Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Pre-Effective Amendment to Registration Statement 99 487K
(General Form)
2: EX-2.01 Form of Agreement and Plan of Merger 7 25K
3: EX-3.02 Form of First Amended & Restated Certificate 22 100K
4: EX-3.03 Form of Second Amended & Restated Certificate 4 20K
5: EX-3.05 Restated Bylaws of Registrant 20 89K
6: EX-4.02 Second Amended & Restated Investors Rights 38 140K
7: EX-10.01 Form of Indemnity Agreement 9 45K
8: EX-10.03 2000 Equity Incentive Plan of Registrant 40 150K
9: EX-10.04 2000 Equity Incentive Plan and Related Forms 14 80K
10: EX-10.05 2000 Employee Stock Purchase Plan 7 51K
11: EX-10.12 Series D Preferred Stock Purchase 83 270K
12: EX-23.02 Consent of Ernst & Young LLP 1 7K
S-1/A — Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents
As filed with the Securities and Exchange Commission on February 29, 2000
Registration No. 333-96271
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ALLADVANTAGE.COM INC.
(Exact name of registrant as specified in its charter)
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Delaware 7319 94-3327058
(State or other
jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
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4010 Point Eden Way, Hayward, California 94545, (510) 888-3898
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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James Jorgensen
President and Chief Executive Officer
4010 Point Eden Way, Hayward, California 94545, (510) 888-3898
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
[Download Table]
Laird H. Simons III, Esq. Gregory C. Smith, Esq.
Mark A. Leahy, Esq. Thomas J. Ivey, Esq.
Andrew Y. Luh, Esq. Skadden, Arps, Slate, Meagher & Flom LLP
Fenwick & West LLP 525 University Ave.
Two Palo Alto Square Suite 220
Palo Alto, CA 94306 Palo Alto, CA 94301
(650) 494-0600 (650) 470-4500
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
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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 of 1933, 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 of 1933, 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 of 1933, 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,
please check the following box. [_]
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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 the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 29, 2000.
Shares
[AllAdvantage.com Logo]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $ and $ per
share. We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "AADV."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 6.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions AllAdvantage
-------- ------------- ------------
Per Share.................................. $ $ $
Total...................................... $ $ $
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Joint Book-Running Managers
Credit Suisse First Boston Donaldson, Lufkin & Jenrette
Robertson Stephens
The date of this prospectus is , 2000.
GRAPHICS AND TEXT ON THE OUTSIDE GATEFOLD INCLUDE:
The following words are centered across the top of the outside gatefold:
"The AllAdvantage Viewbar -TM-"
The following information is centered directly below the initial text:
A horizontal screen shot of the Viewbar.
Across the top of the Viewbar are depictions of buttons containing the words
"Home," "News," "Finance," "Shop," "Entertainment," "Travel," "Sports," and
"Tech."
On top of the "Shop" button is an expanded pop-up menu, in the form of a
vertical column, containing the following words which read from the top down:
"Auctions" "Autos," "Baby Care," "Books," "Clothing & Accessories," "Computers &
Electronics" which are highlighted, "Department Stores," "Events/Tickets,"
"Flowers & Gifts," "Food and Beverages," "Health & Beauty," "Home & Garden,"
"Music & Video," "Office Supplies, Pets," "Software, Sports & Fitness," "Toys,
Games & Hobbies," "Travel," and "Miscellaneous". To the right and parallel to
the highlighted words "Computers & Electronics" is a drop-down menu, in the form
of a vertical column, containing the following words which read from the top
down: "PCs & Laptops," which are highlighted, "Software," "Audio & Video,"
"Phones & Handhelds" and "Cameras."
The following text connected by lines to functional areas of the Viewbar
surrounds the depiction of the Viewbar, starting above the depiction of the
Viewbar and to the left of the "Shop" button pop-up menu and following anti-
clockwise around the entire screen shot of the Viewbar:
"Check the weather, buy a car or book a vacation. Members select a category and
get direct access to popular sites."
"One click minimizes the Viewbar at any time for ultimate flexibility of use."
"Use the menu bar to navigate quickly and easily."
"Members choose from seven available search engines. Just enter search criteria
while using any program and launch directly to the search results."
"Banner and tile advertising spaces allow persistent messaging throughout the
user's Internet experience."
"One-to-one targeting makes marketing messages more relevant."
The body of the Viewbar is depicted in three adjoining sections, the section on
the left hand side of the Viewbar depicts a search engine with the word "Search"
presented and an expanded drop-down menu, in the form of a vertical column,
containing the following words, which read from the top down: "About.com," "Ask
Jeeves," "Direct Hit," "Excite," "Go.com," "GoTo.com" and "LookSmart". The
center section of the Viewbar depicts the Viewbar's banner advertising space
with AllAdvantage.com's logo presented and the section on the right hand side of
the Viewbar depicts the Viewbar's tile advertising space and presents the
following text: "ALLPLAY-TM- Channel Advantage-TM-"
At the bottom right hand corner of the page is AllAdvantage.com's logo with the
following text directly below:
"Its time to take advantage of the Internet.-TM-"
GRAPHICS AND TEXT ON THE INSIDE GATEFOLD INCLUDE:
The following words are centered across the top of the two page inside gatefold:
"The Infomediary Position"
The AllAdvantage.com logo without the word AllAdvantage.com embedded in the logo
is centered in the middle of the page directly below the initial text.
The following text is centered directly below the logo: "Providing a platform
for e-commerce, and digital products distribution." and the following text is
centered directly above the logo between the logo and the initial text:
"Connecting businesses and consumers through a persistent, one to one marketing
channel."
To the right of the logo in the middle of the page is the word "Businesses" and
to the left of the logo in the middle of the page is the word "Consumers."
Four arching arrows surround the logo with text presented in the center of each
arrow. Two arrows point inwards at the logo, one at the top left side of the
logo containing the words "Advertising & Promotional $" and the other at the
right hand side of the logo containing the words "Demographic & Behavioral Data"
and two arrows point away from the logo one from the bottom left hand side of
the logo containing the words "Targeting Capability & Increased ROI" and one
from the bottom right hand side of the logo containing the words "Functionality,
$ and Privacy."
At the bottom right hand corner of the page is AllAdvantage.com's logo with the
following text directly below:
"Its time to take advantage of the Internet.-TM-"
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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 30
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Management................................................................. 45
Related Party Transactions................................................. 55
Principal Stockholders..................................................... 59
Description of Capital Stock............................................... 61
Shares Eligible for Future Sale............................................ 65
Underwriting............................................................... 67
Notice to Canadian Residents............................................... 70
Legal Matters.............................................................. 71
Experts.................................................................... 71
Where You Can Find Additional Information.................................. 71
Index to Consolidated Financial Statements................................. F-1
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligations
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to unsold allotments or subscriptions.
2
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this prospectus. This prospectus contains forward-looking
statements. The outcome of the events described in these forward-looking
statements is subject to risks, and actual results could differ materially.
Please see "Special Note Regarding Forward-Looking Statements" on page 18 for
information on how those results may differ.
AllAdvantage.com Inc.
AllAdvantage has built a new Internet communications platform that connects
businesses and consumers using our proprietary Web interface and extensive
database of member profiles. We provide businesses with a powerful online
advertising, direct marketing and electronic commerce tool to target and reach
our large community of members. We provide our members cash compensation, as
well as simplified Internet navigation and electronic commerce links that
enhance their Internet experience.
Through our Web interface, and with our members' express permission, we
continuously track and collect data about their Internet behavior and
demographic information in order to develop highly accurate and detailed
personal profiles. While keeping each of our member's personal data private, we
use these profiles to enable businesses to reach their desired audience more
effectively by delivering highly-targeted advertisements to, and conducting
electronic commerce with, our members. In this way, we have become a leading
Internet-based information intermediary, or infomediary, acting as the
gatekeeper to our members while maintaining their privacy.
At the core of our service is the AllAdvantage Viewbar, an interactive
communications window that is persistently displayed on our members' computer
screens. The Viewbar is the channel through which we deliver highly-targeted
advertisements and direct marketing messages to, and collect data from, our
members. The Viewbar also facilitates Internet navigation and electronic
commerce and contains our advertising windows, a search field and pop-up menus
that contain direct links to over 400 Web sites.
From our inception in March 1999 to January 31, 2000, over 5.3 million users
registered to receive our service. We launched our Viewbar service in July 1999
and have activated the Viewbar for members in the United States, Australia,
Canada, France, Germany, New Zealand and the United Kingdom. We intend to
introduce our Viewbar service in additional countries during the first quarter
of 2000. During the three months ended January 31, 2000, over 1.7 million
members actively used our service, and we delivered advertisements for over
1,100 businesses. In the month of January 2000, we delivered over 6 billion
advertising impressions on our Viewbar.
Our objective is to become the leading Internet-based infomediary,
redefining the way businesses and consumers interact on the Internet. Key
elements of our strategy include expanding our database of profiled members,
expanding our business customer base, increasing the features and functionality
of our Viewbar and utilizing our communications platform to generate new
revenue opportunities. Also, we believe that, by increasing the number of our
members and the number of business customers using our communications channel,
we can offer increasingly compelling benefits to both businesses and members.
We were incorporated in California on March 24, 1999, and we intend to
reincorporate in Delaware prior to the closing of this offering. As of January
31, 2000, we had 390 full-time employees and contractors. Our address is 4010
Point Eden Way, Hayward, California 94545. Our telephone number is (510) 888-
3898. Our Web site is located at www.alladvantage.com. Information contained on
our Web site does not constitute part of this prospectus.
3
The Offering
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Common stock offered by AllAdvantage................ shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For general corporate purposes, including
working capital and capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.............. AADV
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of December 31, 1999, adjusted for the
issuance of 16,453,926 shares of our Series D preferred stock in February 2000.
This number of shares excludes:
. additional shares of common stock which will be issued upon conversion
of the Series D preferred stock in the event that the initial public
offering price is less than $12.10 per share; the number of additional
shares issuable increases as the initial public offering price
decreases, with the maximum number of additional shares equal to
approximately 4,132,231 shares;
. 10,484,233 shares issuable upon the exercise of stock options
outstanding as of December 31, 1999, at a weighted-average exercise
price of $0.69 per share;
. 477,550 shares issuable upon the exercise of warrants for Series C
preferred stock outstanding as of December 31, 1999 at an exercise price
of $0.03 per share, which will become exercisable for common stock upon
the completion of this offering;
. shares issuable upon the exercise of stock options granted after
December 31, 1999 and outstanding on , 2000, at a weighted-average
exercise price of $ per share;
. 75,000 shares issuable upon the exercise of a warrant for Series D
preferred stock issued after December 31, 1999 and outstanding on
February 4, 2000, at an exercise price of $6.05 per share, which will
become exercisable for common stock upon the completion of this
offering; and
. shares available for future issuance under the 1999 Equity
Incentive Plan and 2000 Equity Incentive Plan of our California
predecessor on , 2000 and our 2000 Equity Incentive Plan and 2000
Employee Stock Purchase Plan on , 2000, subject to automatic annual
increases each January 1 as described under "Management--Employee
Benefit Plans."
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Except as otherwise indicated, all information in this prospectus assumes:
. the conversion of all outstanding shares of preferred stock into
shares of common stock upon the consummation of this offering at the
assumed public offering price of $ per share;
. the reincorporation of AllAdvantage in Delaware;
. the adoption of our 2000 Equity Incentive Plan and 2000 Employee Stock
Purchase Plan; and
. no exercise of the underwriters' over-allotment option.
Titles and logos of our products and services appearing in this prospectus,
including AllAdvantage, AllAdvantage.com, It's time to take advantage of the
Internet, and Viewbar, are trademarks or service marks of AllAdvantage.com Inc.
and may be registered in other jurisdictions. Each trademark or service mark of
any other company appearing in this prospectus belongs to its holder.
4
Summary Consolidated Financial Data
(in thousands, except per share amounts)
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Period from Period from
Inception Three Months Inception
(March 24, 1999) Ended (March 24, 1999)
To September 30, December 31, To December 31,
1999 1999 1999
---------------- ------------ ----------------
(unaudited)
Consolidated Statement of
Operations Data:
Revenues........................ $ 235 $ 5,016 $ 5,251
Loss from operations............ (8,428) (28,214) (36,642)
Net loss........................ (8,988) (28,121) (37,109)
Net loss per share(1):..........
Basic and diluted net loss per
share ....................... $ (1.27) $ (3.52) $ (5.04)
Shares used in per share
calculation ................. 7,050 8,000 7,367
Pro forma basic and diluted
net loss per share
(unaudited) ................. $ (0.97)
Shares used in pro forma per
share calculation
(unaudited) ................. 38,287
The actual column in the following table presents actual summary
consolidated balance sheet data as of December 31, 1999. The pro forma
consolidated balance sheet data below reflects the sale of 16,453,926 shares of
our Series D preferred stock in February 2000 for net proceeds of approximately
$94.5 million, the conversion of all outstanding shares of preferred stock into
68,588,612 shares of common stock and the filing of our amended and restated
certificate of incorporation upon completion of this offering. The pro forma as
adjusted consolidated balance sheet data below also reflects the receipt of the
net proceeds from the sale of the shares of common stock offered by us at
an assumed initial public offering price of $ per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
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December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited)
Consolidated Balance Sheet Data:
Cash, cash equivalents and restricted cash
(2)......................................... $ 30,019 $124,563 $
Working capital (deficit).................... (4,476) 90,068
Total assets................................. 39,871 134,415
Capital lease obligations, net of current
portion..................................... 254 254 254
Deferred stock compensation.................. (18,572) (18,572) (18,572)
Total stockholders' equity (net capital
deficiency)................................. (25) 94,519
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(1) See note 2 of notes to consolidated financial statements for the
determination of the number of shares used in computing net loss per share
and pro forma net loss per share amounts.
(2) Restricted cash was $10.0 million at December 31, 1999 and represented the
portion of the November 1999 $20 million customer advance not then
available for our use. Five million dollars of this restricted cash became
unrestricted on January 12, 2000, and the remaining $5.0 million will
become unrestricted on February 12, 2000.
5
RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks described below, together with the other information in this
prospectus, before buying shares in this offering.
We face risks related to our business.
We cannot predict that our business will be successful, because our business
model is unproven and we have operated our business for only a short period of
time.
We were incorporated in March 1999. We have allowed members to use our
Viewbar since July 1999 and the current version of our Viewbar was released in
January 2000. Our limited operating history makes it difficult for members to
evaluate the services we make available to them and for businesses to evaluate
our members' response to advertisements and sponsorships provided on our
Viewbar. Because our business model is unproven, it will be difficult for you
to evaluate our performance.
We just recently began recognizing revenues, have incurred substantial losses
to date and expect to continue to incur losses.
We first recognized revenues in August 1999. As a result, you should not
consider our recent revenue growth as an indication of our future rate of
revenue growth. We had incurred net losses of $37.1 million as of December 31,
1999, and we expect to continue to incur operating losses for at least the next
two years. In the future, we expect our direct member payment costs, sales and
marketing expenses, general and administrative expenses and product development
expenses to increase significantly. We will also incur substantial non-cash
charges relating to the amortization of deferred compensation for issuances of
stock options. Our revenues may never exceed our expenses, so we may never
achieve profitability.
Our quarterly operating results may fluctuate, which could negatively affect
the market price of your shares.
Our quarterly results of operations are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
many of which are outside of our control. These factors include:
. changes in our revenue levels due to the advertising and marketing
budget cycles of our business customers;
. changes in our pricing policies, the pricing policies of our direct
competitors or the pricing policies for Internet advertising and
marketing generally;
. our rate of member acquisition and the level of activity of new and
existing members;
. changes in direct member expenditures, member referral expenditures and
other sales and marketing costs that we incur to attract and retain
members;
. the introduction of new products and services by us or by our
competitors;
. unexpected costs and delays resulting from the expansion of our
operations; and
. the occurrence of technical difficulties or unscheduled system downtime.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful, and you should not
rely upon them as an indication of our future performance.
If we fail to generate sufficient advertising and other revenues, we may not be
able to support our operations.
We currently depend primarily on our ability to generate advertising
revenues in order to support our operations. We generate, or intend to
generate, revenues from a variety of different arrangements including
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sales of traditional and highly-targeted advertising, sponsorships,
performance-based arrangements, referrals to third-party Web-sites, branded
product arrangements and sales of digital products and generalized market data.
During the fourth quarter of 1999, substantially all of the advertisements we
sold were not highly-targeted. Our strategy includes increasing highly-targeted
advertising as a percentage of both the total number of advertisements we sell
and of revenues from all advertising. We have limited experience marketing and
pricing highly-targeted advertisements and these other types of arrangements,
and have limited experience with respect to the performance of these
arrangements. Thus, we cannot be sure that we are appropriately pricing,
marketing or structuring these arrangements, or whether we will perform under
these arrangements to the satisfaction of our business customers. In addition,
the success of some of these arrangements will depend on our ability to target
members effectively based on demographic and other information. We may
encounter technical and other limitations on this ability, including problems
associated with the serving of advertisements, some of which are out of our
control. Further, we believe that we need to increase the size of our internal
sales force in order to sell additional advertising, particularly targeted
advertising. In light of these factors, we cannot assure you that we will be
able to generate sufficient advertising or other revenues to support our
operations.
If we are unable to continue to enhance the functionality of our Viewbar, our
business may be harmed.
If we are unable to continue to enhance the functionality of our Viewbar on
a timely and cost-effective basis, or if these enhancements do not achieve
widespread market acceptance, our membership growth may be reduced, we may miss
market opportunities and our business may be harmed. Implementing enhancements
to our Viewbar is costly and requires significant time of our management. Any
delays we experience in implementing enhancements to our Viewbar may result in
lost revenues and may harm our operating results. The life cycles of our
enhancements are difficult to predict because we operate in a new and emerging
market that is characterized by rapid technological change, changing customer
needs and evolving industry standards. The introduction of competing online
advertising delivery mechanisms that provide greater functionality or better
data collection could render our existing Viewbar obsolete and unmarketable.
We expect that the current version of the Viewbar, released in January 2000,
will be downloaded by existing members over the next several months and will be
available for download by new members starting in February 2000. We may
experience technical and customer support issues associated with this
introduction. We may also lose members who have used the prior version of our
Viewbar and either choose not to spend the time, or are unable, to upgrade
their Viewbar. We may also lose existing members who do not like aspects of the
current version of our Viewbar.
If we fail to grow or retain our member base, we may not be able to generate
revenues.
Membership growth and retention is crucial to our ability to generate
revenues. To date, we have relied on member referral marketing to attract the
vast majority of our new members, and we plan to do so for the foreseeable
future. This type of marketing is outside of our direct control and may not
generate rates of growth in our member base comparable to those experienced to
date. A large percentage of our referrals come from members of our A-Plus
group, which consists of members with 20 or more referrals each. Changes in our
payment policy or the failure of our payment policy to match that of a
competitor could have a disproportionate impact on our A-Plus group, which
might result in a disproportionate decrease in future membership growth.
We may also be unable to grow or retain our member base if a significant
number of our current registered members stopped using our service. Our members
are not required to use our service for a minimum period of time under our
membership agreement. There are a variety of reasons why members might
discontinue using our service, including:
. members might decide they do not like the presence of the Viewbar on
their computer screens or the amount of screen space it consumes;
. members might not like having their online activities tracked;
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. reliability issues, which we have experienced in the past and might
experience in the future, might cause member dissatisfaction;
. our members might forget their passwords;
. the Viewbar software might not be compatible with our members' Internet
service providers, Internet browsers or other computer systems;
. our member support group might not respond adequately or in a timely
manner to our members;
. we might reduce the amount we pay our members, or our competitors might
pay more than we do;
. the imposition of local taxes on members in connection with payments
made by us; and
. we might not provide the level of aggregated purchasing power or the
functionality that members expect.
We cannot assure you that we will be able to address these issues
successfully and retain our existing member base.
Our ability to operate our business could be seriously harmed if we lose, or
fail to assimilate, our senior managers and other key employees.
Many of our senior managers have only recently joined us. For example,
Michael Depatie, our Chief Financial Officer, joined us in October 1999, Tobin
Trevarthen, our Vice President Business Development, joined us in January 2000
and David Martin, our Vice President Business Intelligence, joined us in
January 2000. There can be no assurance that we will successfully assimilate
our recently hired officers or that we can successfully locate, hire,
assimilate and retain other qualified key management personnel. Our business is
largely dependent on the personal efforts and abilities of our senior
management and other key personnel, especially James Jorgensen, our President,
Chief Executive Officer and Chairman of the Board. Any of our officers or
employees can terminate his or her employment relationship at any time. The
loss of these key employees or our inability to attract or retain other
qualified employees could seriously harm our business and prospects. We do not
carry key man life insurance on any of our employees.
We may not be able to manage our growth, which could harm our ability to manage
our business.
We have grown our workforce substantially, from our four founders in March
1999 to 403 employees and contractors on January 31, 2000, and we plan to
continue to expand significantly our sales, media strategy and technology
organizations. Our growth has placed, and the anticipated future growth in our
operations will continue to place, a significant strain on our management
systems and resources. Our membership growth has exceeded, and may in the
future exceed, our ability to sell advertising on our Viewbar at reasonable
rates. To manage our growth effectively, we must:
. train and manage our employee base;
. enhance operational and financial systems;
. coordinate global operations; and
. lease additional facilities.
We may not be able to grow our business if we are not able to hire additional
personnel.
Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, sales and marketing personnel. We plan to
hire substantial numbers of additional personnel in all areas of our business.
Competition for personnel is intense, particularly in our location in Silicon
Valley, California, due to a number of factors, including the high
concentration of established and emerging growth technology companies. As a
result, we may be unable to successfully attract, assimilate or retain
qualified
8
personnel. We may also be unable to retain the employees we currently employ.
We have experienced, and may continue to experience, difficulty in hiring
candidates with appropriate qualifications. If we fail to attract and retain
the necessary personnel, we may not be able to operate and grow our business.
For example, we may not be able to sell additional advertising on our Viewbar,
particularly targeted advertising, if we do not increase our internal sales
force.
We may not be able to grow our base of members and business customers if we are
unsuccessful in establishing and maintaining the AllAdvantage brand.
If we are unsuccessful in establishing or maintaining the AllAdvantage
brand, we may not be able to grow our base of members and business customers.
Promotion of the AllAdvantage brand will depend on our success in providing
high-quality services to our members and business customers. This success,
however, depends in part on the services and efforts of third parties, over
which we have little or no control. For instance, we currently rely on
technology provided by DoubleClick to deliver substantially all of the
advertisements on our Viewbar. If our members and business customers do not
perceive our existing services as high quality, or if we introduce new services
or enter into new business ventures that are not favorably received by our
members and business customers, then we might be unsuccessful in building brand
loyalty in the marketplace. In addition, we may also need to devote substantial
resources to create and maintain a distinct brand loyalty and to promote and
maintain the AllAdvantage brand in a very competitive market. If we incur
significant expenses in promoting and maintaining our brand, our financial
results could be seriously harmed.
Our revenues may significantly decrease if we were to lose key business
customers.
A significant portion of our revenues to date have been recognized from a
limited number of business customers. For example, 24/7 Media, a third party
advertising sales organization, sold advertisements that accounted for
approximately 19% of our revenues for the period from our inception through
December 31, 1999. We do not have long-term contracts with most of our business
customers, and customers can generally terminate their relationships with us
upon specified notice and without penalties. Our results of operations would be
harmed if key business customers were to cease doing business with us.
Our advertising revenues will suffer if our members do not actively use our
Viewbar and respond to Viewbar advertisements.
If our members do not actively use our Viewbar and respond to Viewbar
advertisements at levels acceptable to our business customers, our advertising
revenues will suffer. Given our limited history, we are unable to predict
Viewbar use and advertising response rates.
We face significant competition for business customers and members. If we are
unable to compete successfully, our business may fail.
We compete for business customers and members.
Competition for business customers
The market for online advertising and marketing is extremely competitive. We
may not compete successfully in this environment. Our ability to compete in
this market depends on many factors, some of which are beyond our control. If
we are unable to compete successfully our business may fail.
There is substantial competition for Internet-based advertising revenues
generally, and the amount of available advertising space on the Internet is
increasing at a significant rate. We expect competition for online advertising
space to increase due to the lack of significant barriers to entry for online
business generally. These factors are causing some Internet advertising rates
to decline, and it is possible that these rates will continue to decline in the
future, which may cause our advertising rates to decline. We believe our most
direct competitors
9
for Internet advertising and sponsorship revenues will be providers of targeted
online advertisements. We also compete for those revenues with major Internet
service providers, content providers, large Web publishers, Web search engines
and portal companies, Internet advertising providers, content aggregation
companies, and various other companies that facilitate Internet advertising. We
may also face competition from traditional direct marketing companies that may
seek to offer online products or services. We face significant competition for
a share of advertisers' total advertising budgets from traditional media such
as television, radio, cable and print media. Businesses may be reluctant to
devote a significant portion of their advertising budget to Internet
advertising if they perceive the Internet to be a limited or ineffective
advertising medium.
Competition for members
Since space on a computer screen is limited, we believe our most direct
competitors for members are companies that offer Internet services or
compensation to consumers who allow a portion of their computer screen to be
dedicated to the applications or services of those companies. If our
competitors were to offer more attractive benefits than we do, such as higher
compensation, better functionality or greater aggregated purchasing power, then
our membership could decline, possibly reducing our revenues. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of our current or prospective members. If
we are unable to compete successfully, our business may fail.
We will not be able to support increased numbers of members if we are unable to
enhance our network infrastructure.
Our network infrastructure is composed of a complex system of profiling,
member profile, advertising, payment and web servers. Service interruptions
within our network have occurred in the past and may occur in the future,
especially when usage exceeds capacity. Failures of our server networks would
prevent us from generating advertising revenues and could harm our reputation.
We will need to invest in substantial financial, operational and management
resources to enhance our systems, particularly our database servers and storage
capabilities, to handle a large and growing number of members. We cannot be
certain that we will be able to accomplish this on a timely basis and at a
commercially reasonable cost, or at all. If we fail to do so, our business may
not grow.
If the software or hardware we use contains errors, our business could be
seriously harmed.
The software and hardware we use to operate and provide our products and
services is complex and, accordingly, may contain undetected errors or
failures. We have in the past, and may in the future, encounter errors in the
software or hardware used to operate and provide our products and services. In
the past, these errors have resulted in occasional interruptions of, or
degradation in, our service for several hours at a time. Future hardware or
software errors could result in a variety of adverse consequences, including:
. members being disconnected from our service or being unable to access
our service;
. loss of revenue;
. inaccurate delivery of advertisements or other content that results in
legal liability;
. injury to our brand;
. diversion of development resources; or
. loss of data or privacy of data.
Our service could be disrupted, and demand for our service could be reduced, by
a security breach, virus or other problems caused by third parties.
The future success of our business will depend on the security of our
computer systems. An important feature of our service is our ability to develop
and maintain individual member profiles. We also maintain a
10
database of our members' account balances. Computer viruses or problems caused
by third parties could lead to interruptions, delays or cessation in service to
our members or in serving our advertisements. Third parties could also
potentially jeopardize the security of confidential information stored in our
computer systems or our members' computer systems by their inappropriate use of
the Internet, including breaking into our payment databases and other parts of
our computer network. This could cause losses to us or our members. Third
parties may also potentially expose us to liability by posing as an
AllAdvantage employee. Unauthorized access by current and former employees or
others could also potentially jeopardize the security of confidential
information stored in our computer systems or those of our members. Any
compromise of security or public perception that we engaged in unauthorized
release of member information would harm our ability to attract and retain
members. Unauthorized access to or use of confidential information could result
in potential liability and damages under privacy laws. Any of these events
could harm our business, results of operations and financial conditions.
Our revenues could be harmed if programs that indicate an inactive member is
using the Internet or that disable the Viewbar become prevalent.
Various software programs have been developed that specifically target the
Viewbar and that falsely indicate a member is using the Internet. These
programs may result in members being paid by us when those members are not
actively using the Internet. Additionally, software programs have been
developed that attempt to blank out, or block, advertisements on the Viewbar or
completely delete the Viewbar from members' computer screens. While we believe
we have been able to limit the effectiveness of these attempts and that to date
they have not interrupted our operations, we cannot assure you that these
attempts will not disrupt our operations in the future. Widespread adoption of
this type of software may seriously damage our ability to operate our business
and generate revenues.
