As filed with the Securities and Exchange Commission on March 14, 2000.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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Driveway Corporation
(Exact name of Registrant as specified in its charter)
Delaware 7379 91-1612873
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
380 Brannan Street
San Francisco, California 94107
(415) 908-4200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Christopher S. Logan
President and Chief Executive Officer
Driveway Corporation
380 Brannan Street
San Francisco, California 94107
(415) 908-4200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Mark Albert, Esq. Peter T. Healy, Esq.
William M. Kushner, Esq. O'Melveny & Myers LLP
Perkins Coie LLP 275 Battery Street, 26th Floor
135 Commonwealth Drive, Suite 250 San Francisco, California 94115
Menlo Park, California 94025 (415) 984-8833
(650) 752-6000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Amount (2) Registration Fee
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Common stock, $0.001 par value............ $75,000,000 $19,800
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(1) Includes shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED March 14, 2000
[Driveway LOGO]
Shares
Common Stock
Driveway Corporation is offering shares of its common stock. This
is our initial public offering, and no public market currently exists for our
shares. We have applied for approval for quotation of our common stock on the
Nasdaq National Market under the symbol "DWAY". We anticipate that the initial
public offering price will be between $ and $ per share.
-----------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 6.
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Per Share Total
--------- -----
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to Driveway Corporation.......................... $ $
The Securities and Exchange Commission and any state securities regulators
have not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Driveway has granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
-----------
Robertson Stephens
CIBC World Markets
Thomas Weisel Partners LLC
E*OFFERING
The date of this prospectus is , 2000
Inside front cover art: Three page views from Driveway Web site on violet
background.
Inside back cover art: Heading of "Strategic Partners" with thirteen partner
logos on violet background.
Back cover art: Green circle with Driveway logo on yellow background.
[ARTWORK]
You should rely only on the information contained in this prospectus.
Neither we nor the underwriters have authorized any person to provide you with
information different from that contained in this prospectus. If anyone
provides you with different or inconsistent information, you should not rely on
it. Information contained on our Web site is not part of this prospectus. We
and the underwriters are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of our common stock. Our business, financial condition, results of
operation and prospects may have changed since that date.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after commencement of this offering), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealer's obligation to deliver a prospectus when acting as an underwriter
and with respect to unsold allotments or subscriptions.
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TABLE OF CONTENTS
Page
----
Summary.................................................................. 2
Risk Factors............................................................. 6
Forward-Looking Statements and Industry Data............................. 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 32
Management............................................................... 46
Certain Transactions..................................................... 59
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 71
Experts.................................................................. 71
Where You Can Find Additional Information................................ 71
Index to Financial Statements............................................ F-1
Appendix: "Meet the Management" Presentation............................. A-1
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"Driveway" is a common law trademark of Driveway. Driveway.com and the
Driveway logo are service marks of Driveway. This prospectus also contains
trademarks and service marks of other companies, which are the property of
their respective owners.
1
SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including risk factors, regarding our company
and the common stock being sold in this offering.
Our Company
Driveway is an easy to use online information management service that allows
our members to store, manage and share their personal and business information
from a single virtual location on the Web. We believe these functions are
important to Internet users who seek new forms of communications to facilitate
both the types of content and the ability to remotely access that content from
multiple disparate devices. We believe our market has characteristics and
benefits similar to the growth and adoption of the Web-based email market,
which is indicative of the current potential market for online information
management. Because we target Internet users who possess a high degree of
integration between their personal and business Internet use and frequently
participate in ecommerce, we attempt to aggregate an attractive member base to
drive multiple streams of revenue for Driveway and our strategic partners.
In the last twelve months, more than 3 million members have registered for
our Driveway services. We have achieved this growth and begun to expand our
online information management solutions across the Web primarily through our
strategic partnerships with the following:
Backup Buddy Lycos MSN
Juno Online Services Lycos Europe Phoenix Technologies
LookSmart McAfee.com USA.NET
Microsoft
The Internet has moved beyond simple text-based files and formats and has
expanded to incorporate rich audio and video content and applications. This
expanding quantity of information, increasingly in rich text or media format,
and the desire to access the Internet from different locations and devices are
some of the factors driving the need for an online information management
solution. In addition, to remain competitive, we believe Web sites are
constantly seeking ways to add functionality to their current offerings, add
new visitors, increase the frequency and duration of visits, and increase
revenue opportunities. We also believe that users are increasingly seeking an
online information management solution that allows them to privately and
securely access both personal and business information at any time, from any
location. Furthermore, we believe business-to-business web sites can also
benefit from integrating online information management services into their
offerings.
Driveway allows any Internet user to securely and easily store, manage and
share personal and business information from a single virtual location because
it is designed to be completely device and platform agnostic. In addition,
because members can specify a particular folder to which another individual has
access, privacy concerns involving storing personal and business information in
the same account are minimized. Our intuitive user interface and our
integration into our strategic partners' Web sites and applications allows
users to easily manage and organize activities from multiple Web sites through
their Driveway account. For example, Driveway can be integrated into
2
our users' desktops through our recent strategic partnership with Microsoft,
which provides for the inclusion of a Driveway icon on the Windows desktop.
This integration will allow a member to easily drag and drop files between
folders in Windows Explorer and their Driveway account and to save to their
Driveway account from within a Microsoft application.
In addition, we actively enter into partnerships with highly trafficked Web
sites in an effort to increase their value to their users by adding
functionality, increasing stickiness and aiding in the generation of
incremental revenue opportunities and customer acquisition.
We intend to be the leading provider of online information management
services with the largest base of registered members and active users. We plan
to achieve this membership growth, build our Driveway brand and grow our
revenues through the following:
. capitalize on our growing member base to drive multiple revenue streams;
. target and expand strategic partnerships with highly trafficked Web sites
with attractive user demographics;
. enable our strategic partners to create and manage new and enhanced
applications that utilize our Driveway services;
. work in conjunction with strategic partners to enable multiple mobile
devices to utilize our Driveway services;
. private label our Driveway services to business-to-business Web sites;
and
. pursue international expansion through localized Driveway services.
We incorporated in Washington on October 8, 1993 and changed our name to
Driveway on November 2, 1999. We reincorporated in Delaware on February 17,
1998. Our executive office is located at 380 Brannan Street, San Francisco,
California 94107. Our telephone number at that location is (415) 908-4200 and
our Internet address is www.driveway.com. Information contained on our Web site
does not constitute part of this prospectus.
3
The Offering
Common stock offered by Driveway Corporation...... shares
Common stock to be outstanding after this
offering.......................................... shares
Use of proceeds................................... We intend to use the net
proceeds of this offering
for general corporate
purposes, including
investments in marketing,
promotion and technology.
Proposed Nasdaq National Market symbol............ DWAY
The shares of our common stock to be outstanding after this offering is
based on the number of shares outstanding as of March 13, 2000, and excludes:
. options to purchase 3,729,601 shares outstanding;
. 1,188,623 shares available for grant; and
. 22,532 shares issuable upon the exercise of warrants, at a weighted
average exercise price of $64.98 per share.
Except as otherwise noted, all information in this prospectus:
. assumes the exercise of warrants to purchase 835,030 shares at a weighted
average exercise price of $1.36 per share;
. reflects the conversion of all outstanding shares of our preferred stock
into shares of our common stock at the completion of this offering; and
. assumes no exercise of the underwriters' over-allotment option.
4
Summary Financial Data
The following table presents our summary financial data. The pro forma net
loss per share data below gives effect to the conversion of each outstanding
share of preferred stock into one share of common stock upon the completion of
this offering. The summary financial data below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements included elsewhere in this prospectus.
Year Ended December
31,
-----------------------
1997 1998 1999
------ ------ -------
(dollars in
thousands, except per
share data)
Statement of Operations Data:
Revenue............................................. $ 7 $ 187 $ 264
Cost of revenue..................................... 276 1,179 2,155
Operating expenses.................................. 5,459 4,262 13,321
Loss from operations................................ (5,728) (5,254) (15,212)
Net loss............................................ (5,627) (5,776) (17,219)
Basic and diluted loss per common share............. (8.78)
Pro forma basic and diluted net loss per common
share (unaudited).................................. (1.00)
December 31, 1999
--------------------
Pro Forma
Actual as Adjusted
------- -----------
(dollars in
thousands)
Balance Sheet Data:
Cash and cash equivalents................................ $24,747
Working capital.......................................... 22,590
Total assets............................................. 29,558
Long-term obligations, less current portion.............. 406
Total stockholder's equity (deficit)..................... (4,433)
5
RISK FACTORS
Any investment in our shares of our common stock involves a high degree of
risk. You should consider carefully the following information about these
risks, together with the other information contained in this prospectus, before
you decide to buy our common stock. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock. All references to "partners" or "strategic partners" shall not
necessarily imply equity ownership in us by such entities.
Risks Related To Our Business
Our limited operating history makes it difficult to evaluate our future
prospects.
We initiated our Internet-based information management solution services in
February 1999. Prior to that time, we provided a windows-based data storage and
backup service. Therefore, we have only a limited history of recognizing and
addressing material risks in our current business. Moreover, like other early
stage Internet-based companies, if we are not successful in growing our
revenue, our business may fail.
We have a history of losses and may not achieve profitability in the
foreseeable future.
We have never achieved profitability and, given the level of planned
operating and capital expenditures, expect to continue to incur additional
operating losses for the foreseeable future. In fact, we incurred net losses of
$5.6 million for the year ended December 31, 1997, $5.8 million for the year
ended December 31, 1998 and $17.2 million for the year ended December 31, 1999.
Our accumulated deficit at December 31, 1999 was $38.2 million. The size of our
future losses will depend, in part, on the rate of growth in our revenues and
expenses. It is critical to our success that we continue to devote financial
resources, including a portion of the net proceeds of this offering, to develop
brand awareness and expand our strategic partnerships. In addition, we expect
to make significant capital expenditures as we increase our growth in
operations infrastructure and personnel, both domestically and internationally.
As a result, we expect that our operating expenses will increase significantly
during the next several years, especially in sales and marketing. As we
increase spending, our losses may continue to increase for the foreseeable
future. As a result, we may never achieve or sustain profitability, and if we
do achieve profitability in any period, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
The success of our business depends on our development of relationships with
existing strategic partners and obtaining new strategic partners.
Most of our registered members became members of Driveway while registering
for the services of our strategic partners. We intend to pursue additional
strategic partnerships in the future, and expect a significant percentage of
our membership will continue to be acquired through our relations with
strategic partners. We often pay significant fees to these strategic partners
for the procurement of registered members and for converting these members to
active users of our system. We may not experience increases in the number of
new strategic partnerships or in the number of new member registrations or in
user traffic from our strategic partner affiliations.
Our strategic partnerships have terms of up to three years, with the
majority of them having terms of one year. When these agreements expire, we may
be unable to renew them or enter into
6
replacement agreements on viable commercial terms. If we fail to renew any of
these agreements or enter into substantially similar agreements with other
strategic partners, we could experience a decline in membership growth and
activity on our Web site could decrease. As a result, our competitive position
would be significantly weakened and our operating results would likely suffer.
If our members do not become active users of our services or our users do not
subscribe for premium services, our business will suffer.
We depend on our members becoming active users of Driveway. To date, only a
small percentage of our members have ever used our services. If members do not
actively and regularly use our services, our business will suffer. Moreover, we
may be unable to generate revenue from members who use our services. Only a
small percentage of our current members have ever paid us for any of our
services. Present and future members may be unwilling to pay for services they
currently receive free of charge or may not subscribe for premium fee-based
services.
System failures could prevent access to, and result in the loss of information
stored on, our Web site and harm our business and results of operations.
We currently store all of the data stored on Driveway on equipment that is
owned by us or operated on our behalf and manufactured by StorageTek
Corporation and EMC/2/ Corporation. Each of these entities also provides
professional and maintenance services related to their particular products. We
also contract with Exodus and with Level (3) Communications for the hosting of
our servers and for the provision of bandwidth. The malfunction, interruption
or loss of any of these services or products could result in damage to or loss
of our users' data and result in the interruption in the use of our services.
