Sales &
Marketing for AT&T Wireless Services. Mr. Kokich holds a B.S. degree from the
University of Oregon.
Scott E. Lipsky, a cofounder of Avenue A, has served as our Chief
Technology Officer and Vice President, Engineering since October 1997. From
March 1996 to September 1997, Mr. Lipsky served as Vice President of Business
Expansion for Amazon.com, Inc., an online retailer. From February 1994 to
March 1996, Mr. Lipsky served as Chief Information Officer for Barnes & Noble,
Inc., a national bookstore chain, and Chief Technology Officer for Barnes &
Noble College Bookstores, Inc., a national college bookstore chain. From
September 1991 to January 1994, Mr. Lipsky served as President and Chief
Executive Officer for Omni Information Group, Inc., a software company
providing solutions for retail chains. From September 1987 to September 1991,
Mr. Lipsky served as Vice President of MIS and Chief Technology Officer for
Babbages's, Inc., a retail company.
Robert M. Littauer has served as our Chief Financial Officer and Vice
President, Finance & Administration since August 1998, and as our Secretary
and Treasurer since January 1999. From October 1996 to June 1998, Mr. Littauer
served as Chief Financial Officer and Vice President of Finance and
Administration for Ostex International Inc., a medical diagnostics company.
From June 1987 to September 1996, Mr. Littauer served in various capacities at
NeoRx Corporation, a biotechnology company, including Senior Vice President,
Chief Financial Officer and Treasurer. From June 1982 to May 1987, Mr.
Littauer was Vice President, Finance and Treasurer of Concept, Inc., a
surgical products manufacturer. He holds M.B.A. and B.S. degrees from Cornell
University and is a Certified Public Accountant.
Jamison F. Marra has served as our Vice President, Information Technology
since November 1999. From February 1999 to November 1999, Mr. Marra served as
the Director, Information Technology, for Amazon.com, Inc. From June 1997 to
January 1999, he served as Director, Information Technology, for Laplink.com,
Inc., a provider of electronic file transfer solutions. From November 1991 to
May 1997, he served as Director, Information Technology, for Microsoft
Corporation.
Jeffrey J. Miller, Ph.D., has served as our Vice President, Corporate
Development and Legal Affairs since July 1999. From November 1997 to June
1999, Dr. Miller served as the President and Chief Executive Officer of
Reprogen, Inc., a functional genetics company. From October 1996 to October
1997, he served as Senior Vice President of Corporate Development for Ostex
International Inc. From April 1987 to September 1996, Dr. Miller served in
various capacities at NeoRx Corporation, including Senior Vice President,
Business Development and Legal Affairs, Secretary and General Counsel. From
1985 to April 1987, he was a partner in the Seattle law firm of Seed and
Berry. Dr. Miller holds a Ph.D. degree in biology from the University of
California at Santa Cruz, a J.D. degree from Loyola University of Los Angeles
and a B.A. degree from the University of California at Los Angeles.
Neve R. Savage has served as our President, Avenue A International Division
since January 2000. From November 1998 to January 2000, Mr. Savage served as
our Vice President, Client Results. From August 1994 to September 1998, Mr.
Savage served as Vice President, Marketing of AT&T Wireless Services. From
October 1988 to July 1994, Mr. Savage served as the Executive Group Director
of Ogilvy & Mather, an advertising company. Mr. Savage holds M.A. and B.A.
degrees from Oxford University.
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<PAGE>
Sumit T. Sen has served as our Chief Analytics Officer since September
1999. From December 1998 to August 1999, Mr. Sen was a Principal of Proforma
Consulting, a marketing and risk management consulting firm. From December
1997 to November 1998, Mr. Sen served as the Executive Vice President, Risk
Management for The Money Store Inc., a consumer finance company. From October
1994 to October 1997, Mr. Sen served in various capacities at Household
International Inc., a consumer loan and credit card company, including
Director, Risk Management and Director, Scoring & Analysis. Mr. Sen holds a
B.S. degree from Johns Hopkins University.
Jason Green has served as one of our directors since May 1999. Since
September 1997, Mr. Green has served as a general partner of U.S. Venture
Partners, a venture capital firm. From September 1995 to August 1997, Mr.
Green was an Ewing Marion Kauffman Fellow with Venrock Associates, a venture
capital firm. From June 1994 to August 1995, Mr. Green served as a Research
Fellow at the Harvard Business School. Mr. Green has served as a vice
president of Muzertechnika, an Eastern European computer and
telecommunications company, and as a consultant with Bain & Company, a
strategy consulting firm. Mr. Green holds an M.B.A. degree from the Harvard
Business School and a B.A. degree from Dartmouth College. He currently serves
as a director of NightFire Software Inc., PerksatWork.com Inc. and
PrintNation.com.
Fredric W. Harman has served as one of our directors since May 1999. Since
1992, Mr. Harman has managed several venture capital funds affiliated with Oak
Investment Partners, a venture capital firm. From 1991 to 1994, he served as a
general partner of Morgan Stanley Venture Capital. Mr. Harman holds an M.B.A.
degree from the Harvard Business School and B.S. and M.S. degrees from
Stanford University. Mr. Harman currently serves as a director of ILOG, S.A.,
InterNAP Network Services Corporation, Inktomi Corporation, Primus Knowledge
Solutions, Inc., Quintus Corporation and several privately held companies.
Gregory B. Maffei has served as one of our directors since September 1999.
Since December 1999, Mr. Maffei has served as the Chief Executive Officer of
Worldwide Fiber Inc., a manufacturer of fiber optic communications equipment.
From April 1997 to December 1999, Mr. Maffei served as the Chief Financial
Officer of Microsoft Corporation. From 1993 to 1997, Mr. Maffei served in
various capacities at Microsoft, including Director of Business Development &
Investment; Vice President, Corporate Development; and Treasurer. Mr. Maffei
holds an M.B.A. degree from the Harvard Business School and an A.B. degree
from Dartmouth College. He currently serves as a director of Expedia, Inc.,
Starbucks Corporation, Skytel Communications, Inc., CNET Business Services and
Ragen MacKenzie Group Incorporated.
Unless he earlier dies, resigns or is removed, each director serves for a
term expiring at the next annual meeting of shareholders, provided that each
director shall serve until his successor is elected and qualified. Effective
at the first annual meeting of shareholders following this offering, our
amended and restated articles of incorporation will provide for the division
of our board of directors into three classes, with each class serving a three
year term, and one class being elected each year by our shareholders. At the
first election of our directors to the classified board, each class 1 director
will be elected to serve until the next following annual meeting of
shareholders, each class 2 director will be elected to serve until the second
following annual meeting of shareholders and each class 3 director will be
elected to serve until the third following annual meeting of shareholders. At
each annual meeting of shareholders following the meeting at which the board
would be initially classified, the successors to directors whose terms are
expiring will be elected to serve until the third annual meeting of
shareholders following their election.
Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation committee. The compensation committee's duties include
establishing, reviewing and making recommendations to the board regarding
compensation of our officers, considering compensation plans for our
employees, and carrying out other duties under our stock incentive
compensation and other plans approved by us as may be assigned to the
committee by the board. The current members of the compensation
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<PAGE>
committee are Nicolas J. Hanauer, Fredric W. Harman and Gregory B. Maffei. The
current members of the compensation committee do not meet the definition of
"non-employee" directors for purposes of SEC Rule 16(b)(3). Until the
compensation committee is composed of "non-employee" directors, the full board
of directors will continue to approve stock option grants for our officers in
order to qualify the option grants for an exemption from short-swing trading
rules.
Audit committee. The audit committee recommends the selection and retention
of our independent auditors, reviews the scope and results of audits and
submits appropriate recommendations regarding audits, reviews our internal
controls and reviews procedures to ensure compliance with applicable financial
reporting requirements. The current members of the audit committee are Jason
Green, Fredric W. Harman and Gregory B. Maffei.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1998, Mr. Hanauer, our former chief
executive officer, served on the compensation committee of our board of
directors, as did Eric Moen and Roy Clothier, Jr., both former directors of
Avenue A. The compensation committee currently consists of Nicolas J. Hanauer,
Fredric W. Harman and Gregory B. Maffei. None of our executive officers serves
as a member of the compensation committee or board of directors of any entity
that has an executive officer serving as a member of our compensation
committee or board of directors.
Director Compensation
We reimburse our nonemployee directors for reasonable expenses they incur
in attending meetings of the board of directors and its committees. In 1998
and 1999, Mr. Hanauer devoted part of his time to Pacific Coast Feather
Company and part of his time to Avenue A. Under an arrangement with Pacific
Coast Feather Company, we reimbursed Pacific Coast Feather Company for $85,230
of salary paid by that company to Mr. Hanauer in 1999, which reimbursement
represented compensation for Mr. Hanauer's services as an officer and
director of Avenue A in 1999. Except for this transaction, our directors have
not and do not receive salaries for their services.
In August 1999, Mr. Maffei was granted an option to purchase 75,000 shares
of our common stock under our 1998 stock incentive compensation plan at an
exercise price of $1.27 per share. In August 1999, we authorized the sale to
Mr. Maffei of 75,000 shares of our common stock at $1.27 per share under this
plan and in October 1999, we authorized the sale to him of an additional
75,000 shares of our common stock at $2.67 per share under this plan. Both of
these sales were consummated in October 1999.
In November 1999, our board of directors adopted our stock option grant
program for nonemployee directors. The program will be administered under our
1999 stock incentive compensation plan, subject to shareholder approval of
that plan. Under this program, each nonemployee director will automatically
receive a nonqualified stock option to purchase 50,000 shares of common stock
upon initial election or appointment to the board following this offering.
One-third of this option will vest on each of the first, second and third
anniversaries of the grant date. Thereafter, beginning with the annual meeting
of shareholders in 2000, each nonemployee director who continues to serve on
the board will receive an additional option to purchase 15,000 shares of
common stock upon reelection or reappointment to the board, which will fully
vest on the first anniversary of the grant date. The exercise price for all
options granted under the program will be the fair market value of the common
stock on the grant date. Options will have a ten year term, except that
options will expire three months after a nonemployee director ceases service
as a director, unless cessation is due to death, in which case the options
will expire one year after date of death.
50
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
received for services rendered to us in all capacities by named executive
officers for purposes of the summary compensation table, specifically, our
current chief executive officer, our former chief executive officer, our next
four most highly compensated executive officers who earned compensation in
excess of $100,000 during the fiscal year ended December 31, 1999, and one
former executive officer who earned compensation in excess of $100,000 during
the fiscal year ended December 31, 1999. The table also sets forth information
concerning compensation received by our former chief executive officer and an
executive officer who earned compensation in excess of $100,000 during the
year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
-------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------- ---- -------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Brian P. McAndrews(1).......... 1999 $ 88,804 $ -- 1,845,000 $20,179
Chief Executive Officer
Nicolas J. Hanauer(2).......... 1999 85,230 -- -- --
Former Chief Executive Officer 1998 -- -- -- --
Michael T. Galgon.............. 1999 144,350 -- 150,000 --
Senior Vice President,
Marketing and Business
Development
Robert M. Littauer............. 1999 199,850 -- 112,500 --
Chief Financial Officer, Vice
President of Finance &
Administration, Secretary and
Treasurer
Scott E. Lipsky................ 1999 147,475 -- 150,000 --
Chief Technology Officer 1998 121,599 -- 1,084,500 --
Neve R. Savage................. 1999 180,720 -- -- --
President, Avenue A
International Division
R. Michael Leo(3).............. 1999 169,412 70,299 375,000 1,497
Vice President, Strategic
Partnerships
</TABLE>
- --------
(1) Based on an annualized salary of $300,000. Mr. McAndrews joined Avenue A
on September 5, 1999. All other compensation represents relocation
expenses.
(2) Under an arrangement with Pacific Coast Feather Company, we reimbursed
Pacific Coast Feather Company for $85,230 of salary paid by that company
to Mr. Hanauer in 1999, which reimbursement represented compensation for
Mr. Hanauer's services as an officer and director of Avenue A in 1999.
The amount shown represents the amount of this reimbursement paid by us
to Pacific Coast Feather Company.
(3) Mr. Leo's employment with us ended on October 9, 1999. Bonus represents
sales commissions paid to Mr. Leo. All other compensation represents
relocation expenses.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options we
granted to the named executive officers shown in the summary compensation
table during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed
Number of Annual Rates of Stock
Securities Percent of Total Price Appreciation for
Underlying Options Granted Option Term(2)
Options to Employees in Exercise Expiration -----------------------
Name Granted Fiscal Year(1) Price Date 5% 10%
- ---- ---------- ---------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brian P. McAndrews(3)... 1,845,000 22.2% $1.27 09/15/2009 $ 1,469,727 $ 3,724,576
Nicolas J. Hanauer...... -- -- -- -- -- --
Michael T. Galgon(4).... 150,000 1.8 2.67 10/29/2009 251,558 637,497
Robert M. Littauer(4)... 112,500 1.4 2.67 09/30/2009 188,668 478,123
Scott E. Lipsky(4)...... 150,000 1.8 2.67 10/29/2009 251,558 637,497
Neve R. Savage.......... -- -- -- -- -- --
R. Michael Leo(5)....... 375,000 4.5 2.67 01/08/2001 63,125 127,500
</TABLE>
- --------
* Less than 1%.
(1) Based on a total of 8,296,125 options granted to employees during fiscal
1999.
(2) The dollar amounts under these columns result from calculations at the 5%
and 10% rates required by SEC regulations and are not intended to
forecast possible future appreciation, if any, of the common stock price.
The information in this table assumes that all options are exercised at
the end of each of their terms. Each option has a ten-year term, except
for the option granted to Mr. Leo, which has a fifteen-month term. Actual
gains, if any, on stock option exercises depend on factors such as the
future performance of the common stock and overall stock market
conditions. The amounts shown in this table may not be achieved.
(3) These options are fully exercisable and the shares purchasable upon
exercise of such options are subject to repurchase by Avenue A at the
original exercise price paid per share if Mr. McAndrews terminates his
employment or attempts to transfer the shares before the shares have
vested. In this context, "vested" means that the shares subject to, or
issued on exercise of, options are no longer subject to repurchase by
Avenue A. Shares subject to, or issued upon exercise of, options will
vest at the rate of 20% after one year from his date of hire and 6.66% at
the end of each quarter after one year after his date of hire until fully
vested four years after the hire date.
(4) These options are fully exercisable and the shares purchasable upon
exercise of such options are subject to repurchase by Avenue A at the
original exercise price paid per share if the optionee terminates
employment or attempts to transfer the shares before the shares have
vested. In this context, "vested" means that the shares subject to, or
issued on exercise of, options are no longer subject to repurchase by
Avenue A. Shares subject to, or issued upon exercise of, options vest at
the rate of 20% after one year from the date of the option grant and
6.66% at the end of each quarter after one year after the grant date
until fully vested four years after the grant date.
(5) Mr. Leo's option fully vests and becomes exercisable on October 9, 2000.
The option expires on January 9, 2001.
52
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for the named executive officers shown in
the summary compensation table information regarding the aggregate dollar
value realized upon exercise of stock options in the last fiscal year and the
number and value of securities underlying unexercised stock options held at
December 31, 1999 based on an assumed initial offering price of $9.00 per
share. The shares purchasable upon exercise of the options may be subject to
repurchase by Avenue A at the original exercise price paid per share if the
optionee terminates employment or attempts to transfer the shares before those
shares have vested.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-End Fiscal Year-End (1)
Shares Acquired -------------------------------- -------------------------
Name on Exercise Value Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------------- ---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brian P.
McAndrews(2)(3)........ 533,683 $4,125,370 1,311,316 -- $10,136,473 $ --
Nicholas J. Hanauer..... -- -- -- -- -- --
Michael T.
Galgon(2)(4)........... 750,000 6,699,750 304,500 -- 2,290,199 --
Robert M.
Littauer(2)(5)......... 201,562 1,714,638 98,437 -- 623,107 --
Scott E. Lipsky(2)(6)... 739,500 6,589,974 495,000 -- 4,013,025 --
Neve R. Savage.......... 120,000 1,040,000 -- -- -- --
R. Michael Leo(7)....... 529,500 4,690,074 375,000 -- 2,373,750 --
</TABLE>
- --------
(1) Based on an assumed initial offering price of $9.00 per share, minus the
per share exercise price, multiplied by the number of shares underlying
the option.
(2) These options are fully exercisable and the shares purchasable upon
exercise of such options are subject to repurchase by Avenue A at the
original exercise price paid per share if the optionee terminates his
employment or attempts to transfer the shares before the shares have
vested. In this context, "vested" means that the shares subject to, or
issued on exercise of, options are no longer subject to repurchase by
Avenue A.
(3) Shares subject to, or issued upon exercise of, options will vest at the
rate of 20% after one year from the date of hire and 6.66% at the end of
each quarter beginning one year after the date of hire until fully vested
four years after the date of hire.
(4) Of Mr. Galgon's options granted prior to January 1, 1999 that have not
yet vested, 10% will vest on April 1, 2000 and 5.0% will vest each
quarter thereafter through October 1, 2001, after which date the option
will be fully vested.
(5) Shares subject to, or issued upon exercise of, options vest at the rate
of 20% after one year from the date of the option grant and 6.66% at the
end of each quarter beginning one year after the grant date until fully
vested four years after the grant date.
(6) Of Mr. Lipsky's options granted prior to January 1, 1999 that have not
yet vested, 8.3% will vest on April 1, 2000 and 4.2% will vest each
quarter thereafter through October 1, 2001, after which date the option
will be fully vested.
(7) Mr. Leo's option fully vests and becomes exercisable on October 9, 2000.
The option expires on January 9, 2001.
53
<PAGE>
Employment Agreements and Change of Control Arrangements
Employment Agreements
Brian P. McAndrews' employment agreement provides for an initial annual
salary of $300,000. The agreement confirms we have granted Mr. McAndrews an
option, which vests over a four year period, to purchase 1,845,000 shares of
our common stock. The agreement also provides that, upon the completion of
this offering, Mr. McAndrews will be granted an option, subject to a four-year
vesting period with vesting credit from his hire date, to purchase 264,000
shares of common stock at an exercise price equal to the initial public
offering price per share. Each of the options is exercisable prior to vesting
for unvested shares, which would be subject to a right of repurchase in favor
of us which would lapse according to the vesting schedule applicable to the
option. Mr. McAndrews' employment may be terminated by him or us upon thirty-
days' notice. Pursuant to the agreement, if Mr. McAndrews terminates his
employment for "good reason," or he is terminated by us other than for
"cause," Mr. McAndrews' salary will continue at its then-present rate for 12
months. If Mr. McAndrews is terminated without cause, then the vesting
schedule of his unvested stock options and unvested shares will be accelerated
by 12 months. If he terminates his employment for good reason, then 100% of
his unvested options and shares will immediately vest. The agreement also
provides that if he terminates his employment other than for good reason or is
terminated for cause, his salary will continue for three months. Under the
agreement, "good reason" includes the occurrence after a change of control, as
defined in the agreement, of a demotion or reduction of status or
responsibilities, a reduction in salary, relocation in some circumstances, or
our failure to have the successor company in a change of control assume our
obligations under the employment agreement. Under the agreement, "cause"
includes willful misconduct, dishonesty in the performance of his duties or
other knowing violation of corporate policies which has a material adverse
effect on us, actions or omissions in bad faith that materially impair the
corporate business, goodwill or reputation, conviction of a felony involving
an act of dishonesty, moral turpitude, deceit or fraud (or acts that could
reasonably be expected to result in this kind of conviction), use of illegal
substances, or material violations of his Confidentiality, Inventions
Assignment, Noncompetition and Nonsolicitation Agreement with us.
Brian P. McAndrews' employment agreement states that, upon a change in
control of Avenue A, fifty percent of his unvested stock options and unvested
shares of common stock will immediately vest. Under the agreement, if his
employment with a successor company is terminated without cause within one
year after a change of control of us, his salary will continue at its then
present rate for 12 months and his unvested stock options and unvested shares
will immediately fully vest.
Summit T. Sen's employment agreement provides for an initial annual salary
of $175,000. The agreement confirms that we have granted Mr. Sen an option, to
vest over a four-year period, to purchase 300,000 shares of our common stock.
The option is immediately exercisable for unvested shares, which are subject
to a right of repurchase in favor of us which lapses in accordance with the
vesting schedule applicable to the option. Mr. Sen's employment may be
terminated by him or us upon thirty-days' notice. Pursuant to his employment
agreement, if he is terminated other than for "cause," or if he terminates his
employment for "good reason," then Mr. Sen's salary will continue at its then-
present rate for 6 months, plus an additional 3 months base salary for each
full calendar year in which he has been employed by us, up to a total possible
amount of 12 months annual base salary. In addition, he will be entitled to
receive severance payments in the amount of his monthly salary for each month
in which he remains unemployed after termination up to a maximum of 12 months.
In addition, if Mr. Sen is terminated other than for cause or if he terminates
his employment for good reason, then the vesting of his unvested stock options
and unvested shares will be accelerated by 12 months. The definitions of "good
reason" and "cause" under Mr. Sen's agreement are similar to those in Mr.
McAndrews' employment agreement. Under Mr. Sen's agreement, upon a change of
control of Avenue A, as defined in the agreement, the vesting schedule of his
unvested stock options and unvested shares will be accelerated by 12 months.
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<PAGE>
Severance Agreement
On October 8, 1999, we entered into a severance agreement and release with
R. Michael Leo, our former Vice President, Sales and Marketing. Pursuant to
that agreement, Mr. Leo will receive a severance payment of $200,000, payable
in monthly installments over a 12-month period from the date of the agreement.
Pursuant to the agreement, we granted Mr. Leo an option to purchase 375,000
shares of our common stock, which vests one year after date of grant, subject
to Mr. Leo's compliance with the Confidentiality, Inventions Assignment,
Noncompetition and Nonsolicitation Agreement between him and us. In addition,
we provided Mr. Leo with a loan of $75,000, which was applied to the exercise
of previously granted options. Under the agreement, each party agreed to
release the other from any claims arising from Mr. Leo's employment or
termination.
Employee Benefit Plans
1999 Stock Incentive Compensation Plan
In 1999, our board of directors and shareholders approved our 1999 stock
incentive compensation plan. In January 2000, our board increased the shares
available for issuance under the 1999 plan subject to shareholder approval.
The purpose of the plan is to enhance long-term shareholder value by offering
opportunities to selected persons to participate in our growth and success,
and to encourage them to remain in the service of Avenue A and its related
corporations and to acquire and maintain ownership in our company. The plan
permits awards of stock options, shares of common stock or units denominated
in common stock, all of which may be subject to restrictions. Persons eligible
to receive awards under the plan are our officers, directors, employees,
consultants, advisors, agents and independent contractors and related
corporations, but only employees may receive incentive stock options under the
plan.
The board of directors has reserved a total of 5,250,000 shares of common
stock under the plan plus an automatic annual increase, to be added on the
first day of our fiscal year beginning in 2001, equal to the least of (1)
5,250,000 shares, (2) 8.0% of the adjusted average common shares outstanding
as used to calculate fully diluted earnings per share as reported in our
annual report to shareholders for the preceding year and (3) a lesser amount
as may be determined by the board. In addition, shares formerly available for
issuance under our 1998 stock incentive compensation plan will become
available for issuance under the 1999 plan, as will shares subject to options
granted under the 1998 stock incentive compensation plan that expire or are
otherwise cancelled without being exercised, up to an aggregate maximum of
9,613,840 shares. The board or a committee appointed by the board will be the
plan administrator for the plan. The plan administrator selects the
individuals to receive awards under the plan. The board also may authorize one
or more senior executive officers to grant awards under the plan, within
limits set by the board. Unless the plan administrator permits otherwise, no
awards may be assigned or transferred by the holder other than by will or by
the applicable laws of descent and distribution, and, during the holder's
lifetime, awards generally may be exercised only by the holder. The board may
suspend or terminate the plan at any time. Unless the board terminates the
plan sooner, the plan will end on November 16, 2009.
Stock option grants. The plan administrator has the authority to specify
the terms and conditions of each option granted, including the vesting
schedule, the term and the exercise price, which, for incentive stock options,
must be at least equal to the fair market value of the common stock on the
grant date and, for nonqualified stock options, must not be less than 85% of
the fair market value of the common stock on the grant date. For purposes of
the plan, fair market value means the closing sales price as reported on the
Nasdaq National Market on the date of grant. Unless the plan administrator
provides otherwise, options granted under the plan will generally expire ten
years from the grant date.
Stock awards. The plan administrator is authorized to award shares of
common stock or awards denominated in units of common stock. These stock
awards may be subject to terms and conditions determined by the plan
administrator, including conditions on how the shares subject to restrictions
must be held while restricted and the circumstances under which a holder will
forfeit the shares if services with us are terminated. Holders of restricted
stock are shareholders of Avenue A and have, subject to some restrictions, all
the rights of shareholders with respect to their shares.
55
<PAGE>
Adjustments. The plan administrator will make proportional adjustments to
the number of shares issuable under the plan and to outstanding awards in the
event of stock splits or other similar capital adjustments.
Corporate transactions. Unless individual letter agreements provide
otherwise, if a corporate transaction specified in the 1999 stock incentive
compensation plan, such as a merger or sale of Avenue A, occurs, each
outstanding option under the plan will be assumed, continued or replaced with
a comparable award by the successor corporation or the parent of the successor
corporation; provided, however, that if a successor corporation refuses to
assume, continue or replace outstanding options, each outstanding option will
automatically accelerate and become 100% vested and exercisable immediately
before the corporate transaction. Any option held by some executive officers
that is assumed, continued or replaced with a comparable award in the
corporate transaction, other than in specified related-party transactions,
will accelerate if the officer's employment or services are terminated by the
successor corporation without cause or by the officer voluntarily and with
good reason within two years after the corporate transaction. Acceleration of
option vesting will not occur if the acceleration would prevent pooling of
interests accounting treatment in a transaction for which it is available.
Stock Option Grant Program for Nonemployee Directors
In November 1999, our board of directors adopted our stock option grant
program for nonemployee directors. This program will be administered under our
1999 plan.
Under the program, each nonemployee director will automatically receive a
nonqualified stock option to purchase 50,000 shares of common stock upon his
or her initial election or appointment to the board following this offering.
One-third of this option will vest on each of the first, second and third
anniversaries of the grant date. After that, beginning with the annual meeting
of shareholders in 2000, each nonemployee director who continues to serve on
the board will receive an additional option to purchase 15,000 shares of
common stock upon reelection or reappointment to the board, which will fully
vest on the first anniversary of the grant date. The exercise price for all
options granted under the program will be the fair market value of the common
stock on the grant date. Options will have a ten-year term, except that
options will expire three months after a nonemployee director ceases service
as a director, unless cessation is due to death, in which case the options
will expire one year after the date of death.
Unless individual letter agreements provide otherwise, if specified
corporate transactions, such as a merger or sale of Avenue A, occur, each
outstanding option granted to a director under the program will automatically
accelerate and become 100% vested and exercisable immediately before the
corporate transaction. Acceleration of option vesting will not occur if the
corporate transaction is a related-party transaction specified in the plan or
if the acceleration would prevent pooling of interests accounting treatment in
a transaction for which it is available.
1999 Employee Stock Purchase Plan
In 1999, our board of directors and shareholders adopted our 1999 employee
stock purchase plan. We will implement our employee stock purchase plan upon
the effectiveness of this offering to assist employees in acquiring a stock
ownership interest in Avenue A and to encourage employees to remain in our
employ or the employ of our domestic subsidiaries. We intend for the plan to
qualify under Section 423 of the Internal Revenue Code. The plan will be
administered by our board, a committee of the board or an executive officer
appointed to administer the plan.
The board of directors has reserved a total of 750,000 shares of common
stock under the plan plus an automatic annual increase, to be added on the
first day of our fiscal year beginning in 2001, equal to the least of
(1) 1,125,000 shares, (2) 2% of the adjusted average common shares outstanding
as used to calculate fully diluted earnings per share as reported in our
annual report to shareholders for the preceding year and (3) a lesser amount
as may be determined by the board. The plan will expire ten years after it is
adopted by our board of directors, but the board may suspend or terminate the
plan at any time.
56
<PAGE>
Eligibility. Employees generally will be eligible to participate in the
employee stock purchase plan if they are customarily employed by Avenue A for
20 hours or more per week and are not holders of 5% or more of our common
stock or our subsidiaries' common stock. The plan administrator may require
for future offerings that an employee work a minimum of up to five months per
year and have been an employee for some minimum period of time not to exceed
two years. Options granted under the plan are not transferable and are only
exercisable during the employee's lifetime.
Payroll deductions. Our employee stock purchase plan permits our eligible
employees and those of our domestic subsidiaries to purchase common stock
through payroll deductions of up to 20% of their compensation. Under the plan,
no employee may purchase common stock with a fair market value of more than
$25,000 in any calendar year or purchase more than 5,000 shares of common
stock in any single purchase period.
Offering and purchase periods. We will implement the employee stock
purchase plan with one-year offering periods. Each offering period will have
two consecutive six-month purchase periods. The first offering period will
commence on the effectiveness of this offering and will end on January 31,
2001. Thereafter offerings will begin on each February 1 and August 1. The
first purchase period under the first offering period will begin on the
effectiveness of this offering and end on July 31, 2000. Subsequent purchase
periods will begin on each February 1 and August 1 and end on the next July 31
and January 31, respectively. Subject to some limitations, the plan
administrator may establish different offering and purchase periods in the
future.
The price of the common stock purchased under the plan will be the lesser
of 85% of the fair market value on the first day of an offering period and 85%
of the fair market value on the last day of the applicable purchase period.
However, the purchase price for the first offering period will be equal to the
lesser of 100% of the initial public offering price of the common stock and
85% of the fair market value on the last day of the applicable purchase
period. For purposes of the plan, fair market value means the closing sales
price as reported on the Nasdaq National Market on the applicable day.
Adjustments. The plan administrator will make proportional adjustments to
the number of shares issuable under the plan and to outstanding options in the
event of stock splits or other similar capital adjustments.
Corporate transactions. In the event of a merger, consolidation or
acquisition by another corporation of all or substantially all of our assets,
each outstanding option to purchase shares under the stock purchase plan will
be assumed or an equivalent option substituted by the successor corporation.
If the successor corporation refuses to assume or substitute for the option,
the offering period during which a participant may purchase stock will be
shortened to a specified date before the proposed transaction. Similarly, in
the event of Avenue A's proposed liquidation or dissolution, the offering
period during which a participant may purchase stock will be shortened to a
specified date before the date of the proposed event.
1998 Stock Incentive Compensation Plan
In 1998, our board of directors and shareholders approved our 1998 stock
incentive compensation plan. The plan permits awards of stock options, shares
of common stock or units denominated in common stock, all of which may be
subject to restrictions. The 1998 plan authorizes the issuance of up to
13,875,000 shares. In January 2000, our board approved the increase of shares
authorized under the plan to 15,525,000 which is subject to shareholder
approval. As of September 30, 1999, options to purchase 5,496,351 shares were
outstanding under the plan with exercise prices ranging from $.07 to $2.67 per
share, and options for 5,042,142 shares had been exercised. In addition, as of
September 30, 1999, 83,266 shares had been issued as stock awards under the
plan. We will not grant any further options or stock awards under the plan
after this offering is effective.
The plan administrator has the discretion to issue unvested shares of our
common stock upon exercise of a stock option under the plan. Any shares
acquired upon exercise of an unvested portion of an option will be unvested
shares. If an optionee's employment or services at Avenue A are terminated,
all shares issued on exercise of the option that are unvested on the date of
termination may be repurchased by Avenue A at the exercise price paid for the
shares. The terms and conditions of our repurchase right are set forth in an
agreement
57
<PAGE>
each optionee signs when the optionee exercises an unvested option. The plan
administrator has the discretionary authority to cancel Avenue A's repurchase
right for unvested shares. Avenue A's repurchase right will also terminate if
the vesting of outstanding options is accelerated in a corporate transaction.
Corporate Transactions. Unless individual letter agreements provide
otherwise, if a corporate transaction specified in the 1998 stock incentive
compensation plan, such as a merger or sale of Avenue A, occurs, each
outstanding option under the plan will automatically accelerate and become
100% vested and exercisable immediately before the corporate transaction,
unless the option is assumed, continued or replaced with a comparable award by
the successor corporation or the parent of the successor corporation. If
option vesting is accelerated, any rights of repurchase held by us applicable
to the stock issued on exercise of the options will lapse. Any option or stock
award held by certain executive officers that is assumed, continued or
replaced with a comparable award in the corporate transaction, other than in
specified related-party transactions, will accelerate if the holder's
employment or services are terminated by the successor corporation without
cause or by the holder voluntarily and with good reason within two years after
the corporate transaction. Acceleration of option vesting will not occur if
the acceleration would prevent pooling of interests accounting treatment in a
transaction for which it is available. In other material respects, the terms
of the 1998 stock incentive compensation plan are the same as those in the
1999 stock incentive compensation plan.
401(k) Plan
We maintain a 401(k) plan that covers all our employees over the age of 18.
We may make an annual contribution for the benefit of eligible employees in an
amount determined by our board of directors. We have not made any contribution
to date and have no current plans to do so. Eligible employees may make pre-
tax elective contributions of up to 25% of their compensation, subject to
maximum limits on contributions prescribed by law.
Limitations on Director and Officer Liability and Indemnification
Our articles of incorporation limit the liability of directors to the
fullest extent permitted by the Washington Business Corporation Act as it
currently exists or as it may be amended in the future. Consequently, subject
to the Washington Business Corporation Act, no director will be personally
liable to us or our shareholders for monetary damages resulting from his or
her conduct as one of our directors, except liability for:
. acts or omissions involving intentional misconduct or knowing violations
of law or unlawful distributions; or
. transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our bylaws also provide that we will indemnify any individual made a party
to a proceeding because that individual is or was a director or officer or, in
some circumstances, an employee of Avenue A, and will reimburse reasonable
expenses incurred by such individual in advance of the final disposition of
the proceeding to the fullest extent permitted by applicable law. Any repeal
of or modification to our articles of incorporation or bylaws may not
adversely affect any right of indemnification under the articles or bylaws of
a director or officer of Avenue A who is or was a director or officer at the
time of such repeal or modification. To the extent the provisions of our
articles of incorporation or bylaws provide for indemnification of directors
or officers for liabilities arising under the Securities Act, those provisions
are, in the opinion of the SEC, against public policy as expressed in the
Securities Act and they are unenforceable.
In addition, we intend to purchase and maintain a liability insurance
policy pursuant to which our directors and officers may be indemnified against
liability they may incur for serving in their capacities as our directors and
officers.
We believe that the limitation of liability provision in our articles of
incorporation, the indemnification provisions in our bylaws and the liability
insurance policy will help us continue to attract and retain qualified
individuals to serve as our directors and officers.
58
<PAGE>
RELATED-PARTY TRANSACTIONS
Nicolas J. Hanauer, the current chairman of our board of directors, is, and
was during 1997 through 1999, a director, officer and significant shareholder
of Pacific Coast Feather Company. During the period from our inception through
1998, Pacific Coast Feather Company paid for a portion of our operating
expenses and asset purchases, including some payroll expenses, totalling
$3,082,000. We repaid $1,794,000 of this amount in cash directly to Pacific
Coast Feather Company; we repaid $1,288,000 of this amount through the
proceeds of our sale of shares of our common stock in 1998 to Pacific Coast
Feather Company and affiliates of Pacific Coast Feather Company, including
Nicolas Hanauer; Gerard Hanauer, the father of Nicolas Hanauer; Roy Clothier,
Jr.; Eric Moen; Lenore Hanauer, the mother of Nicolas Hanauer; and
Adrian Hanauer, the brother of Nicolas Hanauer. Each of Gerard Hanauer, Roy
Clothier, Jr., Lenore Hanauer and Adrian Hanauer is and was during 1997
through 1999 an officer, director and significant shareholder of Pacific Coast
Feather Company. Mr. Moen is and was during 1997 through 1999 an officer and
shareholder of Pacific Coast Feather Company. Gerard Hanauer, Roy Clothier,
Jr. and Eric Moen served as directors of Avenue A during 1998 and part of
1999. Sales of our common stock to Pacific Coast Feather Company and its
affiliates with an aggregate purchase price in excess of $60,000 are set forth
in the table below.
Since our inception we have sold shares of our common and preferred stock
to some of our executive officers and directors and some of their affiliates.
Sales of our stock to our officers and directors and their affiliates with an
aggregate purchase price in excess of $60,000 are also set forth in the table
below.
<TABLE>
<CAPTION>
Number of Price Aggregate
shares per Purchase
Date of Purchase Purchaser purchased share(1) Price(1)
---------------- --------- --------- -------- ----------
<C> <S> <C> <C> <C>
May 26, 1998 Roy Clothier, Jr.(2)........ 1,650,000 $ .10 $ 160,996
Adrian Hanauer(3)........... 1,650,000 .10 160,996
Gerard Hanauer(4)........... 1,650,000 .10 160,996
Nicolas Hanauer, Chairman of 4,950,000 .10 482,988
the Board..................
May 29, 1998 Lenore Hanauer(5)........... 1,650,000 .10 160,996
June 10, 1998 Pacific Coast Feather 1,421,850 .10 138,735
Company....................
July 2, 1998 Nicolas Hanauer............. 3,000,000 .10 300,000
August 5, 1998 John P. Galgon(6)........... 78,313 .83 65,000
March 15, 1999 R. Michael Leo(7)........... 92,142 .75 68,800
May 4, 1999 Entities associated with
U.S. Venture
Partners(8)(10)............ 3,092,783 1.94 6,000,000
Entities associated with Oak
Investment
Partners(9)(10)............ 5,154,639 1.94 9,990,000
October 8, 1999 Brian P. McAndrews,
President, Chief Executive
Officer and Director....... 37,500 2.67 100,000
Robert M Littauer, Chief
Financial Officer, Vice
President, Finance &
Administration, Secretary
and Treasurer.............. 37,500 2.67 100,000
Neve R. Savage, President, 37,500 2.67 100,000
Avenue A International
Division...................
Jeffrey J. Miller, Vice
President, Corporate
Development and Legal
Affairs.................... 37,500 2.67 100,000
Michael T. Galgon, Senior
Vice President, Marketing
and Business Development... 37,500 2.67 100,000
Scott E. Lipsky, Chief 37,500 2.67 100,000
Technology Officer and Vice
President, Engineering.....
October 25, 1999 Sumit T. Sen, Chief 187,500 2.67 500,000
Analytics Officer..........
October 26, 1999 Gregory B. Maffei, 75,000 2.67 200,000
Director...................
Gregory B. Maffei........... 75,000 1.27 95,000
December 15, 1999 Bruce Allenbaugh, Vice 37,500 4.33 162,500
President, Marketing.......
</TABLE>
- --------
(1) Price per share is rounded to the nearest cent and aggregate purchase
price is rounded to the nearest dollar. Aggregate purchase price may not
equal the number of shares purchased multiplied by the price per share
due to rounding.
59
<PAGE>
(2) Mr. Clothier was one of our directors in 1998 and part of 1999.
(3) Adrian Hanauer is the brother of Nicolas Hanauer, who has been a director
of Avenue A since its incorporation.
(4) Gerard Hanauer is the father of Nicolas Hanauer.
(5) Lenore Hanauer is the mother of Nicolas Hanauer.
(6) Mr. Galgon is the father of Michael Galgon, our Senior Vice President,
Marketing and Business Development. Michael Galgon served as our General
Manager at the time of his father's purchase of shares of our Series A
preferred stock. Number shown does not assume conversion of preferred
stock into common stock. Each share of preferred stock converts into 1.5
shares of common stock.
(7) Mr. Leo was a Vice President of the company at the time of this sale.
(8) Jason Green, one of our directors, is a managing member of Presidio
Management Group VI, L.L.C. Presidio Management Group VI is the general
partner of each of U.S. Venture Partners VI, L.P., USVP VI Affiliates
Fund, L.P., 2180 Associates Fund VI, L.P. and USVP VI Entrepreneur
Partners, L.P., collectively the "USVP Entities." On May 4, 1999, the
USVP Entities purchased 3,092,783 shares of our Series C preferred stock
for $6 million. Presidio Management Group VI disclaims beneficial
interest in such shares, except as to its pecuniary interest arising as a
result of its interest in each of the USVP Entities. Mr. Green disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest arising as a result of his interest in Presidio
Management Group VI. Number shown does not assume conversion of preferred
stock into common stock. Each share of preferred stock converts into 1.5
shares of common stock upon the closing of this offering.