Our business could be shut down or severely impacted if a natural disaster,
power loss or telecommunications failure occurs.
Our operations and services, particularly our ability to have advertisements
placed on Viewbars and collect membership data, depend on our computer
equipment being protected against damage from fire, earthquakes, power loss,
telecommunications failures and similar events. Despite precautions taken by
us, a natural disaster or other unanticipated problem could cause interruption
in the services that we provide. For example, if an earthquake damages
equipment at our network operations center, we may have no means of replacing
this equipment on a timely basis or at all and our service may be shut down.
Furthermore, we do not currently have any business disruption insurance. Any
prolonged disruption of our services due to system failure could result in
decreased revenues.
Our operations will be harmed if services and products provided to us by third
parties do not perform satisfactorily or if we are unable to renew our licenses
to use those services or products.
We rely on third parties to provide us with services and products that are
integral to our ability to serve our members and businesses. Those services and
products include the following:
Advertisement Serving
We deliver substantially all of the advertisements on our Viewbar using
technology provided by DoubleClick. Other companies could provide the
technology for us to serve advertisements on our Viewbar, but it would
temporarily disrupt our business to switch to another provider. Our agreement
with DoubleClick expires in November 2002. Technology provided by third parties
for serving Internet advertising occasionally experiences errors in serving
advertisements. If DoubleClick's technology fails to allow us to serve
advertisements properly, or if we are not able to renew our agreement with
DoubleClick, reach agreement with others to provide technology to serve our
advertisements or internally develop advertising serving software in the
future, we may not be able to display advertisements effectively to our
members. In this event, our ability to generate advertising revenues would be
severely limited.
11
Centralized Software System
Virtually every aspect of our operations, including finance, billing,
accounting, storage and retrieval of member data, and advertisement tracking,
uses or connects to a centralized software system provided by Oracle. We have
only limited experience with the operation of this system. Difficulty with, or
errors, defects or malfunctions in, the operation of this system could result
in loss of data, erroneous overcharges or undercharges to advertising customers
or disruption of operations.
Our Web Site
Our Web site is hosted by GlobalCenter Inc. In the past, our Web site has
become temporarily unavailable and has experienced degraded performance due to
unpredictable system malfunctions on our host's system. In the fourth quarter
of 1999, the longest period during which our Web site was unavailable was less
than two hours. Members may become frustrated with any further difficulties
with our Web site and discontinue using our service as a result.
Servers
The applications that run our various servers and networks run on
commercially available computers provided primarily by Sun Microsystems, Cisco
Systems and third party Intel processor-based manufacturers. These complex
computers can be expected to fail periodically, leading to the possible
interruption of service to our members. Although steps have been taken to
provide redundancy in order to minimize dependency on individual computer and
network connections, from time to time our members will experience outages
resulting from failures of these system components.
Our member referral program could generate negative media attention.
We rely primarily on member referrals to add to our membership. Although we
maintain an anti-spam policy regarding email solicitations for membership
growth, it is difficult for us to monitor the use of email by our members to
solicit referrals. Anti-spam groups or activists might generate negative media
attention respecting member referral activities. Further, anti-spam
legislation, in the United States or elsewhere, could restrict our ability or
the ability of our members to use email to solicit referrals.
Although members do not make any payment to us to participate in our member
referral program, some jurisdictions could assert a claim that the use of email
marketing to add to our membership violates laws restricting multi-level
marketing activities. In addition, our business model requires that we pay our
members cash for their Viewbar usage and that of their referrals. We believe
this program complies with applicable regulation. Any regulatory challenge or
limitation asserted or implied regarding these payments could significantly
harm our business. Any litigation could subject us to significant liability for
damages, attorneys fees and injunctions or other court orders that would
prevent us from using our primary method of membership marketing. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve.
If we alter the current member payment structure, our business could be harmed.
In the future we may modify the amount of money paid to members for their
and their referred members' use of the Viewbar. Our membership agreement
specifies that we may alter the member payment structure, and we have altered
the member payment structure three times in the past. These modifications could
include increasing or decreasing the amount paid for each hour the Viewbar is
used, increasing or decreasing the amount paid for each hour the Viewbar is
used by referred members, or increasing or decreasing the maximum number of
hours per month of Viewbar use for which a member may receive payment. Any
decreases in the member payment structure could harm our ability to attract and
retain members and expose us to other costs or negative publicity. Any
increases in the member payment structure to attract or retain members could
substantially increase our costs. We may be required to alter our payment
structure for a variety of reasons, including business, tax or regulatory
concerns, any of which could significantly harm our business.
12
We rely on our intellectual property rights, and if we are unable to protect
these rights, we might face increased competition or greater difficulty in
successfully establishing the AllAdvantage brand.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our technology. Monitoring
unauthorized use of our technology is difficult, and we cannot be certain that
the steps we have taken will prevent unauthorized use of our technology,
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 one U.S. registered copyright. We have pending U.S. patent and
copyright applications and pending U.S. and foreign trademark applications. We
cannot assure you that our pending patent or trademark applications will be
approved, or that any of our applications for registration of our copyrights
will be granted. Even if they are approved or granted, our patents, copyrights
and trademarks may be successfully challenged by others or invalidated. We
cannot assure you that any of our proprietary rights will be viable or of value
since the validity, enforceability and scope of protection of proprietary
rights in Internet-related industries are uncertain and evolving. If our
trademark registrations are not approved because third parties own these
trademarks, our use of these trademarks would be restricted unless we entered
into arrangements with the third-party owners, which might not be possible on
reasonable terms.
We may incur substantial costs and diversion of management resources if we
infringe upon the proprietary rights of others.
Our business activities may infringe upon the proprietary rights of others.
From time to time, we have received and may continue to receive, claims of
infringement against us. We have a license from each developer of the software
that we use in our software. Although we do not believe that the intellectual
property we use, or any of the other elements of our business, infringe on the
proprietary rights of any third parties, third parties may assert claims
against us for infringement of their proprietary rights and these claims may be
successful. As with other providers of online services, patent claims could be
asserted against us based upon our services or technologies.
We have received notices from two third parties regarding their Internet
business model patents. We have reviewed these patents with outside counsel and
believe that we do not infringe these patents. However, any litigation filed by
these third parties could be costly and could distract managements' attention
from operating matters, which could harm our business. In addition, an adverse
judgment in any such litigation could also harm our business.
Any intellectual property litigation initiated against us could subject us
to significant liability for damages and attorneys' fees, invalidation of our
proprietary rights or injunctions or other court orders that would prevent us
from using certain technologies or engaging in certain business activities.
These lawsuits, regardless of their success, would likely be time consuming and
expensive to resolve and would divert management's time and attention away from
our business. Any potential intellectual property litigation could also force
us to do one or more of the following:
. cease using key aspects of our technology that incorporates the
challenged intellectual property;
. make significant changes to the structure and operation of our business;
. design around a third party's patent; or
. license technology from a third party.
Implementation of any of these alternatives could be costly and time
consuming, or may not be possible at all. Accordingly, an adverse determination
in any litigation that we are a party to would harm our business, results of
operations and financial condition.
13
We may be subject to currency regulation.
We currently do not make payments to a member until the member's account has
accrued at least $20. In the future, we may offer members who have accrued over
$20 in their accounts the opportunity to keep those amounts in their accounts.
If we offer new programs or if any governmental agency deemed that our current
or any future services are subject to currency regulation, the cost of
compliance could harm our results of operations.
We are subject to foreign government regulation and taxation, currency issues,
difficulties in managing foreign operations and foreign political and economic
instability.
Our participation in international markets is subject to a number of risks,
including foreign government regulations, export license requirements, tariffs
and taxes, fluctuations in currency exchange rates, introduction of the
European Union common currency, difficulties in managing foreign operations and
political and economic instability. For instance, laws of foreign countries can
be more restrictive than U.S. laws respecting our collection and use of member
data and respecting advertisement content. To the extent our potential
international members are impacted by currency devaluations, general economic
crises or other macroeconomic events, the ability of our members to utilize our
services could be diminished. We cannot assure you that electronic commerce
will develop successfully in international markets. Any failure to develop our
business internationally may harm our competitive position and consequently our
business.
Potential acquisitions may be difficult to assimilate into our operations, use
a significant amount of our available cash, result in dilution to our
stockholders and harm our reported results of operations.
We may acquire or make investments in businesses, products, services or
technologies to implement our business strategy. We do not have any present
understanding regarding, nor are we having any discussions relating to, any
acquisition or investment. We have not made a significant acquisition or
investment to date. If we acquire businesses, products, services or
technologies, we could have difficulty in assimilating them into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. In addition, effecting
acquisitions could require use of a significant amount of our available cash.
Furthermore, we might have to issue equity or equity-linked securities to pay
for future acquisitions, and these issuances could be dilutive to existing and
future stockholders. In addition, acquisitions and investments might harm our
reported results of operations due to acquisition-related charges and
amortization of acquired technology and other intangibles. Any of these
acquisition-related risks or costs could harm our business, financial condition
and operating results.
We face risks related to the Internet industry.
Failure to comply with laws governing our service or material changes in the
regulatory environment relating to the Internet could harm our business.
Because of uncertainties as to the applicability of foreign, federal and
state laws and regulations to the Internet and, more specifically, to our
business, and considering our business has evolved and expanded in a relatively
short period of time, we may not in the future always be in compliance with
applicable foreign, federal and state laws and regulations. Failure to comply
with the laws and regulatory requirements of regulatory authorities may result
in, among other things, indemnification liability to business customers and
others doing business with us, administrative enforcement actions and fines,
class action lawsuits, cease and desist orders, and civil and criminal
liability. The occurrence of one or more of these events could materially harm
our business, results of operations and financial condition.
The parties conducting business with us, such as business customers,
similarly may be subject to foreign, federal and state regulation. These
parties act as independent contractors and not as our agents in their
solicitations and transactions with consumers. Consequently, we cannot ensure
that these entities will comply
14
with applicable laws and regulations at all times. Failure on the part of a
business customer to comply with these laws or regulations could result in,
among other things, claims of vicarious liability or negatively impact our
reputation. The occurrence of one or more of these events could materially
harm our business, results of operations, and financial condition.
We may face risks if new laws or government regulations regarding the Internet
are enacted.
The laws relating to our business and operations are evolving and few clear
legal precedents have been established. Most of the laws governing Internet
transactions have not been substantially revised or updated to fully
accommodate electronic commerce. Moreover, it may take years to determine the
extent to which existing laws relating to issues such as intellectual property
ownership and infringement and personal privacy are applicable to the
Internet. Many of these laws were adopted prior to the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. Until these laws,
rules, and regulations are revised to clarify their applicability to
transactions conducted through electronic commerce, any company providing
services through the Internet or other means of electronic commerce will face
compliance uncertainty. Further, the adoption of new laws or the application
of existing laws may decrease the growth in the use of the Internet. These
results could decrease the demand for our services or increase our cost of
doing business, each of which would cause our revenues to decline and harm our
business. In particular, the following risks could occur:
Regulation of content, and access and marketing programs could limit our
ability to generate revenues and expose us to liability.
Prohibition or restriction of Internet content and access could dampen the
growth of Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. A variety of
restrictions on content and access, such as those that relate to children and
federal and state consumer protection laws prohibiting unfair or deceptive
acts or practices, have been enacted or proposed. Because of these content
restrictions and potential liability to us for materials carried on,
misdirected or disseminated through our systems, we may be required to
implement measures to reduce our exposure to liability. These measures may
require the expenditure of substantial resources or the discontinuation of our
product or service offerings that subject us to this liability. In addition,
our business model requires that we pay our members cash for their Viewbar
usage and that of their referrals. We believe this program complies with
applicable regulation. Any regulatory challenge or limitation asserted or
implied regarding these payments could significantly harm our business.
Further, we could incur substantial costs in defending against any of these
claims and we may be required to pay large judgments or settlements or alter
our business practices. Proposed laws could make compliance more difficult or
expensive, restrict our ability to provide services or otherwise harm our
business or prospects. In addition, our liability insurance may not cover
potential claims relating to the services we provide or may not be adequate to
indemnify us for all liabilities that may be imposed on us.
Our ability to sell targeted advertising may be limited if new laws relating
to member privacy are enacted.
Our ability to sell targeted advertising depends on our ability to use
personal information collected from our members. The Federal Trade Commission
and government agencies in certain states have been investigating Internet
companies regarding their use of personal information. The federal government
recently enacted legislation protecting the privacy of consumer nonpublic
personal information collected by financial institutions. We cannot assure you
that our current information collection procedures and disclosure policies
will be found to be in compliance with existing or future laws or regulations.
Our failure to comply with existing laws, including those of foreign
countries, or the adoption of new laws or regulations that require us to
change the way we conduct our business, could make it cost-prohibitive to
operate our business, and prevent us from pursuing our business strategies
including the sale of targeted advertising.
Our costs would be increased if our business or the Internet generally
becomes subject to taxation.
The tax treatment of activities on or relating to the Internet is currently
unsettled. A number of proposals have been made at the federal, state and
local levels and by foreign governments that could impose taxes on the
15
online purchase and sale of services and other Internet activities. The
Internet Tax Freedom Act of 1998 has generally imposed a U.S. moratorium
through October 2001 on the imposition of some kinds of consumer-related taxes,
other than sales or use taxes, in connection with Internet access and Internet-
related sales. However, future laws imposing taxes or other regulations on
commerce over the Internet could substantially impair the growth of Internet
commerce and, as a result, decrease our revenues or make it cost-prohibitive to
operate our business.
Seasonal trends in Internet usage and advertising sales may harm our business.
Seasonal trends could affect the advertising revenues we generate from our
business. To the extent that our advertising revenues depend on the amount of
Internet usage by our members, seasonal fluctuations in Internet usage could
affect our advertising revenues during these periods of fluctuation. In
addition, the rate at which new members sign up for our services may be lower
during certain seasons and holiday periods. Because our operating history is so
limited, it is difficult for us to predict these trends accurately and plan
accordingly. Since our operating expenses are based on our expectations of
future revenues, it is possible that seasonal fluctuations could materially
harm our revenues and our operating results.
If Internet usage does not continue to increase, we may not be able to grow our
business and increase our revenues.
If our assumption that use of the Internet will continue to increase turns
out to be incorrect, we will not be able to grow our business and increase our
revenues. All of our revenues and current business strategies for growth are
dependent on the continued use and current rates of expansion of the Internet.
Use of the Internet has increased dramatically, but we cannot assure you that
usage of the Internet will continue to increase. A decrease in the use of the
Internet or a reduction in the currently anticipated growth of Internet usage
could cause our member base and our advertising revenues to decrease.
The Internet infrastructure may not be able to accommodate rapid growth, which
could harm our ability to retain our existing customers and to attract new
customers.
The Internet infrastructure may fail to support the growth of the Internet.
If the Internet continues to experience an increase in users, an increase in
frequency of use or an increase in the capacity requirements of users, we
cannot assure you that the Internet infrastructure will be able to support the
demands placed on it. Any actual or perceived failure of the Internet could
undermine the benefits and use of our services. In addition, the Internet could
lose its viability as a commercial medium due to delays in the development or
adoption of new technology required to accommodate increased levels of Internet
activity or due to increased government regulation. Changes in, or insufficient
availability of, telecommunications services to support the Internet could
result in slower response times and could hamper use of the Internet. Even if
the Internet infrastructure is able to accommodate rapid growth, we may be
required to spend heavily to adapt to new technologies.
We face risks related to the offering.
Our stock price could fall as a result of continued losses and negative cash
flow.
As of December 31, 1999, we had an accumulated deficit of approximately
$37.1 million. We expect that our losses and negative cash flow from operations
will increase for the foreseeable future as we continue to expand our
operations. Our ability to achieve profitability or positive cash flow depends
upon a number of factors, including our ability to increase revenue. We may be
unable to increase revenues, achieve profitability or achieve positive cash
flow. If we do achieve profitability, we may be unable to sustain or increase
profitability on a quarterly or annual basis in the future. If we fail to do
so, the market price for our common stock could suffer.
16
Our common stock has not been publicly traded, and we expect that the price of
our stock may fluctuate substantially.
Recently, the stock prices of technology companies have been quite volatile.
Moreover, prior to this offering, there has been no public market for our
common stock. The initial public offering price has been determined through
negotiations between the underwriters and us. You may not be able to resell
your shares at or above the initial public offering price. The market price of
our common stock may fluctuate significantly in response to a number of
factors, including:
. changes in expectations about our future financial performance;
. changes in financial estimates of securities analysts;
. the failure of securities analysts to follow our stock;
. the operating and stock price performance of other comparable companies;
and
. actual or anticipated changes in economic conditions generally.
Due to these factors, the price of our stock may decline and the value of
your investment might be reduced. In addition, the stock market experiences
extreme volatility that often is unrelated or disproportionate to the
performance of particular companies. These market fluctuations may cause our
stock price to decline regardless of our performance.
Our business may be harmed by class action litigation due to stock price
volatility.
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. Companies in the Internet industry and other technology industries
are particularly vulnerable to this kind of litigation due to the high
volatility of their stock prices. Accordingly, we may in the future be the
target of securities litigation. Securities litigation could result in
substantial costs and could divert our management's attention and resources.
We may be unable to obtain the additional capital required to grow our
business.
Our ability to grow depends significantly on our ability to grow our member
base, increase our revenues, hire additional personnel and expand our internal
network infrastructure. These expansion efforts will require significant cash
outlays and substantial capital equipment expenditures and commitments. If the
proceeds from this offering, together with our cash on hand, cash generated
from operations and the amounts available under bank lines, are not sufficient
to meet our cash requirements, we will need to seek additional capital to fund
our growth. We may not be able to raise needed cash on terms acceptable to us
or at all. Financings may be on terms that are dilutive or potentially dilutive
to our stockholders. The holders of new equity securities may also be granted
rights, preferences or privileges senior to those of existing holders of common
stock. If sources of financing are required, but are insufficient or
unavailable, we will be required to modify our growth and operating plans to
make them consistent with available funding. This would harm our ability to
grow our business.
Shares eligible for public sale after this offering could harm our stock price.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of their common stock after this offering,
or the perception that these sales could occur. These sales also might make it
difficult for us to sell securities in the future at a time and at a price that
we deem appropriate. Please see "Shares Eligible For Future Sale" beginning on
page 65 for a more detailed discussion of when and how many additional shares
of our stock may be sold after this offering.
Provisions in our charter documents and Delaware law could prevent or delay a
change in control of AllAdvantage and may reduce the market price of our common
stock.
Provisions of our certificate of incorporation and bylaws could discourage,
delay or prevent a merger or acquisition that a stockholder might consider
favorable. These provisions include:
. authorizing the issuance of preferred stock without stockholder
approval;
17
. providing for a classified board of directors with staggered, three-year
terms;
. prohibiting cumulative voting in the election of directors;
. requiring super-majority voting to amend some provisions in our
certificate of incorporation and bylaws;
. limiting the persons who may call special meetings of stockholders; and
. prohibiting stockholder actions by written consent.
Provisions of Delaware law also may discourage, delay or prevent someone
from acquiring or merging with us. Please see "Description of Capital Stock--
Anti-Takeover Provisions" beginning on page 63 for detailed information on
these protective provisions.
You will experience an immediate and substantial dilution in the book value of
your investment.
The initial public offering price of our common stock is substantially
higher than what the net tangible book value per share of the common stock will
be immediately after this offering. If you purchase our common stock in this
offering, you will incur immediate dilution of approximately $ in the net
tangible book value per share of our common stock from the price you pay for
our common stock. Please see "Dilution" beginning on page 22 for detailed
information on the dilution you will incur. The exercise of outstanding options
and warrants may result in further dilution.
Stockholders may not agree with management regarding the use of the net
proceeds of this offering.
Our management has broad discretion as to how to spend the net proceeds from
this offering and may spend those proceeds in ways with which our stockholders
may not agree. We cannot assure you that our investments and use of the net
proceeds of this offering will yield favorable returns or results.
Our officers and directors exert substantial influence over us, which could
limit your ability to influence us and which could delay or prevent a change of
control of us.
We anticipate that our executive officers, our directors and entities
affiliated with them and our 5% stockholders will beneficially own, in the
aggregate, approximately % of our outstanding common stock following the
completion of this offering. These stockholders may be able to exercise
substantial influence over all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control of us. We also plan to reserve up to
% of the shares offered in this offering under a directed share program in
which our executive officers, directors, principal stockholders, employees,
business associates and related persons may be able to purchase shares in this
offering at the initial public offering price. This program may further
increase the amount of stock held by persons whose interests are closely
aligned with management's interests.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that 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,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intends," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. We cannot
guarantee future results, levels of activity, performance or achievements. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including new law and regulations
affecting online content or privacy issues, advertising expenditures over the
Internet and the other risks outlined under "Risk Factors" and elsewhere in
this prospectus.
18
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
offered by us will be approximately $ million, or approximately $
million if the underwriters' over-allotment option is exercised in full, at an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and the estimated offering
expenses payable by us.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, such as working capital and capital expenditures. We may
use a portion of the net proceeds from this offering to acquire or invest in
businesses, technologies or services that are complementary to our business.
However, we have no present plans or commitments, and are not engaged in any
negotiations, with respect to any transactions of this type.
The amounts that we use for working capital purposes will vary significantly
depending on a number of factors. We will retain broad discretion in the
allocation and use of the net proceeds of this offering. Pending their use, we
intend to invest the net proceeds in short-term, interest-bearing, investment-
grade securities.
The principal purposes of this offering are to increase our working capital,
create a public market for our stock, increase our visibility and facilitate
future access by us to public equity markets.
DIVIDEND POLICY
We have never declared or paid cash dividends on shares of our capital
stock. We intend to retain any future earnings to finance future growth and do
not anticipate paying cash dividends in the foreseeable future.
19
CAPITALIZATION
The following table sets forth our capitalization and our cash, cash
equivalents and restricted cash, as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect the sale of 16,453,926 shares of our
Series D preferred stock in February 2000 for net proceeds of
approximately $94.5 million, and the conversion of all outstanding
shares of preferred stock into 68,588,612 shares of common stock prior
to the closing of this offering; and
. on a pro forma as adjusted basis to reflect in addition, the receipt of
the net proceeds from sale of shares of common stock offered by us
at an assumed initial public offering price of $ per share and
after deducting estimated underwriting discounts and commissions and the
estimated offering expenses payable by us and the filing of our amended
and restated certificate of incorporation upon completion of this
offering.
[Download Table]
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share
data)
Cash, cash equivalents and restricted cash
(1)........................................... $ 30,019 $124,563 $
======== ======== ========
Capital lease obligations, net of current
portion....................................... $ 254 $ 254 $ 254
-------- -------- --------
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $0.001 par
value: 22,663,266 shares authorized,
19,567,343 shares issued and outstanding,
actual; 36,335,044 shares authorized, none
issued or outstanding, pro forma; 5,000,000
shares authorized, none issued and
outstanding pro forma as adjusted........... 20 -- --
Common stock, $0.001 par value: 116,000,000
shares authorized, 28,498,133 shares issued
and outstanding, actual; 150,000,000 shares
authorized, 97,086,745 shares issued and
outstanding, pro forma; shares
authorized, shares issued and
outstanding, pro forma as adjusted.......... 28 97
Additional paid-in capital................... 55,608 150,103
Deferred stock compensation.................. (18,572) (18,572) (18,572)
Accumulated deficit.......................... (37,109) (37,109) (37,109)
-------- -------- --------
Total stockholders' equity (net capital
deficiency)............................... (25) 94,519
-------- -------- --------
Total capitalization..................... $ 229 $ 94,773 $
======== ======== ========
--------
(1) Restricted cash was $10.0 million as of December 31, 1999 and represented
the portion of a November 1999 $20 million customer advance not then
available for our use. Five million dollars of this restricted cash became
unrestricted on January 12, 2000, and the remaining $5.0 million will
become unrestricted on February 12, 2000.
The number of shares of common stock shown as outstanding in the table above
excludes the following:
. additional shares of common stock which will be issued upon conversion
of the Series D preferred stock in the event that the initial public
offering price is less than $12.10 per share; the number of additional
shares issuable increases as the initial public offering price
decreases, with the maximum number of additional shares equal to
approximately 4,132,231;
20
. 10,484,233 shares issuable upon the exercise of stock options
outstanding as of December 31, 1999, at a weighted average exercise
price of $0.69 per share;
. 477,550 shares issuable upon the exercise of warrants for Series C
preferred stock outstanding as of December 31, 1999, at an exercise
price of $0.03 per share, which will become exercisable for common stock
upon the completion of this offering;
. shares issuable upon the exercise of stock options granted after
December 31, 1999 and outstanding on , 2000, at a weighted average
exercise price of $ per share;
. 75,000 shares issuable upon the exercise of a warrant for Series D
preferred stock issued after December 31, 1999 and outstanding on
February 4, 2000, at an exercise price of $6.05 per share, which will
become exercisable for common stock upon the completion of this
offering;
. shares available for future issuance under the 1999 equity
incentive plan and 2000 equity incentive plan of our California
predecessor on 2000 and our 2000 equity incentive plan and 2000
employee stock purchase plan on 2000, subject to automatic annual
increases each January 1 as described under "Management--Employee
Benefit Plans."
The number of shares of common stock shown as outstanding in the table above
assumes that no adjustment will be made to the ratio at which our Series D
preferred stock will convert into common stock in connection with this
offering. If the initial public offering price of the shares in this offering
is less than $12.10 then the conversion ratio for the Series D preferred stock
will be adjusted such that each share of Series D preferred stock will convert
into that number of shares of common stock equal to the result obtained by
dividing $6.05 by the greater of one-half of the offering price or $4.84.
21
DILUTION
As of December 31, 1999, our pro forma net tangible book value was
approximately $94.5 million, or $0.97 per share of common stock. Pro forma net
tangible book value per share represents our pro forma stockholders' equity
less intangible assets divided by the pro forma number of shares of common
stock outstanding after giving effect to the sale of 16,453,926 shares of our
Series D preferred stock in February 2000 for net proceeds of approximately
$94.5 million and the conversion of all outstanding shares of preferred stock
into 68,588,612 shares of common stock upon completion of this offering at an
assumed initial offering price of $ per share. Dilution per share represents
the difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net pro forma tangible book value per
share of our common stock immediately following this offering.
After giving effect to the receipt of the net proceeds from the sale of the
shares of our common stock at an assumed initial public offering price
of $ per share and after deducting estimated underwriting discounts and
commissions and the estimated offering expenses, our pro forma net tangible
book value as of December 31, 1999 would have been approximately $
million, or $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and
an immediate dilution of $ per share to new investors purchasing shares at
the initial public offering price. The following table illustrates the per
share dilution:
[Download Table]
Assumed initial public offering price per share.......... $
Pro forma net tangible book value per share as of
December 31, 1999..................................... $ 0.97
Increase per share attributable to new investors.......
------
Pro forma net tangible book value per share after this
offering................................................
--------
Dilution per share to new investors...................... $
========
The following table summarizes as of December 31, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing stockholders and by new investors purchasing shares of common stock in
this offering, before deducting underwriting discounts and commissions and the
estimated offering expenses:
[Download Table]
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
Existing stockholders... 97,086,745 % $128,985,000 % $1.33
New investors...........
---------- ----- ------------ ----- -----
Total................. 100.0% $ 100.0% $
========== ===== ============ ===== =====
The above discussion and tables assume no exercise of any stock options or
warrants for common stock outstanding as of December 31, 1999. As of December
31, 1999, there were options outstanding to purchase a total of 10,484,233
shares of common stock at a weighted-average exercise price of $0.69 per share
and warrants outstanding to purchase a total of 238,775 shares of Series C
preferred stock with an exercise price of $0.06 per share, which will become
exercisable for a total of 477,550 shares of common stock with an exercise
price of $0.03 per share upon completion of this offering. In addition, between
December 31, 1999 and 2000, we issued options to purchase a total of
shares of common stock at a weighted-average exercise price of $ per
share, and a warrant to purchase 75,000 shares of Series D preferred stock at
an exercise price of $6.05 per share, which will become exercisable for 75,000
shares of common stock at an exercise price of $6.05 per share upon completion
of this offering. There are also shares of common stock available for
future issuance under our employee benefit plans as of , 2000. If any of
these options or warrants are exercised, there will be further dilution to new
public investors. Please see "Capitalization," "Management--Employee Benefit
Plans," and notes 4, 5, 10 and 11 of notes to consolidated financial
statements.