Our revenues could decline and we could lose existing or potential members of
our services if they are not able to access their stored data, or if their
stored data on our Web site, transaction processing systems or network
infrastructure do not perform to our users' satisfaction. Any network
interruptions or problems with our Web site could:
. prevent members from accessing data stored on Driveway;
. reduce the number of new users we register;
. cause member dissatisfaction; or
. damage our reputation.
We have experienced brief computer system interruptions in the past. In
January 2000, a technical failure at one of our suppliers caused Driveway to be
unavailable to Internet users over a period of approximately two days. This
outage was the result of a failure of certain storage equipment and technical
support provided by a third party supplier. Approximately 64,000 users may have
been unable to access some of their files stored on Driveway for up to an
additional six days, and approximately 3,400 users lost one or more of their
files. We are unable to quantify the damage that such outage has caused to our
business or to our users' information.
We do not presently have a formal disaster recovery plan in effect and do
not carry sufficient business interruption insurance to compensate us for
losses that could occur due to any failures or interruptions in our systems
and, accordingly, we cannot be certain that litigation and liabilities may not
result from this interruption and from future interruptions. Such interruptions
may recur. If the
7
number of users visiting our Web site and storing information on our services
continues to increase, we will need to expand and upgrade our technology,
transaction processing systems and network infrastructure significantly. We may
not be able to make timely upgrades to our systems and infrastructure to
accommodate increases in the number of users.
Our systems and operations are also vulnerable to damage or interruption
from a number of sources, including fire, flood, power loss, telecommunications
failure, physical and electronic break-ins, earthquakes and other similar
events. For example, our primary data center is currently located in Northern
California, a seismically active region. Our servers are also vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. Any
substantial disruption could completely impair our ability to generate revenues
from our Web site.
Our operating results are likely to fluctuate from quarter to quarter, and if
we fail to meet the expectations of securities analysts or investors, our stock
price could decline significantly.
Our results of operations have varied significantly from quarter to quarter
in the past and we anticipate that they will continue to fluctuate in the
future due to a variety of factors, some of which are outside of our control.
Factors that may affect our future operating results include:
. market acceptance of our services;
. growth in the number of new strategic partnerships we enter into to
increase the use of our services;
. growth in payment and timing for our premium services;
. the amount of advertising and commerce activity on our Web site and the
rate we can charge for such activity;
. the amount and timing of our other operating expenses and capital
expenditures;
. our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
. our ability to introduce new products or services in a timely and
effective manner; and
. new product and service introductions by our competitors.
As a result, period to period comparisons of our operating results are not
necessarily meaningful or indicative of future performance. Furthermore, it is
likely that in some future quarters our operating results will fall below the
expectations of public market analysts or investors. If this occurs, the
trading price of our common stock could decline.
If the online information management market fails to develop or develops more
slowly than expected, or if the market segment of Internet users we target
fails to adopt our services, our business may suffer.
The development of the online information management service market is in
its early stages, is rapidly evolving and likely will be characterized by an
increasing number of market entrants. Therefore, there is significant
uncertainty with respect to the viability and growth potential of this market
and as to the most likely users of these services. We do not know whether
consumers or businesses will significantly increase their use of the Internet
for information management services or
8
whether our services will be accepted by consumers or businesses. If the online
information management market fails to develop, or develops more slowly than we
expect, or if our services do not achieve widespread market acceptance, or
acceptance in the demographic segment we target, our business may suffer.
Acceptance of our services is highly uncertain and subject to a number of
potential factors, including:
. reluctance to change information management storage behavior in favor of
services hosted on our servers;
. concerns regarding the effectiveness of hosted PC services compared with
information storage devices residing on a user's PC or network systems;
. the unwillingness to incur ongoing subscription fees for hosted services
previously offered free of charge;
. concerns about whether the Internet is able to deliver critical PC
security and management functions effectively; and
. concerns about storing sensitive data and information at a location other
than on a personal computer.
Any failures of, or capacity constraints in, our systems could adversely affect
our business, harm our reputation and slow the growth of our membership.
Our Web site must accommodate a high volume of traffic and deliver
frequently updated information, the accuracy and timeliness of which is
critical to our business. Traffic on our Web site is growing rapidly. If we
fail to increase capacity to accommodate increased use of our system, we may
experience slower response times or system failures. Our Web site has in the
past experienced slower response times, decreased traffic or loss of service
for a variety of reasons. Any of these problems could adversely affect our
business.
We have a new and unproven business model which we may not successfully
implement.
We intend to compete in the online information management services market,
which is in its infancy. We intend to derive revenue from fees for advertising,
the purchase of additional storage space and from our strategic relationships.
Although we are developing additional service offerings including private
labeling, we believe that Driveway will continue to account for a significant
portion of our revenue for the foreseeable future. The life cycle of Driveway
is difficult to estimate because of, among other factors, the emerging nature
of the online information management market and the possibility of future
competition. As a result, our future operating results, particularly in the
near term, are dependent upon the continued market acceptance and penetration
of Driveway and its related services. There can be no assurance that Driveway
will continue to meet with market acceptance or achieve market penetration or
that we will be successful in generating revenue from our service offerings.
We face intense competition, which could adversely affect our ability to
maintain or increase sales of our services.
The online information management market is intensely competitive. We
currently face direct competition from several privately-held online
information management companies. We also face indirect competition from other
companies, including:
. Internet portal and content companies, such as America Online and Yahoo!;
9
. online community sites, such as iVillage;
. online personal homepage services, such as Yahoo! Geocities;
. online music services that offer storage space for digital music files,
such as MP3.com and Real Networks; and
. Internet desktop companies, such as Visto and desktop.com.
Because technological barriers to entry are extremely low, additional
competitors may enter our market. As a result, we must educate prospective
users as to the advantage of our services relative to those offered by our
competitors. In order to remain competitive, we may have to continue to provide
certain services free of charge and we may be unable to generate significant
revenue with our premium service offerings.
We will likely also face competition in the future from developers of Web
directories, search engine providers, shareware archives, content sites,
commercial online services, sites maintained by Internet service providers and
other entities that establish or attempt to establish online information
management solutions by developing their own offerings or by purchasing or
entering into significant strategic partnerships with one of our competitors.
We may also face competition from traditional storage solutions, including
currently installed hard drives which can be modified to add substantially more
storage space and from stand-alone equipment such as Iomega zip drives.
Enhancements to hard drive capacity could increase current storage capacity of
personal computers to such a level where our online information management
solution might not be as compelling. Also, hand-held devices that are internet-
connected could in the future be equipped with hard drives with sufficient
storage for music and other rich data files.
Certain of our competitors and potential competitors have substantially
greater financial, marketing, sales and support resources, have longer
operating histories, more "brand-name" recognition and a larger user base than
we have. There can be no assurance that we will be able either to develop
services comparable or superior to services offered by our current or future
competitors or to adapt to new technologies, evolving industry standards and
changes in customer requirements. Many of these competitors are able to respond
more quickly to take advantage of new or changing opportunities, technologies
and customer requirements, undertake more extensive marketing campaigns for
their products and services, adopt more aggressive pricing policies and make
more attractive offers to potential employees, strategic partners, ecommerce
companies and third-party service providers. Accordingly, our competitors may
experience greater growth than we do and our strategic partners may terminate
their agreements with us and enter into arrangements with these competitors. We
may not be able to compete successfully against our current or future
competitors. To compete successfully, we must respond promptly and effectively
to technological changes, evolving industry standards and our competitors'
innovations and competitive marketing efforts by continuing to enhance and
expand our products and services and our sales and marketing channels.
Increased competition, particularly online competition, may result in price
reductions, reduced margins and loss of market share, any or all of which could
harm our business.
Our services may not be accepted as a private label offering.
One key component of our future revenue model involves making our services
available on a private label basis to business-to-business Web sites and to
other online and offline businesses. If we are unable to convince these
businesses of the value of our services or our services do not gain wide-spread
adoption, we will be unable to attain future revenue projections.
10
Factors beyond our control will dictate the amount of revenue we are able to
generate from selling advertising on our Web site and sponsorship activities.
We anticipate increased revenue in the future from advertising and
sponsorship activities. Our business would suffer if the market for Web
advertising fails to develop or develops more slowly than expected. Our ability
to generate advertising revenues will depend on, among other factors, the
development of the Internet as an advertising medium, the amount of traffic on
our Web site and our ability to achieve and demonstrate user and member
demographic characteristics that are attractive to advertisers. Most potential
advertisers and their advertising agencies have only limited experience with
the Internet as an advertising medium and have not devoted a significant
portion of their advertising expenditures to Internet-based advertising. The
widespread adoption of technologies that permit Internet users selectively to
block-out unwanted graphics, including advertisements, attached to Web pages
could also adversely affect the growth of the Internet as an advertising medium
and therefore our revenue.
We may not successfully promote our brand or achieve brand recognition.
If we fail to promote our brand successfully, or if these efforts are
excessively expensive, our business may not grow. There are a growing number of
Web sites that offer services which are similar to and competitive with our
services. Therefore, we believe that brand recognition will become an
increasingly important competitive advantage in our industry. Establishing and
maintaining our brand is critical to expanding our customer base, solidifying
our business relationships and successfully implementing our business strategy.
We cannot assure you that our brand will be viewed positively and be accepted
by the market, or that we will have a strong and positive reputation.
Additionally, expenses incurred toward building brand awareness do not have an
immediate payback, and it may be a long time before the general public
recognizes and makes positive connections with our brand. In order to attract
and retain customers and strategic partners and to promote and maintain our
brand in response to competitive pressures, we intend to increase our financial
commitment to creating and maintaining prominent brand awareness.
The value of our brand could be diluted if visitors to our Web site do not
perceive our existing services to be of high quality or if we alter or modify
our brand image, introduce new services or enter into new strategic ventures
that are not favorably received, which may decrease the attractiveness of our
services to potential customers. Moreover, promoting and enhancing our brand
will also depend, in part, on our success in providing a high-quality member
experience. We cannot assure you that we will be successful in achieving this
goal.
Our business will be adversely affected if we are unable to safeguard the
security and privacy of our customers' information or network systems.
The secure transmission of confidential information over public networks is
critical to the acceptance of the online information management market and
ecommerce. A significant barrier to electronic commerce and online
communications has been the ability to transmit confidential information over
the Internet in a secure manner. Internet usage and/or use of our services
could decline if any well-publicized compromise of security occurs. We rely on
certain encryption and authentication technology licensed from third parties to
provide secure transmission of confidential information. There can be no
assurance that advances in computer capabilities, new discoveries in the field
of cryptography, or other events or developments will not result in a
compromise or breach of the algorithms we use to protect customer data. A party
who is able to circumvent our security measures could misappropriate
proprietary information or cause disruptions in our operations. We
11
may be required to expend significant capital and other resources to protect
against such security breaches or to alleviate problems caused by such
breaches. Further, such breaches in security could adversely affect our
reputation and expose us to a risk of loss or litigation and possible
liability.
Lastly, we can provide no assurances that our privacy policies will be
deemed sufficient by our members or any federal or state laws governing privacy
which may be adopted in the future.
We have experienced significant growth in recent periods, and if we are unable
to manage our growth effectively our business may suffer.
