ITEM 1. BUSINESS
Overview
Avenue A provides technology-based Internet advertising services to businesses. We use Internet media planning and buying, proprietary ad management technology, anonymous user profiling and data analysis systems to help advertisers increase the effectiveness and return on investment of their Internet advertising campaigns. Through this approach we have developed an extensive knowledge base of Internet advertising strategies, targeting methods and media placements that perform effectively. We believe this knowledge base grows richer and more valuable with each additional campaign we execute and with each additional client we serve. We focus on serving the needs of buyers of Internet advertising, providing a service that harnesses the complexity, interactivity and dynamic nature of the Internet with the objective of delivering the most successful advertising campaigns for our clients.
Our services for Internet advertisers include the following key elements:
Internet media planning and buying. We use our proprietary database and experience from past advertising campaigns to plan highly targeted advertising campaigns for our clients. We negotiate and purchase Internet advertising space for our clients using our status as a large purchaser of advertising and our historical pricing and performance data from past campaigns.
Campaign management. We use our proprietary software and systems, including our Atlas Digital Marketing Suite, in ad serving, anonymous user profiling, performance reporting and data collection and analysis to manage and increase the effectiveness of our clients' Internet advertising campaigns.
Data warehousing and analysis. Our technology enables us to collect, store and analyze extensive data from our previous and current Internet advertising campaigns that we use to plan and improve current and future advertising campaigns for all of our clients.
We recently established our Digital Marketing Technologies division. Through this division, we intend to license our proprietary Atlas Digital Marketing Suite to traditional and online advertising agencies, as well as to large advertisers who have their own media strategy and planning capabilities. We continue to provide our core services to advertisers through our Digital Marketing Solutions division.
Our subsidiary, iballs LLC, provides its clients with Internet media planning and buying services similar to those provided by Avenue A, and uses our ad serving, anonymous user profiling, performance reporting and data collection and analysis capabilities for some of its clients. We believe that our media planning and buying expertise, our proprietary technology and our commitment to serving only advertisers will enable us to continue to strengthen our leadership position in Internet advertising.
Industry Background
Emergence of the Internet as an Advertising Medium
Historically, the leading Internet advertisers have included technology companies, Internet portals and e-commerce companies. However, many of the largest advertisers in traditional media, including mass marketers such as consumer products companies and automobile manufacturers, have begun advertising online. Expenditures for online advertising currently represent a small portion of all media spending, but these expenditures are expected to grow at a higher rate than expenditures for traditional advertising.
Advantages of Internet Advertising
Unlike traditional advertising, Internet advertising involves the delivery of messages which can be tailored for individual viewers, giving the Internet unique characteristics for advertisers. Because Internet advertisements are generally delivered to individual viewers across a digital infrastructure, the Internet has several advantages as an advertising medium, including:
Measurability. The Internet provides the ability to observe and record a wide range of online activities, including the delivery of advertisements to a browser, click-throughs on Internet advertisements, the completion of online purchases and the downloading of software files. As a result, sophisticated Internet advertisers can collect and measure data about a broad range of consumer behaviors associated with a particular advertisement. Using this data, advertisers can track, monitor and measure the effectiveness of their Internet advertising campaigns.
Targeting capabilities. Because each Internet image or message is generally delivered to one user at a time, specific advertisements or emails can be tailored with the goal of addressing the interests and needs of the user. Using the Internet, advertisers can target advertising campaigns to specific geographic regions, specific audiences, and consumer segments with specific demographic or behavioral profiles. Advertisers can also rotate sequentially the advertisements that are delivered to a user's browser. In addition, advertisers can build anonymous user profiles for future advertising campaigns through the use of transaction information, registration procedures and anonymous matching techniques.
Rapid feedback and response. The Internet enables much more rapid measurement of and response to the effectiveness of an advertising campaign than most traditional media. Information on consumer responses to campaigns can be provided promptly after they occur, allowing an advertiser to respond quickly to that feedback. For example, an online retailer can assess which advertisements result in greater numbers of click-throughs or sales, and respond by eliminating under-performing advertisements from the campaign. In addition, a traditional mass marketer that does not sell products online but maintains a Web site to build its brand can determine which online advertisements are resulting in the most visits to its Web site and eliminate under-performing advertisements.
Efficient reach. As a medium with no geographic boundaries, the Internet enables advertisers to reach large audiences throughout the United States and internationally. Unlike traditional print, outdoor, television or radio broadcast advertising, which may require advance media purchases in hundreds of markets to reach an international audience, Internet advertisers can quickly reach individuals worldwide with a single Internet advertising campaign.
Challenges of Internet Advertising
Despite the capabilities of the Internet as an advertising medium, individual advertisers seeking to take advantage of the Internet's potential may face numerous challenges, including:
Scale and complexity. The proliferation of Web sites and the dispersed nature of the Internet audience make it difficult for individual advertisers and ad agencies to target, measure, analyze and optimize Internet advertising campaigns. An advertiser seeking to conduct a campaign across a large number of Web sites or advertising networks must be able to identify appropriate Web sites, understand the technical capabilities of individual Web sites, determine available inventory of desired advertisement placements, choose the size and location of advertisements, negotiate placement pricing and prepare its systems to deliver advertisements and track results. To determine the overall effectiveness of its advertising, an advertiser managing campaigns across different Web sites and advertising networks must reconcile reports from these multiple parties, which are often based on different measurement methodologies and therefore are not easily consolidated or compared.
Data analysis and technology requirements. The measurement and recording of a wide range of online advertising responses, such as click-throughs, purchases or software downloads, can generate large amounts of data. To evaluate and optimize their Internet advertising campaigns, advertisers must analyze this data, which requires access to sophisticated data aggregation, storage and mining technology and capabilities.
Limited services for advertising buyers. The Internet advertising market is broadly segmented into two groups: advertisers seeking to conduct the most effective Internet advertising campaigns at the lowest possible price, and Web sites and advertising networks seeking to maximize the revenue generated by their advertising inventory. We believe that while selling power has been aggregated by large portal sites and advertising networks, there are relatively few buyers of Internet advertising that match the scale of these aggregated sellers.
The Avenue A Advantage
Avenue A integrates proprietary technology and media planning and buying to help advertisers realize the potential of Internet advertising, providing the following benefits:
Comprehensive Internet advertising management services. We provide a wide range of services to conduct and increase the effectiveness of Internet advertising campaigns, including media planning and buying, ad serving, ad management, data analysis and consulting services. We have designed our services to enable advertisers to easily and cost-effectively conduct multiple advertising campaigns across a broad range of Web sites and advertising networks.
Technology-enabled analysis, monitoring, tracking and optimization. We collect and analyze data about hundreds of publisher Web sites, numerous advertising campaigns and tens of millions of anonymous Web user profiles, so that our client strategists can structure targeted advertising campaigns to achieve our clients' desired business results. To improve campaign performance, we use our proprietary technology and data analysis capabilities to track, store and measure data on anonymous Web users' online responses to Internet advertisements promptly after they occur. Based on this data, we generate detailed performance reports that clients can view over the Internet at any time. Using these reports, we can refine and improve our clients' advertising campaigns while they are being conducted to increase their efficiency and effectiveness.
Proprietary knowledge base. Because we have executed a substantial number of Internet advertising campaigns for our clients, we have captured a large quantity of data regarding the efficacy of online advertising campaigns and techniques. Our Client Service teams draw upon our dynamically updated databases to help improve the results of our clients' advertising campaigns. In particular, these teams use our proprietary
knowledge base to more accurately understand which techniques are the most effective, what pricing for placements is appropriate and which targeting efforts are best suited for a particular client's needs.
Focus on Internet advertisers. Because we serve a large number of Internet advertisers, we are a large and frequent purchaser of Internet advertising space. We believe that our status as a large purchaser of Internet advertising, together with our extensive knowledge of historical pricing and performance information, enables us to negotiate efficient, cost-effective advertising purchases for Internet advertisers.
Avenue A's Services
Core services. Our Digital Marketing Solutions division provides to clients our core services, which include media planning and buying, ad serving, campaign analysis, optimization and data collection and aggregation.
. Media planning and buying. Our Client Service teams evaluate our client's needs and objectives, outline a media strategy for the client, develop a media plan by identifying appropriate media placements, and execute this plan by negotiating the rates for these placements and purchasing advertising space.
. Ad serving. Through our proprietary ad serving technology, we serve advertisements on third-party Web sites to execute our clients' advertising campaigns. Our media engineers coordinate and monitor this ad serving process once an advertising campaign begins. Our ad serving systems allow us to adjust advertising campaigns quickly and efficiently because changes required to the advertisements are made on our ad serving systems rather than on each individual Web site where the advertisements appear.
. Campaign analysis. Through our proprietary ad serving systems, we evaluate advertising campaigns based on criteria important to the client, such as sales, leads, registrations and software downloads. We provide this campaign data to our clients in comprehensive online performance reports generated by our system, which our client strategists review with the clients.
. Optimization. Based upon consultations with our clients, our Client Service teams can adjust an advertising campaign in progress to improve its performance. If a Web site is generating unacceptably low response rates, we can remove that Web site from the campaign, reduce the number of impressions allocated to that site, or negotiate a lower rate for advertisement placements on that site. If a Web site is generating high responses, we can serve more advertisements to that Web site.
. Data collection and aggregation. We use our aggregated campaign data to help plan effective advertising campaigns for our clients. As we conduct advertising campaigns, we collect and store data on these campaigns in our data warehouse. Typically, we aggregate data with the data from our advertising campaigns to expand our data warehouse and build our anonymous user profile databases.
Digital Marketing Technologies Division. Through our Digital Marketing Technologies division, we intend to license the Atlas(TM) Digital Marketing Suite, our proprietary technology platform, to traditional and online advertising agencies, as well as to large advertisers who have their own media strategy and planning capabilities. We believe that licensing this platform to third parties represents an additional and fundamentally different opportunity for us to address the Internet advertising market and expand the reach of our Atlas Digital Marketing Suite.
Strategic Partnership Program(TM). Through our Strategic Partnership Program, we manage exclusive or complex partnerships between our clients and Web sites or advertising networks, such as exclusive sponsorships of specific locations or features of a Web site, or advertising campaigns based on several complex measurement criteria or methods of advertising. These arrangements typically have terms ranging from six months to one year. Managers in the Strategic Partnership Program consult with clients to determine their objectives and to negotiate the terms of these longer-term, complex advertising relationships with appropriate Web sites and advertising networks. We then help manage the partnership by providing participants in the program with ongoing advertising campaign analysis and optimization services with respect to exclusive sponsorship links and complex advertising placement arrangements.