22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The consolidated statement of operations data for the period from
inception (March 24, 1999) to December 31, 1999, and the consolidated balance
sheet data as of December 31, 1999, are derived from our audited consolidated
financial statements that are included elsewhere in this prospectus. The
consolidated statement of operations data for the period from inception (March
24, 1999) to September 30, 1999 and the three months ended December 31, 1999
are unaudited but in the opinion of management include all adjustments,
consisting only of normal recurring adjustments, that are necessary for a fair
presentation of our results of operations for these periods. The historical
results presented below are not necessarily indicative of future results.
[Enlarge/Download Table]
Period from Inception Three Months Period from Inception
(March 24, 1999) Ended (March 24, 1999)
To September 30, 1999 December 31, 1999 To December 31, 1999
--------------------- ----------------- ---------------------
(in thousands, except per share amounts)
Consolidated Statement
of Operations Data:
Revenues................ $ 235 $ 5,016 $ 5,251
Costs and expenses:
Direct member costs... 2,192 14,949 17,141
Sales and marketing... 1,580 10,022 11,602
General and
administrative....... 3,302 5,042 8,344
Product development... 1,267 1,644 2,911
Depreciation and
amortization......... 78 270 348
Stock-based
compensation......... 244 1,303 1,547
------- -------- --------
Total costs and
expenses........... 8,663 33,230 41,893
------- -------- --------
Loss from operations.... (8,428) (28,214) (36,642)
Interest expense........ (570) (257) (827)
Interest income......... 10 350 360
------- -------- --------
Net loss................ $(8,988) $(28,121) $(37,109)
======= ======== ========
Net loss per share(1):
Basic and diluted net
loss per share....... $ (1.27) $ (3.52) $ (5.04)
Shares used in per
share calculation.... 7,050 8,000 7,367
Pro forma basic and
diluted net loss per
share (unaudited) ... $ (0.97)
Shares used in pro
forma per share
calculation
(unaudited) ......... 38,287
[Download Table]
As of
December 31, 1999
-----------------
Consolidated Balance Sheet Data:
Cash, cash equivalents and restricted cash(2)................. $ 30,019
Working capital (deficit)..................................... (4,476)
Total assets.................................................. 39,871
Capital lease obligations, net of current portion............. 254
Deferred stock compensation................................... (18,572)
Net capital deficiency........................................ (25)
--------
(1) See note 2 of notes to consolidated financial statements for the
determination of the number of shares used in computing net loss per share
and pro forma net loss per share per share amounts .
(2) Restricted cash was $10.0 million at December 31, 1999 and represented the
portion of the November 1999 $20.0 million customer advance not then
available for our use. Five million dollars of this restricted cash became
unrestricted on January 12, 2000, and the remaining $5.0 million will
become unrestricted on February 12, 2000.
23
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 the notes to the consolidated financial statements
included in this prospectus. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ significantly from those projected in the forward-looking statements as
a result of many factors, including those discussed in "Risk Factors,"
"Business" and elsewhere in this prospectus. We assume no obligation to update
the forward-looking statements or these factors.
Overview
AllAdvantage is a leading Internet information intermediary, or infomediary,
that enables businesses to deliver highly-targeted advertisements to, and
conduct electronic commerce with, an aggregated community of profiled members.
With our members' express permission, we utilize our proprietary Viewbar
technology to continuously track and collect data about their Internet activity
and demographics. We use this data to build accurate and detailed member
profiles. While keeping each of our members' personal data private, we use
these profiles to provide businesses with a powerful online advertising, direct
marketing and electronic commerce channel to more effectively reach the desired
audience. The Viewbar persistently displays advertising, electronic commerce
links and other Internet navigational features, such as search capabilities,
pop-up menus and links.
We were incorporated in March 1999 and released the first version of our
Viewbar in July 1999. We released the current version of our Viewbar to
selected members in January 2000, and plan a full release to current and new
members during the first quarter of 2000.
Revenues
We first recognized revenue in August 1999. In 1999, we generated
substantially all of our revenues from the sale of online advertisements on our
Viewbar. More recently, we have also generated revenue from commissions for
referring electronic commerce, fees for directing members to our business
customers' Web sites and the sale of sponsorships on the Viewbar. Advertisers
pay us for the number of impressions, or advertisements displayed, for the
number of times members click on advertisements, or based on other criteria,
such as the number of members who register for a service. In January 2000, we
released a substantially upgraded version of our Viewbar, on which we sell non-
exclusive sponsorships of the Viewbar's pop-up menu buttons and search field.
Under these arrangements, we may receive a fixed fee or a fee based on the
usage of the respective pop-up menu or search field. We also have arrangements
with our business customers under which we receive a fee for directing members
to their Web sites. These fees are based upon the number of times members are
directed to our business customers' Web sites via the Viewbar.
Online advertising and sponsorship revenues are recognized in the periods in
which the advertisement or sponsorship is displayed, based upon the total
number of impressions delivered, provided that no significant obligations on
our part remain and collection of the related receivable is probable. Our
obligations typically include the guarantee of a minimum number of impressions
or the satisfaction of other performance criteria. The guaranteed minimum
number of impressions is generally required to be delivered over the term of
the commitment, which has generally ranged from several weeks to two months.
Revenues from advertising sold through third-party sales organizations are
recognized net of commissions. Revenues from performance-based arrangements are
recognized as the related performance criteria are met, provided that no
significant obligations on our part remain and collection of the related
receivable is probable. Revenues from commissions for referring electronic
commerce are recognized upon receipt of payment. Fees paid to us in advance of
satisfaction of revenue recognition criteria are recorded as deferred revenue.
24
Costs and Expenses
Costs and expenses consist of direct member costs, sales and marketing
expenses, general and administrative expenses, product development expenses,
depreciation and amortization and stock-based compensation expenses.
Direct Member Costs. Direct member costs consist of costs incurred to
compensate each member for using the Internet while our Viewbar is activated.
Members in the United States are currently compensated at a rate of $0.50 per
hour for up to 25 hours per month for using the Internet while our Viewbar is
activated. Members outside the United States are currently compensated at a
comparable rate in their local currency. Our membership agreement specifies
that we may alter the member payment structure at any time. Currently, members
are paid only after having accrued a minimum account balance of $20 at the end
of any given month.
Sales and Marketing. Sales and marketing expenses include personnel and
related costs for our direct sales force and marketing staff, marketing and
promotional programs, member referral costs and costs related to the delivery
of advertisements to the Viewbar. Member referral costs consist of payments to
members when new users whom they have referred to us download the Viewbar and
use the Internet while our Viewbar is activated. We currently limit payment for
these referrals to direct referrals and a maximum of four tiers of indirect
referrals. We currently compensate members $0.10 per hour for direct referrals
and $0.05 per hour for indirect referrals, for up to 25 hours of active
Internet use per month. These referral payments are further limited to the
number of hours the original referring member uses the Internet while our
Viewbar is activated. Our membership agreement specifies that we may alter the
member payment structure at any time.
General and Administrative. General and administrative expenses include
personnel and related costs for corporate functions such as accounting and
finance, human resources, facilities, legal and information systems.
Product Development. Product development expenses include personnel and
related costs for the development of our Viewbar and related systems, technical
support and quality assurance.
Depreciation and Amortization. Depreciation and amortization expenses
represent depreciation and amortization of computer software and equipment,
leasehold improvements and furniture and fixtures.
Stock-Based Compensation. Deferred stock compensation represents the
aggregate difference, at the date of grant, between the respective exercise
prices of stock options and the deemed fair market values of the underlying
stock. This deferred stock compensation is amortized as stock-based
compensation expense using the graded amortization method over the vesting
period of the related options, which is generally four years. Stock-based
compensation expense relates to stock options awarded to individuals in all
cost and expense categories.
Results of Operations
Period from Inception (March 24, 1999) to December 31, 1999
Revenues. Revenues for the period from inception (March 24, 1999) to
December 31, 1999 were $5.3 million. We have historically sold a significant
portion of our advertisements through third-party sales organizations. 24/7
Media, a third-party advertising sales organization, sold advertisements that
accounted for approximately 19% of our revenues. These advertisements were
typically not targeted. Our internal sales force generally sells targeted
advertising. We have received and we anticipate that we will continue to
receive higher advertising rates for targeted advertisements and sponsorships
than for non-targeted advertisements. As we grow our sales force, we believe
that we will be able to increase targeted advertising sales as a percentage of
our total advertising sales. To date, substantially all of our revenues have
been derived from United States business customers.
25
Direct Member Costs. Direct member costs for the period from inception
(March 24, 1999) to December 31, 1999 were $17.1 million. Although we
anticipate that our direct member costs will decrease as a percentage of our
revenues, we expect our direct member costs will increase substantially in
absolute dollars as our membership base continues to grow.
Sales and Marketing Expenses. Sales and marketing expenses for the period
from inception (March 24, 1999) to December 31, 1999 were $11.6 million. During
that period, member referral costs were $3.0 million and costs related to the
delivery of advertisements to the Viewbar were $2.9 million. We expect our
sales and marketing expenses to continue to increase in absolute dollars as our
membership base continues to grow and as we hire additional sales personnel in
the United States and in other countries.
General and Administrative Expenses. General and administrative expenses for
the period from inception (March 24, 1999) to December 31, 1999 were $8.3
million. We expect that our general and administrative expenses will continue
to increase in absolute dollars as we hire additional personnel and incur costs
associated with being a public company.
Product Development Expenses. Product development expenses for the period
from inception (March 24, 1999) to December 31, 1999 were $2.9 million. We
expect that product development expenses will increase in absolute dollars as
we continue to enhance our Viewbar and related systems.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the period from inception (March 24, 1999) to December 31, 1999
were $348,000. We intend to increase our capital expenditures in absolute
dollars to continue to expand our systems infrastructure, which will result in
increased depreciation and amortization expenses associated with these
expenditures.
Stock-Based Compensation Expenses. Stock-based compensation expenses for the
period from inception (March 24, 1999) to December 31, 1999 were $1.5 million.
The remaining deferred stock compensation at December 31, 1999 was $18.6
million, which will be amortized as follows: $9.7 million for the year ending
December 31, 2000, $5.1 million for the year ending December 31, 2001,
$2.7 million for the year ending December 31, 2002 and $1.1 million for the
year ending December 31, 2003. Terminations of option holders could cause
stock-based compensation in future years to be less than indicated.
Interest expense. Interest expense for the period from inception (March 24,
1999) to December 31, 1999 was $827,000. In connection with the issuance of
convertible notes payable in July 1999, we issued warrants to purchase Series C
preferred stock. We recorded a charge for the fair value of the warrants of
approximately $528,000 for the period from inception to December 31, 1999. We
also incurred interest expense from a $20.0 million customer advance received
in November 1999.
Interest Income. Interest income for the period from inception (March 24,
1999) to December 31, 1999 was $360,000. Interest income was generated from
cash balances resulting from our private equity financings and the cash advance
received from a customer.
Provision for Income Taxes. No provision for federal or state income taxes
was recorded for the period from inception (March 24, 1999) to December 31,
1999 because we incurred losses from inception through that date. As of
December 31, 1999, we had approximately $28.6 million of federal net operating
loss carryforwards which expire on various dates beginning in 2019. Due to the
uncertainty regarding the ultimate utilization of the net operating loss
carryforwards, we have not recorded any benefit for losses and a valuation
allowance has been recorded for the entire amount of the deferred tax asset. In
addition, certain future changes in our share ownership may restrict our
ability to utilize our net operating loss carryforwards.
26
Liquidity and Capital Resources
Since our incorporation in March 1999, we have financed our operations
primarily through private placements of preferred and common stock and
convertible notes payable, raising $33.9 million through December 31, 1999. In
February 2000, we raised an additional $94.5 million through the issuance of
Series D convertible preferred stock in a private placement.
Cash and cash equivalents, including restricted cash, were $30.0 million at
December 31, 1999. Restricted cash was $10.0 million at December 31, 1999, and
represented a portion of a $20.0 million customer advance that we received in
November 1999. Five million dollars of this restricted cash became unrestricted
on January 12, 2000, and the remaining $5.0 million will become unrestricted on
February 12, 2000.
Net cash used in operating activities was $9.9 million for the period from
inception (March 24, 1999) to December 31, 1999. Net cash used in operating
activities consisted primarily of our net loss, substantially offset by
increases in accounts payable and other accrued liabilities, accrued member
payables and the unrestricted portion of a customer advance.
Net cash used in investing activities was $4.3 million for the period from
inception (March 24, 1999) to December 31, 1999. Net cash used in investing
activities consisted of capital expenditures for computer equipment, leasehold
improvements and furniture and fixtures.
Net cash provided by financing activities was $34.2 million for the period
from inception (March 24, 1999) to December 31, 1999. Net cash provided by
financing activities consisted primarily of the net proceeds from the private
sale of convertible preferred stock, proceeds from the issuance of convertible
notes payable and proceeds from the exercise of options to purchase common
stock.
As of December 31, 1999, our principal commitments consisted of operating
and capital leases. Future minimum cash payments under these non-cancelable
commitments are $1.5 million through the year 2000. In addition, in January
2000, we entered into several non-cancelable commitments for office leases for
the year beginning in January 2000, and are obligated to pay a total of $49.3
million through 2010 under these leases. As a condition of one of the leases,
we are required to provide a letter of credit of $2 million, which may increase
to as much as $6.3 million, as a security deposit. In addition, we currently
have commitments for capital expenditures of approximately $1.1 million.
Our working capital requirements depend on numerous factors, including
market acceptance of our products and services and the resources we allocate to
growing our member base, increasing our revenues, hiring additional personnel
and expanding our internal network infrastructure. We have experienced
substantial increases in our expenditures since our inception consistent with
the growth in our operations and personnel, and we anticipate that our
expenditures will continue to increase significantly for the foreseeable
future.
We believe that our available cash and cash equivalents and cash flows from
operations, combined with the net proceeds from this offering, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. Thereafter, however, we may need
to raise additional funds to fund expansion, including significant increases in
member costs, personnel and office facilities, to develop new or enhance
existing services or products, to respond to competitive pressures or to
acquire or invest in complementary businesses, technologies, services or
products. In addition, to meet our long-term liquidity needs, we may need to
raise additional funds, establish credit facilities or seek other financing
arrangements. Additional funding may not be available on favorable terms, on a
timely basis or at all.
Year 2000 Compliance
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able
to distinguish whether "00" means 1900 or 2000, which may result in failures or
the creation of erroneous results.
27
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of lawsuits against software vendors.
Because of the unprecedented nature of this litigation, it is uncertain whether
or to what extent we may be affected by it.
We designed our Internet-based programs as well as our Web site and related
technology infrastructure to be Year 2000 compliant, provided that the
underlying operating systems of our vendors', suppliers' and members' computers
and any other software and hardware used on their computers are Year 2000
compliant.
We have defined Year 2000 compliant as the ability to:
. correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
. store and provide output of date information in ways that are
unambiguous as to century if that date elements in interfaces and data
specify the century; and
. recognize Year 2000 as a leap year;
provided that all other products, such as hardware, software and firmware, used
with our products properly exchange and recognize date data.
However, we rely on third-party hardware and software in the operation of
our business. We believe we have identified all of the major information
systems used in our internal operations, including operating systems, databases
and the software residing between databases and the user interface, and have
substantially completed all modifications, upgrades or replacements to minimize
the possibility of a material disruption of our business. These remediation
activities include updating these systems to the newest versions, which are
claimed to be Year 2000 compliant, and applying patches to current versions.
The expenditures that we have incurred to date and the expenditures we expect
to incur in this regard have not been and are not expected to be material to
our business, results of operations and financial condition.
We have also contacted the vendors of third-party hardware and software we
use in order to gauge their Year 2000 compliance. Based on these vendors'
representations and the activities we have conducted, we believe that the
third-party hardware and software we use are Year 2000 compliant. We cannot
assure you, however, that we will not experience unanticipated negative
consequences, including material costs caused by undetected errors or defects
in the technology used in our internal systems. If, in the future, it comes to
our attention that the software underlying our e-mail or Internet-based
programs requires modification, or that any of our third-party hardware and
software is not Year 2000 compliant, then we will seek to make modifications to
our systems. In this case, we expect these modifications will not have a
material effect on our results of operations. There can be no assurance,
however, that we will be able to modify our systems in a timely and successful
manner to comply with the Year 2000 requirements. Any failure to do so could
have a material adverse effect on our business, results of operations and
financial conditions. The worst case scenario for Year 2000 problems for us if
the third-party hardware and software we use in our service were to prove not
to be Year 2000 compliant would be the need to cease normal operations for an
indefinite period of time if our Web site were to become inoperative and the
need to fix transactions that were incorrectly processed or recorded.
We do not currently have complete information concerning the Year 2000
compliance status of our business customers. We have contacted business
customers to remind them of the Year 2000 problem and its potential effects on
their systems and to gauge their Year 2000 compliance. To the extent that our
business customers are no longer able to process transactions, process them
incorrectly, or transmit incorrect data to our systems, our business could be
harmed. If our current or future business customers fail to achieve Year 2000
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compliance or if they divert expenditures, especially technology expenditures
that were reserved for promotional products, to address Year 2000 compliance
problems, our business, results of operations or financial condition could be
materially harmed.
If Year 2000 issues prevent our members from accessing the Internet, our
business and operations will suffer. Any failure of our systems and our
communications infrastructure with respect to the Year 2000 problem could
result in:
. an extended interruption of our ability to provide services to our
members and to fulfill commitments to our business customers;
. our members and business customers seeking alternate providers or
advertising space; or
. an unmanageable burden on member service and technical support.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivatives and Hedging
Activities," or SFAS 133, as amended by SFAS 137, which establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. Because we
do not currently hold any derivative instruments and do not currently engage in
hedging activities, we expect that the adoption of SFAS 133, as amended, will
not have a material impact on our financial position or results of operations.
We will be required to implement SFAS 133, as amended, for fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101. SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We believe that our current
revenue recognition principles comply with SAB 101.
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 interest rates in the United
States, particularly since the majority of our investments are in cash
equivalent debt securities issued by corporations or divisions of the United
States government. 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
investments, we believe that we are not subject to any material market risk
exposure.
We did not have any foreign currency hedging or other derivative financial
instruments as of December 31, 1999.
Inflation
The impact of inflation on our business has not been material.
29
BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in these forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
Overview
AllAdvantage is a leading Internet-based intermediary, or infomediary, that
enables businesses to deliver highly-targeted advertisements to, and conduct
electronic commerce with, a large community of profiled members. We have built
an Internet communications platform that connects businesses and consumers
through our proprietary Web interface, the AllAdvantage Viewbar. The Viewbar is
an interactive communications window that is persistently displayed on each
member's computer screen. The Viewbar is also the channel through which we
deliver highly-targeted advertising, direct marketing messages, electronic
commerce opportunities and digital products. The Viewbar also facilitates
Internet navigation and electronic commerce with our business customers, and
includes search capabilities and pop-up menus that contain direct links to over
400 Web sites.
With our members' express permission, we continuously track and collect data
about their Internet behavior and demographics with our proprietary Viewbar
technology. We use our proprietary database and profiling technology to develop
detailed personal profiles of our members. We use these profiles to provide
businesses with a powerful online advertising, direct marketing and electronic
commerce channel to more effectively reach their desired audience while keeping
each of our member's personal data private. To our members, we provide cash
compensation, as well as simplified Internet navigation and electronic commerce
links that enhance their Internet experience.
We believe that, by increasing our membership, our value to business
increases because we can deliver highly-targeted advertising and marketing
messages based on increasingly refined criteria to a large community of
members. We also believe that, as more businesses use our services, we can
offer increasingly compelling benefits to consumers, thereby enhancing our
ability to attract new members. The combination of these benefits to businesses
and consumers has the potential to create a self-perpetuating cycle of
increasing membership and increasing value to businesses.
Between our inception in March 1999 and January 31, 2000, over 5.3 million
users registered to receive our Viewbar service. We launched our Viewbar
service in July 1999 and, have made the Viewbar available for our members in
the United States, Australia, Canada, France, Germany, New Zealand and the
United Kingdom. Similarly, we intend to introduce our Viewbar service to our
members in additional countries during the first quarter of 2000. During the
three months ended January 31, 2000, over 1.7 million members actively used our
service. Since the introduction of our Viewbar in July 1999, we have delivered
advertisements for over 148 advertisers obtained by our direct sales force and
973 additional advertisers obtained through third party sales organizations. In
January 2000, we delivered over 6 billion advertising impressions on our
Viewbar.
Industry Background
The Growth of the Internet
The Internet has dramatically changed the way that millions of people
worldwide share information, communicate and conduct business. International
Data Corporation, or IDC, an independent technology research organization,
estimates that the total number of Internet users worldwide will grow from
approximately 196 million at the end of 1999 to approximately 502 million by
the end of 2003. IDC further estimates that worldwide electronic commerce over
the Internet will increase from $111 billion in 1999 to $1.3 trillion in 2003.
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The Growth of Online Advertising and Direct Marketing
As the Internet has grown, businesses have devoted increasing portions of
their budgets to online advertising and direct marketing. Forrester Research,
an independent technology research organization, projects that online
advertising expenditures worldwide will increase tenfold from $3.3 billion in
1999 to $33.1 billion in 2004. Currently, online advertising consists primarily
of banner advertisements and sponsorships on frequently visited portals and
other Web sites. Although these forms of online advertising have generally
allowed businesses to create an online awareness of their brands and products,
businesses are increasingly demanding the ability to target their desired
audience more effectively.
Limitations of Current Targeted Online Advertising Methods
While targeted online advertising has a number of advantages over
traditional advertising, there remain significant challenges to realizing its
full potential. The effectiveness of targeted online advertising is currently
limited by the lack of precise demographic and Internet behavioral data about
consumers. To date, online targeting methods have generally used unverifiable
data from surveys and registrations or incomplete Internet behavioral data
derived from a single Web site or limited network of Web sites. Further, the
effectiveness of existing online delivery methods is limited because users
often scroll traditional banner advertisements off of their computer screens or
leave a Web site before an advertisement can be served to that site.
Consumer Online Privacy and Control of Personal Data
Many companies on the Internet are collecting valuable data about consumers
without their knowledge or permission. Online consumers are becoming
increasingly aware of Internet privacy issues and concerned with the need to
control their personal data. According to Forrester Technographics,
approximately 67% of Internet users are extremely or very concerned about
releasing their personal data. To date, online consumers have had limited ways
to control this flow of data or realize any of its value.
Market Opportunity
We believe that a significant market opportunity exists for an Internet-
based infomediary to serve as an effective communication channel between
businesses and online consumers. This infomediary would collect consumers'
demographic and Internet behavioral data, with their permission, and build
detailed profiles from that information. The infomediary would use these
profiles to enable businesses to deliver highly-targeted, one-to-one marketing
messages and other products and services to specified consumers. The
infomediary, as the trusted custodian of their information, would empower
consumers to realize value from their data while protecting their privacy.
The AllAdvantage Solution
AllAdvantage is a leading Internet-based infomediary that enables businesses
to deliver highly-targeted advertisements to, and conduct electronic commerce
with, a large community of profiled members. We connect businesses with these
members through our Viewbar, an interactive communications window that is
persistently displayed on our members' computer screens. The Viewbar displays
advertising and also contains features such as a search field and menus of
links that facilitate electronic commerce by connecting our members directly to
Web sites and services of our business customers.
With our members' express permission, we collect their demographic
information upon registration and continuously capture data about their
Internet activity. Using our proprietary database and profiling system, we then
create, and continuously update, accurate and detailed profiles for each of our
members. These profiles enable us to deliver highly-targeted advertisements and
marketing messages on behalf of our business customers. We compensate our
members for time that they, and the members whom they have referred, spend
browsing the Internet while using the Viewbar.
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Benefits to Businesses
Accurate and Detailed Member Profiles. We enable businesses to deliver
highly-targeted advertising and marketing messages, based on accurate and
detailed member profiles, to our large community of members. With our members'
express permission, we collect extensive data on their actual browsing behavior
across the entire Internet. Because our members must provide us with accurate
names and addresses in order to receive payment, we are able to validate this
information. With our accurate and continuously updated database of profiles,
we enable businesses to continuously refine and optimize their online marketing
campaigns.
Higher Returns on Their Marketing Investment. Our highly-targeted
advertising and marketing messages are designed to generate higher consumer
response rates and advertising impact and, as a result, provide businesses with
a higher return on their marketing investments. We offer businesses an
effective means of delivering highly-targeted online advertisements and
marketing messages based on combinations of the following variables:
. profiled behavior, including personal interests and spending habits;
. demographic data, including gender, age, street address and zip code;
. geography, including local, regional, national or international
placement;
. specific Web sites or Web site topics, such as sports or travel;
. current Internet behavior, such as researching or buying;
. keywords searched, such as stocks or golf; and
. specific time, including time of day or week.
Using combinations of these variables, an advertiser can target a very specific
audience. For example, a local car dealership can target its advertising to
males, age 25-40, who live in the zip codes near the dealership when they are
using the Internet to research sport utility vehicles or browsing related
automotive Web sites. Also, a national airline could run a campaign in specific
cities where it has excess capacity. With our detailed member profiles, the
airline could target members who have frequented travel Web sites within the
past month or visited the Web sites of its closest competitors in the same time
period. This highly targeted advertising is designed to generate higher
consumer response rates and advertising impact and, as a result, provide
businesses with a higher return on their marketing investments.
Persistent and Rich Media Advertising. When activated, the Viewbar is always
visible on a member's computer screen, regardless of which Web site he or she
is viewing or which desktop application he or she is using. Accordingly,
businesses can have their advertisements viewed on a persistent basis, without
the possibility of their advertisements being scrolled off the screen. In
addition, we designed the Viewbar system to send advertisements to members
between downloads and uploads of data from the Internet, allowing us to
efficiently send more complex and appealing graphics, or rich media, to our
members.
Ability to Target Members Viewing Any Web Site. We can deliver
advertisements on the Viewbar while our members are viewing any Web site,
including sites that are sold out of advertising inventory or do not feature
advertising. Rather than separately negotiating for and purchasing advertising
space on a number of Web sites, a business can instead purchase advertising on
the Viewbar that will be displayed when members view any of those selected Web
sites.
Media Strategy Expertise. We work with business customers to evaluate,
develop, execute, analyze and refine their online marketing campaigns. Because
we can collect data on our members' activity across the Internet, we are able
to offer customers information that might otherwise be unavailable. We can
accurately identify the demographic and behavioral characteristics of those
members who have, and those who have not, responded to our advertisers'
campaigns. Our media strategy group uses this data to assist our business
customers to more effectively target their future campaigns.
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Platform for Electronic Commerce. Our Viewbar contains features that
facilitate electronic commerce between business customers and our members. For
example, the Viewbar contains a menu bar that provides links to over 400 sites
on which our members may engage in commerce. In addition, each of our active
members holds an AllAdvantage cash account. We have recently begun to allow
members to use their cash accounts for the direct purchase of goods and
services online.
Benefits to Members
Payments for Using the Internet and for Referrals. Our members are paid for
time they spend navigating the Internet while the Viewbar is active on their
computer screens. In this way, members are paid for activities they already
undertake and are able to share in the value that their personal information
has for Internet advertisers and marketers. Members who accrue a minimum
balance can receive the cash they earn in the form of a check we mail to them.
We have recently begun to enable our members to use the funds in their accounts
to make purchases online. Members can also be paid when other people they have
directly or indirectly referred to us become members and use the Internet while
their Viewbars are active.
Simplified Internet Navigation. When the Viewbar is active on a member's
computer screen, it serves as a persistent and private portal that is always
accessible. The Viewbar simplifies navigation of the Internet by featuring a
search field and a menu bar that provides direct links to selected Web sites.
We believe that our members will find these features easier to use and more
convenient than other alternatives.
Increased Purchasing Power. We have recently begun to help our members
capitalize on the value of our large member base by working with selected
vendors to obtain pricing discounts, promotional rewards and other benefits for
our members. We provide a vehicle by which consumers receive the benefit of
their collective purchasing power, which encourages them to participate
actively in the AllAdvantage community and refer other consumers for
membership.
Relevant Advertising and Electronic Commerce Offers. Each of our members has
given us express permission to deliver advertising and marketing messages to
him or her through the Viewbar. Our profiling capabilities enable us to deliver
these messages in a highly targeted fashion, increasing the likelihood that the
member will view and respond to a given message. As we collect additional data
regarding the interests, activities and Internet usage patterns of our members
over time, we believe we can increase the level of personalization and hence
the direct relevance and value of these messages to members. We believe that
receiving these highly-targeted messages can be valuable to our members and
will be viewed by them as useful and informative.