We have rapidly and significantly expanded our operations recently and
expect to continue to expand our operations for the foreseeable future in order
to address market opportunities. If we fail to implement or improve systems or
controls or to manage any future growth and expansion effectively, our business
could suffer. This growth has placed, and will continue to place, a significant
strain on our managerial, operational, financial and other resources. We have
recently hired a number of executive officers, including Christopher S. Logan,
Chief Executive Officer, Kent Jarvi, Chief Financial Officer, Michael Zukerman,
Vice President--Business Development, Philip Constantinou, Vice President--
Engineering, Larry Jones, Vice President--Product Marketing and Michael
Vanneman, Vice President--Sales. Because our senior management currently
consists of individuals who have worked together for a relatively short period
of time, our management may be unable to work together or to manage our
employees effectively. We have grown to 61 employees as of March 13, 2000 from
28 employees on January 1, 1999. We expect to hire additional new employees to
support our technology development, business development and operations
departments. We have limited experience training large numbers of new staff
members, and we could experience a significant amount of employee turnover. If
we fail to manage the growth of our operations and staff effectively, the
quality of our services will be impaired and our financial performance will
suffer.
Our success depends on retaining our key senior management team and attracting
and retaining qualified individuals.
We do not have long-term employment contracts with our senior management or
key personnel. Our future success depends to a significant extent on the
continued services of our senior management, particularly Christopher S. Logan,
our President and Chief Executive Officer. The loss of the services of any
person on our senior management team would likely have a significantly
detrimental effect on our business. We have not obtained "key-person" life
insurance for any officer. The loss of any key employee or the failure of any
key employee to perform satisfactorily in his or her current position could
have a significant negative impact on our operations.
We may also be unable to retain our key employees or to attract, assimilate
or retain other highly qualified employees in the future. We have from time to
time experienced, and we expect in the future to continue to experience,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications. In addition, there is significant competition for qualified
employees in the Internet industry and, in particular, in northern California
where we are located. If we do not succeed in attracting new personnel or
retaining and motivating our current personnel, our business will suffer.
12
We may be unable to adequately protect our intellectual property and we may be
subject to claims that we infringe the intellectual property of others.
We rely on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We also believe that factors such as the technological and
creative skills of our personnel, new product developments, frequent product
enhancements and name recognition are essential to establishing and maintaining
a technology leadership position. We seek to protect our software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. There can be no assurance that our
intellectual property will be successfully protected, or if protected, that it
will not be invalidated, circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to us or that any of our pending
or future patent applications, whether or not being currently challenged by
applicable governmental patent examiners, will be issued on substantially the
same basis as the claims we seek, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or
superior to our technology or design around the intellectual property. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. Policing unauthorized use of our products is difficult, and
while we are unable to determine the extent to which piracy of our software
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not ensure that our means of
protecting our proprietary rights in the United States or abroad will be
adequate or that competition will not independently develop similar technology.
There can be no assurance that third parties will not claim infringement by
us of their intellectual property rights. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources or cause product release delays. In
addition, such claims could require us to discontinue the use of certain
software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that we would be able to
develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially acceptable to us. In the
event of a successful claim of product infringement against us and our failure
or inability to license the infringed or similar technology, our business,
operating results and financial condition will suffer.
Protection of our domain names is uncertain.
We hold domain names that are important to our business. The regulation of
domain names is subject to change. Some proposed changes include the creation
of additional top-level domain names in addition to the current top-level
domains, such as ".com," ".net" and ".org." It is also possible that the
requirements for obtaining and holding a domain name could change. Therefore,
we may not be able to obtain or maintain relevant domain names for all areas of
our business. It may also be difficult for us to prevent third parties from
acquiring domain names that are similar to ours, that infringe our trademarks
or that otherwise decrease the value of our intellectual property.
13
Any acquisitions we make may disrupt our business and dilute our stockholders.
While we have no current agreements or negotiations underway, we may acquire
or make investments in complimentary businesses, products and technologies in
the future. We may experience difficulties integrating an acquired company's
operations into ours. In the event of any investments or purchases, we could:
. issue stock that would dilute our current stockholders:
. incur debt;
. assume liabilties;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
These acquisitions could also involve numerous operational risks, including:
. problems combining the purchased operations, products or technologies;
. unanticipated costs;
. diversion of management's attention for our core business relationships
with suppliers and customers;
. risks associated with entering into markets in which we have no or
limited prior experience; and
. potential loss of key employees, particularly those of the purchased
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products or technologies that we might acquire in the future.
We face risks associated with international operations.
We intend to expand our business into international markets and to spend
significant financial and managerial resources to do so. We have limited
experience in international markets and may not be able to compete effectively
in international markets. We also face certain risks inherent in conducting
business internationally, such as:
. legal and governmental regulatory requirements;
. difficulties and costs of staffing and managing international operations;
. differing technology standards;
. language and cultural differences;
. trade barriers;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonal business activity in other parts of the world;
. political and economic instability;
. payment in foreign currency and fluctuations in currency exchange rates;
. imposition of currency exchange controls;
14
. potentially adverse tax consequences; and
. reduced protection for intellectual property rights in certain countries.
Any of these factors could harm our international operations and,
consequently, our business, operating results and financial condition.
Certain existing investors experienced substantial dilution prior to the sale
of our Series A Preferred Stock.
On two occasions prior to the sale of the outstanding shares of our Series A
Preferred Stock, and in order to further induce investments in Driveway and its
predecessor, all holders of the then outstanding preferred stock were required
to convert their shares into common stock. Additionally, on October 29, 1998,
the then outstanding common stock was subject to a 1,000-to-1 reverse stock
split. The interest of former holders of preferred stock in Driveway and its
predecessor was significantly diluted by this stock split and the subsequent
issuances of common stock and preferred stock. The holders of preferred stock
and common stock outstanding as of the date of this stock split currently own
less than 1% of the capital stock of Driveway on a fully diluted basis.
Furthermore, certain holders of less than 1% of our capital stock outstanding
at the time of such transactions did not consent to the 1,000-to-1 reverse
stock split. It is possible that one or more of the holders of capital stock
outstanding at the time of the reverse stock split could challenge the basis
for the reverse stock split or that the holders of capital stock who did not
consent to the reverse stock split could successfully claim they are entitled
to the full value of the securities without giving effect to the reverse stock
split.
Risks Related To The Internet Industry
Our success depends on the continued growth of the Internet.
Our success depends on consumers and businesses increasing their use of the
Internet. Consumers and businesses may not use the Internet for a number of
reasons, including:
. internet access costs;
. perceived security risks;
. legal issues;
. inconsistent service quality; and
. unavailability of cost-effective, high-speed service.
If consumers and businesses do not increase their use of the Internet, our
business and operating results would suffer.
The regulation of the Internet is unsettled and future regulations could have
an adverse effect on our business.
Laws and regulations directly applicable to electronic commerce or relating
to online content, user privacy, access charges, liability for third-party
activities, jurisdiction and taxation may become more prevalent in the future.
It is uncertain as to how existing laws will be applied toward the Internet.
Such legislation could dampen the growth in Internet usage generally and
decrease the acceptance of the Internet as a commercial medium. Although our
business is based in California, the governments of other states or foreign
countries might attempt to regulate our activities or levy sales or other taxes
on us.
15
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by various foreign governments to impose taxes on the sale of goods
and services and other Internet activities. Recently, the Internet Tax
Information Act was signed into law placing a three-year moratorium on new
state and local taxes on Internet commerce. However, future laws may impose
taxes or other regulations on Internet commerce, which could substantially
impair the growth of electronic commerce.
Some local telephone carriers have asserted that the increasing popularity
and use of the Internet have burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service
providers and online service providers. If access fees are imposed, the costs
of communicating on the Internet could increase substantially, potentially
slowing the increasing use of the Internet. This slowing could in turn decrease
demand for our services or increase our cost of doing business.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws such as those governing intellectual property,
telecommunications, privacy and taxation apply to the Internet. In addition,
the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad, that may impose additional burdens on companies conducting business
over the Internet. In the event the Federal Trade Commission, Federal
Communications Commission, local authorities or other governmental authorities
adopt or modify laws or regulations relating to the Internet, our business
could suffer.
The Internet industry is experiencing consolidation that may intensify
competition.
The Internet industry has recently experienced substantial consolidation and
a proliferation of strategic transactions. We expect this consolidation and
strategic partnering to continue. Acquisitions or strategic partnerships could
harm us in a number of ways, including:
. competitors could acquire or partner with companies with which we have
strategic partnerships and discontinue our strategic partnerships,
resulting in the loss of distribution opportunities for our services;
. our competitors could merge with each other or third-parties with
significant resources and experience, thereby increasing their ability to
compete with our services; and
. a competitor could acquire or partner with one of our key suppliers.
Any of these factors could materially adversely affect our operations and,
consequently, our business, operating results and financial condition.
The success of our business depends on the continued growth of the Internet as
a viable commercial marketplace.
Our future revenues substantially depends upon the widespread acceptance of
the Internet as an effective medium of commerce by consumers. We cannot predict
the extent to which Internet users will shift their habits from traditional to
online information management tools. If customers or manufacturers are
unwilling to use the Internet to conduct business and exchange information, our
business will fail. It is possible that the Internet may not become a viable
long-term commercial marketplace due to the potentially inadequate development
of the necessary network infrastructure,
16
the delayed development of enabling technologies and performance improvements
and the high cost of shipping products. The commercial acceptance and use of
the Internet may not continue to develop at historical rates, or may not
develop as quickly as we expect. In addition, concerns over security and
privacy may inhibit the growth of the Internet.
Our internal and hosted network infrastructure could be disrupted by a number
of different occurrences which can affect specific companies' Web sites.
We expect that experienced computer programmers, or hackers, may attempt to
penetrate our network security from time to time. Because a hacker who
penetrates our network security could misappropriate proprietary information or
cause interruptions in our services, we might be required to expend significant
capital and resources to protect against or to alleviate problems caused by
hackers. We could face liability for unauthorized access to, or destruction of,
our users' stored information or for information retrieved from or transmitted
over the Internet.
We could face liability for information retrieved from or transmitted over the
Internet.
We provide third party content on our Web site. We could be exposed to
liability with respect to this third-party information. Our users might assert,
among other things, that, by directly or indirectly providing links to Web
sites operated by third parties, or by being provided access to third parties'
files, we should be liable for copyright or trademark infringement or other
wrongful actions by third parties. Our customers could also assert that our
third-party information contains errors or omissions, and they could seek
damages for losses incurred if they rely upon that information.
It is possible that claims may be made against us on the basis of
defamation, negligence, copyright or trademark infringement or other theories
based on the nature and content of materials that have been or may be stored on
Driveway and made available to others. We could be held liable for information
stored using Driveway which we have not generated or compiled. These claims
could be based on us providing access to obscene, lascivious, inaccurate, or
indecent information or based on asserted infringements of copyrighted or
trademarked data. In addition, our provision of access to Internet content or
advertisements on Driveway that users may find objectionable could harm our
reputation and reduce the value of our brand.
Although we carry general liability insurance, our insurance does not cover
potential claims of this type, or may not be adequate to indemnify us for all
types of liability that may be imposed. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could impair our
business. Even if claims do not result in liability to us, we could incur
significant costs in investigating and defending against these claims.
Risks Related To This Offering
There has been no prior market for our common stock and an active trading
market may not develop following this offering.
Before this offering, there has not been a public market for our common
stock and the trading market price for our common stock may decline below the
initial public offering price. We cannot predict the extent to which a market
will develop or how liquid that market might become. The initial public
offering price for our common stock will be determined by negotiations between
us and the representatives of the underwriters and may not be indicative of
prices that will prevail in the
17
trading market. Investors may not be able to resell their common stock at or
above the initial public offering price due to a number of factors, including:
. actual or anticipated fluctuations in operating results;
. changes in expectations as to future financial performance or changes in
financial estimates or buy/sell recommendations of securities analysts;
. technical innovations by us or our competitors; and
. the operating and stock price performance of other comparable companies.
Our stock price could be volatile and could decline following this offering.
The stock markets, particularly the Nasdaq National Market on which we have
applied to have our common stock listed, have experienced significant price and
volume fluctuations, and the market prices of technology companies,
particularly Internet-related companies, have been highly volatile. The trading
prices of many technology companies' stocks are at or near historical highs.
