<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-23137
______________
AVENUE A, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1819567
(State of Incorporation) (I.R.S. Employer Identification Number)
506 Second Avenue, 9th Floor Seattle,
Washington 98104
(Address of principal executive offices)
(206) 816-8800
(Registrant's telephone number, including area code)
______________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No
The number of shares of the registrant's Common Stock outstanding as of
October 31, 2000 was 58,313,173.
================================================================================
1
<PAGE>
AVENUE A, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.................................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 25
Item 2. Changes in Securities and Use of Proceeds.................................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................................. 25
</TABLE>
2
<PAGE>
AVENUE A, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- -----------------
Assets (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,675 $ 10,962
Short-term investments 115,886 11,803
Accounts receivable, net of allowance 39,646 28,295
Other receivables 1,885 183
Prepaid expenses and other current assets 1,300 153
----------------- -----------------
Total current assets 178,392 51,396
Property and equipment, net 12,050 4,625
Intangible assets, net 4,026 5,221
Other assets 1,994 849
----------------- -----------------
Total assets $ 196,462 $ 62,091
================= =================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 34,835 $ 36,075
Accrued expenses 3,969 3,066
Notes payable, current portion 1,587 303
Deferred revenue 1,975 20
----------------- -----------------
Total current liabilities 42,366 39,464
Notes payable, less current portion 4,197 683
----------------- -----------------
Total liabilities 46,563 40,147
----------------- -----------------
Shareholders' equity:
Convertible preferred stock, $0.01 par value
Authorized 37,500 shares
Outstanding 0 and 16,416 shares -- 164
Common stock, $0.01 par value
Authorized 200,000 shares
Outstanding 58,309 and 25,121 583 251
Paid-in capital 227,535 60,447
Deferred stock compensation (30,987) (22,670)
Subscription receivable (965) (965)
Accumulated deficit (46,272) (15,260)
Accumulated other comprehensive gain (loss) 5 (23)
----------------- -----------------
Total shareholders' equity 149,899 21,944
----------------- -----------------
Total liabilities and shareholders' equity $ 196,462 $ 62,091
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE>
AVENUE A, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 47,172 $ 20,151 $ 146,372 $ 34,098
Expenses:
Cost of revenue 37,372 16,743 117,927 28,007
Client services 4,021 1,340 11,156 2,585
Technology and analytics 4,136 768 11,238 1,796
Selling, general, and administrative 7,178 2,622 18,187 5,624
Depreciation and amortization of property and equipment 1,155 399 2,856 648
Amortization of intangible assets 503 163 1,510 163
Amortization of deferred stock compensation 7,107 857 20,641 860
----------- ----------- ----------- -----------
Total expenses 61,472 22,892 183,515 39,683
----------- ----------- ----------- -----------
Loss from operations (14,300) (2,741) (37,143) (5,585)
Interest income, net 2,244 201 5,212 335
Other income (expense), net (118) -- 919 --
----------- ----------- ----------- -----------
Net loss $ (12,174) $ (2,540) $ (31,012) $ (5,250)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.22) $ (0.13) $ (0.65) $ (0.29)
=========== =========== =========== ===========
Shares used in computing basic and diluted net loss per share 55,159 18,889 47,522 18,347
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
AVENUE A, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Convertible Deferred
Preferred Stock Common Stock Paid-In Stock
------------------- -------------------
Shares Amount Shares Amount Capital Compensation
-------- ---------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1999 16,416 $ 164 25,121 $ 251 $ 60,447 $ (22,670)
Conversion of preferred stock (16,416) (164) 24,624 246 (82) -
Issuance of common stock , net - - 6,037 60 132,482 -
Exercise of common stock warrant - - 678 7 368 -
Exercise of common stock options - - 1,723 18 4,295 -
Employee stock purchase plan - - 126 1 1,067 -
Deferred stock compensation
related to common stock options - - - - 28,958 (28,958)
Amortization of deferred stock
compensation - - - - - 20,641
Unrealized loss on investments - - - - - -
Loss on currency translation - - - - - -
Net loss - - - - - -
-------- ---------- -------- ---------- ----------- --------------
BALANCES, September 30, 2000 (unaudited) - $ - 58,309 $ 583 $ 227,535 $ (30,987)
======== ========== ======== ========== =========== ==============
<CAPTION>
Accumulated
Other Total
Subscription Accumulated Comprehensive Shareholders'
Receivable Deficit Income (Loss) Equity
-------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1999 $ (965) $ (15,260) $ (23) $ 21,944
Conversion of preferred stock - - - -
Issuance of common stock , net - - - 132,542
Exercise of common stock warrant - - - 375
Exercise of common stock options - - - 4,313
Employee stock purchase plan - - - 1,068
Deferred stock compensation
related to common stock options - - - -
Amortization of deferred stock
compensation - - - 20,641
Unrealized loss on investments - - 14 14