Customer Targeting Program(TM). Our Customer Targeting Program enables us to target tailored advertisements to the browsers of users that have previously visited our clients' Web sites. The program is designed to strengthen the clients' relationship with the user, improve response rates and accelerate the sales cycle. This targeting is based on data acquired from prior interactions conducted through that computer on the client's Web site. For example, if the information in our data warehouse indicates that the computer of a particular Web user was previously used to purchase a backpack from our client, our ad serving systems can serve an advertisement to that user's computer recommending additional, complementary purchases, such as hiking boots, tents or fleece jackets.
LifeCycle E-mail Service(TM). Through our LifeCycle E-mail Service (formerly known as Precision E-mail(TM)), we deliver targeted emails to specific customer segments based on their shopping and browsing behavior. This service enables us to assist our clients in expanding their relationship with their customers after they have been acquired. We intend to integrate LifeCycle E-mail campaigns with our online advertising campaigns to enhance the overall effectiveness of our clients' Internet advertising and marketing campaigns.
Consulting. We launched our Consulting Group in October 2000 to provide clients with data-driven insights about their customers. The Consulting Group develops and maintains an evolving suite of proprietary analytical tools, fed by Avenue A data, that lend insight into how customers and prospective customers are likely to behave in the future. These predictive models enable us to advise our clients how to more effectively market to specific customer segments and help them to acquire, maintain, and grow their customer base. For example, with our Customer Retention Analysis, we analyze how customer loyalty is built for a client over time. Hypothetically, we might find that the probability of a customer's first purchase increases significantly upon a third site visit. We would advise clients how and when to market to customers with two site visits to encourage them to make that critical third visit.
Our subsidiary, iballs LLC, provides our Internet media planning and buying services, ad serving, anonymous user profiling, performance reporting and data collection and analysis capabilities to its clients. In addition, iballs LLC's clients can participate in our Strategic Partnership Program and Customer Targeting Program and use our LifeCycle E-mail Service.
Sales, Marketing and Client Service
We acquire clients primarily through our field sales force, which works in sales offices in Seattle, New York City, Chicago, and London. We generate sales leads primarily through field sales and responses to our public relations and marketing efforts. We seek to close sales through a team-based approach, using our Client Service teams to propose integrated solutions for our clients' Internet advertising needs.
In addition, we market our services through our Client Service teams as the services become appropriate for an individual advertiser's evolving needs. For example, if a client has achieved its initial goal of acquiring customers through our advertising services, the client might begin using our Customer Targeting Program to retain these customers or use our LifeCycle E-mail Service to expand into email marketing.
We use a variety of marketing methods to build awareness of Avenue A and our service offerings within our target market and to establish credibility and leadership in the marketplace. These methods include marketing materials, advertising, press coverage and other public relations efforts, direct marketing, trade shows, seminars and conferences, relationships with recognized industry analysts, and the Avenue A Web site.
Technology
Our proprietary technology, including our Atlas Digital Marketing Suite, consists of software applications, Web-based applications, systems and databases, and delivers advertisements. This proprietary technology tracks users' responses, aggregates data and provides standardized reporting and data processing support to the Client Service teams, to the Data Analytics group and to our clients. Our systems and applications consist of several
independently scalable components: data warehousing, technological applications for media planning, campaign management and trafficking, and ad serving. In building these systems and applications, we have developed a significant amount of proprietary software and techniques, and have also leveraged leading industry-standard software and hardware.
Data warehousing. Our data warehouse is the foundation of our campaign management, ad serving, targeting, data collection, data analysis and performance reporting systems. These systems feed into or utilize the warehouse for a significant portion of their overall system functionality. We have developed a number of proprietary technologies for managing and compressing data that allow us to keep billions of pieces of historical campaign information online and available to our other systems. We also utilize industry-standard database technology to aggregate and store information.
Media planning. Our client strategists and media buyers use media planning tools, such as historical cost databases and campaign management software programs, to keep track of Web sites and select sites and placements during initial media planning activities. After an advertising campaign is underway, these tools support ongoing planning and optimization activities.
Campaign management and trafficking. We have developed and use campaign management and trafficking tools to manage the information from our clients' advertising campaigns and to assist in or automate the process of communicating with our clients and with the Web sites on which we serve advertisements.
Ad serving. Our ad serving systems are multi-tiered applications that were built for reliability and scalability. Each response to an advertisement request is based on several factors, which may include part of the advertising viewing history of a user's browser. We use standard cookie technology to track anonymous Internet users' activity on our clients' Web sites, and on each Web site on which the users' computers receive advertisements served by our systems. The modular design of our ad serving systems allows us to grow capacity incrementally by adding a single server at a time, or scale substantially by adding several servers at a time.
Our ad serving systems are designed to operate 24 hours a day, 7 days a week. These systems are primarily located in the Seattle, Washington metropolitan area at facilities operated by Exodus Communications, Inc. and InterNAP Network Services Corporation. These data centers give us redundant capabilities in the event of a hardware failure or loss of connectivity at a data center. In addition, we use Akamai Technologies, Inc. in conjunction with our ad serving systems for redirecting and caching banners to users' browsers in order to reduce load time and latency.
Competition
The market for Internet advertising is relatively new, yet intensely competitive. We compete most directly with Internet media buyers that integrate ad serving technology and Internet media buying, such as AppNet Inc., through its i33 Communications division, and MediaPlex, Inc. We also compete with:
. interactive advertising agencies, such as Modem Media Poppe Tyson Inc., Ogilvy & Mather Worldwide through its OgilvyOne division, and Saatchi & Saatchi Advertising, through its Darwin Digital Media Services division;
. enabling online advertising technology providers, such as At Home Corporation, through its MatchLogic, Inc. subsidiary, CMGI, Inc., through its AdForce, Inc., AdKnowledge, Inc. and Engage Technologies, Inc. subsidiaries, and DoubleClick Inc.;
. advertising networks, such as DoubleClick Inc., CMGI, Inc., through its Flycast Communications Corporation subsidiary, L90, Inc. and 24/7 Media, Inc.;
. targeted email service providers, such as At Home Corporation, through its MatchLogic, Inc. subsidiary, ClickAction Inc., Digital Impact, Inc., DoubleClick Inc., E-Dialog, Inc. and Message Media, Inc.; and
. traditional advertising agencies that perform Internet advertising and marketing as part of their services to clients, such as Ogilvy & Mather Worldwide and Saatchi & Saatchi Advertising.
In addition, we compete with other traditional advertising agencies that use traditional advertising media, and in general we compete with television, radio, cable and print media for a share of advertisers' budgets.
We believe that the principal competitive factors affecting our market are ad serving technology and functionality, data analysis capabilities, client service and price. Although we believe we currently compete adequately with respect to these factors, our continued ability to compete depends on a number of circumstances, such as:
. our capability to plan advertising campaigns and serve advertisements across a broad range of Web sites;
. our ability to serve advertisements on Internet portals and advertising networks;
. our ability to respond to rapid technological change and provide feature enhancements and expanded service offerings;
. the quality and reliability of our operations and client service and support organizations; and
. the effectiveness of our sales and marketing efforts.
Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than we have. Also, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties. In addition, several of our competitors have combined or may combine with larger companies with greater resources than ours. These competitors may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more attractive offers to existing and potential employees and clients than we do. They could also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings. They may also develop services that are equal or superior to our services or that achieve greater market acceptance than our services. In addition, our competitors may develop databases that are larger than or otherwise superior to our databases. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share. We cannot assure you that we will be able to compete successfully, and competitive pressures may harm our business.
Intellectual Property
To protect our proprietary rights, we rely generally on patent, copyright, trademark and trade secret laws, confidentiality agreements with many of our employees and consultants, and confidentiality provisions in our vendor and client agreements. Despite these protections, third parties might obtain and use our technologies without authorization or develop similar technologies independently. The steps we have taken may not prevent infringement or misappropriation of our intellectual property, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.
We have obtained an issued U.S. trademark registration for, among others, "AVENUE A MEDIA". We also have applied for registration of the following service marks: "AVENUE A," "ATLAS," "IBALLS," "KNOW WHAT WORKS," "PRECISION E- MAIL," the Avenue A logo and the iballs logo. We cannot assure you that any of our service mark applications will ultimately proceed to registration. Some of our service mark applications have been opposed by third parties, and our pending applications may still be successfully challenged by others or invalidated. We are aware of third parties that use marks or names, including Internet domain names, that contain the words "Avenue A" or similar words, one of which is a Canadian advertising agency. There may be other third parties using names similar to ours of whom we are unaware. If our service
mark applications do not proceed to registration or if our service marks are invalidated because of prior third-party registrations, applications or rights, our use of these marks could be restricted unless we enter into arrangements with these third parties, which might not be available on commercially reasonable terms, if at all. Even if our service mark applications proceed to registration, our use of these marks could be restricted to the services set forth in our service mark applications.
We have filed eleven pending patent applications in the United States for aspects of our technologies, processes and methods, but we have not been issued any patents to date. We cannot assure you that our pending or future patent applications, will be granted, that any future patent of ours will not be challenged, invalidated or circumvented, or that the rights granted under any future patent of ours will provide competitive advantages to us. If a blocking patent has issued or issues in the future to a third party, and we are not able to distinguish our technologies, processes or methods from those covered under the patent, we may need to either obtain a license or develop noninfringing technologies, processes or methods with respect to that patent. We may not be able to obtain a license on commercially reasonable terms, if at all, or design around the patent, which could impair our ability to provide our services. We also cannot assure you that any proprietary rights with respect to our technologies will be viable or of value in the future since the validity, enforceability and scope of protection of proprietary rights in Internet- related industries are uncertain and still evolving.
A U.S. patent was issued to DoubleClick in September 1999 relating to a method of delivery, targeting and measuring of advertising over networks. In addition, 24/7 Media has received a U.S. patent on aspects of its ad delivery technology that 24/7 Media asserts relates to enabling technology currently in use by a number of ad serving systems. These patents may cover some of the technologies, processes or methods we use in our ad serving systems. We cannot assure you that we will be able to distinguish our technologies, processes or methods from those covered under the DoubleClick patent or 24/7 Media patent or that the DoubleClick patent or 24/7 Media patent would be invalidated if challenged.
In addition, DoubleClick and MatchLogic, a subsidiary of At Home Corporation, have each filed U.S. patent applications and related applications under the Patent Cooperation Treaty that appear to cover technologies relating to ad serving. If patents are issued pursuant to these applications, we cannot assure you that we will be able to distinguish our technologies, processes or methods from those covered under these patents or that the patents would be invalidated if challenged.
Any claims that might be brought against us relating to intellectual property infringement, including claims of infringement of the DoubleClick patent or 24/7 Media patent and other patents that may be issued to DoubleClick or MatchLogic, or others, may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages and limit our ability to use the intellectual property subject to these claims. Even if we were to prevail, such litigation could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit, we may be prevented from providing some of our services, including our core ad serving services, unless we enter into royalty or license agreements. We may not be able to obtain royalty or license agreements on terms acceptable to us, if at all.