Privacy and Control. We believe we have built a trusted relationship with
our members by rigidly maintaining the privacy of their data. We expressly
state in our membership agreement that we will never sell or disclose to any
third parties our members' personally identifiable information, unless
permitted by our members or required by law. Additionally, members can control
our tracking of their Internet behavior by turning the Viewbar on and off at
any time.
Strategy
It is our objective to be the leading Internet-based infomediary. Key
elements of our strategy include:
Build a Premier and Trusted Brand. We believe that building strong brand
awareness is fundamental to establishing ourselves as the Internet-based
infomediary most trusted by consumers and as the most effective online
marketing channel for businesses. We intend to build a premier and trusted
brand by consistently delivering value to both businesses and consumers. We
also intend to maximize awareness of the AllAdvantage brand to businesses
through traditional marketing channels. We will also utilize multiple points of
contact with consumers, including our Viewbar, Web site, email and direct mail,
to increase brand awareness.
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Expand our Community of Profiled Members. We believe that expanding our
membership increases our attractiveness to businesses. We plan to continue to
rely on word-of-mouth referral marketing and may augment this strategy with
other marketing campaigns. We also intend to attract additional members by
improving member benefits with enhancements to the Viewbar and expanded product
and service offerings. Further, we intend to continue to grow our community
internationally by introducing the Viewbar in additional countries.
Expand our Business Customer Base. We intend to continue to increase our
sales force domestically and internationally in order to expand our worldwide
business customer base. We also intend to attract and retain business customers
by offering the services of our media strategy group, which assists these
customers in utilizing our extensive database to better evaluate, develop,
execute, analyze and refine their marketing campaigns.
Increase Targeted Advertising Sales. Businesses generally pay higher rates
for targeted online advertising than for traditional online advertising. As we
grow our sales force and media strategy group, we believe that we will be able
to increase targeted advertising sales as a percentage of our total advertising
sales. We believe that our business customers will experience higher response
rates from our increasingly targeted advertisements and that these higher
response rates will in turn encourage them to buy more targeted advertising
from us.
Pursue New Revenue Opportunities. We intend to leverage the purchasing power
of our large membership base and the functionality of the Viewbar to
aggressively pursue new revenue opportunities, including:
. Digital Products. We intend to offer businesses the opportunity to sell
or rent digital products, such as software, music, games and video, that
can be electronically distributed to our members through the Viewbar,
and be paid for by debiting members' accounts;
. Data Products. We intend to offer businesses the opportunity to purchase
reports using our extensive, aggregated market data, that will not
personally identify members; and
. Co-branded Products and Services. We intend to offer business the
opportunity to sell co-branded products and services, such as
permission-based email, financial services and telecommunication
services, to our large membership community.
We believe that, in the future, advertisements may be delivered through the
Internet to a number of digital devices in addition to computers, including
interactive television, Internet-enabled home appliances, hand-held computers,
cellular phones, pagers and automobile personal computers. Over time, we may
extend our technology to deliver targeted advertisements through some of these
emerging digital devices.
Enhance Viewbar Functionality and Member Experience. We intend to continue
to add functionality to the Viewbar in order to enhance our members'
experience. For instance, we recently added a menu bar and search field to our
Viewbar. These features facilitate more convenient Internet navigation and
electronic commerce. We intend to develop and acquire additional technology and
services that make our members' online experience more relevant and personal.
Enhance our Profiling and Data Analysis Technology. We intend to continue to
enhance our proprietary profiling and data analysis technology. We intend to
maximize the effectiveness of our targeted advertising capabilities by building
increasingly detailed and personalized member profiles. We also intend to
continue to enhance our data analysis capabilities in order to plan and execute
more effective advertising and marketing campaigns for our business customers.
The AllAdvantage Viewbar
At the core of our service is our Viewbar, an interactive communications
window that appears on each member's computer screen. The Viewbar is the
channel through which we gather valuable data about our
34
members' Internet activity and through which we deliver highly-targeted
advertising and facilitate electronic commerce. The Viewbar contains a search
field and pop-up menus of links that allow members to navigate directly to Web
sites and services on the Internet. The current version of our Viewbar,
released in January 2000, is depicted below:
The following schematic illustrates the Viewbar.
Centered on the page is a horizontal screen shot of the Viewbar. Across the
top of the Viewbar are depictions of buttons containing the words "Home,"
"News," "Finance," "Shop," "Entertainment," "Travel," and "Tech."
On top of the "Finance" button is an expanded pop-up menu, in the form of a
vertical column, containing the following words which read from the top down:
"News," "Stocks & Investing" which are highlighted, "Banking," "Credit Cards,"
"Taxes," "Insurance," and "Loans & Mortgages." To the right and parallel to
the highlighted words "Stocks & Investing" is a drop-down menu, in the form of
a vertical column, containing the following words which read from the top
down: "On-Line Research" and "Research."
The following text connected by lines to functional areas of the Viewbar
surrounds the depiction of the Viewbar, starting above the depiction of the
Viewbar and to the left of the "Finance" button pop-up menu and following
anti-clockwise around the entire screen shot of the Viewbar.
"Minimizer button for control of use."
"Home menu button takes members directly to individual account page, referral
center and other areas of our web site."
"Choice of seven search engines."
"Direct link to our web site homepage www.AllAdvantage.com"
"Banner and tile advertising spaces."
"Menu Bar with eight channels of detailed link menus."
The body of the Viewbar is depicted in three adjoining sections, the section
on the left hand side of the Viewbar depicts a search engine with the word
"Search" presented and an expanded drop-down menu, in the form of a vertical
column, containing the following words, which read from the top down:
"About.com," "Ask Jeeves," "Direct Hit," "Excite," "Go.com," "GoTo.com" and
"LookSmart." The center section of the Viewbar depicts the Viewbar's banner
advertising space with AllAdvantage.com's logo presented and the section on
the right hand side of the Viewbar depicts the Viewbar's tile advertising
space and presents the following text: "ALLPLAY-TM-Channel Advantage-TM-"
The Viewbar can be downloaded from our Web site in Windows 95, Windows 98
and Windows NT 4.x and Macintosh 8.6 and 9.0 formats. Once a member downloads,
installs and launches the Viewbar, it opens a two-way communications channel
between the member's computer and AllAdvantage. The Viewbar appears on the
user's screen automatically when the computer is turned on, and its default
position is at the bottom of the screen. A member can move the Viewbar to any
part of the computer screen, and it remains visible throughout a computing
session unless minimized or closed. We control the type of content and the
frequency with which that content is displayed through the Viewbar, based on a
member's unique profile and Internet browsing behavior.
The Viewbar has the following interactive features:
. The Menu Bar. Along the top of the Viewbar there is a menu bar currently
containing eight category menus. The menu bar may be opened or closed at
the option of the member. Each menu contains direct links to select Web
sites. The current Viewbar features more than 400 direct links that may
be sold to sponsors in the future. We intend to increase the number of
category menus and links on the menu bar.
. The Search Field. On the left side of the Viewbar is a text box that
members can use to search the Internet. An expandable menu button from
this search text box allows users to choose the search engine of their
choice. We currently offer seven sponsored search engine options.
Members can type in their search criteria or a specific Web site address
in the search text box, even while using a non-Internet application.
This activates the member's Internet browser, which displays the search
results or takes the member to the Web site address entered.
. Advertising Windows. To the right of the search field, there are spaces
for standard-sized and tile-sized advertisements, both of which are
updated several times a minute.
AllAdvantage Membership Services
Member Payments
Members earn money for time they spend navigating the Internet while the
Viewbar is active on their computer screens. Members are paid only after
reaching a minimum account balance. Time for which a member is eligible for
payment is capped at a maximum number of hours per month. In addition to
earning money from their own Internet use, members are paid, at a lesser rate,
when other members they have referred to us directly or indirectly use the
Internet while their Viewbars are active. We currently limit payment for
referrals to five levels removed from the original referring member. The
amount paid to a member for their referrals' usage is based on an hourly rate
and is also limited by the Internet usage of the original referring member.
Our membership agreement specifies that we may alter the member payment
structure at any time. Users sign up free of charge at our Web site by
providing their name, gender, street address, email address and age. Because
we verify name and address information through the payment process, we believe
we have highly accurate personal data.
Web Site
Our Web site, www.alladvantage.com, contains:
. information about AllAdvantage and our Viewbar;
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. a download area for new Viewbar versions and digital products;
. password-protected access to member referral and account pages;
. information and tools to aid members in referring new members; and
. specialized community pages for A-Plus members, a designation for
members with 20 or more referrals.
The member account page, the most frequently visited page on our Web site, is
continuously updated to reflect member earnings and referrals. Many of our
members repeatedly visit their account pages over the course of a day. In each
month of the fourth quarter of 1999, PC Data ranked our Web site as one of the
20 most visited Web sites, measured by the number of unique users.
Specialized Member Offers
We have recently begun to provide our members with third party product and
service offerings that are generally not available elsewhere. For example, we
currently offer our members the ability to rent anti-virus software on a
monthly basis over the Internet, payable through direct deductions from their
individual AllAdvantage accounts. We intend to further leverage the value of
our large membership base and digital distribution channel, the Viewbar, to
obtain additional specialized third party product and service offerings.
Customer Service
We provide customer service to our members through our community and member
services departments. Our community department supports the member community,
communicating with members through email about new features and services. Our
member services department answers email queries from members about topics such
as Viewbar functionality, technology and usage and member accounts.
AllAdvantage Business Services
Advertising
We offer business customers the opportunity to purchase advertising on the
Viewbar. Customers may purchase standard-sized and also tile-sized
advertisements. Business customers may purchase either traditional online
advertisements or highly-targeted advertisements tailored to one or more
combinations of the individual member's demographics or Internet behavior.
These variables may include profiled behavior, age, gender, address, geography,
current Web activity or site, keywords, or time of day. To date, traditional
advertising sold by third party advertising sales organizations have generated
a significant portion of our total advertising sales and accounted for a
significant portion of the advertising impressions delivered to our Viewbar. As
we increase our internal sales force, we intend to generate an increasing
proportion of our revenue from targeted advertising.
Media Strategy
We offer business customers comprehensive media strategy services, which
include evaluating, developing, executing and refining online marketing
campaigns. We provide detailed reports that include data valuable to customers
for their online and offline marketing campaigns. Because we collect data about
our members' behavior wherever they go on the Internet, we are able to offer
business customers information that might otherwise be unavailable or might
require time-intensive and inefficient marketing campaigns. Because the Viewbar
provides a persistent one-to-one marketing channel from advertisers to our
members, we provide true one-stop shopping for our business customer's online
media plan.
Digital Products
The Viewbar is designed to serve as a digital distribution channel that our
business customers may use to distribute software, music, video and other
digital products directly to our members. For example, we currently
36
offer our members the opportunity to download and rent anti-virus software from
Network Associates, for which we charge members a monthly fee that is deducted
automatically from their AllAdvantage member account.
Electronic Commerce
The current Viewbar contains over 400 direct links to specific Web sites
which we intend to sell. The menu bar containing these links is organized into
categories such as shopping, news, finance, travel and technology. Business
customers may pay to sponsor these links to their own Web sites and services.
For example, a finance-related Web site can sponsor a link in the finance menu,
so that their Web site is always one click away from our members. In addition,
businesses may sponsor the search field on the Viewbar. The tile portion of the
Viewbar and the certain pages on the AllAdvantage Web site are also available
for sponsorship, thereby providing businesses with multiple channels through
which they may communicate with our members. We have entered into agreements
with businesses where we receive fees based on the number of members who sign
up for their services, purchase their products or satisfy other performance
criteria. We may also receive an up-front payment or fee in these arrangements.
AllAdvantage Business Customers
From the introduction of our Viewbar in July 1999 through December 1999, we
have delivered advertisements for 148 advertisers obtained by our direct sales
force and 973 additional advertisers obtained through third party advertising
sales organizations. During that period, we entered into agreements with
DoubleClick and 24/7 Media under which they sell Viewbar advertising on behalf
of AllAdvantage.
Sales and Marketing
Customer Acquisition
We acquire business customers through our direct sales force and third-party
advertising sales organizations. As of January 31, 2000, our sales and
marketing organization included 156 employees located in the following
metropolitan areas: Atlanta, Boston, Charlotte, Chicago, Dallas, Detroit,
London, Los Angeles, Louisville, New York, San Francisco, Seattle, Sydney and
Washington, D.C. Our sales organization develops and maintains relationships
with leading advertisers and advertising agencies globally. We also have
entered into relationships with third-party advertising sales organizations in
order to augment the efforts of our sales personnel and accelerate the
expansion of our business internationally.
We use a variety of methods to build brand awareness of AllAdvantage 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 AllAdvantage Web site. We expect to increase our
business marketing activities in the future.
Member Acquisition
Since our inception, we have relied on word-of-mouth marketing to attract
the vast majority of our members. We employ a referral marketing system that
rewards members for referring other members to our service. Members derive
increased benefits from our service, such as referral payments and greater
purchasing power, as more members join, thereby motivating members to work to
further increase the membership base. Between the launch of our Web site in
March 1999 and January 31, 2000, over 5.3 million users registered to receive
our service. In addition, as of January 31, 2000, over 1,000,000 of our members
had successfully referred at least one new member to our service, and our over
100,000 A-Plus members had each referred 20 or more members to our service. We
may supplement our word-of-mouth member marketing efforts in the future with
more traditional marketing campaigns.
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Technology
As of January 31, 2000, our technology organization included 124 employees
and contractors. We have developed and continue to expand our proprietary
software architecture that enables us to detect and catalogue our members'
computer-usage behavior, create member profiles based on their browsing
behavior, improve the delivery of dynamic, targeted advertisements, and update
and maintain members' online accounts. This software architecture includes the
following components:
Viewbar. The Viewbar, which is downloaded by each member from our Web site,
runs on the member's computer and displays advertisements supplied by the
advertisement server. The Viewbar communicates continuously with our central
servers, keeping member earnings and profile information current and enabling
customization of advertising displayed on the Viewbar based on the most recent
profiles. The Viewbar is a client application programmed in C++ and designed to
be portable between operating systems. The Viewbar currently operates on the
Windows 95, Windows 98, and Windows NT 4.x and Macintosh 8.6 and 9.0 operating
systems.
Profiling Server. The profiling server collects data about each member's
actual Internet browsing behavior. This server gathers data describing the
sites visited, and the frequency and duration of these visits. This server is
also used to infer additional Internet behavior data regarding each member.
This data is transmitted to the member profile server and subsequently used to
target advertising on the Viewbar.
Member Profile Server. The member profile server stores the member data we
use to target advertisements and marketing messages. The member data consists
of demographic and Internet behavioral information. The member profile server
enables members to authenticate themselves to our system and transmit their
data through the Viewbar. The member profile server also maintains the
information about each of our members' referrals.
Advertising Server. The advertising server determines which advertisements
are shown to a particular member at a particular moment. Advertisements are
served based on targeting information provided to the advertising server by the
member's Viewbar and the member profile server, as well as the specific
targeting criteria associated with a particular marketing campaign. This server
maintains data regarding available advertising inventory and provides reports
on the delivery of advertisements. The server technology is licensed to us by
DoubleClick.
Payment Server. The payment server monitors the time members spend browsing
the Internet while the Viewbar is active. Based on this data, the payment
server computes each member's earnings, maintains an account for each member,
and computes the amount to be paid to each member based on the member's
browsing time and that of the members whom they have referred.
Web Server. The Web server supports the AllAdvantage Web site.
We have designed and constructed our software and related technology
infrastructure to comply with industry-standard security specifications, and we
utilize a broad range of monitoring and assessment tools to ensure the security
of our systems. We have designed our system to be highly scaleable and
reliable, and we believe the various components of our technology architecture
have the ability to scale well beyond their current configuration. We actively
monitor our systems to ensure that we have substantial available capacity. We
house our technology within the GlobalCenter facilities located in Sunnyvale,
California, and by the second quarter of 2000 we intend to have a second
hosting site located at GlobalCenter's facilities in Herndon, Virginia.
Our information technology infrastructure is built upon a number of hardware
and software components from well-known technology vendors, including:
. Intel-based servers for our Web site, running Microsoft's NT operating
system;
38
. Sun Microsystems servers for our other servers, running Sun's Solaris
operating system;
. high-availability storage equipment from EMC;
. firewalls and network routing equipment from Cisco; and
. Oracle database software to manage the large amounts of data we collect
about our members' Internet usage activities.
Product Development
We consider our product functionality and architecture to be one of our
competitive advantages. An integral part of our strategy is to continually make
our service attractive to new and current members. We believe that, in order to
meet this goal, we will need to regularly improve and extend the functionality
of our Viewbar and related systems, which include profiling servers, a payment
server, and a Web server. To this end, we currently have software developers
and engineers working in a number of areas, including:
. database and server systems development;
. Web development;
. client software development;
. software testing; and
. systems support.
Our software developers rely on state-of-the-art development tools and
development environments.
The January 2000 release of our Viewbar was enhanced to include search
capability, electronic commerce menus and an auto-update feature, which allows
the Viewbar to automatically update itself with new or upgraded components. The
auto-update capability enables us to update members' Viewbars transparently
without disrupting online activity. We believe that this capability, when
combined with the Viewbar's modular design and ability to support several
operating systems, enables us to rapidly deploy new products and software
components that may be created by third-party developers to our members. Our
ability to centrally update the Viewbar and the server-side Web and database
systems facilitates rapid adjustments to all product components based on
consumer demand and business needs.
Privacy Policy
We believe that concerns regarding online privacy raised by consumer
advocates, legislatures and the media will increase as commercial usage of the
Internet increases. Foreign, federal and state laws increasingly may regulate
our use of personal information regarding our members. We have a stringent
privacy policy concerning how we use information about our members and the
extent to which others may have access to this information. We have a chief
privacy officer who oversees the creation and implementation of and compliance
with our privacy policy. We use information about our members for internal
purposes, such as to target advertisements and other communications to our
members, to improve our marketing and promotional efforts and to improve our
service and Web site. We do not give, sell, rent, share or trade any
identifiable personal information regarding our members to any third party,
except as required by law or expressly permitted by a member. We do, however,
offer summaries of generalized market data to our advertisers and other
interested parties, but we do not disclose personally indentifiable information
to these parties. In contrast to other companies on the Web that collect
personal data without the knowledge or permission of the Internet user, we have
a permission-based relationship with every one of our members.
Competition
We compete for business customers and members.
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Competition for businesses customers
The market for online advertising and marketing is extremely competitive. We
believe that the principal competitive factors in the online advertising market
are:
. the ability to target users based on specific demographic and inferred
behavioral criteria;
. brand recognition;
. size and characteristics of membership base;
. breadth and depth of reporting and other services;
. reliability and quality of data and technology infrastructure;
. pricing; and
. technical expertise.
There is substantial competition for Internet-based advertising revenues
generally, and the amount of available advertising space on the Internet is
increasing at a significant rate. We believe our most direct competitors for
Internet advertising and sponsorship revenues will be providers of targeted
online advertisements. We will also compete for those revenues with major
Internet service providers, content providers, large Web publishers, Web search
engines and portal companies, Internet advertising providers, content
aggregation companies, and various other companies that facilitate Internet
advertising. We may also face competition from traditional direct marketing
companies that may seek to offer online products or services. We face
significant competition from traditional media, such as television, radio,
cable and print, for a share of advertisers' total advertising budgets.
Businesses may be reluctant to devote a significant portion of their
advertising budget to Internet advertising if they perceive the Internet to be
a limited or ineffective advertising medium.
Competition for members
Since space on a computer screen is limited, we believe our most direct
competitors for members are companies that offer Internet services or
compensation to consumers who allow a portion of their computer screen to be
dedicated to the applications or services of those companies. If our
competitors were to offer more attractive benefits than we do, such as higher
compensation, better functionality or greater aggregated purchasing power, then
our membership could decline, possibly reducing our revenues. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of our current or prospective members. If
we are unable to compete successfully, our business may fail.
Intellectual Property
We rely on a combination of patent, copyright, trademark, trade secret and
contract law to protect our intellectual property rights. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our technology. Monitoring unauthorized use of our
technology is difficult, and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology.
We have one U.S. registered copyright. We have pending U.S. patent and
copyright applications and pending U.S. and foreign trademark applications. We
cannot assure you that our pending patent or trademark applications will be
approved, or that any of our applications for registration of our copyrights
will be granted. Even if they are approved or granted, our patents, copyrights
and trademarks may be successfully challenged by others or invalidated. We
cannot assure you that any of our proprietary rights will be viable or of value
since the validity, enforceability and scope of protection of proprietary
rights in Internet-related industries are
40
uncertain and evolving. If our trademark registrations are not approved because
third parties own these trademarks, our use of these trademarks would be
restricted unless we entered into arrangements with the third-party owners,
which might not be possible on reasonable terms.
We generally enter into confidentiality or license agreements with our
employees and consultants, and control access to and distribution of our
technologies, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights from unauthorized use or disclosure,
unauthorized parties may attempt to obtain, use or disclose our technologies.
We cannot assure you that the steps we have taken will prevent misappropriation
of our technologies, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
Our business activities may infringe upon the proprietary rights of others,
and, from time to time, we have received and may continue to receive, claims of
infringement against us. We have permission and, in some cases, licenses from
each developer of the software that we use in our software. Although we do not
believe that the software or the trademarks we use or any of the other elements
of our business infringe on the proprietary rights of any third parties, third
parties may assert claims against us for infringement of their proprietary
rights and these claims may be successful. In addition, a number of third-party
owners of patents have claimed to hold patents that cover various forms of
online transactions or online technology generally. As with other online
service providers, patent claims could be asserted against us based upon our
services or technologies.
Litigation may be necessary to determine the validity and scope of the
proprietary rights of others. Any litigation could subject us to significant
liability for damages and attorneys fees, invalidation of our proprietary
rights, or injunctions or other court orders that would prevent us from using
certain technologies or engaging in certain business activities. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management's time and attention away from
our business. Any potential intellectual property litigation could also force
us to do one or more of the following:
. cease using key aspects of our technology that incorporate the
challenged intellectual property;
. make significant changes to the structure and operation of our business;
. design around a third party's patent; or
. license technology from a third party.
Implementation of any of these alternatives could be costly and time-
consuming, or may not be possible at all. Accordingly, an adverse determination
in any litigation to which we are a party would harm our business.
Governmental Regulation
Overview
The services we provide are subject to regulation by various federal, state
and foreign governmental authorities. Federal and state laws may, for example,
mandate protection of consumer privacy and regulate online content generally.
The laws relating to our business and operations are evolving. A number of
legislative and regulatory proposals under consideration by federal, state,
local and foreign governments may lead to additional laws or regulations
concerning online content, user privacy, taxation, parental consent for access
by their minor children, access charges, liability for third-party activities,
bulk e-mail, or spam, encryption standards, online sales of goods and services,
domain name registration and use, copyright infringement and other intellectual
property issues. The adoption of new laws or the application of existing laws
may decrease the growth in the use of the Internet. These results could
decrease the demand for our services or increase our cost of doing business,
each of which would harm our business.
41
Foreign Laws and Jurisdiction.
It is not clear the extent to which we are, or may in the future be, subject
to regulatory activity of foreign jurisdictions. We could be held to be subject
to the laws or regulations of foreign jurisdictions because of the location of
our members, our presence on the Internet or the impact or effects of our
operations. We could also be held subject to foreign laws or regulations
because of possible future activities that specifically target or are based in
other countries. The possible application of foreign laws and regulations could
include a wide range of subjects. The application of foreign laws and
regulations to Internet and online activity has only limited precedents abroad
and is an evolving area of law. It is not clear how existing foreign laws and
regulations might be applied to our activities.
Regulation of Content and Access; Membership Program
Prohibition and restriction of Internet content and access could dampen the
growth of Internet use, decrease the acceptance of the Internet as a
communications and commercial medium or expose us to liability. A variety of
restrictions on content and access, primarily as they relate to children, have
been enacted or proposed. The Children's Online Privacy Protection Act of 1998,
for example, prohibits and imposes criminal penalties and civil liability on
anyone engaged in the business of selling or transferring, by means of the
World Wide Web, material that is harmful to minors, unless access to this
material is blocked to persons under 17 years of age. In addition, the Federal
Telecommunications Act of 1996 imposes fines on any entity that knowingly
permits any telecommunications facility under its control to be used to make
obscene or indecent material available to minors via an interactive computer
service. Numerous states have adopted or are currently considering similar
types of legislation. In addition, laws have been proposed that would require
Internet service providers to supply, at cost, filtering technologies to limit
or block the ability of minors to access unsuitable materials on the Internet.
Federal and state consumer protection laws, including the Federal Trade
Commission Act, generally prohibit unfair or deceptive acts or practices and
impose civil and criminal liability for violations.
Because of these content restrictions and potential liability to us for
materials carried on or disseminated through our systems, we may be required to
implement measures to reduce our exposure to liability. These measures might
require the expenditure of substantial resources or the discontinuation of our
product or service offerings that subject us to this liability. In addition,
our business model requires that we pay our members cash for their Viewbar
usage and that of their referrals. We believe this program complies with
applicable regulation. Any regulatory challenge or limitation asserted or
implied regarding these payments could significantly harm our business.
Further, we could incur substantial costs in defending against any of these
claims and we might be required to pay large judgments or settlements or alter
our business practices. In addition, our liability insurance might not cover
potential claims relating to the services we provide or might not be adequate
to indemnify us for all liabilities that could be imposed on us.
User Privacy Issues
Internet user privacy has become an issue both in the United States and
abroad. Some commentators, privacy advocates and government bodies have
recommended limitations on, or taken actions to limit, the use of personal
information by those collecting such information. For example, the Children's
Online Privacy Protection Act of 1998 requires, among other things, that online
operators obtain verifiable parental consent for the collection, use or
disclosure of personal information from children. The act further mandates that
the Federal Trade Commission publish regulations for the collection of data
from children by commercial Web site operators. We cannot predict the exact
form of the regulations that the FTC may finally adopt.
Congress has recently enacted the Gramm-Leach-Bliley Act, which contains
provisions protecting the privacy of consumer non-public personal information
collected by financial institutions. We may be deemed a financial institution
under the Gramm-Leach-Bliley Act. If so, we may be required to amend our
privacy policy and consumer authorizations and disclosures to comply with this
or other laws or regulations. Federal regulations implementing the statute are
being developed.
42
Rights in Member Data
Our ability to sell targeted advertising depends on our ability to use
personal information collected from our members. We collect, with member
consent, various forms of data from and about our members, and market or
otherwise use that data. Although we attempt to protect, based on trade secret
law, copyright law and license agreements, among other means, the information
we collect, we cannot be certain that these means will be sufficient to
maintain the integrity or value of information collected. Also, some of the
data that we obtain and use may be derived in part from information contained
on Web sites operated by other parties. Although we endeavor not to violate any
of the proprietary rights of others in collecting or obtaining this
information, the law relating to ownership of information contained on Web
sites and in electronic and online databases is still developing, and third
parties may assert claims against us based on this data acquisition. New laws
relating to the protection of information contained in databases have been
proposed and are under consideration in the United States and in foreign
countries. A new law could impose obstacles to our rights to collect data or
give rise to claims by third party owners of data. It is not possible to
predict whether legislation will pass, what provisions it might contain, or the
scope of its possible impact on our business activities. We cannot assure you
that our current information collection procedures and disclosure policies will
be found to be in compliance with existing or future laws or regulations. Our
failure to comply with existing laws, including those of foreign countries, or
the adoption of new laws or regulations that require us to change the way we
conduct our business, could make it cost-prohibitive to operate our business,
and prevent us from pursuing our business strategies including the sale of
targeted advertising.
Internet Taxation
The tax treatment of activities on or relating to the Internet is currently
unsettled. A number of proposals have been made at the federal, state and local
levels and by foreign governments that could impose taxes on the online
purchase and sale of services and other Internet activities. The Internet Tax
Freedom Act of 1998 has generally imposed a moratorium through October 2001 on
the imposition of some kinds of consumer-related taxes, other than sales or use
taxes, in connection with Internet access and Internet-related sales in the
United States. Future laws imposing taxes or other regulations on commerce over
the Internet could, however, substantially impair the growth of Internet
commerce and as a result make it cost-prohibitive to operate our business.