These high trading prices may not be sustained. Investors may not be able to
resell their common stock at or above the initial public offering price. In the
past, securities class action litigation has often been instituted against
companies following periods of volatility in the market price of their
securities, regardless of actual operating performance. Such litigation could
result in substantial costs and a diversion of management's attention and
resources.
Certain existing stockholders own a large percentage of our voting stock, which
they could exercise against your best interests.
Upon completion of this offering, we anticipate that our executive officers,
directors and greater than five percent stockholders, along with their
affiliates, will, in the aggregate, own approximately % of our outstanding
common stock. As a result, such persons, acting together, will have the ability
to substantially influence all matters submitted to the stockholders for
approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. These persons
will also have the ability to control our management and affairs. Accordingly,
such concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, impeding a merger, consolidation, takeover or
other business combination involving us or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of our
business, even if such a transaction would be beneficial to other stockholders.
Matters that could require stockholder approval include:
. election and removal of directors;
. merger or consolidation of our company; and
. sale of all or substantially all of our assets.
Future sales of our common stock may cause our stock price to decline.
Sales of significant amounts of our common stock in the public market after
this offering or the perception that such sales will occur could adversely
affect the market price of our common stock or our future ability to raise
capital through an offering of our equity securities. After the completion of
this offering, we will have shares of common stock outstanding, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants after
18
Of these shares, all of the common stock sold in this offering will be freely
tradable without restriction under the Securities Act, unless purchased by our
officers, directors and some of our significant security holders. The sale of a
large number of shares held by affiliates could have an adverse effect on the
market price for our common stock. Those shares of common stock that constitute
restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
under the Act. 95.0% of the holders of these restricted securities, including
our officers and directors, have entered into lock-up agreements providing
that, subject to certain limited exceptions, they will not sell, directly or
indirectly, any shares of our common stock without the prior written consent of
FleetBoston Roberston Stephens Inc. for a period of 180 days from the date of
this prospectus. Upon expiration of this 180-day period and subject to the
provisions of Rules 144, 144(k) and 701, shares of common stock will
be available for sale in the public market, subject to compliance with certain
volume restrictions in the case of shares held by affiliates.
In addition, as of March 13, 2000, there were outstanding options to
purchase 3,729,601 shares of common stock that will be eligible for sale in the
public market from time to time, subject to vesting and the expiration of lock-
up agreements. After the completion of this offering, certain stockholders
representing approximately 36,146,055 shares of common stock, including shares
issuable upon the exercise of certain warrants to purchase common stock, are
entitled to certain demand and piggy-back registration rights.
We are uncertain of our ability to obtain additional financing for our future
capital needs.
We may need to raise additional funds in order to fund more rapid expansion,
to expand marketing activities, to develop new or enhance existing services or
products, to respond to competitive pressures or to acquire complementary
services, businesses or technologies. Additional financing may not be available
on terms favorable to us, if at all.
You will experience immediate and substantial dilution in the net tangible book
value of the stock you purchase.
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock
immediately after this offering. Therefore, based on an assumed initial public
offering price of $ per share of common stock, if you purchase our common
stock in this offering, you will suffer immediate dilution of approximately
$ per share. If additional shares are sold by the underwriters following
exercise of their over-allotment option, or if outstanding options and warrants
to purchase our common stock are exercised, you will experience additional
dilution. Accordingly, if you purchase common stock in this offering, you will:
. pay a price per share that substantially exceeds the value of our assets
after subtracting liabilities; and
. contribute % of our capital but will only own % of the shares
outstanding.
Delaware law and our charter documents contain provisions that could discourage
or prevent a potential takeover, even if the transaction would benefit our
stockholders.
Other companies may seek to acquire or merge with us. An acquisition or
merger of our company could result in benefits to our stockholders, including
an increase in the value of our common stock. Some provisions of our
Certificate of Incorporation and Bylaws, as well as provisions
19
of Delaware law, may discourage, delay or prevent a merger or acquisition that
our stockholders may consider favorable.
These provisions include:
. authorizing the Board of Directors to issue additional preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent;
. creating a classified Board of Directors, to which our directors are
elected for staggered three year terms; and
. establishing advance notice requirements for nominations for election to
the Board of Directors and for proposing matters that can be acted on by
stockholders at stockholder meetings.
Our management may not use the net proceeds of this offering effectively.
Our management has broad discretion over the use of the net proceeds of this
offering. In addition, our management has not designated a specific use for a
substantial portion of the net proceeds of this offering. Accordingly, it is
possible that our management may allocate the net proceeds differently than
investors in this offering would have preferred, or that we fail to maximize
our return on the net proceeds from this offering.
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
inventions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will"
and "continue" or similar words. You should read statements that contain these
words carefully. They discuss our future expectations, contain projections of
our future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements. The factors
discussed in the sections captioned "Risk Factors," "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" and "Business"
identify important factors that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
This prospectus contains data related to the electronic commerce and
Internet market. This market data has been included in studies published by
International Data Corporation, the Forrester Group, the Gartner Group, Jupiter
Communications and Messaging Online. These data include projections that are
based on a number of assumptions. We did not independently verify this market
data projections or assumptions. If any of these assumptions is incorrect,
actual results may differ from the projections based on those assumptions.
20
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the
shares of common stock will be approximately $ million, based upon the
public offering price of $ per share and after deducting the underwriting
discounts and commissions and estimated offering expenses that we will pay. We
estimate that our net proceeds will be approximately $ million if the
underwriters exercise their over-allotment option in full.
We intend to use the net proceeds of this offering for general corporate
purposes, including investments in marketing, promotion and technology. We have
not yet determined the expected expenditures and thus cannot estimate the
amount to be used for each specified purpose. The amounts actually expended for
such working capital purposes may vary significantly and will depend on a
number of factors, including the amount of our future revenues and the other
factors described under "Risk Factors." The principal purposes of this offering
are:
. to obtain additional capital;
. to create a public market for our common stock;
. to increase our visibility and credibility; and
. to facilitate future access to the public equity markets.
In addition, we may use a portion of the net proceeds to acquire
complementary technologies or businesses and enter into additional strategic
partnerships. We have no current plans, agreements or commitments with respect
to any such acquisitions or additional strategic partnerships. Accordingly, we
will retain broad discretion in the allocation of the net proceeds of this
offering. Pending these uses, we intend to invest our net proceeds in short-
term, investment-grade, interest-bearing instruments, repurchase agreements or
high-grade corporate notes. Because our management has not designated a
specific use for a substantial portion of the net proceeds of this offering, it
is possible that they may allocate the net proceeds differently than investors
in this offering would have preferred.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and
we do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance our operations
and growth of our business. Payment of future dividends, if any, will be at the
discretion of our Board of Directors, after taking into account various
factors, including our financial condition, operating results, current and
anticipated cash needs and plans for expansion.
21
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis after giving effect to the following upon the
completion of this offering:
--the conversion of all outstanding shares of non-redeemable and
mandatorily redeemable convertible preferred stock; and
--the exercise of warrants to purchase 835,030 shares at a weighted
average exercise price of $1.36 per share; and
. our pro forma as adjusted capitalization after giving effect to the sale
of shares of common stock in this offering at an anticipated initial
public offering price of $ per share, less underwriting discounts and
commissions and estimated offering expenses payable by us.
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(dollars in thousands)
Long-term obligations, less current portion.... $ 406 $ 406 $
-------- -------- ---
Redeemable convertible preferred stock, $0.001
par value, Series C, 11,000,000 shares
authorized; 7,477,562 shares issued and
outstanding actual; none pro forma and none
pro forma as adjusted......................... 28,383 -- --
Stockholders' equity (deficit):
Convertible Preferred Stock, $0.001 par value,
18,200,000 shares authorized:
Series A, 10,100,000 shares designated,
10,000,000 shares issued and outstanding
actual; none pro forma and pro forma as
adjusted.................................... 1,980 -- --
Series B, 8,100,000 shares designated,
7,444,770 shares issued and outstanding
actual; none pro forma and pro forma as
adjusted.................................... 9,352 -- --
Common Stock, $0.001 par value, 70,800,000
shares authorized; 5,298,547 shares issued
and outstanding actual; 31,055,909 shares
issued and outstanding pro forma; shares
issued and outstanding pro forma as
adjusted..................................... 5 31
Additional paid-in capital.................... 27,078 67,902
Deferred compensation......................... (4,139) (4,139)
Notes receivable from stockholders............ (537) (537)
Accumulated deficit........................... (38,172) (38,172)
-------- -------- ---
Total stockholders' equity (deficit)........ (4,433) 25,085
-------- -------- ---
Total capitalization........................ $ 24,356 $ 25,491 $
======== ======== ===
The above table excludes:
. 3,729,601 shares issuable upon exercise of options outstanding as of
March 31, 2000, with a weighted average exercise price of $1.45 per
share;
. 1,188,623 shares available for future grants as of March 13, 2000;
. warrants to purchase 22,532 shares at a weighted average exercise price
of $64.98 per share;
. 3,322,945 shares of Series C Preferred Stock sold on January 8, 2000; and
. 1,666,666 shares of Series D Preferred Stock sold on March 10, 2000.
22
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $25.1 million, or $0.81 per share of common stock. Our pro forma
net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the shares of common stock
outstanding as of December 31, 1999, assuming the conversion of all outstanding
shares of preferred stock and the exercise of warrants to purchase 835,030
shares at a weighted average exercise price of $1.36 per share. Our pro forma
net tangible book value as of December 31, 1999, after giving effect to the
issuance and sale of the shares of common stock offered hereby
after deducting underwriting discounts and commissions and estimated offering
expenses would have been $ million, or $ per share.
This represents an immediate increase in pro forma net tangible book value
per share of $ to existing stockholders and an immediate dilution per
share of $ to new investors. The following table illustrates this per
share dilution:
Assumed initial public offering price per share..................
Pro forma net tangible book value per share at December 31,
1999............................................................ $0.81
Increase in pro forma net tangible book value per share
attributable to new investors.................................
Pro forma net tangible book value per share after offering.......
Pro forma dilution per share to new investors....................
The following table summarizes, on a pro forma basis, as of March 13, 2000,
the number of shares of common stock purchased in this offering, the aggregate
cash consideration paid and the average price per share paid by existing
stockholders for common stock and by new investors purchasing shares of common
stock in this offering:
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
Existing stockholders.. 36,587,542 % $73,259,824 % $2.00
New investors..........
---------- --- ----------- --- -----
Total................ 100% $ 100%
========== === =========== === =====
The foregoing discussion and tables assume no exercise of any stock options.
To the extent that any of these options are exercised, there may be further
dilution to new investors. As of March 13, 2000, the foregoing discussion
excludes:
. 3,729,601 shares issuable upon exercise of options outstanding with a
weighted average exercise price of $1.45 per share and 1,188,623 shares
available for future grant; and
. 22,532 shares issuable upon the exercise of warrants at a weighted
average exercise price of $64.98 per share.
23
SELECTED FINANCIAL DATA
The following selected financial data is derived from and should be read in
conjunction with our financial statements, the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
balance sheet data set forth below as of December 31, 1998 and 1999 and the
statement of operations data for each of the three years in the period ended
December 31, 1999 are derived from, and are qualified by reference to our
audited financial statements included elsewhere in this prospectus. The balance
sheet data set forth below as of December 31, 1997, 1996 and 1995 and the
statement of operations data for the year ended December 31, 1996 are derived
from, and qualified by, reference to our audited financial statements not
included in this prospectus. The statement of operations data for the year
ended December 31, 1995 is derived from unaudited financial statements.
We transitioned our business focus from developing and selling software
products to data warehousing and backup services in 1997. Therefore, we believe
our 1995 and 1996 financial data is not necessarily meaningful when reading or
comparing our results of operations.