Our technology enables us to collect and use data derived from user activity on the Internet. Although we believe that we have the right to use this information and to compile it in our databases, we cannot assure you that any trade secret, copyright or other protection will be available for this information. In addition, our clients and other parties may claim rights to this information.
Employees
As of January 31, 2001, we had 391 employees. We believe that we have good relationships with our employees. We have never had a significant work stoppage, and none of our employees is represented under a collective bargaining agreement or by a union. We believe that our future success will depend in part on our ability to attract, integrate, retain and motivate highly skilled personnel and upon the continued service of our
senior management. Competition for qualified personnel in our industry is intense, and we cannot assure you that we will succeed in attracting, integrating, retaining and motivating a sufficient number of qualified personnel to conduct our business in the future.
Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition
You should carefully consider the following factors that may affect our business, future operating results and financial condition, as well as other information included in this Annual Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.
We are subject to risks frequently encountered by companies in the Internet advertising market
Our prospects for financial and operational success must be considered in light of the risks frequently encountered by companies in the Internet advertising industry. These risks include the need to:
. attract new clients and maintain current client relationships;
. achieve effective advertising campaign results for our clients;
. continue to develop and upgrade our technologies to keep pace with the growth of the Internet advertising market and changes in technology;
. continue to expand the number of services we offer;
. successfully implement our business model, which is evolving;
. maintain our reputation and build trust with our clients; and
. identify, attract, retain and motivate qualified personnel.
If we do not successfully address these risks, our business could suffer.
We have a history of losses and may not achieve profitability
We incurred net losses of $58.8 million for the period from our inception on July 1, 1997 through December 31, 2000, and net losses of $42.9 million for the year ended December 31, 2000. As of December 31, 2000, our accumulated deficit was $58.2 million. We have not achieved profitability and may not do so in the future. We expect to continue to make significant operating and capital expenditures and, as a result, we may need to generate significant additional revenue to achieve and maintain profitability. We cannot assure you that we will generate sufficient revenue to achieve profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If our revenue grows more slowly than we anticipate, or if our operating expenses exceed our expectations or cannot be reduced, we may be unable to achieve or maintain profitability.
Our quarterly operating results are subject to fluctuations that may cause our stock price to decline
Our quarterly operating results have fluctuated in the past and are likely to continue to do so in the future. It is possible that in the future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts, investors or Avenue A. If our operating results fail to meet these expectations, the market price of our common stock could decline. We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and should not be relied upon to predict the future performance of our stock price.
Our revenue, expenses and operating results could vary significantly from quarter to quarter for several reasons, including:
. fluctuating demand for our advertising services and changes in the mix of advertisements placed and services provided;
. addition of new clients or loss of current clients;
. seasonal fluctuations in advertising spending;
. timing variations on the part of advertisers to implement advertising campaigns;
. changes in the availability and pricing of advertising space;
. timing and amount of our costs; and
. costs related to any possible future acquisitions of technologies or businesses.
Our current and future expense estimates are based, in large part, on estimates of future revenue, which is difficult to predict. In particular, we plan to increase our operating expenses as needed in order to enhance our proprietary technology, expand our client services, sales and marketing operations and expand internationally. We may be unable to, or may elect not to, adjust spending quickly enough to offset any unexpected revenue shortfall. If our expenses are not accompanied by increased revenue in the same quarter, our quarterly operating results would be harmed.
The Internet advertising market may deteriorate, or develop more slowly than expected, which could harm our business
If the market for Internet advertising deteriorates, or develops more slowly than we expect, our business could suffer. Our future success is highly dependent on an increase in the use of the Internet, the commitment of advertisers to the Internet as an advertising medium, and on the willingness of our potential clients to outsource their Internet advertising and marketing needs. The Internet advertising market is relatively new and rapidly evolving. As a result, demand and market acceptance for Internet advertising services is uncertain. Many of our current or potential clients have little or no experience using the Internet for advertising purposes and have allocated only a limited portion of their advertising budgets to Internet advertising. Also, we must compete with traditional advertising media, including television, radio, cable and print, for a share of our clients' total advertising budgets. Our current and potential clients may find Internet advertising to be less effective than traditional advertising media for promoting their products and services, and therefore the market for Internet advertising services may deteriorate or develop more slowly than expected. In addition, "filter" software programs are available that limit or prevent advertising from being delivered to an Internet user's computer. The widespread adoption of such software could significantly undermine the commercial viability of Internet advertising.
Our operating results may fluctuate seasonally, and these fluctuations may cause our stock price to decline
Our stock price may decline due to seasonal fluctuations. We believe that our operating results will fluctuate depending on the season because retail advertisers generally purchase substantially more advertising space during the fourth calendar quarter of each year than during other quarters, particularly the first calendar quarter. Given our limited operating history, we cannot be certain how pronounced these seasonal trends may be or what, if any, other seasonal trends may emerge that would affect our business.
Our business may be seriously harmed by third-party claims against us relating to the collection and use of Internet user information
We are a defendant in pending class action lawsuits alleging, among other things, that our collection and use of Internet user information violates federal and state laws. We may be subject to additional suits in the
future regarding our collection and use of Internet user information. Class action litigation is often expensive and time-consuming, and the outcome of such litigation is often uncertain. Such lawsuits, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations. In addition, such lawsuits may require us to pay substantial damages, be prevented from conducting targeted advertising and aggregating data from our clients' advertising campaigns, and otherwise seriously harm our business. Furthermore, several Internet-related companies, including some in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission, regarding the collection and use of Internet user information, and we may be subject to similar claims. Such claims and any other claim by a government entity or other third party against us regarding our collection and use of Internet user information could seriously harm our business. See "Legal Proceedings."
Privacy concerns could lead to legislative and other limitations on our ability to collect personal data from Internet users, including limitations on our use of cookie or action tag technology and user profiling
Privacy concerns could lead to legislative and other limitations on our ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies for our clients. Our systems use "cookies" and "action tags" to track Internet users and their online behavior to build anonymous user profiles. A cookie is a small file of information stored on a user's computer that allows us to recognize that user's browser when we serve advertisements. An action tag functions similarly to a banner ad, except that the action tag is not visible. Our action tags may be placed on specific pages of our clients' or prospective clients' websites and some LifeCycle E-mails. This enables our measurement of an advertising campaign's effectiveness to drive consumers to specific actions. We are substantially dependent on cookie and action tag technology to target our clients' advertising campaigns and measure their effectiveness. Any reduction in our ability to use cookies or action tags or other means to build anonymous user profiles could harm our business. Governmental bodies concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, action tags or user profiling. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in Congress and many state legislatures. Also, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy. In addition, privacy concerns have led to legal and technical limitations on the use of cookies, action tags and user profiling in some jurisdictions. For example, the European Union has adopted a directive addressing data privacy that may result in limitations on the collection and use of information regarding European Internet users. Also, Germany has imposed its own laws limiting the use of user profiling, and other countries may impose similar limitations. In addition, users may limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling the cookie functions of their Internet browser software. Also, third parties have brought class action lawsuits against us relating to our use of cookies, and we may be subject to similar lawsuits in the future. If our ability to use cookies or action tags or build user profiles were substantially restricted by technology, government regulation or any other means, or as a result of litigation, we would likely have to use other technology or methods that allow the gathering of user profile data in other ways in order to provide our services to our clients. This change in technology or methods could require significant reengineering time and resources, and might not be done in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially reasonable terms, if at all.
Our client contracts have short terms, and the loss of a significant number of these contracts in a short period of time could harm our business
We derive substantially all of our revenue from the sale of advertising services under short-term advertising campaign services contracts, all of which are cancelable upon 90 days' or less notice. In addition, these contracts generally do not contain penalty provisions for cancellation before the end of the contract term. The non-renewal, cancellation or deferral of a significant number of these contracts in any one period could cause an immediate and significant decline in our revenue and harm our business.
Some of our competitors have obtained patents and have sued other parties to enforce their rights under these patents, and we may also be subject to patent infringement claims, including claims that our ad serving technologies, processes or methods infringe these or other patents
Other parties may claim that our technologies, processes or methods infringe their patents. Any such claim may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages and prevent us from providing some of our services, including our core ad serving services, which would substantially harm our business. U.S. patents were issued to DoubleClick Inc. in September 1999 and to 24/7 Media in February 2000. These patents may cover some of the technologies, processes or methods that we use in our ad serving systems. We cannot assure you that we will be able to distinguish our technologies, processes or methods from those covered under the DoubleClick patent or 24/7 Media patent or that either of these patents would be invalidated if challenged. In addition, DoubleClick and MatchLogic, a subsidiary of At Home Corporation, have each filed U.S. patent applications and related applications under the Patent Cooperation Treaty that appear to cover technologies relating to ad serving. If patents are issued pursuant to these applications, we cannot assure you that we will be able to distinguish our technologies, processes or methods from those covered under these patents or that the patents would be invalidated if challenged. The patent field covering Internet-related technologies is rapidly evolving and surrounded by a great deal of uncertainty, and other patents or patent applications relating to the delivery of Internet advertising may exist of which we are unaware. Several companies in the Internet advertising field have brought patent infringement suits against competitors in connection with patents relating to ad serving technologies.
Any patent infringement claims brought against us may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages and limit our ability to use the intellectual property subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit, we may be prevented from providing some of our services, including our core ad serving services, unless we enter into royalty or license agreements. We may not be able to obtain royalty or license agreements on terms acceptable to us, if at all.
In addition to patent infringement claims, third parties may assert other intellectual property claims, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services
In addition to patent infringement claims, third parties may claim that we are infringing or violating their other intellectual property rights, including their copyrights, trademarks and trade secrets, which may cause us to incur significant expenses and, if successfully asserted against us, pay substantial damages and be prevented from providing our services, which would substantially harm our business. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Furthermore, as a result of an intellectual property infringement suit, we may be prevented from providing some of our services or using some of the service marks for which we have sought service mark protection, unless we enter into royalty or license agreements. We may not be able to obtain royalty, license or coexistence agreements on terms acceptable to us, if at all.
Our use of the name "Avenue A" may result in infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and be prevented from using this name
Our use of the name "Avenue A" may result in infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and be prevented from using this name. We are aware of third parties that use marks or names, including Internet domain names, that contain the words "Avenue A" or similar words, one of which is a Canadian advertising agency. There may be other third parties using names similar to ours of whom we are unaware. We may be subject to trademark infringement
claims by third parties as a result of our use of the name "Avenue A." In addition, we may not receive registration of our service mark application for the name "Avenue A." This application has been opposed by third parties, and even if the application is registered, the service mark may be challenged by third parties or invalidated. As a result of such infringement claims or challenges, we may incur significant expenses, pay substantial damages and be prevented from using the name "Avenue A" unless we enter into royalty, license or coexistence agreements. We may not be able to obtain royalty, license or coexistence agreements on terms acceptable to us, if at all. Use of the name "Avenue A" or similar names by third parties may also cause confusion to our clients and confusion in the market, which could decrease the value of our brand and harm our reputation.