The Workforce Investment Act of 1998
Section 508 of the Workforce Investment Act of 1998 requires that all Web
sites operated by a federal agency, as well as those operated by anyone doing
business with the federal government, modify their Web sites to make them
accessible to those who are handicapped. There are proposals to extend this act
to all Web sites, which could increase our costs and make our service less
attractive to the non-handicapped.
Employees
As of January 31, 2000, we had 403 employees, contract-to-hire personnel and
independent contractors--156 in sales and marketing, 59 in member services and
community, 124 in product development and information systems and operations,
and 64 in finance and administration. We have never had a work stoppage, and no
employees are represented under any collective bargaining agreement. Our
business and future success depends on the efforts and abilities of our senior
management and other key personnel and our ability to attract, retain and
motivate highly skilled technical, managerial, sales and marketing personnel.
Competition for qualified personnel is intense, particularly in our location in
Silicon Valley, California, due to a number of factors, including the high
concentration of established and emerging growth technology companies. As a
result, we may be unable to attract qualified personnel. We may also be unable
to retain the employees we currently employ.
43
Facilities
Our principal administrative, marketing and technology operations are
located in two facilities comprising 63,000 square feet in Hayward, California.
The lease for one of these spaces expires on December 31, 2000 and the lease
for the other space expires on December 31, 2001. As of January 31, 2000, we
also had leased facilities in Atlanta, Boston, Chicago, Dallas, Detroit,
London, Los Angeles, New York, Paris, San Francisco, Seattle and Washington
D.C. We have entered into a lease agreement for a 135,000 square foot facility
in South San Francisco, California, which will replace our current facilities
in Hayward, California. We expect to occupy the new facility in the first
quarter of 2001. We continually evaluate our facilities requirements, and
believe that we must lease additional facilities in the next 12 months to
accommodate our plans to expand our sales, marketing, media strategy and
technology organizations. We cannot assure you that such leases will be
available on reasonable terms or at all.
Legal Proceedings
We are not a party to any material legal proceedings.
44
MANAGEMENT
Executive Officers, Directors and Key Employees
Our executive officers, directors and key employees, and their ages and
positions as of January 31, 2000, were as follows:
[Download Table]
Name Age Position
---- --- --------
James R. Jorgensen.......... 51 President, Chief Executive Officer and
Chairman
Michael A. Depatie.......... 42 Chief Financial Officer
Oliver Brock................ 30 Chief Technology Officer
Johannes A. Pohle........... 30 Vice President Product Management and
Director
David W. Johnson............ 41 General Counsel
Carl T. Anderson............ 27 Vice President Corporate Development
David Beckman-Robertson..... 44 Vice President Sales
Tobin W. Trevarthen......... 39 Vice President Business Development
Mauro Calvi................. 44 Vice President International
Chad D. Balch............... 41 Vice President Product Development
Joseph M. Feliu............. 49 Chief Information Officer and Vice President
Operations
Raymond Everett-Church...... 30 Chief Privacy Officer and Vice President
Public Policy
Nicola C. Barrett........... 40 Vice President Media Strategy
David C. Martin............. 36 Vice President Business Intelligence
Nancy Myers Booth........... 48 Vice President Product Marketing
Bernie J. Murphy............ 34 Vice President Finance, Treasurer
David W. Pidwell............ 52 Director
John F. Shoch .............. 50 Director
Thomas Unterman............. 55 Director
Richard A. LeFurgy.......... 43 Director
William L. Burnham.......... 28 Director
James R. Jorgensen is a co-founder of AllAdvantage and has served as our
Chief Executive Officer and director of AllAdvantage since March 1999. From
August 1997 to September 1998, Mr. Jorgensen co-founded and served as Chief
Executive Officer and Chairman of the Board of Challenger Sports Corporation, a
children's sports training company where he continues to serve as Chairman of
the Board. From February 1995 to May 1996, Mr. Jorgensen co-founded and served
as Chairman of Qualtos Computer Corporation, a provider of 24/7 telephone
helpdesk services for individual and small business personal computer users.
From 1989 to 1992, Mr. Jorgensen co-founded and served as Chairman and CEO of
Discovery Zone, Inc. until it merged operations with Blockbuster Entertainment.
Since its founding in 1978, Mr. Jorgensen has served as Chief Executive Officer
of Nottingham Financial Corporation, a management consulting company
instrumental in the creation and management of start-ups in direct mail,
advertising agencies, magazine publishing, accounting, insurance and personal
computer software, sales and service. Mr. Jorgensen is a certified public
accountant and holds a B.B.A. in accounting and finance from the University of
Wisconsin and an M.B.A. from Stanford University.
Michael A. Depatie has served as our Chief Financial Officer since October
1999. From November 1996 to January 1999, he served as Executive Vice President
and Chief Financial Officer of Sunterra Corporation, a resort hotel developer
and operator and from October 1997 to December 1999 he served on the company's
Board of Directors. From July 1992 to August 1996, Mr. Depatie was Senior Vice
President of Finance and Chief Financing Officer of La Quinta Inns, Inc., a
hotel development and operating company. From 1989 to 1992, Mr. Depatie was co-
founder and Senior Vice President of Finance of Summerfield Hotel Corporation,
a hotel development and operating company. From 1988 to 1989, Mr. Depatie was
founder and Managing General Partner of Pacwest Capital Partners. From 1984 to
1988, Mr. Depatie served as Senior Vice President of Finance and Development of
The Residence Inn Company, a division of Marriott International, Inc.
Mr. Depatie holds a B.A. in business from Michigan State University and an
M.B.A. from Harvard Business School.
45
Oliver Brock is a co-founder of AllAdvantage, served as our Chief Technology
Officer since March 1999 and served as a director of AllAdvantage from March
1999 to June 1999. From September 1994 to November 1999, Dr. Brock did doctoral
work in the computer science department at Stanford University, where he was
involved in the development of robotic motion technologies as well as
algorithmic robotics and geometric problems related to motion. From 1984 to
1989, Dr. Brock served as general manager at a billing management firm and a
snowboard manufacturing company. Dr. Brock holds a Diploma in computer science
from the Technical University of Berlin, an M.S. in computer science from
Stanford University and a Ph.D. in computer science from Stanford University.
Johannes A. Pohle is a co-founder of AllAdvantage and has served as our Vice
President Product Management and as a director since March 1999. From September
1996 to June 1998, Mr. Pohle attended the Graduate School of Business at
Stanford University. From December 1995 to September 1996, Pohle served as
Deputy CEO and Vice Chairman of the Board for Grupo Frio, a frozen foods
distributor in Mexico. From August 1994 to December 1995, Mr. Pohle served as
lead consultant for Booz, Allen & Hamilton, a management consulting company.
Mr. Pohle holds a B.S. in mechanical engineering from Northwestern University,
an M.S. in mechanical engineering from Stanford University and an M.B.A. from
Stanford University.
David W. Johnson has served as our General Counsel since September 1999.
From November 1996 to August 1999, Mr. Johnson was of counsel to Fenwick & West
LLP, a technology law firm. From September 1991 to October 1996, Mr. Johnson
did post doctoral work and taught at Stanford Law School. Mr. Johnson holds an
A.B. in political science from Carleton College, a J.D. from the University of
Miami, and is a J.S.D. candidate at Stanford Law School.
Carl T. Anderson is a co-founder of AllAdvantage and has served as our Vice
President Corporate Development since December 1999, as Vice President Business
Development from March 1999 to December 1999, and served as a director of
AllAdvantage from March 1999 to June 1999. From September 1997 to June 1999,
Mr. Anderson attended the Graduate School of Business at Stanford University.
From July 1995 to February 1997, Mr. Anderson worked as an Analyst in the
Mergers and Acquisitions Department for Gleacher & Co., an investment banking
firm. Mr. Anderson holds an A.B. in economics from Princeton University and an
M.B.A. from Stanford University.
David Beckman-Robertson has served as our Vice President Sales since August
1999. From August 1998 to August 1999, Mr. Beckman-Robertson served as Vice
President of CNN Interactive Sales for Time Warner. From January 1992 to July
1998, Mr. Beckman-Robertson served as sales manager for Turner Broadcasting.
From 1990 to 1992, Mr. Beckman-Robertson worked in promotions for Valassis
Inserts, a marketing and promotional company. From 1984 to 1990, Mr. Beckman-
Robertson worked on network and cable sports sales for Capital Cities/ABC. From
1979 to 1984, Mr. Beckman-Robertson worked in sales for Cox Broadcasting. Mr.
Beckman-Robertson holds a B.A. in television and film from Northwestern
University.
Tobin W. Trevarthen has served as our Vice President Business Development
since January 2000. From June 1993 to December 1999, Mr. Trevarthen served as
Corporate Sales Director for the Time Inc. division of Time Warner. From 1991
to 1993, Mr. Trevarthen served as Senior Marketing Manager for Meredith
Corporation, a publishing company. From 1987 to 1991, Mr. Trevarthen served as
Midwest Sales Manager for USA Weekend, a division of Gannet Corporation, a
media company. In May 1994, Mr. Trevarthen co-founded The Paradigm Network, a
technology, media and entertainment convergence group in Los Angeles.
Mr. Trevarthen holds a B.A. in advertising from Michigan State University.
Mauro Calvi has served as our Vice President International since December
1999. From 1998 to 1999, Mr. Calvi served as President of Telecom Italia
Ventures and served on the boards of Stream SpA, Italy's second largest pay
television network, Protozoa Inc. and Cygent Inc. From 1991 to 1997, Mr. Calvi
worked at Microsoft Corporation. During his tenure there, Mr. Calvi served from
1993 to 1997 as Lead Product Manager where he was responsible for the
international strategy, product planning and marketing of The Microsoft
46
Network from its inception and, from 1991 to 1993, as Program Manager for the
Product Support Services Division. From 1990 to 1991, Mr. Calvi served as
International Product Manager for Ashton-Tate. Mr. Calvi holds an M.S. in
electrical engineering from the Politecnico di Milano, Italy.
Chad D. Balch has served as our Vice President Product Development since May
1999. From December 1997 to April 1999, Dr. Balch served as a technical
consultant in software development, working with start-up companies. From
February 1996 to October 1996, Dr. Balch worked as Manager of Motion Technology
for Parametric Technology Corporation, where he was in charge of core
development for mechanism simulation software. From September 1992 to February
1996, Dr. Balch served as Manager, Product Development for Rasna Corporation, a
producer of design and analysis software for engineers. From July 1980 to
February 1983, Dr. Balch worked as a research associate at the GWU/NASA Joint
Institute for the Advancement of Flight Sciences at NASA-Langley Research
Center. Dr. Balch holds a B.A. in physics from Harvard University, an M.S. in
mechanical engineering from George Washington University, and a Ph.D. in
aeronautical sciences from Stanford University.
Joseph M. Feliu has served as our Chief Information Officer and Vice
President Operations since May 1999. From August 1997 to August 1999, Mr. Feliu
served as Director of Information Technology at Integrated Device Technology, a
semiconductor manufacturer. From March 1996 to August 1997, Mr. Feliu served as
Senior Director of Information Technology at Applied Materials, Inc., a
semiconductor equipment manufacturer. In these positions, Mr. Feliu was
responsible for the operations of these companies' global information
technology infrastructure. From May 1981 to February 1996, Mr. Feliu held
several director-level positions in operations and information technology for
the United States Postal Service. In January 1994, Mr. Feliu was elected as
Chairman of the Northern California Chapter of the Society for Information
Management. Mr. Feliu holds a B.S. in mathematics from Manhattan College and an
M.S. in operations research from George Washington University.
Raymond B. Everett-Church has served as our Chief Privacy Officer and Vice
President Public Policy since August 1999. From November 1998 to August 1999,
Mr. Everett-Church served as an Associate with Haley Bader & Potts, a
technology law firm. Since 1996, Mr. Everett-Church has served as a technology
policy advocate and lobbyist on issues of privacy and anti-spam. Mr. Everett-
Church serves as an ad hoc advisor to the Internet Service Provider Security
Consortium of the International Computer Security Association, as a member of
the Congressional Internet Caucus' Advisory Committee for the 106th U.S.
Congress, and as a Fellow with the Internet Telecommunications Project. In
April 1999, Mr. Everett-Church was a founding board member of Whitehat.com, a
permission-based email marketing service bureau. In March 1997, Mr. Everett-
Church was a founding board member of the Coalition Against Unsolicited
Commercial Email. From August 1994 to November 1998, Mr. Everett-Church served
as a technology management and Internet consultant. From November 1992 to June
1994, Mr. Everett-Church served as an Information Specialist with the American
Immigration Lawyers Association. Mr. Everett-Church holds a B.A. from George
Mason University and a J.D. from George Washington University School of Law.
Nicola C. Barrett has served as our Vice President Media Strategy since
November 1999. From July 1995 to November 1999, Ms. Barrett worked at Ernst &
Young LLP, an accounting firm. During her tenure there, Ms. Barrett served from
October 1997 to November 1999 as Senior Manager, Strategic Services Development
where she focused on developing new service and business opportunities. From
July 1995 to October 1997, Ms. Barrett served as Manager, National Planning
where she advised executive management on strategic business issues. From 1994
to 1995, Ms. Barrett was a management consultant at Bankers Trust and from 1981
to 1992 worked at IBM Australia where she held a number of sales, marketing and
management positions. Ms. Barrett holds a B.Ru.Sci. honors degree from the
University of New England, Australia and a M.M. from the Kellogg Graduate
School of Management at Northwestern University.
David C. Martin has served as our Vice President Business Intelligence since
January 2000. From April 1995 to December 1999, Mr. Martin worked for
International Business Machines Corporation, where he most recently served as
development executive for global business intelligence solutions. During his
tenure at IBM, Mr. Martin also served as a senior development manager for
net.Mining Solutions and as an information
47
technology specialist. From September 1992 to April 1995, Mr. Martin worked as
assistant director for innovative software systems for University of California
at San Francisco Library and Center for Knowledge Management. From 1991 to
1992, Mr. Martin worked as senior systems scientist for Molecular Simulations,
Inc., a computational science company. Mr. Martin holds a B.A. in
interdisciplinary science from the University of California at Berkeley and an
M.S. in computer science from the University of Wisconsin at Madison.
Nancy Myers Booth has served as our Vice President Product Marketing since
July 1999. From September 1996 to July 1999, Ms. Booth served as a marketing
and advertising consultant with Kensington Technology Group specializing in
product positioning and new product development. From 1990 to 1991, Ms. Booth
served as Vice President at Young & Rubicam, an advertising agency. From 1983
to 1989, Ms. Booth worked at Foote Cone & Belding, an advertising agency where
she served as Vice President, Management Supervisor from 1987 to 1989, as
Account Supervisor from 1985 to 1987 and as Account Executive from 1983 to
1985. In addition, Ms. Booth has held marketing positions at General Mills. Ms.
Booth holds a B.S. in Consumer Food Science from the University of California
at Davis and an M.B.A. from the University of California at Berkeley.
Bernie J. Murphy has served as our Vice President Finance, Treasurer since
December 1999. From June 1996 to December 1999, Mr. Murphy held various
positions at QuadraMed Corporation a health care information systems company.
From February 1998 to December 1999, he served as QuadraMed's Vice President,
Finance and Chief Accounting Officer and, from June 1996 to February 1998, as
Corporate Controller. From July 1988 to June 1996, Mr. Murphy worked at Arthur
Andersen LLP, where he served in various positions from July 1988 to August
1993 and as manager in the business advisory practice from September 1993 until
June 1996. Mr. Murphy holds a B.S. in Business Administration from the
University of San Francisco and is a certified public accountant.
David W. Pidwell has served as a director of AllAdvantage since June 1999.
Since January 1996, Mr. Pidwell has served as a venture partner with Alloy
Ventures, a venture capital firm. Mr. Pidwell serves on the boards of directors
of Informatica Corporation and several private companies, including eTranslate,
RAINfinity and Made To Order.com. From January 1987 to January 1996, Mr.
Pidwell served as Chief Executive Officer and President of Rasna Corp, a
mechanical design automation software company that he founded. Mr. Pidwell
holds a B.S. in electrical engineering and a M.S.I.S.E. in computer systems
engineering from Ohio University.
John F. Shoch has served as a director of AllAdvantage since June 1999. Dr.
Shoch serves as a general partner with Alloy Ventures, a venture capital firm.
From October 1985 until December 1995, Dr. Shoch was a general partner with
Asset Management Company, a venture capital firm. From 1971 until 1985, Dr.
Shoch held various positions with Xerox Corporation, initially at the Palo Alto
Research Center and ultimately as President of Xerox's Office Systems Division.
Dr. Shoch is a director of Remedy, Conductus and several private companies,
including BoldFish, InterSurvey, Kasenna, MontaVista, Network Elements, PostX,
UpShot and Zing. Dr. Shoch holds a B.A. in political science from Stanford
University, an M.S. in computer science from Stanford University, and a Ph.D.
in computer science from Stanford University.
Thomas Unterman has served as a director of AllAvantage since September
1999. Mr. Unterman serves as the Chief Executive Officer and a Partner of the
Rustic Canyon Group and the Manager of TMCT Ventures, a venture capital
investment firm, both of which are affiliated with Times Mirror. Mr. Unterman
held various other positions at Times Mirror including Vice President and
General Counsel from 1992 to 1994, Senior Vice President and General Counsel in
1995, then Senior Vice President and Chief Financial Officer in 1995, and
Executive Vice President and Chief Financial Officer from January 1998 to
December 1999. Prior to Times Mirror, Mr. Unterman was a partner at two law
firms, Morrison & Foerester and Orrick, Herrington and Sutcliffe. Mr. Unterman
is a member of the board of directors of Ticketmaster Online-City Search, Big
Entertainment and several privately-held companies. Mr. Unterman holds a A.B.
in public affairs from Princeton University and a J.D. from the University of
Chicago.
48
Richard A. LeFurgy has served as a director of AllAdvantage since September
1999. Mr. LeFurgy is a Partner with WaldenVC, a venture capital firm. From June
1995 to August 1998, Mr. LeFurgy was a Senior Vice President of Sales at
Starwave, an online media company that was acquired by Disney in 1998. From
June 1978 to May 1995, Mr. LeFurgy was a director and an Executive Vice
President and Senior Partner of NW Ayer & Partners, an advertising agency. Mr.
LeFurgy was a Founder of the Internet Advertising Bureau and is its Chairman.
Mr. LeFurgy also serves on the board of the Advertising Research Foundation and
the Advertising Educational Foundation. Mr. LeFurgy is a director of
Snowball.com, an Internet media company, and Lot 21, an online advertising
agency. He received his B.S. in advertising from Syracuse University.
William L. Burnham has served as a director of AllAdvantage since February
2000. Since August 1999, Mr. Burnham has been managing director of SOFTBANK
Capital Partners L.P. From July 1998 to August 1999, Mr. Burnham was a Vice
President of Credit Suisse First Boston Corporation. From May 1998 to July
1998, Mr. Burnham served as a Vice President at Deutsche Morgan Grenfell, and
from April 1997 to May 1998, he served as a Vice President at US Bancorp Piper
Jaffray. From August 1993 to March 1997, Mr. Burnham served as a Senior
Associate at Booz Allen & Hamilton, a management consulting company. Mr.
Burnham is a director of Buy.com Inc., an Internet retailer. Mr. Burnham holds
an A.B. in political science from Washington University.
Board Composition
Our bylaws currently provide for a board of directors consisting of eight
members. The term of each of our current directors will expire at the next
annual meeting of stockholders. Commencing at the first annual meeting of
stockholders following the date on which we first have at least 800
stockholders, the board of directors will be divided into three classes,
serving staggered three-year terms: Class I, whose term will expire at the
first annual meeting of stockholders following the annual meeting of
stockholders when we first have at least 800 stockholders; Class II, whose term
will expire at the second annual meeting of stockholders following the annual
meeting of stockholders when we first have at least 800 stockholders; and Class
III, whose term will expire at the third annual meeting of stockholders
following the annual meeting of stockholders when we first have at least 800
stockholders. As a result, only one class of directors will be elected at each
annual meeting of stockholders, with the other classes continuing for the
remainder of their respective terms. Messrs. Shoch and Unterman have been
designated as Class I directors; Messrs. Burnham and Pohle have been designated
as Class II directors; and Messrs. Jorgensen, Pidwell and LeFurgy have been
designated as Class III directors. We do not expect to have 800 or more
stockholders immediately after this offering.
Board Committees
The audit committee consists of Messrs. Shoch, Unterman and Burnham. The
audit committee:
. reviews our financial statements and accounting practices;
. makes recommendations to the board of directors regarding the selection
of independent auditors; and
. reviews the results and scope of the audit and other services provided
by our independent auditors.
The compensation committee consists of Messrs. LeFurgy and Pidwell. The
compensation committee:
. reviews and recommends to the board of directors the compensation and
benefits of all officers, directors and consultants of AllAdvantage; and
. reviews general policy relating to compensation and benefits.
The board of directors currently administers the issuance of stock options
and other awards under the 1999 equity incentive plan and 2000 equity incentive
plan of our California predecessor and our 2000 equity incentive plan and our
2000 employee stock purchase plan.
49
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has at any time been an
officer or employee of AllAdvantage. For a description of transactions between
AllAdvantage and members of the compensation committee or entities affiliated
with them, see "Related-Party Transactions." None of our executive officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee.
Change of Control Arrangements
Mr. Jorgensen and Messrs. Depatie, Johnson and Pohle, whom we anticipate
will be executive officers named in our summary compensation table in future
years, have each purchased shares of common stock or received options to
purchase common stock subject to agreements providing for accelerated vesting
under certain circumstances following a change in control of AllAdvantage. With
respect to Mr. Jorgensen, upon a change in control transaction followed within
nine months by a termination of employment meeting specified conditions,
vesting will accelerate as to any unvested portion of the 7,333,336 shares of
common stock that he holds. With respect to Mr. Pohle, upon a change in control
transaction followed within nine months by a termination of employment meeting
specified conditions, vesting will accelerate as to any unvested portion of the
7,333,332 shares of common stock that he holds. With respect to Mr. Depatie,
upon a change in control transaction followed within 12 months by a termination
of employment meeting specified conditions, vesting will accelerate as to an
additional 175,000 shares subject to the stock option granted to him. With
respect to Mr. Johnson, upon a change in control transaction followed within 12
months by a termination of employment meeting specified conditions, vesting
will accelerate as to an additional 42,500 shares subject to the stock option
granted to him. However, this acceleration in vesting for Mr. Johnson will not
occur, subject to limited exceptions, if AllAdvantage undergoes, or agrees to
undergo, a change in control transaction on or before May 15, 2000.
Director Compensation
Directors of AllAdvantage do not receive cash compensation for their
services as directors, but are reimbursed for their reasonable and necessary
expenses for attending board and board committee meetings. All board members
are eligible to receive stock options pursuant to the discretionary option
grant program in effect under the 1999 equity incentive plan and 2000 equity
incentive plan of our California predecessor and under our 2000 equity
incentive plan.
In July 1999, David W. Pidwell was granted an option to purchase 200,000
shares of common stock under the 1999 equity incentive plan of our California
predecessor. This option was exercised in full in November 1999, but the shares
purchased are subject to our right of repurchase, which lapses with respect to
25% of the shares in July 2000 and 2.083% of the shares each month thereafter.
Each eligible director who is not our employee and who is or becomes a
member of our board will be automatically granted an option to purchase 10,000
shares of common stock under our 2000 equity incentive plan, unless that
director has previously received an option grant. Immediately following each
annual meeting of stockholders, each eligible director will automatically be
granted an option to purchase 10,000 shares of common stock under our 2000
equity incentive plan, provided that the director is a member of the board on
that date and has served continuously as a member of the board for a period of
at least one year since the date of the director's initial grant. All options
will have an exercise price equal to the fair market value of our common stock
on the date of grant. The options will have ten-year terms and will terminate
three months after the date the director ceases to be one of our directors or
consultants or 12 months after any termination due to death or disability.
Options granted under the plan will generally vest over four years. Any
unvested shares subject to these options will become fully vested and
exercisable upon a transaction that results in a change in our control.
50
Executive Compensation
The following table shows all compensation awarded to, earned by or paid for
services rendered to AllAdvantage by our chief executive officer in 1999. None
of our executive officers or former executive officers earned compensation in
excess of $100,000 in 1999.
Summary Compensation Table
[Download Table]
Name and Principal Position Annual Compensation
--------------------------- -------------------
Salary
------
James R. Jorgensen......................................... $65,000(1)
Chief Executive Officer, President and Chairman
--------
(1) Represents salary from the formation of AllAdvantage in March 1999 through
December 1999. Mr. Jorgensen's salary for 2000 is $175,000.
We currently employ the following executive officers who we anticipate will
be named in the summary compensation table in future years. Those executives
are Michael A. Depatie, with an annual salary of $175,000 in 2000, David W.
Johnson, with an annual salary of $150,000 in 2000, Johannes A. Pohle, with an
annual salary of $120,000 in 2000 and Carl T. Anderson, with an annual salary
of $120,000.
Option Grants and Exercises in Last Fiscal Year
During 1999, we granted no options to Messrs. Anderson, Jorgensen or Pohle.
In October 1999, we granted an option to purchase 700,000 shares of our common
stock at an exercise price per share of $0.75 to Mr. Depatie and, in November
1999, Mr. Depatie exercised this option with respect to 133,333 shares. In
September 1999, we granted an option to purchase 170,000 shares of our common
stock at an exercise price per share of $0.18 to Mr. Johnson, and in September
1999, Mr. Johnson exercised this option in full. Each of these options was
immediately exercisable, but the shares issued upon exercise are subject to our
right of repurchase, which lapses with respect to 25% of the shares after one
year and 2.083% of the shares each month thereafter.
Employee Benefit Plans
1999 Equity Incentive Plan of our California Predecessor
The 1999 equity incentive plan of our California predecessor was adopted by
its board of directors in April 1999. As of December 31, 1999, 4,498,133 shares
of common stock had been purchased pursuant to the exercise of options granted
under this plan, options to purchase a total of 10,484,233 shares of common
stock with a weighted-average exercise price of $0.69 were outstanding under
this plan, and 217,634 shares remained available for future grants of options
under this plan. No further options will be granted under this plan following
this offering. All outstanding options granted under this plan will remain
outstanding and subject to the terms of this plan and relevant stock option
agreements until they are exercised, or until they terminate or expire by their
terms. Under this plan, upon a change in control of AllAdvantage though a
merger or sale of assets, if stock options and restricted stock awards are not
assumed or substituted with similar consideration by the successor or acquiring
corporation, then the stock options and restricted stock awards will terminate.
2000 Equity Incentive Plan of our California Predecessor
The 2000 equity incentive plan of our California predecessor was adopted by
its board of directors in January 2000. As of , 2000, shares of
common stock had been purchased pursuant to the exercise of options granted
under this plan, options to purchase a total of shares of common
51
stock with a weighted-average exercise price of $ were outstanding under
this plan, and shares remained available for future grants under this
plan. No further options will be granted under this plan following this
offering. All outstanding options granted under this plan will remain
outstanding and subject to the terms of this plan and relevant stock option
agreements until they are exercised, or until they terminate or expire by their
terms. Under this plan, upon a change in control of AllAdvantage though a
merger or sale of assets, if stock options and restricted stock awards are not
assumed or substituted with similar consideration by the successor or acquiring
corporation, then the stock options and restricted stock awards will terminate.
2000 Equity Incentive Plan
Our 2000 equity incentive plan will become effective on the date of this
prospectus and will serve as the successor to the 1999 equity incentive plan
and 2000 equity incentive plan of our California predecessor. We have reserved
20,000,000 shares of common stock for issuance under this plan. Our 2000 equity
incentive plan authorizes the award of options, restricted stock awards and
stock bonuses. The number of shares reserved for issuance under this plan will
be increased to include:
. any shares reserved under the 1999 equity incentive plan or 2000 equity
incentive plan of our California predecessor not issued or subject to
outstanding grants on the date of this prospectus;
. any shares issued under the 1999 equity incentive plan or 2000 equity
incentive plan of our California predecessor that are repurchased by us
at the original purchase price; and
. any shares issuable upon exercise of options granted under the 1999
equity incentive plan or 2000 equity incentive plan of our California
predecessor that expire or become unexercisable without having been
exercised in full.
The number of shares reserved under this plan will be increased
automatically on January 1 of each year by an amount equal to 5% of our total
outstanding shares on the day before.