(9) Fredric W. Harman, one of our directors, is a managing member of Oak
Associates VIII, LLC, the general partner of Oak Investment Partners
VIII, Limited Partnership and a managing member of Oak VIII Affiliates,
LLC, the general partner of Oak VIII Affiliates Fund, Limited
Partnership. On May 4, 1999, Oak Investment Partners VIII, Limited
Partnership purchased 5,056,701 shares of our Series C preferred stock
for $9.8 million and Oak VIII Affiliates Fund, Limited Partnership
purchased 97,938 shares of our Series C preferred stock for $190,000. Mr.
Harman disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest arising as a result of his interest in
Oak Associates VIII, LLC and Oak VIII Affiliates, LLC. Number shown does
not assume conversion of preferred stock into common stock. Each share of
preferred stock converts into 1.5 shares of common stock upon the closing
of this offering.
(10) U.S. Venture Partners VI, L.P., Oak Investment Partners VIII, Limited
Partnership and Oak VIII Affiliates Fund, Limited Partnership are
parties to an investors rights agreement with us. Pursuant to the terms
of that agreement, the holders of our Series C preferred stock have
registration rights that obligate us, under circumstances specified in
the investor rights agreement, to register shares of common stock under
the Securities Act. Number shown does not assume conversion of preferred
stock into common stock. Each share of preferred stock converts into 1.5
shares of common stock upon the closing of this offering.
Pacific Coast Feather Company incurred obligations of approximately $13,333
in 1998 and $67,473 in 1999 for advertising services we provided, of which
$38,085 was uncollected as of December 31, 1999. In 1998 and 1999,
Nicolas Hanauer devoted part of his time to Pacific Coast Feather Company and
part of his time to Avenue A. Under an arrangement with Pacific Coast Feather
Company, we reimbursed Pacific Coast Feather Company for $85,230 of salary
paid by it to Mr. Hanauer in 1999, which reimbursement represented
compensation for Mr. Hanauer's services as an officer and director of Avenue A
in 1999.
Nicolas Hanauer is also a director of Gear.com, Inc. Gear.com incurred
obligations to us of approximately $7,733 in 1998 and $641,463 in 1999 for
advertising services, of which $108,436 was uncollected as of December 31,
1999.
60
<PAGE>
Gregory B. Maffei, one of our directors, was an executive officer of
Microsoft Corporation in 1998 and 1999. Microsoft incurred obligations to us
of approximately $3,750 in 1998 and $7,572,932 in 1999 for advertising
services, of which $1,331,759 was uncollected as of December 31, 1999.
On October 8, 1999, we made loans of $100,000 to Robert M. Littauer, our
chief financial officer, vice president, finance & administration, secretary
and treasurer, and $676,000 to Brian P. McAndrews, our chief executive officer
and one of our directors, pursuant to promissory notes in connection with the
purchase of shares of common stock and the exercise of stock options by Mr.
Littauer and Mr. McAndrews, respectively. The notes bear interest at a rate
equal to the greater of (1) the applicable federal rate for a demand note as
of October 8, 1999 and as redetermined each year on the anniversary date of
the notes and (2) the lowest rate necessary to avoid the imputation of
interest under the Internal Revenue Code.
On October 8, 1999, we entered into a severance agreement and release with
Mr. Leo. Pursuant to that agreement, Mr. Leo will receive a severance payment
of $200,000, payable in monthly installments over a 12-month period from the
date of the agreement. Pursuant to the agreement, we granted Mr. Leo an option
to purchase 375,000 shares of our common stock, subject to Mr. Leo's
compliance with the Confidentiality, Inventions Assignment, Noncompetition and
Nonsolicitation Agreement between us and him. The option has an exercise price
of $2.67 per share. In addition, we provided Mr. Leo with a loan of $75,000
which was applied to the exercise of previously granted options. Under the
agreement, each party agreed to release the other from any claims arising from
Mr. Leo's employment or termination.
61
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of December 31, 1999 by
. each person or group known by us to own beneficially more than 5% of
our common stock;
. each of our directors;
. our named executive officers shown in the summary compensation
table; and
. our current directors and executive officers as a group.
As of December 31, 1999, assuming conversion of all outstanding shares of
preferred stock, there were 49,745,282 shares of common stock outstanding and
354 shareholders of record of Avenue A. Beneficial ownership is determined in
accordance with SEC rules. In computing the number of shares beneficially
owned by a person or a group and the percentage ownership of that person or
group, shares of our common stock subject to options currently exercisable or
exercisable within 60 days after December 31, 1999 are deemed outstanding but
are not deemed outstanding for computing the percentage ownership of any other
person. Except as otherwise indicated in the footnotes below, we believe the
beneficial owners of the common stock listed below, based on information
furnished by them, have sole voting and investment power with respect to the
number of shares listed opposite their names, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Number of Owned
Shares -----------------
Beneficially Prior to After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Oak Investment
Partners(1)................................... 7,654,639 15.4% 13.4%
525 University Avenue, Ste. 1300
Palo Alto, CA 94301
Entities affiliated with U.S. Venture
Partners(2)................................... 4,639,174 9.3 8.0
2180 Sand Hill Road, Ste. 300
Menlo Park, CA 94025
Jason Green(2)................................. 4,639,174 9.3 8.0
2180 Sand Hill Road, Ste. 300
Menlo Park, CA 94025
Nicolas J. Hanauer............................. 6,490,651 13.0 11.3
506 Second Avenue, 9th Floor
Seattle, WA 98104
Fredric W. Harman(1)........................... 7,654,639 15.4 13.4
525 University Avenue, Ste. 1300
Palo Alto, CA 94301
Gregory B. Maffei(3)........................... 225,000 * *
Brian P. McAndrews(4).......................... 1,850,999 3.6 3.1
506 Second Avenue, 9th Floor
Seattle, WA 98104
Michael T. Galgon(5)........................... 1,062,750 2.1 1.8
Robert M. Littauer(6).......................... 614,999 1.2 1.0
Neve R. Savage(7).............................. 435,000 * *
Scott E. Lipsky(8)............................. 1,534,500 3.1 2.6
R. Michael Leo(9).............................. 934,779 1.9 1.6
Directors and executive officers
as a group (16 persons)(10)................. 26,998,067 51.1 44.5
</TABLE>
- --------
* less than 1%.
62
<PAGE>
(1) Represents 7,509,201 shares held by Oak Investment Partners VIII, Limited
Partnership and 145,438 shares held by Oak VIII Affiliates Fund, Limited
Partnership. Fredric W. Harman, a director of Avenue A, is a managing
member of Oak Associates VIII, LLC, the general partner of Oak Investment
Partners VIII, Limited Partnership, and a managing member of Oak VIII
Affiliates, LLC, the general partner of Oak VIII Affiliates Fund, Limited
Partnership and thus may be deemed to share voting and dispository power
with each of the above entities. Mr. Harman disclaims beneficial
ownership of shares held by these entities, except to the extent of his
pecuniary interest in Oak Associates VIII, LLC and Oak VIII Affiliates,
LLC.
(2) Represents 4,314,432 shares held by U.S. Venture Partners VI, LP,
120,618 shares held by USVP VI Affiliates Fund, LP, 134,536 shares held
by USVP VI Entrepreneur Partners, L.P., and 69,588 shares held by
2180 Associates Fund VI, L.P. Jason Green, a director of Avenue A, is a
managing member of Presidio Management Group VI, LLC, the general
partner of each of the above entities and thus may be deemed to share
voting and dispository power with each of the above entities. Mr. Green
disclaims beneficial ownership of shares held by these entities, except
to the extent of his pecuniary interest in Presidio Management Group VI
LLC.
(3) Represents (a) 150,000 shares and (b) 75,000 shares subject to options
exercisable within 60 days of December 31, 1999, which shares are subject
to repurchase by Avenue A at the original exercise price in the event of
termination of services of holder, which right lapses over time in
accordance with a vesting schedule.
(4) Represents (a) 6,000 shares, (b) 533,683 shares that are subject to
repurchase by Avenue A at the original exercise price paid for such
shares in the event of termination of services of holder, which right
lapses over time in accordance with a vesting schedule, and (c) 1,311,316
shares subject to options exercisable within 60 days of December 31,
1999, which shares are subject to repurchase by Avenue A at the original
exercise price in the event of termination of services of holder, which
right lapses over time in accordance with a vesting schedule.
(5) Represents (a) 487,500 shares, (b) 270,750 shares that are subject to
repurchase by Avenue A at the original exercise price paid for such
shares in the event of termination of services of holder, which right
lapses over time in accordance with a vesting schedule, and (c) 304,500
shares subject to options exercisable within 60 days of December 31,
1999, which shares are subject to repurchase by Avenue A at the original
exercise price in the event of termination of services of holder, which
right lapses over time in accordance with a vesting schedule.
(6) Represents (a) 364,999 shares, (b) 151,563 shares that are subject to
repurchase by Avenue A at the original exercise price paid for such
shares in the event of termination of services of holder, which right
lapses over time in accordance with a vesting schedule, and (c) 98,437
shares subject to options exercisable within 60 days of December 31,
1999, which shares are subject to repurchase by Avenue A at the original
exercise price in the event of termination of services of holder, which
right lapses over time in accordance with a vesting schedule.
(7) Represents (a) 339,000 shares and (b) 96,000 shares that are subject to
repurchase by Avenue A at the original exercise price paid for such
shares in the event of termination of services of holder, which right
lapses over time in accordance with a vesting schedule.
(8) Represents (a) 865,500 shares, (b) 174,000 shares that are subject to
repurchase by Avenue A at the original exercise price paid for such
shares in the event of termination of services of holder, which right
lapses over time in accordance with a vesting schedule, and (c) 495,000
shares subject to options exercisable within 60 days of December 31,
1999, which shares are subject to repurchase by Avenue A at the original
exercise price in the event of termination of services of holder, which
right lapses over time in accordance with a vesting schedule.
(9) Mr. Leo's employment with the Company ended on October 9, 1999.
(10) Includes 1,483,167 shares subject to repurchase by Avenue A at the
original exercise price paid for such shares, which right lapses over
time in accordance with a vesting schedule. Also includes 3,267,583
shares subject to options exercisable within 60 days of December 31,
1999, 3,225,583 shares of which are subject to repurchase by Avenue A at
the original exercise price in the event of termination of services of
holder, which right lapses over time in accordance with a vesting
schedule.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 200,000,000 shares of common stock, $.01
par value per share, and 37,500,000 shares of preferred stock, $.01 par value
per share. The following summary of provisions of the common stock and
preferred stock is not complete and may not contain all the information you
should consider before investing in the common stock. You should read
carefully our articles of incorporation, which are included as an exhibit to
the Registration Statement, of which this prospectus is a part.
Common Stock
As of December 31, 1999, assuming conversion of all outstanding shares of
preferred stock, there were 49,745,282 shares of common stock outstanding held
of record by 354 shareholders. Following this offering, there will be
54,995,282 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option, no exercise of outstanding options and no
exercise of an outstanding warrant. The holders of common stock are entitled
to one vote per share on all matters to be voted on by the shareholders. Our
amended and restated articles of incorporation do not authorize cumulative
voting. Effective at the first annual meeting of shareholders following this
offering, our board will be classified. See "--Antitakeover Effects of
Provisions of Articles of Incorporation, Bylaws and Washington Law--Election
and Removal of Directors." Subject to preferences of any outstanding shares of
preferred stock, the holders of common stock are entitled to receive ratably
any dividends the board of directors declares out of funds legally available
for the payment of dividends. If Avenue A is liquidated, dissolved or wound
up, the holders of common stock are entitled to share pro rata all assets
remaining after paying liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued following this
offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, each outstanding share of Series A,
Series B and Series C preferred stock automatically will be converted into 1.5
shares of common stock. After that, pursuant to our articles of incorporation,
the board of directors will have the authority, without further action by the
shareholders, to issue up to 21,083,902 shares of preferred stock in one or
more series. The board also has the authority to fix the designations, powers,
preferences, privileges and relative, participating, optional or special
rights and the qualifications, limitations or restrictions of any preferred
stock, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater
than the rights of the common stock. The board of directors, without
shareholder approval, can issue preferred stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of common stock. Preferred stock could thus be issued quickly with
terms that could delay or prevent a change in control of Avenue A or make
removal of management more difficult. Additionally, the issuance of preferred
stock may decrease the market price of the common stock and may adversely
affect the voting and other rights of the holders of common stock. We have no
plans at this time to issue any preferred stock.
Warrant
At December 31, 1999, we had one warrant outstanding to purchase 677,710
shares of common stock at $.55 per share which is held by Jeffrey P. Bezos.
The warrant expires in August 2003.
Registration Rights
After this offering, the holders of 15,506,436 shares of common stock will
be entitled to rights with respect to the registration of such shares under
the Securities Act, pursuant to the terms of an Investors Rights Agreement
between Avenue A and the holders of Avenue A's Series C preferred stock and a
Registration Rights Agreement
64
<PAGE>
between Avenue A and the members of iballs LLC, a New York limited liability
company acquired by Avenue A in September 1999.
Antitakeover Effects of Provisions of Articles of Incorporation, Bylaws and
Washington Law
Issuance of preferred stock. As noted above, our board of directors,
without shareholder approval, has the authority under our articles of
incorporation to issue preferred stock with rights superior to the rights of
the holders of common stock. As a result, preferred stock could be issued
quickly and easily, could adversely affect the rights of holders of common
stock and could be issued with terms calculated to delay or prevent a change
in control of Avenue A or make removal of management more difficult.
Election and removal of directors. Upon the closing of this offering and
effective at the first annual meeting of shareholders following this offering,
our amended and restated articles of incorporation will provide for the
division of our board of directors into three classes, as nearly as equal in
number as possible. At the first election of our directors to the classified
board, each class 1 director will be elected to serve until the next following
annual meeting of shareholders, each class 2 director will be elected to serve
until the second following annual meeting of shareholders and each class 3
director will be elected to serve until the third following annual meeting of
shareholders. At each annual meeting of shareholders following the meeting at
which the board would be initially classified, the successors to directors
whose terms are expiring will be elected to serve until the third annual
meeting of shareholders following their election. Directors serve until their
successors are elected and qualified or until their death, resignation or
removal from office. Our directors can be removed from office only for cause
and only by a two-thirds vote of the shareholders. Because this system of
electing and removing directors generally makes it more difficult for
shareholders to replace a majority of the board of directors, it may
discourage a third party from making a tender offer or otherwise attempting to
gain control of Avenue A and may maintain the incumbency of the board.
Approval for business combinations. Upon the closing of this offering, our
articles will require that specified business combinations (including a
merger, share exchange and the sale, lease, exchange, mortgage, pledge,
transfer or other disposition or encumbrance of a substantial part of assets
other than in the usual and regular course of business) be approved by the
holders of not less than two-thirds of the outstanding shares, unless such a
business combination has been approved by the board of directors, in which
case the affirmative vote required shall be a majority of the outstanding
shares.
Shareholder meetings. Upon the closing of this offering, our articles and
bylaws will provide that our shareholders may call a special meeting only upon
the written request of holders of at least 25% of the outstanding shares
delivered to us at least 20 days prior to the date of the meeting.
Additionally, the board of directors, the chairman of the board, the chief
executive officer and the president may call special meetings of shareholders.
Requirements for advance notification of shareholder nominations and
proposals. Upon the closing of this offering, our bylaws will establish
advance notice procedures with respect to shareholder proposals and the
nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee thereof.
Washington law. Washington law imposes restrictions on some transactions
between a corporation and significant shareholders. With some exceptions,
Chapter 23B.19 of the Washington Business Corporation Act prohibits a "target
corporation" from engaging in specified "significant business transactions"
with an "acquiring person." An acquiring person is defined as a person or
group of persons that beneficially owns 10% or more of the voting securities
of the target corporation. "Significant business transactions," as defined in
Chapter 23B.19, may not occur for a period of five years after the acquiring
person acquires the securities, unless the transaction or acquisition of
shares is approved by a majority of the members of the target corporation's
board of directors prior to the time of acquisition. "Significant business
transactions" include, among other things,
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
65
<PAGE>
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive any disproportionate benefit as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with "fair price" provisions specified in the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Avenue A.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for Avenue A common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering
because of contractual and legal restrictions on resale, sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect prevailing market prices and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have 53,749,555 shares of common
stock outstanding, assuming no exercise of options after September 30, 1999,
no exercise of an outstanding warrant and the conversion of all shares of
outstanding preferred stock into common stock, based on shares outstanding as
of September 30, 1999. Of these shares, the 5,250,000 shares sold in this
offering, plus any shares issued upon exercise of the underwriters' over-
allotment option, will be freely transferable without restriction or
registration under the Securities Act, except for shares purchased by any of
our existing "affiliates," which generally includes officers, directors or 10%
shareholders, as that term is defined in Rule 144 under the Securities Act.
The remaining 48,499,555 shares of common stock held by existing shareholders
outstanding are "restricted securities" within the meaning of Rule 144 under
the Securities Act. These shares may be sold in the public market only if
registered, or if they qualify for an exemption from registration under Rule
144, 144(k) or 701 promulgated under the Securities Act, which are summarized
below.
Including our directors and officers, holders of a total of approximately
46,956,558 shares of common stock including shares issuable upon automatic
conversion of the outstanding preferred stock and shares issuable upon
exercise of an outstanding warrant, have entered into lock-up agreements
generally providing that they will not, without the prior written consent of
Morgan Stanley & Co. Incorporated, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
for a period of 180 days after the date of this prospectus. Avenue A has
entered into a similar agreement with Morgan Stanley. As a result of
these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, shares subject to
lock-up agreements will not be eligible for sale until these agreements expire
or are waived by Morgan Stanley. Taking into account the lock-up agreements,
and assuming Morgan Stanley does not release the parties from these
agreements, the following shares will be eligible for sale in the public
market at the following times:
. Beginning on the effective date of this offering, only the shares sold
in this offering will be immediately available for sale in the public
market.
. Beginning 180 days after the effective date of this offering, the
expiration date of the lock-up agreements, approximately 25,196,989
shares will be eligible for sale pursuant to Rules 144, 144(k) and 701.
. An additional 23,302,566 shares will become eligible for sale pursuant
to Rule 144 beginning approximately one year after the date of this
prospectus. Shares eligible to be sold by affiliates pursuant to Rule
144 are subject to the volume restrictions described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year is entitled to sell within any three-month period a
number of shares that does not exceed the greater of: (1) 1% of our then
outstanding shares of common stock, approximately 537,446 shares immediately
after this offering, or (2) the average weekly trading volume of our common
stock on the Nasdaq Stock Market during the four calendar weeks preceding the
date on which notice of the sale is filed with the SEC. Sales under Rule 144
also are subject to manner of sale provisions, notice requirements and the
availability of current public information about us. Under Rule 144(k), a
person who is not deemed to have been one of our affiliates at any time during
the three months preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, may sell such shares without
complying with the manner of sale, public information, volume limitation, or
notice provisions of Rule 144.
67
<PAGE>
The holders of approximately 15,506,436 shares of common stock or their
transferees are also entitled to various rights with respect to the
registration of their shares of common stock for offer or sale to the public.
If these holders, by exercising their registration rights, cause a large
number of shares to be registered and freely transferable in the public
market, the sales could have a material adverse effect on the market price of
our common stock.
Beginning 90 days after the effective date of this prospectus, subject to
contractual restrictions, any of our employees, consultants or advisors who
purchased shares from us prior to the closing of this offering pursuant to a
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements
of Rule 144. Rule 701 further provides that persons other than affiliates may
sell shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation, or notice provisions of Rule
144.
As of September 30, 1999, options to purchase 5,496,351 shares of common
stock pursuant to our 1998 stock incentive compensation plan were outstanding
and exercisable, and options to purchase 1,312,500 shares of common stock
outside of our 1998 stock incentive compensation plan were outstanding and
exercisable. At September 30, 1999, an additional 2,586,507 shares of common
stock were available for future grants under the 1998 stock incentive
compensation plan and, in November 1999, an additional 750,000 shares were
reserved for issuances under that plan and, in January 2000, an additional
1,650,000 shares were reserved for issuances under that plan. In addition, we
have reserved 5,250,000 shares of common stock for future issuance under our
1999 stock incentive compensation plan and 750,000 shares of common stock for
future issuance under our 1999 employee stock purchase plan. No shares have
been issued to date under this plan.
After the closing of this offering, we intend to file registration
statements under the Securities Act to register shares to be issued pursuant
to our stock plans. Such registration statements are expected to become
effective immediately upon filing, and shares covered by such registration
statements will then become eligible for sale in the public market. As a
result, shares issued pursuant to our 1998 stock incentive compensation plan,
our 1999 stock incentive compensation plan and our 1999 employee stock
purchase plan, after the effectiveness of such registration statements, also
will be freely transferable in the public market, subject to Rule 144
limitations applicable to affiliates, vesting restrictions and expiration of
lock-up agreements.
68
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc. and Thomas
Weisel Partners LLC are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them, the respective number of shares
of common stock set forth opposite the names of the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ------------
<S> <C>
Morgan Stanley & Co. Incorporated...............................
Salomon Smith Barney Inc........................................
Thomas Weisel Partners LLC......................................
------------
Total.........................................................
============
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered by us in this offering are
subject to the approval of legal matters by their counsel and to other
conditions.
The underwriters are obligated to take and pay for all of the shares of
common stock offered by this prospectus, other than those covered by the over-
allotment option described below, if any of these shares are taken. Morgan
Stanley Dean Witter Online, an affiliate of Morgan Stanley & Co. Incorporated,
is acting as a selected dealer in connection with this offering and will be a
distributor of shares of common stock over the Internet to its eligible
account holders.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to some dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. Any underwriters may allow, and any of these dealers may
reallow, a concession not in excess of $ per share to other underwriters
or to some other dealers. After the initial offering of the shares of common
stock, the offering price and other selling terms may from time to time be
varied by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 787,500
additional shares of common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose
of covering over-allotments, if any, made in connection with this offering of
common stock. To the extent this over-allotment option is exercised, each
underwriter will become obligated, subject to specified conditions, to
purchase approximately the same percentage of additional shares of common
stock as the number set forth next to that underwriter's name in the preceding
table bears to the total number of shares of common stock set forth next to
the names of all underwriters in the preceding table.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the estimated per
share and total other expenses of issuance and distribution which are payable
by us. These amounts are shown assuming both no exercise and full exercise of
the underwriters' over-allotment option.
<TABLE>
<CAPTION>
Per Share Total
------------------------- --------------------------
No
Exercise Full Exercise No Exercise Full Exercise
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Estimated expenses
payable by us.......... $1,550,000 $1,550,000
</TABLE>
At our request, the underwriters have reserved up to 400,000 shares of
common stock to be issued by us and offered hereby for sale, at the initial
public offering price, to employees, business associates and related
69
<PAGE>
persons of us. The number of shares of common stock available for sale to the
general public will be reduced to the extent these individuals purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered by this prospectus.
Avenue A, our directors and officers, and some other shareholders of Avenue
A have each agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the underwriters, during the period ending 180
days after the date of this prospectus, they will not:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock.
The restrictions described above do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance by Avenue A of shares of common stock upon exercise of any
options or warrants or the conversion of any securities outstanding on
the date of this prospectus which is described in this prospectus;
. transactions by any person other than Avenue A relating to shares of
common stock or other securities acquired in open market transactions
after the completion of this offering; or
. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of this prospectus.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed 5% of the total number of shares of common
stock offered by them.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with this offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in this offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,550,000.
We and the underwriters have agreed to indemnify each other against some
liabilities, including liabilities under the Securities Act.
Due to the fact that one of the representatives of the underwriters was
organized within the last three years, we are providing the following
information. Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners LLC has been named as a lead
or co-manager of, or as a syndicate member in, numerous public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or other controlling
persons.
70
<PAGE>
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be determined by
negotiations between us and the representatives. Among the factors to be
considered in determining the initial public offering price are:
. our future prospects and those of our industry in general;
. our sales, earnings and other financial and operating information in
recent periods; and
. the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
LEGAL MATTERS
Avenue A is being represented by Perkins Coie LLP, Seattle, Washington. An
attorney at Perkins Coie LLP beneficially owns 20,100 shares of our series A
preferred stock. The underwriters are being represented by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Kirkland, Washington.
EXPERTS
The consolidated financial statements and schedules of Avenue A, Inc. and
its subsidiaries included in this prospectus and elsewhere in the registration
statement, to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of Arthur Andersen LLP as experts in accounting
and auditing in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered in this
prospectus. This prospectus, which forms a part of the registration statement,
does not contain all of the information included in the registration
statement. Some information is omitted and you should refer to the
registration statement and its exhibits for that information. With respect to
references made in this prospectus to any contract or other document of Avenue
A, such references are not necessarily complete and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract or document. You may review a copy of the registration statement,
including exhibits and the schedule filed with it, at the SEC's public
reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at 7
World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also
obtain copies of such materials from the Public Reference Room of the SEC,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as Avenue A, that
file electronically with the SEC.
71
<PAGE>
AVENUE A, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AVENUE A, INC.
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
I-BALLS L.L.C.
Report of Independent Public Accountants................................... F-19
Balance Sheets............................................................. F-20
Statements of Operations................................................... F-21
Statements of Members' Equity.............................................. F-22
Statements of Cash Flows................................................... F-23
Notes to Financial Statements.............................................. F-24
Unaudited Pro Forma Combined Financial Statements of Avenue A, Inc. and
I-Balls L.L.C. ........................................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Avenue A, Inc.:
We have audited the accompanying consolidated balance sheets of Avenue A, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from inception (July 1, 1997) to December 31, 1997 and
for the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Avenue A, Inc. and its
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from inception to December 31,
1997 and for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
January 19, 2000
F-2
<PAGE>
AVENUE A, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Shareholders'
December 31, Equity at
-------------- September 30, September 30,
1997 1998 1999 1999
----- ------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........ $ 3 $ 847 $ 6,292
Short-term investments........... -- -- 11,539
Accounts receivable, net of
allowance of $1, $70 and $752 in
1997, 1998 and 1999,
respectively.................... 8 1,545 18,353
Other receivable................. -- -- 180
Prepaid expenses and other
current assets.................. 10 9 245
----- ------- --------
Total current assets............... 21 2,401 36,609
----- ------- --------
Property and equipment, net........ 50 1,027 3,582
Goodwill, net...................... -- -- 5,691
Other assets....................... 4 13 41
----- ------- --------
Total assets....................... $ 75 $ 3,441 $ 45,923
===== ======= ========
Liabilities and Shareholders'
Equity (Deficit)
Current liabilities:
Accounts payable................. $ 5 $ 2,078 $ 21,686
Accrued expenses................. 19 187 716
Due to affiliates................ 335 75 1
Deferred revenue................. -- 91 1,255
----- ------- --------
Total current liabilities.......... 359 2,431 23,658
----- ------- --------
Commitments and contingencies (Note
7)
Shareholders' equity (deficit):
Convertible preferred stock, $0.01
par value, aggregate liquidation
preferences of $25,293 at
September 30, 1999
Authorized 17,500,000
Outstanding 3,998,474 and
16,416,098 at December 31,1998
and September 30, 1999......... -- 40 164 $ --
Common stock, $0.01 par value
Authorized 50,000,000
Outstanding 18,059,700 and
23,875,408 at December 31,1998
and September 30, 1999;
48,499,555 shares outstanding
pro forma...................... -- 181 239 485
Paid-in-capital................... -- 4,156 47,506 47,424
Deferred stock compensation....... -- -- (16,062) (16,062)
Subscriptions receivable.......... -- -- (965) (965)
Accumulated deficit prior to
incorporation.................... (284) -- -- --
Accumulated deficit............... -- (3,367) (8,617) (8,617)
----- ------- -------- --------
Total shareholders' equity
(deficit)......................... (284) 1,010 22,265 $ 22,265
----- ------- -------- ========
Total liabilities and shareholders'
equity............................ $ 75 $ 3,441 $ 45,923
===== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
AVENUE A, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Period from
Inception Nine Months Ended
(July 1, 1997) to Year Ended September 30,
December 31, December 31, ---------------------
1997 1998 1998 1999
----------------- ------------ --------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Advertising services.. $ -- $ -- $ -- $ 33,425
Advertising service
fees................. 18 599 276 673
------ ---------- --------- ----------
Total revenue....... 18 599 276 34,098
Expenses:
Cost of advertising
services............. 20 125 93 28,007
Client services....... 19 382 117 2,585
Technology and
operations........... -- 1,493 973 1,796
Selling, general and
administrative....... 263 2,257 1,189 6,435
Amortization of
deferred stock
compensation......... -- -- -- 860
------ ---------- --------- ----------
Total expenses...... 302 4,257 2,372 39,683
------ ---------- --------- ----------
Loss from operations.... (284) (3,658) (2,096) (5,585)
Interest income
(expense).............. -- 12 (10) 335
------ ---------- --------- ----------
Loss before provision
for income taxes....... (284) (3,646) (2,106) (5,250)
Provision for income
taxes.................. -- -- -- --
------ ---------- --------- ----------
Net loss................ $ (284) $ (3,646) $ (2,106) $ (5,250)
====== ========== ========= ==========
Basic and diluted net
loss per share......... $ (.34) $ (.25) $ (.28)
========== ========= ==========
Shares used in computing
basic and diluted net
loss per share......... 10,860,682 8,448,996 18,591,951
========== ========= ==========
Pro forma basic and
diluted net loss per
share.................. $ (.27) $ (.21) $ (.15)
========== ========= ==========
Shares used in computing
pro forma basic and
diluted net loss
per share.............. 13,387,488 9,803,127 35,748,046
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AVENUE A, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Deficit
----------------- ----------------- Paid-In Deferred Stock Subscriptions Prior to Accumulated
Shares Amount Shares Amount Capital Compensation Receivable Incorporation Deficit
---------- ------ ---------- ------ ------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, July 1,
1997............. -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss........ -- -- -- -- -- -- -- (284) --
---------- ----- ---------- ----- ------- -------- ----- ----- -------
BALANCES,
December 31,
1997............. -- -- -- -- -- -- -- (284) --
Net loss prior
to incorporation
on February 27,
1998............ -- -- -- -- -- -- -- (279) --
Issuance of
common stock to
affiliates for
cash, conversion
of payable and
satisfaction of
payable......... -- -- 18,000,000 180 857 -- -- 563 --
Exercise of
common stock
options......... -- -- 59,700 1 3 -- -- -- --
Issuance of
convertible
preferred stock
and issuance of
common stock
warrants for
cash, net of
offering costs
of approximately
$165............ 3,998,474 40 -- -- 3,271 -- -- -- --
Compensation
expense
associated with
stock option
grants.......... -- -- -- -- 25 -- -- -- --
Net loss from
February 27,
1998 to December
31, 1998........ -- -- -- -- -- -- -- -- (3,367)
---------- ----- ---------- ----- ------- -------- ----- ----- -------
BALANCES,
December 31,
1998............. 3,998,474 40 18,059,700 181 4,156 -- -- -- (3,367)
Issuance of
preferred stock,
net of offering
costs of
approximately
$95............. 12,417,624 124 -- -- 21,755 -- -- -- --
Deferred stock
compensation
related to stock
options......... -- -- -- -- 16,922 (16,922) -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- 860 -- -- --
Issuance of
common stock in
connection with
the I-Balls
acquisition..... -- -- 750,000 8 2,492 -- -- -- --
Issuance of
common stock for
services........ -- -- 83,266 1 166 -- -- -- --
Issuance of
common stock
options to
consultants..... -- -- -- -- 153 -- -- -- --
Exercise of
common stock
options......... -- -- 4,982,442 49 1,862 -- (965) -- --
Net loss........ -- -- -- -- -- -- -- -- (5,250)
---------- ----- ---------- ----- ------- -------- ----- ----- -------
BALANCES,
September 30,
1999
(unaudited)...... 16,416,098 $ 164 23,875,408 $ 239 $47,506 $(16,062) $(965) $ -- $(8,617)
========== ===== ========== ===== ======= ======== ===== ===== =======
<CAPTION>
Total
Shareholders'
Equity
(Deficit)
-------------
<S> <C>
BALANCES, July 1,
1997............. $ --
Net loss........ (284)
-------------
BALANCES,
December 31,
1997............. (284)
Net loss prior
to incorporation
on February 27,
1998............ (279)
Issuance of
common stock to
affiliates for
cash, conversion
of payable and
satisfaction of
payable......... 1,600
Exercise of
common stock
options......... 4
Issuance of
convertible
preferred stock
and issuance of
common stock
warrants for
cash, net of
offering costs
of approximately
$165............ 3,311
Compensation
expense
associated with
stock option
grants.......... 25
Net loss from
February 27,
1998 to December
31, 1998........ (3,367)
-------------
BALANCES,
December 31,
1998............. 1,010
Issuance of
preferred stock,
net of offering
costs of
approximately
$95............. 21,879
Deferred stock
compensation
related to stock
options......... --
Amortization of
deferred stock
compensation.... 860
Issuance of
common stock in
connection with
the I-Balls
acquisition..... 2,500
Issuance of
common stock for
services........ 167
Issuance of
common stock
options to
consultants..... 153
Exercise of
common stock
options......... 946
Net loss........ (5,250)
-------------
BALANCES,
September 30,
1999
(unaudited)...... $22,265
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
AVENUE A, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
Inception Nine
(July 1, 1997) Year Months Ended
to Ended September 30,
December 31, December 31, -----------------
1997 1998 1998 1999
-------------- ------------ ------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(284) $(3,646) $(2,106) $ (5,250)
Adjustments to reconcile net
loss to net cash used in
operating activities--
Depreciation and
amortization................ 2 155 68 649
Amortization of deferred
compensation................ -- -- -- 860
Noncash compensation
expense..................... -- 25 25 320
Changes in assets and
liabilities, net of
acquisition:
Accounts receivable........ (8) (1,537) (860) (15,426)
Other receivables and other
current assets............ (10) 1 -- (415)
Other assets............... (4) (9) (9) 9
Accounts payable........... 5 2,073 971 17,752
Accrued expenses........... 19 168 (9) 390
Deferred revenue........... -- 91 85 1,118
----- ------- ------- --------
Net cash (used in) provided by
operating activities.......... (280) (2,679) (1,835) 7
----- ------- ------- --------
Cash flows from investing
activities:
Purchases of property and
equipment..................... (52) (1,132) (721) (3,002)
Purchase of I-Balls, LLC....... -- -- -- (3,584)
Proceeds from sale of
marketable securities......... -- -- -- 866
Purchase of marketable
securities.................... -- -- -- (12,405)
Cash acquired in I-Balls
acquisition................... -- -- -- 812
----- ------- ------- --------
Net cash used in investing
activities.................... (52) (1,132) (721) (17,313)
Cash flows from financing
activities:
Proceeds from issuance of
common stock, net............. -- 1,471 1,471 --
Proceeds from issuance of
convertible preferred stock... -- 3,311 3,311 21,879
Proceeds from the exercise of
common stock options.......... -- 4 1 946
Advances from (payments to)
affiliate, net................ 335 (131) 28 (74)
----- ------- ------- --------
Net cash provided by financing
activities.................... 335 4,655 4,811 22,751
----- ------- ------- --------
Net increase in cash and cash
equivalents................... 3 844 2,255 5,445
Cash and cash equivalents,
beginning of period........... -- 3 3 847
----- ------- ------- --------
Cash and cash equivalents, end
of period..................... $ 3 $ 847 $ 2,258 $ 6,292
===== ======= ======= ========
Supplemental disclosure of
noncash activities:
Affiliate payable converted to
common stock.................. $ -- $ 139 $ 139 $ --
===== ======= ======= ========
Conversion of accumulated
deficit prior to incorporation
to contributed capital........ $ -- $ (563) $ (563) $ --
===== ======= ======= ========
Common stock issued in I-Balls
acquisition................... $ -- $ -- $ -- $ 2,500
===== ======= ======= ========
Subscriptions receivable....... $ -- $ -- $ -- $ 965
===== ======= ======= ========
Deferred stock compensation.... $ -- $ -- $ -- $ 16,922
===== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
1. Organization and Operations of the Company
Avenue A, Inc. (the Company) is an Internet advertising services company
that was founded on July 1, 1997. During the early stages of the Company,
Pacific Coast Feather Company (PCF) provided loans to fund operations and
provided certain accounting services. As of September 30, 1999, all of the
loans were either repaid or converted to common stock in the Company and all
services provided by PCF were paid for. On February 27, 1998, the Company was
incorporated.
On September 2, 1999, the Company completed the acquisition of I-Balls LLC
(I-Balls) a full service interactive media planner and buyer. The acquisition
was recorded under the purchase method of accounting and, therefore, the
results of operations of I-Balls and the fair value of the acquired assets and
liabilities were included in the Company's consolidated financial statements
beginning on the acquisition date (Note 3).
The Company is subject to a number of risks similar to other companies in a
comparable stage of development including reliance on key personnel,
competition from other companies with greater financial, technical and
marketing resources, and the risk relating to the ability to secure adequate
financing.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of the 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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Data
The unaudited interim financial statements as of September 30, 1999 and for
the nine months ended September 30, 1998 and 1999, have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The
Company believes that the results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for any future period.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, money market accounts
and all highly liquid debt instruments with an original maturity date of three
months or less.
Stock Split
In January 2000, the Board of Directors approved a 3-for-2 stock split in
the form of a common stock dividend of the Company's common stock. The related
common stock, per-share data and preferred stock conversion ratios in the
accompanying financial statements has been retroactively adjusted to reflect
the stock split.
F-7
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
Short-Term Investments
The Company's short-term investments consist primarily of investment-grade
marketable securities, which are classified as available for sale and recorded
at fair value.
At December 31, 1998, all short-term investments had a contractual maturity
of one year or less.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents, short-term
investments, accounts receivable and accounts payable. Fair values of cash and
cash equivalents and short-term investments approximate cost due to the short
period of time to maturity. The fair values of financial instruments that are
short-term and/or that have little or no market risk are considered to have a
fair value equal to book value. Assets and liabilities that are included in
this category are accounts receivable and accounts payable.
The Company performs initial and ongoing evaluations of its customers'
financial position, and generally extends credit on open account, requiring
collateral as deemed necessary. The Company maintains allowances for potential
credit losses.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, of
three to five years. Leasehold improvements are amortized over the shorter of
the remaining lease term or the estimated useful lives of the improvements
using the straight-line method.
Goodwill and Other Intangible Assets
The Company identifies and records impairment losses on intangible and
other assets when events and circumstances indicate that such assets might be
impaired. The Company considers factors such as significant changes in the
regulatory or business climate and projected future cash flows from the
respective asset. Impairment losses are measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Subscriptions Receivable
In conjunction with the exercise of certain stock options by several
executives of the Company, the Company received full recourse promissory notes
in the amount of approximately $965. The notes are due on demand and bear
interest at a rate equal to the greater of the applicable federal rate for a
demand note or the lowest rate allowable by the Internal Revenue Code of 1986.
Revenue Recognition
Revenue consists of both advertising services revenue and advertising
service fee revenue. Advertising services revenue consists of the gross value
of the Company's billings to the Company's clients, which includes the price
of the advertising space that the Company purchases from Web sites to resell
to its clients. Under advertising services contracts, the Company purchases
advertising space from publisher Web sites and sells the purchased space to
the Company's clients. Under advertising services arrangements, the Company is
ultimately responsible for payment to Web sites for the cost of space the
Company purchases. Advertising service fees revenue consists of commissions
earned on services the Company provides to its clients. To generate revenue
F-8
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
from advertising service fees, the Company buys advertising space from
publisher Web sites on behalf of its clients and earns fees based on the
dollar amount of advertising space the Company purchases. Under the
advertising service fee arrangements, the Company's clients are ultimately
responsible for payment to the publisher Web sites for the cost of the
advertising space purchased. Revenue under both advertising services and
advertising service fees is recognized over the period that the related
advertising is delivered.