The loss of key personnel or any inability to attract and retain additional personnel could impair our ability to maintain or expand our business
The loss of the services of members of our management team or other key employees could harm our business. Our future success depends to a significant extent on the continued service of our key management, client service, analytics, sales and technical personnel. We do not maintain key person life insurance on any of our executive officers and do not intend to purchase any in the future. Although we generally enter into noncompetition agreements with our employees, our business could be harmed if one or more of our officers or key employees decided to join a competitor or otherwise compete with us.
Our future success also depends on our ability to attract, retain and motivate highly skilled personnel. Competition for qualified personnel in the Internet and technology industries is intense. If we fail to hire and retain a sufficient number of client service, analytics, sales and technical personnel, we will not be able to maintain or expand our business.
Many of our clients have limited operating histories, are unprofitable and may not be able to pay for our services
If any of our current or future clients is unable to pay for our services, our business could suffer. Some of our clients have limited operating histories and have not achieved profitability. In the past we have lost clients, or have had difficulty collecting payments from clients, who could not pay for our services because they were unable to secure ongoing funding. The ability of many of our clients to meet their payment obligations is affected by the risks and difficulties encountered by companies with limited operating histories, particularly in the evolving Internet market.
We may not be able to compete successfully in the market for Internet advertising
The market for Internet advertising is relatively new, yet intensely competitive. We compete most directly with Internet media buyers that integrate ad serving technology and Internet media buying, such as AppNet Inc., through its i33 Communications division, and MediaPlex, Inc. We also compete with:
. interactive advertising agencies, such as Modem Media Poppe Tyson Inc., Ogilvy & Mather Worldwide through its OgilvyOne division, and Saatchi & Saatchi Advertising, through its Darwin Digital Media Services division;
. enabling online advertising technology providers, such as At Home Corporation, through its MatchLogic, Inc. subsidiary, CMGI, Inc., through its AdForce, Inc., AdKnowledge, Inc. and Engage Technologies, Inc. subsidiaries, and DoubleClick Inc.;
. advertising networks, such as DoubleClick Inc., CMGI, Inc., through its Flycast Communications Corporation subsidiary, L90, Inc. and 24/7 Media, Inc.;
. targeted email service providers, such as At Home Corporation, through its MatchLogic, Inc. subsidiary, ClickAction Inc., Digital Impact, Inc., DoubleClick Inc., E-Dialog, Inc. and Message Media, Inc.; and
. traditional advertising agencies that perform Internet advertising and marketing as part of their services to clients, such as Ogilvy & Mather Worldwide and Saatchi & Saatchi Advertising.
Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than we have. Also, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties. In addition, several of our competitors have combined or are in the process of combining with larger companies with greater resources than ours. These competitors may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more attractive offers to existing and potential employees and clients than we do. They could also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings. They may also develop services that are equal or superior to our services or that achieve greater market acceptance than our services. In addition, our competitors may develop databases that are larger than or otherwise superior to our databases. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share. We cannot assure you that we will be able to compete successfully, and competitive pressures may harm our business.
Consolidation in the Internet industry may impair our ability to retain our clients
Many of our clients may be affected by rapid consolidation in the Internet industry. Our business would suffer if we were to lose a substantial number of clients or any of our significant clients as a result of consolidation. These clients may be required to use the advertising services of the companies that acquire them or of other advertising service providers, or may use the advertising services of companies that they acquire.
Consolidation of Internet advertising networks and large Internet portals may impair our ability to serve advertisements, to acquire advertising space at favorable rates and to collect campaign data
The consolidation of Internet advertising networks and large Internet portals could harm our business. This type of consolidation could eventually lead to a concentration of desirable advertising space on a very small number of networks and large Web sites. This type of concentration could substantially impair our ability to serve advertisements if these networks or large Web sites decide not to permit us to serve advertisements on their Web sites or if they develop ad placement systems that are not compatible with our ad serving systems. These networks or Web sites could also use their greater bargaining power to increase their rates for advertising space or prohibit or limit our aggregation of advertising campaign data. In addition, concentration of desirable advertising space in a small number of networks and Web sites could diminish the value of our advertising campaign databases, as the value of these databases depends on the continuous aggregation of data from advertising campaigns on a variety of different Web sites and advertising networks.
Sustained or repeated system failures could significantly impair our operations and lead to client dissatisfaction
Sustained or repeated system failures could significantly impair our operations and reduce the attractiveness of our services to our current and potential clients. The continuous and uninterrupted performance of our systems is critical to our success. Our operations depend on our ability to protect these systems against damage from fire, power loss, water damage, earthquakes, telecommunications failures, viruses, vandalism and other malicious acts, and similar unexpected adverse events. Clients may become dissatisfied by any system failure that interrupts our ability to provide our services to them. In particular, the failure of our ad serving systems, including failures that delay or prevent the delivery of targeted advertisements to Web sites and advertising networks, could reduce client satisfaction and damage our reputation.
Our services are substantially dependent on systems provided by third parties, over whom we have little control. Interruptions in our services could result from the failure of telecommunications providers and other
third parties to provide the necessary data communications capacity in the time frame required. Our ad serving systems and computer hardware are primarily located in the Seattle, Washington metropolitan area at facilities operated by Exodus Communications, Inc. and InterNAP Network Services Corporation. We depend on these third-party providers of Internet communication services to provide continuous and uninterrupted service. We also depend upon Internet service providers that provide access to our services. In the past, we have occasionally experienced significant difficulties delivering advertisements to Web sites and advertising networks due to system failures unrelated to our own systems. For example, power outages at one of our co-location facilities, including one outage that lasted for approximately five hours, have prevented us from serving advertisements, tracking user responses and providing performance reports to our clients. Any disruption in the Internet access provided by third-party providers or any failure of third-party providers to handle higher volumes of user traffic could impair our ability to deliver advertisements and harm our business.
Our operations may be adversely affected by earthquakes or power outages in the Pacific Northwest
Our corporate headquarters and a significant portion of our operations are located in the Pacific Northwest. The Pacific Northwest has from time-to-time experienced earthquakes and experienced an earthquake in February 2001 that caused significant damage in the region. We do not know the ultimate impact on our operations of being located near major earthquake faults, but an earthquake could harm our operating results. In addition, due to the ongoing power shortages in California, the Pacific Northwest may experience power shortages or outages. These power shortages or outages could cause disruptions to our operations, which in turn may result in a material decrease in our revenues and earnings and harm our business. Power shortages in the Northwest could adversely affect the region's economy and decrease regional demand for our advertising services, which could reduce our revenues. Our insurance coverage may not be adequate to cover the losses and interruptions caused by earthquakes or power outages.
Acquisitions or investments may be unsuccessful and may divert our management's attention and consume significant resources
We may in the future acquire or make investments in other businesses, or acquire products and technologies, to complement our current business. Any future acquisition or investment may require us to use significant amounts of cash, make potentially dilutive issuances of equity securities and incur debt. In addition, acquisitions involve numerous risks, any of which could harm our business, including:
. difficulties in integrating the operations, technologies, services and personnel of acquired businesses;
. diversion of management's attention from other business concerns;
. unavailability of favorable financing for future acquisitions;
. potential loss of key employees of acquired businesses;
. inability to maintain the key business relationships and the reputations of acquired businesses;
. responsibility for liabilities of acquired businesses;
. inability to maintain our standards, controls, procedures and policies; and
. increased fixed costs.
Clients may attempt to prohibit us from providing services to their competitors, limiting our business opportunities
To use our services more effectively, clients often provide us with confidential business and marketing information. Many companies are wary of third parties having access to this information, because access by third parties increases the risk that confidential business and marketing information may become known, even if unintentionally, to these companies' competitors. These confidentiality concerns may prompt our clients to
attempt to contractually prohibit us from managing the Internet advertising campaigns of their competitors. Limitation of our client base in a particular industry in this manner could limit the growth of our business.
International operations could impose burdens on our resources and divert management's attention from domestic operations
International operations could impose burdens on our resources, divert management's attention from domestic operations, and otherwise harm our business. Our international operations require significant management attention and resources. In addition, we may need to rely extensively on third parties in foreign countries to help conduct our international operations, coordinate with foreign Web sites and conduct sales and marketing efforts. Furthermore, international operations are subject to several inherent risks, including:
. difficulties and costs of staffing and managing foreign offices;
. the impact of recessions in economies outside the United States;
. changes in regulatory requirements;
. regulations relating to the export of consumer data;
. more stringent rules relating to the collection and use of information regarding Internet users;
. reduced protection of intellectual property rights;
. adverse tax consequences;
. political and economic instability;
. tariffs and other trade barriers; and
. fluctuations in currency exchange rates.
Our failure to address these risks adequately could harm our business.
Our business does not generate the cash needed to finance our operations, and we may need additional financing in the future, which we may be unable to obtain
Our business does not currently generate the cash needed to finance our operations. We may need additional funds to finance our operations, as well as to enhance our services, fund our expansion, respond to competitive pressures or acquire complementary businesses or technologies. We may be unable to obtain financing on terms favorable to us, if at all. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing shareholders would be reduced, and these securities might have rights, preferences or privileges senior to those of our common stock. If adequate funds are not available or are not available on acceptable terms, our ability to enhance our services, fund our expansion, respond to competitive pressures or take advantage of business opportunities would be significantly limited, and we might need to significantly restrict our operations.
Legislation or regulations may be adopted that could impair our ability to provide our services to clients
Legislation or regulations may be adopted that could impair our ability to provide our services to clients. The legal and regulatory environment governing the Internet is uncertain and may change. Laws and regulations may be adopted covering issues such as privacy, pricing, acceptable content, taxation, consumer protection and quality of products and services on the Internet. These laws and regulations could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as an advertising medium. In addition, due to the global nature of the Internet, it is possible that multiple federal, state or foreign
jurisdictions might inconsistently regulate our activities or the activities of advertising networks or Web sites. Any of these developments could harm our business.
Our service offering includes email advertising and marketing services. The market for email advertising and marketing in general is vulnerable to the negative public perception associated with unsolicited email. Various states have enacted legislation and several bills have been introduced in Congress that limit or prohibit the use of unsolicited email. Government action, public perception or press reports related to solicited or unsolicited email could reduce the overall demand for email advertising and marketing in general and our email services in particular.