The following shares will again become available for grant and issuance
under our 2000 equity incentive plan:
. shares issuable upon exercise of an option granted under this plan that
is terminated or cancelled before it is exercised;
. shares issued upon exercise of an option granted under this plan that
are subsequently repurchased by us at the original purchase price;
. shares subject to awards granted under this plan that are subsequently
forfeited or repurchased by us at the original issue price; and
. shares subject to stock bonuses granted under this plan that otherwise
terminate without shares being issued.
No person will be eligible to receive more than 10,000,000 shares in any
calendar year under this plan. This plan is administered by the compensation
committee of our board of directors, all members of which are "outside
directors" as defined under applicable federal tax laws. The committee has the
authority to interpret this plan and any agreement made under the plan, grant
options, awards and stock bonuses and make all other determinations for the
administration of this plan. Also, our non-employee directors are entitled to
receive automatic annual grants of options to purchase shares of our common
stock, as described under "Management--Director Compensation."
Our 2000 equity incentive plan provides for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees. Nonqualified stock options, and all other awards other than
incentive stock options, may be granted to employees, officers, directors,
consultants, independent contractors and advisors of
52
AllAdvantage or a parent or subsidiary of AllAdvantage. However, consultants,
independent contractors and advisors are only eligible to receive awards if
they render bona fide services not in connection with the offer and sale of
securities in a capital-raising transaction.
The exercise price of incentive stock options must be at least equal to the
fair market value of the underlying common stock on the date of grant. The
exercise price of incentive stock options granted to 10% stockholders must be
at least equal to 110% of that value, and the exercise price of nonqualified
stock options must be at least equal to 85% of that value. Options may be
granted that are exercisable only as they vest or may be immediately
exercisable with the shares issued subject to our right of repurchase that
lapses as the shares vest. In general, options will vest over a four-year
period. The maximum term of options granted under our 2000 equity incentive
plan is ten years. Awards granted under this plan may not be transferred in any
manner other than by will or by the laws of descent and distribution and may be
exercised during the lifetime of the optionee only by the optionee. The
compensation committee may allow exceptions to this restriction with respect to
awards that are not incentive stock options. Options granted under our 2000
equity incentive plan generally expire three months after the termination of
the optionee's service to AllAdvantage or a parent or subsidiary of
AllAdvantage. In the event of a dissolution, liquidation or change in control
of AllAdvantage, if the successor does not assume the options, they will expire
upon conditions determined by the compensation committee. Alternatively, the
compensation committee may accelerate the vesting of awards upon a change in
control of AllAdvantage. This plan will terminate in 2010, unless it is
terminated earlier pursuant to its terms.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan will become effective on the first day
on which price quotations are available for our common stock on the Nasdaq
National Market. We have initially reserved 600,000 shares of common stock for
issuance under this plan. The number of shares reserved for issuance under our
2000 employee stock purchase plan will be increased automatically on January 1
of each year by an amount equal to 1% of our total outstanding shares on the
day before. Our board of directors or compensation committee may reduce the
amount of the increase in any particular year.
Our compensation committee will administer our 2000 employee stock purchase
plan. Employees generally will be eligible to participate in our 2000 employee
stock purchase plan if they are employed by AllAdvantage, or any subsidiaries
that AllAdvantage designates, for more than 20 hours per week and more than
five months in a calendar year. Employees are not eligible to participate in
our 2000 employee stock purchase plan if they are 5% stockholders, or would
become 5% stockholders as a result of their participation in this plan. Under
our 2000 employee stock purchase plan, eligible employees may acquire shares of
our common stock through payroll deductions. Eligible employees may select a
rate of payroll deduction between 1% and 15% of their cash compensation and are
subject to maximum purchase limitations. Participation in this plan will end
automatically upon termination of employment for any reason. A participant will
not be able to purchase shares having a fair market value of more than $25,000,
determined as of the first day of the applicable offering period, for each
calendar year in which the employee participates in this plan.
Each offering period under this plan will be for two years and will consist
of four six-month purchase periods. The first offering period is expected to
begin on the first business day on which price quotations for our common stock
are available on the Nasdaq National Market. The first purchase period may be
more or less than six months long. Offering periods thereafter will begin on
February 1 and August 1. The purchase price for common stock purchased under
this plan will be 85% of the lesser of the fair market value of our common
stock on the first day of the applicable offering period or the last day of
each purchase period. The compensation committee will have the power to change
the offering dates, the purchase dates and the duration of offering periods.
Our 2000 employee stock purchase plan is intended to qualify as an employee
stock purchase plan under Section 423 of the Internal Revenue Code. This plan
will terminate in 2010, unless it is terminated earlier pursuant to its terms.
53
401(k) Plan
We sponsor a defined contribution plan intended to qualify under Section 401
of the Internal Revenue Code. Participants may make pre-tax contributions to
the plan of up to 25% of their eligible earnings, subject to a statutorily
prescribed annual limit, which is $10,500 in 2000. Contributions by the
participants to the 401(k) plan, and the earnings on these contributions, are
generally not taxable to the participants until withdrawn. Participants are
fully vested in their contributions and the earnings on these contributions.
Contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Limitation of Liability and Indemnification of Directors and Executive Officers
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to AllAdvantage or its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions where indemnification is not permitted by applicable
law;
. we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions; and
. the rights conferred in the bylaws are not exclusive.
In addition to the indemnification required in our certificate of
incorporation and bylaws, before the completion of this offering, we intend to
enter into indemnity agreements with each of our current directors and
officers. These agreements will provide for the indemnification of our officers
and directors for all expenses and liabilities incurred in connection with any
action or proceeding brought against them by reason of the fact that they are
or were agents of AllAdvantage. We also intend to obtain directors' and
officers' insurance to cover our directors, officers and some of our employees
for liabilities, including liabilities under securities laws. We believe that
these indemnification provisions and agreements and this insurance are
necessary to attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against
directors and officers as required by these indemnification provisions. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification by
AllAdvantage is sought, nor are we aware of any threatened litigation that may
result in claims for indemnification.
54
RELATED PARTY TRANSACTIONS
Since we incorporated in March 1999, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
we were or are to be a party in which the amount involved exceeds $60,000 and
in which any director, executive officer or holder of more than 5% of our
common stock or any member of their immediate family had or will have a direct
or indirect interest, other than compensation arrangements which are described
where required under "Management" and the transactions described below. Share
numbers and per share prices for the transactions described below are presented
on an as-converted to common stock basis and reflect the two-for-one common
stock splits effected on July 1, 1999 and October 13, 1999.
Issuances of Common Stock and Preferred Stock
The following table summarizes the shares of common stock and preferred
stock purchased in private placement transactions by directors, executive
officers, 5% stockholders and other stockholders of AllAdvantage since its
incorporation in March 1999.
[Enlarge/Download Table]
Preferred Stock Warrants for
Common ---------------------------------------- Series C
Stockholder Stock Series A Series B Series C Series D Preferred Stock
----------- --------- --------- --------- --------- ---------- ---------------
James R. Jorgensen...... 7,333,336 8,000,000 -- -- -- --
Johannes A. Pohle....... 7,333,332 2,000,000 -- -- -- --
Carl T. Anderson........ 6,533,332 4,000,000 -- -- -- --
Oliver Brock............ 2,800,000 2,000,000 -- -- -- --
Entities affiliated with
Alloy Ventures
1998, LLC (1).......... -- -- 8,333,336 4,460,652 165,289 232,654
Pidwell Investments LLC
(2).................... -- -- 555,556 122,448 16,529 12,244
Entities affiliated with
J. & W. Seligman & Co.
Incorporated (3)....... -- -- -- 4,081,634 165,289 --
Entities affiliated with
Partech
International (4)...... -- -- -- 4,081,632 165,289 --
Technology Partners
Fund, L.P.............. -- -- -- 4,081,632 165,289 --
TMCT Ventures, L.P.
(5).................... -- -- -- 4,081,632 165,289 122,448
Walden Media and
Information Technology
Fund L.P............... -- -- -- 4,081,632 165,289 122,448
Michael A. Depatie Trust
U/A DTD 7/18/91 (6).... -- -- -- 816,326 -- --
Entities affiliated with
SOFTBANK Capital
Partners L.P. (7)...... -- -- -- -- 11,570,248 --
Putnam OTC & Emerging
Growth Fund............ -- -- -- -- 991,736 --
Putnam Emerging
Information Sciences
Trust.................. -- -- -- -- 247,934 --
T. Rowe Price........... -- -- -- -- 1,239,670 --
--------
(1) John F. Shoch is a managing member of Alloy Ventures 1998, LLC, which is
the general partner of the purchasers of these shares--each of AMA98
Corporate, L.P., AMA98 Investors, L.P., AMA98 Partners, L.P. and AMA98
Ventures, L.P. Alloy Ventures 1998, LLC is therefore deemed to exercise
voting and investment power over all of the shares held by AMA98 Corporate,
L.P., AMA98 Investors, L.P., AMA98 Partners, L.P. and AMA98 Ventures, L.P.
(2) David W. Pidwell is a managing member of Pidwell Investments LLC and is
therefore deemed to exercise voting and investment power over all of the
shares held by Pidwell Investments LLC. In July 1998 David Pidwell was
granted an option for 200,000 shares of common stock, which was exercised
in full in November 1999, as described under "Management--Director
Compensation."
(3) J. & W. Seligman & Co. Incorporated is the investment advisor to Seligman
New Technologies Fund, Inc., Seligman Communications and Information Fund,
Inc. and Seligman Investment Opportunities (Master) Fund--NTV Portfolio,
and is therefore deemed to exercise voting and investment power over all of
the shares held by these entities.
(4) Vincent Worms is the managing member of Axa U.S. Growth Fund, LLC, Parallel
I, LLC, Parallel II, LLC, Double Black Diamond II, LLC, 45th Parallel, LLC,
and Multinvest, LLC, the investment general partner of Partech U.S.
Partners III C.V., and the attorney-in-fact for Almanori Limited, and is
therefore deemed to exercise voting and investment power over all of the
shares held by these entities.
(5) Thomas Unterman is managing partner of Rustic Canyon Partners, LLC, which
is the general partner of TMCT Ventures, L.P. Rustic Canyon Partners, LLC
is therefore deemed to exercise voting and investment power over all of the
shares held by TMCT Ventures, L.P.
(6) In October 1999 Michael Depatie was granted an option for 700,000 shares of
common stock, which was exercised with respect to 133,333 shares in
November 1999, as described under "Management--Option Grants and Exercises
in Last Fiscal Year."
(7) William L. Burnham is a managing director of the general partner of
SOFTBANK Capital Partners L.P. and SOFTBANK Capital Advisors Fund L.P. The
general partner is therefore deemed to exercise voting and investment power
over all of the shares held by SOFTBANK Capital Partners L.P. and SOFTBANK
Capital Advisors Fund L.P.
55
Issuance of Founders Stock and Series A Preferred Stock
In April 1999, we sold a total of 24,000,000 shares of common stock at a
price per share of $0.00104175, for a total purchase price of $25,002, to James
R. Jorgensen, Johannes A. Pohle, Carl T. Anderson and Oliver Brock, the
founders of AllAdvantage, pursuant to restricted stock purchase agreements. The
per share consideration paid represented $0.00104167 in cash and $0.00000008
for the assignment to AllAdvantage of technology for the Viewbar and related
systems developed by the founders. Messrs. Jorgensen, Pohle, Anderson and Brock
collectively made the valuation of this technology. At the time of issuance,
4,933,332 of the shares held by Mr. Jorgensen, 4,933,332 of the shares held by
Mr. Pohle, 4,933,332 of the shares held by Mr. Anderson and 1,200,000 of the
shares held by Mr. Brock were unvested and subject to our right of repurchase
upon termination of employment. This right of repurchase will expire as to 25%
of the shares one year after the date of issuance and 2.083% of the shares each
month thereafter. Upon a change in control transaction followed within nine
months by a termination of employment meeting specified conditions, vesting
will accelerate as to all of the then unvested shares.
In April 1999, we sold a total of 16,000,000 shares of Series A preferred
stock at a price per share of $0.0125, for a total purchase price of $200,000,
to Messrs. Jorgensen, Pohle, Anderson and Brock. The consideration paid was the
cancellation of indebtedness of AllAdvantage to the purchasers.
Issuance of Series B Preferred Stock
In June 1999, we sold a total of 10,000,000 shares of Series B preferred
stock at a price per share of $0.18 to several investors pursuant to a
preferred stock purchase agreement, including:
. entities affiliated with Alloy Ventures 1998, LLC, which purchased a
total of 8,333,336 shares of Series B preferred stock for a total
purchase price of $1,500,000; and
. Pidwell Investments LLC, which purchased a total of 555,556 shares of
Series B preferred stock for a total purchase price of $100,000.
Issuance of Series C Preferred Stock
In September 1999, we sold a total of 24,995,912 shares of Series C
preferred stock at price per share of $1.225 to several investors pursuant to a
preferred stock purchase agreement, including:
. entities affiliated with Alloy Ventures 1998, LLC, which purchased a
total of 4,460,652 shares of Series C preferred stock for a total
purchase price of $5,464,298;
. Pidwell Investments LLC, which purchased a total of 122,448 shares of
Series C preferred stock for a total purchase price of $149,999;
. the John M. Anderson Trust u/d/d July 16, 1999, as amended, whose
trustee is John Anderson, the father of Carl T. Anderson, which
purchased a total of 81,632 shares of Series C preferred stock for a
total purchase price of $99,999;
. entities affiliated with J. & W. Seligman & Co. Incorporated, which
purchased a total of 4,081,634 shares of Series C preferred stock for a
total purchase price of $5,000,002;
. entities affiliated with Partech International, which purchased a total
of 4,081,632 shares of Series C preferred stock for a total purchase
price of $4,999,999;
. Technology Partners Fund, L.P., which purchased a total of 4,081,632
shares of Series C preferred stock for a total purchase price of
$4,999,999;
. TMCT Ventures, L.P., which purchased a total of 4,081,632 shares of
Series C preferred stock for a total purchase price of $4,999,999; and
. Walden Media and Information Technology Fund L.P., which purchased a
total of 4,081,632 shares of Series C preferred stock for a total
purchase price of $4,999,999.
56
In October 1999, we committed to sell an additional 816,326 shares of Series
C preferred stock at a price per share of $1.225 to the Michael A. Deptatie
Trust U/A DTD 7/18/91 pursuant to the preferred stock purchase agreement. These
shares were later sold to the trust.
Issuance of Series C Warrants
In September 1999, in connection with a bridge financing of convertible
notes, we issued warrants to purchase shares of our Series C preferred stock
with an exercise price of $0.03 per share to the following directors, executive
officers, 5% stockholders and entities associated with them. Unless exercised,
these warrants will remain outstanding after the completion of this offering at
which time they will each become exercisable for common stock. They will expire
in September 2009.
. entities affiliated with Alloy Ventures 1998, LLC received a warrant for
232,654 shares of Series C preferred stock;
. TMCT Ventures, L.P. received a warrant for 122,448 shares of Series C
preferred stock;
. Walden Media and Information Technology Fund L.P. received a warrant for
122,448 shares of Series C preferred stock; and
. David Pidwell received a warrant for 12,244 shares of Series C preferred
stock, which was exercised in full in November 1999.
Issuance of Series D Preferred Stock
In February 2000, we sold a total of 16,453,926 shares of Series D preferred
stock at price per share of $6.05 to several investors pursuant to a preferred
stock purchase agreement, including:
. entities affiliated with Alloy Ventures 1998, LLC, which purchased a
total of 165,289 shares of Series D preferred stock for a total purchase
price of $999,998;
. Pidwell Investments LLC, which purchased a total of 16,529 shares of
Series D preferred stock for a total purchase price of $100,000;
. entities affiliated with Partech International, which purchased a total
of 165,289 shares of Series D preferred stock for a total purchase price
of $999,998;
. entities affiliated with J & W. Seligman & Co. Incorporated, which
purchased a total of 165,289 shares of Series D preferred stock for a
total purchase price of $999,998;
. Technology Partners Fund, L.P., which purchased a total of 165,289
shares of Series D preferred stock for a total purchase price of
$999,998;
. TMCT Ventures, L.P., which purchased a total of 165,289 shares of Series
D preferred stock for a total purchase price of $999,998;
. Walden Media and Information Technology Fund L.P., which purchased a
total of 165,289 shares of Series D preferred stock for a total purchase
price of $999,998;
. Entities affiliated with SOFTBANK Capital Partners L.P., which together
purchased a total of 11,570,248 shares of Series D preferred stock for a
total purchase price of $70,000,000;
. Putnam Emerging Information Sciences Trust and Putman OTC & Emerging
Growth Fund, which together purchased a total of 1,239,670 shares of
Series D preferred stock for a total purchase price of $7,500,003; and
. T. Rowe Price, which purchased a total of 1,239,670 shares of Series D
preferred stock for a total purchase price of $7,500,003.
57
Investors Rights Agreement
In connection with our issuances of Series B preferred stock, Series C
preferred stock and Series D preferred stock, we have entered into an investors
rights agreement granting the holders of the preferred stock registration
rights with respect to the common stock issuable upon conversion of their
preferred stock. Their registration rights are described in more detail under
"Description of Capital Stock--Registration Rights."
Contract with Summit Consulting Group
During 1999, Summit Group Consulting supplied recruiting and contract labor
services to us. During 1999, Summit Group Consulting recruited 30 employees for
us and was paid by us a total of $206,000 for those services. Summit Group
Consulting is owned by Bridget Jorgensen, the wife of James R. Jorgensen, our
President, Chief Executive Officer and Chairman.
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PRINCIPAL STOCKHOLDERS
The following table presents information with respect to beneficial
ownership of our common stock as of February 4, 2000 by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. other significant stockholders;
. each of our directors;
. the executive officer listed in the summary compensation table; and
. all current executive officers and directors as a group.
The percentage of beneficial ownership for the following table is based on
97,888,095 shares of common stock outstanding as of February 4, 2000, assuming
conversion of all outstanding shares of preferred stock into common stock.
Unless otherwise indicated, the address for each listed 5% stockholder is:
c/o AllAdvantage.com Inc., 4010 Point Eden Way, Hayward, California 94545. To
our knowledge, except as indicated in the footnotes to this table and under
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock.
[Download Table]
Percentage of
Outstanding
Shares
Beneficially
Owned
-----------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
------------------------ ------------------ -------- --------
James R. Jorgensen (1)................... 15,333,336 15.7
John F. Shoch
Entities affiliated with Alloy Ventures
1998, LLC (2)........................... 13,191,931 13.4
William L. Burnham
Entities affiliated with SOFTBANK
Capital Partners LP (3)................. 11,570,248 11.8
Carl T. Anderson (4)..................... 10,533,332 10.8
Johannes A. Pohle (5).................... 9,333,332 9.5
Oliver Brock (6)......................... 4,800,000 4.9
Thomas Unterman
TMCT Ventures, L.P. (7)................. 4,369,369 4.5
Richard A. LeFurgy
Walden Media and Information Technology
Fund L.P. (8)........................... 4,369,369 4.5
Entities affiliated with J. & W. Seligman
& Co. Incorporated (9).................. 4,246,923 4.3
Entities affiliated with Partech
International (10)...................... 4,246,921 4.3
Technology Partners Fund, L.P. .......... 4,246,921 4.3
T. Rowe Price ........................... 1,239,670 1.3
Putnam OTC & Emerging Growth Fund ....... 991,736 1.0
David W. Pidwell
Pidwell Investments LLC (11)............ 906,777 *
Putnam Emerging Information Sciences
Trust................................... 247,934 * *
All directors and executive officers as a
group (11 persons)(12).................. 71,724,651 72.6%
--------
*Less than 1%.
(1) Includes 4,933,332 shares subject to a right of repurchase held by us as of
February 4, 2000, which right of repurchase expires as to 25% of the shares
in April 2000 and 2.083% of the shares each month thereafter.
(2) Includes 9,454,097 shares held by AMA98 Ventures, L.P., 1,419,486 shares
held by AMA98 Investors, L.P., 1,134,494 shares held by AMA98 Corporate,
L.P., and 951,200 shares held by AMA98 Partners, L.P. Includes 232,654
shares subject to warrants held by these entities that are immediately
exercisable
59
John F. Shoch is a managing member of Alloy Ventures 1998, LLC, which is
the general partner of each of AMA98 Corporate, L.P., AMA98 Investors,
L.P., AMA98 Partners, L.P. and AMA98 Ventures, L.P. The address of Mr.
Shoch and Alloy Ventures 1998, LLC is 480 Cowper Street, Palo Alto, CA
94301.
(3) Includes 11,404,793 shares held by SOFTBANK Capital Partners L.P. and
165,455 shares held by SOFTBANK Capital Advisors Fund L.P. William Burnham
is a managing director of the general partner of SOFTBANK Capital Partners
L.P. and SOFTBANK Capital Advisors Fund L.P. The address of Mr. Burnham and
these entities is 10 Langley Road, Suite 403, Newton Center, MA 02159.
(4) Includes 4,933,332 shares subject to a right of repurchase held by us as of
February 4, 2000, which right of repurchase expires as to 25% of the shares
in April 2000 and 2.083% of the shares each month thereafter.
(5) Includes 4,933,332 shares subject to a right of repurchase held by us as of
February 4, 2000, which right of repurchase expires as to 25% of the shares
in April 2000 and 2.083% of the shares each month thereafter.
(6) Includes 1,200,000 shares subject to a right of repurchase held by us as of
February 4, 2000, which right of repurchase expires as to 25% of the shares
in April 2000 and 2.083% of the shares each month thereafter.
(7) Includes 122,448 shares subject to a warrant held by TMCT Ventures, L.P.
that is immediately exercisable. Mr. Unterman is managing partner of Rustic
Canyon Partners, LLC, which is the general partner of TMCT Ventures, L.P.
(8) Includes 122,448 shares subject to a warrant that is immediately
exercisable. Richard A. LeFurgy, a representative of WaldenVC is one of our
directors, although he does not have voting power or investment power with
respect to the shares held by Walden Media and Information Technology Fund
L.P.
(9) Represents 2,786,642 shares held by Seligman New Technologies Fund, Inc.,
849,384 shares held by Seligman Communications and Information Fund, Inc.
and 610,897 shares held by Seligman Investment Opportunities (Master) Fund
NTV Portfolio. J. & W. Seligman & Co. Incorporated is the investment
advisor to Seligman New Technologies Fund, Inc., Seligman Communications
and Information Fund, Inc. and Seligman Investment Opportunities (Master)
Fund-NTV Portfolio.
(10) Represents 1,953,585 shares held by Partech U.S. Partners III C.V.,
862,125 shares held by Parallel Capital II, LLC, 719,428 shares held by
Parallel Capital I, LLC, 456,967 shares held by Axa U.S. Growth Fund, LLC,
127,409 shares held by Double Black Diamond II, LLC, 42,469 shares held by
45th Parallel, LLC, 42,469 shares held by Almanori Limited and 42,469
shares held by Multinvest, LLC. Vincent Worms is the investment general
partner of Partech U.S. Partners III C.V., the managing member of Parallel
Capital II, LLC, Parallel Capital I, LLC, Axa U.S. Growth Fund, LLC,
Double Black Diamond II, 45th Parallel, LLC and Multinvest, LLC, and the
attorney-in-fact for Almanori Limited.
(11) Represents 690,248 shares held by Pidwell Investments LLC and 200,000
shares held by David Pidwell. The 200,000 shares held by Mr. Pidwell are
subject to our right of repurchase as of February 4, 2000, which right of
repurchase expires as to 25% of the shares in July 2000 and 2.083% of the
shares each month thereafter. David Pidwell is a managing member of
Pidwell Investments LLC.
(12) Includes 16,199,996 shares subject to our right of repurchase as of
February 4, 2000. Includes 566,667 shares subject to an immediately
exercisable option and 355,102 shares subject to immediately exercisable
warrants. Does not include shares or warrants held by Walden Media and
Information Technology Fund L.P.
The shares included in the preceding table as beneficially owned by some of
our executive officers and directors include outstanding shares that we have
the right to repurchase upon termination of their employment or status as a
director or consultant. This repurchase right entitles us to repurchase the
shares at a price equal to the initial purchase price paid by the stockholder
for the shares. Our repurchase right generally lapses over a four-year period.
In addition, the shares included in the preceding table as beneficially
owned by some of our executive officers, directors and 5% stockholders include
shares that are issuable under stock options or warrants that are exercisable
on or before March 31, 2000. These shares are deemed outstanding for purposes
of computing the percentage held by the person holding the options or warrants
but are not deemed outstanding for purposes of computing the percentage of any
other person.
60
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of shares of common stock, $0.001 par value per share,
and 5,000,000 shares of preferred stock, $0.001 par value per share. As of
February 4, 2000, and assuming the conversion of all outstanding preferred
stock into shares of common stock at the assumed initial public offering
price to $ per share and conversion of all warrants for preferred stock into
warrants for common stock, there were 97,888,095 shares of common stock
outstanding, of which 16,199,996 shares were subject to our right of
repurchase, options to purchase 9,682,883 shares of common stock and warrants
to purchase 552,550 shares of common stock.
Common Stock
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts that the board of directors may determine from
time to time.
Voting Rights. Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
We have not provided for cumulative voting for the election of directors in our
certificate of incorporation. This means that, commencing at the first annual
meeting of stockholders following the date on which we first have at least 800
stockholders, the holders of a majority of the shares voted can elect all of
the directors then standing for election. Prior to that time, however,
cumulative voting in the election of directors will be in effect, meaning that
each share of voting stock will be entitled to a number of votes equal to the
number of votes to which that share would normally be entitled multiplied by
the number of directors to be elected. A stockholder may then cast all of these
votes for a single candidate or may allocate them among as many candidates as
the stockholder may choose. In addition, our certificate of incorporation and
bylaws require the approval of two-thirds, rather than a majority, of the
shares entitled to vote for some matters. For a description of these matters,
see "Description of Capital Stock--Anti-Takeover Provisions."
No Preemptive or Similar Rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to Receive Liquidation Distributions. Upon a liquidation, dissolution
or winding-up of AllAdvantage, the holders of common stock are entitled to
share ratably with holders of any participating preferred stock in all assets
remaining after payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, each outstanding share of preferred stock
will be converted into shares of common stock. See note 4 to the notes our
consolidated financial statements for a description of our preferred stock. If
the initial public offering price of the shares in this offering is less than
$12.10, then the conversion ratio for the Series D preferred stock will be
adjusted, so that each share of Series D preferred stock will convert into that
number of shares of common stock equal to the result obtained by dividing $6.05
by the greater of one-half of the offering price or $4.84.
Following the offering, we will be authorized, subject to limitations
imposed by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series,
and to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations or restrictions. The
board of directors can also increase or decrease the number of shares of any
series, but not below the number of shares of that series then outstanding,
without any further vote or action by the stockholders.
61
The board may authorize the issuance of preferred stock with voting or
conversion rights that could harm the voting power or other rights of the
holders of the common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of delaying, deferring or
preventing a change in control of AllAdvantage and might harm the market price
of our common stock and the voting and other rights of the holders of common
stock. We have no current plans to issue any shares of preferred stock.
Warrants
As of February 4, 2000, we had outstanding the following warrants to
purchase our stock.
[Download Table]
Total Number of Shares Exercise Price
Type of Stock Subject to Warrants Per Share Expiration Date
------------- ---------------------- -------------- ---------------
Series C Preferred
Stock.................. 238,775(1) $0.06(1) 9/22/09
Series D Preferred
Stock.................. 75,000(2) 6.05(2) 12/31/09
--------
(1) Unless exercised, these warrants will remain outstanding after the
completion of this offering, at which time they will become exercisable for
a total of 477,550 shares of common stock at an exercise price per share of
$0.03.
(2) Unless exercised, this warrant will remain outstanding after the completion
of this offering, at which time it will become exercisable for a total of
75,000 shares of common stock at an exercise price per share of $6.05.
Registration Rights
The holders of approximately 52,588,612 shares of common stock issuable upon
conversion of Series B, Series C and Series D preferred stock have the right to
require us to register their shares with the Securities and Exchange Commission
so that those shares may be publicly resold or to include their shares in any
registration statement we file.
Demand Registration Rights
At any time six months after the closing of this offering, the holders of at
least 40% of the shares having registration rights have the right to demand
that we register all or a portion of their shares. We are only obligated to
file three registration statements in response to these demand registration
rights. If neither the first nor the second demand registration right exercised
covers the sale of securities with a total public offering price of at least
$25 million, then the third demand registration right exercised must cover a
sale of at least $25 million of securities. We may postpone the filing of a
registration statement for up to 90 days once in a 12-month period if we
determine that the filing would be seriously detrimental to AllAdvantage and
its stockholders. The underwriters of any underwritten offering will have the
right to limit the number of shares to be included in a registration statement
filed in response to the exercise of these demand registration rights due to
marketing reasons.