Revenue is deferred in cases where the Company has not yet earned
advertising revenue due to billing the customer or receiving payment from the
customer prior to providing the services.
The percentage of sales to significant customers is as follows:
<TABLE>
<CAPTION>
Nine months
December 31, ended
--------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Customer A.................................. * * 19%
Customer B.................................. * * 18%
Customer C.................................. * * 13%
Customer D.................................. * 19% *
Customer E.................................. * 17% *
Customer F.................................. * 14% *
Customer G.................................. * 10% *
Customer H.................................. 100% * *
</TABLE>
- --------
* Less than 10%
Computation of Basic Net Loss Per Share and Pro Forma Basic Net Loss Per
Share
Historical net loss per share has been calculated under Statement of
Financial Accounting Standards No. 128 "Earnings per Share." Basic net loss
per share on a historical basis is computed using the weighted average number
of shares of common stock outstanding. Unvested outstanding shares subject to
repurchase rights are excluded from the calculation. No diluted loss per share
information has been presented in the accompanying consolidated statements of
operations since potential common shares from conversion of preferred stock,
stock options, and warrants are antidilutive.
Pro forma basic net loss per share has been calculated assuming the
conversion of preferred stock into an equivalent number of common shares, as
if the shares had converted on the dates of their issuance.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences of temporary differences between the
financial reporting and tax bases of assets, liabilities and tax
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized (see Note
5).
Costs of Advertising Services, Costs of Advertising Service Fees, Client
Services, and Technology and Operations
Cost of advertising services consist of the costs of advertising space that
the Company purchases from publisher's Web sites and the costs of delivering
the advertisements over the Internet.
F-9
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
Cost of advertising service fees revenue consists only of the costs of
delivering advertisements over the Internet.
Client services expenses consist primarily of salaries and related expenses
for client service personnel. Also included in client services costs are the
salaries and related expenses of personnel in the Company's data analysis
group.
Technology and operations expenses consist of salaries and related costs
for information technology and software development personnel. In addition,
these expenses include the cost of housing the Company's ad serving equipment
at third-party co-location facilities.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123). In accordance with the provisions of SFAS 123,
the Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its stock option plan.
Unaudited Pro Forma Shareholders' Equity
If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding as of the closing date will automatically be
converted into shares of common stock. Unaudited pro forma shareholders'
equity at September 30, 1999, as adjusted for the conversion of preferred
stock, is presented in the accompanying consolidated balance sheet.
Comprehensive Income
In 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income (SFAS 130)." SFAS 130 requires
companies to report a new, additional measure of income on the income
statement or to create a new financial statement that shows the new measure of
income. Comprehensive income includes foreign currency translation gains and
losses and unrealized gains and losses on equity securities that have been
previously excluded from net income and reflected instead in equity. SFAS 130
did not have a material impact on the Company's results of operations.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 changes the way
companies report selected segment information in annual financial statements
and requires companies to report selected segment information in interim
financial reports to shareholders. SFAS 131 is effective for Avenue A's year
ending December 31, 1999. Avenue A operates solely in one segment, providing
Internet advertising services. As of December 31, 1997 and 1998, and September
30, 1999, the Company's assets are located solely in the United States. The
Company has no sales to international customers and therefore the Company has
no international revenue.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use."
F-10
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
SOP 98-1 was effective for financial statements for years beginning after
December 15, 1998. SOP 98-1 provides guidance over accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specific costs and amortization of such costs. The Company
implemented SOP 98-1 and capitalized approximately $242 of internally
developed software costs. Accumulated depreciation related to the capitalized
costs was approximately $37 at September 30, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. The
implementation of SOP 98-5 did not have a material impact on the Company's
financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. Acquisitions
Effective September 2, 1999, the Company acquired I-Balls. I-Balls is a New
York based, full service interactive media planning and buying company. In
connection with the acquisition, the Company issued 750,000 shares of common
stock and paid $3.5 million in cash in exchange for all of the outstanding
members' equity. The deemed fair value of the common stock issued in the
acquisition, for accounting purposes, was approximately $2.5 million. The
Company also incurred $84 in acquisition costs, for a total purchase price of
$6,084. At the date of closing, $500 of the cash payment was deposited in an
escrow account. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of I-Balls have been included in the
consolidated financial statements commencing on the date of acquisition. The
excess purchase price of approximately $5,854 was allocated to goodwill, which
is being amortized on a straight-line basis over a useful life of three years.
Accumulated amortization was approximately $163 at September 30, 1999.
In connection with the acquisition, net assets acquired were as follows:
<TABLE>
<S> <C>
Cash, receivables and other current assets........................ $2,194
Property and equipment, and other noncurrent assets............... 74
Current liabilities............................................... (2,039)
------
$ 229
======
</TABLE>
The following table presents the unaudited pro forma results assuming that
the Company had acquired I-Balls at the beginning of fiscal year 1998. This
information may not necessarily be indicative of the future combined results
of operations of the Company.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Total revenue..................................... $ 1,607 $35,600
Net loss.......................................... $(5,244) $(5,815)
Basic net loss per share.......................... $ (.68) $ (.45)
</TABLE>
F-11
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
4. Property and Equipment
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Computer equipment........................... $ 39 $ 1,161 $3,425
Furniture and fixtures....................... 13 23 287
Software costs............................... -- -- 242
Leasehold improvements....................... -- -- 269
---- ------- ------
52 1,184 4,223
Less: Accumulated depreciation and
amortization................................ (2) (157) (641)
---- ------- ------
$ 50 $ 1,027 $3,582
==== ======= ======
</TABLE>
5. Federal Income Taxes
The Company did not provide any current or deferred U.S. federal or state
income tax provision or benefit for any of the periods presented because it
has experienced operating losses since inception, and has provided full
valuation allowances on deferred tax assets because of uncertainty regarding
their realizability.
The difference between the statutory federal tax rate of 34% and the tax
provision of zero recorded by the Company is primarily due to the Company's
full valuation allowance against its deferred tax assets.
At September 30, 1999, the Company had net operating loss carryforwards of
approximately $7.7 million related to U.S federal and state jurisdictions.
Utilization of net operating loss carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as
amended, as a result of the Series C preferred financing transaction. The
Company's use of reporting losses is limited to approximately $1.8 million per
year on net operating losses incurred prior to May 1999. These carryforwards
will begin to expire at various times commencing in 2018.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes were as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Net operating loss
carryforwards.......... $ 1,032 $ 2,617
Other................... 46 296
------- -------
Total deferred assets... 1,078 2,913
Deferred tax liabilities
property and
equipment.............. (30) (156)
Valuation allowance for
deferred tax assets.... (1,048) (2,757)
------- -------
Net deferred taxes...... $ -- $ --
======= =======
</TABLE>
F-12
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
6. Stockholders' Equity
Convertible Preferred Stock
As of September 30, 1999, the Company was authorized to issue 17.5 million
shares of preferred stock. Shares of preferred stock may be issued from time
to time in one or more series, with designations, rights, preferences and
limitations established by the Company's Board of Directors.
As of September 30, 1999, the Company had designated three series of
convertible preferred stock (Series A through C).
The rights and privileges of the Preferred Stock are as follows:
Dividends--Holders of Series A, B and C are entitled to receive
dividends of $0.05, $0.05 and $0.10, respectively, per share per annum,
when and if declared by the Board of Directors. Such dividends are not
cumulative. As of September 30, 1999, no dividends have been declared.
Conversion--Each share of Series A and B is convertible, at the option
of the holders or upon the vote of two-thirds of the Series A and B
stockholders, respectively, into 1.5 shares of common stock. Each share of
Series C is convertible at the option of the shareholders into 1.5 shares
of common stock. Each share of Series A and B automatically converts into
common stock upon the closing of a public offering that meets certain
conditions. Each share of Series C automatically converts into common stock
upon the closing of a public offering with an aggregate offering price of
not less than $20 million (the "Proceeds Target"). In the event the Company
closes a public offering which meets the Proceeds Target but is at a per
share price to the public which is less than $2.59, each share of Series C
preferred stock shall, upon the closing of such offering, be converted into
the number of shares of common stock which equals $2.59 divided by the per
share price to the public in such offering.
Liquidation Preferences--The Series A, B and C shares have liquidation
preferences of $.83, $1.12 and $1.94 per share, respectively, plus all
declared but unpaid dividends.
If the value of the Company on liquidation is insufficient to pay the
entire preferential amount, distribution shall be made pro rata to all
preferred shareholders in proportion to the preferential amount the
preferred shareholder is otherwise entitled to receive.
Any assets remaining after the preferential distribution will be paid to
holders of common stock in proportion to shares held by each.
Voting Rights--The holders of each share of Series A, B and C shall be
entitled to the number of votes equal to the number of shares of common
stock into which such shares could be converted, and have voting rights
equal to holders of common stock.
Stock Option Plan
As of September 30, 1999, the Company has reserved 13,125 shares of common
stock for issuance under its 1998 Stock Incentive Compensation Plan (the Plan)
to employees and consultants of the Company. Under the Plan, either incentive
or nonqualified options to purchase the Company's common stock may be granted
to full-time employees and consultants at prices determined by the Board of
Directors. Options granted under the Plan are exercisable at such times and
under such conditions as determined by the Board of Directors, but the term of
F-13
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
the options and the right of exercise may not exceed 10 years from the date of
grant. The stock options typically vest 20% in the first year and ratably over
the following twelve quarters. The Plan permits the exercise of unvested
options. Unvested common stock purchased under the Plan may be subject to
repurchase by the Company at the option exercise price in the event of
termination of employment. At September 30, 1999, 2,896,956 of the shares
acquired under the Plan were subject to the Company's repurchase rights. The
Company accounts for the Plan under APB 25 for which approximately $25 and
$320 has been recognized as compensation expense for the issuance of non-
qualified stock options for the year ending December 31, 1998 and for the nine
months ended September 30, 1999, respectively. Had compensation expense for
the Plan been determined consistent with SFAS 123, the Company's net loss
would have been increased as follows:
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
----- ------- -------------
<S> <C> <C> <C>
Net Loss:
As reported.................................. $(284) $(3,646) $(5,250)
Pro forma.................................... $(3,649) $(5,275)
Basic and Diluted Net Loss Per Share:
As reported.................................. $ (.34) $ (.28)
Pro forma.................................... $ (.34) $ (.28)
</TABLE>
To determine compensation expense under SFAS 123, the Company used the
following assumptions:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
. Weighted average risk-free interest rate......... 5.26 5.69
. Expected lives................................... 1 year 1-4 years
. Expected dividend yields......................... -- --
. Expected volatility.............................. -- --
</TABLE>
Option activity under the Plan was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Options Average Average
Available Options Exercise Grant Date
for Grant Outstanding Price Fair Value
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Balances, December 31, 1997.... -- -- --
Authorized................... 5,250,000 -- --
Granted...................... (4,774,575) (4,774,575) $ .14 $ .03
Exercised.................... -- (59,700) .07
Cancelled.................... 36,000 (36,000) .13
---------- ----------
Balances, December 31, 1998.... 511,425 4,678,875 $ .14
Authorized................... 7,875,000 --
Granted...................... (6,046,725) 6,046,725 $1.40 $1.40
Exercised.................... -- (4,982,442) .39
Cancelled.................... 246,807 (246,807) .41
---------- ----------
Balances, September 30, 1999... 2,586,507 5,496,351 $1.29
========== ==========
</TABLE>
F-14
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
The following information is provided for options outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- -----------
Weighted Average
Remaining
Exercise Number of Contractual Life Number of
Price Options (Years) Options
-------- --------- ---------------- -----------
<S> <C> <C> <C>
$ .07 760,674 8.73 760,674
.33 514,581 9.01 514,581
.52 594,090 9.41 594,090
1.03 270,210 9.72 270,210
1.27 2,283,316 9.93 2,283,316
2.67 1,463,250 7.76 1,463,250
</TABLE>
The options outstanding at September 30, 1999 have a weighted average
remaining contractual life of approximately 9.11 years. 2,085,099 of these
options are fully vested and 5,496,351 are exercisable as of September 30,
1999 with exercise prices ranging from $.07 to $2.67. In addition to the
shares noted above, the Company has granted 1,312,500 options outside of the
Plan at exercise prices ranging from $1.27 to $1.67 to employees of I-Balls.
Additionally, on November 16, 1999, the Board of Directors authorized an
additional 750,000 shares of common stock for issuance under the Plan.
In November 1999, the Board of Directors and shareholders approved the
adoption of the Company's 1999 Stock Incentive Compensation Plan (the 1999
Plan). In January 2000, the Board of Directors increased the shares available
for issuance under the 1999 Plan, subject to shareholder approval. The Company
has reserved 1.5 million shares of common stock for issuance under the 1999
Plan with a proposed increase to 5,250,000 shares. No issuances have been made
under the 1999 Plan as of December 31, 1999. The shares under the 1999 Plan
will increase annually on the first day of the Company's fiscal year beginning
in 2001 by an amount equal to the lessor of (i) 5,250,000 shares, (ii) 8% of
the adjusted average common shares outstanding of the Company used to
calculate fully diluted earnings per share for the preceding year or (iii) a
lesser amount determined by the Board of Directors. Any shares not yet issued
under the Company's 1998 Stock Incentive Compensation Plan as of the date of
the Company's proposed initial public offering, as well as shares subject to
options under the 1998 Plan that expire or are cancelled without being
exercised, will be available for grant under the 1999 Plan. The exercise price
for incentive stock options may not be less than 100% of the fair value of the
Company's common stock on the date of grant (85% for nonstatutory options).
The 1999 Plan terms and conditions are substantially the same as the 1998
Stock Incentive Compensation Plan.
Employee Stock Purchase Plan
On November 16, 1999, the Board of Directors approved the adoption of the
Company's 1999 Employee Stock Purchase Plan (the 1999 Purchase Plan), subject
to shareholder approval. A total of 750,000 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan. The shares under the 1999
Purchase Plan will increase annually on the first day of the Company's fiscal
year beginning in 2001 by an amount equal to the lessor of (i) 1,125,000
shares of common stock, (ii) 2% of the adjusted average common shares
outstanding of the Company used to calculate fully diluted earnings per share
for the preceding year, or (iii) a lesser amount determined by the Board of
Directors. The 1999 Purchase Plan permits eligible employees to acquire shares
of the Company's common stock through periodic payroll deductions of up to 20%
of base cash compensation.
F-15
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
Each offering period will have a maximum duration of 12 months. The price at
which the common stock may be purchased is 85% of the lesser of the fair
market value of the Company's common stock on the first day of the applicable
offering period or on the last day of the respective purchase period. The
initial offering period will commence on the effectiveness of the initial
public offering and will end on January 31, 2001.
Deferred Stock Compensation
In connection with the grant of certain stock options to employees and
consultants during the nine months ended September 30, 1999, the Company
recorded deferred stock compensation of approximately $16.9 million
representing the difference between the deemed fair value of the common stock
for accounting purposes and the option exercise price of such options at the
date of grant. Such amount is presented as a reduction of shareholders' equity
and amortized, in accordance with Financial Accounting Standards Board
Interpretation No. 28, on an accelerated basis over the vesting period of the
applicable options (generally 4 years). Under this method, approximately 52%
of the Deferred Stock Compensation is recognized in the first twelve months,
27% in the second twelve months, 15% in the third twelve months and 6% in the
fourth twelve months.
During the nine months ended September 30, 1999, the Company amortized
approximately $860. Compensation expense is decreased in the period of
forfeiture for any accrued but unvested compensation arising from the early
termination of an option holder's services.
Equity Instruments Issued to Non-employees
In connection with the sale of Series A preferred stock, the Company issued
a warrant to purchase 677,710 shares of common stock at an exercise price of
$.55 per share. The warrant had a grant date fair value of $.23 per share and
expires in August 2003. To determine the grant date fair value, the Company
used a risk free interest rate of 5.6%, expected life of five years, expected
dividend yields of 0%, and expected volatility of 105%. The Company recorded
$157 during the year ended December 31, 1998 related to the warrant.
During 1999, the Company granted options to purchase 251,775 shares of the
Common Stock at exercise prices ranging from $.52 to $1.27 per share to
consultants for past services. The two option grants had grant date fair
values of $.23 and $.74 per share, respectively, and expire in 2009. To
determine the grant date fair value, the Company used a risk free interest
rate of 4.4% and 4.8%, respectively, expected life of two years, expected
dividend yields of 0%, and expected volatility of 111%. The Company expensed
approximately $153 during the nine months ended September 30, 1999 related to
the options.
Reserved for Future Issuance
The following shares of common stock have been reserved for future issuance
as of September 30, 1999:
<TABLE>
<S> <C>
Employee stock options........................................ 5,496,351
Stock options issued outside of the Plan...................... 1,312,500
Convertible Preferred Stock................................... 24,624,147
Warrants...................................................... 677,710
----------
32,110,708
==========
</TABLE>
F-16
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
7. Commitments and Contingencies
Operating Leases
The Company has various operating leases, including building and equipment,
that expire at various times through 2004. Future minimum lease payments as of
September 30, 1999 are as follows:
<TABLE>
<S> <C>
1999 (3 months)................................................... $ 334
2000.............................................................. 1,456
2001.............................................................. 1,383
2002.............................................................. 1,180
2003.............................................................. 1,195
2004.............................................................. 915
------
$6,463
======
</TABLE>
Rent expense under operating leases totaled approximately $0, $182 and $229
for the year ended December 31, 1997 and 1998 and for the nine month period
ended September 30, 1999, respectively.
The above future minimum lease payments include a commitment of
approximately $21 per month expiring on June 30, 2001, which has been
subleased at a loss. The loss of approximately $54 has been recognized in the
statement of operations.
The Company has multiple agreements with third-parties to house the
Company's ad serving equipment. One of the agreements is on a month-to-month
basis and the other agreement is on year-to-year basis. As of nine months
ended September 30, 1999, total expense under these agreements approximated
$81.
8. Related Party Transactions:
Prior to incorporation on February 27, 1998, the Company relied on non-
interest bearing loans from PCF to fund operations. During 1998, PCF converted
approximately $139 of the debt to 1,421,850 shares of the Company's common
stock. Subsequent to year-end, the Company repaid all loans to PCF. The
accompanying statement of operations includes allocations from PCF for certain
accounting services. These allocations totaled approximately $32 and $1 in
1997 and 1998, respectively, and were based on estimates of time and effort
spent by PCF personnel on behalf of the Company. Additionally, PCF paid the
Company approximately $36 and $33 during 1998 and 1999, respectively, for
advertising services. At December 31, 1997 and 1998, amounts due to PCF were
approximately $335 and $75, respectively.
F-17
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
(in thousands except share and per share data)
(Information as of September 30, 1998 and 1999 is unaudited)
9. Earnings Per Share:
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------- September 30,
1997 1998 1999
----- ---------- -------------
<S> <C> <C> <C>
Net Loss (numerator for basic and
diluted).................................. $(284) $ (3,646) $ (5,250)
===== ========== ==========
Shares (denominator for basic and diluted):
Gross weighted average common shares
outstanding............................. 10,860,682 19,019,982
Less:
Weighted average common shares subject
to repurchase.......................... -- 428,031
---------- ----------
Shares used in computation................. 10,860,682 18,591,951
========== ==========
Basic and diluted net loss per share....... $ (.34) $ (.28)
========== ==========
</TABLE>
The following is a reconciliation between historical and pro forma shares
used in computing basic and diluted net loss per share:
<TABLE>
<CAPTION>
Year Ended September 30,
December 31, 1998 1999
----------------- -------------
<S> <C> <C>
Historical weighted average shares used in
computing basic and diluted net loss per
share.................................... 10,860,682 18,591,951
Add:
Weighted average preferred stock that
will convert upon the closing of a
public offering........................ 2,526,806 17,156,095
---------- ----------
Pro forma shares used in computing basic
and diluted net loss per share........... 13,387,488 35,748,046
========== ==========
</TABLE>
At September 30, 1999, options to purchase 5,496,351 shares of common
stock, warrants to purchase 677,710 shares of common stock, 16,416,098 shares
of convertible preferred stock to purchase 24,624,147 shares of common stock
and 2,896,956 shares of common stock subject to repurchase rights were
outstanding but were not included in the computation of diluted earnings per
share as their inclusion would be antidilutive.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of I-Balls L.L.C.:
We have audited the accompanying balance sheets of I-Balls L.L.C. as of
December 31, 1997 and 1998, and the related statements of operations, members'
equity and cash flows for the period January 28, 1997 to December 31, 1997 and
the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of I-Balls L.L.C. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period January 28, 1997 to December 31, 1997 and the year ended
December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
October 29, 1999
F-19
<PAGE>
I-BALLS L.L.C.
(a limited liability company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------- September 2,
1997 1998 1999
-------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents................... $ 49,730 $ 494,505 $ 811,610
Accounts receivable, net of allowance for
doubtful accounts of $4,100, $59,900 and
$123,600, respectively..................... 438,395 992,172 1,151,264
Unbilled receivables........................ -- 181,572 230,087
Prepaids and other current assets........... 4,070 8,054 1,000
-------- ---------- ----------
Total current assets.......................... 492,195 1,676,303 2,193,961
Equipment and leasehold improvements, net..... 14,607 16,958 36,672
Other assets.................................. 6,208 6,167 37,500
-------- ---------- ----------
Total assets.................................. $513,010 $1,699,428 $2,268,133
======== ========== ==========
Liabilities and Members' Equity
Current liabilities:
Accounts payable and accrued expenses....... $412,098 $1,276,354 $1,886,149
Capital lease obligation current portion.... 6,365 9,436 9,136
Employee loan............................... 38,345 -- --
Deferred revenue............................ 38,228 54,992 137,723
-------- ---------- ----------
Total current liabilities..................... 495,036 1,340,782 2,033,008
-------- ---------- ----------
Long-term debt:
Capital lease obligation long-term portion.. 7,997 1,715 5,625
-------- ---------- ----------
Commitments and contingencies (Note 5)
Members' equity:
Members' interest........................... 1,000 1,000 1,000
Retained earnings........................... 8,977 355,931 228,500
-------- ---------- ----------
Total members' equity......................... 9,977 356,931 229,500
-------- ---------- ----------
Total liabilities and members' equity......... $513,010 $1,699,428 $2,268,133
======== ========== ==========
</TABLE>
See accompanying notes are an integral part of these balance sheets.
F-20
<PAGE>
I-BALLS L.L.C.
(a limited liability company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Periods Ended
-------------------------
January 28, Year January 1
Through Ended Through
December 31, December 31, September 2,
1997 1998 1999
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Advertising service fees................. $115,854 $1,008,022 $1,501,943
Expenses:
Sales and marketing.................... 66,687 409,100 581,586
General and administrative............. 40,190 256,137 162,575
-------- ---------- ----------
Total expenses....................... 106,877 665,237 744,161
-------- ---------- ----------
Income from operations................... 8,977 342,785 757,782
Interest income.......................... -- 10,435 19,693
Income taxes............................. -- -- 35,062
-------- ---------- ----------
Net income............................... $ 8,977 $ 353,220 $ 742,413
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
I-BALLS L.L.C.
(a limited liability company)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
Total
Members' Retained Members'
Interest Earnings Equity
-------- -------- --------
<S> <C> <C> <C>
Initial Capital Contribution, January 28, 1997.... $1,000 $ -- $ 1,000
Net income........................................ -- 8,977 8,977
------ -------- --------
Balance, December 31, 1997........................ 1,000 8,977 9,977
Distributions..................................... -- (6,266) (6,266)
Net income........................................ -- 353,220 353,220
------ -------- --------
Balance, December 31, 1998........................ 1,000 355,931 356,931
Distributions (unaudited)......................... -- 869,844 869,844
Net income (unaudited)............................ -- 742,413 742,413
------ -------- --------
Balance, September 2, 1999 (unaudited)............ $1,000 $228,500 $229,500
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
I-BALLS L.L.C.
(a limited liability company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 28, January 1,
Through Year Ended Through
December 31, 1997 December 31, 1998 September 2, 1999
----------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from
operating activities:
Net income.............. $ 8,977 $ 353,220 $ 742,413
Adjustments to reconcile
net income to net cash
provided by operating
activities-
Depreciation.......... 3,652 6,979 6,720
Amortization of
intangible assets.... 292 541 1,667
Changes in assets and
liabilities-
Accounts
receivable......... (438,395) (553,777) (159,092)
Unbilled
receivables........ -- (181,572) (48,515)
Prepaid expenses and
other current
assets............. (2,070) (4,984) 8,054
Other assets........ (6,500) (500) (33,000)
Accounts payable and
accrued expenses... 412,098 864,256 609,795
Deferred revenue.... 38,228 16,764 82,731
--------- --------- ----------
Net cash provided by
operating activities... 16,282 500,927 1,210,773
--------- --------- ----------
Cash flows from
investing activities:
Capital expenditures.... -- (2,572) (22,824)
Cash flows from
financing activities:
Proceeds (repayment) of
member loans........... 38,345 (38,345) --
Repayment of capital
lease obligation....... (3,897) (9,969) --
Employee (loan)
receivable/payment..... (1,000) 1,000 (1,000)
Member distributions.... -- (6,266) (869,844)
--------- --------- ----------
Net cash provided by
(used in) financing
activities............. 33,448 (53,580) (870,844)
--------- --------- ----------
Net increase in cash and
cash equivalents....... 49,730 444,775 317,105
Cash and cash
equivalents, beginning
of period.............. -- 49,730 494,505
--------- --------- ----------
Cash and cash
equivalents, end of
period................. $ 49,730 $ 494,505 $ 811,610
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
I-BALLS L.L.C.
(a limited liability company)
NOTES TO FINANCIAL STATEMENTS
1. Business and Summary of Significant Accounting Policies
Business
I-Balls L.L.C. (the "Company"), a New York limited liability company, was
incorporated on January 28, 1997. The Company is a full-service interactive
media planner and buyer.
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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue consists of fees charged to customers. The Company acts as an agent
for clients and purchases space from publisher websites on their behalf.
Advertising service fees earned under fee based contracts reflect the amount
of the commission earned. Revenue is recognized over the period the
advertising is delivered. Deferred revenue represents billings issued in
advance of the service period. Unbilled receivables represents fees earned but
not billed. All contracts in process are expected to be billed and collected
within one year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity from the date of purchase of three months or less to be cash
equivalents.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost, net of accumulated
depreciation and amortization. Equipment is depreciated on the double-
declining method over estimated useful lives ranging from five to seven years.
Leasehold improvements are amortized over the life of the current office
lease. The lease expires on August 14, 2001.
Income Taxes
The Company is a limited liability company taxed as a partnership for
federal and state income tax purposes and, as a result, the earnings of the
Company are taxable directly to the members. The Company remains liable for
the New York City Unincorporated Business Tax.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, due
from members, due to members, and accounts payable approximate fair value due
to the short-term maturity of these instruments.
New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"),
F-24
<PAGE>
I-BALLS L.L.C.
(a limited liability company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
which provides guidance for determining whether computer software is internal-
use software and on accounting for the proceeds of computer software
originally developed or obtained for internal use and then subsequently sold
to the public. It also provides guidance on capitalization of the costs
incurred for computer software developed or obtained for internal use. SOP 98-
1 is effective for fiscal years beginning after December 31, 1998. The Company
does not expect the adoption of SOP 98-1 to have a material effect on its
financial statements.
2. Equipment and Leasehold Improvements
Equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------- September 2,
1997 1998 1999
------- ------- ------------
(Unaudited)
<S> <C> <C> <C>
Computer equipment.............................. $18,259 $27,589 $44,073
Leasehold improvements.......................... -- -- 9,950
------- ------- -------
Total equipment............................... 18,259 27,589 54,023
Less--Accumulated depreciation.................. 3,652 10,631 17,351
------- ------- -------
Equipment and leaseholds, net................. $14,607 $16,958 $36,672
======= ======= =======
</TABLE>
Depreciation expense aggregated $3,652, $6,979 and $6,720 (unaudited) for
the period January 28, 1997 to December 31, 1997 and the year ended December
31, 1998 and for the period from January 1, 1999 through September 2, 1999,
respectively.
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------- September 2,
1997 1998 1999
-------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
Accounts payable.......................... $393,906 $1,269,930 $1,643,805
Accrued bonuses........................... 11,500 -- 211,838
Accrued payroll........................... 6,692 6,424 --
Accrued tax payable....................... -- -- 30,506
-------- ---------- ----------
Total accounts payable and accrued
expenses............................... $412,098 $1,276,354 $1,886,149
======== ========== ==========
</TABLE>
4. Members' Equity
Initial Capital Contribution
On June 1, 1997, the founding members entered into a Limited Liability
Company Operating Agreement by which they pledged a total capital contribution
of $1,000.
Distributions
The Company distributes earnings to its members based upon a formula in the
members' agreement, which takes into consideration, among other things,
ownership percentages, and other subjective allocations.
F-25
<PAGE>
I-BALLS L.L.C.
(a limited liability company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Commitments and Contingencies
Leases
The Company is committed under operating leases for office space and fixed
assets. Rent expense was $10,325, $27,275 and $24,750 (unaudited) for the
period January 28, 1997 to December 31, 1997 and the year ended December 31,
1998 and for the period from January 1, 1999 through September 2, 1999,
respectively. Operating lease expense related to fixed assets was $3,010,
$8,408 and $6,870 (unaudited) for the period January 28, 1997 to December 31,
1997 and the year ended December 31, 1998 and for the period from January 1,
1999 through September 2, 1999, respectively. Future minimum lease payments
under the terms of noncancelable operating lease are as follows:
<TABLE>
<CAPTION>
Lease
Payments
--------
<S> <C>
Years ending December 31:
1999............................................................. $ 81,377
2000............................................................. 161,867
2001............................................................. 82,290
2002............................................................. 1,180
--------
$326,714
========
</TABLE>
6. Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of
credit risk, consisted primarily of cash and cash equivalents and trade
accounts receivable. The Company maintains cash and cash equivalents with
various financial institutions. The Company performs periodic evaluations of
the relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing
credit evaluations, generally does not require collateral, and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses
have been within management's expectations.
For the period January 28, 1997 to December 31, 1997, three clients
accounted for 52%, 23% and 16%, respectively, of total revenue.
For the year ended December 31, 1998, three clients accounted for 28%, 20%
and 18%, respectively, of total revenue.
For the period from January 1, 1999 through September 2, 1999 (unaudited),
three clients accounted for 34%, 17% and 11%, respectively, of total revenue.
As of December 31 1997 four clients accounted for 37%, 26%, 17% and 11%,
respectively, of total accounts receivable.
As of December 31, 1998, two clients accounted for 49% and 15%,
respectively, of total accounts receivable.
As of September 2, 1999 (unaudited), one client accounted for 53% of total
accounts receivable.
7. Sale of Members' Interest
On September 2, 1999, the members of the Company sold 100% of their
interest in the Company to Avenue A, Inc. ("Avenue A"). As a result of this
transaction, the Company became a wholly owned subsidiary of Avenue A.
F-26
<PAGE>
AVENUE A, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On September 2, 1999, Avenue A, Inc. (the "Company" or "Avenue A")
completed the acquisition of I-Balls L.L.C. ("I-Balls"), a full service
interactive media planner and buyer. The acquisition of I-Balls has been
accounted for as a purchase. Accordingly, the results of operations of I-Balls
have been included in the consolidated statement of operations of Avenue A
commencing on the date of acquisition.
The accompanying unaudited pro forma combined statement of operations of
Avenue A, Inc. for the year ended December 31, 1998 and the nine months ended
September 30, 1999 assumes that the acquisition took place as of January 1,
1998.
The unaudited pro forma combined statements of operations are presented for
informational purposes only and do not purport to represent what the Company's
results of operations for the year ended December 31, 1998 or for the nine
months ended September 30, 1999 would actually have been had the acquisitions,
in fact, occurred on January 1, 1998, or the Company's results of operations
for any future period. The unaudited pro forma combined statements of
operations should be read in conjunction with the financial statements and
related notes thereto included elsewhere in this prospectus and the
information set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
F-27
<PAGE>
AVENUE A, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
January 1-
September 2, Pro
September 30, 1999 Forma Pro Forma
1999 Avenue A I-Balls Adjustments Combined
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Advertising services.. $ 33,425 $ -- $ -- $ 33,425
Advertising service
fees................. 673 1,502 -- 2,175
---------- ------ ------- ----------
Total revenue....... 34,098 1,502 -- 35,600
---------- ------ ------- ----------
Expenses:
Cost of advertising
services revenue..... 28,007 -- -- 28,007
Client services....... 2,585 -- -- 2,585
Technology and
operations........... 1,796 -- -- 1,796
Selling, general and
administration....... 6,272 745 -- 7,017
Amortization of
goodwill............. 163 -- 1,304 (b) 1,467
Amortization of
deferred stock
compensation......... 860 -- -- 860
---------- ------ ------- ----------
Total expenses...... 39,683 745 1,304 41,732
---------- ------ ------- ----------
Income (loss) from
operations......... (5,585) 757 (1,304) (6,132)
Interest income......... 335 20 -- 355
---------- ------ ------- ----------
Income (loss) before
provision for income
taxes.................. (5,250) 777 (1,304) (5,777)
Provision for income
tax.................... -- 35 -- 35
---------- ------ ------- ----------
Net income (loss)....... $ (5,250) $ 742 $(1,304) $ (5,812)
========== ====== ======= ==========
Basic and diluted net
loss per share......... $ (.28) $ (.30)(c)
========== ==========
Shares used in computing
basic and diluted net
loss per share......... 18,591,951 19,265,028 (c)
========== ==========
Pro forma basic and
diluted net loss per
share.................. $ (.15) $ (.16)(c)
========== ==========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 35,748,046 36,421,123 (c)
========== ==========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-28
<PAGE>
AVENUE A, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended
December 31, 1998
------------------- Pro Forma Pro Forma
Avenue A I-Balls Adjustments Combined
---------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Advertising services........ $ -- $ -- $ -- $ --
Advertising service fees.... 599 1,008 -- 1,607
---------- ------ ------- ----------
Total revenue............. 599 1,008 -- 1,607
---------- ------ ------- ----------
Expenses:
Cost of advertising services
revenue.................... 125 -- -- 125
Client services............. 382 -- -- 382
Technology and operations... 1,493 -- -- 1,493
Selling, general and
administration............. 2,257 665 -- 2,922
Amortization of goodwill.... -- -- 1,951(a) 1,951
Amortization of deferred
stock compensation......... -- -- -- --
---------- ------ ------- ----------
Total expenses............ 4,257 665 1,951 6,873
---------- ------ ------- ----------
Income (loss) from
operations................... (3,658) 343 (1,951) (5,266)
Interest income............... 12 10 -- 22
---------- ------ ------- ----------
Income (loss) before provision
for income taxes............. (3,646) 353 (1,951) (5,244)
Provision for income taxes.... -- -- -- --
---------- ------ ------- ----------
Net income (loss)............. $ (3,646) $ 353 $(1,951) $ (5,244)
========== ====== ======= ==========
Basic and diluted net loss per
share........................ $ (.34) $ (.45)(c)
========== ==========
Shares used in computing basic
and diluted net loss per
share........................ 10,860,682 11,610,682 (c)
========== ==========
Pro forma basic and diluted
net loss per share........... $ (.27) $ (.37)(c)
========== ==========
Shares used in computing pro
forma basic and diluted net
loss per share............... 13,387,488 14,137,488 (c)
========== ==========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-29
<PAGE>
AVENUE A, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma combined statement of operations for the year ended
December 31, 1998 and for the nine months ended September 30, 1999 gives
effect to the acquisition of I-BALLS, LLC as if this transaction had occurred
January 1, 1998.
The pro forma combined financial statements are presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the cash and common stock consideration exchanged by
Avenue A for the fair value of the assets acquired and liabilities assumed.
2. Pro Forma Adjustments
Certain pro forma adjustments have been made to the accompanying unaudited
pro forma combined statements of operations as described below:
(a) Reflects 12 months amortization of the excess of the purchase price
over the fair value of net assets acquired, which is being amortized
over three years.
(b) Reflects eight months amortization of the excess of the purchase price
over the fair value of net assets acquired, which is being amortized
over three years.
(c) Basic and diluted net loss per share is computed by dividing net loss
by the weighted average number of shares outstanding during the period
assuming that shares issued for the acquisition were outstanding for
the entire period. Pro forma basic and diluted net loss per share has
been computed assuming the conversion of preferred stock into an
equivalent number of common shares, as if the shares had converted on
the dates of their issuance, and based on the weighted average number
of shares outstanding giving effect to shares issued in the acquisition
as if they were outstanding for the entire period.
3. Purchase Price Allocation:
In connection with the acquisition, the Company issued 750,000 shares of
common stock and paid $3.5 million in cash in exchange for all of the
outstanding member's equity for a total purchase price of $6.1 million. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of I-Balls have been included in the consolidated financial
statements commencing on the date of acquisition. The excess purchase price of
approximately $5.9 million was recorded as goodwill and is being amortized on
a straight-line basis over a useful life of three years.
F-30
<PAGE>
[LOGO OF AVENUE A]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in
connection with the sale of the common stock being registered hereby. All
amounts shown are estimates, except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 15,939
NASD filing fee............................................... 6,538
Nasdaq National Market listing fee............................ 95,000
Blue Sky fees and expenses.................................... 10,000
Printing and engraving expenses............................... 150,000
Legal fees and expenses....................................... 500,000
Accounting fees and expenses.................................. 400,000
Directors' and officers' insurance............................ 350,000
Transfer Agent and Registrar fees............................. 10,000
Miscellaneous expenses........................................ 12,523
----------
Total......................................................... $1,550,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on
terms sufficiently broad to permit indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Amended and Restated Bylaws
(Exhibit 3.2 hereto) provides for indemnification of the registrant's
directors and officers (and, in certain instances, employees and agents) to
the maximum extent permitted by Washington law.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article 9 of the registrant's Amended and
Restated Articles of Incorporation (Exhibit 3.1 hereto) contains provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
Article 10 of the registrant's Amended and Restated Articles of Incorporation
provides for the indemnification of any individual made a party to a
proceeding because that individual is or was a director of the registrant and
provides for the advancement or reimbursement of reasonable expenses incurred
by that individual in advance of the final disposition of the proceeding.
Section 10 of the registrant's Amended and Restated Bylaws provides for
indemnification of the registrant's directors and officers (and, in certain
instances, employees and agents) to the maximum extent permitted by Washington
law. The directors and officers of the registrant also may be indemnified
against liability they may incur for serving in that capacity pursuant to a
liability insurance policy maintained by the registrant for such purpose.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the underwriters of the registrant and its executive
officers and directors, and by the registrant of the underwriters, for certain
liabilities, including liabilities arising under the Securities Act, in
connection with matters specifically provided in writing by the underwriters
for inclusion in this Registration Statement.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
The information in this Item 15 has not been adjusted to reflect our 3-for-
2 stock split on January 19, 2000. Since its inception in July 1997, the
registrant has issued and sold unregistered securities as follows:
1. On February 27, 1998 and March 9, 1998, the registrant issued an
aggregate of 1,200,000 shares of common stock to its one founder and five
investors, each of whom is an "accredited investor" under Rule 501
promulgated under the Securities Act, for a consideration of $.01 per
share, or an aggregate of $12,000. The sale and issuance of these
securities was exempt from registration under the Securities Act pursuant
to Section 4(2) of the Securities Act, on the basis that the transaction
did not involve a public offering.
2. On May 26, 1998, the registrant issued an aggregate of 7,700,000 shares
of common stock to one founder and four investors, each of whom is an
"accredited investor" under Rule 501 promulgated under the Securities
Act. The consideration was $.14636 per share, or an aggregate of
$1,127,000. The sale and issuance of these securities was exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act, on the basis that the transaction did not involve a
public offering.
3. On June 10, 1998, the registrant issued an aggregate of 1,100,000 shares
of common stock to one founder and one investor, each of whom is an
accredited investor. The consideration was $.14636 per share, or an
aggregate of $161,000. The sale and issuance of these securities was
exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act, on the basis that the transaction did not
involve a public offering.
4. On July 2, 1998, the registrant issued an aggregate of 2,000,000 shares
of common stock to one of its founders, an accredited investor, for a
consideration of $.15 per share, or an aggregate of $300,000. The sale
and issuance of these securities was exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, on the
basis that the transaction did not involve a public offering.