We may not be able to adapt to rapidly changing Internet technology trends and evolving industry standards
The Internet and Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing client demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards may render our services obsolete. Our future success will depend on our ability to adapt to rapidly changing technologies, enhance our existing Internet advertising services and develop and introduce a variety of new services to address our clients' changing demands. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our services. In addition, any new services or enhancements must meet the requirements of our current clients and must achieve significant market acceptance. Material delays in introducing new services and enhancements may cause clients to discontinue use of our services and use the services of our competitors.
Our stock price has been and may continue to be volatile
The trading price of our common stock has been and is likely to continue to be highly volatile. For example, during the 56 week period ended March 23, 2001, the closing price of our common stock ranged from $1.03 to $72.00 per share. The market price of our common stock may fluctuate significantly in response to a number of factors, including:
. quarterly variations in our operating results;
. announcements by us or our competitors of new products or services, significant contracts, acquisitions or business relationships with other companies;
. publicity about our company, our services, our competitors, or Internet advertising in general;
. additions or departures of key personnel;
. any future sales of our common stock or other securities; and
. stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are Internet-related.
In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention, which could harm our business.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive, administrative, engineering, marketing and sales facility currently occupies approximately 44,000 square feet of office space in Seattle. The lease for this facility expires in November 2006, with an option to renew for an additional four-year term and a further option to renew for an additional five-year term. We lease approximately 62,000 square feet of additional office space in Seattle. Of this additional space, the lease term for approximately 31,000 square feet expires in December 2001, with the
remainder expiring in December 2003. In addition, our iballs LLC subsidiary leases approximately 6,400 square feet of office space in New York City under a lease that expires in August 2001 with an option to renew for an additional one-year term. We lease approximately 4,800 square feet of office space in London, England to house our international operations. This lease expires in August 2010. We also have a lease for approximately 2,800 square feet of office space in Paris, France, on a lease that can be terminated in July 2003. Our ad serving systems and computer hardware are primarily located in the Seattle, Washington metropolitan area at facilities operated by Exodus Communications, Inc. and InterNAP Network Services Corporation. Our agreement with Exodus Communications expires in December 2001, with automatic one year renewals. Our agreement with InterNAP expires in April 2001, with automatic quarterly renewals. In London, England, our ad serving equipment is located in a facility operated by Level 3 Communications, under a lease that expires in May 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are currently the subject of four lawsuits concerning our collection and use of Internet user information. We believe all of these lawsuits are without merit and are vigorously defending against them.
In Chance et al. v. Avenue A, Inc., plaintiffs, on behalf of themselves and all others similarly situated throughout the nation, filed a class action complaint against us on or about November 20, 2000 in the United States District Court for the Western District of Washington. The complaint contains the following purported claims relating to our collection and use of Internet user information: (1) violation of 18 U.S.C. section 2510 et seq. (the Wiretap/Interception section of the Electronic Communications Privacy Act), (2) violation of 18 U.S.C. section 2701 et seq. (the Access to Stored Information section of the Electronic Communications Privacy Act), (3) violation of 18 U.S.C. section 1030 et seq. (the Computer Fraud and Abuse Act), (4) common law trespass to personal property, (5) common law invasion of privacy, (6) unjust enrichment, (7) violation of state consumer protection and deceptive practices statutes, and (8) declaratory judgment. The plaintiffs seek declaratory and injunctive relief as well as monetary damages and disgorgement of profits that Avenue A has received in connection with the alleged illegal practices. Plaintiffs have moved for class certification and we have filed an opposition to that motion. We have also filed a motion for summary judgment, requesting that the Court dismiss plaintiffs' federal claims and decline jurisdiction over plaintiffs' state claims. A trial date has been set for June 2002.
In Werber v. Avenue A, Inc., the plaintiff, on behalf of himself and all others similarly situated throughout the nation, filed a class action complaint against us on or about November 30, 2000 in the United States District Court for the Western District of Washington. This case raises the same claims and requests substantially the same relief as the Chance case, and the district court has ordered the Werber case to be consolidated with the Chance case.
In Bowles v. Avenue A, Inc., the plaintiff, on behalf of himself and all others similarly situated throughout the nation, filed a class action complaint against us on or about December 27, 2000 in the United States District Court for the Northern District of Illinois. This suit raises most of the same claims and requests substantially the same relief as the Chance case. The case is currently pending in the district court.
In Lopez v. Avenue A, Inc., the plaintiff, on behalf of himself and all others similarly situated in the State of Texas, filed a class action complaint against us on or about February 13, 2001, in the District Court of Cameron County, Texas. The complaint contains the following claims relating to our collection and use of Internet user information: (1) common law invasion of privacy, and (2) unjust enrichment. The plaintiff seeks declaratory and injunctive relief as well as monetary damages and disgorgement of profits that Avenue A has received in connection with the alleged illegal practices. The case is currently pending in the district court.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock is traded on the Nasdaq National Market (symbol "AVEA"). The number of shareholders of record of our Common Stock at March 23, 2001, was 510.
High and low bid quotations for our Common Stock as quoted on the Nasdaq National Market for the periods indicated since February 29, 2000, the date the Common Stock began trading, are as follows.
We have never declared or paid any cash dividends on our Common Stock. We currently anticipate that we will retain all future earnings for use in the expansion and operations of our business and do not anticipate paying cash dividends in the foreseeable future.
On February 28, 2000, the Commission declared effective our Registration Statement on Form S-1 (Registration No. 333-92301) as filed with the Commission in connection with our initial public offering. The date of commencement of the initial public offering was February 29, 2000. Total net proceeds received were $132.5 million. These funds, which have been reduced by funding operating losses and capital expenditures, have been invested with professional money managers in short-term investments or are in money market accounts.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained herein in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historical results are not necessarily indicative of future results.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled "Factors that May Affect Our Business, Future Operating Results and Financial Condition", included elsewhere in this report. When used in this document, the words "believes," "expects," "anticipates," "intends," "plans" and similar expressions, are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document.
Overview
We provide technology-based Internet advertising services to businesses. We use Internet media planning and buying, proprietary ad management technology, anonymous user profiling and data analysis systems to help advertisers increase the effectiveness and return on investment of their Internet advertising campaigns. Through this approach we have developed an extensive knowledge base of Internet advertising strategies, targeting methods and media placements that perform effectively. We focus on serving the needs of buyers of Internet advertising, providing a service that harnesses the complexity, interactivity and dynamic nature of the Internet with the objective of delivering the most successful advertising campaigns for our clients.
Our core services include media planning and buying, ad serving, campaign analysis, optimization and data collection and aggregation. We also generate revenue through our Strategic Partnership Program, in which we manage longer term exclusive or complex partnerships between our clients and Web sites or advertising networks, consulting services, in which we develop and maintain an evolving suite of proprietary analytical tools, fed by Avenue A data, that lend insight into how customers and prospective customers are likely to behave in the future, our LifeCycle E-mail Service, in which we deliver targeted emails to specific customer segments, and the Customer Targeting Program, in which we deliver tailored advertisements to the browsers of users that have previously visited our clients' Web sites.
The majority of our revenue in 2000 and the last three quarters in 1999 has been recognized on a gross basis in accordance with the final consensus reached by the Emerging Issues Task Force (EITF) in July 2000 on EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." Revenue generated under gross method contracts, which consists of the gross value of our billings to our clients, includes the price of the advertising space that we purchase from Web sites to resell to our clients. To generate revenue under these contracts, we purchase advertising space from publisher Web sites and sell the purchased space to our clients and are ultimately responsible for payment to Web sites for the cost of space we purchase. We also recognize revenue for certain contracts with clients under the net method. To generate revenue under net method contracts, we buy advertising space from publisher Web sites on behalf of our clients and earn fees based on the dollar amount of advertising space we purchase. Under net method contracts, our clients are ultimately responsible for payment to the publisher Web sites for the cost of the advertising space purchased. If it were determined that use of the gross method would result in adverse tax consequences to us (for which we have made adequate reserves), we would consider restructuring most or all of our contracts with clients and publishers in order to utilize the net method for such contracts. All such revenue is recognized over the period that the related advertising is delivered. For our LifeCycle E-mail services, revenue is generally recognized when email impressions are delivered. Revenue is generally recognized for our consulting services under the percentage of completion method of accounting.
During the first quarter of 1999, we replaced a majority of our net method contracts with gross method contracts. This has resulted in recognition of greater revenue and expenses for the same level of client services
and advertising. Although the increase in our revenue in 2000 compared to 1999 was a result of an increase in our number of clients and increased total spending by clients, revenue has increased disproportionately relative to prior periods as a result of the recognition of gross billings to our clients as revenue in connection with our use of gross method contracts.
We believe that our operating results will continue to be subject to seasonal fluctuations because retail advertisers generally purchase substantially more advertising space during the fourth calendar quarter of each year than during other quarters, particularly the first calendar quarter.
Results of Operations
The following table presents, in dollars and as a percentage of revenue, statements of operations data for the years ended December 31, 2000, 1999 and 1998. This information reflects all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of such information. The results of any period are not necessarily indicative of results for any future period.
Revenue. Revenue increased to $194.5 million for the year ended December 31, 2000 from $69.7 million for the year ended December 31, 1999. Revenue recognized under the gross method increased to $188.0 million for the year ended December 31, 2000 from $67.1 million for the year ended December 31, 1999. Revenue recognized under the net method increased to $6.5 million for the year ended December 31, 2000 from $2.6 million for the year ended December 31, 1999. The increase in revenue was primarily due to an increase in the number of clients served during the year as well as an increase in overall client spending on our core services and other services such as the Strategic Partnership Program. Revenue increased to $69.7 million for the year ended December 31, 1999 from $599,000 for the year ended December 31, 1998. Revenue recognized under the gross method increased to $67.1 million for the year ended December 31, 1999. Revenue recognized under the net method increased to $2.6 million for the year ended December 31, 1999 from $599,000 for the year ended December 31, 1998. The increase in revenue was due to the change in the majority of our contracts from the net method to the gross method of accounting as a result of the change in client contracts and an increase in the number of our clients.
Cost of revenue. Cost of revenue consists mainly of the costs of advertising space that we purchase from publishers' Web sites and the variable costs of delivering the advertisements over the Internet. It also consists of costs paid to third parties for email delivery. Cost of revenue increased to $155.3 million, or 79.8% of revenue, for the year ended December 31, 2000 from $57.0 million, or 81.8% of revenue, for the year ended December 31, 1999. The dollar increase in cost of revenue was primarily due to increases in the volume of advertising space we purchased. The percentage decrease in cost of revenue was primarily due to increased revenue contribution from higher margin products such as the Strategic Partnership Program. Cost of revenue increased to $57.0 million, or 81.8% of revenue, for the year ended December 31, 1999 from $125,000, or 20.9% of revenue, for the year ended December 31, 1998. The dollar increase was primarily due to increases in the volume of advertising space we purchased during this period. The increase as a percentage of revenue was primarily due to the change from accounting primarily under the net method to accounting primarily under the gross method.