Year Ended December 31,
-----------------------------------------------
1995
(unaudited) 1996 1997 1998 1999
----------- ------- ------- ------- --------
Statement of Operations Data: (in thousands, except per share data)
Revenue....................... $ 27 $ -- $ 7 $ 187 $ 264
Cost of revenue............... 41 118 276 1,179 2,155
Operating expenses:
Sales and marketing.......... 475 670 1,752 1,787 4,147
Technology development....... 1,170 3,805 2,457 1,434 2,136
General and administrative... 1,514 1,633 1,212 1,023 2,387
Stock-based compensation..... -- -- 38 18 4,651
------- ------- ------- ------- --------
Total operating expenses.... 3,159 6,108 5,459 4,262 13,321
------- ------- ------- ------- --------
Loss from operations......... (3,173) (6,226) (5,728) (5,254) (15,212)
Other income (expense)....... (93) 550 101 (522) (2,007)
------- ------- ------- ------- --------
Net loss.................... $(3,266) $(5,676) $(5,627) $(5,776) $(17,219)
======= ======= ======= ======= ========
Basic and diluted loss per
common share................. $(3,266) $(5,676) $(1,125) $ (152) $ (8.78)
======= ======= ======= ======= ========
Shares used to compute basic
and diluted net loss per
common share(1).............. -- -- 5 38 1,962
======= ======= ======= ======= ========
Pro forma basic and diluted
net loss per common share
(unaudited)(1)............... $ (1.00)
========
Shares used to compute pro
forma basic and diluted net
loss per common share
(unaudited)(1)............... 17,162
========
December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- --------
Balance Sheet Data: (in thousands)
Cash and cash equivalents..... $ 516 $ 5,214 $ 2,068 $ 406 $ 24,747
Working capital............... 4,279 4,555 1,333 (1,809) 22,590
Total assets.................. 6,506 6,645 2,944 1,374 29,558
Long-term obligations, less
current portion.............. 334 229 312 176 406
Redeemable convertible
preferred stock.............. 5,948 5,944 7,719 1,911 28,383
Total stockholders' deficit... (1,112) (374) (5,960) (3,267) (4,433)
- --------
(1) See Note 5 of notes to our financial statements included elsewhere in this
prospectus for an explanation of the method used to determine the number of
shares used to compute pro forma net loss per share.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements, the accuracy of which
involves risks and uncertainties. We use words such as "anticipates,"
"believes," "plans," "expects," "future" and "intends" and similar expressions
to identify forward-looking statements. This prospectus also contains forward-
looking statements attributed to certain third parties relating to their
estimates regarding the growth of certain electronic commerce, and spending.
You should not place undue reliance on these forward-looking statements which
apply only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in our forward-looking statements for many
reasons, including the risks described in "Risk Factors" and elsewhere in this
prospectus.
Overview
Driveway is an online information management service that allows our members
to securely and easily store, manage and share their personal and business
information from a single virtual location on the Web. Our Driveway services
offer free online file storage, access, retrieval and sharing to anyone with
Internet access. Driveway was originally incorporated in Washington on October
8, 1993 under the name XactData Services, Inc. In 1997, we changed our name to
Atrieva Corporation to reflect our shift in business focus to data warehousing
and backup services. We reincorporated in Delaware on February 17, 1998, and in
1999 renamed the company to Driveway with the release of our online information
management service.
We launched our online information management service in February 1999.
Comparison of our financial results from year to year prior to 1999 may
therefore not be indicative of our future performance due to the adoption of
our new business model in February 1999.
Revenue
We have derived substantially all our revenue to date from subscribers who
pay a monthly fee for online storage services. Billings in advance of services
being performed are recorded in deferred revenue, which consist primarily of
payments received from customers for prepaid storage services.
We have recently transitioned our business model whereby registered members
of our Driveway services receive an initial allocation of storage, free of
charge, with the potential to purchase additional storage. Our revenue in the
future will consist of service fees paid by users for additional information
storage space and for other premium services. In addition, we expect to derive
a substantial part of our services revenue from fees we generate from private
label service offerings. Revenue is recognized over the period in which the
related service is provided.
We also expect to derive a significant amount of our revenue from the sale
of advertisements delivered to users of our Web site. Advertising revenue will
be recognized in the period in which the advertisements are delivered.
Advertising programs are generally delivered on either an impression based
program or a performance based program. An impression based program earns
revenue when an advertisement is delivered to a user of our Web site. A
performance based program earns revenue when a user of our Web site responds to
an advertisement by linking to an advertiser's Web site. We began to generate
advertising revenue in the first quarter of 2000. Our ability to generate
revenue for Internet advertising will depend on numerous factors, including our
ability to increase our inventory of delivered Internet pages on which
advertisements can be displayed and our ability to maintain or increase
advertising rates. We also expect to derive revenue from sponsorships in which
fees are paid for selective positioning and promotion of our sponsor's logo,
marketing messages and site links.
25
Cost of Revenue
Our cost of revenue consists primarily of compensation and benefits for
personnel, Web site operations and customer service activities. Web site
operation expenses include bandwidth, storage and co-location costs, Web site
content, system maintenance and communication expenses, and depreciation on
equipment required to run our Web site. Co-location costs include bandwidth,
communications and maintenance services by third parties related to hosting of
our servers at multiple locations within the United States.
We are making significant investments in systems technology and have
established technology centers in San Francisco, California and Seattle,
Washington. We currently have data centers only in the United States, and we
expect to open additional data centers in the United States and
internationally. These facilities support systems, network services, customer
service, storage redundancy and backup between the locations, thereby providing
operational systems in the event of a service interruption at any facility when
the Web sites are fully operational.
Sales and Marketing
Our sales and marketing expenses are comprised primarily of compensation and
benefits for personnel, advertising, business development, promotional
activities and consulting expenses. We have entered into various marketing and
co-marketing agreements with our strategic partners and affiliate Web sites
that provide for certain advertising, reciprocal advertising, promotional and
customer acquisition activities. These agreements generally have terms of up to
three years and provide for payments for services based on the first time a
customer clicks on one of our links and registers for the Driveway service
and/or becomes an active user of our services. Some agreements include minimum
monthly and quarterly payments and in some cases, an up-front Web site
placement fee. Placement fees are deferred and expensed throughout the term of
the contract. As of December 31, 1999, future minimum payments under these
obligations were approximately $4.3 million in 2000 and $425,000 in 2001.
Advertising costs are expensed as incurred. The aggregate of commitments at
December 31, 1999 was approximately $5.4 million.
We intend to develop worldwide sales offices. We currently have sales
offices only in the United States, although we expect to open additional sales
offices in the United States and internationally. We have commitments for
expenditures on media advertising in 2000. We intend to expand our sales and
marketing force to increase the breadth of our customer base and generate
additional revenue. We also intend to expand our sales and marketing efforts
globally through leveraging our existing relationship with Lycos Europe, a
joint venture between Lycos and Bertelsmann, and by establishing a larger
international strategic partner base. We also intend to further develop new and
existing strategic relationships to expand our distribution channels and to
undertake joint product development and marketing efforts.
Technology Development
Technology development expenses consist of expenses for the development and
production of new Internet services and for research and development of new or
improved technologies to enhance the features and functionality of our Driveway
services. Technology development expenses include employee compensation
relating to developing and enhancing the features and functionality of our Web
site. Our technology expenses also include product development and information
services personnel, data telecommunications expense and consultants. Because we
believe our Web site is subject to continual and substantial change, technology
development expenditures are expensed as
26
incurred. We believe a significant investment in technology is required to
remain competitive in the online information management market. Future
investments in technology may involve the development, acquisition or licensing
of technologies that complement or augment our existing services and
technologies. Accordingly, we expect to incur increased product development
expenditures in absolute dollars in future periods.
General and Administrative
General and administrative expenses consist primarily of salaries and
related costs for executive, finance and human resource personnel, professional
fees, and other general corporate expenses. We expect that general and
administrative expenses will increase in absolute dollars as we add personnel
to support expanding operations, incur additional costs related to the growth
of our business and assume the reporting requirements of a public company.
Stock-Based Compensation
In connection with the issuance of stock and stock options to employees and
consultants, we recorded non-cash stock-based compensation charges of
$8.8 million for the year ended December 31, 1999. This amount represents the
difference between the purchase price or the exercise price of these stock and
option grants, as the case may be, and the deemed fair value of the common
stock at the time of grant or purchase. Of this amount, we expensed
approximately $4.7 million through December 31, 1999. We expect to record
additional stock-based compensation in connection with options granted during
the first quarter of 2000. The remaining $4.1 million and the additional amount
of stock-based compensation from recent grants will be amortized over the
remaining vesting period of the options, generally four years or less. Deferred
compensation at December 31, 1999 will be amortized as follows: $2.2 million in
2000; $1.0 million in 2001; $569,000 in 2002 and $290,000 in 2003. As a result,
the amortization of stock-based compensation will impact our reported results
of operations through 2003.
Income Taxes
We have recorded no provision for Federal or state income taxes for any
period since our inception as we have incurred losses in each period. As of
December 31, 1999, we had approximately $35.0 million of Federal and $11.9
million state net operating loss carryforwards for income tax purposes,
available to reduce future taxable income, which expire between 2008 and 2019
for Federal and 2019 for state, respectively. Utilization of the net operating
loss and tax credit carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation may result in the expiration of the net operating loss and tax
credit carryforwards before utilization.
Operating History
We have a limited operating history upon which investors may evaluate our
business and prospects. We incurred net losses of $17.2 million, $5.8 million
and $5.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Our accumulated deficit at December 31, 1999 was $38.2 million.
We expect to expand our operations and employee base, including our sales,
marketing, technical, operational and customer support resources, and as a
result, we expect to
27
continue to incur net losses for the foreseeable future. In view of the rapidly
evolving nature of our business and our limited operating history, we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful and should not be relied upon as an indication of our future
performance.
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
Revenue
Revenue increased 41% to $264,000 in 1999 as compared to $187,000 in 1998.
Revenue increased 2,571% in 1998 from $7,000 in 1997. The increase in total
revenue in 1999 was primarily the result of the launch of our initial online
information management service and the increase in registered users of this
platform. The increase in revenue in 1998 was primarily due to revenue derived
from our data warehousing and backup services launched in January 1998.
Cost of Revenue
Cost of revenue increased 83% to $2.2 million in 1999 as compared to $1.2
million in 1998. Cost of revenue increased 335% in 1998 from $276,000 in 1997.
The increase in cost of revenue in 1999 was primarily attributable to the costs
associated with the launch of our initial online information management service
and additional costs related to increased personnel, facilities and other costs
associated with growing our Web site infrastructure. The increase in 1998 was
primarily due to the launch of our data warehousing and backup services.
Sales and Marketing
Sales and marketing expenses increased 132% to $4.1 million in 1999, as
compared to $1.8 million in 1998. Sales and marketing expenses were relatively
unchanged in 1998, with expenses of $1.8 million in 1997. The increases in
these periods in absolute dollars are primarily attributable to an increase in
advertising and distribution costs associated with our aggressive brand-
building strategy and increases in personnel associated with growth in
marketing and business development. We anticipate that sales and marketing
expenses in absolute dollars will increase in future periods as we continue to
pursue an aggressive brand-building strategy through advertising and
distribution, continue to expand our international operations, and continue to
build our global direct sales organization.
Technology Development
Technology development expenses increased 49% to $2.1 million in 1999, as
compared to $1.4 million in 1998. Technology and development expenses decreased
42% from $2.5 million in 1997. The increase in 1999 was primarily attributable
to increases in the number of engineers and consultants that develop and
enhance our services. The decrease in 1998 was primarily attributable to a
decrease in personnel primarily due to a refocusing of our business. We believe
a significant investment in technology is required to remain competitive in the
online information management market. Accordingly, we expect to incur increased
product development expenditures in absolute dollars in future periods.