5. In July and August 1998, the registrant issued 3,998,474 shares of Series
A preferred stock, which are convertible into 3,998,474 shares of common
stock, to 42 accredited investors for a consideration of $.83 per share,
or an aggregate of $3,318,733. The sale and issuance of these securities
was exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act, on the basis that the transaction did not
involve a public offering.
6. On August 7, 1998, the registrant issued a warrant for the purchase of
451,807 shares of common stock, with an exercise price of $.83 per share,
to 1 accredited investor. The sale and issuance of these securities was
exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act, on the basis that the transaction did not
involve a public offering.
7. In February and March 1999, the registrant issued 2,580,000 shares of
Series B preferred stock, which are convertible into 2,580,000 shares of
common stock, to 36 accredited investors for a consideration of
$1.12 per share, or an aggregate of $2,889,600. The sale and issuance of
these securities was exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act, on the basis that the
transaction did not involve a public offering.
8. On May 4, 1999, the registrant issued 9,837,624 shares of Series C
preferred stock, which are convertible into 9,837,624 shares of common
stock, to 11 accredited investors for a consideration of $1.94 per share,
or an aggregate of $19,084,991. The sale and issuance of these securities
was exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act, on the basis that the transaction did not
involve a public offering.
9. On June 10, 1999, the registrant issued an aggregate of 35,511 shares of
common stock to seven employees in lieu of sales commissions under the
registrant's 1998 stock incentive compensation plan. The sale and
issuance of these securities was exempt from registration under the
Securities Act pursuant to Rule 701 promulgated thereunder on the basis
that these securities were sold or issued either pursuant to a written
compensatory plan or pursuant to written contracts relating to
consideration, as provided by Rule 701.
10. On July 1, 1999 and August 16, 1999, the registrant issued an aggregate
of 20,000 shares of common stock to two consultants in exchange for
services under the registrant's 1998 stock incentive compensation plan.
II-2
<PAGE>
The sale and issuance of these securities was exempt from registration
under the Securities Act pursuant to Rule 701 promulgated thereunder on the
basis that these securities were sold or issued either pursuant to a
written compensatory plan or pursuant to written contracts relating to
consideration, as provided by Rule 701.
11. On September 2, 1999, pursuant to a purchase agreement among the
registrant and the members of I-Balls LLC, the registrant issued an
aggregate of 500,000 shares of common stock to the 6 members of I-Balls
LLC as partial consideration for the registrant's acquisition of all the
membership interests of I-Balls LLC. The sale and issuance of these
securities was exempt from registration under the Securities Act pursuant
to Section 4(2) of the Securities Act, on the basis that the transaction
did not involve a public offering.
12. On September 2, 1999 and September 22, 1999, in connection with the
registrant's acquisition of all the membership interests of I-Balls LLC,
the registrant granted stock options to purchase 875,000 shares of common
stock, with exercise prices ranging from $1.90 to $2.50 per share, to two
employees who were former members of I-Balls LLC, outside of the
registrant's 1998 stock incentive compensation plan. Of these options, no
shares have been exercised or canceled without being exercised and
875,000 shares remain outstanding. The sale and issuance of these
securities was exempt from registration under the Securities Act pursuant
to Section 4(2) of the Securities Act, on the basis that the transaction
did not involve a public offering.
13. From June 23, 1998 through December 31, 1999, the registrant granted
stock options to employees to purchase 4,213,196 shares of common stock,
with exercise prices ranging from $.10 to $6.50 per share, under the
registrant's 1998 stock incentive compensation plan. The sale and
issuance of these securities was exempt from registration under the
Securities Act pursuant to Rule 701 promulgated under the Securities Act
on the basis that these securities were sold or issued either pursuant to
a written compensatory plan or pursuant to written contracts relating to
consideration, as provided by Rule 701.
14. From June 23, 1998 through December 31, 1999, the registrant granted
stock options to executive officers, employees and consultants to
purchase 5,672,604 shares of common stock, with exercise prices ranging
from $.10 to $6.50 per share. The sale and issuance of these securities
was exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act on the basis that the transaction did not
involve a public offering.
15. On October 8, 1999, the registrant issued an aggregate of 170,000 shares
of common stock to eight of its executive officers for a consideration of
$4.00 per share, or an aggregate of $680,000. The sale and issuance of
these securities was exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act, on the basis that the
transaction did not involve a public offering.
16. On October 25, 1999, the registrant issued 125,000 shares of common stock
to one of its executive officers for a consideration of $4.00 per share,
or an aggregate of $500,000. The sale and issuance of these securities
was exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act, on the basis that the transaction did not
involve a public offering.
17. On October 26, 1999, the registrant issued 50,000 shares of common stock
to one of its directors for a consideration of $1.90 per share, or an
aggregate of $95,000, and 50,000 shares of common stock to that same
director for a consideration of $4.00 per share, or an aggregate of
$200,000. The sale and issuance of these securities was exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act, on the basis that the transaction did not involve a
public offering.
18. On November 16, 1999, the registrant authorized the issuance of 25,000
shares of common stock to one of its consultants, an accredited investor,
for a consideration of $5.00 per share, or an aggregate of $125,000. The
sale and issuance of these securities was exempt from registration under
the Securities Act pursuant to Section 4(2) of the Securities Act, on the
basis that the transaction did not involve a public offering.
19. On December 22, 1999, the registrant issued 25,000 shares of common stock
to one of its executive officers, an accredited investor, for a
consideration of $6.50 per share, or an aggregate of $162,500. The sale
and issuance of these securities was exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, on the
basis that the transaction did not involve a public offering.
No underwriter was used in connection with any of the foregoing sales and
issuances.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the registrant
3.2 Amended and Restated Bylaws of the registrant
4.1+ Form of Warrant to purchase common stock
5.1 Opinion of Perkins Coie LLP
10.1+ Form of Series A Purchase Agreement between the registrant and the
investors listed on Schedule A thereto
10.2+ Warrant Agreement dated August 7, 1998
10.3+ Form of Series B Purchase Agreement between the registrant and the
investors listed on Schedule A thereto
10.4+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated July 2, 1998
10.5+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated June 10, 1998
10.6+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated May 26, 1998
10.7+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated March 9, 1998
10.8+ Series C Preferred Stock Purchase Agreement between the registrant and
Voyager Capital Fund I, L.P., Voyager Capital Founders Fund, L.P., Oak
Investment Partners VI, L.P., Kirlan Venture Partners II, L.P., Norman
H. Nie, Trustee, Norman H. Nie Revocable Trust dated 3/15/91, Media
partners, the Phoenix Partners IV Limited Partnership, R. Michael Leo
and Insight Venture Associates LLC dated May 4, 1999
10.9+ Investors Rights Agreement between the registrant and Voyager Capital
Fund I, L.P., Voyager Capital Founders Fund, L.P., Oak Investment
Partners VI, L.P., Kirlan Venture Partners II, L.P., Norman H. Nie,
Trustee, Norman H. Nie Revocable Trust dated 3/15/91, Media partners,
the Phoenix Partners IV Limited Partnership, R. Michael Leo and Insight
Venture Associates LLC dated May 4, 1999
10.10+ Form of Promissory Note between the registrant and the executive
officers listed on Schedule A thereto dated October 8, 1999
10.11+ Form of Stock Purchase Agreement dated October 8, 1999 between the
registrant and the executive officers listed on Schedule A thereto
10.12+ Stock Purchase Agreement between the registrant and Gregory B. Maffei
dated October 26, 1999
10.13+ Stock Purchase Agreement between the registrant and Gregory B. Maffei
dated October 26, 1999
10.14+ Stock Purchase Agreement between the registrant and Sumit T. Sen dated
October 25, 1999
10.15+ Purchase Agreement among the registrant and Stephen D. Klein, Michael
Cohen, Jonathan Bond, Richard Kirshenbaum, Margaret Boyer and Daniel
DeWolf dated September 2, 1999
10.16+ Employment Agreement between the registrant and Michael Cohen dated
September 2, 1999
10.17+ Employment Agreement between the registrant and Stephen D. Klein dated
September 2, 1999
10.18 Employment Agreement between the registrant and Sumit T. Sen dated
September 29, 1999
10.19 Employment Agreement between the registrant and Brian P. McAndrews
dated January 20, 2000.
10.20+ Registration Rights Agreement between the registrant and Stephen D.
Klein, Michael Cohen, Jonathan Bond, Richard Kirshenbaum, Margaret
Boyer and Daniel DeWolf dated September 2, 1999
10.21+ Severance Agreement between the registrant and R. Michael Leo dated
October 8, 1999
10.22+ 1999 Stock Incentive Compensation Plan
10.23+ Stock Option Grant Program for Nonemployee Directors under the 1999
Stock Incentive
Compensation Plan
10.24+ 1999 Employee Stock Purchase Plan
10.25+ 1998 Stock Incentive Compensation Plan
10.26+ Loan and Security Agreement between the registrant and Silicon Valley
Bank dated May 25, 1999
10.27+ Lease Agreement between the registrant and Samis Foundation dated July
16, 1999
10.28 Internet Data Center Services Agreement between the registrant and
Exodus Communications, Inc. dated January 23, 1998.
10.29 Service Agreement between the registrant and Verio, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
21.1+ Subsidiaries of the registrant
23.1 Consent of Arthur Andersen LLP, independent public accountants
23.2 Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1)
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules
Schedule II--Valuations and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements of the
registrant or related notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that, in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes to provide to the
underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 20th day of January, 2000.
AVENUE A, INC.
/s/ Brian P. McAndrews
By: _________________________________
Brian P. McAndrews
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 20th day of January, 2000.
<TABLE>
<S> <C>
*Nicolas J. Hanauer Chairman of the Board
______________________________________
Nicolas J. Hanauer
*Brian P. McAndrews Chief Executive Officer, President and
______________________________________ Director (Principal Executive Officer)
Brian P. McAndrews
/s/ Robert M. Littauer Vice President, Finance and
______________________________________ Administration, Chief Financial
Robert M. Littauer Officer, Secretary and Treasurer
(Principal Financial and
Accounting Officer)
*Jason Green Director
______________________________________
Jason Green
*Fredric W. Harman Director
______________________________________
Fredric W. Harman
*Gregory B. Maffei Director
______________________________________
Gregory B. Maffei
/s/ Robert M. Littauer
*By: _________________________________
Robert M. Littauer
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders of
Avenue A, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Avenue A, Inc. and subsidiaries included in this
registration statement and have issued our report thereon dated January 19,
2000. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchanges Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Seattle, Washington
January 19, 2000
<PAGE>
AVENUE A, INC.
Schedule II--Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Deductions,
Balance at Additions- Returns and Balance at
Description Beginning of Year Provisions Write-offs End of Year
- ----------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year ending December 31,
1998.................... $ 1 $69 $-- $70
Year ending December 31,
1997.................... $-- $ 1 $-- $ 1
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the registrant
3.2 Amended and Restated Bylaws of the registrant
4.1+ Form of Warrant to purchase common stock
5.1 Opinion of Perkins Coie LLP
10.1+ Form of Series A Purchase Agreement between the registrant and the
investors listed on Schedule A thereto
10.2+ Warrant Agreement dated August 7, 1998
10.3+ Form of Series B Purchase Agreement between the registrant and the
investors listed on Schedule A thereto
10.4+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated July 2, 1998
10.5+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated June 10, 1998
10.6+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated May 26, 1998
10.7+ Share Purchase Agreement between the registrant and Nicolas J. Hanauer
dated March 9, 1998
10.8+ Series C Preferred Stock Purchase Agreement between the registrant and
Voyager Capital Fund I, L.P., Voyager Capital Founders Fund, L.P., Oak
Investment Partners VI, L.P., Kirlan Venture Partners II, L.P., Norman
H. Nie, Trustee, Norman H. Nie Revocable Trust dated 3/15/91, Media
partners, the Phoenix Partners IV Limited Partnership, R. Michael Leo
and Insight Venture Associates LLC dated May 4, 1999
10.9+ Investors Rights Agreement between the registrant and Voyager Capital
Fund I, L.P., Voyager Capital Founders Fund, L.P., Oak Investment
Partners VI, L.P., Kirlan Venture Partners II, L.P., Norman H. Nie,
Trustee, Norman H. Nie Revocable Trust dated 3/15/91, Media partners,
the Phoenix Partners IV Limited Partnership, R. Michael Leo and Insight
Venture Associates LLC dated May 4, 1999
10.10+ Form of Promissory Note between the registrant and the executive
officers listed on Schedule A thereto dated October 8, 1999
10.11+ Form of Stock Purchase Agreement dated October 8, 1999 between the
registrant and the executive officers listed on Schedule A thereto
10.12+ Stock Purchase Agreement between the registrant and Gregory B. Maffei
dated October 26, 1999
10.13+ Stock Purchase Agreement between the registrant and Gregory B. Maffei
dated October 26, 1999
10.14+ Stock Purchase Agreement between the registrant and Sumit T. Sen dated
October 25, 1999
10.15+ Purchase Agreement among the registrant and Stephen D. Klein, Michael
Cohen, Jonathan Bond, Richard Kirshenbaum, Margaret Boyer and Daniel
DeWolf dated September 2, 1999
10.16+ Employment Agreement between the registrant and Michael Cohen dated
September 2, 1999
10.17+ Employment Agreement between the registrant and Stephen D. Klein dated
September 2, 1999
10.18 Employment Agreement between the registrant and Sumit T. Sen dated
September 29, 1999
10.19 Employment Agreement between the registrant and Brian P. McAndrews
dated January 20, 2000.
10.20+ Registration Rights Agreement between the registrant and Stephen D.
Klein, Michael Cohen, Jonathan Bond, Richard Kirshenbaum, Margaret
Boyer and Daniel DeWolf dated September 2, 1999
10.21+ Severance Agreement between the registrant and R. Michael Leo dated
October 8, 1999
10.22+ 1999 Stock Incentive Compensation Plan
10.23+ Stock Option Grant Program for Nonemployee Directors under the 1999
Stock Incentive
Compensation Plan
10.24+ 1999 Employee Stock Purchase Plan
10.25+ 1998 Stock Incentive Compensation Plan
10.26+ Loan and Security Agreement between the registrant and Silicon Valley
Bank dated May 25, 1999
10.27+ Lease Agreement between the registrant and Samis Foundation dated July
16, 1999
10.28 Internet Data Center Services Agreement between the registrant and
Exodus Communications, Inc. dated January 23, 1998.
10.29 Service Agreement between the registrant and Verio, Inc.
21.1+ Subsidiaries of the registrant
23.1 Consent of Arthur Andersen LLP, independent public accountants
23.2 Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1)
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED ARTICLES OF
INCORPORATION
OF
AVENUE A, INC.
ARTICLE 1. NAME
The name of this corporation is Avenue A, Inc.
ARTICLE 2. SHARES
2.1 Authorized Capital
The total number of shares which this corporation (hereinafter also
referred to as the "Corporation") is authorized to issue is 237,500,000,
consisting of 200,000,000 shares of common stock having a par value of $.01 per
share (hereinafter referred to as "Common Stock") and 37,500,000 shares of
preferred stock having a par value of $.01 per share (hereinafter referred to as
"Preferred Stock" or "preferred stock").
2.2 Issuance of Preferred Stock in Series
The Preferred Stock may be issued from time to time in one or more series
in any manner permitted by law and the provisions of these Articles of
Incorporation of the corporation, as determined from time to time by the Board
of Directors and stated in the resolution or resolutions providing for the
issuance thereof, prior to the issuance of any shares thereof. The Board of
Directors shall have the authority to fix and determine and to amend, subject to
the provisions hereof, the designation, preferences, limitations and relative
rights of the shares of any series that is wholly unissued or to be established.
Unless otherwise specifically provided in the resolution establishing any
series, the Board of Directors shall further have the authority, after the
issuance of shares of a series whose number it has designated, to amend the
resolution establishing such series to decrease the number of shares of that
series, but not below the number of shares of such series then outstanding.
2.3 Dividends
The holders of shares of the Preferred Stock shall be entitled to receive
dividends, out of the funds of the corporation legally available therefor, at
the rate and at the time or times, whether cumulative or noncumulative, as may
be provided by the
<PAGE>
Board of Directors in designating a particular series of Preferred Stock. If
such dividends on the Preferred Stock shall be cumulative, then if dividends
shall not have been paid, the deficiency shall be fully paid or the dividends
declared and set apart for payment at such rate, but without interest on
cumulative dividends, before any dividends on the Common Stock shall be paid or
declared and set apart for payment. The holders of the Preferred Stock shall not
be entitled to receive any dividends thereon other than the dividends referred
to in this section.
2.4 Redemption
The Preferred Stock may be redeemable at such price, in such amount, and at
such time or times as may be provided by the Board of Directors in designating a
particular series of Preferred Stock. In any event, such Preferred Stock may be
repurchased by the corporation to the extent legally permissible.
2.5 Liquidation
In the event of any liquidation, dissolution, or winding up of the affairs
of the corporation, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the Common Stock, the holders of
the Preferred Stock at the time outstanding shall be entitled to be paid the
preferential amount or amounts per share as may be provided by the Board of
Directors in designating a particular series of Preferred Stock and dividends
accrued thereon to the date of such payment. The holders of the Preferred Stock
shall not be entitled to receive any distributive amounts upon the liquidation,
dissolution, or winding up of the affairs of the corporation other than the
distributive amounts referred to in this section, unless otherwise provided by
the Board of Directors in designating a particular series of Preferred Stock.
2.6 Conversion
Shares of Preferred Stock may be convertible into Common Stock of the
corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
2.7 Voting Rights
Holders of Preferred Stock shall have such voting rights as may be provided
by the Board of Directors in designating a particular series of Preferred Stock.
-2-
<PAGE>
2.8 Designation Of Rights And Preferences Of Series A Preferred Stock
The Board of Directors of the Corporation hereby establishes a new series
of preferred stock to be called "Series A Preferred Stock" consisting of
4,000,000 shares with the following rights, preferences and other terms:
1. Dividends.
---------
(a) The holders of the Series A Preferred Stock shall be entitled to
receive dividends, prior and in preference to any dividend on Common Stock, at
the rate of $.05 per share of Series A Preferred Stock, per annum (as adjusted
for any stock dividends, combinations or splits with respect to such shares),
whenever funds are legally available and when and if declared by the Board of
Directors. The dividends shall be non-cumulative and non-accruing.
(b) No dividends (other than those payable solely in Common Stock)
shall be paid on any Common Stock of the Corporation during any fiscal year of
the Corporation until dividends in the total amount set forth above per share of
Series A Preferred Stock per annum (as adjusted for any stock dividends,
combinations or splits with respect to such shares) shall have been paid or
declared and set apart during that fiscal year on the Series A Preferred Stock,
and no dividends shall be paid on any share of Common Stock unless a dividend
(including, for this purpose the amount of any dividends paid pursuant to the
provisions of Subsection 1(a)) is paid with respect to all outstanding shares of
Series A Preferred Stock in an amount for each such share of Series A Preferred
Stock equal to or greater than the aggregate amount of such dividends for all
shares of Common Stock into which each such share of Series A Preferred Stock
could then be converted.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of Common Stock by reason of their ownership thereof, the amount of $.83
per share then held by them (as adjusted for any stock dividends, combinations
or splits with respect to such shares) plus all declared but unpaid dividends on
each such share. If, upon the occurrence of such event, the assets and funds
thus distributed among the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such holders and the holders of any other
class or series of preferred stock ranking on a parity with or senior to the
Series A Preferred Stock of the full preferential amounts due to such holders,
then the entire assets and funds of the Corporation legally available for
-3-
<PAGE>
distribution shall be distributed ratably among the holders of the Series A
Preferred Stock and the holders of any other such class or series of preferred
stock in proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) After payment has been made to the holders of the Series A Preferred
Stock and the holders of any other class or series of preferred stock of the
full amounts to which they shall be entitled as provided in Section 2(a), the
entire remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of Common Stock in
proportion to the shares of Common Stock then held by each.
(c) A consolidation or merger of the Corporation with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Corporation, shall not be deemed to be a liquidation, dissolution or
winding up within the meaning of this Section 2, but shall be subject to the
provisions of Section 5 hereof.
3. Voting Rights.
-------------
The holder of each share of Series A Preferred Stock shall be entitled to
the number of votes equal to the number of shares of Common Stock into which
such share of Series A Preferred Stock could be converted and shall have voting
rights and powers equal to the voting rights and powers of the Common Stock
(except as otherwise expressly provided herein or as required by law), voting
together as a single class, and shall be entitled to notice of any stockholders'
meeting in accordance with the By-laws of the Corporation. Fractional votes
shall not, however, be permitted and any fractional voting rights resulting from
the above formula (after aggregating all shares into which shares of Series A
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
4. Conversion Rights. The holders of the Series A Preferred Stock shall
-----------------
have the conversion rights as follows:
(a) Right to Convert: Each share of the Series A Preferred Stock shall
----------------
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share, at the office of the Corporation or any transfer
agent for such shares, into one fully paid and nonassessable share of Common
Stock (the "Series A Conversion Rate"), subject to adjustment as hereinafter
provided.
-4-
<PAGE>
(b) Automatic Conversion.
--------------------
1. Initial Public Offering. Each share of Series A Preferred
-----------------------
Stock shall automatically be converted into shares of Common Stock at the then-
effective Series A Conversion Rate immediately upon the closing of the sale of
the Corporation's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act of 1933, as amended (other than a
registration relating solely to a transaction under Rule 145 under such Act (or
any successor thereto) or to an employee benefit plan of the Corporation), (i)
at a public offering price (prior to underwriter commissions and expenses) equal
to or exceeding $5.00 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to such shares), and (ii) the
aggregate proceeds to the Corporation (before deduction for underwriter
commissions and expenses relating to the issuance, including without limitation
fees of the Corporation's counsel) of which equal or exceed $5,000,000.
2. Stockholder Vote. Each share of Series A Preferred Stock
----------------
shall automatically be converted into shares of Common Stock at the then-
effective Series A Conversion Rate upon the affirmative vote or written consent
of holders of not less than two-thirds of the shares of Series A Preferred Stock
outstanding at such time.
(c) Mechanics of Conversion. Before any holder of Series A Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that such holder
elects to convert the same and shall state therein the name or names in which
such holder wishes the certificate or certificates for shares of Common Stock to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of surrender of the
shares of Series A Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
(d) Adjustments to Conversion Prices for Combinations or Subdivisions
-----------------------------------------------------------------
of Common Stock. In the event that this Corporation at any time or from time to
- ---------------
time after the date of filing of this Designation shall declare or pay any
dividend on the Common Stock payable in Common Stock or in any right to acquire
-5-
<PAGE>
Common Stock, or shall effect a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the Series A
Conversion Rate in effect immediately prior to such event shall, concurrently
with the effectiveness of such event, be proportionately and equitably decreased
or increased, as appropriate.
(e) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation.
(f) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Series A Conversion Rate pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series A Preferred Stock, as the case may be, a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Series A Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the applicable Series A Conversion
Rate at the time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be received upon
the conversion of such Series A Preferred Stock.
(g) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to this Designation.
-6-
<PAGE>
(h) Fractional Shares. No fractional shares shall be issued upon the
-----------------
conversion of any share or shares of Series A Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Series A Preferred Stock by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the issuance
of any fractional share. If, after the aforementioned aggregation, the
conversion would result in the issuance of a fraction of a share of Common
Stock, the Corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors of the Corporation).
(i) Adjustments. Except under the circumstances set forth in Section
-----------
5 below (in which case this subsection (i) shall not apply), in case of any
reorganization or any reclassification of the capital stock of the Corporation,
any consolidation or merger of the Corporation with or into another corporation
or corporations, or the conveyance of all or substantially all of the assets of
the Corporation to another corporation, each share of Series A Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property (including cash) to which a holder of the number of
shares of Common Stock deliverable upon conversion of such share of Series A
Preferred Stock would have been entitled upon the record date of (or date of, if
no record date is fixed) such reorganization, reclassification, consolidation,
merger or conveyance, and, in any case, appropriate adjustment (as determined by
the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of the Series A Preferred Stock, to the end that the provisions set
forth herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or property
(including cash) thereafter deliverable upon the conversion of the shares of
such Series A Preferred Stock.
5. Merger, Consolidation.
---------------------
(a) At any time, in the event of:
1. a consolidation or merger of the Corporation with or into
any other corporation, or any other entity or person in which the stockholders
of the Corporation hold in the aggregate less than one-half of the outstanding
voting securities of the surviving entity after the merger,
2. any corporate reorganization in which the stockholders of
the Corporation hold in the aggregate less than one-half of the outstanding
voting securities of the surviving entity after the merger,
-7-
<PAGE>
3. a sale of all or substantially all of the assets of the
Corporation, or
4. a reorganization of the Corporation as defined in Section
368(a)(1)(B) of the Internal Revenue Code of 1986 or in which more than fifty
percent (50%) of the outstanding stock of the Corporation is exchanged
(calculated on an as-converted to Common Stock basis), the holders of the Series
A Preferred Stock, the holders of any other class or series of preferred stock
hereafter created and issued and the holders of Common Stock shall be paid in
cash or in securities received from the acquiring corporation or in a
combination thereof, at the closing of any such transaction, amounts per share
equal to the amounts per share which would be payable to such holders pursuant
to Section 2 if all consideration received by the Corporation and its
stockholders in connection with such event were being available distributed in a
liquidation of the Corporation; provided, however, that if upon the occurrence
of such event, the assets and funds thus available for distribution among the
holders of the Series A Preferred Stock and the holders of any other class or
series of preferred stock ranking on a parity with or senior to the Series A
Preferred Stock shall be insufficient to permit the payment to such holders of
the full preferential amounts due to them pursuant to Section 2 above, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series A Preferred Stock
and the holders of any other such class or series of preferred stock in
proportion to the preferential amount each such holder is otherwise entitled to
receive.
(b) Any securities to be delivered to stockholders pursuant to
Section 5(a) above shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
1. If traded on a securities exchange, the value shall be deemed to
be the average of the security's closing prices on such exchange over the 30-day
period ending three (3) days prior to the closing;
2. If actively traded over-the-counter, the value shall be deemed to
be the average of the midpoints of the closing bid and ask prices over the 30-
day period ending three (3) days prior to the closing, and
3. If there is no active public market, the value shall be the fair
market value thereof, as mutually determined by the Corporation and the holders
of not less than a majority of the outstanding Series A Preferred Stock; and
-8-
<PAGE>
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make an
appropriate discount from the market value determined as above in (i)(1), (2) or
(3) to reflect the approximate fair market value thereof, as mutually determined
by the Corporation and the holders of not less than a majority of the
outstanding Series A Preferred Stock.
(iii) In the event of any dispute between the Corporation and the
holders of Series A Preferred Stock regarding valuation issues as provided in
this Section 5(b), such dispute shall be submitted to binding arbitration in
accordance with the currently prevailing commercial arbitration rules of the
American Arbitration Association. The decisions and awards rendered in such
proceedings shall be final and conclusive and may be entered in any court having
jurisdiction thereof.
(c) The Corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than
fifteen (15) days prior to the stockholders' meeting called to approve such
transaction or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of said notices shall describe the
material terms and conditions of the contemplated transaction as well as the
terms and conditions of this Section 5, and the Corporation shall thereafter
give such holders prompt notice of any material changes.
6. Amendment. Any term relating to the Series A Preferred Stock may be
---------
amended and the observance of any term relating to the Series A Preferred Stock
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the vote or written consent of holders
of at least a majority of the shares of the Series A Preferred Stock then
outstanding and the Corporation. Any amendment or waiver so effected shall be
binding upon the Corporation and any holder of shares of the Series A Preferred
Stock.
7. Restrictions and Limitations. As long as any shares of Series A
----------------------------
Preferred Stock shall be issued and outstanding, the Corporation shall not,
without first obtaining the approval (by vote or consent as provided by law) of
the holders of not less than a majority of the total number of shares of the
Series A Preferred Stock then outstanding:
(a) amend or repeal any provision of, or add any provision to, the
Company's Restated Certificate of Incorporation or By-laws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series A Preferred Stock;
-9-
<PAGE>
(b) authorize, create or issue shares of any class or series of stock
having any preference or priority superior to any such preference or priority of
the Series A Preferred Stock;
(c) increase or decrease (other than for decreases resulting from
conversion of the Series A Preferred Stock) the number of authorized shares of
Series A Preferred Stock; or
(d) amend this Subsection 7.
8. No Reissuance of Preferred Stock. No share or shares of Series A
--------------------------------
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
2.9 Designation Of Rights And Preferences Of Series B Preferred Stock
The Board of Directors of the Corporation hereby establishes a new series
of preferred stock to be called "Series B Preferred Stock" consisting of
2,580,000 shares with the following rights, preferences and other terms:
1. Dividends.
---------
(a) The Series B Preferred Stock shall rank, with respect to the
payment of dividends, on a parity with the Series A Preferred Stock.
(b) Subject to the rights of holders, if any, of shares of preferred
stock then outstanding that have a right to dividends ranking equal to or
superior to the rights of holders of Series B Preferred Stock, the holders of
the Series B Preferred Stock shall be entitled to receive dividends, prior and
in preference to any dividend on Common Stock, at the rate of $.05 per share of
Series B Preferred Stock, per annum (as adjusted for any stock dividends,
combinations or splits with respect to such shares), whenever funds are legally
available and when and if declared by the Board of Directors. The dividends
shall be non-cumulative and non-accruing.
(c) No dividends (other than those payable solely in Common Stock)
shall be paid on any Common Stock of the Corporation during any fiscal year of
the Corporation until dividends in the total amount set forth above per share of
Series B Preferred Stock per annum (as adjusted for any stock dividends,
combinations or splits with respect to such shares) shall have been paid or
declared and set apart during that fiscal year on the Series B Preferred Stock,
and no dividends shall be paid on any share of Common Stock unless a dividend
(including, for this purpose the amount of any dividends paid pursuant to the
provisions of Subsection 1(b)) is paid with respect
-10-
<PAGE>
to all outstanding shares of Series B Preferred Stock in an amount for each such
share of Series B Preferred Stock equal to or greater than the aggregate amount
of such dividends for all shares of Common Stock into which each such share of
Series B Preferred Stock could then be converted.
2. Liquidation Preference.
----------------------
(a) The Series B Preferred Stock shall rank, with respect to
liquidation preference, on a parity with the Series A Preferred Stock. In the
event of any liquidation, dissolution or winding up of the Corporation, either
voluntary or involuntary, the holders of the Series B Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of Common Stock by
reason of their ownership thereof, the amount of $1.12 per share then held by
them (as adjusted for any stock dividends, combinations or splits with respect
to such shares) plus all declared but unpaid dividends on each such share. If,
upon the occurrence of such event, the assets and funds thus distributed among
the holders of the Series B Preferred Stock shall be insufficient to permit the
payment to such holders and the holders of any other class or series of
preferred stock ranking on a parity with or senior to the Series B Preferred
Stock of the full preferential amounts due to such holders, then the entire
assets and funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series B Preferred Stock and the
holders of any other such class or series of preferred stock in proportion to
the preferential amount each such holder is otherwise entitled to receive.
(b) After payment has been made to the holders of the Series B
Preferred Stock and the holders of any other class or series of preferred stock
of the full amounts to which they shall be entitled as provided in subsection
2(a), the entire remaining assets and funds of the Corporation legally available
for distribution, if any, shall be distributed among the holders of Common Stock
in proportion to the shares of Common Stock then held by each.
(c) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or a sale of all or substantially all of the
assets of the Corporation, shall not be deemed to be a liquidation, dissolution
or winding up within the meaning of this Section 2 entitled "Liquidation
Preference", but shall be subject to the provisions of Section 5 hereof.
3. Voting Rights.
-------------
The holder of each share of Series B Preferred Stock shall be entitled to
the number of votes equal to the number of shares of Common Stock into which
such
-11-
<PAGE>
share of Series B Preferred Stock could be converted and shall have voting
rights and powers equal to the voting rights and powers of the Common Stock
(except as otherwise expressly provided herein or as required by law), voting
together as a single class with the holders of Common Stock, and shall be
entitled to notice of any stockholders' meeting in accordance with the By-laws
of the Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series B Preferred Stock held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
4. Conversion Rights. The holders of the Series B Preferred Stock shall
-----------------
have the conversion rights as follows:
(a) Right to Convert: Each share of the Series B Preferred Stock shall
----------------
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share, at the office of the Corporation or any transfer
agent for such shares, into one fully paid and nonassessable share of Common
Stock (the "Series B Conversion Rate"), subject to adjustment as hereinafter
provided.
(b) Automatic Conversion.
--------------------
1. Initial Public Offering. Each share of Series B Preferred
-----------------------
Stock shall automatically be converted into shares of Common Stock at the then-
effective Series B Conversion Rate immediately upon the closing of the sale of
the Corporation's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act of 1933, as amended (other than a
registration relating solely to a transaction under Rule 145 under such Act (or
any successor thereto) or to an employee benefit plan of the Corporation), the
aggregate proceeds to the Corporation (before deduction for underwriter
commissions and expenses relating to the issuance, including without limitation
fees of the Corporation's counsel) of which equal or exceed $5,000,000.
2. Stockholder Vote. Each share of Series B Preferred Stock
----------------
shall automatically be converted into shares of Common Stock at the then-
effective Series B Conversion Rate upon the affirmative vote or written consent
of holders of not less than two-thirds of the shares of Series B Preferred Stock
outstanding at such time.
(c) Mechanics of Conversion. Before any holder of Series B Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written
-12-
<PAGE>
notice to the Corporation at such office that such holder elects to convert the
same and shall state therein the name or names in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series B Preferred Stock, a certificate or certificates
for the number of shares of Common Stock to which such holder shall be entitled
as aforesaid. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of surrender of the shares of Series
B Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock on
such date.
(d) Adjustments to Conversion Prices for Combinations or Subdivisions
-----------------------------------------------------------------
of Common Stock. In the event that this Corporation at any time or from time to
- ---------------
time after the date of the first issuance of shares of the Series B Preferred
Stock shall declare or pay any dividend on the Common Stock payable in Common
Stock or in any right to acquire Common Stock, or shall effect a subdivision of
the outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire Common Stock), or in the
event the outstanding shares of Common Stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, then the Series B Conversion Rate in effect immediately prior to such
event shall, concurrently with the effectiveness of such event, be
proportionately and equitably decreased or increased, as appropriate.
(e) No Impairment. The Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation.
(f) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Series B Conversion Rate pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series B Preferred Stock, as the case may be, a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Series B Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the applicable Series B Conversion
Rate at the time in effect, and (iii) the number
-13-
<PAGE>
of shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of such Series B Preferred Stock.
(g) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series B Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series B Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series B
Preferred Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to this Designation.
(h) Fractional Shares. No fractional shares shall be issued upon the
-----------------
conversion of any share or shares of Series B Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Series B Preferred Stock by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the issuance
of any fractional share. If, after the aforementioned aggregation, the
conversion would result in the issuance of a fraction of a share of Common
Stock, the Corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors of the Corporation).
(i) Adjustments. Except under the circumstances set forth in Section
-----------
5 below (in which case this subsection (i) shall not apply), in case of any
reorganization or any reclassification of the capital stock of the Corporation,
any consolidation or merger of the Corporation with or into another corporation
or corporations, or the conveyance of all or substantially all of the assets of
the Corporation to another corporation, each share of Series B Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property (including cash) to which a holder of the number of
shares of Common Stock deliverable upon conversion of such share of Series B
Preferred Stock would have been entitled upon the record date of (or date of, if
no record date is fixed) such reorganization, reclassification, consolidation,
merger or conveyance, and, in any case, appropriate adjustment (as determined by
the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of the Series B Preferred Stock, to the end that the provisions
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<PAGE>
set forth herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or property
(including cash) thereafter deliverable upon the conversion of the shares of
such Series B Preferred Stock.
5. Merger, Consolidation.
---------------------
(a) At any time, in the event of:
1. a consolidation or merger of the Corporation with or into
any other corporation, or any other entity or person in which the stockholders
of the Corporation hold in the aggregate less than one-half of the outstanding
voting securities of the surviving entity after the merger,
2. any corporate reorganization in which the stockholders of
the Corporation hold in the aggregate less than one-half of the outstanding
voting securities of the surviving entity after the merger,
3. a sale of all or substantially all of the assets of the
Corporation, or
4. a reorganization of the Corporation as defined in Section
368(a)(1)(B) of the Internal Revenue Code of 1986 or in which more than fifty
percent (50%) of the outstanding stock of the Corporation is exchanged
(calculated on an as-converted to Common Stock basis), the holders of the Series
B Preferred Stock, the holders of any other class or series of preferred stock
hereafter created and issued and the holders of Common Stock shall be paid in
cash or in securities received from the acquiring corporation or in a
combination thereof, at the closing of any such transaction, amounts per share
equal to the amounts per share which would be payable to such holders pursuant
to Section 2 if all consideration received by the Corporation and its
stockholders in connection with such event were being distributed in a
liquidation of the Corporation; provided, however, that if upon the occurrence
of such event, the assets and funds thus available for distribution among the
holders of the Series B Preferred Stock and the holders of any other class or
series of preferred stock ranking on a parity with or senior to the Series B
Preferred Stock shall be insufficient to permit the payment to such holders of
the full preferential amounts due to them pursuant to Section 2 above, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series B Preferred Stock
and the holders of any other such class or series of preferred stock in
proportion to the preferential amount each such holder is otherwise entitled to
receive.
(b) Any securities to be delivered to stockholders pursuant to Section
5(a) above shall be valued as follows:
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(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
1. If traded on a securities exchange, the value shall be deemed to
be the average of the security's closing prices on such exchange over the 30-day
period ending three (3) days prior to the closing;
2. If actively traded over-the-counter, the value shall be deemed to
be the average of the midpoints of the closing bid and ask prices over the 30-
day period ending three (3) days prior to the closing, and
3. If there is no active public market, the value shall be the fair
market value thereof, as mutually determined by the Corporation and the holders
of not less than a majority of the outstanding Series B Preferred Stock; and
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make an
appropriate discount from the market value determined as above in (i)(1), (2) or
(3) to reflect the approximate fair market value thereof, as mutually determined
by the Corporation and the holders of not less than a majority of the
outstanding Series B Preferred Stock.
(iii) In the event of any dispute between the Corporation and the
holders of Series B Preferred Stock regarding valuation issues as provided in
this Section 5(b), such dispute shall be submitted to binding arbitration in
accordance with the currently prevailing commercial arbitration rules of the
American Arbitration Association. The decisions and awards rendered in such
proceedings shall be final and conclusive and may be entered in any court having
jurisdiction thereof.
(c) The Corporation shall give each holder of record of Series B
Preferred Stock written notice of such impending transaction not later than
fifteen (15) days prior to the meeting of shareholders called to approve such
transaction or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of said notices shall describe the
material terms and conditions of the contemplated transaction as well as the
terms and conditions of this Section 5, and the Corporation shall thereafter
give such holders prompt notice of any material changes.
6. Amendment. Any term relating to the Series B Preferred Stock may be
---------
amended and the observance of any term relating to the Series B Preferred Stock
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the vote or written consent of holders
of at least a majority of the shares of the Series B Preferred Stock then
outstanding and the Corporation. Any
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<PAGE>
amendment or waiver so effected shall be binding upon the Corporation and any
holder of shares of the Series B Preferred Stock.
7. Restrictions and Limitations. As long as any shares of Series B
----------------------------
Preferred Stock shall be issued and outstanding, the Corporation shall not,
without first obtaining the approval (by vote or written consent as provided by
law) of the holders of not less than a majority of the total number of shares
of the Series B Preferred Stock then outstanding:
(a) amend or repeal any provision of, or add any provision to, the
Company's Articles of Incorporation or Bylaws if such action would alter or
change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series B Preferred Stock;
(b) authorize, create or issue shares of any class or series of stock
having any preference or priority superior to any such preference or priority of
the Series B Preferred Stock;
(c) increase or decrease (other than for decreases resulting from
conversion of the Series B Preferred Stock) the number of authorized shares of
Series B Preferred Stock; or
(d) amend this Section 7.