Form S-3 Registration Rights
If we are eligible to file a registration statement on Form S-3, any holder
of shares having registration rights has the right to demand that we file a
registration statement on Form S-3, as long as the amount of securities to be
sold under the registration statement exceeds $1 million. We may postpone the
filing of a registration statement for up to 90 days once in a 12 month period
if we determine that the filing would be seriously detrimental to AllAdvantage
and its stockholders.
62
Piggyback Registration Rights
If we register any securities for public sale, holders of shares with
registration rights will have the right to include their shares in the
registration statement. However, this right does not apply to a registration
statement filed pursuant to the exercise of demand registration rights or Form
S-3 registration rights. The underwriters of any underwritten offering will
have the right to limit the number of shares registered by these holders to 30%
of the total shares covered by the registration statement due to marketing
reasons.
Expenses of Registration
We will pay all expenses relating to any demand registration and the first
four piggyback registrations. However, we will not pay for the expenses of any
demand registration if the request is subsequently withdrawn by the holders of
a majority of the shares having registration rights, subject to very limited
exceptions.
Expiration of Registration Rights
The registration rights described above will expire five years after this
offering is completed.
Anti-Takeover Provisions
The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or discouraging another
person from acquiring control of us.
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets with any interested stockholder, which is a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the
date that the stockholder became an "interested stockholder" unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
. on or subsequent to that date the business combination is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.
Charter and Bylaws
Our certificate of incorporation and bylaws provide that:
. following the completion of this offering, no action can be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and that stockholders may not act
by written consent;
63
. following the completion of this offering, the approval of holders of
two-thirds of the shares entitled to vote at an election of directors
will be required to adopt, amend or repeal our bylaws or amend or repeal
the provisions of our certificate of incorporation regarding the
election and removal of directors and ability of stockholders to take
action;
. stockholders may not call special meetings of the stockholders or fill
vacancies on the board;
. commencing at the first annual meeting of stockholders following the
date on which we first have at least 800 stockholders, our board of
directors will be divided into three classes, each serving staggered
three-year terms. This means that only one class of directors will be
elected at each annual meeting of stockholders, with the other classes
continuing for the remainder of their respective terms. Directors may
only be removed for cause by the holders of two-thirds of the shares
entitled to vote at an election of directors (we do not expect to have
800 stockholders as a result of this offering, and we may not have this
many stockholders for some time, if at all); and
. we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the trading symbol "AADV."
64
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares issued
upon exercise of outstanding warrants or options, in the public market after
this offering could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through the sale of our equity
securities. Furthermore, as described below, no shares currently outstanding
will be available for sale immediately after this offering due to contractual
restrictions on resale. Sales of substantial amounts of our common stock in the
public market after these restrictions lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, based on shares outstanding at February 4,
2000, we will have outstanding shares of common stock, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options and warrants. Shares held by our affiliates, which are
persons that directly or indirectly control, or are controlled by, or are under
common control with us, may generally only be sold in compliance with the
limitations of Rule 144 of the Securities Act. Of the outstanding shares, the
shares sold in this offering, shares of the underwriters' over-
allotment option is exercised in full, will be freely tradable without
restriction under the Securities Act unless purchased by our affiliates. The
remaining shares will be restricted securities as defined in Rule 144. We
issued and sold these restricted securities in private transactions in reliance
on exemptions from registration under the Securities Act. Restricted securities
may be sold in the public market only if they are registered or if they qualify
for an exemption from registration under Rule 144 or Rule 701 under the
Securities Act, as summarized below. The remaining shares will become eligible
for public sale as follows:
[Download Table]
Approximate
Number of
Shares
Eligible
for Future
Date Sale Comment
---- ----------- -------
Date of this prospectus 0 Freely tradable shares
Underwriters' lock-up released. These
181 days after the date of shares may be sold under Rules 144 or
this prospectus 701
At various times thereafter These shares may be sold under Rules
144, 144(k) or 701
Lock-Up Agreements
All of our officers and directors and substantially all of our stockholders
have signed lock-up agreements under which they agreed not to sell, dispose of,
loan, pledge or grant any rights with respect to any shares of common stock or
any securities convertible into or exercisable or exchangeable for shares of
common stock without the prior written consent of Credit Suisse First Boston
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation for a
period of 180 days after the date of this prospectus, subject to limited
exceptions.
Credit Suisse First Boston Corporation and Donaldson, Lufkin & Jenrette
Securities Corporation may in their sole discretion, at any time without
notice, choose to release some or all of these shares from these restrictions
prior to the expiration of this 180-day period.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
65
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Shares otherwise eligible for sale under Rule 144 are still subject to
lock-up agreements and will only become eligible for sale when the 180-day
lock-up agreements expire.
Rule 144 (k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
Any of our employees, officers, directors or consultants who purchased his
or her shares under a written compensatory plan or contract may be entitled to
sell his or her shares in reliance on 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 non-affiliates
may sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling those shares. However, all
shares issued under Rule 701 are subject to lock-up agreements and will only
become eligible for sale when the 180-day lock-up agreements expire.
Registration Rights
Upon completion of this offering, the holders of 52,588,612 shares of common
stock, or their transferees, will be entitled to rights with respect to the
registration of those shares under the Securities Act. For a discussion of
these rights please see "Description of Capital Stock--Registration Rights."
After these shares are registered, they will be freely tradable without
restriction under the Securities Act.
Stock Options
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering approximately shares of common stock
subject to outstanding options and reserved for issuance under our stock option
and employee stock purchase plans. As of December 31, 1999, options to purchase
10,484,233 shares of common stock were issued and outstanding. Between December
31, 1999 and the date hereof, we granted options to purchase approximately
shares of common stock. Upon the expiration of the lock-up agreements
described above, shares of common stock will be subject to vested
options, based on options outstanding as of , 2000.
This registration statement is expected to be filed and become effective as
soon as practicable after the effective date of this offering. Accordingly,
shares registered under this registration statement will, subject to vesting
provisions and Rule 144 volume limitations applicable to our affiliates, be
freely tradeable immediately after the 180-day lock-up agreements expire.
Warrants
As of January 31, 2000, we had outstanding warrants to purchase 238,775
shares of Series C preferred stock and 75,000 shares of Series D preferred
stock, which will become exercisable for 477,550 and 75,000 shares,
respectively, of common stock upon the completion of this offering. When these
warrants are exercised and the exercise price is paid in cash, the shares must
be held for one year before they can be sold under Rule 144. Upon the
completion of this offering, these warrants to purchase up to 552,550 shares of
common stock will contain net exercise provisions. These provisions allow a
holder to exercise the warrant for a lesser number of shares of common stock in
lieu of paying cash. The number of shares that would be issued in this case
would be based upon the market price of the common stock at the time of the net
exercise. If the warrant had been held for at least one year, the shares of
commons stock could be publicly sold under Rule 144. After the lock-up
agreements described above expire, warrants to purchase 477,550 shares of our
common stock, which also contain net exercise provisions, will have been
outstanding for at least one year.
66
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation and FleetBoston Robertson Stephens Inc. are
acting as representatives the following respective numbers of shares of common
stock:
[Download Table]
Number
Underwriter of Shares
----------- ---------
Credit Suisse First Boston Corporation.............................
Donaldson, Lufkin & Jenrette Securities Corporation................
FleetBoston Robertson Stephens Inc. ...............................
-----
Total............................................................
=====
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
[Enlarge/Download Table]
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
Underwriting Discounts
and Commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933,
as amended, relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, in each case acquired prior to the date of this prospectus, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation for a
period of 180 days after the date of this prospectus, except in our case
issuances pursuant to
67
the exercise of stock options outstanding on the date hereof, grants of
employee stock options or the issuance of other common stock pursuant to the
1999 equity incentive plan and 2000 equity incentive plan of our California
predecessor, 2000 equity incentive plan or 2000 employee stock purchase plan in
effect on the date hereof, and issuances of common stock pursuant to the
exercise of those options.
Our executive officers and directors, and stockholders and holders of
options to purchase our common stock have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock, other than shares purchased in the open market,
including in this offering, or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction which
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any such aforementioned transaction is
to be settled by delivery of our common stock or such other securities, in cash
or otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, or to enter into any such transaction, swap, hedge or
other arrangement, without, in each case, the prior written consent of Credit
Suisse First Boston Corporation and Donaldson, Lufkin & Jenrette Securities
Corporation for a period of 180 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial offering price, up
to shares of common stock for employees, directors and other persons
associated with us who have expressed an interest in purchasing common stock in
the offering and up to shares of common stock for our members. The
number of shares available for sale to the general public in this offering will
be reduced to the extent those persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
DLJ ESC II LP, DLJ Fund Investment Partners II, L.P., DLJ Private Equity
Employees Fund, L.P. and DLJ Private Equity Partners Fund, L.P. (who are
affiliates of Donaldson, Lufkin & Jenrette Securities Corporation) have
purchased 49,587, 54,187, 4,959 and 139,201 shares of Series D preferred stock,
respectively, at $6.05 per share. Employees of Fleet Boston Robertson Stephens
have purchased 8,264 shares of Series D preferred stock at $6.05 per share.
Credit Suisse First Boston Venture Fund I L.P. has purchased 330,578 shares of
Series D preferred stock at a price of $6.05 per share. Under NASD Rules of
Fair Practice, the difference between the initial offering price of our common
stock and the purchase price could be deemed underwriting compensation.
Credit Suisse First Boston Corporation acted as placement agent in
connection with the sale of the Series D preferred stock for which it received
customary compensation.
We have made application to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "AADV."
Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation between us and the representatives, and may not reflect the market
price for the common stock following this offering. Among the principal factors
to be considered in determining the initial public offering price of our common
stock will be:
. the information in this prospectus or otherwise available to the
representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we compete;
. the ability of our management;
. our prospects for future earnings, the present state of our development
and our current financial condition;
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
. the general condition of the securities markets at the time of this
offering.
68
We can offer no assurances that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market following this offering or that an active trading market for the common
stock will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by that
syndicate member is purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
69
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws,
which will vary depending on the relevant jurisdiction and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from which that
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under those securities laws, (ii) where
required by law, the purchaser is purchasing as principal and not as agent, and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer, and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named in
this prospectus may be located outside of Canada and, as a result, it may not
be possible for Canadian purchasers to effect service of process within Canada
upon the issuer or those persons. All or a substantial portion of the assets of
the issuer and those persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or those
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that he or she is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any common stock
acquired by him or her in this offering. That report must be in the form
attached to British Columbia Securities Commission Blanket Order BOR #95/17, a
copy of which may be obtained from us. Only one report must be filed in respect
of common stock acquired on the same date and under the same prospectus
exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
70
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus for
AllAdvantage. Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California,
will pass upon legal matters in connection with this offering for the
underwriters. Entities affiliated with Fenwick & West LLP hold 214,633 shares
of our common stock. In addition, Fenwick & West LLP or an affiliated entity
may purchase up to of the shares reserved by the underwriters for sale to
our employees and directors and other persons associated with us, as described
under "Underwriting."
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and for the period from inception
(March 24, 1999) to December 31, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus does not contain all of the
information contained in the registration statement and the exhibits to the
registration statement. For further information with respect to AllAdvantage
and our common stock, we refer you to the registration statement and the
exhibits filed as a part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
to which reference is made are not necessarily complete; we refer you to the
copy of each contract or document filed as an exhibit to the registration
statement. Each statement is qualified in all respects by reference to that
exhibit. The registration statement, including exhibits, may be inspected
without charge at the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048,
and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies may be obtained from the SEC upon payment of
fees prescribed by the SEC. Information on the operation of the public
reference room may be obtained by calling the SEC at 1-800-SEC-0330. These
reports and other information may also be inspected without charge at a Web
site maintained by the SEC at http://www.sec.gov.
71
AllAdvantage.com Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheet............................................... F-3
Consolidated Statement of Operations..................................... F-4
Consolidated Statement of Net Capital Deficiency......................... F-5
Consolidated Statement of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AllAdvantage.com Inc.
We have audited the accompanying consolidated balance sheet of
AllAdvantage.com Inc. as of December 31, 1999, and the related consolidated
statements of operations, net capital deficiency, and cash flows for the period
from inception (March 24, 1999) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
AllAdvantage.com Inc. at December 31, 1999, and the results of its operations
and its cash flows for the period from inception (March 24, 1999) to December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
Ernst & Young LLP
Palo Alto, California
February 3, 2000 except for note 11, as to which the date is March , 2000
--------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the reincorporation and other matters described in Note 11 to the
consolidated financial statements.
/s/ Ernst & Young LLP
Palo Alto, California
February 3, 2000
F-2
AllAdvantage.com Inc.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
[Download Table]
Pro Forma Net
December 31, Capital Deficiency
1999 at December 31, 1999
------------ --------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents.................. $ 20,019
Restricted cash............................ 10,000
Accounts receivable, net of allowance of
$235...................................... 4,523
Prepaid expenses and other assets.......... 624
--------
Total current assets..................... 35,166
Property and equipment, net.................. 4,705
--------
Total assets............................. $ 39,871
========
Liabilities and net capital deficiency
Current liabilities:
Accounts payable........................... $ 1,753
Accrued member payables.................... 12,239
Other accrued liabilities.................. 5,362
Customer advance........................... 19,830
Deferred revenue........................... 75
Current portion of capital lease
obligations............................... 383
--------
Total current liabilities................ 39,642
Capital lease obligations, net of current
portion..................................... 254
Commitments
Net capital deficiency:
Convertible preferred stock, $0.001 par
value, issuable in series: 22,663,266
shares authorized; 19,567,343 shares
issued and outstanding at December 31,
1999, aggregate liquidation preference of
$34,014,990, pro forma--36,335,044 shares
authorized, no shares issued and
outstanding............................... 20 $ --
Common stock, $0.001 par value: 116,000,000
shares authorized, 28,498,133 shares
issued and outstanding at December 31,
1999, pro forma--150,000,000 shares
authorized, 80,632,819 shares issued and
outstanding............................... 28 81
Additional paid-in capital................. 55,608 55,575
Deferred stock compensation................ (18,572) (18,572)
Accumulated deficit........................ (37,109) (37,109)
-------- --------
Total net capital deficiency............. (25) $ (25)
-------- ========
Total liabilities and net capital
deficiency.............................. $ 39,871
========
See accompanying notes.
F-3
AllAdvantage.com Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
[Download Table]
Period from
Inception
(March 24, 1999) to
December 31, 1999
-------------------
Revenues.................................................. $ 5,251
Costs and expenses:
Direct member costs..................................... 17,141
Sales and marketing..................................... 11,602
General and administrative.............................. 8,344
Product development..................................... 2,911
Depreciation and amortization........................... 348
Stock-based compensation................................ 1,547
--------
Total costs and expenses.............................. 41,893
--------
Loss from operations...................................... (36,642)
Interest expense.......................................... (827)
Interest income........................................... 360
--------
Net loss.................................................. $(37,109)
========
Basic and diluted net loss per share...................... $ (5.04)
========
Shares used in per share calculation...................... 7,367
========
Pro forma basic and diluted net loss per share
(unaudited).............................................. $ (0.97)
========
Shares used in pro forma per share calculation
(unaudited).............................................. 38,287
========
See accompanying notes.
F-4
AllAdvantage.com Inc.
CONSOLIDATED STATEMENT OF NET CAPITAL DEFICIENCY
Period from Inception (March 24, 1999) to December 31, 1999
(in thousands, except share amounts)
[Enlarge/Download Table]
Convertible
Preferred Stock Common Stock Additional Deferred Total Net
----------------- ----------------- Paid-in Stock Accumulated Capital
Shares Amount Shares Amount Capital Compensation Deficit Deficiency
---------- ------ ---------- ------ ---------- ------------ ----------- ----------
Balance at inception
(March 24, 1999) ...... -- $-- -- $-- $ -- $ -- $ -- $ --
Issuance of common stock
to founders............ -- -- 24,000,000 24 1 -- -- 25
Issuance of Series A
preferred stock at
$0.05 per share
to founders, net of
issuance costs of $1... 4,000,000 4 -- -- 195 -- -- 199
Issuance of Series B
preferred stock at
$0.72 per share for
cash and exchange of
convertible notes
payable, net of
issuance costs of $34.. 2,500,000 3 -- -- 1,763 -- -- 1,766
Issuance of Series C
preferred stock at
$2.45 per share for
cash and exchange of
convertible notes
payable, net of
issuance costs of $88.. 13,067,343 13 -- -- 31,899 -- 31,912
Issuance of common stock
to employees upon
exercise of
stock options.......... -- -- 4,498,133 4 443 -- -- 447
Issuance of options to
purchase common stock
to non-employees....... -- -- -- -- 660 -- -- 660
Issuance of warrants to
purchase Series C
preferred stock in
connection with
issuance of notes
payable................ -- -- -- -- 528 -- -- 528
Deferred stock
compensation from the
issuance of stock
options................ -- -- -- -- 20,119 (20,119) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- 1,547 -- 1,547
Net loss................ -- -- -- -- -- -- (37,109) (37,109)
---------- --- ---------- --- ------- -------- -------- --------
Balance at December 31,
1999................... 19,567,343 $20 28,498,133 $28 $55,608 $(18,572) $(37,109) $ (25)
========== === ========== === ======= ======== ======== ========
See accompanying notes.
F-5
AllAdvantage.com Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
[Download Table]
Period from
Inception
(March 24, 1999) to
December 31, 1999
-------------------
Operating activities:
Net loss.................................................. $(37,109)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 348
Amortization of deferred stock compensation............. 1,547
Interest expense from issuance of warrants.............. 528
Other non-cash expense.................................. 660
Changes in assets and liabilities:
Restricted cash....................................... (10,000)
Accounts receivable................................... (4,523)
Prepaid expenses and other assets..................... (624)
Accounts payable and other accrued liabilities........ 7,115
Accrued member payables............................... 12,239
Customer advance...................................... 19,830
Deferred revenue...................................... 75
--------
Net cash used in operating activities..................... (9,914)
--------
Investing activities:
Purchase of equipment..................................... (4,290)
--------
Net cash used in investing activities..................... (4,290)
--------
Financing activities:
Proceeds from issuance of common and preferred stock,
net...................................................... 30,352
Proceeds from issuance of convertible notes payable....... 3,550
Proceeds from exercise of common stock options............ 447
Payments under capital lease obligations.................. (126)
--------
Net cash provided by financing activities................. 34,223
--------
Net increase in cash and cash equivalents................. 20,019
Cash and cash equivalents at beginning of period.......... --
--------
Cash and cash equivalents at end of period................ $ 20,019
========
Schedule of noncash investing and financing activities:
Conversion of notes payable to Series B Preferred Stock... $ 1,550
========
Conversion of notes payable to Series C Preferred Stock... $ 2,000
========
Equipment acquired under capital lease obligations........ $ 763
========
See accompanying notes.
F-6
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
AllAdvantage.com Inc. (AllAdvantage or the Company) was incorporated on
March 24, 1999 and launched its service in July 1999. AllAdvantage provides
businesses with an online advertising, direct marketing and electronic commerce
tool to target and reach AllAdvantage's community of members through
AllAdvantage's proprietary Viewbar targeting technology. In turn, AllAdvantage
provides its members with cash compensation, as well as Internet navigation and
electronic commerce links, for actively using the Viewbar.
AllAdvantage has incurred net losses and negative cash flows from operations
since inception. AllAdvantage's ability to meet obligations in the ordinary
course of business is dependent on its ability to establish profitable
operations and raise additional funds through public or private equity
financings, collaborative or other arrangements with corporate sources, or
other sources of financing. In the period from inception (March 24, 1999) to
December 31, 1999, AllAdvantage has received financing of approximately
$33,900,000 through the issuance of common stock, Series A, B and C convertible
preferred stock and convertible notes payable (see Note 4). Management believes
that these funds, together with the Series D convertible preferred stock
financing, that closed in February 2000 (see Note 10), will be sufficient to
enable AllAdvantage to meet its planned expenditures through December 31, 2000.
If anticipated operating results are not achieved, management has the ability
and intends to delay or reduce expenditures so as not to require additional
financial resources, if those resources are not available on terms acceptable
to AllAdvantage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of AllAdvantage
and its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosures of contingent liabilities. Actual results could
differ from those estimates.
Cash Equivalents
AllAdvantage considers all highly liquid investments with a maturity of
three months or less from the date of purchase to be cash equivalents. Cash
equivalents consist of money market funds, commercial paper and government
agency instruments.
AllAdvantage accounts for marketable investments under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," (SFAS No. 115). Under SFAS No. 115, management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. To
date, all marketable securities have been classified as available-for-sale and
are carried at fair value at quoted market prices. Unrealized gains and losses
are reported as a separate component of accumulated comprehensive income. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization or
accretion is included in interest income or interest expense respectively. The
cost of securities sold is based on the specific identification method.
Interest earned on securities classified as available-for-sale is included in
interest income.
F-7
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, AllAdvantage had U.S. Government securities and
commercial paper available for sale at fair market values of $249,000 and
$19,482,000, respectively, with fair values approximating amortized cost. As of
December 31, 1999, all available-for-sale securities were recorded as cash
equivalents since the maturities of the instruments at the date of purchase
were less than 90 days. By policy, the Company limits similar types of
investments and diversifies investing activities utilizing multiple investment
agencies.
Certain Risks and Concentrations
AllAdvantage has a limited operating history and its prospects are subject
to the risks, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies in new and rapidly
evolving markets such as Internet services. These risks include the failure to
develop and extend online service brands, the rejection of services by
AllAdvantage's members, vendors and/or advertisers and the inability of
AllAdvantage to maintain and increase its member base, as well as other risks
and uncertainties.
AllAdvantage's revenue is principally derived from the sale of
advertisements, the market for which is highly competitive and rapidly
changing. Significant changes in the industry or changes in customer buying
behavior could adversely affect operating results.
Financial instruments that potentially subject AllAdvantage to
concentrations of credit risk consist principally of investments in debt
securities and trade receivables. AllAdvantage is exposed to credit risks in
the event of default by the financial institutions or issuers of investments to
the extent those investments are recorded on the balance sheet. AllAdvantage
generally does not require collateral. From inception (March 24, 1999) to
December 31, 1999, one customer represented 19% of AllAdvantage's revenues.
AllAdvantage had no credit losses in the period from inception (March 24, 1999)
to December 31, 1999.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accrued member payables and accounts payable, are carried
at historical cost, which approximates their fair value because of the short-
term maturities of these instruments. The fair value of capital lease
obligations is estimated based on current interest rates available to
AllAdvantage for debt instruments with similar terms, degrees of risk, and
remaining maturities. The carrying value of these obligations approximate their
fair values as of December 31, 1999.
Property and Equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or terms of the leases, whichever are shorter.
Revenue Recognition
AllAdvantage's revenues were substantially derived from the sale of
advertisements, which includes arrangements for the delivery of impressions or
click-throughs and sponsorships. The foregoing may include additional
performance-based revenues based on arrangements with individual sponsors or
advertisers. Advertising and sponsorship revenues are recognized in the period
in which the advertisement or sponsorship placement is displayed, based upon
the total number of impressions delivered, provided that no significant
obligations remain and collection of the related receivable is probable.
AllAdvantage's obligations typically include the guarantee of a minimum number
of impressions or the satisfaction of other performance criteria.
F-8
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The guaranteed minimum number of impressions is generally required to be
delivered over the term of the commitment, which has generally ranged from
several weeks to two months. Revenues from performance-based arrangements,
including click-throughs, are recognized as the related performance criteria
are met. Revenues from advertising sold through third-party sales organizations
are recognized net of commissions. Revenues from commissions for referring
electronic commerce are recognized upon receipt of payment. Fees paid to us in
advance of satisfaction of revenue recognition criteria are recorded as
deferred revenues.
To date, AllAdvantage has not recognized any revenue related to the
nonmonetary exchange of advertising for advertising or other services as such
exchanges were not objectively determinable based on criteria set forth in
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary
Transactions."
Direct Member Costs
Direct member costs consist of costs incurred to compensate members for
using the Internet while the Viewbar is activated. These costs are expensed as
incurred.
Sales and Marketing
Sales and marketing expenses include personnel and related costs for the
direct sales force and marketing staff, marketing and promotional programs
fees, member referral costs and costs related to the delivery of advertisements
to the Viewbar. These costs are expensed as incurred. Member referral costs and
costs related to the delivery of advertisements to the Viewbar included in
sales and marketing expenses totaled $2,981,000 and $2,913,000 respectively,
for the period from inception to December 31, 1999. Advertising expenses, which
consist primarily of advertising to business customers, were $1,074,000 for the
period from inception to December 31, 1999. Advertising costs are expensed as
incurred in accordance with Statement of Position No. 93-7, "Reporting on
Advertising Costs."
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," requires the capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on
AllAdvantage's product development process, technological feasibility is
established upon the completion of a working model. Through December 31, 1999,
capitalizable costs incurred after achieving technological feasibility have not
been significant for any development project. Accordingly, AllAdvantage has
charged all costs to research and development expense in the periods they were
incurred.
AllAdvantage adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" during 1999, which requires
capitalization of certain costs incurred during the development of internal use
software. Through December 31, 1999 capitalizable costs incurred have not been
significant for any development project. Accordingly, AllAdvantage has charged
all costs to research and development expense in the periods they were
incurred.
Segment Reporting
Effective March 24, 1999, AllAdvantage adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. AllAdvantage has determined that it did not have any
separately reportable business segments as of December 31, 1999.
F-9
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
AllAdvantage accounts for its stock options and equity awards in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and has elected to follow the "disclosure only"
alternative prescribed by Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). AllAdvantage accounts for stock options issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force 96-18.
Comprehensive Loss
AllAdvantage has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive loss and its components in the financial statements. To
date, AllAdvantage's comprehensive loss has equaled its net loss.
Net Loss Per Share
Basic net loss per share and diluted net loss per share are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS No. 128), for the period presented. Pursuant to the Securities
and Exchange Commission Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued or granted for nominal consideration prior
to the anticipated effective date of the initial public offering must be
included in the calculation of basic and diluted net loss per share as if they
had been outstanding for all periods presented. Through December 31, 1999,
AllAdvantage had not had any issuances or grants for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share have
been computed using the weighted-average number of shares outstanding during
the period, less the weighted-average number of shares of common stock issued
to founders, investors and employees that are subject to repurchase. Basic and
diluted pro forma net loss per share, as presented in the statement of
operations, has been computed as described above and also gives effect, under
Securities and Exchange Commission ("SEC") guidance, to the conversion of the
convertible preferred stock (using the if-converted method) as though it had
happened on the original date of issuance. The following table presents the
calculations of basic and diluted and pro forma basic and diluted net loss per
share:
[Download Table]
Period from Inception
(March 24, 1999) to
December 31, 1999
---------------------
Net loss................................................. $ 37,109,000
============
Basic and diluted:
Weighted-average shares of common stock outstanding.... 23,344,138
Less: weighted-average shares subject to repurchase.... (15,977,627)
------------
Weighted-average shares used in computing basic and
diluted net loss per share.............................. 7,366,511
============
Basic and diluted net loss per share..................... $ (5.04)
============
Pro forma:
Shares used above...................................... 7,366,511
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock..... 31,006,461
Less: weighted-average shares of convertible preferred
stock subject to repurchase........................... (85,773)
------------
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)...................... 38,287,199
============
Pro forma basic and diluted net loss per share
(unaudited)......................................... $ (0.97)
============
F-10
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AllAdvantage has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per share because all these
securities are antidilutive for the period presented. If the offering
contemplated by this prospectus is consummated, all of the convertible
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity at December 31, 1999, as adjusted for
the assumed conversion of convertible preferred stock based on the shares of
convertible preferred stock outstanding at December 31, 1999, is disclosed on
the accompanying consolidated balance sheet. In February 2000, AllAdvantage
completed a private placement of 16,453,926 shares of Series D convertible
preferred stock (See Note 10). Had this transaction occurred prior to December
31, 1999, the pro forma weighted average shares calculated above would have
been higher. The total number of shares excluded from the calculations of
diluted net loss per share were as follows:
[Download Table]
Total
Shares
----------
Common stock, subject to repurchase............................. 20,498,129
Preferred stock (prior to conversion to common stock)........... 19,567,343
Common stock options outstanding................................ 10,484,233
Warrants to purchase preferred stock (prior to conversion to
common stock).................................................. 238,775
----------
50,788,480
==========
Income Taxes
Since incorporation, AllAdvantage has recognized income taxes under the
liability method. Deferred income taxes are recognized for differences between
the financial statement and tax basis of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires AllAdvantage to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through net income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be
immediately recognized in earnings. SFAS No. 133 is effective for years
beginning after June 15, 2000. AllAdvantage does not currently hold any
derivatives and does not expect this pronouncement to materially impact the
results of its operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. AllAdvantage believes that its
current revenue recognition principles comply with SAB 101.