28
General and Administrative
General and administrative expenses increased 133% to $2.4 million in 1999
as compared to $1.0 million in 1998. General and administrative expenses
decreased 16% in 1998 from $1.2 million in 1997. The increase in 1999 was
primarily attributable to additional finance, administrative and human resource
personnel and higher occupancy costs related to the move of our corporate
headquarters to San Francisco, California in the fourth quarter of 1999. The
decrease in 1998 was primarily attributable to a decrease in personnel
primarily due to a refocusing of our business. We believe that the absolute
dollar level of general and administrative expenses will increase in future
periods, as a result of an increase in personnel to support expanding
operations, incur additional costs related to the growth of our business and
assume the reporting requirements of a public company.
Other Income (Expense), Net
Other expense increased 283% to $2.0 million in 1999 as compared to $522,000
in 1998. Other expense increased 617% in 1998 from other income of $101,000 in
1997. The increase in other expense in 1999 was primarily the result of
interest charges from warrants issued in exchange for guarantees in connection
with our bridge financing in the fourth quarter of 1999. The increase in other
expense in 1998 was primarily due to additional bank and equipment lease
financings.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through private
sales of equity securities. On March 13, 2000, we had $38.1 million in cash and
cash equivalents. In January 2000, we sold an aggregate of 3,322,945 shares of
our Series C Preferred Stock for gross proceeds of $13.2 million. In March
2000, we sold an aggregate of 1,666,666 shares of our Series D Preferred Stock
for gross proceeds of $10.0 million.
Net cash provided by financing activities totaled $33.5 million in 1999,
$3.0 million in 1998 and $1.4 million in 1997, generated primarily from the
sale of our equity securities. Net cash provided by financing activities
primarily consisted of the proceeds of issuances of preferred stock and
payments on promissory notes in each of these periods.
Net cash used in operating activities in 1999 reflected a net loss of $17.2
million offset principally by non-cash stock-based compensation charges
totaling $4.7 million and non-cash interest expenses of $2.0 million, an
increase of accounts payable and accrued liabilities totaling $2.1 million and
depreciation and amortization of $423,000. Net cash used in operating
activities in 1998 reflected a net loss of $5.8 million offset by depreciation
and amortization of $502,000, non-cash interest expenses of $469,000, and an
increase in accrued expenses of $645,000. Net cash used in operating activities
in 1997 reflected a net loss of $5.6 million offset by depreciation and
amortization of $845,000.
Since our inception, our investing activities have consisted primarily of
purchases of property and equipment, principally computer hardware and software
for our growing number of employees. Capital expenditures totaled $1.2 million
in 1999, $454,000 in 1998 and $295,000 in 1997. We had $2.9 million in capital
expenditure commitments as of December 31, 1999, and we expect that capital
expenditures will increase with our anticipated growth in operations,
infrastructure and personnel both domestically and internationally.
29
We currently anticipate that the net proceeds from this offering, together
with our current cash, cash equivalents, short-term investments and credit
facility, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
12 months. However, we may need to raise additional funds in order to support
more rapid expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or take
advantage of unanticipated opportunities. Our future liquidity and capital
requirements will depend upon numerous factors, including costs and timing of
expansion of research and development efforts and the success of such efforts,
the success of our existing and new service offerings and competing
technological and market developments. The factors described earlier in this
paragraph will impact our future capital requirements and the adequacy of its
available funds. There can be no assurance that additional financing will be
available when needed on terms favorable to us, if at all.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires all derivative instruments to be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if so, the type of hedge transaction. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters or all fiscal years
beginning after June 15, 2000, or January 1, 2001 for us. We do not expect that
the adoption of this statement will have a material impact on our reported
results of operations.
Market Risk
The following discussion analyzes our exposure to market risk related to
changes in interest rates and foreign currency exchange rates.
Foreign Exchange Rate Risk
To date, substantially all of our recognized revenue has been denominated in
U.S. dollars and generated primarily from customers in the United States, and
our exposure to foreign currency exchange rates has been immaterial. We expect,
however, that future product and service revenue may also be derived from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to significant
fluctuations based upon changes in exchange rates of certain currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of
the U.S. dollar relative to foreign currencies could make our products and
services less competitive in international markets. Although we will continue
to monitor our exposure to currency fluctuations, and, when appropriate, may
use financial hedging techniques in the future to minimize the effect of these
fluctuations, we cannot assure you that exchange rate fluctuations will not
adversely affect our financial results in the future.
30
Interest Rate Risk
As of December 31, 1999, we had cash and cash equivalents of $24.7 million
consisting of cash and highly liquid, short-term investments. Our short-term
investments will decline by an immaterial amount if market interest rates
increase, and therefore, our exposure to interest rate changes is minimal.
Declines of interest rates over time will, however, reduce our interest income
from our short-term investments. Our outstanding notes payable and capital
lease obligations are all at fixed interest rates and therefore have minimal
exposure to interest rate fluctuations.
31
BUSINESS
Overview
Driveway is an easy to use online information management service that allows
our members to store, manage and share their personal and business information
from a single virtual location on the Web. We believe these functions are
important to Internet users who seek new forms of communications to facilitate
both the types of content and the ability to remotely access that content from
multiple disparate devices. We believe our market has characteristics and
benefits similar to the growth and adoption of the Web-based email market,
which is indicative of the current potential market for online information
management. Because we target Internet users who possess a high degree of
integration between their personal and business Internet use and frequently
participate in ecommerce, we attempt to aggregate an attractive member base to
drive multiple streams of revenue for Driveway and our strategic partners.
In the last twelve months, more than 3 million members have registered for
our Driveway services. We have achieved this growth and have begun to expand
our online information management solutions primarily through our strategic
partnerships, including Lycos, McAfee.com and Microsoft.
Industry Background
Expanding Uses of the Internet Driving the Need for Online Storage
The Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct business
electronically. The explosive growth of the Internet and its increasing
influence on communication and commerce continues unabated. According to the
International Data Corporation in June 1999, the number of Web users worldwide
will grow from an estimated 196 million in 1999 to 502 million by 2003.
Furthermore, the International Data Corporation estimates that the total value
of goods and services purchased over the Web will increase from approximately
$111 billion in 1999 to approximately $1.3 trillion in 2003. Some of the many
contributors to this growth have been the rapid technological improvements to
Internet infrastructure and bandwidth capacity, which have allowed users to
quickly download and upload information in multiple formats, run Web-based
applications and complete commerce transactions.
These uses represent a significant shift in usage patterns, as traditionally
the Internet was used primarily to acquire information most often stored in
simple text-based format. As the Internet continues to expand and evolve, we
believe users will increasingly move towards online management and storage
solutions to accommodate this shift. We further believe that dependence on
traditional desktop or private network solutions for information and storage
management limits or hampers an individual's ability to fully take advantage of
the capabilities of the Internet for their personal and business information
needs.
Some of the drivers of the demand for online information management include:
. Multiple Web Access Points. Many users frequently use more than one
personal computer for Internet access. We believe they are looking for
ways to remotely access all their files from a single virtual location
that is not limited by multiple computers located both at home, in the
office or elsewhere. For example, we believe many users are frustrated
with emailing files to themselves to have access to their information
from different computers in disparate locations.
32
. Web-enabled Devices. Internet access has expanded beyond personal
computers to personal digital assistants, cellular phones and other thin
client devices, which have limited storage capability. This expansion has
created new challenges for users who are looking for ways to access
information from these devices.
. Voluminous Data. The Internet is a virtual marketplace, providing vast
quantities of information from different sources. Users can shop
insurance rates, compare automobile options, and collect relevant
information about their favorite stocks, all through the Internet.
. Rich Media. The introduction onto the Web of rich media, including music,
video and picture downloads, has created new possibilities for ecommerce
and user interactivity. Web sites are moving beyond simple presentation
of data and providing new functionality through applications such as MP3
music file downloads, online video games and picture downloads made
possible by the recent proliferation of digital cameras. We anticipate
that storage needs will substantially increase as Web users will
increasingly look to store data within Web sites. According to Forrester
in February 2000, Web sites should be prepared to provide users with up
to 200 megabyte of storage by 2002 and 1 gigabyte by 2005.
These drivers, combined with the improved technological advancements to the
Internet infrastructure, should create a significant opportunity for online
information management. We believe that the Web-based email market has
characteristics and benefits similar to online information management.
According to Messaging Online, as of October 26, 1999, there were an estimated
431 million electronic mailboxes worldwide over 138 million, or 32% of which
were Web-based email accounts. According to the Gartner Group, approximately
300 billion email messages were sent in 1998. We believe this adoption rate and
market size is indicative of our current potential market.
Requirements for Online Applications
To remain competitive, Web sites are constantly looking for ways to increase
the utility of their Web sites. To accomplish this objective, many Web sites
have layered applications onto their existing service offerings in an effort to
decrease the static, one-way nature of the traditional Internet and to increase
the ability of users to communicate with each other and share information. As
Web sites attempt to provide more value added applications, we believe they are
demanding several requirements of those applications, including:
. differentiating functionality;
. aiding in customer acquisition and retention;
. increasing revenue opportunities; and
. encouraging return visits.
As an example, email has emerged as a basic application that many Web sites
have integrated into their offerings in order to fulfill these requirements. As
Web sites build out their application offerings, we believe that online
information management will add immediate value to Web sites because it not
only satisfies the demand of users to share information, it also integrates
seamlessly with many other existing and emerging applications.
33
The Emergence and Demand for Online Information Management
In an environment of increasingly ubiquitous Internet access and complex and
rich multi-media content, we believe Internet users will demand tools that help
them store, manage and share information central to their personal and business
lives. We believe the following represent the primary user requirements for
online information management:
. Ubiquitous access. Remote access to files from any Web-enabled computer
or device anywhere in the world.
. Single account. Storage of work files and personal and business
information, including documents and digital photos, and music downloads
from Web sites or desktop applications into one convenient account.
. Organize information. Manage and organize myriad files and a growing
volume of information.
. Ease of use. Access to information from any Web browser through an
intuitive interface without requiring downloads or additional
configuration.
. Integration with leading Internet sites and applications. Access to
online data from within Web sites and a single online storage desktop
application.
. Sharing of information. Selectively sharing information with anyone with
an Internet connection.
. Privacy. Control of access to user information and selectively share
files without allowing access to other information stored in a user
account.
. Security. Assurance that data is secured for only specified uses.
. Scalability. Availability of additional space on demand and assurance
that data availability will not vary as demands on the system increase.
. Reliability. Available 24 hours a day, 7 days a week.
As a result of these factors, we believe that Web sites seeking value added
and differentiating applications and Internet users seeking to store, manage
and share information are increasingly requiring an effective online
information management solution.
The Driveway Solution
Driveway is an easy to use online information management service that allows
members to store, manage and share their personal and business information. Our
solution is available to any Internet user and for nearly all types of
electronic data, including URL's, desktop files and rich multimedia content. We
have designed our architecture to be scalable and to meet high standards of
reliability as our member base expands rapidly. Our system is designed to be
completely device and platform agnostic, a feature that offers our members the
greatest freedom and flexibility to manage their online personal and business
information. In addition, we actively partner with highly trafficked Web sites
to help them increase their value to their users. We believe our solution
provides significant benefits to both our members and our strategic partners.
34
Benefits to our members:
Ubiquitous access to information from multiple devices. We allow members to
store and access information at any time from any standard Web-enabled device,
which we define as any device that supports hyper-text transfer protocol (HTTP)
and hyper-text mark-up language (HTML). The Driveway online information
management service permits members to use a company computer, a personal
computer or any other standard Web-enabled device to access information. In
addition, Driveway provides a single virtual location for all personal and
business files. As a result, Driveway makes using Internet-based information
easier. For example, Driveway obviates the need to email large rich-media files
across disparate platforms, systems or multiple computers. Furthermore,
Driveway works with Unix, Mac and PC platforms and is not affected by most
standard firewall applications.
Ability to securely share private information. We enable information-sharing
by allowing our members to provide secure password-protected, highly
customizable access to other Internet users. Members can grant access to one or
more folders within their Driveway account to any number of Internet users.