8. No Reissuance of Preferred Stock. No share or shares of Series B
--------------------------------
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
2.10 Series C Preferred Stock
The series of Preferred Stock called "Series C Preferred Stock", consisting
of 10,000,000 shares, shall have the following rights, preferences and other
terms:
1. Dividends.
---------
(a) The Series C Preferred Stock shall rank, with respect to the
payment of dividends, on a parity with the Series A Preferred Stock and the
Series B Preferred Stock.
(b) The holders of the Series C Preferred Stock shall be entitled to
receive dividends, prior and in preference to any dividend on Common Stock, at
the rate of $.10 per share of Series C Preferred Stock, per annum (as adjusted
for any stock dividends, combinations or splits with respect to such shares),
whenever funds
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<PAGE>
are legally available and when and if declared by the Board of Directors. The
dividends shall be non-cumulative and non-accruing.
(c) No dividends (other than those payable solely in Common Stock)
shall be paid on any Common Stock of the Corporation during any fiscal year of
the Corporation until dividends in the total amount set forth above per share of
Series C Preferred Stock per annum (as adjusted for any stock dividends,
combinations or splits with respect to such shares) shall have been paid or
declared and set apart during that fiscal year on the Series C Preferred Stock,
and no dividends shall be paid on any share of Common Stock unless a dividend
(including, for this purpose the amount of any dividends paid pursuant to the
provisions of Subsection 1(b)) is paid with respect to all outstanding shares of
Series C Preferred Stock in an amount for each such share of Series C Preferred
Stock equal to or greater than the aggregate amount of such dividends for all
shares of Common Stock into which each such share of Series C Preferred Stock
could then be converted.
2. Liquidation Preference.
----------------------
(a) The Series C Preferred Stock shall rank, with respect to
liquidation preference, on a parity with the Series A Preferred Stock and the
Series B Preferred Stock. In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series C Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of Common Stock by reason of their ownership thereof,
the amount of $1.94 per share then held by them (as adjusted for any stock
dividends, combinations or splits with respect to such shares) plus all declared
but unpaid dividends on each such share. If, upon the occurrence of such event,
the assets and funds thus distributed among the holders of the Series C
Preferred Stock shall be insufficient to permit the payment to such holders and
the holders of any other class or series of preferred stock ranking on a parity
with or senior to the Series C Preferred Stock of the full preferential amounts
due to such holders, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series C Preferred Stock and the holders of any other such class or series of
preferred stock in proportion to the preferential amount each such holder is
otherwise entitled to receive.
(b) After payment has been made to the holders of the Series C
Preferred Stock and the holders of any other class or series of preferred stock
of the full amounts to which they shall be entitled as provided in subsection
2(a), the entire remaining assets and funds of the Corporation legally available
for distribution, if any, shall be distributed among the holders of Series C
Preferred Stock, subject to the limitation set forth below, and Common Stock in
a manner such that the amount
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<PAGE>
distributed to each holder of Common Stock and Series C Preferred Stock under
this Section 2(b) shall equal the amount obtained by multiplying the entire
assets and funds of the corporation legally available for distribution pursuant
to this Section 2(b) by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock then held by the holder and the number of
shares of Common Stock issuable upon conversion of Series C Preferred Stock then
held by the holder, and the denominator of which shall be the sum of the total
number of shares of Common Stock then outstanding and the total number of shares
of Common Stock issuable upon conversion of the total number of shares of Series
C Preferred Stock then outstanding; provided, however that at such time as the
aggregate distributions of liquidation preferences pursuant to Sections 2(a) and
(b) shall equal $5.82 per share of Series C Preferred (based on the
Corporation's capital stock as constituted on the Original Issue Date (as
defined in Section 4(c)(i) below) and subject to proportionate adjustment for
stock splits, combinations and dividends), such holders of Series C Preferred
shall not be entitled to any further distribution pursuant to this Section 2(b)
with respect to shares of Series C Preferred.
(c) At any time, in the event of:
1. a consolidation or merger of the Corporation with or into
any other corporation, or any other entity or person in which the stockholders
of the Corporation hold in the aggregate less than one-half of the outstanding
voting securities of the surviving entity after the merger,
2. any corporate reorganization in which the stockholders of
the Corporation hold in the aggregate less than one-half of the outstanding
voting securities of the surviving entity after the merger,
3. a sale of all or substantially all of the assets of the
Corporation, or
4. a reorganization of the Corporation as defined in Section
368(a)(1)(B) of the Internal Revenue Code of 1986 or in which more than fifty
percent (50%) of the outstanding stock of the Corporation is exchanged
(calculated on an as-converted to Common Stock basis), the holders of the Series
C Preferred Stock, the holders of any other class or series of preferred stock
and the holders of Common Stock shall be paid in cash or in securities received
from the acquiring corporation or in a combination thereof, at the closing of
any such transaction, amounts per share equal to the amounts per share which
would be payable to such holders pursuant to Section 2(a) and Section 2(b) if
all consideration received by the Corporation and its stockholders in connection
with such event were being distributed in a liquidation of the Corporation;
provided, however, that if upon the occurrence of such event, the
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<PAGE>
assets and funds thus available for distribution among the holders of the Series
C Preferred Stock and the holders of any other class or series of preferred
stock ranking on a parity with or senior to the Series C Preferred Stock shall
be insufficient to permit the payment to such holders of the full preferential
amounts due to them pursuant to Section 2(a), then the entire assets and funds
of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series C Preferred Stock and the holders of any
other such class or series of preferred stock in proportion to the preferential
amount each such holder is otherwise entitled to receive.
(d) Any securities to be delivered to stockholders pursuant to
Section 2(c) above shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
1. If traded on a securities exchange, the value shall be deemed to
be the average of the security's closing prices on such exchange over the 30-day
period ending three (3) days prior to the closing;
2. If actively traded over-the-counter, the value shall be deemed to
be the average of the midpoints of the closing bid and ask prices over the 30-
day period ending three (3) days prior to the closing, and
3. If there is no active public market, the value shall be the fair
market value thereof, as mutually determined by the Corporation and the holders
of not less than a majority of the outstanding Series C Preferred Stock; and
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make an
appropriate discount from the market value determined as above in (i)(1), (2) or
(3) to reflect the approximate fair market value thereof, as mutually determined
by the Corporation and the holders of not less than a majority of the
outstanding Series C Preferred Stock.
(iii) In the event of any dispute between the Corporation and the
holders of Series C Preferred Stock regarding valuation issues as provided in
this Section 2(d), such dispute shall be submitted to binding arbitration in
accordance with the currently prevailing commercial arbitration rules of the
American Arbitration Association. The decisions and awards rendered in such
proceedings shall be final and conclusive and may be entered in any court having
jurisdiction thereof.
(e) The Corporation shall give each holder of record of Series C
Preferred Stock written notice of such impending transaction not later than
fifteen (15)
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<PAGE>
days prior to the meeting of shareholders called to approve such transaction or
twenty (20) days prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
transaction. The first of said notices shall describe the material terms and
conditions of the contemplated transaction as well as the terms and conditions
of this Section 2, and the Corporation shall thereafter give such holders prompt
notice of any material changes.
3. Voting Rights.
-------------
(a) General. Except as otherwise required by law or by Sections 3(b)
-------
or 5 below, each holder of shares of Series C Preferred Stock shall be entitled
to the number of votes equal to the number of shares of Common Stock into which
such shares of Series C Preferred Stock could be converted pursuant to Section 4
and shall have voting rights equal to the voting rights and powers of the Common
Stock, voting together as a single class, and shall be entitled to notice of any
meetings of shareholders in accordance with the Bylaws of the Corporation (the
"Bylaws"). Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Series C Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
(b) Board of Directors and Voting for Directors. The number of
-------------------------------------------
directors constituting the Board of Directors shall be as determined in
accordance with the Articles of Incorporation and the Bylaws. The holders of
Series C Preferred Stock, voting as a separate class, shall be entitled to
nominate and elect one (1) director (the "Series C Director"). The holders of
Common Stock and Preferred Stock, voting together, shall be entitled to nominate
and elect all other directors (the "Other Directors"). Any vacancy on the Board
of Directors occurring because of death, resignation or removal of a director
elected by the holders of any class or series of shares shall be filled by the
vote or written consent of the holders of a majority of the shares of such class
or series. Except as otherwise provided above, any vacancy on the Board of
Directors, including a vacancy resulting from an increase in the number of
directors, shall be filled by the Board of Directors in accordance with the
Bylaws.
4. Conversion Rights.
-----------------
(a) Each share of Series C Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of such
share, at the office of the Corporation or any transfer agent for the Series C
Preferred Stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $1.94 by the conversion price
applicable to such share, determined as hereinafter provided, in effect on the
date the certificate is surrendered
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<PAGE>
for conversion. The conversion price of shares of Series C Preferred (the
"Series C Conversion Price") shall initially be $1.94 per share of Common Stock.
Each share of Series C Preferred Stock shall automatically be converted into
shares of Common Stock at the then effective Series C Conversion Price upon the
closing of a firm commitment underwritten public offering pursuant to an
effective registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), covering
the offer and sale of Common Stock to the public with an aggregate offering
price of not less than $20,000,000 (the "Proceeds Target"). Notwithstanding the
foregoing or any other provision of these Articles of Incorporation, in the
event the Corporation closes a firm commitment underwritten public offering
pursuant to an effective registration statement filed with the SEC under the Act
which meets the Proceeds Target but is at a per share price to public which is
less than $3.88 (based on the Corporation's capital stock as constituted on the
Original Issue Date (as defined in Section 4(c)(i) below) and appropriately
adjusted for any stock splits, stock dividends, reclassifications and like
events), each share of Series C Preferred Stock shall, upon the closing of such
offering, be converted into that number of shares of Common Stock which equals
$3.88 (based on the Corporation's capital stock as constituted on the Original
Issue Date (as defined in Section 4(c)(i) below) and appropriately adjusted for
any stock splits, stock dividends, reclassifications and like events) divided by
the per share price to public in such offering. In the event of the automatic
conversion of the Series C Preferred Stock upon a public offering as set forth
above, the person(s) entitled to receive the Common Stock issuable upon such
conversion of Series C Preferred Stock shall not be deemed to have converted
such Series C Preferred Stock until immediately prior to the closing of such
sale of securities.
(b) No fractional shares of Common Stock shall be issued upon
conversion of Series C Preferred Stock. In lieu of any fractional shares to
which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Series C Conversion
Price. Before any holder of Series C Preferred Stock shall be entitled to
convert the same into full shares of Common Stock and to receive certificates
therefor, the holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Series C Preferred Stock, and shall give written notice to the Corporation at
such office that he elects to convert the same; provided, however, that in the
event of an automatic conversion pursuant to Section 4(a), the outstanding
shares of Series C Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its transfer
agent, and provided further that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such automatic
conversion
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<PAGE>
unless the certificates evidencing such shares of Series C Preferred Stock are
either delivered to the Corporation or its transfer agent as provided above, or
the holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as practicable
after such delivery, or such agreement and indemnification in the case of a
lost, stolen or destroyed certificate, issue and deliver at such office to such
holder of Series C Preferred Stock, a certificate or certificates for the number
of shares of Common Stock to which he shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series C Preferred Stock to be converted, or
in the case of automatic conversion on the date of closing of the offering or
the effective date of such vote or written consent, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
(c) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) For purposes of this Section 4(c), the following definitions shall
apply:
1) "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire from the Corporation either Common
Stock or Convertible Securities.
2) "Original Issue Date" shall mean the date on which the first
-------------------
share of Series C Preferred Stock was issued.
3) "Convertible Securities" shall mean any evidence of
----------------------
indebtedness, shares or other securities convertible into or exchangeable for
Common Stock.
4) "Additional Shares of Common" shall mean all shares of
---------------------------
Common Stock issued (or, pursuant to Section 4(c)(iii), deemed to be issued) by
the Corporation after the Original Issue Date, other than shares of Common Stock
or Options issued or issuable:
a) upon conversion of shares of Preferred Stock;
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<PAGE>
b) to officers, directors, employees, agents and advisors
of, and independent contractors and consultants to, the Corporation pursuant to
any stock option or any stock option, stock incentive compensation or stock
purchase plans or agreements on terms approved by the Board of Directors, but
not exceeding 6,343,470 shares of Common Stock (net of any repurchase of such
shares or cancellations or expirations of options), subject to adjustment for
all subdivisions and combinations;
c) as a dividend or distribution on Preferred Stock or any
event for which adjustment is made pursuant to Section 4(c)(vi) hereof;
d) to persons or entities with whom the Corporation has a
business relationship, including under equipment leasing arrangements, bank or
other institutional loans, acquisitions of companies or product lines or other
arrangements or transactions wherein the principal purpose of the issuance of
such Common Stock is for non-equity financing purposes; provided, however, that
such arrangements are approved by the Board of Directors of the Corporation;
e) pursuant to that certain Stock Purchase Warrant, dated
August 7, 1998, previously issued by this Corporation; or
f) by way of dividend or other distribution on shares of
Common Stock excluded from the definition of Additional Shares of Common by any
of the foregoing clauses a)-e) or this clause (f).
(ii) No adjustment in the number of shares of Common Stock into which
Series C Preferred Stock is convertible shall be made, by adjustment in the
Series C Conversion Price in respect of the issuance of Additional Shares of
Common or otherwise, unless the consideration per share for an Additional Share
of Common issued or deemed to be issued by the Corporation is less than the
Series C Conversion Price in effect on the date of, and immediately prior to,
the issue of such Additional Share of Common.
(iii) Deemed Issuances of Additional Shares of Common.
------------------------------------------------
(1) Options and Convertible Securities. In the event that the
-----------------------------------
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the
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<PAGE>
conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common issued as of the time of such issue or, in the case
such a record date shall have been fixed, as of the close of business on such
record date, provided that Additional Shares of Common shall not be deemed to
have been issued unless the consideration per share (determined pursuant to
Section 4(c)(v) hereof) of such Additional Shares of Common would be less than
the Series C Conversion Price in effect on the date of and immediately prior to
such issue, or such record date, as the case may be, and provided further that
in any such case in which Additional Shares of Common are deemed to be issued:
(a) no further adjustment in the Series C Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, or decrease or increase in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Series C Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(c) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price for Series C Preferred Stock then
outstanding computed upon the original issue thereof (or upon the occurrence of
a record date with respect thereto) and any subsequent adjustments based thereon
shall, upon such expiration, be recomputed as if:
(i) in the case of Convertible Securities or Options for
Common Stock the only Additional Shares of Common issued were the shares of
Common Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of such exercised Options plus the consideration actually received by
the Corporation upon such exercise or for the issue of all such Convertible
Securities which were actually converted or exchanged, plus the additional
consideration, if any, actually received by the Corporation upon such conversion
or exchange, and
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<PAGE>
(ii) in the case of Options for Convertible Securities only
the Convertible Securities, if any, actually issued upon the exercise thereof
were issued at the time of issue of such Options, and the consideration received
by the Corporation for the Additional Shares of Common deemed to have been then
issued was the consideration actually received by the Corporation for the issue
of such exercised Options, plus the consideration deemed to have been received
by the Corporation (determined pursuant to Section 4(d)(v)) upon the issue of
the Convertible Securities with respect to which such Options were actually
exercised;
(d) no readjustment pursuant to Section 4(d)(iii)(1)(b) or (c)
above shall have the effect of increasing the Series C Conversion Price to an
amount which exceeds the lower of (i) the Series C Conversion Price on the
original adjustment date immediately prior to the original adjustment, or (ii)
the Series C Conversion Price that would have resulted from any issuance of
Additional Shares of Common between the original adjustment date and such
readjustment date;
(e) in the case of any Options which expire by their terms not
more than 30 days after the date of issue thereof, no adjustment of the Series C
Conversion Price shall be made until the expiration or exercise of all such
Options issued on the same date, whereupon such adjustment shall be made in the
same manner provided in clause 4(d)(iii)(1)(c) above; and
(f) if such record date shall have been fixed and such Options or
Convertible Securities are not issued on the date fixed therefor, the adjustment
previously made in the Series C Conversion Price which became effective on such
record date shall be canceled as of the close of business on such record date,
and thereafter the Series C Conversion Price shall be adjusted pursuant to this
Section 4(d)(iii) as of the actual date of their issuance.
(2) Stock Dividends, Stock Distributions and Subdivisions. In the
-----------------------------------------------------
event that the Corporation at any time or from time to time after the Original
Issue Date shall declare or pay any dividend or make any other distribution on
the Common Stock payable in Common Stock, or effect a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in Common Stock), then and in any such event, Additional
Shares of Common shall be deemed to have been issued:
(a) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such dividend or
distribution, or
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<PAGE>
(b) in the case of any such subdivision, at the close of
business on the date immediately prior to the date upon which such corporate
action becomes effective.
If such record date shall have been fixed and such dividend shall not have
been paid on the date fixed therefor, the adjustment previously made in the
Series C Conversion Price which became effective on such record date shall be
cancelled as of the close of business on such record date, and thereafter the
Series C Conversion Price shall be adjusted pursuant to this Section 4(d)(iii)
as of the time of actual payment of such dividend.
(iv) Adjustment of Series C Conversion Price Upon Issuance of
--------------------------------------------------------
Additional Shares of Common. In the event that the Corporation shall issue
- ---------------------------
Additional Shares of Common (including Additional Shares of Common deemed to be
issued pursuant to Section 4(d)(iii), but excluding Additional Shares of Common
issued pursuant to Section 4(d)(iii)(2)), without consideration or for a
consideration per share less than the Series C Conversion Price in effect
immediately prior to such issue, then and in such event, the Series C Conversion
Price shall be reduced, concurrently with such issue, to a price (calculated to
the nearest cent) determined by multiplying the Series C Conversion Price by a
fraction (x) the numerator of which shall be (1) the number of shares of Common
Stock outstanding immediately prior to such issue, plus (2) the number of shares
of Common Stock which the aggregate consideration received by the Corporation
for the total number of Additional Shares of Common so issued would purchase at
the Series C Conversion Price, and (y) the denominator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue,
plus (2) the number of such Additional Shares of Common so issued, provided that
for the purposes of this Section 4(d)(iv), all shares of Common Stock issuable
upon exercise, conversion or exchange of all outstanding vested Options,
outstanding vested warrants to purchase Common Stock or outstanding, then-
convertible or exercisable Convertible Securities, as the case may be, shall be
deemed to be outstanding, and immediately after any Additional Shares of Common
are deemed issued pursuant to subsection (iii) above, such Additional Shares of
Common shall be deemed to be outstanding, and provided further that the Series C
Conversion Price shall not be so reduced at such time if the amount of such
reduction would be an amount less than $0.01, but any such amount shall be
carried forward and reduction with respect thereto made at the time of and
together with any subsequent reduction which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.01 or more.
(v) Determination of Consideration. For purposes of Section 4(c), the
------------------------------
consideration received by the Corporation for the issue of any Additional Shares
of Common Stock shall be computed as follows:
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<PAGE>
(1) Cash and Property. Such consideration shall:
-----------------
a. insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation
excluding amounts paid or payable foraccrued interest or
accrued dividends
b. insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of
Directors; and
c. in the event Additional Shares of Common are issued
together with other shares or securities or other assets
of the Corporation for consideration which covers both,
be the proportion of such consideration so received for
such Additional Shares of Common, computed as provided in
clauses a) and b) above, as determined in good faith by
the Board of Directors.
(2) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Corporation for Additional Shares of
Common deemed to have been issued pursuant to Section
4(d)(iii)(1), relating to Options and Convertible
Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of
such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities, by
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<PAGE>
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(vi) Adjustments for Subdivisions, Combinations, Consolidations or
-------------------------------------------------------------
Stock Dividends. In the event that this Corporation at any time or from time to
- ---------------
time after the date of the first issuance of shares of the Series C Preferred
Stock shall declare or pay any dividend on the Common Stock payable in Common
Stock or in any right to acquire Common Stock, or shall effect a subdivision of
the outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire Common Stock), or in the
event the outstanding shares of Common Stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, then the Series C Conversion Price in effect immediately prior to such
event shall, concurrently with the effectiveness of such event, be
proportionately and equitably decreased or increased, as appropriate.
(vii) No Impairment. The Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation.
(viii) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Series C Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series C Preferred Stock, as the case may be, a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Series C Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the applicable Series C Conversion
Price at the time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be received upon
the conversion of such Series C Preferred Stock.
(ix) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion
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<PAGE>
of the shares of the Series C Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series C Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the Series
C Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to this Designation.
(x) Adjustments. Except under the circumstances set forth in Section
-----------
2 (in which case this subsection (x) shall not apply), in case of any
reorganization or any reclassification of the capital stock of the Corporation,
any consolidation or merger of the Corporation with or into another corporation
or corporations, or the conveyance of all or substantially all of the assets of
the Corporation to another corporation, each share of Series C Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property (including cash) to which a holder of the number of
shares of Common Stock deliverable upon conversion of such share of Series C
Preferred Stock would have been entitled upon the record date of (or date of, if
no record date is fixed) such reorganization, reclassification, consolidation,
merger or conveyance, and, in any case, appropriate adjustment (as determined by
the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of the Series C Preferred Stock, to the end that the provisions set
forth herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or property
(including cash) thereafter deliverable upon the conversion of the shares of
such Series C Preferred Stock.
(xi) Notices of Record Date. In the event that the Corporation shall
----------------------
propose at any time:
(a) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(b) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(c) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or
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<PAGE>
(d) to merge or consolidate with or into any other corporation,
or sell, lease or convey all or substantially all its property or business, or
to liquidate, dissolve or wind up; then, in connection with each such event, the
Corporation shall send to the holders of the Series C Preferred Stock:
at least 20 days' prior written notice of the date on which a record shall
be taken for such dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (c) and (d)
above; and
in the case of the matters referred to in (c) and (d) above, at least 20
days' prior written notice of the date when the same shall take place (and
specifying the date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
the occurrence of such event).
Each such written notice shall be delivered personally or given by first
class mail or courier, postage prepaid, addressed to the holders of Series C
Preferred Stock at the address for each such holder as shown on the books of the
Corporation.
5. Restrictions and Limitations. As long as any shares of Series C
----------------------------
Preferred Stock shall be issued and outstanding, the Corporation shall not,
without first obtaining the approval (by vote or written consent as provided by
law) of the holders of not less than a majority of the total number of shares
of the Series C Preferred Stock then outstanding:
(a) Increase the authorized number of shares of Common Stock, Preferred
Stock or any series of Preferred Stock; or
(b) Adversely alter or change the rights, preferences or privileges of the
Series C Preferred Stock; or
(c) Create any new class or series of shares having any powers,
preferences, or special rights superior to or on a parity with the Series C
Preferred Stock as to dividends or assets; or
(d) Pay or declare any dividend on any shares of Preferred Stock or Common
Stock; or
(e) Merge or consolidate with or into any other corporation or business
entity, or effect any other form of corporate reorganization; or
(f) Acquire, by means of merger, purchase of assets, reorganization,
consolidation or other form of business combination transaction, any business;
or
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<PAGE>
(g) Sell, convey, or otherwise dispose of, all or substantially all of the
property or business of the Corporation; or
(h) Do any act or thing which would result in the taxation of the holders
of the Series C Preferred Stock under Section 305 of the Internal Revenue Code
of 1986, as amended (or any successor provision), as determined in the good
faith reasonable discretion of the Company; or
(i) Increase or decrease the authorized number of directors of the
Corporation to a number greater than or less than three (3).
6. No Reissuance of Preferred Stock. No share or shares of Series C
--------------------------------
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
2.11 Elimination of Preferred Stock Provisions Upon Conversion of Outstanding
Shares
When, as a result of the conversion of the outstanding shares of Preferred
Stock into Common Stock, no shares of such Preferred Stock remain outstanding,
Sections 2.8, 2.9 and 2.10 of these Articles of Incorporation shall no longer be
in effect and operative.
ARTICLE 3. REGISTERED OFFICE AND AGENT
The name of the initial registered agent of this corporation and the
address of its initial registered office are as follows:
Lawco of Washington, Inc.
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
ARTICLE 4. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 5. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist
with respect to shares of stock of this corporation.
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<PAGE>
ARTICLE 6. DIRECTORS
Following an event in which all outstanding shares of Preferred Stock of
this corporation convert into Common Stock (a "Full Conversion Event"), the
number of Directors of this corporation shall be determined, and the Directors
of this corporation shall be elected and removed from office, as provided in
this Article 6.
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein. Prior to the first annual election of
Directors following such a Full Conversion Event, unless a Director earlier
dies, resigns or is removed, his or her term of office shall expire at the next
annual meeting of shareholders. At the first annual election of Directors
following such a Full Conversion Event, the Board of Directors shall be divided
into three classes, with said classes to be as equal in number as may be
possible, with any Director or Directors in excess of the number divisible by
three being assigned to Class 3 and Class 2, as the case may be. At the first
election of Directors to such classified Board of Directors, each Class 1
Director shall be elected to serve until the next ensuing annual meeting of
shareholders, each Class 2 Director shall be elected to serve until the second
ensuing annual meeting of shareholders and each Class 3 Director shall be
elected to serve until the third ensuing annual meeting of shareholders. At
each annual meeting of shareholders following the meeting at which the Board of
Directors is initially classified, the number of Directors equal to the number
of Directors in the class whose term expires at the time of such meeting shall
be elected to serve until the third ensuing annual meeting of shareholders.
Notwithstanding any of the foregoing provisions of this Article, Directors shall
serve until their successors are elected and qualified or until their earlier
death, resignation or removal from office, or until there is a decrease in the
number of Directors.
The Directors of this corporation may be removed only for cause; such
removal shall be by the holders of not less than two-thirds of the shares
entitled to elect the Director or Directors whose removal is sought in the
manner provided by the Bylaws.
ARTICLE 7. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of this corporation, subject to the power of the shareholders to amend or
repeal such Bylaws. The shareholders shall also have the power to amend or
repeal the Bylaws of this corporation and to adopt new Bylaws.
-33-
<PAGE>
ARTICLE 8. AMENDMENTS TO ARTICLES OF INCORPORATION
This corporation reserves the right to amend or repeal any of the
provisions contained in these Articles of Incorporation in any manner now or
hereafter permitted by law, and the rights of the shareholders of this
corporation are granted subject to this reservation. Following a Full
Conversion Event, the limitations on amendment of these Articles of
Incorporation set forth in Section 8.1, 8.2 and 8.3 shall apply.
8.1. Supermajority Voting
Except as provided in Section 8.2 or Section 8.3, the provisions in the
Articles may be amended or repealed only upon the affirmative vote of the
holders of at least two-thirds of the outstanding shares entitled to vote
thereon and, to the extent, if any, provided by resolution adopted by the Board
authorizing the issuance of a class or series of Common Stock or Preferred
Stock, by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of such class or series, voting as a separate voting group:
Article 6 ("Directors")
Article 8 ("Amendments to Articles of Incorporation")
Article 9 ("Limitation of Director Liability")
Article 10 ("Indemnification")
Article 12 ("Special Voting Requirements")
Article 13 ("Special Meeting of Shareholders")
8.2. Majority Voting
Notwithstanding the provisions of Section 8.1, and except as provided in
Section 8.3, an amendment or repeal of an Article identified in Section 8.1 that
is approved by a majority of the Continuing Directors (as defined in Section
12.1), voting separately and as a subclass of Directors, shall require the
affirmative vote of the holders of at least a majority of the outstanding shares
entitled to vote thereon and, to the extent, if any, provided by resolution
adopted by the Board authorizing the issuance of a class or series of Common
Stock or Preferred Stock or required by the provisions of the Washington
Business Corporation Act, by the affirmative vote of the holders of at least a
majority of the outstanding shares of such class or series, voting as a separate
voting group.
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<PAGE>
8.3. No Shareholder Vote
Notwithstanding the provisions of Section 8.1 or 8.2 hereof, if the
amendment or repeal of any Article not identified in Section 8.1 shall have been
approved by a majority of the Continuing Directors, voting separately and as a
subclass of Directors, and if such amendment or repeal is not otherwise required
to be approved by this corporation's shareholders pursuant to the provisions of
the Washington Business Corporation Act or of these Articles of Incorporation
other than this Article 8, then no vote of the shareholders of this corporation
shall be required for approval of such amendment or repeal.
ARTICLE 9. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of Directors, a Director of this corporation shall
not be liable to this corporation or its shareholders for monetary damages for
conduct as a Director. Any amendments to or repeal of this Article 9 shall not
adversely affect any right or protection of a Director of this corporation for
or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
ARTICLE 10. INDEMNIFICATION
This corporation shall indemnify any individual made a party to a
proceeding because that individual is or was a director of this corporation and
shall advance or reimburse the reasonable expenses incurred by such individual
in advance of final disposition of the proceeding, without regard to the
limitations in RCW 23B.08.510 through 23B.08.550 of the Washington Business
Corporation Act, or any other limitation which may hereafter be enacted to the
extent such limitation may be disregarded if authorized by the Articles of
Incorporation, to the full extent and under all circumstances permitted by
applicable law.
ARTICLE 11. SHAREHOLDER ACTIONS
Any action required or permitted to be taken at a shareholders' meeting may
be taken without a meeting or a vote if either:
(i) the action is taken by written consent of all shareholders
entitled to vote on the action; or
(ii) So long as this corporation is not a public company, the
action is taken by written consent of shareholders holding of record, or
otherwise
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<PAGE>
entitled to vote, in the aggregate not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote on the action were present and voted.
To the extent the Washington Business Corporation Act requires prior notice
of any such action to be given to nonconsenting or nonvoting shareholders, such
notice shall be made prior to the date on which the action becomes effective, as
required by the Washington Business Corporation Act. The form of the notice
shall be sufficient to apprise the nonconsenting or nonvoting shareholder of the
nature of the action to be effected, in a manner approved by the directors of
this corporation or by the committee or officers to whom the board has delegated
that responsibility.
ARTICLE 12. SPECIAL VOTING REQUIREMENTS
Following a Full Conversion Event, in addition to any affirmative vote
required by law, by these Articles of Incorporation or otherwise, any "Business
Combination" (as hereinafter defined) involving this corporation shall be
subject to approval in the manner set forth in this Article 12.
12.1. Definitions
For the purposes of this Article 12:
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of this corporation or any of its Subsidiaries with any
other corporation; (ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition or encumbrance, whether in one
transaction or a series of transactions, by this corporation or any
of its Subsidiaries of all or a substantial part of this
corporation's assets otherwise than in the usual and regular course
of business; or (iii) any agreement, contract or other arrangement
providing for any of the foregoing transactions.
(b) "Continuing Director" means any member of the Board of Directors who
was a member of the Board of Directors on November 1, 1999 or who is
elected to the Board of Directors after November 1, 1999 upon the
recommendation of a majority of the Continuing Directors voting
separately and as a subclass of Directors on such recommendation.
(c) "Subsidiary" means a domestic or foreign corporation, a majority of
the outstanding voting shares of which are owned, directly or
indirectly, by this corporation.
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<PAGE>
12.2. Vote Required for Business Combinations
12.2.1.Supermajority Vote
Except as provided in subsections 12.2.2 and 12.2.3 hereof, the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares entitled to vote thereon and, to the extent, if any, provided by
resolution adopted by the Board of Directors authorizing the issuance of a class
or series of Common Stock or Preferred Stock required by the provisions of the
Washington Business Corporation Act, the affirmative vote of the holders of not
less than two-thirds of the outstanding shares of such class or series, voting
as a separate voting group, shall be required for the adoption or authorization
of a Business Combination.
12.2.2.Majority Vote
Notwithstanding subsection 12.2.1 hereof, if a Business Combination shall
have been approved by a majority of the Continuing Directors, voting separately
and as a subclass of Directors, and if such Business Combination is otherwise
required to be approved by this corporation's shareholders pursuant to the
provisions of the Washington Business Corporation Act or of these Articles of
Incorporation other than this Article 12, then the affirmative vote of the
holders of not less than a majority of the outstanding shares entitled to vote
thereon and, to the extent, if any, provided by resolution adopted by the Board
of Directors authorizing the issuance of a class or series of Common Stock or
Preferred Stock or required by the provisions of the Washington Business
Corporation Act, the affirmative vote of the holders of not less than a majority
of the outstanding shares of such class or series, voting as a separate voting
group, shall be required for the adoption or authorization of such Business
Combination.
12.2.3.No Shareholder Vote
Notwithstanding subsection 12.2.1 or 12.2.2 hereof, if a Business
Combination shall have been approved by a majority of the Continuing Directors,
voting separately and as a subclass of Directors, and if such Business
Combination is not otherwise required to be approved by this corporation's
shareholders pursuant to the provisions of the Washington Business Corporation
Act or of these Articles of Incorporation other than this Article 12, then no
vote of the shareholders of this corporation shall be required for approval of
such Business Combination.
ARTICLE 13. SPECIAL MEETING OF SHAREHOLDERS
Following a Full Conversion Event, special meetings of shareholders shall
be called in the manner set forth in this Article 13.
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<PAGE>
The Chairman of the Board, the Chief Executive Officer, the President or
the Board of Directors may call special meetings of the shareholders for any
purpose. Further, a special meeting of the shareholders shall be held if the
holders of not less than twenty-five (25%) percent of all the votes entitled to
be cast on any issue proposed to be considered at such special meeting have
dated, signed and delivered to the Secretary of this corporation, no later than
twenty (20) days prior to the date of such meeting, one or more written demands
for such meeting describing the purpose or purposes for which it is to be held.
ARTICLE 14. RESTATEMENT OF ARTICLES OF INCORPORATION
Following a Full Conversion Event, the Board of Directors may, at its
discretion and without a vote of the shareholders of this corporation, cause the
elimination of the provisions of these Articles of Incorporation which are no
longer operative and in effect by reason of such Full Conversion Event,
including, without limitation, Sections 2.8, 2.9 and 2.10, and make such
clerical amendments as are appropriate to effectuate any amendments to the
provisions of these Articles of Incorporation that become effective upon such
Full Conversion Event, by providing for the filing of restated articles of
incorporation setting forth the provisions of these Articles, as they may be
amended, which remain in effect and operative.
Dated: January 18, 2000
AVENUE A, INC.
/s/ ROBERT M. LITTAUER
----------------------
Robert M. Littauer
Vice President, Finance & Administration,
and Secretary
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
AVENUE A, INC.
Originally adopted on: February 27, 1998
amended and restated on November 16, 1999.
Amendments are listed on page i
<PAGE>
AMENDMENTS
----------
<TABLE>
<CAPTION>
Section Effect of Amendment Date of Amendment
------- ------------------- -----------------
<S> <C> <C>
All Restated in its entirety November 16, 1999
6.2 Allow stock certificates to be December 15, 1999
signed by the Chief Executive Officer
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
SECTION 1. OFFICES...................................................... 1
SECTION 2. SHAREHOLDERS................................................. 1
2.1 Annual Meeting............................................... 1
2.2 Special Meetings............................................. 1
2.3 Meetings by Communication Equipment.......................... 1
2.4 Date, Time and Place of Meeting.............................. 2
2.5 Notice of Meeting............................................ 2
2.6 Waiver of Notice............................................. 2
2.7 Business for Shareholders' Meetings.......................... 3
2.7.1 Business at Annual Meetings........................... 3
2.7.2 Business at Special Meetings.......................... 3
2.7.3 Notice to Corporation................................. 3
2.8 Fixing of Record Date for Determining Shareholders........... 4
2.9 Voting Record................................................ 4
2.10 Quorum....................................................... 4
2.11 Manner of Acting............................................. 5
2.12 Proxies...................................................... 5
2.13 Voting of Shares............................................. 5
2.14 Voting for Directors......................................... 5
2.15 Action by Shareholders Without a Meeting..................... 5
SECTION 3. BOARD OF DIRECTORS........................................... 6
3.1 General Powers............................................... 6
3.2 Number and Tenure............................................ 6
3.3 Nomination and Election...................................... 7
3.3.1 Nomination............................................ 7
3.3.2 Election.............................................. 8
3.4 Annual and Regular Meetings.................................. 8
3.5 Special Meetings............................................. 8
3.6 Meetings by Communications Equipment......................... 8
3.7 Notice of Special Meetings................................... 8
3.7.1 Personal Delivery..................................... 8
3.7.2 Delivery by Mail...................................... 8
3.7.3 Delivery by Private Carrier........................... 9
3.7.4 Facsimile Notice...................................... 9
3.7.5 Delivery by Telegraph................................. 9
3.7.6 Oral Notice........................................... 9
3.8 Waiver of Notice............................................. 9
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3.8.1 In Writing............................................ 9
3.8.2 By Attendance......................................... 9
3.9 Quorum....................................................... 10
3.10 Manner of Acting............................................. 10
3.11 Presumption of Assent........................................ 10
3.12 Action by Board or Committees Without a Meeting.............. 10
3.13 Resignation.................................................. 10
3.14 Removal...................................................... 11
3.15 Vacancies.................................................... 11
3.16 Executive and Other Committees............................... 11
3.16.1 Creation of Committees................................ 11
3.16.2 Authority of Committees............................... 11
3.16.3 Quorum and Manner of Acting........................... 12
3.16.4 Minutes of Meetings................................... 12
3.16.5 Resignation........................................... 12
3.16.6 Removal............................................... 12
3.17 Compensation................................................. 12
SECTION 4. OFFICERS..................................................... 12
4.1 Appointment and Term......................................... 12
4.2 Resignation.................................................. 13
4.3 Removal...................................................... 13
4.4 Contract Rights of Officers.................................. 13
4.5 Chairman of the Board........................................ 13
4.6 Chief Executive Officer...................................... 13
4.7 President.................................................... 14
4.8 Vice President............................................... 14
4.9 Secretary.................................................... 14
4.10 Treasurer.................................................... 14
4.11 Salaries..................................................... 15
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS........................ 15
5.1 Contracts.................................................... 15
5.2 Loans to the Corporation..................................... 15
5.3 Checks, Drafts, Etc.......................................... 15
5.4 Deposits..................................................... 15
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER................... 15
6.1 Issuance of Shares........................................... 15
6.2 Certificates for Shares...................................... 16
6.3 Stock Records................................................ 16
6.4 Restriction on Transfer...................................... 16
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
6.5 Transfer of Shares........................................... 17
6.6 Lost or Destroyed Certificates............................... 17
SECTION 7. BOOKS AND RECORDS............................................ 17
SECTION 8. ACCOUNTING YEAR.............................................. 18
SECTION 9. SEAL......................................................... 18
SECTION 10. INDEMNIFICATION.............................................. 18
10.1 Right to Indemnification..................................... 18
10.2 Restrictions on Indemnification.............................. 19
10.3 Advancement of Expenses...................................... 19
10.4 Right of Indemnitee to Bring Suit............................ 19
10.5 Procedures Exclusive......................................... 20
10.6 Nonexclusivity of Rights..................................... 20
10.7 Insurance, Contracts and Funding............................. 20
10.8 Indemnification of Employees and Agents of the Corporation... 20
10.9 Persons Serving Other Entities............................... 20
SECTION 11. AMENDMENTS.................................................. 21
</TABLE>
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<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
AVENUE A, INC.
SECTION 1. OFFICES
The principal office of the corporation shall be located at the principal
place of business or such other place as the Board of Directors ("Board") may
designate. The corporation may have such other offices, either within or
without the State of Washington, as the Board may designate or as the business
of the corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 Annual Meeting
The annual meeting of the shareholders shall be held within 90 to 180 days
after the fiscal year end of the corporation at a date and time determined by
resolution of the Board of Directors, for the purpose of electing Directors and
transacting such other business as may properly come before the meeting. At any
time prior to the commencement of the annual meeting, the Board may postpone the
annual meeting for a period of up to 120 days from the date fixed for such
meeting in accordance with this subsection 2.1.
2.2 Special Meetings
The Chairman of the Board, the Chief Executive Officer, the President or
the Board may call special meetings of the shareholders for any purpose.
Further, as provided in the Articles of Incorporation, a special meeting of the
shareholders shall be held if the holders of not less than 25% of all the votes
entitled to be cast on any issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary, no later than 20
business days prior to the date of such meeting, one or more written demands for
such meeting, describing the purpose or purposes for which it is to be held.