Loss on currency translation - - 14 14
Net loss - (31,012) - (31,012)
-------------- ------------- --------------- --------------
BALANCES, September 30, 2000 (unaudited) $ (965) $ (46,272) $ 5 $ 149,899
============== ============= =============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
AVENUE A, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (31,012) $ (5,250)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 24,867 1,509
Noncash compensation expense 128 320
Loss on disposal of fixed assets 71 --
Changes in assets and liabilities:
Accounts receivable (11,351) (15,426)
Other receivables and other current assets (2,849) (415)
Other assets (1,145) 9
Accounts payable (1,240) 17,752
Accrued expenses 903 390
Deferred revenue 1,955 1,118
------------------ ------------------
Net cash provided by (used in) operating activities (19,673) 7
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,342) (3,002)
Purchases of marketable securities, net (104,055) --
Purchases of intangible assets (313) --
Purchase of iballs, LLC -- (3,584)
Cash aquired in iballs acquisition -- 812
------------------ ------------------
Net cash used in investing activities (114,710) (5,774)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 4,798 --
Proceeds from issuance of common stock and exercises
of common stock options, net 138,298 946
Proceeds from issuance of convertible preferred stock, net -- 21,879
Payments to affiliate, net -- (74)
------------------ ------------------
Net cash provided by financing activities 143,096 22,751
------------------ ------------------
Net increase in cash and cash equivalents 8,713 16,984
Cash and cash equivalents, beginning of period 10,962 847
------------------ ------------------
Cash and cash equivalents, end of period $ 19,675 $ 17,831
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
<PAGE>
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(in thousands except share and per share amounts)
(unaudited)
1. Organization and Operations of the Company
Avenue A (the Company) provides technology-based Internet advertising
services to businesses. The Company integrates Internet media planning and
buying, proprietary ad management technology, anonymous user profiling, data
analysis systems, and Precision Email(TM) services to help advertisers increase
the effectiveness and return on investment of their Internet advertising
campaigns. The Company focuses 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 its clients.
The Company began operations in July 1997 and was incorporated in February
1998. On September 2, 1999, the Company completed the acquisition of iballs LLC
(iballs), a full service interactive media planner and buyer. The acquisition
was recorded using the purchase method of accounting, therefore, the results of
operations of iballs and the fair value of the acquired assets and liabilities
were included in the Company's consolidated financial statements beginning on
the acquisition date.
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
Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
These statements reflect all adjustments, consisting only of normal,
recurring adjustments that, in the opinion of the Company's management, are
necessary for a fair presentation of the results of operations for the periods
presented. Operating results for the quarter and nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for any
subsequent quarter or for the year ending December 31, 2000. Certain information
and footnote disclosures normally included in financial statements prepared in
conformity with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC).
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's audited financial statements and the accompanying
notes for the years ended December 31, 1999 and 1998, as included in the
Company's Registration Statement on Form S-1 (Registration No. 333-92301) filed
with the SEC.
In January 2000, the Board of Directors approved a 3-for-2 stock split of
the Company's common stock paid in the form of a common stock dividend. The
related common stock, per-share data and preferred stock conversion ratios in
the accompanying financial statements have been retroactively adjusted to
reflect the stock split.
Reclassifications: Certain prior year amounts have been reclassified to conform
to the current year presentation.
7
<PAGE>
AVENUE A, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000 (in thousands except share
and per share amounts) (unaudited)
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 its 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 its clients. Under these 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 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 in advance or receiving payment
from the customer prior to providing the services.
Computation of Basic and Diluted 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 issued upon conversion of preferred stock, and exercise
of common stock options and warrants are antidilutive.
Segment Reporting: In June 1997, the Financial Accounting Standards Board
(FASB) 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 was effective
for the Company's year ended December 31, 1999. The Company operates solely in
one segment, providing Internet advertising services. As of September 30, 2000,
substantially all of the Company's assets are located in the United States.