Client services. Client services expenses consist primarily of salaries and related expenses for client service personnel. These employees are organized into Client Service teams consisting of client strategists, media buyers, account managers and media engineers. Client services expenses increased to $15.7 million, or 8.1% of revenue, for the year ended December 31, 2000 from $4.9 million, or 7.0% of revenue, for the year ended December 31, 1999. The increases in client services expenses were primarily due to the increase in the number of our Client Service teams throughout the year, which was in response to the increase in the number of clients served, and expenses relating to our international operations. Client services expenses increased to $4.9 million, or 7.0% of revenue, for the year ended December 31, 1999 from $382,000, or 63.8% of revenue, for the year ended December 31, 1998. This dollar increase was primarily due to the increase in the number of our Client Service teams, which was in response to the increase in the number of our clients.
Technology and analytics. Technology and analytics expenses consist of salaries and related costs for information technology, software development, and analytics personnel. In addition, these expenses include the costs of housing our ad servers and other equipment at third-party co-location facilities. Technology and analytics expenses increased to $16.1 million, or 8.3% of revenue, for the year ended December 31, 2000 from $3.3 million, or 4.7% of revenue, for the year ended December 31, 1999. The increases in technology and analytics expenses were primarily due to increases in the number of personnel in software development, production systems, information systems and analytics. Due to our increasing volume of advertisements served, we have increased our capacity for ad serving, in part by adding computer equipment to the data centers maintained at our co-location facilities, resulting in increased rental charges. Technology and analytics expenses increased to $3.3 million, or 4.7% of revenue, for the year ended December 31, 1999 from $1.5 million, or 249.2% of revenue, for the year ended December 31, 1998. This dollar increase was primarily due to increases in the number of personnel in information technology, software development and production systems.
Selling, general and administrative. Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, finance, marketing, human resource and administrative personnel and other general corporate expenses. In addition, these expenses include marketing costs such as trade shows and the costs of advertising our services in trade publications. Selling, general and administrative expenses increased to $26.9 million, or 13.8% of revenue, for the year ended December 31, 2000 from $10.8 million, or 15.5% of revenue, for the year ended December 31, 1999. The dollar increase in selling, general and administrative expenses was primarily due to increases in the number of personnel as well as increases in the amount of sales commissions and marketing expenses. Selling, general, and administrative expenses as a percentage of revenue decreased as a result of revenues growing at a faster rate than expenses. Selling, general and administrative expenses increased to $10.8 million, or 15.5% of revenue, for the year ended December 31, 1999 from $2.1 million, or 350.9% of revenue, for the year ended December 31, 1998. This dollar increase was primarily due to increases in the number of personnel in executive, sales, marketing, finance, accounting, human resources and administrative positions. The dollar increase was also due to increases in the amount of sales commissions and increased marketing expenses.
Depreciation and amortization of property and equipment. Depreciation and amortization of property and equipment consists primarily of depreciation expense on computer equipment, furniture and fixtures, and software costs and amortization expense of leasehold improvements. Depreciation and amortization of property and equipment increased to $4.2 million, or 2.2% of revenue, for the year ended December 31, 2000 from $853,000, or 1.2% of revenue, for the year ended December 31, 1999. Depreciation and amortization of property and equipment increased to $853,000, or 1.2% of revenue, for the year ended December 31, 1999 from $155,000, or 25.9% of revenue, for the year ended December 31, 1998. The dollar increases were primarily due to purchases of production equipment for operations and computer equipment as a result of increased personnel.
Amortization of intangible assets. In connection with the purchase of iballs LLC during September 1999, we recorded intangible assets of approximately $6.0 million related to the iballs customer base and workforce. Amortization of intangibles increased to $2.0 million, or 1.0% of revenue, for the year ended December 31, 2000 from $651,000, or 0.9% of revenue, for the year ended December 31, 1999. The increase was primarily due to a full year of amortization associated with the iballs acquisition.
Amortization of deferred stock compensation. Amortization of deferred stock compensation consists of expenses related to employee stock option grants with option exercise prices below the deemed fair value of our common stock as of the date of grant. Deferred stock compensation is being amortized on an accelerated basis over the four-year vesting period of the applicable options. Amortization of deferred stock compensation increased to $25.6 million, or 13.2% of revenue, for the year ended December 31, 2000 from $4.7 million, or 6.7% of revenue, for the year ended December 31, 1999. The increase was primarily due to a full year of amortization related to deferred stock compensation of $27.4 million recorded in 1999 as well as due to amortization on additional deferred stock compensation of $24.2 million recorded in 2000.
Interest income, net. Net interest income consists of earnings on our cash, cash equivalents, and short-term investments. Net interest income increased to $7.4 million, or 3.8% of revenue, for the year ended December 31, 2000 from $554,000, or 0.8% of revenue, for the year ended December 31, 1999. The increase in net interest income was primarily due to higher invested cash balances resulting from our initial public offering of common stock, which was completed during the first quarter of 2000. Net interest income increased to $554,000, or 0.8% of revenue, for the year ended December 31, 1999 from $12,000, or 2.0% of revenue, for the year ended December 31, 1999. The dollar increase in net interest income was primarily due to higher invested cash balances during 1999.
Other income (expense), net. Net other income (expense) consists of non- recurring miscellaneous income and expense transactions. During the year ended December 31, 2000, we recorded net other income of $964,000.
The general weakening of the economy, which has caused some companies to reduce advertising expenditures, and the effects of difficulties experienced by Internet-related companies, which has reduced or eliminated online advertising expenditures from some companies in this industry segment, have adversely impacted demand for our services. As a result of these conditions, we expect that our revenue for the first half of 2001 will be significantly below our revenue for the comparable period in 2000, and that our revenue for 2001 will be below our revenue for 2000.
During January 2001, we announced an immediate reduction in work force as part of a cost reduction program. The associated severance costs and other expenses of approximately $1.5 million will be reflected as a restructuring charge in the first quarter of 2001 statement of operations. We anticipate our operating expenses for the first quarter to be higher than the remainder of the year as a result of this restructuring charge.
Provision for Income Taxes
As of December 31, 2000, we had net operating loss carryforwards for federal income tax reporting purposes of approximately $34.9 million, and research and development tax credit carryforwards of
approximately $206,000 which begin to expire in 2018 if not utilized. The Internal Revenue Code contains provisions that limit the use in any future period of net operating loss and credit carryforwards upon the occurrence of specified events, including significant change in ownership interests. We had deferred tax assets, including our net operating loss carryforwards and tax credits, totaling approximately $24.4 million as of December 31, 2000. We have recorded a valuation allowance for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset balance. See note 6 of the notes to our consolidated financial statements.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the net proceeds from private sales of equity securities, which raised $30.4 million through December 31, 1999, and our initial public offering of common stock, which raised $132.5 million during the first quarter of 2000.
As of December 31, 2000, we had cash and cash equivalents of $38.8 million and short-term investments of $95.3 million. We have a $6.0 million equipment term loan facility with a bank which was fully utilized as of December 31, 2000.
Net cash used in operating activities was $16.0 million in 2000, net cash provided by operating activities was $2.9 million in 1999, and net cash used in operating activities was $2.7 million 1998.
Net cash used in investing activities was $98.7 million, $19.0 million, and $1.1 million in 2000, 1999, and 1998, respectively. Net cash used in investing activities was primarily related to net purchases of marketable securities and purchases of computer equipment to expand our ad serving capacity and to equip employees hired during that period. Net cash used in investing activities in 1999 also included the purchase of iballs.
Net cash provided by financing activities was $142.7 million, $26.3 million, and $4.7 million in 2000, 1999, and 1998, respectively. Net cash provided by financing activities was primarily related to proceeds from sales of securities, including our initial public offering of common stock.
As of December 31, 2000, we had no material commitments other than obligations under operating leases for office space and office equipment, of which some commitments extend through 2010, and a note payable to a bank which requires monthly payments through 2003. This note is secured by the equipment purchased with the proceeds from the note.
Since our inception, we have significantly increased our operating expenses. We currently anticipate that we will continue to experience some growth in our operating expenses and that such expenses will be a material use of our cash resources. We believe that our current cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) and in June 2000 issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment to SFAS 133. These statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. These statements require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the consolidated statements of operations, and requires that a company must formally document, designate, and assess the effectiveness of transactions that are subject to hedge accounting.
Pursuant to Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB No. 133--an Amendment to FASB Statement No. 133" (SFAS 137), the effective date of SFAS 133 has been deferred until fiscal years beginning after January 15, 2000. SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1998 (and, at our election, before January 1, 1999).
We believe that our practices are in conformity with this guidance, and therefore SFAS 133 will have no impact on our financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term, investment-grade debt securities issued by corporations. We place our investments with high-quality issuers and limit the amount of credit exposure to any one issuer. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We also believe that we are not subject to any material market risk exposure with respect to any foreign currency or other derivative financial instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data are included beginning on page of this Report:
AVENUE A, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Avenue A, Inc.:
We have audited the accompanying consolidated balance sheets of Avenue A, Inc. (a Washington corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avenue A, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Seattle, Washington January 25, 2001
AVENUE A, INC.
CONSOLIDATED BALANCE SHEETS (in thousands except per share amounts)
The accompanying notes are an integral part of these consolidated balance sheets.
AVENUE A, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
AVENUE A, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
AVENUE A, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 (in thousands except share and per share amounts)
1. Organization and Operations of the Company
Avenue A, Inc. (the Company) provides technology-based Internet advertising services to businesses. The Company uses Internet media planning and buying, proprietary ad management technology, anonymous user profiling and data analysis systems to help advertisers increase the effectiveness and return on investment of their Internet advertising campaigns. The Company was founded on July 1, 1997 and incorporated on February 27, 1998 in Washington State. The Company's headquarters are located in Seattle.
On September 2, 1999, the Company completed the acquisition of iballs LLC (iballs), a full service interactive media planner and buyer located in New York State. The acquisition was recorded under the purchase method of accounting and, therefore, the results of operations of iballs and the fair value of the acquired assets and liabilities were included in the Company's consolidated financial statements beginning on the acquisition date (Note 3).
In 2000, the Company commenced international operations and opened offices in Europe.
The Company is subject to a number of risks similar to other companies in a comparable stage of development including the need for continued growth of the Internet advertising market, reliance on key personnel, competition from other companies with greater financial, technical and marketing resources, and the risks relating to the ability to secure adequate financing.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, money market accounts and all highly liquid debt instruments with an original maturity date of three months or less.