Business files can be stored in a secure manner and accessed by colleagues from
any standard Web-enabled device without the need to dial into a private
network. In addition, by specifying a particular folder to which another
individual has access, users can minimize privacy concerns raised by storing
personal and business information in the same account.
Ease of use. Our solution is compatible with all browsers, version 2.1 and
above, and does not require users to download client software. Driveway
requires no configuration or administrative set-up. Our intuitive user
interface makes it easy for users to aggregate information from disparate
sources and logically organize it into manageable folders within their account.
Integration with existing Web sites and applications. Our online information
management solution is accessible from all of our strategic partners and more
than 4,000 affiliates. We integrate into the existing applications of some of
our strategic partners' Web sites, making it even easier for users to manage
and organize activities from multiple sites into their Driveway account. In
addition, Driveway can be integrated into our users' desktops through our
recent strategic partnership with Microsoft, which provides Driveway access
into the Windows environment and Office 2000 applications.
Benefits to our strategic partners:
Adds functionality. Our online information management services provide an
additional service to our strategic partners' Web site offerings. Additionally,
our online information management application can be seamlessly integrated into
existing and emerging Web site applications. For example, Web portals may
integrate our information management solution with email, local directories,
maps and scheduling services to immediately enhance the value of these
applications to their users.
Aids in customer acquisition and retention. By providing a more complete set
of services to users, our strategic partners can differentiate themselves from
their competitors, attract new users and retain existing users. We believe that
integrating the Driveway services into strategic partner Web sites may attract
current Driveway members to the service offerings of our other strategic
partners. We also believe that as users store more information from the
strategic partner's site onto their Driveway account, they will have an
increased loyalty to that Web site.
35
Enhances stickiness. Because we can integrate our online information
management solution with a strategic partner's Web site applications, users
have all relevant information centrally located, potentially increasing the
time a user is active on our strategic partner's Web site. Our services allow a
user to save large files obtained on the strategic partner site in a minimal
amount of the time without downloads and without substantially interrupting the
user's experience on the strategic partner's Web site.
Facilitates new revenue opportunities. Our strategic partners can share in
revenues generated from paid services from members we receive through that
strategic partner. We provide our strategic partners access to our extensive
member base for opt-in marketing programs and other advertising opportunities.
In addition, our strategic partners can offer value added applications to our
members.
Strategy
We intend to be the leading provider of online information management
services. We plan to achieve market leadership by rapidly growing our
membership base through strategic partnerships that can drive new members with
attractive demographics to our services. We also intend to grow our membership
base through marketing activities that will drive new members directly to our
site and through registrations that result when a member shares Driveway files
with an Internet user who subsequently becomes a member. We believe that
enhancing the profile and utility of our services will result in greater
activity and higher rates of user retention increasing the revenue
opportunities from each member. We also plan to increase revenue opportunities
by offering the Driveway services to business-to-business Web sites. The
following are the primary elements of our strategy for achieving these
objectives:
Capitalize on Growing Member Base to Drive Multiple Revenue Streams
We intend to expand and capitalize on our large and growing membership base.
We believe continued enhancements of our services and continued integration of
Driveway into our member's Internet activities will allow us to grow and retain
an increasingly active user base. As we expand the number of members and
increase the amount and duration of activity on our site, we intend to utilize
this customer engagement to drive multiple streams of revenue. User activity on
our Web site will drive advertising and promotional revenue. In addition,
because we collect demographic information from our members as part of our
registration process and in other solicitations, we plan to utilize this
information to achieve higher advertising rates. We plan to promote the
purchase of additional storage capacity and promote our own and our strategic
partners' services. We also expect to develop new functionality and create
strategic partnerships where we can recognize revenue by exposing our user base
to additional offerings.
Leverage Existing Strategic Partnerships and Develop New Relationships
We intend to reach new prospective members through our strategic
partnerships and leverage our growing membership base to develop new strategic
relationships. Partner-driven growth is an important element of our strategy
and has accounted for approximately 80% of our membership base. Because our
strategic partners provide us with information on their users, we are able to
focus our marketing efforts on Internet users who we believe are more likely to
be active users of our services and result in higher revenue per member.
Furthermore, as our membership base grows, we believe that a strategic
partner's access to our members combined with the value in an integrated
Driveway service may cause a decrease in our member acquisition costs.
36
Build Driveway Brand
We intend to establish Driveway as the leading brand for online information
management. Our branding efforts are designed to foster new strategic
partnerships and increase direct membership recruitment and retention. In
addition, we intend to educate the press, Internet users and potential
strategic partners about the advantages of our online information management
services. We believe that as Web sites and users begin to encounter our
solution more frequently and understand the value of online information
management, we will experience a dramatic increase in the number of strategic
partnerships as well as continued growth in our membership base.
Enable Additional Applications and Services
We intend to further enable our strategic partners to create and manage new
applications that utilize our Driveway services. We plan to integrate our
online information management platform into online application providers' Web
sites to provide a central location to store, manage and share the activities
of these applications. For example, we plan to release enhanced product
features, including site-to-site file transfers, folder messaging and
sophisticated user profiling, designed to further enhance and facilitate our
integration into our strategic partners' sites and applications.
Enable Functionality to Mobile Devices
We intend to add features to our solution that will allow our members to
access their information through a variety of wireless devices, such as mobile
telephones, personal digital assistants or personal computers that are
connected to the Internet by wireless service. We intend to enter into
strategic relationships with key providers of content and applications
delivered by wireless service companies. We plan to enter into relationships to
enable access to a Driveway account from a wireless device.
Capitalize on Web-Based Business-to-Business Opportunity
We intend to private label our Driveway service offerings for Web sites that
are focused on business-to-business opportunities. By private labeling our
services, we intend to further spread our solution across the Web and generate
revenue directly from business-to-business Web sites. Using our private label
offerings, sites can outsource their online information storage requirements,
enhancing the functionality of their Web sites, reducing the costs associated
with these services and reducing the time involved in deploying these services.
We also believe by establishing our services on popular Web sites, users will
demand our services outside of those sites as well.
Pursue International Market Opportunity
We intend to form international strategic partnerships because we believe
that worldwide demand for online information management presents a significant
opportunity for us to acquire new members. To facilitate this effort, we
developed our interface to easily allow translation into different languages.
In December 1999, we formed an exclusive strategic partnership with Lycos
Europe, a joint venture of Lycos and Bertelsmann and one of the most highly
trafficked Web sites in Europe, to expand our online information management
platform. We intend to invest resources and capital to further expand our sales
and marketing efforts internationally to address the needs of online
information management worldwide.
37
Our Services
Driveway provides personal online information management to its members and
allows them to remotely and securely access files anytime from a standard Web-
enabled device. Users must register to become a Driveway member, and each
member receives an initial allocation of storage space free of charge. Users
may also purchase additional space from our Web site or through some of our
strategic partners' Web sites. Using our real time registration technology,
members who register at some of our strategic partner's sites are automatically
registered for the Driveway services. Each Driveway account is customizable,
enabling members to create personalized folders using their own organization
structures. They can also choose to selectively share folders with other
Internet users.
The following table summarizes the features and benefits of Driveway:
STORE
- ------------------------------------------------------------------------------------------------------------------------------------
Feature Description Benefit
- ------------------------------------------------------------------------------------------------------------------------------------
Web Folders Full integration with . Drag and drop files from hard
Microsoft's Web Folders drive to Driveway
technology .Save files directly to
Driveway from within the
Windows environment and
Office 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Park It Save Web-based data directly to . One step file save from a
a Driveway account without strategic partner site to a
downloading it to a hard drive Driveway account
and then uploading it to .Significantly decreases file
Driveway account save time
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Storage Purchase additional storage . Virtually no limit to the
Capacity space through an easy online amount of space a user may
transaction buy
- ------------------------------------------------------------------------------------------------------------------------------------
Upload Multiple Files Upload a number of files at the . One step multiple file
same time uploads
.Speed and efficiency
- ------------------------------------------------------------------------------------------------------------------------------------
38
MANAGE
- -------------------------------------------------------------------------------------------
Feature Description Benefit
- -------------------------------------------------------------------------------------------
Real Time Registration Register at a strategic partner . One step, seamless
Web site and simultaneously registration
register for a Driveway account .Member does not need to
enter information twice
- -------------------------------------------------------------------------------------------
Auto Login When a Driveway user logs onto . Saving files from a strategic
a strategic partner Web site, partner site to Driveway is a
that user is automatically one step process
logged into Driveway .Single sign-on for both
Driveway and a strategic
partner site
- -------------------------------------------------------------------------------------------
Security User accounts are secure at all . Secure file storage
times and must be accessed with
a user name and password
- -------------------------------------------------------------------------------------------
Query Service View in real time the folders . Instant view into Driveway
in a Driveway account from a account from a strategic
strategic partner Web site partner site
.One click access to Driveway
- -------------------------------------------------------------------------------------------
Sorting Sort folders and files by any . Easy organization of files
current category (i.e., file and folders
name, file type, date, etc.)
- -------------------------------------------------------------------------------------------
File Information Summary Add summary information . Search for files according to
regarding any file in a personalized criteria
Driveway account (i.e., .Quick summaries of files
authors, subject, key words, without opening a file
etc.)
- -------------------------------------------------------------------------------------------
SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
Feature Description Benefit
- ------------------------------------------------------------------------------------------------------------------------------------
Flexible Sharing Share files with anyone on the . Users do not need to be
Internet with an email address Driveway members to access
shared files
- ------------------------------------------------------------------------------------------------------------------------------------
Secure Private Sharing Share specified password . Share folders and files with
protected Driveway folders with anyone
others and create personalized .Allows members to store
emails notifying others of private personal and business
folders they are allowed to information in the same
access account
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Target Market
We target a large number of Internet users that have a need to store, manage
and share information from multiple locations. We believe that busy
professionals needing to access the Internet to manage multiple aspects of
their lives are the most active users of the Internet and account for a
disproportionate amount of money being spent on online purchases. We believe
that this group of users represents a highly attractive demographic to
advertisers and sponsors.
We believe that many of these busy professionals need to access information
both at home and at work. The Internet has helped these professionals balance
their work requirements and their home
39
needs, but we believe that they are requiring a solution to remotely access all
of their information from any location.
We also target a large group of users that access the Internet to make
online purchases. Jupiter Communications stated that in 1999, 20.5 million
adults 19-50 years old, made a purchase online. This group represents 71% of
all purchasers online. The same study stated that this group of adults spent
$11.7 billion dollars online in 1999, 79% of all money spent online in the same
year. As individuals become increasingly busier, they are depending on the
Internet to provide solutions that simplify their lives.
We believe that busy, adult professionals represents the key market for the
Driveway service because we offer these users the easiest and most convenient
way to control information and balance their lives.
Affiliates and Strategic Partnerships
We have entered into strategic relationships with ten partners, and over
4,000 Web sites have opted into our affiliate program. Our affiliates provide
their visitors with a link to our Web site and we pay these affiliates a fee
for member conversions. Our strategic partner relationships meet one or more of
the following five criteria:
. our registration process is integrated with the strategic partner's
registration process;
. access is integrated into the strategic partner's software product;
. we are deeply integrated into the strategic partner's online service;
. our services are highlighted in multiple specified ways throughout the
strategic partner's site; or
. our relationship with the strategic partner is exclusive.
We have entered into strategic partner relationships with the following:
Backup Buddy Lycos MSN
Juno Online Services Lycos Europe Phoenix Technologies
LookSmart McAfee.com USA.NET
Microsoft
We believe that these relationships aid us in customer acquisition,
development of new applications and services and also increase our revenues. To
date, we have acquired more than 80% of our members through our strategic
partnerships and affiliates. The following case studies illustrate how our
strategic partners enable us to expand market acceptance of our services and
enhance our applications:
Microsoft
Microsoft's Web Folders feature enables save-to-the-web functionality from
within the Office environment, as well as web-to-desktop drag and drop
capability from within Windows Explorer, the Windows desktop and Internet
Explorer Favorites. With the rapid growth in usage of Microsoft Office Products
among small business and individual users, Microsoft wanted to promote this Web
Folders feature to these users via an Internet File Storage partner who could
provide ready and reliable service. In February 2000, we began distributing
software which automates the process of
40
creating a Driveway Web Folder enabling a user to save a Microsoft document
directly to their Driveway account from within the desktop. We will also
shortly distribute an application that will automate the processes of both
registering for Driveway and creating a Driveway Web Folder for Microsoft
Office customers.