Recent Accounting Pronouncements: In June 1998, the FASB issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the consolidated
statements of operations, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that are subject to
hedge accounting.
Pursuant to Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133 - an Amendment to FASB Statement No. 133" (SFAS
137), the effective date of SFAS 133 has been deferred until fiscal years
beginning after January 15, 2000. SFAS 133 cannot be applied retroactively. SFAS
133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1998 (and, at the Company's election,
before January 1, 1999).
The Company has not yet quantified the impacts of adopting SFAS 133 on
the financial statements and has not determined the timing or method of adoption
of SFAS 133. However, the statement could increase volatility in earnings and
other comprehensive income.
8
<PAGE>
AVENUE A, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000 (in thousands except share
and per share amounts) (unaudited)
In December 1999, the Staff of the SEC released Staff Accounting Bulletin
101 (SAB 101), "Revenue Recognition in Financial Statements." This pronouncement
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition. The Company is required to adopt
SAB 101 for the quarter ended December 31, 2000. The Company believes its
revenue recognition practices are in conformity with the guidelines in SAB 101.
In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." The
Company believes that the final consensus reached supports the accounting
historically followed by the Company. Accordingly, this EITF is not expected to
impact the Company's financial statements.
In March 2000, the FASB released FIN 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25," which provides clarification of Opinion 25 for certain issues such as the
determination of an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. The Company believes that its practices are in conformity with this
guidance, and therefore FIN 44 will have no impact on the Company's financial
statements.
3. Initial Public Offering
In February 2000, the Company completed its initial public offering of
6,037,500 shares of common stock (including the underwriters' over-allotment
shares) at a purchase price of $24.00 per share for net proceeds of
approximately $132,482, after deducting applicable issuance costs and expenses.
The net proceeds received by the Company will continue to be used for general
corporate purposes, including working capital to fund anticipated operating
losses and to expand operations internationally.
Upon the closing of the initial public offering, each share of preferred
stock then outstanding was converted into 1.5 shares of common stock and a
warrant to purchase 678,000 shares of common stock was exercised at an aggregate
exercise price of approximately $375.
4. Earnings Per Share
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Loss (numerator for basic and diluted):..................... $ (12,174) $ (2,540) $ (31,012) $ (5,250)
============ ============ ============ ============
Shares (denominator for basic and diluted):
Gross weighted average common shares outstanding............. 58,168,375 19,431,967 51,007,817 18,591,951
Less:
Weighted average common shares subject to repurchase ...... 3,008,888 543,323 3,485,887 244,710
------------ ------------ ------------ ------------
Shares used in computation...................................... 55,159,487 18,888,644 47,521,931 18,347,241
============ ============ ============ ============
Basic and diluted net loss per share............................ $ (.22) $ (.13) $ (.65) $ (.29)
============ ============ ============ ============
</TABLE>
9
<PAGE>
AVENUE A, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000 (in thousands except share
and per share amounts) (unaudited)
5. Acquisition
Effective September 2, 1999, the Company, in a transaction accounted for as
a purchase, acquired iballs, 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 $3,500 in cash in exchange for
all of the outstanding members' equity of iballs. The following table presents
the 1999 unaudited pro forma results assuming that the Company had acquired
iballs at the beginning of fiscal year 1999. This information may not
necessarily be indicative of the future combined results of operations of the
Company.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Total revenue $ 20,527 $ 35,600
Net loss $ (2,681) $ (5,812)
Basic and diluted loss per share $ (.14) $ (.30)
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report contains forward-looking statements that
involve risks and uncertainties. Avenue A's actual results could differ
materially from those discussed below. Factors that could cause or contribute to
such differences include, but are not limited to, those identified below, and
those discussed in the section titled "Factors that May Affect Our Business,
Future Operating Results and Financial Condition", included elsewhere in this
report. When used in this document, the words "believes," "expects,"
"anticipates," "intends," "plans" and similar expression, are intended to
identify certain of these forward-looking statements. However, these words are
not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. The cautionary
statements made in this document should be read as being applicable to all
related forward-looking statements wherever they appear in this document.
Overview
We provide technology-based Internet advertising services to businesses. We
integrate Internet media planning and buying, proprietary ad management
technology, anonymous user profiling, data analysis systems, and Precision
Email(TM) services 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.