2.3 Meetings by Communication Equipment
Shareholders may participate in any meeting of the shareholders by any
means of communication by which all persons participating in the meeting can
hear each other during the meeting. Participation by such means shall
constitute presence in person at a meeting.
<PAGE>
2.4 Date, Time and Place of Meeting
Except as otherwise provided herein, all meetings of shareholders,
including those held pursuant to demand by shareholders as provided herein,
shall be held on such date and at such time and place, within or without the
State of Washington, designated by or at the direction of the Board.
2.5 Notice of Meeting
Written notice stating the place, day and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called shall be given by or at the direction of the Board, the Chairman of the
Board, the Chief Executive Officer, the President or the Secretary to each
shareholder entitled to notice of or to vote at the meeting not less than 10 nor
more than 60 days before the meeting, except that notice of a meeting to act on
an amendment to the Articles of Incorporation, a plan of merger or share
exchange, the sale, lease, exchange or other disposition of all or substantially
all of the corporation's assets other than in the regular course of business or
the dissolution of the corporation shall be given not less than 20 nor more than
60 days before such meeting. Such notice may be transmitted by mail, private
carrier, personal delivery, telegraph, teletype or communications equipment
which transmits a facsimile of the notice to like equipment which receives and
reproduces such notice. If these forms of written notice are impractical in the
view of the Board, the Chairman of the Board, the Chief Executive Officer, the
President or the Secretary, written notice may be transmitted by an
advertisement in a newspaper of general circulation in the area of the
corporation's principal office. If such notice is mailed, it shall be deemed
effective when deposited in the official government mail, first-class postage
prepaid, properly addressed to the shareholder at such shareholder's address as
it appears in the corporation's current record of shareholders. Notice given in
any other manner shall be deemed effective when dispatched to the shareholder's
address, telephone number or other number appearing on the records of the
corporation. Any notice given by publication as herein provided shall be deemed
effective five days after first publication.
2.6 Waiver of Notice
Whenever any notice is required to be given to any shareholder under the
provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice and delivered to the corporation, whether before
or after the date and time of the meeting, shall be deemed equivalent to the
giving of such notice. Further, notice of the time, place and purpose of any
meeting will be deemed to be waived by any shareholder by attendance thereat in
person or by proxy, unless such shareholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting.
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2.7 Business for Shareholders' Meetings
2.7.1 Business at Annual Meetings
In addition to the election of directors, other proper business may be
transacted at an annual meeting of shareholders, provided that such business is
properly brought before such meeting. To be properly brought before an annual
meeting, business must be (a) brought by or at the direction of the Board or (b)
brought before the meeting by a shareholder pursuant to written notice thereof,
in accordance with subsection 2.7.3 hereof, and received by the Secretary not
fewer than 45 nor more than 75 days prior to the first anniversary of the date
on which the corporation first mailed its proxy materials for the preceding
year's annual meeting; provided that if the date of the annual meeting is
advanced more than 30 days prior to or delayed by more than 30 days after the
anniversary of the preceding year's annual meeting, notice by the shareholder to
be timely must be so delivered not later than the close of business on the later
of (i) the 90/th/ day prior to such annual meeting or (ii) the tenth day
following the day on which the notice of the date of the annual meeting was
mailed or such public disclosure was made. No business shall be conducted at
any annual meeting of shareholders except in accordance with this subsection
2.7.1. If the facts warrant, the Board, or the chairman of an annual meeting of
shareholders, may determine and declare that (a) a proposal does not constitute
proper business to be transacted at the meeting or (b) business was not properly
brought before the meeting in accordance with the provisions of this subsection
2.7.1 and, if it is so determined in either case, any such business shall not be
transacted. The procedures set forth in this subsection 2.7.1 for business to
be properly brought before an annual meeting by a shareholder are in addition
to, and not in lieu of, the requirements set forth in Rule 14a-8 under Section
14 of the Securities Exchange Act of 1934, as amended, or any successor
provision.
2.7.2 Business at Special Meetings
At any special meeting of the shareholders, only such business as is
specified in the notice of such special meeting given by or at the direction of
the person or persons calling such meeting, in accordance with subsection 2.2
hereof, shall come before such meeting.
2.7.3 Notice to Corporation
Any written notice required to be delivered by a shareholder to the
corporation pursuant to subsection 2.2, subsection 2.7.1 or subsection 2.7.2
hereof must be given, either by personal delivery or by registered or certified
mail, postage prepaid, to the Secretary at the corporation's principal executive
offices. Any such shareholder notice shall set forth (i) the name and address
of the shareholder proposing such business; (ii) a representation that the
shareholder is entitled to vote at such meeting and a statement of the number of
shares of the corporation that are beneficially owned by the shareholder; (iii)
a representation that the shareholder intends to appear in person or by proxy at
the meeting to propose such business; and (iv) as to each matter the shareholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for
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conducting such business at the meeting, the language of the proposal (if
appropriate), and any material interest of the shareholder in such business.
2.8 Fixing of Record Date for Determining Shareholders
For the purpose of determining shareholders entitled (a) to notice of or to
vote at any meeting of shareholders or any adjournment thereof, (b) to demand a
special meeting, or (c) to receive payment of any dividend, or in order to make
a determination of shareholders for any other purpose, the Board may fix a
future date as the record date for any such determination. Such record date
shall be not more than 70 days, and in case of a meeting of shareholders not
less than 10 days prior to the date on which the particular action requiring
such determination is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting, the
record date shall be the day immediately preceding the date on which notice of
the meeting is first given to shareholders. Such a determination shall apply to
any adjournment of the meeting unless the Board fixes a new record date, which
it shall do if the meeting is adjourned to a date more than 120 days after the
date fixed for the original meeting. If no record date is set for the
determination of shareholders entitled to receive payment of any stock dividend
or distribution (other than one involving a purchase, redemption, or other
acquisition of the corporation's shares) the record date shall be the date the
Board authorizes the stock dividend or distribution.
2.9 Voting Record
At least 10 days before each meeting of shareholders, an alphabetical list
of the shareholders entitled to notice of such meeting shall be made, arranged
by voting group and by each class or series of shares therein, with the address
of and number of shares held by each shareholder. This record shall be kept at
the principal office of the corporation for 10 days prior to such meeting, and
shall be kept open at such meeting, for the inspection of any shareholder or any
shareholder's agent.
2.10 Quorum
A majority of the votes entitled to be cast on a matter by the holders of
shares that, pursuant to the Articles of Incorporation or the Washington
Business Corporation Act, are entitled to vote and be counted collectively upon
such matter, represented in person or by proxy, shall constitute a quorum of
such shares at a meeting of shareholders. If less than a majority of such votes
are represented at a meeting, a majority of the votes so represented may adjourn
the meeting from time to time without further notice if the new date, time or
place is announced at the meeting before adjournment. Any business may be
transacted at a reconvened meeting that might have been transacted at the
meeting as originally called, provided a quorum is present or represented
thereat. Once a share is represented for any purpose at a meeting other than
solely to object to holding the meeting or transacting business thereat, it is
deemed present for quorum purposes for the remainder of the meeting and any
adjournment thereof (unless a new record date is or must be set for the
adjourned meeting) notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
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2.11 Manner of Acting
If a quorum is present, action on a matter other than the election of
Directors shall be approved if the votes cast in favor of the action by the
shares entitled to vote and be counted collectively upon such matter exceed the
votes cast against such action by the shares entitled to vote and be counted
collectively thereon, unless the Articles of Incorporation or the Washington
Business Corporation Act requires a greater number of affirmative votes.
2.12 Proxies
A shareholder may vote by proxy executed in writing by the shareholder or
by his or her attorney-in-fact or agent. Such proxy shall be effective when
received by the Secretary or other officer or agent authorized to tabulate
votes. A proxy shall become invalid 11 months after the date of its execution,
unless otherwise provided in the proxy. A proxy with respect to a specified
meeting shall entitle the holder thereof to vote at any reconvened meeting
following adjournment of such meeting but shall not be valid after the final
adjournment thereof.
2.13 Voting of Shares
Except as provided in the Articles of Incorporation or in Section 2.14
hereof, each outstanding share entitled to vote with respect to a matter
submitted to a meeting of shareholders shall be entitled to one vote upon such
matter.
2.14 Voting for Directors
Each shareholder entitled to vote at an election of Directors may vote, in
person or by proxy, the number of shares owned by such shareholder for as many
persons as there are Directors to be elected and for whose election such
shareholder has a right to vote, or (unless otherwise provided in the Articles
of Incorporation) each such shareholder may cumulate such shareholder's votes by
distributing among one or more candidates as many votes as are equal to the
number of such Directors multiplied by the number of such shareholder's shares.
2.15 Action by Shareholders Without a Meeting
Any action that may or is required to be taken at a meeting of the
shareholders may be taken without a meeting by unanimous consent if one or more
written consents setting forth the action so taken shall be signed by all the
shareholders entitled to vote with respect to the matter. Action may also be
taken by less than unanimous consent. Action by less than unanimous consent may
be taken if one or more written consents describing the action taken shall be
signed by shareholders holding of record or otherwise entitled to vote in the
aggregate not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
on the action were present and voted. If not otherwise fixed by the Board, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder consent is signed. A
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shareholder may withdraw a consent only by delivering a written notice of
withdrawal to the corporation prior to the time that consents sufficient to
authorize taking the action have been delivered to the corporation. Every
written consent shall bear the date of signature of each shareholder who signs
the consent. A written consent is not effective to take the action referred to
in the consent unless, within 60 days of the earliest dated consent delivered to
the corporation, written consents signed by a sufficient number of shareholders
to take action are delivered to the corporation. Unless the consent specifies a
later effective date, actions taken by written consent of the shareholders are
effective when (a) consents sufficient to authorize taking the action are in
possession of the corporation and (b) the period of advance notice required by
the Articles of Incorporation to be given to any nonconsenting or nonvoting
shareholders has been satisfied. Any such consent shall be inserted in the
minute book as if it were the minutes of a meeting of the shareholders.
SECTION 3. BOARD OF DIRECTORS
3.1 General Powers
All corporate powers shall be exercised by or under the authority of, and
the business and affairs of the corporation shall be managed under the direction
of, the Board, except as may be otherwise provided in these Bylaws, the Articles
of Incorporation or the Washington Business Corporation Act.
3.2 Number and Tenure
The Board shall be composed of not less than one nor more than nine
Directors, the specific number to be set by resolution of the Board . The
number of Directors may be changed from time to time by amendment to these
Bylaws, but no decrease in the number of Directors shall have the effect of
shortening the term of any incumbent Director. Prior to the first annual
election of Directors following a Full Conversion Event (as defined in the
Articles of Incorporation), unless a Director earlier dies, resigns or is
removed, his or her term of office shall expire at the next annual meeting of
shareholders. At the first annual election of Directors following a Full
Conversion Event, the Board shall be divided into three classes, with said
classes to be as equal in number as may be possible. At the first election of
Directors to such classified Board, each Class 1 Director shall be elected to
serve until the next ensuing annual meeting of shareholders, each Class 2
Director shall be elected to serve until the second ensuing annual meeting of
shareholders and each Class 3 Director shall be elected to serve until the third
ensuing annual meeting of shareholders. At each annual meeting of shareholders
following the meeting at which the Board is initially classified, the number of
Directors equal to the number of Directors in the class whose term expires at
the time of such meeting shall be elected to serve until the third ensuing
annual meeting of shareholders. Notwithstanding any of the foregoing provisions
of this subsection 3.2, Directors shall serve until their successors are elected
and qualified or until their earlier death, resignation or removal from office
or until there is a decrease in the number of Directors.
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3.3 Nomination and Election
3.3.1 Nomination
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as Directors. Nominations for the election of
Directors may be made (a) by or at the direction of the Board or (b) by any
shareholder of record entitled to vote for the election of Directors at such
meeting; provided, however, that a shareholder may nominate persons for election
as Directors only if written notice (in accordance with subsection 2.7.3 hereof)
of such shareholder's intention to make such nominations is received by the
Secretary not later than (i) with respect to an election to be held at an annual
meeting of the shareholders, not fewer than 45 nor more than 75 days prior to
the first anniversary of the date on which the corporation first mailed its
proxy materials for the preceding year's annual meeting; provided that if the
date of the annual meeting is advanced more than 30 days prior to or delayed by
more than 30 days after the anniversary of the preceding year's annual meeting,
notice by the shareholder to be timely must be delivered no later than the close
of business on the later of (i) the 90/th/ day prior to such annual meeting or
(ii) the tenth day following the day on which the notice of the date of the
annual meeting or such public disclosure was made, and (iii) with respect to an
election to be held at a special meeting of the shareholders for the election of
Directors, the close of business on the seventh business day following the date
on which notice of such meeting is first given to shareholders. Any such
shareholder's notice shall set forth (a) the name and address of the shareholder
who intends to make a nomination; (b) a representation that the shareholder is
entitled to vote at such meeting and a statement of the number of shares of the
corporation that are beneficially owned by the shareholder; (c) a representation
that the shareholder intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (d) as to each person
the shareholder proposes to nominate for election or re-election as a Director,
the name and address of such person and such other information regarding such
nominee as would be required in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had such nominee been nominated
by the Board, and a description of any arrangements or understandings, between
the shareholder and such nominee and any other persons (including their names),
pursuant to which the nomination is to be made; and (e) the consent of each such
nominee to serve as a Director if elected. If the facts warrant, the Board, or
the chairman of a shareholders' meeting at which Directors are to be elected,
may determine and declare that a nomination was not made in accordance with the
foregoing procedure and, if it is so determined, the defective nomination shall
be disregarded. The right of shareholders to make nominations pursuant to the
foregoing procedure is subject to the superior rights, if any, of the holders of
any class or series of stock having a preference over the common stock. The
procedures set forth in this subsection 3.3.1 for nomination for the election of
Directors by shareholders are in addition to, and not in limitation of, any
procedures now in effect or hereafter adopted by or at the direction of the
Board or any committee thereof.
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3.3.2 Election
At each election of Directors, the persons receiving the greatest number of
votes, up to the number of Directors to be elected, shall be the Directors.
3.4 Annual and Regular Meetings
An annual Board meeting shall be held without notice immediately after and
at the same place as the annual meeting of shareholders. By resolution the
Board, or any committee thereof, may specify the time and place either within or
without the State of Washington for holding regular meetings thereof without
notice other than such resolution.
3.5 Special Meetings
Special meetings of the Board or any committee designated by the Board may
be called by or at the request of the Chairman of the Board, the Chief Executive
Officer, the President, the Secretary or, in the case of special Board meetings,
any one Director and, in the case of any special meeting of any committee
designated by the Board, by the Chairman thereof. The person or persons
authorized to call special meetings may fix any place either within or without
the State of Washington as the place for holding any special Board or committee
meeting called by them.
3.6 Meetings by Communications Equipment
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by, or conduct the meeting
through the use of, any means of communication by which all Directors
participating in the meeting can hear each other during the meeting.
Participation by such means shall constitute presence in person at a meeting.
3.7 Notice of Special Meetings
Notice of a special Board or committee meeting stating the place, day and
hour of the meeting shall be given to a Director in writing or orally. Neither
the business to be transacted at, nor the purpose of, any special meeting need
be specified in the notice of such meeting.
3.7.1 Personal Delivery
If notice is given by personal delivery, the notice shall be effective if
delivered to a Director at least two days before the meeting.
3.7.2 Delivery by Mail
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail at least five days before the meeting,
properly addressed to a
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Director at his or her address shown on the records of the corporation, with
postage thereon prepaid.
3.7.3 Delivery by Private Carrier
If notice is given by private carrier, the notice shall be deemed effective
when dispatched to a Director at his or her address shown on the records of the
corporation at least three days before the meeting.
3.7.4 Facsimile Notice
If notice is delivered by wire or wireless equipment which transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched at
least two days before the meeting to a Director at his or her telephone number
or other number appearing on the records of the corporation.
3.7.5 Delivery by Telegraph
If notice is delivered by telegraph, the notice shall be deemed effective
if the content thereof is delivered to the telegraph company for delivery to a
Director at his or her address shown on the records of the corporation at least
three days before the meeting.
3.7.6 Oral Notice
If notice is delivered orally, by telephone or in person, the notice shall
be deemed effective if personally given to the Director at least two days before
the meeting.
3.8 Waiver of Notice
3.8.1 In Writing
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice and delivered to the corporation, whether before
or after the date and time of the meeting, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board or any committee
designated by the Board need be specified in the waiver of notice of such
meeting.
3.8.2 By Attendance
A Director's attendance at or participation in a Board or committee meeting
shall constitute a waiver of notice of such meeting, unless the Director at the
beginning of the meeting, or promptly upon his or her arrival, objects to
holding the meeting or transacting business thereat and does not thereafter vote
for or assent to action taken at the meeting.
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3.9 Quorum
A majority of the number of Directors fixed by or in the manner provided in
these Bylaws shall constitute a quorum for the transaction of business at any
Board meeting but, if less than a majority are present at a meeting, a majority
of the Directors present may adjourn the meeting from time to time without
further notice.
3.10 Manner of Acting
If a quorum is present when the vote is taken, the act of the majority of
the Directors present at a Board meeting shall be the act of the Board, unless
the vote of a greater number is required by these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act.
3.11 Presumption of Assent
A Director of the corporation who is present at a Board or committee
meeting at which any action is taken shall be deemed to have assented to the
action taken unless (a) the Director objects at the beginning of the meeting, or
promptly upon the Director's arrival, to holding the meeting or transacting any
business thereat, (b) the Director's dissent or abstention from the action taken
is entered in the minutes of the meeting, or (c) the Director delivers written
notice of the Director's dissent or abstention to the presiding officer of the
meeting before its adjournment or to the corporation within a reasonable time
after adjournment of the meeting. The right of dissent or abstention is not
available to a Director who votes in favor of the action taken.
3.12 Action by Board or Committees Without a Meeting
Any action which could be taken at a meeting of the Board or of any
committee created by the Board may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee member either before or after the action is taken
and delivered to the corporation. Action taken by written consent of Directors
without a meeting is effective when the last Director signs the consent, unless
the consent specifies a later effective date. Any such written consent shall be
inserted in the minute book as if it were the minutes of a Board or a committee
meeting.
3.13 Resignation
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the Chief Executive Officer, the President, the Secretary
or the Board. Any such resignation is effective upon delivery thereof unless
the notice of resignation specifies a later effective date and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
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3.14 Removal
Directors shall, as provided in the Articles of Incorporation, be removed
only for cause and only at a meeting of shareholders expressly called for that
purpose. Such removal shall be by the holders of not less than two-thirds of
the shares entitled to elect the Director or Directors whose removal is sought.
3.15 Vacancies
Unless the Articles of Incorporation provide otherwise, any vacancy
occurring on the Board may be filled by the shareholders, the Board or, if the
Directors in office constitute fewer than a quorum, by the affirmative vote of a
majority of the remaining Directors. Any vacant office held by a Director
elected by the holders of one or more classes or series of shares entitled to
vote and be counted collectively thereon shall be filled only by the vote of the
holders of such class or series of shares. A Director elected to fill a vacancy
shall serve only until the next election of Directors by the shareholders.
3.16 Executive and Other Committees
3.16.1 Creation of Committees
The Board, by resolution adopted by the greater of a majority of the
Directors then in office and the number of Directors required to take action in
accordance with these Bylaws, may create standing or temporary committees,
including an Executive Committee, and appoint members thereto from its own
number and invest such committees with such powers as it may see fit, subject to
such conditions as may be prescribed by the Board, these Bylaws and applicable
law. Each committee must have two or more members, who shall serve at the
pleasure of the Board.
3.16.2 Authority of Committees
Each committee shall have and may exercise all of the authority of the
Board to the extent provided in the resolution of the Board creating the
committee and any subsequent resolutions pertaining thereto and adopted in like
manner, except that no such committee shall have the authority to: (1)
authorize or approve a distribution except according to a general formula or
method prescribed by the Board, (2) approve or propose to shareholders actions
or proposals required by the Washington Business Corporation Act to be approved
by shareholders, (3) fill vacancies on the Board or any committee thereof, (4)
adopt, amend or repeal Bylaws, (5) amend the Articles of Incorporation pursuant
to RCW 23B.10.020, (6) approve a plan of merger not requiring shareholder
approval, or (7) authorize or approve the issuance or sale or contract for sale
of shares, or determine the designation and relative rights, preferences and
limitations of a class or series of shares except that the Board may authorize a
committee or a senior executive officer of the corporation to do so within
limits specifically prescribed by the Board.
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3.16.3 Quorum and Manner of Acting
A majority of the number of Directors composing any committee of the Board,
as established and fixed by resolution of the Board, shall constitute a quorum
for the transaction of business at any meeting of such committee but, if less
than a majority are present at a meeting, a majority of such Directors present
may adjourn the meeting from time to time without further notice. Except as may
be otherwise provided in the Washington Business Corporation Act, if a quorum is
present when the vote is taken the act of a majority of the members present
shall be the act of the committee.
3.16.4 Minutes of Meetings
All committees shall keep regular minutes of their meetings and shall cause
them to be recorded in books kept for that purpose.
3.16.5 Resignation
Any member of any committee may resign at any time by delivering written
notice thereof to the Chairman of the Board, the President, the Secretary or the
Board. Any such resignation is effective upon delivery thereof, unless the
notice of resignation specifies a later effective date, and the acceptance of
such resignation shall not be necessary to make it effective.
3.16.6 Removal
The Board may remove any member of any committee elected or appointed by it
but only by the affirmative vote of not less than a majority of the number of
Directors fixed by or in the manner provided in these Bylaws.
3.17 Compensation
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 4. OFFICERS
4.1 Appointment and Term
The officers of the corporation shall be those officers appointed from time
to time by the Board or by any other officer empowered to do so. The Board
shall have sole power and authority to appoint executive officers. As used
herein, the term "executive officer" shall
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mean the Chief Executive Officer, the President, any Vice President in charge of
a principal business unit, division or function or any other officer who
performs a policy-making function. The Board, the Chief Executive Officer, or
the President may appoint such other officers and assistant officers to hold
office for such period, have such authority and perform such duties as may be
prescribed. The Board may delegate to any other officer the power to appoint any
subordinate officers and to prescribe their respective terms of office,
authority and duties. Any two or more offices may be held by the same person.
Unless an officer dies, resigns or is removed from office, he or she shall hold
office until his or her successor is appointed.
4.2 Resignation
Any officer may resign at any time by delivering written notice thereof to
the corporation. Any such resignation is effective upon delivery thereof,
unless the notice of resignation specifies a later effective date, and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
4.3 Removal
Any officer may be removed by the Board at any time, with or without cause.
An officer or assistant officer, if appointed by another officer, may be removed
by any officer authorized to appoint officers or assistant officers.
4.4 Contract Rights of Officers
The appointment of an officer does not itself create contract rights.
4.5 Chairman of the Board
If appointed, the Chairman of the Board shall perform such duties as shall
be assigned to him or her by the Board from time to time and shall preside over
meetings of the Board and shareholders unless another officer is appointed or
designated by the Board as Chairman of such meetings.
4.6 Chief Executive Officer
If appointed, the Chief Executive Officer shall be the chief executive
officer of the corporation, shall preside over meetings of the Board and
shareholders in the absence of a Chairman of the Board and, subject to the
Board's control, shall supervise and control all of the assets, business and
affairs of the corporation. The Chief Executive Officer may sign certificates
for shares of the corporation, deeds, mortgages, bonds, contracts or other
instruments, except when the signing and execution thereof have been expressly
delegated by the Board or by these Bylaws to some other officer or agent of the
corporation or are required by law to be otherwise signed or executed by some
other officer or in some other manner. In
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general, the Chief Executive Officer shall perform all duties incident to the
office of Chief Executive Officer and such other duties as are prescribed by the
Board from time to time.
4.7 President
In the event of the death of the Chief Executive Officer or his inability
to act, the President, if appointed, shall perform the duties of the Chief
Executive Officer, except as may be limited by resolution of the Board, with all
the powers of and subject to all the restrictions upon the Chief Executive
Officer. The President may sign with the Secretary or any Assistant Secretary
certificates for shares of the corporation. The President shall have, to the
extent authorized by the Chief Executive Officer or the Board, the same powers
as the Chief Executive Officer to sign deeds, mortgages, bonds, contracts or
other instruments. The President shall perform all duties incident to the
office of President and such other duties as from time to time may be assigned
to him or her by the Chief Executive Officer or the Board.
4.8 Vice President
In the event of the death of the President or his or her inability to act,
the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first elected to such
office) shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Vice Presidents shall perform such other
duties as from time to time may be assigned to them by the President or by or at
the direction of the Board.
4.9 Secretary
If appointed, the Secretary shall be responsible for preparation of minutes
of the meetings of the Board and shareholders, maintenance of the corporation
records and stock registers, and authentication of the corporation's records,
and shall in general perform all duties incident to the office of Secretary and
such other duties as from time to time may be assigned to him or her by the
President or by or at the direction of the Board. In the absence of the
Secretary, an Assistant Secretary may perform the duties of the Secretary.
4.10 Treasurer
If appointed, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in banks,
trust companies or other depositories selected in accordance with the provisions
of these Bylaws, and in general perform all of the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
or her by the President or by or at the direction of the Board. In the absence
of the Treasurer, an Assistant Treasurer may perform the duties of the
Treasurer. If required by the Board, the Treasurer or
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any Assistant Treasurer shall give a bond for the faithful discharge of his or
her duties in such amount and with such surety or sureties as the Board shall
determine.
4.11 Salaries
The salaries of the officers shall be fixed from time to time by the Board
or by any person or persons to whom the Board has delegated such authority. No
officer shall be prevented from receiving such salary by reason of the fact that
he or she is also a Director of the corporation.
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 Contracts
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances.
5.2 Loans to the Corporation
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the Board. Such authority may be general or confined to specific instances.
5.3 Checks, Drafts, Etc.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation shall be signed
by such officer or officers, or agent or agents, of the corporation and in such
manner as is from time to time determined by resolution of the Board.
5.4 Deposits
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies or
other depositories as the Board may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 Issuance of Shares
No shares of the corporation shall be issued unless authorized by the
Board, or by a committee designated by the Board to the extent such committee is
empowered to do so.
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<PAGE>
6.2 Certificates for Shares
Certificates representing shares of the corporation shall be signed, either
manually or in facsimile, by the Chairman of the Board, the President or any
Vice President and by the Treasurer or any Assistant Treasurer or the Secretary
or any Assistant Secretary and shall include on their face written notice of any
restrictions which may be imposed on the transferability of such shares. All
certificates shall be consecutively numbered or otherwise identified.
6.3 Stock Records
The stock transfer books shall be kept at the principal office of the
corporation or at the office of the corporation's transfer agent or registrar.
The name and address of each person to whom certificates for shares are issued,
together with the class and number of shares represented by each such
certificate and the date of issue thereof, shall be entered on the stock
transfer books of the corporation. The person in whose name shares stand on the
books of the corporation shall be deemed by the corporation to be the owner
thereof for all purposes.
6.4 Restriction on Transfer
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall bear a legend on the face of the certificate, or
on the reverse of the certificate if a reference to the legend is contained on
the face, which reads substantially as follows:
"The securities evidenced by this certificate have not been registered
under the Securities Act of l933, as amended, or any applicable state law,
and no interest therein may be sold, distributed, assigned, offered,
pledged or otherwise transferred unless (a) there is an effective
registration statement under such Act and applicable state securities laws
covering any such transaction involving said securities or (b) this
corporation receives an opinion of legal counsel for the holder of these
securities (concurred in by legal counsel for this corporation) stating
that such transaction is exempt from registration or this corporation
otherwise satisfies itself that such transaction is exempt from
registration. Neither the offering of the securities nor any offering
materials have been reviewed by any administrator under the Securities Act
of 1933, as amended, or any applicable state law."
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6.5 Transfer of Shares
The transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to
the corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and canceled.
6.6 Lost or Destroyed Certificates
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
SECTION 7. BOOKS AND RECORDS
The corporation shall:
(a) Keep as permanent records minutes of all meetings of its shareholders
and the Board, a record of all actions taken by the shareholders or the Board
without a meeting, and a record of all actions taken by a committee of the Board
exercising the authority of the Board on behalf of the corporation.
(b) Maintain appropriate accounting records.
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of shares
held by each; provided, however, such record may be maintained by an agent of
the corporation.
(d) Maintain its records in written form or in another form capable of
conversion into written form within a reasonable time.
(e) Keep a copy of the following records at its principal office:
1. the Articles of Incorporation and all amendments thereto as
currently in effect;
2. the Bylaws and all amendments thereto as currently in effect;
3. the minutes of all meetings of shareholders and records of all
action taken by shareholders without a meeting, for the past three years;
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4. the financial statements described in Section 23B.16.200(1) of
the Washington Business Corporation Act, for the past three years;
5. all written communications to shareholders generally within the
past three years;
6. a list of the names and business addresses of the current
Directors and officers; and
7. the most recent annual report delivered to the Washington
Secretary of State.
SECTION 8. ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year, provided
that if a different accounting year is at any time selected by the Board for
purposes of federal income taxes, or any other purpose, the accounting year
shall be the year so selected.
SECTION 9. SEAL
The Board may provide for a corporate seal which shall consist of the name
of the corporation, the state of its incorporation and the year of its
incorporation.
SECTION 10. INDEMNIFICATION
10.1 Right to Indemnification
Each person who was, is or is threatened to be made a named party to or is
otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
Director or officer of the corporation or, that being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of the corporation as a Director, officer, partner,
trustee, employee or agent of another corporation or of a partnership, joint
venture, trust, employee benefit plan or other enterprise (hereinafter an
"indemnitee"), whether the basis of a proceeding is alleged action in an
official capacity as such a Director, officer, partner, trustee, employee or
agent or in any other capacity while serving as such a Director, officer,
partner, trustee, employee or agent, shall be indemnified and held harmless by
the corporation against all expense, liability and loss (including counsel fees,
judgments, fines, ERISA excise taxes or penalties and amounts to be paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith, and such indemnification shall continue as to an
indemnitee who has ceased to be a Director, officer, partner, trustee, employee
or agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators. Except as provided in subsection 10.4 of this Section with
respect to proceedings seeking to enforce rights to indemnification, the
corporation shall
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indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if a proceeding (or part thereof) was
authorized or ratified by the Board. The right to indemnification conferred in
this Section shall be a contract right.
10.2 Restrictions on Indemnification
No indemnification shall be provided to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to which
the indemnitee was not legally entitled or if the corporation is otherwise
prohibited by applicable law from paying such indemnification, except that if
Section 23B.08.560 or any successor provision of the Washington Business
Corporation Act is hereafter amended, the restrictions on indemnification set
forth in this subsection 10.2 shall be as set forth in such amended statutory
provision.
10.3 Advancement of Expenses
The right to indemnification conferred in this Section shall include the
right to be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). An advancement of expenses shall be made upon delivery to the
corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this subsection 10.3.
10.4 Right of Indemnitee to Bring Suit
If a claim under subsection 10.1 or 10.3 of this Section is not paid in
full by the corporation within 60 days after a written claim has been received
by the corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim. If successful in whole or in part, in any such suit
or in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. The indemnitee
shall be presumed to be entitled to indemnification under this Section upon
submission of a written claim (and, in an action brought to enforce a claim for
an advancement of expenses, where the required undertaking has been tendered to
the corporation) and thereafter the corporation shall have the burden of proof
to overcome the presumption that the indemnitee is so entitled.
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10.5 Procedures Exclusive
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and
advancement of expenses set forth in this Section are in lieu of the procedures
required by Section 23B.08.550 or any successor provision of the Washington
Business Corporation Act.
10.6 Nonexclusivity of Rights
The right to indemnification and the advancement of expenses conferred in
this Section shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the Articles of
Incorporation or Bylaws of the corporation, general or specific action of the
Board, contract or otherwise.
10.7 Insurance, Contracts and Funding
The corporation may maintain insurance, at its expense, to protect itself
and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Washington Business Corporation Act. The
corporation may enter into contracts with any Director, officer, partner,
trustee, employee or agent of the corporation in furtherance of the provisions
of this Section and may create a trust fund, grant a security interest or use
other means (including, without limitation, a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification as
provided in this Section.
10.8 Indemnification of Employees and Agents of the Corporation
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees and agents or any class
or group of employees and agents of the corporation (i) with the same scope and
effect as the provisions of this Section with respect to the indemnification and
advancement of expenses of Directors and officers of the corporation; (ii)
pursuant to rights granted pursuant to, or provided by, the Washington Business
Corporation Act; or (iii) as are otherwise consistent with law.
10.9 Persons Serving Other Entities
Any person who, while a Director, officer or employee of the corporation,
is or was serving (a) as a Director or officer of another foreign or domestic
corporation of which a majority of the shares entitled to vote in the election
of its Directors is held by the corporation, or (b) as a partner, trustee or
otherwise in an executive or management capacity in a partnership, joint
venture, trust or other enterprise of which the corporation or a wholly owned
subsidiary of the corporation is a general partner or has a majority ownership
shall be
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deemed to be so serving at the request of the corporation and entitled to
indemnification and advancement of expenses under subsections 10.1 and 10.3 of
this Section.
SECTION 11. AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board, except that the Board may not repeal or amend any Bylaw
that the shareholders have expressly provided, in amending or repealing such
Bylaw, may not be amended or repealed by the Board. The shareholders may also
alter, amend and repeal these Bylaws or adopt new Bylaws. All Bylaws made by
the Board may be amended, repealed, altered or modified by the shareholders.
The foregoing Amended and Restated Bylaws were adopted by the Board of
Directors on November 16, 1999.
/s/ Robert M. Littauer
--------------------------------------
Robert M. Littauer, Secretary
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EXHIBIT 5.1
[Letterhead of Perkins Coie LLP]
January 20, 2000
Avenue A, Inc.
506 Second Avenue, 9th Floor
Seattle, WA 980104
Ladies and Gentlemen:
We have acted as counsel to you in connection with the proceedings for the
authorization and issuance by Avenue A, Inc. (the "Company") of up to 5,250,000
shares (the "Firm Shares") of the Company's common stock, $.01 par value per
share (the "Common Stock"), together with an additional 787,500 shares of Common
Stock if and to the extent the underwriters exercise an over-allotment option
granted by the Company (the "Over-Allotment Shares"), and the preparation and
filing of a registration statement on Form S-1 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), which you
are filing with the Securities and Exchange Commission with respect to the Firm
Shares and the Over-Allotment Shares (collectively, the "Shares").
We have examined the Registration Statement and such documents and records
of the Company and other documents as we have deemed necessary for the purpose
of this opinion. Based upon the foregoing, we are of the opinion that upon the
happening of the following events:
(a) the filing and effectiveness of the Registration Statement and any
amendments thereto,
(b) due execution by the Company and registration by its registrar of the
Firm Shares and, to the extent the underwriters exercise their over-
allotment option, the Over-Allotment Shares,
(c) the offering and sale of the Firm Shares and, to the extent the
underwriters exercise their over-allotment option, the Over-Allotment
Shares, as contemplated by the Registration Statement, and
(d) receipt by the Company of the consideration required for the Firm
Shares and, to the extent the underwriters exercise their over-
allotment option, the Over-Allotment Shares, to be sold by the Company
as contemplated by the Registration Statement,
<PAGE>
Avenue A, Inc.
January 20, 2000
Page 2
the Firm Shares and, to the extent the underwriters exercise their over-
allotment option, the Over-Allotment Shares will be duly authorized, validly
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto, including any and all post-
effective amendments and any registration statement relating to the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to the reference to our firm in the Prospectus of the
Registration Statement under the heading "Legal Matters." In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ PERKINS COIE LLP
<PAGE>
EXHIBIT 10.18
Employment Agreement
between
Avenue A, Inc.
and
Sumit Sen
Dated as of September 29, 1999
<PAGE>
Employment Agreement
This Employment Agreement (this "Agreement"), dated as of September 29,
1999, between Avenue A, Inc., a Washington corporation ("Avenue A"), and Sumit
Sen ("Executive").
W I T N E S S E T H:
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WHEREAS, Executive has been serving as Chief Analytics Officer of Avenue A
and Avenue A desires to retain the services of Executive upon the terms and
conditions set forth herein; and
WHEREAS, Executive is willing to provide services to Avenue A upon the
terms and conditions set forth herein;
A G R E E M E N T S:
- - - - - - - - - -
NOW, THEREFORE, for and in consideration of the foregoing premises and for
other good and valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, Avenue A and Executive hereby agree as follows:
1. EMPLOYMENT
Avenue A will employ Executive and Executive will accept employment by
Avenue A as the Chief Analytics Officer of Avenue A. During Executive's
employment, Executive shall serve Avenue A faithfully and to the best of his
ability, devoting substantially all his working time, attention and energies to
the business of Avenue A. Executive's status, duties and responsibilities shall
be reasonably commensurate with his title, and he shall perform such duties as
lawfully assigned to Executive. Executive shall not engage in any other business
activity (except the management of personal investments and charitable and civic
activities which in the aggregate do not interfere with the performance of
Executive's duties hereunder) without first obtaining the written consent of
Avenue A's CEO, such consent not to be unreasonably withheld.
2. COMPENSATION
During his employment, Avenue A will pay Executive an annual salary of not
less than $175,000 paid semi-monthly. In addition, Executive has been granted a
stock option for the purchase of 300,000 shares of the common stock of Avenue A,
which is subject to four-year vesting and other conditions in accordance with
the terms
<PAGE>
of the option letter agreement evidencing such option and the terms of the
Avenue A, Inc. 1998 Stock Incentive Compensation Plan.
3. BENEFITS
Effective the first month following employment, and during the term of his
employment, Executive will be entitled to participate in Avenue A's health care
benefits and 401k Savings Plan. Avenue A will pay reasonable expenses associated
with relocating Executive to Seattle through Relocation Management, Inc.;
provided, however, that should Executive voluntarily terminate his employment
with Avenue A without "good reason" within one year of his first day of
employment, Executive shall reimburse Avenue A for the expenses relating to his
relocation previously paid or reimbursed by Avenue A.
4. TERMINATION
Employment of Executive pursuant to this Agreement may be terminated as
follows:
4.1. By Avenue A
With or without Cause (as defined below), Avenue A may terminate the
employment of Executive at any time upon giving Notice of Termination (as
defined below).
4.2. By Executive
Executive may terminate his employment at any time, for any reason, upon
giving Notice of Termination.
4.3. Automatic Termination
This Agreement and Executive's employment hereunder shall terminate
automatically upon the death or total disability of Executive. The term "total
disability" as used herein shall mean Executive's inability to perform the
duties set forth in paragraph 1 hereof for a period or periods aggregating
ninety (90) calendar days in any 12-month period as a result of physical or
mental illness, loss of legal capacity or any other cause beyond Executive's
control, unless Executive is granted a leave of absence by the Board of
Directors of Avenue A. Executive and Avenue A hereby acknowledge that
Executive's ability to perform the duties specified in paragraph 1 hereof is of
the essence of this Agreement. Termination hereunder shall be deemed to be
effective (a) at the end of the calendar month in which Executive's
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death occurs or (b) immediately upon a determination by the Board of Directors
of Avenue A of Executive's total disability, as defined herein.
4.4. Notice
The term "Notice of Termination" shall mean at least thirty (30) days'
written notice of termination, by either party, of Executive's employment,
during which period Executive's employment and performance of services will
continue; provided, however, that Avenue A may, upon notice to Executive and
without reducing Executive's compensation during such period, excuse Executive
from any or all of his duties during such period. Such a reduction in duties
shall not constitute "good reason" for voluntary termination so as to trigger
termination payments in accordance with subparagraph 5.2. The effective date of
the termination (the "Termination Date") of Executive's employment hereunder
shall be the date on which such 30-day period expires.
5. TERMINATION PAYMENTS AND ACCELERATION OF VESTING
In the event of termination of the employment of Executive, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this paragraph 5:
5.1. Termination by Avenue A
(a) Upon termination by Avenue A, Avenue A shall pay Executive any unpaid
annual base salary which has accrued for services already performed as of the
Termination Date.