Stock Split
In January 2000, the Board of Directors approved a 3-for-2 stock split in the form of a common stock dividend of the Company's common stock. The related common stock and per-share data in the accompanying financial statements have been retroactively adjusted to reflect the stock split.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
Investments
The Company's short-term investments consist primarily of investment-grade marketable securities, which are classified as available for sale and recorded at fair value. Investments with maturities of less than one year are considered short-term and are carried at fair value. At December 31, 2000 and 1999, substantially all of the Company's investments were classified as available for sale. Unrealized gains and losses on these investments are included as a separate component of shareholders' equity. The Company also has a minority investment in a private company. This investment is included in other assets on the Company's balance sheet and carried at cost. The Company monitors its investment for impairment and makes appropriate reductions in carrying values when necessary.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-term investments, accounts receivable and accounts payable. Fair values of cash and cash equivalents and short-term investments approximate cost due to the short period of time to maturity. The fair values of financial instruments that are short- term and/or that have little or no market risk are considered to have a fair value equal to book value. Assets and liabilities that are included in this category include accounts receivable and accounts payable.
The Company performs initial and ongoing evaluations of its customers' financial position, and generally extends credit on open account, requiring collateral as deemed necessary. The Company maintains allowances for potential credit losses.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are translated at average rates prevailing during the year. Translation adjustments are included in accumulated other comprehensive income, a separate component of shareholders' equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved, which have been insignificant, are included in the consolidated statements of operations and comprehensive loss. To date, the Company has entered into no foreign currency exchange contracts to hedge its foreign currency exposure.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, of three to five years. Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful lives of the improvements using the straight-line method.
Intangible Assets
Intangible assets include identifiable intangible assets purchased by the Company, primarily in connection with the iballs acquisition. Intangible assets are presented net of related accumulated amortization and are being amortized over three years.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
The Company identifies and records impairment losses on property and equipment, intangible assets, and other assets when events and circumstances indicate that such assets might be impaired. The Company considers factors such as significant changes in the regulatory or business climate and projected future cash flows from the respective asset. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Software Capitalization
The Company follows the provisions outlined in Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" related to the treatment of costs. In situations where the Company's internal use software is complete and a decision to market the software is subsequently made, proceeds received from the license of such software, net of direct incremental costs of marketing would be applied against the carrying amount of the software until the basis of the software has been reduced to zero. Subsequent proceeds would be recognized as revenue when earned. Any subsequent development of internal software would be subject to the provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" which requires capitalization of software development costs upon establishment of technological feasibility of the product.
Subscriptions Receivable
In conjunction with the exercise of certain stock options by several executives of the Company, the Company received full recourse promissory notes in the amount of approximately $965 at December 31, 1999. At December 31, 2000, $941 was outstanding under the notes. The notes are due on demand and bear interest at a rate equal to the greater of the applicable federal rate for a demand note or the lowest rate allowable by the Internal Revenue Code of 1986.
Revenue Recognition
The Company generates revenue by providing technology-based Internet advertising services to businesses. The Company's core services include media planning and buying, ad serving, campaign analysis, optimization and data collection and aggregation. The Company also generates revenue through the Strategic Partnership Program which manages longer term exclusive or complex partnerships between the Company's clients and Web sites or advertising networks; Consulting which develops and maintains an evolving suite of proprietary analytical tools, fed by Avenue A data, that lend insight into how customers and prospective customers are likely to behave in the future; LifeCycle E-mail Service which delivers targeted emails to specific customer segments; and the Customer Targeting Program which delivers tailored advertisements to the browsers of users which have previously visited clients' Web sites.
The Company follows Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition and was effective for the quarter ended December 31, 2000. In addition, the Company follows the final consensus reached by the Emerging Issues Task Force (EITF) in July 2000 on EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent."
In accordance with EITF 99-19, the majority of the Company's revenue is recognized under the gross method, which consists of the gross value of the Company's billings to the Company's clients, includes the price of the advertising space that the Company purchases from Web sites to resell to its clients. To generate
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
revenue under gross method contracts, the Company purchases advertising space from publisher Web sites and sells the purchased space to the Company's clients and is ultimately responsible for payment to Web sites for the cost of space the Company purchases. The Company also recognizes revenue for certain contracts under the net method. To generate revenue under net method contracts, the Company buys advertising space from publisher Web sites on behalf of its clients and earns fees based on the dollar amount of advertising space the Company purchases. Under net method contracts, the Company's client that is party to the contract is ultimately responsible for payment to the publisher Web sites for the cost of the advertising space purchased. All such revenue is recognized over the period that the related advertising is delivered. For LifeCycle E-mail services, revenue is generally recognized when email impressions are delivered. Revenue is generally recognized for consulting under the percentage of completion method of accounting. Revenue recognized under gross and net method contracts for the three years ended December 31, 2000 are as follows:
Revenue is deferred in cases where the Company has not yet earned advertising revenue due to billing the customer or receiving payment from the customer prior to providing the services. Revenue is recognized only when collection of the resulting receivable is reasonably assured.
The percentage of sales to customers representing more than 10% of consolidated revenues is as follows:
- -------- *Less than 10%
Computation of Basic and Diluted Net Loss Per Share
Historical net loss per share has been calculated under SFAS No. 128 "Earnings per Share." Basic net loss per share on a historical basis is computed using the weighted average number of shares of common stock outstanding. Unvested outstanding shares subject to repurchase rights are excluded from the calculation. No diluted loss per share information has been presented in the accompanying consolidated statements of operations and comprehensive loss since potential common shares from conversion of preferred stock, stock options, and warrants are antidilutive.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the expected future income tax consequences of temporary differences between the financial reporting and tax bases of assets, liabilities and tax carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized (Note 6).
Cost of Revenue, Client Services, and Technology and Analytics
Cost of revenue consists mainly of the costs of advertising space that the Company purchases from publisher's Web sites and the costs of delivering the advertisements over the Internet. It also consists of costs paid to third parties for email delivery.
Client services expenses consist primarily of salaries and related expenses for client service personnel.
Technology and analytics expenses consist of salaries and related costs for information technology, software development, and analytics personnel. In addition, these expenses include the costs of housing the Company's ad serving equipment at third-party co-location facilities.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its stock option plans.
Comprehensive Income
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires companies to report a new, additional measure of income on statement of operations or to create a new financial statement that shows the new measure of income. Comprehensive income includes foreign currency translation gains and losses and unrealized gains on equity securities that have been previously excluded from net income and reflected instead in equity.
Segment Reporting
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 changes the way companies report selected segment information in annual financial statements and requires companies to report selected segment information in interim financial reports to shareholders. The Company operates solely in one segment, providing Internet advertising services. As of December 31, 2000, and 1999, the majority of the Company's assets are located in the United States. The Company has no significant sales to international customers.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) and in June 2000 issued SFAS No. 138, "Accounting for Certain Derivative
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
Instruments and Certain Hedging Activities," an amendment to SFAS 133. These statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. These statements require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the consolidated statements of operations, and requires that a company must formally document, designate, and assess the effectiveness of transactions that are subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB No. 133--an Amendment to FASB Statement No. 133" (SFAS 137), the effective date of SFAS 133 has been deferred until fiscal years beginning after January 15, 2000. SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1998 (and, at the Company's election, before January 1, 1999).
The Company believes that its practices are in conformity with this guidance, and therefore SFAS 133 will have no impact on the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. Acquisition
Effective September 2, 1999, the Company acquired iballs, a New York based, full service interactive media planning and buying company. In connection with the acquisition, the Company issued 750,000 shares of common stock and paid $3,500 in cash in exchange for all of the outstanding members' equity. The deemed fair value of the common stock issued in the acquisition, for accounting purposes, was approximately $2,500. The Company also incurred $101 in acquisition costs, for a total purchase price of $6,101. The acquisition was accounted for as a purchase and, accordingly, the results of operations of iballs have been included in the consolidated financial statements commencing on the date of acquisition. The excess of the purchase price over the value of the net assets acquired of approximately $5,872 was allocated to customer base and skilled workforce, which is being amortized on a straight-line basis over a useful life of three years. Accumulated amortization was approximately $2,660 and $651 at December 31, 2000 and 1999, respectively.
In connection with the acquisition, net assets acquired were as follows:
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
The following table presents the unaudited pro forma results assuming that the Company had acquired iballs at the beginning of fiscal year 1999. This information may not necessarily be indicative of the future combined results of operations of the Company.
4. Property and Equipment
As of December 31, 2000 and 1999, property and equipment consisted of the following:
5. Intangible Assets
As of December 31, 2000 and 1999, intangible assets consisted of the following:
6. Federal Income Taxes
The Company did not provide any current or deferred U.S. federal or state income tax provision or benefit for any of the periods presented because it has experienced operating losses since inception, and has provided full valuation allowances on deferred tax assets because of uncertainty regarding their realizability.
The difference between the statutory federal tax rate of 34% and the tax provision of zero recorded by the Company is primarily due to the Company's full valuation allowance against its deferred tax assets.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
At December 31, 2000, the Company had net operating loss carryforwards of approximately $34,900 related to U.S federal and state jurisdictions. The valuation allowance increased by approximately $19,400, $4,000 and $0, respectively for the three years ended December 31, 2000. Utilization of net operating loss carryforwards are subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended, as a result of the Series C preferred financing transaction in 1999. The Company's use of losses is limited to approximately $1,800 per year on net operating losses incurred prior to May 1999. These carryforwards will begin to expire at various times commencing in 2018.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred taxes were as follows:
7. Shareholders' Equity
Initial Public Offering
On February 29, 2000, the Company completed its initial public offering of 6,037,500 shares of common stock (including the underwriters' over-allotment shares) at a purchase price of $24.00 per share. The net proceeds to the Company from the offering were approximately $132,500, after deducting applicable issuance costs and expenses. Upon the close of the initial public offering, each share of preferred stock then outstanding was converted into 1.5 shares of common stock and a warrant to purchase 677,710 shares of common stock was exercised.
Convertible Preferred Stock
As of December 31, 2000, the Company had designated three series of convertible preferred stock (Series A through C). The rights and privileges of the Preferred Stock are as follows:
Dividends--Holders of Series A, B and C are entitled to receive dividends of $0.05, $0.05 and $0.10, respectively, per share per annum, when and if declared by the Board of Directors. Such dividends are not cumulative. No dividends have been declared.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
Conversion--Each share of Series A and B is convertible, at the option of the holders or upon the vote of two-thirds of the Series A and B shareholders, respectively, into 1.5 shares of common stock. Each share of Series C is convertible at the option of the shareholders into 1.5 shares of common stock. Each share of Series A, B and C automatically converted into common stock upon the closing of the initial public offering.