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. 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
has resulted in recognition of greater revenue and expenses for the same level
of client services and advertising.
During the first quarter of 1999, we replaced a majority of our advertising
service fee contracts with advertising services contracts. Substantially all of
the clients we acquired during 1999 and 2000 have entered into advertising
services contracts, and all of the contracts with clients acquired prior to 1999
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. 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. 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.
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.
11
<PAGE>
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2000 and
September 30, 1999
The following table presents, in dollars and as a percentage of revenue,
unaudited statements of operations data for the three and nine months ended
September 30, 2000 and 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 period are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
(in thousands except percentage amounts) (in thousands except percentage amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $ 47,172 100.0% $ 20,151 100.0% $ 146,372 100.0% $ 34,098 100.0%
Expenses:
Cost of revenue.................. 37,372 79.2 16,743 83.1 117,927 80.6 28,007 82.1
Client services.................. 4,021 8.5 1,340 6.6 11,156 7.6 2,585 7.6
Technology and analytics......... 4,136 8.8 768 3.8 11,238 7.7 1,796 5.3
Selling, general, and
administrative.................. 7,178 15.2 2,622 13.0 18,187 12.4 5,624 16.5
Depreciation and amortization of
property and equipment.......... 1,155 2.4 399 2.0 2,856 2.0 648 1.9
Amortization of intangible
assets.......................... 503 1.1 163 0.8 1,510 1.0 163 0.5
Amortization of deferred stock
compensation.................... 7,107 15.1 857 4.3 20,641 14.1 860 2.5
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses................. 61,472 130.3 22,892 113.6 183,515 125.4 39,683 116.4
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations................ (14,300) (30.3) (2,741) (13.6) (37,143) (25.4) (5,585) (16.4)
Interest income, net................ 2,244 4.8 201 1.0 5,212 3.6 335 1.0
Other income (expense), net......... (118) (0.3) - - 919 0.6 - -
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss............................ $ (12,174) (25.8)% $ (2,540) (12.6)% $ (31,012) (21.2)% $ (5,250) (15.4)%
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
Revenue. Revenue increased from $20.2 million for the three months ended
September 30, 1999 to $47.2 million for the three months ended September 30,
2000. Revenue increased from $34.1 million for the nine months ended September
30, 1999 to $146.4 million for the nine months ended September 30, 2000. The
increases in revenue were primarily due to an increase in the number of our
clients from 47 as of September 30, 1999 to 109 as of September 30, 2000 and the
change from the use of advertising service fee contracts to the use of
advertising services contracts.
Cost of revenue. Cost of revenue 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. Cost of revenue increased from $16.7 million, or 83.1% of revenue, for
the three months ended September 30, 1999 to $37.4 million, or 79.2% of revenue,
for the three months ended September 30, 2000. Cost of revenue increased from
$28.0 million, or 82.1% of revenue, for the nine months ended September 30, 1999
to $117.9 million, or 80.6% of revenue, for the nine months ended September 30,
2000. The dollar increases in cost of revenue were primarily due to increases in
the volume of advertising space we purchased. The percentage decreases in cost
of revenue were primarily due to increased revenue contribution from higher
margin products such as consulting.
Client services. 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 increased
from $1.3 million, or 6.6% of revenue, for the three months ended September 30,
1999 to $4.0 million, or 8.5% of revenue, for the three months ended September
30, 2000. Client services expenses increased from $2.6 million, or 7.6% of
revenue, for the nine months ended September 30, 1999 to $11.2 million, or 7.6%
of revenue, for the nine months ended September 30, 2000. The increases in
client services expenses were 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 47 as of September 30, 1999 to 109 as of September 30, 2000, and
expenses relating to our international operations. We anticipate continued
increases in our client services expenses to accommodate growth in our client
base and associated revenue increases.