(b) If Avenue A terminates Executive's employment without Cause, as defined
below, Executive shall be entitled to receive termination payments equal to six
(6) months annual base salary, plus an additional three months base salary for
each year in which the Executive has been employed with Avenue A, up to a total
termination benefit of twelve (12) months annual base salary; further provided
that regardless of the length of Executive's employment with Avenue A, should
Executive remain continuously unemployed after his termination from Avenue A, he
shall be entitled to receive severance payments for each month in which he
remains unemployed after termination up to a maximum of 12 months. The
termination payments shall be calculated according to Executive's base salary as
of the date of Notice of Termination and the termination payments will be paid
semi-monthly in equal parts in accordance with the same time schedule that
Avenue A or a Successor Company (as defined in Exhibit A hereto and incorporated
by reference herein) makes
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its customary payroll. Avenue A or a Successor Company may deduct customary
withholdings including social security, federal and state income taxes, and
state disability insurance from these severance payments; however, any and all
such obligations shall be Executive's responsibility. Avenue A will issue and
file appropriate Form 1099 or similar tax documents in connection with any
termination payments. The termination payments described in this paragraph are
expressly contingent upon Executive's signing upon termination a release in the
form attached hereto as Exhibit B, and are further contingent upon Executive's
full compliance with the terms of his Confidentiality, Inventions Assignment,
Noncompetition and Nonsolicitation Agreement with Avenue A (the "Confidentiality
Agreement"), a copy of which is attached hereto as Exhibit C. In the event
Executive were to materially breach this Confidentiality Agreement, his right to
any termination payments under this paragraph shall be extinguished, Avenue A
(and any Successor Company) shall cease payments, and Executive shall
immediately return to Avenue A or to any Successor Company any severance
payments already made. If Executive is terminated by either of Avenue A or any
Successor Company for Cause, Executive shall not be entitled to receive any of
the foregoing benefits, other than those set forth in clause (a) above.
(c) If Avenue A terminates Executive's employment without Cause, as defined
below, then (1) the portion of any Avenue A stock option held by Executive
immediately prior to the Termination Date that is unvested shall automatically
vest, immediately prior to the Termination Date, in an amount equal to the
portion that would have vested during the one year period immediately following
the Termination Date (assuming, for purpose of determining the amount, that no
termination had occurred and Executive had continued Executive's employment with
Avenue A during that one year period), and (2) the number of unvested shares, if
any, held by Executive immediately prior to the Termination Date that were
obtained on exercise of any Avenue A stock options that is equal to the number
of such unvested shares that would have vested during the one year period
immediately after the Termination Date (assuming, for purposes of determining
the number, that no termination had occurred and Executive had continued
Executive's employment with Avenue A during that one year period) shall,
immediately prior to the Termination Date, automatically vest and be no longer
subject to the right of repurchase in favor of Avenue A. If the one year
anniversary of the Termination Date falls in the middle of a quarter for option
or share vesting purposes, the vesting acceleration described above shall be pro
rated for the actual number of days between the beginning of such quarter and
the one year anniversary date. Any acceleration of vesting of stock options or
of unvested shares pursuant to the terms of any stock option plan of Avenue A
under which any stock option held by Executive is granted (a "Company Stock
Option Plan") and any acceleration of vesting pursuant to any option letter
agreement for any stock option for Avenue A common stock granted to Executive
prior to or after the date of this
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Agreement (an "Option Agreement") shall not be limited by or be in lieu of any
acceleration of vesting provided for pursuant to this Agreement, and any
acceleration of vesting provided for pursuant to this Agreement shall not be
limited by or be in lieu of any acceleration of vesting provided for pursuant to
any Company Stock Option Plan or Option Agreement.
5.2. Termination by Executive
In the case of the termination of Executive's employment by Executive for
"good reason," as defined below, Executive shall be entitled to the termination
payments and accelerated vesting benefit as set forth in clauses 5.1(a), (b) and
(c), above. In the case of termination of Executive's employment by Executive
for any other reason, Executive shall not be entitled to any termination
payments or accelerated vesting benefit, other than as set forth in clause
5.1(a), above.
5.3. Termination as a Result of Death or Total Disability
In the event of termination of Executive's employment pursuant to
subparagraph 4.3, Executive or his estate shall be paid the compensation set
forth in clause 5.1(a) and shall not be entitled to any of the benefits under
clauses 5.1(b) or 5.1(c) above.
5.4. "Good Reason"
"Good reason" shall mean the occurrence of any of the following events,
without the consent of the Executive, in connection with or after a "Change of
Control" (as defined in Exhibit A hereto and incorporated by reference herein:
a) a demotion or other material reduction in the nature or status of
Executive's responsibilities; provided, however, that a change in
the person or office to which Executive reports, without a
corresponding reduction in duties, status and responsibilities,
shall not constitute "good reason;"
b) a non-voluntary reduction in the Executive's annual base salary;
c) requirement by a Successor Company that the Executive relocate his
principal place of employment to a location that is more than 50
miles from the principal place of employment where Executive was
employed immediately prior to the "Change of Control;" or
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d) the failure of Avenue A to obtain a satisfactory agreement from any
Successor Company to assume and perform the obligations under this
Agreement.
5.5. Cause
Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" shall include, without limitation, the occurrence of one
or more of the following events:
(a) willful misconduct, insubordination, or dishonesty in the
performance of Executive's duties or other knowing and material violation
of Avenue A's or a Successor Company's policies and procedures in effect
from time to time which results in a material adverse effect on Avenue A or
a Successor Company;
(b) willful actions (or intentional failures to act) in bad faith by
Executive with respect to Avenue A or a Successor Company that materially
impair Avenue A's or a Successor Company's business, goodwill or
reputation;
(c) conviction of Executive of a felony involving an act of
dishonesty, moral turpitude, deceit or fraud, or the commission of acts
that could reasonably be expected to result in such a conviction;
(d) current use by the Executive of illegal substances; or
(e) any material violation by Executive of Executive's Confidentiality
Agreement with Avenue A.
5.6. Acceleration in the Event of a Change in Control
In the event Executive is employed by Avenue A immediately prior to the
date of a "Change in Control" (as defined in Exhibit A hereto and incorporated
by reference herein), then immediately prior to the Change in Control (1) the
number of unvested shares held by Executive at that time that were obtained on
exercise of any Avenue A stock options that is equal to the number of such
unvested shares that would vest during the one year period immediately after the
date of the Change of Control shall automatically vest and be no longer subject
to a right of repurchase in favor of Avenue A and (2) the portion of any Avenue
A stock options held by Executive at that time that is unvested shall
automatically vest in an amount equal to the portion that would vest during the
one year period immediately following the Change of Control, in each of the
cases of (1) and (2) above assuming that Executive's employment had continued
with Avenue A during such one year period. Any
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<PAGE>
acceleration of vesting of stock options or of shares pursuant to the terms of
any stock option plan of Avenue A under which any stock option held by Executive
is granted (a "Company Stock Option Plan") and any acceleration of vesting
pursuant to any option letter agreement for any stock option for Avenue A common
stock granted to Executive prior to or after the date of this Agreement (an
"Option Agreement") shall not be limited by or be in lieu of the acceleration of
vesting provided for pursuant to this Agreement, and any acceleration of vesting
provided for pursuant to this Agreement shall not be limited by or be in lieu of
any acceleration of vesting provided for pursuant to any Company Stock Option
Plan or Option Agreement.
6. CONFIDENTIALITY, NONCOMPETITION AND NONSOLICITATION AGREEMENT
Executive is subject to the terms of the Confidentiality Agreement entered
into concurrently with this Agreement and the terms of the Confidentiality
Agreement shall survive the termination of Executive's employment with Avenue A.
7. REPRESENTATIONS AND WARRANTIES; NO VIOLATION
In order to induce Avenue A to enter into this Agreement, Executive
represents and warrants to Avenue A that neither the execution nor the
performance of this Agreement by Executive will violate or conflict in any way
with any other agreement by which Executive may be bound, or with any other
duties imposed upon Executive by corporate or other statutory or common law.
8. NOTICE AND CURE OF BREACH
Whenever a breach of this Agreement by either party is relied upon as
justification for any action taken by the other party pursuant to any provision
of this Agreement, other than pursuant to the definition of "Cause" set forth in
subparagraph 5.4 hereof, before such action is taken, the party asserting the
breach of this Agreement shall give the other party at least 14 days' prior
written notice of the existence and the nature of such breach before taking
further action hereunder and shall give the party purportedly in breach of this
Agreement the opportunity to correct such breach during the 14-day period.
9. FORM OF NOTICE
All notices given hereunder shall be given in writing, shall specifically
refer to this Agreement and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, at the address set forth below or at such other
address as may hereafter be designated by notice given in compliance with the
terms hereof:
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<PAGE>
If to Executive: Sumit Sen
-----------------------------------------
-----------------------------------------
-----------------------------------------
If to Avenue A: Avenue A, Inc.
506 Second Avenue
Seattle, WA 98104
Facsimile: (206) 521-8808
Attention: President and CEO
Copy to: Perkins Coie LLP
1201 Third Avenue, 48th Floor
Seattle, WA 98101-3099
Facsimile: (206) 583-8500
Attention: James Sanders
If notice is mailed, such notice shall be effective upon mailing, or if notice
is personally delivered or sent by telecopy or other electronic facsimile
transmission, it shall be effective upon receipt.
10. ASSIGNMENT
This Agreement is personal to Executive and shall not be assignable by
Executive. Avenue A may assign its rights hereunder to (a) any corporation
resulting from any merger, consolidation or other reorganization to which Avenue
A is a party or (b) any corporation, partnership, association or other person to
which Avenue A may transfer all or substantially all of the assets and business
of Avenue A existing at such time. All of the terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of and be
enforceable by the parties hereto and their respective successors and permitted
assigns.
11. WAIVERS
No delay or failure by any party hereto in exercising, protecting or
enforcing any of its rights, titles, interests or remedies hereunder, and no
course of dealing or performance with respect thereto, shall constitute a waiver
thereof. The express waiver by a party hereto of any right, title, interest or
remedy in a particular instance or circumstance shall not constitute a waiver
thereof in any other instance or circumstance. All rights and remedies shall be
cumulative and not exclusive of any other rights or remedies.
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<PAGE>
12. ARBITRATION
Any controversies or claims arising out of or relating to this Agreement
shall be fully and finally settled by arbitration in the city of Seattle,
Washington in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect (the "AAA Rules"), conducted by one
arbitrator either mutually agreed upon by Avenue A and Executive or chosen in
accordance with the AAA Rules, except that the parties thereto shall have any
right to discovery as would be permitted by the Federal Rules of Civil Procedure
for a period of 90 days following the commencement of such arbitration and the
arbitrator thereof shall resolve any dispute which arises in connection with
such discovery. The prevailing party shall be entitled to costs, expenses and
reasonable attorneys' fees, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
13. AMENDMENTS IN WRITING
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified, waived, terminated or discharged and signed by Avenue A
and Executive, and each such amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by Avenue A and Executive.
14. APPLICABLE LAW
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the state of Washington, without regard
to any rules governing conflicts of laws.
15. SEVERABILITY
If any provision of this Agreement shall be held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without
limitation, the duration of such provision, its geographical scope or the extent
of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof shall remain in full force and
effect in such jurisdiction and shall be liberally construed in order to carry
out the intent of the parties hereto as nearly as may
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<PAGE>
be possible, (b) such invalidity, illegality or unenforceability shall not
affect the validity, legality or enforceability of any other provision hereof,
and (c) any court or arbitrator having jurisdiction thereover shall have the
power to reform such provision to the extent necessary for such provision to be
enforceable under applicable law.
16. HEADINGS
All headings used herein are for convenience only and shall not in any way
affect the construction of, or be taken into consideration in interpreting, this
Agreement.
17. COUNTERPARTS
This Agreement, and any amendment or modification entered into pursuant to
paragraph 13 hereof, may be executed in any number of counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
18. ENTIRE AGREEMENT
This Agreement on and as of the date hereof, together with the
Confidentiality Agreement, constitutes the entire agreement between Avenue A and
Executive with respect to the subject matter hereof and all prior or
contemporaneous oral or written communications, understandings or agreements
between Avenue A and Executive with respect to such subject matter are hereby
superseded and nullified in their entireties.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
EXECUTIVE:
Sumit Sen
/s/ Sumit Sen
---------------------------------------------
AVENUE A:
Avenue A, Inc.
By /s/ Brian McAndrews
-------------------------------------------
Its President and CEO
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<PAGE>
EXHIBIT A
1. Definition of "Change of Control"
For purposes of the Employment Agreement, a "Change of Control" means any
of:
(i) an event in which any person (including any individual, entity or
group within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act")) (a "Person"), shall
become the beneficial owner (within the meaning of Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the
combined voting power of the capital stock of Avenue A, Inc. ("Avenue A") then
outstanding; or
(ii) at any time during which Avenue A has a class of equity securities
which is listed on a national securities exchange or an automated quotation
system (including, without limitation, the Nasdaq Stock Market) ("publicly
traded"), the acquisition by a Person of equity securities representing more
than thirty percent (30%) of the combined voting power of the capital stock of
Avenue A outstanding as of the date of such transaction (or the first of a
series of related transactions), but only if such equity securities were
acquired in a transaction or series of related transactions which were not
approved by the Board of Directors of Avenue A in office prior to the date of
such first acquisition (provided, however that if such Person is entitled,
pursuant to Rule 13d-1 under the Exchange Act to file a Form 13G with respect to
its holdings of equity securities of Avenue A in lieu of a Form 13D, such event
will not constitute a Change of Control unless and until such Person files a
Form 13D with respect to such holdings); or
(iii) at any time during which Avenue A has a class of equity securities
which is publicly traded, the acquisition by a Person of equity securities
representing more than twenty percent (20%) of the combined voting power of the
capital stock of Avenue A outstanding prior to the date of such transaction (or
the first of a series of related transactions) in a transaction or series of
related transactions which were not approved by the Board of Directors of Avenue
A in office prior to the date of such first acquisition, and, within one year
thereafter, at least two individuals whose election to the Board of Directors
was proposed by such Person are members of the Board of Directors; or
(iv) the sale or other disposition of all or substantially all of Avenue
A's assets, other than to a corporation with respect to which immediately
following such sale or disposition (A) securities representing more than sixty
percent (60%) of the combined voting power the capital stock of such corporation
are then beneficially owned, directly or indirectly, by all or substantially all
of the beneficial owners of securities representing the combined voting power of
the capital stock of Avenue A (the "Company Voting Securities") immediately
prior to such sale or disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other disposition, of Company
Voting Securities, (B) no Person (excluding Avenue A, any employee benefit plan
(or related trust) of Avenue A or such corporation and any Person beneficially
owning, immediately prior to such sale or other disposition, directly or
indirectly, securities representing 33% or more of Company Voting Securities)
beneficially owns, directly or indirectly, securities representing 33% or more
of the combined voting power of the capital stock of such corporation; and (C)
at least a majority of the members of the board of directors of the such
corporation were approved by majority of directors of the Incumbent Directors
(as defined in subsection (vii))on Avenue A's Board of Directors at the time
such transaction was initially approved by Avenue A.
<PAGE>
(v) the reorganization, merger or consolidation of Avenue A with any other
corporation or entity, in each case unless immediately following such
reorganization, merger or consolidation (A) securities representing more than
60% of the combined voting power of the capital stock of the corporation
resulting from such reorganization, merger or consolidation are then
beneficially owned, directly, or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners of Company Voting
Securities immediately prior to such reorganization, merger or consolidation in
substantially the same proportion as their ownership, immediately prior to such
reorganization, merger or consolidation, of Company Voting Securities, (B) no
Person (excluding Avenue A, any employee benefit plan (or related trust) of
Avenue A or such corporation resulting from such reorganization, merger or
consolidation and any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, securities
representing 33% or more of Company Voting Securities) beneficially owns,
directly or indirectly, securities representing 33% or more of the combined
voting power of the corporation resulting from such reorganization, merger or
consolidation, and (C) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were the Incumbent Directors at the time that the agreement for
such reorganization, merger or consolidation was initially executed; or
(vi) the dissolution or liquidation of Avenue A; or
(vii) a change in the composition of the Board of Directors of Avenue A in
which a majority of the seats (other than vacant seats) on the Board have been
occupied by individuals who were neither (a) nominated by a majority of the
Incumbent Directors nor (b) appointed by directors so nominated.
2. Definition of "Successor Company"
For purposes of the Employment Agreement, "Successor Company" shall mean
any of (i) any corporation that acquires all or substantially all of the assets
of Avenue A in a "Change of Control" described in clause (iv) of the definition
of "Change of Control" above or (ii) a successor corporation to Avenue A (or
parent corporation thereof) resulting from a "Change in Control" of Avenue A
described in clause (v) of the definition of "Change of Control" above.
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<PAGE>
EXHIBIT B
WAIVER AND RELEASE
For and in consideration of the severance payments and benefits set out in
the Employment Agreement attached hereto, Executive, on behalf of himself and
his agents, heirs, successors and assigns, expressly waives any claims against
Employer and releases Employer (including its officers, directors, stockholders,
managers, agents and representatives) from any and all claims, demands,
liabilities, damages, obligations, actions or causes of action of any kind,
known or unknown, past or present, arising out of, relating to, or in connection
with Executive's employment, termination of employment, or the holding of any
office with Employer or any other related entity. The claims released by
Executive include, but are not limited to, claims for defamation, libel,
invasion of privacy, intentional or negligent infliction of emotional distress,
wrongful termination, constructive discharge, breach of contract, breach of the
covenant of good faith and fair dealing, breach of fiduciary duty, fraud, or for
violation of any federal, state or other governmental statute or ordinance,
including, without limitation, Title VII of the Civil Rights Act of 1964, the
federal Age Discrimination in Employment Act, the Americans with Disabilities
Act, the Family and Medical Leave Act, the Employment Retirement Income Security
Program or any other legal limitation on the employment relationship.
This waiver and release shall not waive or release claims where the events
in dispute first arise after execution of this Release.
Executive agrees he has been provided the opportunity to consider for
twenty-one (21) days whether to enter into this Release, and has voluntarily
chosen to enter into it on this date. Executive may revoke this Release for a
period of seven (7) days following the execution of this Release; this Release
shall become effective following expiration of this seven (7) day period. This
Release shall be effective when signed. Executive acknowledges that he is
voluntarily executing this Release, that he has carefully read and fully
understands all aspects of this Release and the attached Employment Agreement,
that he has not relied upon any representations or statements not set forth
herein or made by Avenue A's agents or representatives, that he has been advised
to consult with an attorney prior to executing the Release, and that, in fact,
he has consulted with an attorney of his choice as to the subject matter and
effect of this Release.
- --------------------- ----------------------------------------
Date Sumit Sen
<PAGE>
EXHIBIT C
CONFIDENTIALITY AGREEMENT
<PAGE>
EXHIBIT 10.19
Employment Agreement
between
Avenue A, Inc.
and
Brian McAndrews
Dated as of January 20, 2000
<PAGE>
Employment Agreement
This Employment Agreement (this "Agreement"), is entered into as of January
20, 2000 , between Avenue A, Inc., a Washington corporation ("Avenue A"), and
Brian McAndrews ("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Executive has been serving as Chief Executive Officer of Avenue A
pursuant to a letter agreement respecting Executive's employment and
compensation dated as of August 30, 1999. Avenue A and Executive desire to enter
into a formal employment agreement relating to Executive's employment by Avenue
A, including various changes or additions to the terms of the original letter
agreement; and
WHEREAS, Executive is willing to provide services to Avenue A upon the
terms and conditions set forth herein;
A G R E E M E N T S:
- - - - - - - - - -
NOW, THEREFORE, for and in consideration of the foregoing premises and for
other good and valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, Avenue A and Executive hereby agree as follows:
1. EMPLOYMENT
Avenue A will employ Executive and Executive will serve as the Chief
Executive Officer of Avenue A. During Executive's employment, Executive shall
serve Avenue A faithfully and to the best of his ability, devoting substantially
all his working time, attention and energies to the business of Avenue A.
Executive's status, duties and responsibilities shall be reasonably commensurate
with his title, and he shall perform such duties as lawfully assigned to
Executive. Executive shall not engage in any other business activity (except
the management of personal investments and participation in civic or charitable
activities which in the aggregate do not interfere with the performance of
Executive's duties hereunder) without first obtaining the written consent of
Avenue A, such consent not to be unreasonably withheld.
2. COMPENSATION AND STOCK OPTIONS
During his employment, Avenue A will pay Executive an annual salary of not
less than $300,000 paid semi-monthly. In addition, Executive has been granted a
stock option to purchase 1,230,000 shares of the common stock of Avenue A at an
<PAGE>
exercise price of $1.90 per share, which option is subject to four-year vesting
and other conditions in accordance with the terms of the option letter agreement
evidencing such option and the terms of the Avenue A, Inc. 1998 Stock Incentive
Compensation Plan. A portion of the option, for 210,526 shares, was structured
as an incentive stock option within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and the remainder was structured as a
nonqualified stock option. Upon the completion of the Company's initial public
offering of common stock (IPO), Executive will be granted a non-qualified stock
option for the purchase of an additional 176,000 shares of common stock (as
adjusted for stock splits, stock dividends and the like, occurring after
September 15, 1999 and prior to the consummation of the IPO) at an exercise
price equal to the IPO offering price (which shall not be adjusted for stock
splits, stock dividends and the like prior to the IPO), vesting over a four-year
period in accordance with the terms of the Plan, with credit for vesting given
for the period between Executive's employment commencement date and the date of
completion of the IPO.
3. BENEFITS AND RELOCATION COSTS
During the term of his employment, Executive will be entitled to
participate in Avenue A's benefits made available to employees generally from
time to time, including, without limitation, health care benefits, 401k Savings
Plan, as well as other benefits, if any, as may be offered to Avenue A's senior
management employees. Avenue A will pay reasonable expenses associated with
relocating Executive to Seattle.
4. TERMINATION
Employment of Executive pursuant to this Agreement may be terminated as
follows:
4.1 By Avenue A
With or without Cause (as defined below), Avenue A may terminate the
employment of Executive at any time upon giving Notice of Termination (as
defined below).
4.2 By Executive
Executive may terminate his employment at any time, for any reason, upon
giving Notice of Termination.
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<PAGE>
4.3 Automatic Termination
This Agreement and Executive's employment hereunder shall terminate
automatically upon the death or total disability of Executive. The term "total
disability" as used herein shall mean Executive's inability to perform the
duties set forth in paragraph 1 hereof for a period or periods aggregating
ninety (90) calendar days in any 12-month period as a result of physical or
mental illness, loss of legal capacity or any other cause beyond Executive's
control, unless Executive is granted a leave of absence by the Board of
Directors of Avenue A. Executive and Avenue A hereby acknowledge that
Executive's ability to perform the duties specified in paragraph 1 hereof is of
the essence of this Agreement. Termination hereunder shall be deemed to be
effective (a) at the end of the calendar month in which Executive's death occurs
or (b) provided that an independent physician appointed by Avenue A and
reasonably acceptable to Executive or his personal representative (the
"Independent Physician") has determined in a written report made available to
Executive or his personal representative that Executive is unable to perform the
duties set forth in paragraph 1 hereof as a result of physical or mental
illness, loss of legal capacity or any other cause beyond Executive's control,
and such disability has been in effect for a period or periods aggregating
ninety (90) calendar days in a 12-month period, immediately upon notice to
Executive or his personal representative. Notwithstanding the foregoing, "total
disability" shall not include any temporary illness or condition that prevents
Executive from performing his duties for a period of no more than 180 days if,
in the opinion of the Independent Physician, Executive is reasonably likely to
recover within 180 days or less from the onset of the illness or condition, such
that he can permanently resume performance of his duties.
4.4 Notice
The term "Notice of Termination" shall mean at least thirty (30) days'
written notice of termination, by either party, of Executive's employment,
during which period Executive's employment and performance of services will
continue; provided, however, that Avenue A may, upon notice to Executive and
without reducing Executive's compensation during such period, excuse Executive
from any or all of his duties during such period, and Executive shall be
entitled to all compensation and benefits during such period. Such a reduction
in duties shall not constitute "good reason" for voluntary termination so as to
trigger termination payments in accordance with subparagraph 5.2. The effective
date of the termination (the "Termination Date") of Executive's employment
hereunder shall be the date on which such 30-day period expires.
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<PAGE>
5. TERMINATION PAYMENTS AND ACCELERATION OF VESTING
In the event of termination of the employment of Executive, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this paragraph 5:
5.1 Termination by Avenue A
(a) Upon termination by Avenue A, Avenue A shall pay Executive any unpaid
annual base salary which has accrued or is payable through the Termination Date,
together with any unpaid bonus compensation that Executive has earned in
accordance with the conditions set by the Board of Directors with respect to
such compensation.
(b) If Avenue A terminates Executive's employment without Cause, as
defined below, Executive shall be entitled to receive termination payments equal
to twelve (12) months annual base salary. The termination payments shall be
calculated according to Executive's base salary as of the date of Notice of
Termination and the termination payments will be paid semi-monthly in equal
parts in accordance with the same time schedule that Avenue A or a Successor
Company (as defined in Exhibit A hereto and incorporated by reference herein)
makes its customary payroll. Avenue A or a Successor Company may deduct
customary withholdings including social security, federal and state income
taxes, and state disability insurance from these severance payments; however,
any and all such obligations shall be Executive's responsibility. Avenue A will
issue and file appropriate Form 1099 or similar tax documents in connection with
any termination payments. The termination payments described in this paragraph
are expressly contingent upon Executive's signing upon termination a release in
the form attached hereto as Exhibit B, and are further contingent upon
Executive's full compliance with the terms of his Confidentiality, Inventions
Assignment, Noncompetition and Nonsolicitation Agreement with Avenue A (the
"Confidentiality Agreement"), a copy of which is attached hereto as Exhibit C.
In the event that it is determined by a court of competent jurisdiction that
Executive has engaged in any act or activity that represents a material breach
of this Confidentiality Agreement, Executive shall return to Avenue A (and any
Successor Company) the amount of severance payments made by Avenue A (and any
Successor Company) after the date of such breach. Immediately upon learning of
such a breach, Avenue A may immediately cease any further payments otherwise due
under this Paragraph. In the event that a court of competent jurisdiction
determines that any breach alleged by Avenue A was not in fact or as a matter of
law a breach, Avenue A shall pay to Executive any severance amount so withheld
and reimburse Executive for his reasonable attorneys' fees and court costs
incurred in proving such non-breach.
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<PAGE>
(c) If Avenue A terminates Executive's employment without Cause, as
defined below, then (1) a portion, as is determined in accordance with the
following sentence, of any Avenue A stock option held by Executive immediately
prior to the Termination Date that is unvested shall automatically vest
immediately prior to the Termination Date (and in such case the shares
subsequently issued on exercise of such accelerated portion shall be vested),
and (2) a portion, as is determined in accordance with the following sentence,
of unvested shares, if any, issued to Executive on exercise of any Avenue A
stock options shall, immediately prior to the Termination Date, automatically
vest and be no longer subject to the right of repurchase in favor of Avenue A.
The portion of any unvested stock options or unvested shares that shall vest in
accordance with the foregoing sentence shall be an amount equal to the portion
that would have vested during the one year period immediately following the
Termination Date (assuming, for purpose of determining the amount, that no
termination had occurred and Executive had continued Executive's employment with
Avenue A during that one year period). If the one year anniversary of the
Termination Date falls in the middle of a quarter for option or share vesting
purposes, the vesting acceleration described above shall be pro rated for the
actual number of days between the beginning of such quarter and the one year
anniversary date. To the extent of any inconsistency between (i) the terms
contained in this Agreement regarding acceleration of vesting of stock options
or of unvested shares granted to or held by Executive and (ii) general terms
regarding acceleration of vesting of stock options or of unvested shares
contained in any stock option plan of Avenue A under which any stock option held
by Executive is granted (a "Company Stock Option Plan") or any option letter
agreement for any stock option for Avenue A common stock granted to Executive
prior to or after the date of this Agreement (an "Option Agreement"), such
inconsistency shall be resolved in favor of Executive.
(d) If Executive is terminated for Cause by Avenue A or a Successor
Company, Executive shall not be entitled to any termination payments or
accelerated vesting benefit, except that Executive's salary shall be continued
for three months after his Termination Date.
5.2 Termination by Executive
(a) In the case of the termination of Executive's employment with Avenue A
by Executive for "good reason," as defined below, Executive shall be entitled to
the termination payments and accelerated vesting benefit as set forth in clauses
5.1(a), (b) and (c), above. In the case of termination of Executive's
employment with Avenue A by Executive for any other reason, Executive shall not
be entitled to any termination payments or accelerated vesting benefit, except
that Executive's salary shall be continued for three months after Termination
Date.
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<PAGE>
(b) In the case of the termination of Executive's employment with a
Successor Company by Executive for "good reason," as defined below, Executive
shall be entitled to the termination payments as set forth in clauses 5.1(a) and
(b), above. In addition, in such event 100% of Executive's unvested stock
options and 100% of Executive's unvested shares issued or issuable upon exercise
of Executive's stock options shall immediately vest upon Notice of Termination.
In the case of termination of Executive's employment with a Successor Company by
Executive for any other reason, Executive shall not be entitled to any
termination payments or accelerated vesting benefit, except that Executive's
salary shall be continued for three months after Termination Date.
5.3 Termination by Successor Company
In the case of the termination without Cause, as defined below, of
Executive's employment by a Successor Company within one year after a Change of
Control, as defined in Exhibit A, Executive shall be entitled to the termination
payments as set forth in clauses 5.1(a) and (b), above. In addition, in such
event 100% of Executive's unvested stock options and 100% of Executive's
unvested shares issued or issuable upon exercise of Executive's stock options
shares shall immediately vest upon Notice of Termination.
5.4 Termination as a Result of Death or Total Disability
In the event of termination of Executive's employment pursuant to
subparagraph 4.3, Executive or his estate shall be paid the compensation set
forth in clause 5.1(a) and shall not be entitled to any of the benefits under
clauses 5.1(b) or 5.1(c), above.
5.5 "Good Reason"
"Good reason" shall mean the occurrence of any of the following events,
without the consent of the Executive, after a "Change of Control" (as defined in
Exhibit A hereto and incorporated by reference herein:
a) a demotion or other material reduction in Executive's status or
the nature of Executive's responsibilities; provided, however,
that a change in the person or office to which Executive reports,
without a corresponding reduction in duties, status and
responsibilities, shall not constitute "good reason;"
b) a non-voluntary reduction in the Executive's annual base salary;
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<PAGE>
c) requirement by a Successor Company that the Executive relocate
his principal place of employment to a location that is more than
50 miles from the principal place of employment where Executive
was employed immediately prior to the "Change of Control;" or
d) the failure of Avenue A to obtain a satisfactory agreement from
any Successor Company to assume and perform the obligations under
this Agreement.
5.6 Cause
Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" shall include, without limitation, the occurrence of one
or more of the following events:
(a) willful misconduct, insubordination, or dishonesty in the
performance of Executive's duties or other knowing and material violation
of Avenue A's or a Successor Company's policies and procedures in effect
from time to time which results in a material adverse effect on Avenue A or
a Successor Company;
(b) willful actions (or intentional failures to act) in bad faith
with respect to Avenue A or a Successor Company that materially impair
Avenue A's or a Successor Company's business, goodwill or reputation;
(c) conviction of a felony involving an act of dishonesty, moral
turpitude, deceit or fraud, or the commission of acts that could reasonably
be expected to result in such a conviction;
(d) current use by the Executive of illegal substances; or
(e) any material willful violation of your Confidentiality Agreement
with Avenue A.
5.7 Acceleration in the Event of a Change in Control
In the event Executive is employed by Avenue A immediately prior to the
date of a "Change in Control" (as defined in Exhibit A hereto and incorporated
by reference herein), then immediately prior to the Change in Control 50% of
Executive's then unvested stock options and 50% of Executive's then unvested
shares issued upon exercise of Executive's stock options shall immediately vest
(and in such case the shares subsequently issued on exercise of such accelerated
portion of Executive's option shall be vested); provided further that such
vesting options and shares shall be
-7-
<PAGE>
allotted proportionately from Executive's vesting schedule, i.e., 50% of the
options and shares scheduled to vest on each vesting date shall accelerate. To
the extent of any inconsistency between (i) the terms contained in this
Agreement regarding acceleration of vesting of stock options or of unvested
shares granted to or held by Executive and (ii) general terms regarding
acceleration of vesting of stock options or of unvested shares contained in any
Company Stock Option Plan or any Option Agreement, such inconsistency shall be
resolved in favor of Executive.
6. CONFIDENTIALITY, NONCOMPETITION AND NONSOLICITATION AGREEMENT
Executive is subject to the terms of the Confidentiality Agreement entered
into concurrently with this Agreement and the terms of the Confidentiality
Agreement shall survive the termination of Executive's employment with Avenue A.
7. REPRESENTATIONS AND WARRANTIES; NO VIOLATION
In order to induce Avenue A to enter into this Agreement, Executive
represents and warrants to Avenue A that neither the execution nor the
performance of this Agreement by Executive will violate or conflict in any way
with any other agreement by which Executive may be bound, or with any other
duties imposed upon Executive by corporate or other statutory or common law.
8. NOTICE AND CURE OF BREACH
Whenever a breach of this Agreement by either party is relied upon as
justification for any action taken by the other party pursuant to any provision
of this Agreement, other than pursuant to the definition of "Cause" set forth in
subparagraph 5.4 hereof, before such action is taken, the party asserting the
breach of this Agreement shall give the other party at least 14 days' prior
written notice of the existence and the nature of such breach before taking
further action hereunder and shall give the party purportedly in breach of this
Agreement the opportunity to correct such breach during the 14-day period.
9. FORM OF NOTICE
All notices given hereunder shall be given in writing, shall specifically
refer to this Agreement and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, at the address set forth below or at such other
address as may hereafter be designated by notice given in compliance with the
terms hereof:
-8-
<PAGE>
If to Executive: Brian McAndrews
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
If to Avenue A: Avenue A, Inc.
506 Second Avenue
Seattle, WA 98104
Facsimile: (206) 521-8808
Attention: Chairman
Copy to: Perkins Coie LLP
1201 Third Avenue, 48th Floor
Seattle, WA 98101-3099
Facsimile: (206) 583-8500
Attention: James Sanders
If notice is mailed, such notice shall be effective upon mailing, or if notice
is personally delivered or sent by telecopy or other electronic facsimile
transmission, it shall be effective upon receipt.
10. ASSIGNMENT
This Agreement is personal to Executive and shall not be assignable by
Executive. Avenue A may assign its rights hereunder to (a) any corporation
resulting from any merger, consolidation or other reorganization to which Avenue
A is a party or (b) any corporation, partnership, association or other person to
which Avenue A may transfer all or substantially all of the assets and business
of Avenue A existing at such time. All of the terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of and be
enforceable by the parties hereto and their respective successors and permitted
assigns.
11. WAIVERS
No delay or failure by any party hereto in exercising, protecting or
enforcing any of its rights, titles, interests or remedies hereunder, and no
course of dealing or performance with respect thereto, shall constitute a waiver
thereof. The express waiver by a party hereto of any right, title, interest or
remedy in a particular instance or circumstance shall not constitute a waiver
thereof in any other instance or circumstance. All rights and remedies shall be
cumulative and not exclusive of any other rights or remedies.
-9-
<PAGE>
12. ARBITRATION
Any controversies or claims arising out of or relating to this Agreement
shall be fully and finally settled by arbitration in the city of Seattle,
Washington in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect (the "AAA Rules"), conducted by one
arbitrator either mutually agreed upon by Avenue A and Executive or chosen in
accordance with the AAA Rules, except that the parties thereto shall have any
right to discovery as would be permitted by the Federal Rules of Civil Procedure
for a period of 90 days following the commencement of such arbitration and the
arbitrator thereof shall resolve any dispute which arises in connection with
such discovery. The prevailing party shall be entitled to costs, expenses and
reasonable attorneys' fees, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
13. AMENDMENTS IN WRITING
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified, waived, terminated or discharged and signed by Avenue A
and Executive, and each such amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by Avenue A and Executive.
14. APPLICABLE LAW
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the state of Washington, without regard
to any rules governing conflicts of laws.
15. SEVERABILITY
If any provision of this Agreement shall be held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without
limitation, the duration of such provision, its geographical scope or the extent
of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof shall remain in full force and
effect in such jurisdiction and shall be liberally construed in order to carry
out the intent of the parties hereto as nearly as may
-10-
<PAGE>
be possible, (b) such invalidity, illegality or unenforceability shall not
affect the validity, legality or enforceability of any other provision hereof,
and (c) any court or arbitrator having jurisdiction thereover shall have the
power to reform such provision to the extent necessary for such provision to be
enforceable under applicable law.
16. HEADINGS
All headings used herein are for convenience only and shall not in any way
affect the construction of, or be taken into consideration in interpreting, this
Agreement.
17. COUNTERPARTS
This Agreement, and any amendment or modification entered into pursuant to
paragraph 13 hereof, may be executed in any number of counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
18. CONFIDENTIALITY AGREEMENT
Avenue A expressly acknowledges that (a) this Agreement supersedes Section
6.1 of the Confidentiality Agreement and, (b) notwithstanding anything to the
contrary in the Confidentiality Agreement, the term "Competing Business" shall
not be construed to include a business which offers and sells advertising on
media (including Web sites, radio and television stations and print media) owned
or controlled by such business or a business which markets the products or
services (other than advertising or marketing services to third parties) that
such business offers for sale to the public.
18. ENTIRE AGREEMENT
This Agreement on and as of the date hereof, together with the
Confidentiality Agreement, constitutes the entire agreement between Avenue A and
Executive with respect to the subject matter hereof and all prior or
contemporaneous oral or written communications, understandings or agreements
between Avenue A and Executive with respect to such subject matter are hereby
superseded and nullified in their entireties.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
EXECUTIVE:
Brian McAndrews
/s/ Brian McAndrews
----------------------------------------------------
AVENUE A:
Avenue A, Inc.
By /s/ Jeffrey Miller
--------------------------------------------------
Its Vice President, Corporate Development and Legal
-----------------------------------------------
Affairs
-----------------------------------------------
-12-
<PAGE>
EXHIBIT A
1. Definition of "Change of Control"
For purposes of the Employment Agreement, a "Change of Control" means any
of:
(i) an event in which any person (including any individual, entity or
group within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act")) (a "Person"), shall
become the beneficial owner (within the meaning of Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the
combined voting power of the capital stock of Avenue A, Inc. ("Avenue A") then
outstanding; or
(ii) at any time during which Avenue A has a class of equity securities
which is listed on a national securities exchange or an automated quotation
system (including, without limitation, the Nasdaq Stock Market) ("publicly
traded"), a Person acquires equity securities representing more than thirty
percent (30%) of the combined voting power of the capital stock of Avenue A
outstanding as of the date of such transaction (or the first of a series of
related transactions), but only if such equity securities were acquired in a
transaction or series of related transactions which were not approved by the
Board of Directors of Avenue A in office prior to the date of such first
acquisition (provided, however that if such Person is entitled, pursuant to Rule
13d-1 under the Exchange Act to file a Form 13G with respect to its holdings of
equity securities of Avenue A in lieu of a Form 13D, such event will not
constitute a Change of Control unless and until such Person files a Form 13D
with respect to such holdings); or
(iii) at any time during which Avenue A has a class of equity securities
which is publicly traded, a Person acquires equity securities representing more
than twenty percent (20%) of the combined voting power of the capital stock of
Avenue A outstanding prior to the date of such transaction (or the first of a
series of related transactions) in a transaction or series of related
transactions which were not approved by the Board of Directors of Avenue A in
office prior to the date of such first acquisition, and, within one year
thereafter, at least two individuals whose election to the Board of Directors
was proposed by such person are members of the Board of Directors; or
(iv) the sale or other disposition of all or substantially all of Avenue
A's assets, other than to a corporation with respect to which immediately
following such sale or disposition (A) securities representing more than sixty
percent (60%) of the combined voting power the capital stock of such corporation
are then beneficially owned, directly or indirectly, by all or substantially
all of the beneficial owners of securities representing the combined voting
power of the capital stock of Avenue A (the "Company Voting Securities")
immediately prior to such sale or disposition in substantially the same
proportion as their ownership, immediately prior to such sale or other
disposition, of Company Voting Securities, (B) no Person (excluding Avenue A,
any employee benefit plan (or related trust) of Avenue A or such corporation and
any Person beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, securities representing 33% or more of
Company Voting Securities) beneficially owns, directly or indirectly, securities
representing 33% or more of the combined voting power of the capital stock of
such corporation; and (C) at least a majority of the members of the board of
directors of the such corporation were approved by majority of directors of the
Incumbent Directors on Avenue A's Board of Directors at the time such
transaction was initially approved by Avenue A. An "Incumbent Director" is a
director (a) nominated or appointed by a majority of Avenue A's current Board of
Directors or (b) nominated
<PAGE>
or appointed by directors nominated or appointed by a majority of Avenue A's
current Board of Directors; or
(v) the reorganization, merger or consolidation of Avenue A with any
other corporation or entity, in each case unless immediately following such
reorganization, merger or consolidation (A) securities representing more than
60% of the combined voting power of the capital stock of the corporation
resulting from such reorganization, merger or consolidation are then
beneficially owned, directly, or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners of Company Voting
Securities immediately prior such reorganization, merger or consolidation in
substantially the same proportion as their ownership immediately prior to such
reorganization, merger or consolidation, of Company Voting Securities, (B) no
Person (excluding Avenue A, any employee benefit plan (or related trust) of
Avenue A or such corporation resulting from such reorganization, merger or
consolidation and any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, securities
representing 33% or more of Company Voting Securities) beneficially owns,
directly or indirectly, securities representing 33% or more of the combined
voting power of the corporation resulting from such reorganization, merger or
consolidation, and (C) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were the Incumbent Directors at the time that the agreement for
such reorganization, merger or consolidation was initially executed; or
(vi) the dissolution or liquidation of Avenue A; or
(vii) a change in the composition of the Board of Directors of Avenue A in
which the majority of the seats (other than vacant seats) on the Board have been
occupied by individuals who were neither (a) nominated or appointed by a
majority of the current Board of Directors nor (b) nominated or appointed by
directors nominated or appointed by a majority of the current Board of
Directors.