Liquidation Preferences--The Series A, B and C shares have liquidation preferences of $.83, $1.12 and $1.94 per share, respectively, plus all declared but unpaid dividends.
Voting Rights--The holders of each share of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which such shares could be converted, and have voting rights equal to holders of common stock.
Deferred Stock Compensation
In connection with the grant of certain stock options to employees and consultants during the years ended December 31, 2000 and 1999, respectively, the Company recorded deferred stock compensation of $24,168 and $27,351, respectively, representing the difference between the deemed fair value of the common stock for accounting purposes and the option exercise price of such options at the date of grant. Such amount is presented as a reduction of shareholders' equity and amortized, in accordance with Financial Accounting Standards Board Interpretation No. 28, on an accelerated basis over the vesting period of the applicable options (generally four years). Under this method, approximately 52% of the Deferred Stock Compensation is recognized in the first 12 months, 27% in the second 12 months, 15% in the third 12 months and 6% in the fourth 12 months.
During the years ended December 31, 2000 and 1999, the Company amortized $25,272 and $4,681, respectively. Compensation expense is decreased in the period of forfeiture for any accrued but unvested compensation arising from the early termination of an option holder's services.
Equity Instruments Issued to Non-employees
In connection with the sale of Series A preferred stock, the Company issued a warrant to purchase 677,710 shares of common stock at an exercise price of $.55 per share. The warrant has a grant date fair value of $.23 per share and expires in August 2003. To determine the grant date fair value, the Company used a risk free interest rate of 5.6%, expected life of five years, expected dividend yields of 0%, and expected volatility of 105%. The Company recorded expense of $157 during the year ended December 31, 1998 related to the warrant. Upon completion of the Company's initial public offering, the warrant was exercised at an aggregate exercise price of $375.
During 1999, the Company granted options to purchase 257,025 shares of the Common Stock at exercise prices ranging from $.52 to $1.27 per share to consultants for past services. The two option grants have grant date fair values of $.23 and $.74 per share, respectively, and expire in 2009. To determine the grant date fair value, the Company used a risk free interest rate of 4.4% and 4.8%, respectively, expected life of two years, expected dividend yields of 0%, and expected volatility of 111%. The Company expensed approximately $153 during the year ended December 31, 1999 related to the options.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
Reserved for Future Issuance
The following shares of common stock have been reserved for future issuance as of December 31, 2000:
8. Stock Option and Employee Stock Purchase Plans
Stock Option Plans
The Company's stock option plans consist of the 1998 Stock Incentive Compensation Plan, the 1999 Stock Incentive Compensation Plan, and the 2000 Stock Incentive Compensation Plan (the Plans). Shares reserved under the Plans consist of 1,261,566 shares in the 2000 Stock Incentive Compensation Plan, 5,250,000 shares in the 1999 Stock Incentive Compensation Plan, and 15,525,000 shares in the 1998 Stock Incentive Compensation Plan. Any shares of common stock available for issuance under the 1998 Stock Incentive Compensation Plan that are not issued under that plan may be added to the aggregate number of shares available for issuance under the 1999 Stock Incentive Compensation Plan. The Company's Board of Directors grants options at an exercise price of not less than the fair market value of the Company's common stock at the date of grant.
Options granted under the Plans are exercisable at such times and under such conditions as determined by the Board of Directors, but the term of the options and the right of exercise may not exceed 10 years from the date of grant. The stock options typically vest 20% in the first year and ratably over the following 12 quarters. The 1998 and 2000 Plans permit the exercise of unvested options. Unvested common stock purchased under the 1998 and 2000 Plans may be subject to repurchase by the Company at the option exercise price in the event of termination of employment. At December 31, 2000, 1,798,549 of the shares acquired under the Plan were subject to the Company's repurchase rights.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
Option activity under the Plans was as follows:
The following information is provided for options outstanding and exercisable at December 31, 2000:
The options outstanding at December 31, 2000 have a weighted average remaining contractual life of approximately 8.68 years. Of these options, 1,347,708 are fully vested and 8,307,963 are exercisable as of December 31, 2000 with exercise prices ranging from $.07 to $8.00. In addition to the shares noted above, the Company has 700,000 options outstanding outside of the Plans at exercise prices ranging from $1.27 to $1.67 to employees of iballs as part of the acquisition completed during 1999.
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
Employee Stock Purchase Plan
In 1999, the Board of Directors and shareholders approved the adoption of the Company's 1999 Employee Stock Purchase Plan (the 1999 Purchase Plan). The Company has reserved a total of 750,000 shares of common stock for issuance under the 1999 Purchase Plan. The shares under the 1999 Purchase Plan will increase annually on the first day of the Company's fiscal year beginning in 2001 by an amount equal to the lesser of (i) 1,125,000 shares of common stock, (ii) 2% of the adjusted average common shares outstanding of the Company used to calculate fully diluted earnings per share for the preceding year, or (iii) a lesser amount determined by the Board of Directors. The 1999 Purchase Plan permits eligible employees to acquire shares of the Company's common stock through periodic payroll deductions of up to 20% of base cash compensation. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable offering period or on the last day of the respective purchase period. During 2000, employees purchased 125,780 shares under the 1999 Purchase Plan. As of December 31, 2000, there are 624,220 shares available for purchase under the 1999 Purchase Plan.
The Company accounts for the Plans under APB 25 for which approximately $25,624, $4,681, and $25 has been recognized as compensation expense for the issuance of non-qualified stock options for the years ending December 31, 2000, 1999 and 1998, respectively. Had compensation expense for the Plan been determined consistent with SFAS 123, the Company's net loss would have been increased as follows:
To determine compensation expense under SFAS 123, the Company used the following assumptions:
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
9. Commitments and Contingencies
Operating Leases
The Company has various operating leases, including building and equipment, that expire at various times through 2010. Future minimum lease payments as of December 31, 2000 are as follows:
Rent expense under operating leases totaled approximately $2,945, $601, and $182 for the years ended December 31, 2000, 1999 and 1998, respectively.
The above future minimum lease payments include a commitment of approximately $21 per month expiring on June 30, 2001 which has been subleased.
The Company has multiple agreements with third-parties to house the Company's ad serving equipment with terms ranging from one to two years. For the year ended December 31, 2000 and 1999, total expense under these agreements approximated $1,043 and $240, respectively.
The Company is currently the subject of four lawsuits concerning the collection and use of Internet user information. The Company believes all of these lawsuits are without merit and is vigorously defending against them. The Company may be subject to additional suits in the future regarding its collection and use of Internet user information. Furthermore, several Internet- related companies, including some in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission, regarding the collection and use of Internet user information, and the Company may be subject to similar claims. The pending class action lawsuits could seriously harm the Company's business. In addition, any future claim by a government entity or other third party against the Company regarding its collection and use of Internet user information could seriously harm the Company's business.
10. Related Party Transactions
Promissory Notes
During 2000, the Company advanced funds under full recourse promissory notes (the Notes) to certain officers and employees of the Company bearing interest rates ranging from 6.11% to 9.00%. As of December 31, 2000, the Company had recorded $2,534 under these Notes which are included in other assets in the accompanying balance sheet. The majority of the principal repayments on the Notes are due in 2002. The loans are collateralized by 1,322,578 shares of Company's common stock.
Relationship with Pacific Coast Feather:
Prior to incorporation on February 27, 1998, the Company relied on non- interest bearing loans from Pacific Coast Feather (PCF) to fund operations. During 1998, PCF converted approximately $139 of the debt to
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
1,421,850 shares of the Company's common stock. The remaining loans were subsequently repaid. Additionally, for each of the three years ended December 31, 2000, 1999 and 1998, PCF paid the Company $26, $33 and $36 for advertising services, respectively.
11. Earnings Per Share
The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per share:
At December 31, 2000 and 1999, options to purchase 11,578,561 (including 700,000 options outstanding outside of the Plans) and 7,173,085 shares of common stock and 1,798,549 and 3,147,285 shares of common stock subject to repurchase rights were outstanding but were not included in the computation of diluted earnings per share as their inclusion would be antidilutive. Additionally, at December 31, 1999, warrants to purchase 677,710 shares of common stock and 16,416,098 shares of convertible preferred stock convertible into 24,624,148 shares of common stock were outstanding but were not included in the computation of diluted earnings per share as their inclusion would be antidilutive.
12. Notes Payable
During November and December 1999, the Company borrowed a total of $1,000 under an equipment term loan facility. Interest is accrued on the outstanding balance at a per annum rate of one percentage point above the Prime Rate. During July 2000, the Company borrowed an additional $5,000. Interest is accrued on the outstanding balance at the Prime Rate. The loans are secured by the equipment and are payable in monthly installments of principal and interest of approximately $213. As of December 31, 2000, the interest rates on each note were 10.5% and 9.5%, respectively. The outstanding notes payable have negative and affirmative covenants with which the Company must comply. As of December 31, 2000, the Company was in compliance with the covenants.
Minimum principal payments are as follows:
AVENUE A, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000 (in thousands except share and per share amounts)
13. Subsequent Events (Unaudited)
During January 2001, the Company announced an immediate reduction in work force as part of a cost reduction program. The associated severance costs and other expenses of approximately $1,500 will be reflected as a restructuring charge in the first quarter of 2001 statement of operations.
14. Selected Quarterly Financial Information (Unaudited)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Shareholders of Avenue A, Inc.:
We have audited in accordance with generally accepted auditing standards in the United States, the financial statements of Avenue A, Inc. and subsidiaries included in this Form 10-K, and have issued our report thereon dated January 25, 2001. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The accompanying schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Seattle, Washington January 25, 2001
SCHEDULE II
AVENUE A, INC.
VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Information called for by Part III, Item 10, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 30, 2001, and is incorporated herein by reference. Such Proxy Statement will be filed within 120 days of December 31, 2000, our fiscal year end.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Part III, Item 11, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 30, 2001, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Part III, Item 12, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 30, 2001, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Part III, Item 13, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 30, 2001, and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements--all consolidated financial statements of the Company as set forth under Item 8 of this Report.
(2) Financial Statement Schedules--Schedule II Valuation and Qualifying Accounts.
The independent auditors' report with respect to the financial statement schedules appears on page of this Report. All other financial statements and schedules not listed are omitted because either they are not applicable or not required, or the required information is included in the consolidated financial statements.
(3) Exhibits.
- -------- * Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-92301). ** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. **** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Avenue A, Inc.
/s/ Brian P. McAndrews By: _________________________________ Brian P. McAndrews Chief Executive Officer and President
Date: March 28, 2001
Each person whose individual signature appears below hereby authorizes and appoints Brian P. McAndrews and Michael Vernon, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities indicated below on the 28th day of March, 2001.
INDEX TO EXHIBITS
- -------- * Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-92301). ** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. **** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.