Technology and analytics. Technology and analytics expenses consist of
salaries and related costs for information technology, software development, and
analytics personnel. In addition, these expenses include the cost of housing our
ad
12
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servers and other equipment at third-party co-location facilities. Technology
and analytics expenses increased from $768,000, or 3.8% of revenue, for the
three months ended September 30, 1999 to $4.1 million, or 8.8% of revenue, for
the three months ended September 30, 2000. Technology and analytics expenses
increased from $1.8 million, or 5.3% of revenue, for the nine months ended
September 30, 1999 to $11.2 million, or 7.7% of revenue, for the nine months
ended September 30, 2000. The increases in technology and analytics expenses
were primarily due to increases in the number of personnel in software
development, production systems, information systems, and analytics in 2000. Due
to our increasing volume of advertisements served, 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 some increases in our technology and analytics expenses
in future periods as we add additional technology-based products 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 consist primarily of salaries and related expenses for executive,
sales, finance, marketing, human resource and administrative personnel and other
general corporate expenses. In addition, these expenses include marketing costs
such as trade shows and the costs of advertising our services in trade
publications. Selling, general and administrative expenses increased from $2.6
million, or 13.0% of revenue, for the three months ended September 30, 1999 to
$7.2 million, or 15.2% of revenue, for the three months ended September 30,
2000. Selling, general and administrative expenses increased from $5.6 million,
or 16.5% of revenue, for the nine months ended September 30, 1999 to $18.2
million, or 12.4% of revenue, for the nine months ended September 30, 2000. The
increases in selling, general and administrative expenses were primarily due to
increases in the number of personnel in 2000. 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 some growth of our selling, general and administrative expenses as we
selectively expand our administrative and marketing staff and add new marketing
programs. Selling, general, and administrative expenses as a percentage of
revenue decreased as a result of revenues growing at a faster rate than
expenses.
Depreciation and amortization of property and equipment. Depreciation and
amortization of property and equipment consists primarily of depreciation
expense on computer equipment, furniture and fixtures, and software costs and
amortization expense of leasehold improvements. Depreciation and amortization of
property and equipment increased from $399,000, or 2.0% of revenue, for the
three months ended September 30, 1999 to $1.2 million, or 2.4% of revenue, for
the three months ended September 30, 2000. Depreciation and amortization of
property and equipment increased from $648,000, or 1.9% of revenue, for the nine
months ended September 30, 1999 to $2.9 million, or 2.0% of revenue, for the
nine months ended September 30, 2000. The increases were primarily due to
purchases in 2000 of production equipment for operations and computer equipment
as a result of increased personnel.
Amortization of intangible assets. In connection with the purchase of
iballs, LLC (iballs) during September 1999, we recorded intangible assets of
approximately $6.0 million related to the iballs customer base and workforce.
During the three and nine month periods ended September 30, 2000, we recorded
amortization of these intangible assets of $503,000 and $1.5 million,
respectively.
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. Deferred stock compensation is being amortized on an accelerated
basis over the four-year vesting period of the applicable options. During the
three and nine month periods ended September 30, 2000, we recorded amortization
of deferred stock compensation of $7.1 million and $20.6 million, respectively.
Interest income, net. Net interest income consists of earnings on our cash
and cash equivalents. Net interest income increased from $201,000, or 1.0% of
revenue, for the three months ended September 30, 1999 to $2.2 million, or 4.8%
of revenue, for the three months ended September 30, 2000. Net interest income
increased from $335,000, or 1.0% of revenue, for the nine months ended September
30, 1999 to $5.2 million, or 3.6% of revenue, for the nine months ended
September 30, 2000. The increases in net interest income were primarily due to
higher invested cash balances resulting from our initial public offering of
common stock, which was completed during the first quarter of 2000.
Other income (expense), net. Net other income (expense) consists of
non-recurring miscellaneous income and expense transactions. During the three
and nine month periods ended September 30, 2000, we recorded net other expense
of $118,000 and net other income of $919,000, respectively.
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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.
Liquidity and Capital Resources
Since inception we have financed our operations primarily through the net
proceeds from private sales of equity securities, which raised $30.4 million
through December 31, 1999, and our initial public offering of common stock,
which raised $132.5 million during the first quarter of 2000.
As of September 30, 2000, we had cash and cash equivalents of $19.7 million
and short-term investments of $115.9 million. We have a $6.0 million equipment
term loan facility with a bank which was fully utilized as of September 30,
2000.
Cash used in operating activities was $20.1 for the nine months ended
September 30, 2000. Cash provided by operating activities was $7,000 for the
nine months ended September 30, 1999.
Cash used in investing activities was $114.4 million and $5.8 for the nine
months ended September 30, 2000 and 1999, respectively. Cash used in investing
activities for the nine months ended September 30, 2000 was primarily related to
purchases of marketable securities and purchases of computer equipment to expand
our ad serving capacity and to equip employees hired during that period.