2. Definition of "Successor Company"
For purposes of the Employment Agreement, "Successor Company" shall mean
any of (i) any corporation that acquires all or substantially all of the assets
of Avenue A in a "Change of Control" described in clause (iv) of the definition
of "Change of Control" above or (ii) a successor corporation to Avenue A (or
parent corporation thereof) resulting from a "Change in Control" of Avenue A
described in clause (v) of the definition of "Change of Control" above.
<PAGE>
EXHIBIT B
WAIVER AND RELEASE
For and in consideration of the severance payments and benefits set out in
the Employment Agreement attached hereto, Executive, on behalf of himself and
his agents, heirs, successors and assigns, expressly waives any claims against
Employer and releases Employer (including its officers, directors, stockholders,
managers, agents and representatives) from any and all claims, demands,
liabilities, damages, obligations, actions or causes of action of any kind,
known or unknown, past or present, arising out of, relating to, or in connection
with Executive's employment, termination of employment, or the holding of any
office with Employer or any other related entity. The claims released by
Executive include, but are not limited to, claims for defamation, libel,
invasion of privacy, intentional or negligent infliction of emotional distress,
wrongful termination, constructive discharge, breach of contract, breach of the
covenant of good faith and fair dealing, breach of fiduciary duty, fraud, or for
violation of any federal, state or other governmental statute or ordinance,
including, without limitation, Title VII of the Civil Rights Act of 1964, the
federal Age Discrimination in Employment Act, the Americans with Disabilities
Act, the Family and Medical Leave Act, the Employment Retirement Income Security
Program or any other legal limitation on the employment relationship.
This waiver and release shall not waive or release claims where the events
in dispute first arise after execution of this Release.
Executive agrees he has been provided the opportunity to consider for
twenty-one (21) days whether to enter into this Release, and has voluntarily
chosen to enter into it on this date. Executive may revoke this Release for a
period of seven (7) days following the execution of this Release; this Release
shall become effective following expiration of this seven (7) day period. This
Release shall be effective when signed. Executive acknowledges that he is
voluntarily executing this Release, that he has carefully read and fully
understands all aspects of this Release and the attached Employment Agreement,
that he has not relied upon any representations or statements not set forth
herein or made by Avenue A's agents or representatives, that he has been advised
to consult with an attorney prior to executing the Release, and that, in fact,
he has consulted with an attorney of his choice as to the subject matter and
effect of this Release.
- ----------------------- ---------------------------------------
Date Brian McAndrews
<PAGE>
EXHIBIT C
CONFIDENTIALITY AGREEMENT
<PAGE>
EXHIBIT 10.28
Exodus Communication, Inc.
Internet Data Center Services Agreement
THIS INTERNET DATA CENTER SERVICES AGREEMENT (this "Agreement") is made
effective as of the Submission Date (Jan 23, 1998) indicated in the initial
Internet Data Center Services Order Form accepted by Exodus, by and between
Exodus Communications, Inc. ("Exodus") and the customer identified below
("Customer").
Parties:
Customer Name: Avenue A, Inc.
-----------------------------
Address: 1100 Olive Way, Suite 1270
-----------------------------
Seattle, WA 98101
-----------------------------
Phone: 206/521-8800
-----------------------------
Fax: 206/521-8808
-----------------------------
Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051
Phone: (408) 346-2200
Fax: (804) 346-2206
1. Internet Data Center Services.
Subject to the terms and conditions of this Agreement, during the term of this
Agreement, Exodus will provide to Customer the services described in the
Internet Data Centers Services Order Form(s) ("IDC Services Order Form(s)")
accepted by Exodus, or substantially similar services if such substantially
similar services would provide Customer with substantially similar benefits
("Internet Data Center Services"). All IDC Services Order Forms accepted by
Exodus are incorporated herein by this reference, each as of the Submission Data
indicated in such form.
2. Fees and Billing
2.1 Fees. Customer will pay all fees due according to the IDC Services Order
Form(s).
2.2 Billing Commencement. Billing for Internet Data Center Services, other
than Setup Fees, indicated in the initial IDC Services Order Form shall commence
on the earlier to occur of (i) the "Installation Date" indicated in the initial
IDC Services Order Form, regardless of whether Customer has commenced use of the
Internet Data Center Services, unless Customer is unable to install the Customer
Equipment and/or use the Internet Data Center Services by the Installation Date
due to the fault of Exodus, then billing will not begin until the date Exodus
has remedied such fault and (ii) the date the "Customer Equipment" (Customer's
computer hardware and other tangible equipment, as identified in the Customer
Equipment List which is incorporated herein by this reference) is placed by
Customer in the "Customer Area" (the portion(s) of the Internet Data Centers, as
defined in Section 3.1 below, made available to Customer hereunder for the
placement of Customer Equipment) and is operational. All Setup Fees will be
billed upon receipt of a Customer signed IDC Services Order Form. In the event
that Customer orders additional Internet Data Center Services, billing for such
services shall commence on the data Exodus first provides such additional
Internet Data Center Services to Customer or as otherwise agreed to by Customer
and Exodus.
2.3 Billing and Payment Terms. Customer will be billed monthly in advance of
the provision of Internet Data Center Services, and payment of such fees will be
due within thirty (30) days of the date of each Exodus invoice. All payments
will be made in U.S. dollars. Late payments hereunder will accrue interest at a
rate of one and one-half percent (1 1/2%) per month, or the highest rate allowed
by applicable law, whichever is lower. If in its judgment Exodus determines that
Customer is not creditworthy or is otherwise not financially secure, Exodus may,
upon written notice to Customer, modify the payment terms to require full
payment before the provision of Internet Data Center Services or other
assurances to secure Customer's payment obligations hereunder.
2.4 Taxes. All payments required by this Agreement are exclusive of all
national, state, munic8ipal or other governmental excise, sales, value-added,
use, personal property, and occupational taxes, excises, withholding taxes and
obligations and other levies now in force or enacted in the future, all of which
Customer will be responsible for and will pay in full, except for taxes based on
Exodus' income.
3. Customer's Obligations
3.1 Compliance with Law and Rules and Regulations. Customer agrees that
Customer will comply at all times with all applicable laws and regulations and
Exodus' general rules and regulations relating to its provision of Internet Data
Center Services, as updated by Exodus from time to time ("Rules and
Regulations"). Customer acknowledges that Exodus exercises no control whatsoever
over the content of the information passing through its sites containing the
Customer Area and equipment and facilities used by Exodus to provide Internet
Data Center Services ("Internet Data Centers"), and that it is the sole
responsibility of Customer to ensure that the information it transmits and
receives complies with all applicable laws and regulations.
3.2 Customer's Costs. Customer agrees that it will be solely responsible, and
at Exodus's request will reimburse Exodus, for all costs and expenses (other
than those included as part of the Internet Data Center Services and except as
otherwise expressly provided herein) it incurs in connection with this
agreement.
3.3 Access and Security. Customer will be fully responsible for any charges,
costs, expenses (other than those included in the Internet Data Center
Services), and third party claims that may result form its use of, or access to,
the Internet Data Centers and/or the Customer Area including but not limited to
any unauthorized use of any access devices provided by Exodus hereunder. Except
with the advanced written consent of Exodus, Customer's access to the Internet
Data Centers will be limited solely to the individuals identified and authorized
by Customer to have access to the Internet Data Centers and the Customer Area in
accordance with this Agreement, as identified in the Customer Registration Form,
as amended from time to time, which is hereby incorporated by this reference
("Representatives").
3.4 No Competitive Services. Customer may not at any time permit any Internet
Data Center Services to be utilized for the provision of any services that
compete with any Exodus services, without Exodus' prior written consent.
3.5 Insurance.
(a) Minimum Levels. Customer will keep in full force and effect during the
term of this Agreement (i) comprehensive general liability insurance in an
amount not less than 55 million per occurrence for bodily injury and property
damage; (ii) employer's liability insurance in an amount not less than 51
million per occurrence; and (iii) workers' compensation insurance in an amount
not less than that required by applicable law. Customer also agrees that it
will, and will be solely responsible for ensuring that its agents (including
contractors and subcontractors) maintain, other insurance at levels no less than
those required by applicable law and customary in Customer's and its agents'
industries.
(b) Certificates of Insurance. Prior to installation of any Customer Equipment
in the Customer Area, Customer will furnish Exodus with certificates of
insurance which evidence the minimum levels of insurance set forth above.
(c) Naming Exodus as an Additional Insured. Customer agrees that prior to the
installation of any Customer Equipment, Customer will cause its insurance
provider(s) to name Exodus as an additional insured and notify Exodus in writing
of the effective date thereof.
4. Confidential Information.
4.1 Confidential Information. Each party acknowledges that it will have access
to certain confidential information of the other party concerning the other
party's business, plans, customers, technology, and products, including the
terms and conditions of this Agreement ("Confidential Information").
confidential Information will include, but not be limited to, each party's
proprietary software and customer information. Each party agrees that it will
not use in any way, for its own account or the account of any third party,
except as expressly permitted by this Agreement, nor disclose to any third party
(except as required by law or to that party's attorneys, accountants and other
advisors as reasonably necessary), any of the other party's Confidential
Information and will take reasonable precautions to protect the confidentiality
of such information.
4.2 Exceptions. Information will not be deemed Confidential Information
hereunder if such information: (i) is known to the receiving party prior to
receipt from the disclosing party directly or indirectly from a source other
than one having an obligation of confidentiality to the disclosing party; (ii)
becomes known (independently of disclosure by the disclosing party) to the
receiving party directly or indirectly from a source other than one having an
obligation of confidentiality to the disclosing party; (iii) becomes publicly
known or otherwise ceases to be secret or confidential, except through a breach
of this Agreement by the receiving party; or (iv) is independently developed by
the receiving party.
5. Representations and Warranties.
5.1 Warranties by Customer.
(a) Customer Equipment. Customer represents and warrants that its owns or has
the legal right and authority, and will continue to own or maintain the legal
right and authority during the term of this Agreement, to place and use the
Customer Equipment as contemplated by this Agreement. Customer further
represents and warrants that its placement, arrangement, and use of the Customer
Equipment in the Internet Data Centers complies with the Customer Equipment
Manufacturer's environmental and other specifications.
(b) Customer's Business. Customer represents and warrants that Customer's
services, products, materials, data, information and Customer Equipment used by
Customer in connection with this Agreement as well as Customer's and its
permitted customer's and users' use of the Internet Data Center Services
(collectively, "Customer's Business") does not as of the Installation Date, and
will not during the term of this Agreement operate in any manner that would
violate any applicable law or regulation.
(c) Rules and Regulations. Customer had read the Rules and Regulations
and represents and warrants that Customer and Customer's Business are currently
in full compliance with the Rules and Regulations, and will remain so at all
times during the term of this Agreement.
(d) Breach of Warranties. In the event of any breach, or reasonably
anticipated breach, of any of the foregoing warranties, in addition to any other
remedies available at law or in equity, Exodus will have the right immediately,
in Exodus' sole discretion, to suspend any related Internet Data Center Services
if deemed reasonably necessary by Exodus to prevent any harm to Exodus and its
business.
5.2 Warranties and Disclaimers by Exodus
5.2(a) Service Level Warranty. In the event Customer experiences any of the
following and Exodus determines in its reasonable judgment that such inability
was caused by Exodus' failure to provide Internet Data Center Services for
reasons within
PAGE 1
<PAGE>
Exodus' reasonable control and not as a result of any actions or
interactions of Customer or any third parties (including Customer Equipment and
third party equipment), Exodus will, upon Customer's request in accordance with
paragraph (iii) below, credit Customer's account as described below:
(i) Inability to Access the Internet (Downtime). If Customer is unable to
transmit and receive information from Exodus' Internet Data Centers (i.e.,
Exodus' LAN and WAN) to other portions of the internet because Exodus failed to
provide the Internet Data Center Services for more than fifteen (15) consecutive
minutes, Exodus will credit Customer's account the pro-rate connectivity charges
(i.e., all bandwidth related charges) for one (1) day of service, up to an
aggregate maximum credit of connectivity charges for seven (7) days of service
in any one calendar (1) month. Exodus' scheduled maintenance of the Internet
Data Centers and Internet Data Center Services, as described in the Rules and
Regulations, shall not be deemed to be a failure of Exodus to provide Internet
Data Center Services. For purposes of the foregoing, "unable to transmit and
receive" shall mean sustained packet loss in excess of 50% based on Exodus'
measurements.
(ii) Packet Loss and latency: Exodus does not proactively monitor the packet
loss or transmission latency of specific customers. Exodus does, however,
proactively monitor the aggregate packet loss and transmission latency within
its LAN and WAN. In the event that Exodus discovers (either from its own efforts
or after being notified by Customer) that customer is experiencing packet loss
in excess of one percent (1%) ("Excess Packet Loss") or transmission latency in
excess of 120 milliseconds round trip time (based on Exodus' measurements)
between any two Internet Data Centers within Exodus' U.S. network (collectively,
"Excess Latency", and with Excess Packet Loss "Excess Packet Loss/Latency"), and
Customer notifies Exodus (or confirms that Exodus has notified Customer), Exodus
will take all actions necessary to determine the source of the Excess Packet
Loss/latency.
(A) Time to Discover Source of Excess Packet Loss/Latency: Notification
of Customer. Within two (2) hours of discovering the existence of Excess Packet
Loss Latency, Exodus will determine whether the source of the Excess Packet
Loss/latency is limited to the Customer Equipment and the Exodus equipment
connecting the Customer Equipment to Exodus' LAN ("Customer Specific Packet
Loss/Latency"). If the Excess Packet Loss/Latency is not a Customer Specific
Packet Loss/Latency, Exodus will determine the source of the Excess Packet
Loss/Latency within two (2) hours after determining that it is not a Customer
Specific Packet Loss/Latency. In any event, Exodus will notify Customer of the
source of the Excess Packet Loss/Latency within sixty (60) minutes after
identifying the source.
(B) Remedy of Excess Packet Loss/Latency. If the Excess Packet
Loss/Latency remedy is within the sole control of Exodus, Exodus will remedy the
Excess Packet Loss/Latency within two (2) hours of determining the source of the
Excess Packet Loss/Latency. If the Excess Packet Loss/Latency is caused from
outside of the Exodus LAN or WAN, Exodus will notify Customer and will use
commercially reasonable efforts to notify the party(ies) responsible for the
source and cooperate with it (them) to resolve the problem as soon as possible.
(C) Failure to Determine Source and/or Resolve Problem. In the event
that Exodus is unable to determine the source of and remedy the Excess Packet
Loss/Latency within the time periods described above (where Exodus was solely in
control of the source), Exodus will credit Customer's account the pro-rata
connectivity charges for one (1) day of service for every two (2) hours after
the time periods described above that it takes Exodus to resolve the problem, up
to an aggregate maximum credit of connectivity charges for seven (7) days of
service in any one (1) month.
(iii) Customer Must Request Credit. To receive any of the credits described in
this section 5.2(a), Customer must notify Exodus within three (3) business days
from the time Customer becomes eligible to receive a credit. Failure to comply
with this requirement will forfeit Customer's right to receive a credit.
(iv) Remedies Shall Not Be Cumulative: Maximum Credit: In the event that
Customer is entitled to multiple credits hereunder arising from the same event,
such credits shall not be cumulative and Customer shall be entitled to receive
only the maximum single credit available for such event. In no event will Exodus
be required to credit Customer in any one (1) calendar month connectivity
charges in excess of seven (7) days of service. A credit shall be applied only
to the month in which there was the incident that resulted in the credit.
Customer shall not be eligible to receive any credits for periods in which
Customer received any Internet Data Center Services free of charge.
(v) Termination Option for Chronic Problems. If, in any single calendar month,
Customer would be able to receive credits totaling fifteen (15) or more days
(but for the limitation in paragraph (iv) above resulting from three (3) or more
events during such calendar month or, if any single event entitling customer to
credits under paragraph 5.2(a)(i) exists for a period of eight (8) consecutive
hours, then, Customer may terminate this Agreement for cause and without penalty
by notifying Exodus within five (5) days following the end of such calendar
month. Such termination will be effective thirty (3) days after receipt of such
notice by Exodus.
This Warranty does not apply to any Internet Data Center Services that
expressly exclude this warranty (as described in the specification sheets for
such products). This section 5.2(a) states customer's sole and exclusive remedy
for any FAILURES by Exodus to provide Internet Data Center Services.
(b) No Other Warranty. Except for the express warranty set out in subsection
(a) above, the Internet Data Center Services are provided on an "as is" basis,
and Customer's use of the Internet Data Center Services is at its own risk.
Exodus does not make, and hereby disclaims, any and all other express and/or
implied warranties, INCLUDING, but not limited to, warranties of
merchantability, fitness for a particular purpose, noninfringement and title,
and any warranties arising from a course of dealing, usage, or trade practice.
exodus does not warrant that the Internet Data Center Services will be
uninterrupted, error-free, or completely secure.
(c) Disclaimer of Actions Caused by and/or Under the Control of Third Parties.
Exodus does not and cannot control the flow of data to or from Exodus' Internet
Data Centers and other portions of the internet. Such flow depends in large part
on the performance of internet services provided or controlled by third parties.
At times, actions or inactions caused by these third PARTIES can produce
situations in which Exodus' customers' connections to the Internet (or portions
THEREOF) may be Impaired or Disrupted. Although Exodus will use commercially
reasonable efforts to take actions it deems appropriate t remedy and avoid such
events, Exodus cannot guarantee that they will not occur. Accordingly, Exodus
disclaims any and all liability resulting from or related to such events.
6. Limitations of Liability.
6.1 Personal Injury. Each representative and any other persons visiting the
Internet Data Centers does so at its own risk and Exodus assumes no liability
whatsoever for any harm to such persons resulting from any cause other than
Exodus' negligence or willful misconduct resulting in personal injury to such
persons during such a visit.
6.2 Damage to Customer Equipment or Business. Exodus assumes no liability for
any damage to, or loss relating to, Customer's Business resulting from any cause
whatsoever. Certain Customer Equipment, including but not limited to Customer
Equipment located on CyberRacks, may be directly ACCESSIBLE by OTHER customers.
Exodus assumes no liability for any damage to, or loss of, any Customer
Equipment resulting from any cause other than Exodus' gross negligence or
willful misconduct. To the extent Exodus is liable for any damage to, or loss
of, the Customer Equipment for any reason, such liability will be limited solely
to the then-current value to the Customer Equipment.
6.3 Exclusions. Except as SPECIFIED in Sections 6.1 and 6.2, in no event will
Exodus be liable to Customer, any Representative, or any THIRD party for any
claims arising out of or related to this Agreement, Customer Equipment,
Customer's Business or otherwise, and any lost revenue, lost profits,
replacement goods, loss of technology, rights or services, incidental, punitive,
indirect or consequential damages, loss of data, or interruption or loss of use
of service or of any Customer Equipment or Customer's Business, even if advised
of the possibility of such damages, whether under theory of contract, tort
(including negligence), strict liability or otherwise.
6.4 Maximum Liability. Notwithstanding anything to the contrary in this
Agreement, Exodus's maximum aggregate liability to Customer RELATED to or in
connection with this Agreement will be limited to the total amount paid by
Customer to Exodus hereunder for the prior twelve (12) month period.
6.5 Customer's Insurance. Customer agrees that it will not pursue any claims
against Exodus for any liability Exodus may have under or relating to this
Agreement until Customer first makes claims against Customer's insurance
provider(s) and such insurance provider(s) finally resolve(s) such claims.
6.6 Basis of the Bargain: Failure of Essential Purpose. Customer acknowledges
that Exodus has set its prices and entered into this Agreement in reliance upon
the limitations of liability and the disclaimers of warranties and damages set
forth herein, and that the same form an essential basis of the bargain between
the parties. The parties agree that the limitations and exclusions of liability
and disclaimers specified in this Agreement will survive and apply even if found
to have failed of their essential purpose.
7. Indemnification.
7.1 Exodus' Indemnification of Customer. Exodus will indemnify, defend and
hold Customer harmless from and against any and all costs, liabilities, losses,
and expenses (including, but not limited to, reasonable attorneys' fees)
(collectively, "Losses") resulting from any claim, suit, action, or proceeding
(each, an "Action") brought against Customer alleging (i) the infringement of
any third party registered U.S. copyright or issued U.S. patent resulting from
the provision of Internet Data Center Services pursuant to this Agreement (but
excluding any infringement contributorily caused by Customer's Business or
Customer Equipment) and (ii) personal injury to Customer's Representatives from
Exodus's gross negligence or willful misconduct.
7.2 Customer's Indemnification of Exodus. Customer will indemnify, defend and
hold Exodus, its affiliates and customers harmless from and against any and all
Losses resulting from or arising out of any Action brought by or against Exodus,
its affiliates or customers alleging: (a) with respect to the Customer's
Business: (i) infringement or misappropriate of any intellectual property
rights; (ii) defamation, libel, slander, obscenity, pornography, or violation of
the rights of privacy or publicity; or (iii) spamming, or any other offensive,
harassing or illegal conduct or violation of the Rules and Regulations; (b) any
damage or destruction to the Customer Area, the Internet Data Centers or the
equipment of Exodus or any other customer by Customer or Representative(s) or
Customer's designees; or (c) and other damage arising from the Customer
Equipment or Customer's Business.
PAGE 2
<PAGE>
7.3 Notice. Each party will provide the other party prompt written
notice upon of the existence of any such event of which it becomes aware, and an
opportunity to participate in the defense thereof.
8. Term and Termination.
8.1 Term. This Agreement will be effective for a period of one(1)
year from the Installation Date, unless earlier terminated according to the
provisions of this Section 8. The Agreement will automatically renew for
additional terms of one (1) year each.
8.2 Termination.
(a) For Convenience.
(i) By Customer During First Thirty Days. Customer may terminate this
Agreement for convenience by providing written notice to Exodus at any time
during the thirty (3) day period beginning on the Installation Date.
(ii) By Either Party. Either party may terminate this Agreement for
convenience at any time effective after the first (1st) anniversary of the
Installation Date by providing ninety (90) days' prior written notice to the
other party at any time thereafter.
(b) For Cause. Either party will have the right to terminate this
Agreement if: (i) the other party breaches any material term or condition of
this Agreement and fails to cure such breach within thirty (30) days after
receipt of written notice of the same, except in the case of failure to pay
fees, which must be cured within five (5) days after receipt of written notice
from Exodus; (ii) the other party become the subject of a voluntary petition in
bankruptcy or any voluntary proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of creditors; or (iii) the other
party becomes the subject of an involuntary petition in bankruptcy or any
involuntary proceeding relating to insolvency, receivership, liquidation, or
composition for the benefit of creditors, if such petition or proceeding is not
dismissed within sixty (60) days of filing.
8.3 No Liability for Termination. Neither party will be liable to the
other for any termination or expiration of this Agreement in accordance with its
terms.
8.4 Effect of Termination. Upon the effective date of expiration or
termination of this Agreement: (a) Exodus will immediately cease providing the
Internet Data Center Services; (b) any and all payment obligations of Customer
under this Agreement will become due immediately; (c) within thirty (30) days
after such expiration or termination, each party will return all Confidential
Information of the other party in its possession at the time of expiration or
termination and will not make or retain any copies of such Confidential
Information except as required to comply with any applicable legal or accounting
record keeping requirement; and (d) Customer will remove from the Internet Data
Centers all Customer Equipment and any of its other property within the Internet
Data Centers within five (5) days of such expiration or termination and return
the Customer Area to Exodus in the same condition as it was on the Installation
Date, normal wear and tear excepted. If Customer does not remove such property
within such five-day period, Exodus will have the option t (i) move any and all
such property to secure storage and charge Customer for the cost of such removal
and storage and/or (ii) liquidate the property in any reasonable manner.
8.5 Customer Equipment as Security. In the event that customer fails
to pay Exodus all amounts owned Exodus under this Agreement when due, Customer
Agrees that upon written notice, Exodus may take possession of any Customer
Equipment and store it, at Customer's expense, until taken in full or partial
satisfaction of any lien or judgment, all without being liable to prosecution or
for damages.
8.6 Survival. The following provisions will survive any expiration or
termination of the Agreement: Sections 2, 3, 4, 5, 6, 7, 8 and 9.
9. Miscellaneous Provisions.
9.1 Force Majeure. Except for the obligation to pay money, neither
party will be liable for any failure or delay in its performance under this
Agreement due to any cause beyond its reasonable control, including act of war,
acts of God, earthquake, flood, embargo, riot, sabotage, labor shortage or
dispute, governmental act or failure of the Internet, provided that the delayed
party: (a) give the other party prompt notice of such cause, and (b) uses its
reasonable commercial efforts to correct promptly such failure or delay in
performance.
9.2 No Lease. This Agreement is a services agreement and is not
intended to and will not constitute a lease of any real or personal property.
Customer acknowledges and agrees that (i) it has been granted only a license to
occupy the Customer Space and use the Internet Data Centers and any equipment
provided by Exodus in accordance with this Agreement; (ii) Customer has not been
granted any real property interest in the Customer Space or Internet Data
Centers, and (iii) Customer has no rights as a tenant or otherwise under any
real property or landlord/tenant laws, regulations, or ordinances. For good
cause, including the exercise of any rights under Section 8.5 above, Exodus may
suspend the right of any Representative or other person to visit the Internet
Data Centers.
9.3 Marketing. Customer agrees that Exodus may refer to Customer by
trade name and trademark and may briefly describe Customer's Business, in
Exodus' marketing materials and web site. Customer hereby grants Exodus a
license to use any Customer trade names and trademarks solely in connection with
the rights granted to Exodus pursuant to this Section 9.3.
9.4 Government Regulations. Customer will not export, re-export,
transfer, or make available, whether directly or indirectly, any regulated item
or information to anyone outside the U.S. in connection with this Agreement
without first complying with all export control laws and regulations which may
be imposed by the U.S. Government and any country or organization of nations
within whose jurisdiction Customer operates or does business.
9.5 Non-Solicitation. During the period beginning on the Installation
Data ad ending on the first anniversary of the termination or expiration of this
Agreement in accordance with its terms, Customer agrees that it will not, and
will ensure that its affiliates do not, directly or indirectly, solicit or
attempt to solicit for employment any persons employed by Exodus during such
period.
9.6 Governing Law: Dispute Resolution, Severability: Waiver. This
Agreement is made under and will be governed by and construed in accordance with
the laws of the State of California (except that body of law controlling
conflicts of law) and specifically excluding from application to this Agreement
that law known as the United Nations Convention on the International Sale of
Goods. Any dispute relating to the terms, interpretation or performance of this
Agreement (other than claims for preliminary injunctive relief or other
pre-judgment remedies) will be resolved at the request of either party through
binding arbitration. Arbitration will be conducted in Santa Clara County,
California, under the rules and procedures of the Judicial Arbitration and
Mediation Society ("JAMS"). The parties will request that JAMS appoint a single
arbitrator possessing knowledge of online services agreements: however the
arbitration will proceed even if such a person in unavailable. In the event any
provision of this Agreement is held by a tribunal of competent jurisdiction to
be contrary to the law, the remaining provisions of this Agreement will remain
in full force and effect. The waiver of any breach or default of this Agreement
will not constitute a waiver of any subsequent breach or default, and will not
act to amend or negate the rights of the waiving party.
9.7 Assignment: Notices. Customer may not assign its rights or delegate
its duties under this Agreement either in whole or in part without the prior
written consent of Exodus, except that Customer may assign this Agreement in
whole as part of a corporate reorganization, consolidation, merger, or sale of
substantially all of its assets. Any attempted assignment or delegation without
such consent will be void. Exodus may assign this Agreement in whole or part.
This Agreement will bind and inure to the benefit of each party's successors and
permitted assigns. Any notice or communication required or permitted to be given
hereunder may be delivered by hand, deposited with an overnight courier, sent by
confirmed facsimile, or mailed by registered or certified mail, return receipt
requested, postage prepaid, in each case to the address of the receiving party
indicated on the signature page hereof, or at such other address as may
hereafter be furnished in writing by either party hereto to the other. Such
notice will be deemed to have been given as of the date it is delivered, mailed
or sent, whichever is earlier.
9.8 Relationship of parties. Exodus and Customer are independent
contractors and this Agreement will not establish any relationship of
partnership, joint venture, employment, franchise or agency between Exodus and
Customer. Neither Exodus nor Customer will have the power to bind the other or
incur obligations on the other's behalf without the other's prior written
consent, except as otherwise expressly provided herein.
9.9 Entire Agreement: Counterparts. This Agreement, including all
documents incorporated herein by reference, constitutes the complete and
exclusive agreement between the parties with respect to the subject matter
hereof, and supersedes and replaces any and all prior or contemporaneous
discussions, negotiations, understandings and agreements, written and oral,
regarding such subject matter. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together shall constitute one and the same instrument.
Customer's and Exodus' authorized representatives have read the foregoing and
all documents incorporated therein and agree and accept such terms effective as
of the date first above written.
CUSTOMER EXODUS COMMUNICATIONS, INC.
Signature: /s/ Scott Lipsky Signature: /s/ Dick Stoltz
----------------------- -----------------------
Print Name: Scott Lipsky Print Name: Dick Stoltz
----------------------- -----------------------
Title: VP, Engineering Title: CFO/COO
----------------------- -----------------------
PAGE 3
<PAGE>
EXHIBIT 10.29
Service Agreement -- Internet Services
Customer Name: Avenue A Media
Billing Address: 1100 Olive Way, Suite 1270
Seattle, WA 98101
Contact: Jack Valko
Telephone: 206-521-8800 288
Fax: 206-521-8808
Email: [email protected]
Service(s):
- ----------
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Product/Service Description Recurring Fees One-Time Fees
- ------------------------------------------------------------------------------------------------------------------
Rack Space Full Cabinet Westin Bldg $1000.00 $1000.00
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Term Commitment (Check one) One Year [_] Two Years [_] Other [X] Specify:
- ---------------
Month to Month
- --------------
Comments or Special Instructions (Please reference and include attachments as
- -----------------------------------------------------------------------------
necessary):
- ---------
CABINET INSTALL BY EOB 3/4/1999.
Per Dave Toll, there is an additional
rack space being leased in '99.
4 in total (4 X 1,000 = 4,000).
tf 10/99
Terms and Conditions:
- --------------------
1) This Agreement applies to the purchase of all services (collectively, the
"Services") ordered by Customer under this Service Agreement
("Agreement").
2) Customer shall pay the fees and other charges for each Service as
provided in this Agreement. Billing for Services will commence when a
VERIO hub and a telephone circuit/line are prepared to route IP packets
to Customer's location. Service charges shall be invoiced monthly, unless
otherwise agreed, and payment shall be due on the date specified in the
invoice ("Due Date"). Set-Up charges shall be invoiced upon installation
of Services by VERIO. Charges for equipment shall be invoiced upon
shipment. Unless otherwise specified, equipment prices do not include
shipping and handling. Customer will pay a late payment charge equal to
1.5% (or the highest amount permitted by law, whichever is lower) per
month or portion thereof on the outstanding balance of any invoice
remaining unpaid thirty (30) days after the Due Date. Accounts unpaid
thirty (30) days after the Due Date may have service suspended or
terminated. Such suspension or termination shall not relieve Customer of
its obligation to pay the monthly fee. Customer agrees to
PAGE 1 of 3
<PAGE>
pay VERIO its reasonable expenses, including attorney's fees and
collection agency fees, incurred in enforcing its rights under this
Agreement. Customer shall pay all federal, state, and local sales, use,
value added, excise, duty and any other taxes assessed with respect to
the Services and the sale of equipment to Customer, except that taxes
based on VERIO's net income shall be the responsibility of VERIO. In
addition, Customer may also be required to pay telco installation and
recurring fees, domain name registration fees, and other equipment costs.
3) This Agreement will be automatically renewed on a month to month basis at
the end of the Term Commitment. In the event of early cancellation of a
Term Commitment, Customer will be required to pay 75% of VERIO's standard
monthly charge for each month remaining in the Term Commitment.
Termination at, or after, the end of the Term Commitment requires thirty
(30) days advanced written notice. VERIO reserves the right to change the
rates it charges for Services at the end of the Term Commitment. VERIO
will provide sixty (60) days notice of any such change.
4) Customer shall at all times adhere to the VERIO Acceptable Use Policy
located at http://www.verio.net/isite/policy.html, as amended from time
--------------------------------------
to time by VERIO effective upon posting of the revised policy at the URL.
Notwithstanding anything to the contrary contained herein, VERIO may
immediately take corrective action, including disconnection or
discontinuance of any and all Services, or terminate this Agreement in
the event of notice of possible violation by Customer of the VERIO
Acceptable Use Policy.
5) VERIO exercises no control over, and accepts no responsibility for, the
content of the information passing through VERIO's host computers,
network hubs and points of presence (the "VERIO Network"). VERIO MAKES NO
WARRANTIES OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, OR NON-INFRINGEMENT FOR THE SERVICES OR ANY EQUIPMENT VERIO
PROVIDES. NEITHER VERIO, ITS EMPLOYEES, AFFILIATES, AGENTS, THIRD-PARTY
INFORMATION PROVIDERS, MERCHANTS, LICENSORS OR THE LIKE, WARRANT THAT THE
SERVICES WILL NOT BE INTERRUPTED OR ERROR FREE; NOR DO ANY OF THEM MAKE
ANY WARRANTY AS TO THE RESULTS THAT MAY BE OBTAINED FROM THE USE OF THE
SERVICES OR AS TO THE ACCURACY, RELIABILITY OR CONTENT OF ANY INFORMATION
SERVICED OR MERCHANDISE CONTAINED IN OR PROVIDED THROUGH THE SERVICES.
VERIO IS NOT LIABLE FOR THE CONTENT OF ANY DATA TRANSFERRED EITHER TO OR
FROM CUSTOMER OR STORED BY CUSTOMER OR ANY OF ITS CUSTOMERS VIA THE
SERVICE(S) PROVIDED BY VERIO.
6) VERIO is acting only as a reseller of the hardware and software offered
under this Agreement, which was manufactured by a third party
("Manufacturer"). VERIO shall not be responsible for any changes in
Service(s) that cause hardware or software to become obsolete, require
modification or alteration, or otherwise affect the performance of the
Services. Any malfunction or manufacturer's defects of equipment either
sold or provided by VERIO to Customer or purchased directly by Customer
in connection with the Service(s) will not be deemed a breach of VERIO's
obligations under this Agreement. Customer shall use its best efforts to
protect and keep confidential all intellectual property provided by VERIO
to Customer through any hardware or software and shall make no attempt to
copy, alter, reverse-engineer, or tamper with such intellectual property
or to use it other than in connection with the Services.
7) Any interruption in any Service(s) that is caused by the malfunction or
interruption of any telecommunications services or facility (including,
but not limited to, cables and fiber optic lines) ordered by VERIO on
behalf of Customer or purchased directly by Customer in connection with
the Service(s) will not be deemed a breach of VERIO's obligations under
this Agreement.
8) Customer will indemnify, save harmless, and defend VERIO and all
employees, officers, directors and agents of VERIO (collectively
"indemnified parties") from and against any and all claims, damages,
losses, liabilities, suits, actions, demands, proceedings (whether legal
or administrative) and expenses (including but not limited to reasonable
attorneys' fees) threatened, asserted, or filed by a third party against
any of the indemnified parties arising out of or relating to use of the
Services, including any violation of the VERIO Acceptable Use Policy.
9) IN NO EVENT SHALL VERIO BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL
OR CONSEQUENTIAL DAMAGES, OR LOSS OF PROFITS, REVENUE, DATA OR USE, BY
CUSTOMER OR ANY THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT OR
PAGE 2 of 3
<PAGE>
STRICT LIABILITY OR OTHER LEGAL THEORY, EVEN IF VERIO HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES. In no event will VERIO's liability for
any damages, losses and causes of actions whether in contract or tort
(including negligence or otherwise) exceed the actual dollar amount paid
by Customer for the Service which gave rise to such damages, losses and
causes of actions during the 12-month period prior to the date the damage
or loss occurred or the cause of action arose. VERIO shall not be liable
for failure or delay in performing its obligations hereunder if such
failure or delay is due to circumstances beyond its reasonable control,
including, without limitation, acts of any governmental body, war,
insurrection, sabotage, embargo, fire, flood, strike or other labor
disturbance, interruption of or delay in transportation, interruption or
delay in telecommunications services or inability to obtain raw
materials, supplies, or power used in or equipment needed for provision
of the Services.
10) The validity, interpretation, enforceability, and performance of this
Agreement shall be governed by and construed in accordance with the law
of the State of Colorado. This Agreement may not be amended except upon
the written consent of the parties; provided that the VERIO Acceptable
Use Policy may be amended from time to time by VERIO. No failure to
exercise and no delay in exercising any right, remedy, or power hereunder
shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, or power hereunder preclude any other or
further exercise thereof or the exercise of any other right, remedy, or
power provided herein or by law or in equity. The waiver by any party of
the time for performance of any act or condition hereunder shall not
constitute a waiver of the act or condition itself. This Agreement shall
be binding upon and inure to the benefit of the parties and their
respective successors, and assigns. Customer may not assign this
Agreement without the prior written consent of VERIO. If any provision of
this Agreement shall be held by a court of competent jurisdiction to be
invalid, unenforceable, or void, the remainder of this Agreement shall
remain in full force and effect.
This Agreement supersedes all previous representations, understandings or
agreements and shall prevail notwithstanding any variance with the terms
and conditions of any order submitted. Acceptance of this Agreement by
VERIO may be subject, in VERIO's absolute discretion, to satisfactory
completion of a credit check. Activation of service shall indicate
VERIO's acceptance of this Agreement. Use of the VERIO Network
constitutes acceptance of this Agreement.
<TABLE>
<S> <C>
_______________________________________________ _________________________________________
Signature (Authorized Customer Representative) Signature
_______________________________________________ _________________________________________
Name & Title (please print) VERIO Northwest Sales Representative
_______________________________________________
Tax ID Number
_______________________________________________ _____________________________________
Date Date
If applicable, check as appropriate and enter company name of
VERIO ASP [ ]/Referral Partner [ ]
Partner Name: N/A VERIO Partner #: N/A
___________ __________
</TABLE>
PAGE 3 of 3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement and prospectus.
/s/ Arthur Andersen LLP
Seattle, Washington
January 19, 2000