F-11
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
[Download Table]
December 31,
1999
------------
Computer software and equipment............................... $4,660
Leasehold improvements........................................ 241
Furniture and fixtures........................................ 152
------
Total....................................................... 5,053
Less: accumulated depreciation and amortization............... (348)
------
$4,705
======
4. STOCKHOLDERS' EQUITY
Convertible Preferred Stock:
[Download Table]
Shares Issued and
Shares Outstanding at Liquidation
Authorized December 31, 1999 Preference
---------- ----------------- -----------
Series A........................ 4,000,000 4,000,000 $ 200,000
Series B........................ 2,500,000 2,500,000 1,800,000
Series C........................ 16,163,266 13,067,343 32,014,990
---------- ---------- -----------
Total convertible preferred
stock........................ 22,663,266 19,567,343 $34,014,990
========== ========== ===========
Holders of AllAdvantage's Series A, B and C preferred stock are entitled to
one vote for each share of common stock into which the preferred stock is
convertible. Holders of AllAdvantage's preferred stock are also entitled to
vote separately as a class with regard to customary protective provisions.
The holders of Series A, B and C preferred stock are entitled to annual
noncumulative dividends per share of $0.005, $0.072 and $0.245, respectively,
when and if declared by the board of directors. In the event of any voluntary
or involuntary liquidation of AllAdvantage, Series A, B and C stockholders are
entitled to a liquidation preference of $0.05, $0.72 and $2.45 per share,
respectively, all in preference to the holders of the common stock. After
payment to the Series A, B and C stockholders of all preferential amounts in
the event of liquidation, the holders of the common stock will receive any and
all remaining assets of AllAdvantage.
The holders of Series A, B and C preferred stock have the right at any time
to convert their shares into common stock. Series A and B preferred stock will
convert into four shares of common stock, while Series C preferred stock will
convert into two shares of common stock. Each share of preferred stock will be
automatically converted into common stock upon the closing of a firm commitment
of a public offering of AllAdvantage common stock with aggregate proceeds in
excess of $10,000,000.
In May and June 1999, AllAdvantage issued $1,550,000 of convertible notes
payable. In June 1999, the convertible notes payable were converted into
2,152,777 shares of Series B preferred stock.
In July 1999, AllAdvantage issued $2,000,000 of convertible notes payable.
In September 1999, the convertible notes payable were converted into 816,327
shares of Series C preferred stock.
F-12
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
In connection with the issuance of convertible notes payable of $2,000,000
in July 1999, AllAdvantage issued warrants to purchase 244,897 shares of
Series C Preferred Stock at $0.06 per share, of which warrants to purchase
6,122 shares were exercised in 1999. AllAdvantage valued the warrants using
the Black-Scholes option model. The following assumptions were used in the
option pricing model: stock price of $2.45, exercise price of $0.06, warrant
term of 10 years, risk-free rate of interest of 6.1%, 100% volatility, and a
dividend yield of 0%. The value of the warrants (approximately $528,000) was
expensed as additional interest expense during the period for which the notes
remained outstanding.
Common Stock
AllAdvantage issued 24,000,000 shares of common stock to its founders. The
shares issued to founders were sold pursuant to restricted stock purchase
agreements containing lapsing repurchase provisions established by the board
of directors. These provisions give AllAdvantage the right to repurchase
shares at the original sales price. This right expires at the rate of 25%
after one year and 2.08% each month thereafter. At December 31, 1999,
15,999,996 of the shares issued outside of the 1999 Equity Incentive Plan,
remained subject to repurchase.
As of December 31, 1999, shares of common stock reserved for future
issuance consisted of the following:
[Download Table]
Stock options..................................................... 10,701,867
Series A, B and C convertible preferred stock..................... 52,134,686
Series C warrants................................................. 477,550
----------
63,314,103
==========
Stock Splits
AllAdvantage effected a two-for-one stock split of common stock in both
July and October 1999. The common share information and preferred stock
conversion ratios in the accompanying financial statements have been
retroactively restated to reflect the effect of the stock splits.
5. EQUITY INCENTIVE PLAN
In April 1999, the board of directors approved the 1999 Equity Incentive
Plan (the "Plan"). Under the Plan, AllAdvantage has reserved 15,200,000 shares
for issuance to eligible participants. The Plan provides for option grants at
an option price no less than 85% of the fair market value of the stock subject
to the option on the date the option is granted. The options vest at a rate of
25% after one year of service and ratably over 36 months thereafter, and are
immediately exercisable in full, with the unvested portion of the shares
remaining subject to repurchase by AllAdvantage at the exercise price until
the shares become vested.
AllAdvantage had 4,498,133 unvested shares of common stock issued and
outstanding under the Plan at December 31, 1999, which were subject to
repurchase by the Company at the original exercise price. All options under
the Plan expire ten years after their grant.
The Plan also provides for restricted stock awards. The purchase price of
restricted stock under these awards must not be less than 85% of the fair
market value of the stock on the date the award is made or the purchase is
consummated. No restricted stock had been awarded at December 31, 1999.
F-13
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate activity under the Plan is summarized as follows:
[Download Table]
Options Outstanding
-----------------------
Shares Weighted-
Available Number of Price per Average
for Grant Shares Share Exercise Price
----------- ---------- ------------- --------------
Authorized.............. 15,200,000 -- -- --
Options granted......... (15,543,366) 15,543,366 $0.03 - $1.25 $0.50
Options canceled........ 561,000 (561,000) $0.03 - $0.18 $0.04
Options exercised....... -- (4,498,133) $0.03 - $0.75 $0.10
----------- ----------
Balance at December 31,
1999................... 217,634 10,484,233 $0.03 - $1.25 $0.69
=========== ==========
The following table summarizes information regarding options outstanding and
exercisable at December 31, 1999:
[Download Table]
Weighted-
Number Weighted- Average
Outstanding Average Remaining
Exercise and Exercise Contractual
Prices Exercisable Price Age (Years)
-------- ----------- --------- -----------
$0.03.................................... 2,250,000 $0.03 9.56
0.18.................................... 2,017,000 0.18 9.68
0.75.................................... 1,843,367 0.75 9.78
1.25.................................... 4,373,866 1.25 9.97
----------
10,484,233 $0.69 9.79
==========
In the period from inception (March 24, 1999) to December 31, 1999,
AllAdvantage recorded deferred stock compensation of approximately $20,119,000,
representing the aggregate difference between the exercise prices and the
deemed fair values of the AllAdvantage common stock on the dates these stock
options were granted. This amount is included as a reduction in stockholders'
equity and is being amortized by charges to operations on a graded vesting
method. AllAdvantage recorded amortization of deferred stock compensation of
approximately $1,547,000 for the period from inception (March 24, 1999) to
December 31, 1999. At December 31, 1999, AllAdvantage had a total of
$18,572,000 remaining to be amortized over the corresponding vesting periods of
the options, generally four years. The remaining deferred stock compensation at
December 31, 1999 will be amortized as follows: $9.7 million for the year
ending December 31, 2000, $5.1 million for the year ending December 31, 2001,
$2.7 million for the year ending December 31, 2002 and $1.1 million for the
year ending December 31, 2003. Stock-based compensation expense relates to
stock options awarded to individuals in all cost and expense categories.
In 1999, AllAdvantage issued options to purchase 159,323 shares of common
stock to several third party consultants in exchange for services rendered. In
connection with these options to purchase common stock, AllAdvantage recorded a
non-cash charge of $660,000 in its statement of operations for the period from
inception (March 24, 1999) to December 31, 1999.
F-14
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
AllAdvantage has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based compensation plans. Because the
exercise price of the employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is generally
recognized. Pro forma information regarding net loss has been determined as if
AllAdvantage accounted for its employee stock options under the fair value
method prescribed by SFAS 123. The resulting effect on pro forma net loss
disclosed is not likely to be representative of the effects on net loss on a
pro forma basis in future years, due to additional grants and years of vesting
in subsequent years. The fair value of each option granted through December 31,
1999 was estimated on the date of grant using the minimum value method, with
the following weighted-average assumptions:
[Download Table]
Period from Inception
(March 24, 1999) to
December 31, 1999
---------------------
Dividend yield....................................... 0
Risk-free interest rate.............................. 6%
Expected life........................................ 4 years
Weighted-average fair value of options granted....... $ 1.46
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma expense over the options' vesting period, and
results in a pro forma net loss of approximately $37,237,000 for the period
from inception (March 24, 1999) to December 31, 1999 and pro forma basic and
diluted net loss per share of $5.05 ($0.97 assuming conversion of the
convertible preferred stock that was outstanding at December 31, 1999).
6. PROVISION FOR INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the period from inception
(March 24, 1999) to December 31, 1999.
As of December 31, 1999, AllAdvantage had federal net operating loss
carryforwards of approximately $28,600,000. The net operating loss
carryforwards will expire beginning in 2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and credit carryforwards and of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and the
amounts used for income tax purposes. Significant components of AllAdvantage's
deferred tax assets are as follows (in thousands):
[Download Table]
As of
December 31,
1999
------------
Deferred tax assets:
Net operating loss carryforwards............................ $ 11,700
Accrued member payouts...................................... 2,700
Other individually immaterial items......................... 300
--------
Total deferred tax assets................................. 14,700
Valuation allowance for deferred tax assets................... (14,700)
--------
Net deferred tax assets....................................... $ --
========
F-15
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FASB No. 109 provides for the recognition of deferred tax assets if
realization of these assets is more likely than not. Based upon the weight of
available evidence, which includes AllAdvantage's historical operating
performance, the Company has provided a full valuation allowance against its
total deferred tax assets.
7. CUSTOMER ADVANCE
In November 1999, AllAdvantage entered into an arrangement with a company,
whereby AllAdvantage is required to provide the other company with a certain
amount of advertising impressions on a monthly basis. In return, AllAdvantage
received an advance of $20,000,000. The advance accrues interest at 10% and is
secured by the advance itself. Under the terms of the arrangement, AllAdvantage
may use $5,000,000 per month for general corporate uses, with all restrictions
expiring on February 12, 2000. AllAdvantage has classified $10,000,000 as
restricted cash at December 31, 1999. Revenue earned by Alladvantage for
providing monthly advertising impressions is reduced from the cash advance on a
monthly basis. In addition, in November 1999, AllAdvantage entered into a
three-year arrangement with this company for that company to provide ad serving
services. AllAdvantage pays the company based on the number of impressions
served during each month, with a guaranteed minimum monthly fee.
8. COMMITMENTS
At December 31, 1999, AllAdvantage's aggregate commitments under
noncancelable lease arrangements for office space and computer equipment were
as follows (in thousands):
[Download Table]
Capital Operating
Leases Leases
------- ---------
Year ending December 31,
2000..................................................... $ 444 $1,085
2001..................................................... 255 894
2002..................................................... -- 927
2003..................................................... -- 183
2004..................................................... -- 189
Thereafter............................................... -- 344
----- ------
Total minimum payments required.......................... 699 $3,622
======
Less amount representing interest........................ (62)
-----
Present value of future payments......................... 637
Less current portion..................................... (383)
-----
$ 254
=====
Rent expense, principally for leased office space under operating lease
commitments, was approximately $365,000 for the period from inception (March
24, 1999) to December 31, 1999. AllAdvantage acquired $763,000 of equipment
under capital lease obligations for the period from inception (March 24, 1999)
to December 31, 1999. Accumulated depreciation for this equipment was $56,000
at December 31, 1999.
9. RELATED PARTY TRANSACTIONS
During 1999, one of the founders' spouses, through their placement firm
supplied recruiting and contract labor services to AllAdvantage. AllAdvantage
paid the placement firm $206,000 for such services rendered during 1999.
Management believes such services were rendered at fair value.
F-16
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. PRIVATE PLACEMENT EQUITY OFFERING OF SERIES D CONVERTIBLE PREFERRED STOCK
In February 2000, AllAdvantage completed a private placement of 16,453,926
shares of Series D convertible preferred stock at $6.05 per share, resulting in
net cash proceeds of $94,544,000. Holders of Series D preferred stock are
entitled to annual noncumulative dividends of $0.605 per share when and if
declared by the board of directors. In the event of voluntary or involuntary
liquidation of AllAdvantage, holders of Series D Convertible Preferred Stock
are entitled to a liquidation preference of $6.05 per share plus all declared
and unpaid dividends. Holders of Series D preferred stock are entitled to one
vote for each share of common stock into which the preferred stock is
convertible. Each share of preferred stock will be automatically converted into
one share of common stock upon the closing of a firm commitment of a public
offering of AllAdvantage common stock with aggregate proceeds in excess of
$10,000,000. If the initial public offering price of the shares in this
offering is less than $12.05, then the conversion ratio for the Series D
preferred stock will be adjusted such that each share of Series D preferred
stock will convert into the number of shares of common stock equal to the
result obtained by dividing $6.05 by the greater of one-half of the offering
price or $4.84.
11. SUBSEQUENT EVENTS (unaudited)
Initial Public Offering
In January 2000, the board of directors authorized AllAdvantage to file a
registration statement with the SEC for an initial public offering of
AllAdvantage's common stock.
Amended Articles of Incorporation
In January 2000, the board of directors approved the reincorporation of
AllAdvantage in the State of Delaware, and an increase in the number of
authorized shares, which will be effected prior to the closing of the initial
public offering.
Lease Commitment
In January 1999, AllAdvantage entered into a ten-year lease arrangement for
its yet to be constructed headquarters. Under the terms and conditions of the
lease arrangement, AllAdvantage will commence making lease payments in December
2000, the approximate completion date of construction. Aggregate lease payments
under the term of the lease will be approximately $46,428,000 over the 10 year
term of the lease. As a condition of the lease agreement, AllAdvantage is
required to provide a letter of credit of $2 million (which may increase to as
much as $6.3 million) as a security deposit. In connection with the lease
arrangement, AllAdvantage issued a warrant to the lessor to purchase 75,000
shares of Series D Preferred Stock at $6.05 per share. The value of the warrant
will be capitalized as deferred rental expense and expensed over the period of
the lease arrangement, commencing with occupation of the building.
2000 Equity Incentive Plans
The 2000 equity incentive plan of our California predecessor was adopted by
AllAdvantage's board of directors in January, 2000. As of December 31, 1999, no
options had been granted under this plan.
In February, 2000, AllAdvantage's board of directors approved the adoption
of the 2000 Equity Incentive Plan. A total of 20,000,000 shares of common stock
have been reserved for issuance under this plan. The number of shares reserved
under this plan will be increased automatically on January 1, of each year by
an
F-17
AllAdvantage.com Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amount equal to 5% of AllAdvantage's total outstanding shares on the previous
day. This plan will serve as the successor to the 1999 equity incentive plan
and 2000 equity incentive plan of our California predecessor.
2000 Employee Stock Purchase Plan
In February, 2000, the board of directors approved the adoption of the 2000
Employee Stock Purchase Plan. A total of 600,000 shares of common stock has
been reserved for issuance under this plan, plus, commencing on January 1,
2001, annual increases equal to 1% of the outstanding common shares on the
previous day or a lesser amount determined by the board of directors. The plan
enables eligible employees to acquire shares of AllAdvantage common stock
through periodic payroll deductions of up to 15% of their cash compensation,
subject to maximum purchase limitations. The purchase plan will be implemented
in a series of offering periods, each approximately two years in duration,
consisting of four six-month purchase periods. The price at which the common
stock may be purchased is 85% of the lesser of the fair market value of
AllAdvantage'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.
F-18
GRAPHICS AND TEXT ON THE INSIDE BACK COVER INCLUDE:
The following words are centered across the top of the inside back cover:
"Self-Perpetuating Cycle"
The AllAdvantage.com logo without the word AllAdvantage.com embedded in the
logo is centered in the middle of the page directly below the initial text.
Surrounding the logo is a circle comprised of four curved arrows each arrow
constituting a quadrant of the circumference of the circle. The following text
is presented in the center of each arrow, starting with the arrow above the
logo and following clockwise around the circle: "More Advertisers, More Value
to Members," "More Value to Members, More Incentive to Refer Members," "More
Members, Larger Profiled Audience,""More Attractive Advertising Channel Growth
to Advertiser Base."
At the bottom right hand corner of the page is Alladvantage.com's logo.
[AllAdvantage Logo]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by
AllAdvantage in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the SEC registration
fee, the NASD filing fee and the Nasdaq National Market filing fee.
[Download Table]
SEC registration fee............................................... $ 39,600
NASD filing fee.................................................... 15,500
Nasdaq National Market filing fee.................................. 95,000
Printing and engraving............................................. *
Legal fees and expenses of the Registrant.......................... *
Accounting fees and expenses....................................... *
Directors and officers liability insurance......................... *
Blue sky fees and expenses......................................... *
Transfer agent and registrar fees and expenses..................... *
Miscellaneous...................................................... *
--------
Total............................................................ $
========
--------
*To be filed by amendment
ITEM 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers under certain circumstances and subject to certain limitations.
The terms of Section 145 of the Delaware General Corporation Law are
sufficiently broad to permit indemnification under certain circumstances for
liabilities, including reimbursement of expenses incurred, arising under the
Securities Act of 1933 (the "Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's
certificate of incorporation includes a provision that eliminates the personal
liability of a director for monetary damages resulting from breach of his
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to the Registrant or
its stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
bylaws provide that:
. the Registrant is required to indemnify its directors and officers to
the fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions;
. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions; and
. the rights conferred in the Bylaws are not exclusive.
II-1
In addition, the Registrant intends to enter into indemnity agreements with
each of its current directors and officers. These agreements will provide for
the indemnification of officers and directors for all expenses and liabilities
incurred in connection with any action or proceeding brought against them by
reason of the fact that they are or were agents of the Registrant.
The Registrant intends to obtain directors' and officers' insurance to cover
its directors, officers and some of its employees for certain liabilities,
including public securities matters.
The Underwriting Agreement filed as Exhibit 1.01 to this Registration
Statement provides for indemnification by the underwriters of the Registrant
and its directors and officers for certain liabilities under the Securities Act
of 1933, or otherwise.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
[Download Table]
Exhibit Document Number
---------------- ------
Form of Underwriting Agreement...................................... 1.01
Form of Second Amended and Restated Certificate of Incorporation of
the Registrant..................................................... 3.03
Restated Bylaws of the Registrant................................... 3.05
Form of Indemnity Agreement......................................... 10.01
ITEM 15. Recent Sales of Unregistered Securities.
Since our inception in March 1999, we have issued and sold the following
unregistered securities:
1. In April 1999, 24,000,000 shares of common stock were issued to our
founders pursuant to restricted stock purchase agreements.
2. In April 1999, we issued and sold a total of 4,000,000 shares of
Series A preferred stock to our founders for a total purchase price of
$200,000 paid through cancellation of indebtedness.
3. In June 1999, we issued and sold a total of 2,500,000 shares of
Series B preferred stock to private investors for a total purchase price of
$1,800,000, $1,550,000 of which was paid through conversion of promissory
notes and the remainder of which was paid in cash.
4. In September 1999, we issued and sold a total of 12,497,956 shares of
Series C preferred stock to private investors for a total purchase price of
$30,619,992, $2,000,000 of which was paid through conversion of promissory
notes and the remainder of which was paid in cash. In October 1999, we
issued and sold an additional 155,102 shares of Series C preferred stock to
private investors for a total purchase price of $380,000 in cash. In
October 1999, we committed to issue, and in December 1999, we issued and
sold an additional 408,163 shares of Series C preferred stock to the
Michael A. Depatie Trust U/A DTD 7/18/91 for a purchase price of $999,999
in cash.
5. In September 1999, we issued warrants to purchase a total of 244,897
shares of Series C preferred stock with an exercise price of $0.06 per
share to private investors. In November 1999, a warrant to purchase 6,122
shares of Series C preferred stock was exercised. As of December 31, 1999,
warrants to purchase a total of 238,775 shares of Series C preferred stock
remained outstanding.
6. In February 2000, we issued and sold a total of 16,453,926 shares of
Series D preferred stock to private investors for a total purchase price of
$99,546,252 in cash.
7. In February 2000, we issued a warrant to purchase a total of 75,000
shares of our Series D preferred stock with an exercise price of $6.05 per
share for a purchase price of $750 to a landlord.
8. Since March 1999, shares of common stock have been issued to
our employees, consultants and other service providers upon exercise of
options, and as of December 31, 1999, 10,484,233 shares of common stock
were issuable upon exercise of outstanding options.
II-2
The 4,000,000 shares of Series A preferred stock will automatically convert
on a four-for-one basis into 16,000,000 shares of common stock upon the
consummation of this offering as a result of two-for-one common stock splits
effected on July 1, 1999 and October 13, 1999. The 2,500,000 shares of Series B
preferred stock will automatically convert on a four-for-one basis into
10,000,000 shares of common stock upon the consummation of this offering as a
result of two-for-one common stock splits effected on July 1, 1999 and October
13, 1999. The 13,067,343 shares of Series C preferred stock will automatically
convert on a two-for-one basis into 26,134,686 shares of common stock upon the
consummation of this offering as a result of a two-for-one common stock split
effected on October 13, 1999.
The 16,453,926 shares of Series D preferred stock will automatically convert
on a one-for-one basis into 16,453,926 shares of common stock upon the
consummation of this offering. However, if the shares in this offering are
offered at a price of less than $12.10, then the conversion ratio for the
Series D preferred stock will be adjusted, such that each share of Series D
preferred stock will convert into that number of shares of common stock equal
to the quotient obtained by dividing $6.05 by the greater of one-half of the
offering price or $4.84.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder or Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions by an issuer not involving
any public offering or transactions pursuant to compensation benefit plans and
contracts relating to compensation as provided under Rule 701. These sales were
made without general solicitation or advertising. The recipients of securities
in each such transaction represented their intentions to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof. Each purchaser was a sophisticated investor with access
to all relevant information necessary to evaluate the investment.
ITEM 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
[Download Table]
Exhibit
Number Exhibit Title
------- -------------
1.01* Form of Underwriting Agreement.
2.01 Form of Agreement and Plan of Merger between the Registrant and
the Registrant's California predecessor.
3.01+ Certificate of Incorporation of the Registrant, filed with the
Delaware Secretary of State on January 4, 2000.
3.02 Form of First Amended and Restated Certificate of Incorporation
of the Registrant to be filed and effective prior to completion
of this offering.
3.03 Form of Second Amended and Restated Certificate of Incorporation
of the Registrant to be filed and effective upon the completion
of this offering.
3.04+ Bylaws of the Registrant.
3.05 Restated Bylaws of the Registrant to be effective prior to
completion of this offering.
4.01* Form of Specimen Certificate for Registrant's common stock.
4.02 Second Amended and Restated Investors' Rights Agreement.
5.01* Opinion of Fenwick & West LLP regarding legality of the
securities being registered.
10.01 Form of Indemnity Agreement entered into between the Registrant
and its directors and executive officers.
10.02+ 1999 equity incentive plan of Registrant's California
predecessor and related forms of stock option agreements and
stock option exercise agreements.
10.03 2000 equity incentive plan of Registrant's California
predecessor and related forms of stock option agreements and
stock option exercise agreements.
10.04 2000 equity incentive plan and related forms of stock option
agreements and stock option exercise agreements.
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[Download Table]
10.05 2000 employee stock purchase plan and related enrollment form,
notice of suspension and notice of withdrawal.
10.06+ Form of Restricted Stock Purchase Agreement entered into between
Registrant and its founders.
10.07**+ Network Affiliate Agreement entered into between Registrant and
DoubleClick Inc.
10.08**+ DART Services Agreement for Publishers entered into between
Registrant and DoubleClick Inc.
Network Affiliation Agreement entered into between Registrant and
10.09**+ 24/7 Media Inc.
10.10+ Lease Agreement entered into between Registrant and Hayward Point
Eden I Limited Partnership.
Office Building Lease entered into between Registrant and HMS
10.11+ Gateway Office, L.P.
10.12 Series D Preferred Stock Purchase Agreement.
10.13+ Viewbar Agreement.
21.01+ List of subsidiaries.
23.01* Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, Independent Auditors.
24.01+ Power of Attorney.
27.01+ Financial Data Schedule.
--------
+Previously filed.
*To be supplied by amendment.
**Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) Financial statement schedules are omitted because the information called
for is not required or is shown either in the financial statements or the notes
thereto.
ITEM 17. Undertakings.
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.
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 under Item 14 above, 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 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 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 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Hayward, State of California, on the 29th day of February, 2000.
AllAdvantage.com Inc.
/s/ James Jorgensen
By: _________________________________
James Jorgensen
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
[Download Table]
Signature Title Date
--------- ----- ----
/s/ James Jorgensen President, Chief Executive February 29, 2000
_______________________________ Officer and Chairman of
James R. Jorgensen the Board of Directors
(Principal Executive Officer)
* Chief Financial Officer February 29, 2000
_______________________________ (Principal Financial
Michael A. Depatie Officer)
* Vice President Finance, February 29, 2000
_______________________________ Treasurer (Principal
Bernie Murphy Accounting Officer)
* Director February 29, 2000
_______________________________
William L. Burnham
* Director February 29, 2000
_______________________________
Richard LeFurgy
* Director February 29, 2000
_______________________________
David Pidwell
* Director February 29, 2000
_______________________________
Johannes Pohle
* Director February 29, 2000
_______________________________
John Shoch
* Director February 29, 2000
_______________________________
Thomas Unterman
[Download Table]
*By: /s/ James Jorgensen Attorney-in-fact February 29, 2000
___________________________
James Jorgensen
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EXHIBIT INDEX
[Download Table]
Exhibit
Number Exhibit Title
------- -------------
1.01* Form of Underwriting Agreement.
2.01 Form of Agreement and Plan of Merger between the Registrant and the
Registrant's California predecessor.
3.01+ Certificate of Incorporation of the Registrant, filed with the
Delaware Secretary of State on January 4, 2000.
3.02 Form of First Amended and Restated Certificate of Incorporation of
the Registrant to be filed and effective prior to completion of this
offering.
3.03 Form of Second Amended and Restated Certificate of Incorporation of
the Registrant to be filed and effective upon the completion of this
offering.
3.04+ Bylaws of the Registrant.
3.05 Restated Bylaws of the Registrant to be effective prior to completion
of this offering.
4.01* Form of Specimen Certificate for Registrant's common stock.
4.02 Second Amended and Restated Investors' Rights Agreement.
5.01* Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
10.01 Form of Indemnity Agreement entered into between the Registrant and
its directors and executive officers.
10.02+ 1999 equity incentive plan of Registrant's California predecessor and
related forms of stock option agreements and stock option exercise
agreements.
10.03 2000 equity incentive plan of Registrant's California predecessor and
related forms of stock option agreements and stock option exercise
agreements.
10.04 2000 equity incentive plan and related forms of stock option
agreements and stock option exercise agreements.
10.05 2000 employee stock purchase plan and related enrollment form, notice
of suspension and notice of withdrawal.
10.06+ Form of Restricted Stock Purchase Agreement entered into between
Registrant and its founders.
10.07**+ Network Affiliate Agreement entered into between Registrant and
DoubleClick Inc.
10.08**+ DART Services Agreement for Publishers entered into between
Registrant and DoubleClick Inc.
10.09**+ Network Affiliation Agreement entered into between Registrant and
24/7 Media Inc.
10.10+ Lease Agreement entered into between Registrant and Hayward Point
Eden I Limited Partnership.
10.11+ Office Building Lease entered into between Registrant and HMS Gateway
Office, L.P.
10.12 Series D Preferred Stock Purchase Agreement.
10.13+ Viewbar Agreement.
21.01+ List of subsidiaries.
23.01* Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, Independent Auditors.
24.01+ Power of Attorney.
27.01+ Financial Data Schedule.
--------
+Previously filed.
*To be supplied by amendment.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
Dates Referenced Herein and Documents Incorporated by Reference
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