Cash provided by financing activities was $143.2 million and $22.8 million
for the nine months ended September 30, 2000 and 1999, respectively. The cash
provided by financing activities during the nine months ended September 30, 2000
primarily related to the net proceeds from our initial public offering of common
stock, which raised approximately $132.5 million in the first quarter of 2000.
As of September 30, 2000, we had no material commitments other than
obligations under operating leases for office space and office equipment, of
which some commitments extend through 2003, and a note payable to a bank which
requires monthly payments through 2003. This note is secured by the equipment
purchased with the proceeds from the note.
Since our inception, we have significantly increased our operating
expenses. We currently anticipate that we will continue to experience some
growth in our operating expenses and that such expenses will be a material use
of our cash resources. We believe that our current cash, cash equivalents and
short-term investments will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). The statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the consolidated statements of operations, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that are subject to hedge accounting.
Pursuant to Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133 - an Amendment to FASB Statement No. 133" (SFAS
137), the effective date of SFAS 133 has been deferred until fiscal years
beginning after January 15, 2000. SFAS 133 cannot be applied retroactively. SFAS
133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1998 (and, at our election, before
January 1, 1999).
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We have not yet quantified the impact of adopting SFAS 133 on our financial
statements and have not determined the timing or method of adoption of SFAS 133.
However, the statement could increase volatility in earnings and other
comprehensive income.
In December 1999, the Staff of the SEC released SAB 101, "Revenue
Recognition in Financial Statements." This pronouncement summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition. We are required to adopt SAB 101 for the quarter ended
December 31, 2000. We believe our revenue recognition practices are in
conformity with the guidelines in SAB 101.
In July 2000, the EITF reached a consensus on EITF 99-19 "Reporting Revenue
Gross as a Principal versus Net as an Agent." We believe that the final
consensus reached supports the accounting historically followed by us.
Accordingly, this EITF is not expected to impact our financial statements.
In March 2000, the FASB released FIN 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25," which provides clarification of Opinion 25 for certain issues such as the
determination of an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. We believe that our practices are in conformity with this guidance,
and therefore FIN 44 will have no impact on our financial statements.
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FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION
You should carefully consider the risks described below together with all
of the other information included in this quarterly report on Form 10-Q. The
risks and uncertainties described below are not the only ones facing our
company. If any of the following risks actually occurs, our business, financial
condition or operating results could be harmed.
We are subject to risks frequently encountered by early-stage companies in
the Internet advertising market
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 industry. These risks include the need 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;
. successfully implement our business model, which is unproven and
evolving;
. manage our expanding operations;
. maintain our reputation and build trust with our clients; and
. identify, attract, retain and motivate qualified personnel.
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 $15.8 million for the period from our inception
on July 1, 1997 through December 31, 1999, and net losses of $31.0 million for
the nine months ended September 30, 2000. As of September 30, 2000, our
accumulated deficit was $46.3 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 securities analysts or investors. 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:
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. fluctuating demand for our advertising services and changes in the mix of
advertisements placed and services provided;
. 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 as needed 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.
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 could cause an immediate and
significant decline in our revenue and harm our business.
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. 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. In
addition, patents have been issued to 24/7 Media, Inc. and MatchLogic, Inc., a
subsidiary of At Home Corporation, that appear to cover technologies relating to
ad serving. 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. Several companies in the Internet
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advertising field have brought patent infringement suits against competitors in
connection with patents relating to ad serving technologies.
Any patent infringement claims brought against us 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.
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" or similar names, one of which is a
Canadian advertising agency. There may be other third parties using names
similar to ours of whom we are unaware. We may be subject to trademark
infringement claims by 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" or similar names 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.
Third parties may assert claims against us relating to the collection and use
of Internet user information
Third parties may claim that our collection and use of Internet user
information violates federal or state laws, which may cause us to incur
significant expenses, pay substantial damages and be prevented from conducting
targeted advertising and aggregating data from our clients' advertising
campaigns. Several Internet-related companies, including some in the Internet
advertising industry, have recently been sued under federal and state laws, or
had claims brought against them before the Federal Trade Commission, regarding
the collection and use of Internet user information. Any claim by a third party
against us regarding our collection and use of Internet user information could
harm our business.
The loss of key personnel 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 or other key
employees could harm our business. Our future success depends to a significant
extent on the continued service of our key management, client service,
engineering,
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sales and technical 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.
Although we generally enter into noncompetition agreements with our employees,
our business could be harmed if one or more of our officers or key employees
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 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, 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
and difficulties encountered by companies with limited operating histories,
particularly in the evolving Internet market.
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. 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.
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.
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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., Engage Technologies, 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 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.
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. For example, uBid, Inc., previously one of our top four clients,
stopped using our services after it was acquired by CMGI, Inc. 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.
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 facilities operated by Exodus
Communications, Inc. and InterNAP Network Services Corporation. 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
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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.
Acquisitions or investments may be unsuccessful and may divert our
management's attention and consume significant resources
We may in the future acquire or make investments in other businesses, or
acquire 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 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 third parties 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 to a
large degree on the success of these third parties, 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;
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. 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 funds 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.
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. Bills
aimed at regulating the collection and use of personal data from Internet users
are currently pending in the federal and state legislatures. Also, the Federal
Trade Commission and the Department of Commerce have conducted 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 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
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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.
Our stock price has been and may continue to be volatile.
The trading price of our common stock has been and is likely to continue to
be highly volatile. For example, during the 35 week period ended October 27,
2000, the closing price of our common stock ranged from $3.06 to $72.00 per
share. The market price of our common stock may fluctuate significantly in
response to a number of factors, including:
. quarterly variations in our operating results;
. announcements by us or our competitors of new products or services,
significant contracts, acquisitions or business relationships with
other companies;
. 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 harm our business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 also believe that we
are not subject to any material market risk exposure with respect to any foreign
currency or other derivative financial instruments.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to legal proceedings and claims in the
ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, prospects, financial
condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
On February 28, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 as filed with the Commission in
connection with our initial public offering of common stock, par value $0.01 per
share. The offering was co-managed by Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Thomas Weisel Partners LLC. Pursuant to the registration
statement, we registered and sold an aggregate of 6,037,500 shares of common
stock for a gross aggregate offering price of $144.9 million. In connection with
the offering, we incurred total expenses of approximately $12.4 million,
including underwriting discounts and commissions of approximately $10.1 million.
All of these expenses were direct or indirect payments to others and not
payments to our directors or officers (or their associates) or to our affiliates
or 10% shareholders. We placed all of the net offering proceeds in temporary
investments consisting of cash, cash equivalents and short-term investments.
None of the proceeds was used as payments to our directors or officers (or their
associates), or to our affiliates or 10% shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K:
10.1 Commercial Lease between the registrant and Societe de
Developpement pour la Construction (SDC) S.A.R.L., dated
September 30, 2000
10.2 Employment Agreement between the registrant and Michael Vernon,
dated September 27, 2000
10.3 Employment Agreement between the registrant and Michael T.
Galgon, dated June 21, 2000
10.4 Employment Agreement between the registrant and Jeffrey J.
Miller, dated June 21, 2000
10.5 Pledge Agreement between the registrant and Neve and Ann Savage,
dated August 18, 2000
10.6 Loan Agreement between the registrant and Neve and Ann Savage,
dated August 18, 2000
10.7 Promissory Note issued by the registrant to Neve and Ann Savage,
dated August 18, 2000
27.1 Financial Data Schedule for the period ended September 30, 2000
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 9, 2000.
AVENUE A, INC.
By: /s/ MICHAEL VERNON
-------------------------------------
Michael Vernon
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
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INDEX TO EXHIBITS
Exhibit
-------
Number Description
------ -----------------------------------------------------------
10.1 Commercial Lease between the registrant and Societe de Developpement
pour la Construction (SDC) S.A.R.L., dated September 30, 2000
10.2 Employment Agreement between the registrant and Michael Vernon, dated
September 27, 2000
10.3 Employment Agreement between the registrant and Michael T. Galgon,
dated June 21, 2000
10.4 Employment Agreement between the registrant and Jeffrey J. Miller,
dated June 21, 2000
10.5 Pledge Agreement between the registrant and Neve and Ann Savage, dated
August 18, 2000
10.6 Loan Agreement between the registrant and Neve and Ann Savage, dated
August 18, 2000
10.7 Promissory Note issued by the registrant to Neve and Ann Savage, dated
August 18, 2000
27.1 Financial Data Schedule for the period ended September 30, 2000
27