We also provide our online data management services within the eServices
offering on the Microsoft Office Web sites. In addition, because the Web
Folders technology is enabled at the operating system level, many other
Microsoft applications, including Microsoft Money financial software and
TaxSaver software, are capable of seamlessly interoperating through Web Folders
with Driveway.
Lycos.com
As one of the largest Internet portals, Lycos constantly seeks to enhance
its functionality and services in an attempt to keep its users coming back to
the Lycos network and extend the time spent using Lycos network properties. In
November 1999, we signed a two year agreement with Lycos to provide the
Driveway services to users of the various Lycos network sites. The agreement
calls for integration and promotion within Lycos' Tripod and Angelfire, two of
Lycos' most heavily trafficked web-page building sites, and also contemplates
further integration with the popular MyLycos personal page service. In February
2000, we launched the Driveway services on the Tripod.com site, offering
Driveway as a service option to Tripod users at the time of registration. Users
of the Tripod service can use Driveway services to store Web-page building
assets and to back up their Web sites. We are currently working with Lycos to
implement similar integrations with the popular Angelfire and MyLycos services.
We believe that Lycos users gain immediate benefit from the integration of the
Driveway service into the Lycos properties.
McAfee.com
McAfee.com is one of the fastest growing subscription-based Application
Service Providers that provides a full suite of Internet-based PC maintenance
and support solutions, such as virus scanning, troubleshooting, drive
optimization, repair and updating services. Since December 1999, our online
information management services have been offered to McAfee.com visitors and
subscribers through a variety of banners, tiles, text links and registration
options. McAfee.com recently decided to incorporate certain of its own and
third party PC support services within an intuitive, readily accessible
interface. McAfee chose Driveway to provide it with a reliable, scalable file
storage offering for users of this interface. In February 2000, we amended our
agreement with McAfee.com to provide the exclusive online information
management option within this McAfee.com interface. As part of the amended
agreement, all trial and paid subscribers of McAfee Clinic will have immediate
access to the Driveway services from within this McAfee.com interface. By
choosing Driveway as its file management offering, McAfee is able to provide
its users with a robust online information management offering, without the
expense and distraction of deploying a storage infrastructure.
Infrastructure and Operations
We have deployed a highly secure, robust and scalable infrastructure
designed to support Internet-based content management. This infrastructure is
capable of processing millions of concurrent transactions and managing millions
of customer accounts. Our architecture enables us to provide highly integrated
features through our strategic partner sites and to exchange backend data for
applications such as real-time joint registration and auto login. Furthermore,
our platform is
41
designed to enable users to access their data independent of type of access
device. Key features of our infrastructure include:
Physical Infrastructure
In order to maintain a high level of Web site availability and security, we
co-locate our Web servers and our high volume file storage systems at fault
tolerant data centers operated by Level (3) in San Francisco, California and
Exodus Communications, Seattle, Washington. These data centers are monitored 24
hours a day, 7 days a week and are equipped with redundant fiber links, back-up
cooling and power. We are currently implementing separate redundant servers and
file storage systems.
Three-Tier Architecture
We utilize industry standard systems to create our robust and scalable
three-tier architecture. At the first tier, we operate a Sun Web server cluster
to present our user interface and manage file transfer transactions. Our load
balancing and clustering software, running off of Cisco equipment, enables us
to add servers to the cluster to increase session capacity and to swap faulty
servers out of the cluster with minimal user disruption.
At the second tier, we utilize sophisticated middleware tools to provide
robust modeling of user data, business logic and robust transaction processing.
The flexibility of our second tier enables us to perform highly functional
integration with our strategic partners and to develop new functionality such
as our Park It service.
Our third tier is divided between two key sub-categories, account data and
file meta data that resides on standard database servers running Oracle
relational database software, and user-stored data that resides on a highly
stable and scalable EMC/2/ file system.
Security and Availability of Data
We currently utilize third party firewall applications to control access to
our backend systems. In addition, we have implemented systems and procedures to
protect the availability and integrity of users' stored data in the event of
catastrophic events, equipment failure and human error or sabotage. We monitor
our systems and telecommunications links 24 hours a day, 7 days a week, and
perform daily tape backups, which are remotely archived.
We have, in the past, experienced periodic system interruptions, which we
believe will occur from time to time based upon software errors, hardware
failure, human error, sabotage or catastrophic events beyond our control. We
are currently in the process of switching file storage equipment to EMC/2/
equipment in an attempt to mitigate these outages.
42
Marketing
Our marketing promotional activities are focused on serving our current
member base, building our brand and attracting large numbers of members. These
activities will include the use of public relations, broadcast, online
advertising, print advertisements and email marketing. The key elements of our
marketing efforts include the following:
Serving Our Current Members
We target our current members with a significant marketing effort through
three primary ways. We have a quarterly newsletter giving promotional offers
and keeping our members informed about product and service developments. Our
members can also view information regarding promotional offerings and Driveway
service updates from the Driveway site and the sites of our strategic partners.
Finally, we engage in opt-in email marketing campaigns to our current members
targeting their specific needs based on demographic information that we have
solicited from them.
Branding
Our branding efforts are designed to both support our strategic partnership
activity and drive direct user recruitment and retention activity. Educating
consumers and strategic partners about the advantages of personal storage space
on the Web is key to our strategy. Our current marketing efforts are focused on
the most basic benefits of our services and establishing Driveway as the
premier solution for online information management. However, we believe that as
online storage becomes more pervasive, we must articulate the incremental value
and vision of our services to our members and other Web sites to continue our
growth.
Viral Marketing
Our Driveway services, like email, is viral in its application. We focus our
marketing messages and activities on stimulating this growth. For example, most
Driveway members take advantage of our file-sharing capabilities with their
friends and associates. As the recipients of shared files are increasingly
exposed to the value of Driveway as a collaboration tool and as an easy way to
share information, we market to them to both open their own Driveway account
and to continue sharing with other non-Driveway members.
Competition
The market for online information management is emerging and rapidly
evolving. Competition in this area is intense and is expected to increase
significantly in the future as there are no substantial barriers to entry.
Competition may also increase as a result of industry consolidation.
Our ability to compete depends on many factors, some of which are outside of
our control. These factors include:
. the level of our brand recognition;
. the quality and functionality of our services as compared with services
offered by our competitors;
. user affinity and loyalty;
. our demographic focus;
43
. the reliability of our services; and
. our sales and marketing efforts.
There are several companies that offer online information management
solutions. None of these companies is currently dominant in our space. In
addition, many companies may develop in-house solutions to provide online
information management, which may compete with us for users and strategic
partnerships and offer similar services as the following:
. Internet portal and content companies, such as America Online and Yahoo!;
. online community sites, such as iVillage;
. online personal homepage services, such as Yahoo! Geocities;
. online music services that offer storage space for digital music files,
such as MP3.com and Real Networks; and
. Internet desktop companies, such as Visto and desktop.com.
We will likely also face competition in the future from developers of Web
directories, search engine providers, shareware archives, content sites,
commercial online services, sites maintained by Internet service providers and
other entities that establish or attempt to establish online information
management solutions by developing their own offerings or by purchasing or
entering into significant strategic partnerships with one of our competitors.
We may also face competition from traditional storage solutions, including
currently installed hard drives which can be modified to add substantially more
storage space and from stand-alone equipment such as Iomega zip drives.
Enhancements to hard drive capacity could increase current storage capacity of
personal computers to such a level where our online information management
solution might not be as compelling. Also, hand-held devices that are internet-
connected could in the future be equipped with hard drives with sufficient
storage for music and other rich data files.
Further, our competitors and potential competitors may develop online
information management solutions or other online services that are equal or
superior to ours, or that achieve greater market acceptance than our services.
Proprietary Rights
We regard substantial elements of our Web site and underlying technology as
proprietary and attempt to protect them by relying on trademark, service mark,
copyright and trade secret laws, restrictions on disclosure and transferring
title and other methods. We also generally enter into confidentiality
agreements with our employees and consultants and with third parties in
connection with our license agreements. Such confidentiality agreements
generally seek to control access to, and distribution of, our technology,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
proprietary information without authorization or to develop similar technology
independently.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and we can give no assurance regarding the future
viability or value of any of our proprietary rights. We also cannot assure you
that the steps that we have taken will prevent misappropriation or infringement
of our proprietary information, which could have a material adverse effect on
our business, results of operations and financial condition.
44
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or trademarks or to determine the
validity and scope of the proprietary rights of others. Such litigation might
result in substantial costs and diversion of resources and management
attention. Furthermore, our business activities may infringe upon the
proprietary rights of others and other parties may assert infringement claims
against us, including claims that arise from directly or indirectly providing
hyperlink text links to Web sites operated by third parties. Such claims and
any resultant litigation, should it occur, might subject us to significant
liability for damages, might result in invalidation of our proprietary rights
and, even if not meritorious, could result in substantial costs and diversion
of resources and management attention and have a material adverse effect on our
business, results of operations and financial condition.
We currently license from third parties certain technologies and information
incorporated into our Web site. As we continue to introduce new services that
incorporate new technologies and information, we may be required to license
additional technology and information from others. We cannot assure you that
these third-party technology and information licenses will continue to be
available to us on commercially reasonable terms, if at all. Additionally, we
cannot assure you that the third parties from which we currently license our
technology and information will be able to defend their proprietary rights
successfully against claims of infringement. Any failure to obtain any of these
technology and information licenses could result in delays or reductions in the
introduction of new features, functions or services. It could also adversely
affect the performance of our existing services until equivalent technology or
information can be identified, obtained and integrated.
Employees
As of March 13, 2000, we had 61 employees, of which 17 work in operations,
16 work in sales and marketing, 18 work in technology development and 10 work
in general and administrative capacities. We have never experienced a work
stoppage and no personnel are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
Facilities
The location of our corporate headquarters is 380 Brannan Street, San
Francisco, CA 94107 and is approximately 2,000 square feet in size. In
addition, we maintain facilities of approximately 10,000 square feet at 460A
Bryant Street, San Francisco, CA 94107 and approximately 7,200 square feet at
600 Union Street, Suite 911, Seattle, WA 98101.
Legal Proceedings
We are not involved in any material legal proceedings.
45
MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our executive officers and directors as of
March 13, 2000 are as follows:
Name Age Position
- ---- --- --------
Larry Barels............... 51 Chairman of the Board of Directors
Christopher S. Logan....... 38 President, Chief Executive Officer and Director
Kent Jarvi................. 44 Chief Financial Officer and Secretary
Philip S. Constantinou..... 28 Vice President--Engineering
Larry Jones................ 43 Vice President--Product Marketing
Michael Vanneman........... 43 Vice President--Sales
Michael Zukerman........... 40 Vice President--Business Development
George Garrick............. 48 Director
Gary E. Gigot.............. 49 Director
John A. Hawkins(1)(2)...... 39 Director
Kenneth P. Lawler(1)....... 40 Director
Alan E. Salzman(2)......... 46 Director
Shahan D. Soghikian(1)..... 41 Director
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Larry Barels has served as a member of the Board of Directors since May 1999
and has acted as Chairman of the Board of Directors since June 1999. From
November 1998 to June 1999, Mr. Barels served as our President and Chief
Executive Officer. From January 1995 to September 1997, Mr. Barels was Chairman
of Software.com, Inc. From January 1985 to July 1993, Mr. Barels was Chairman
and Chief Executive Officer of Wavefront Technologies, and from July 1993 to
September 1995, acted as Chairman of Wavefront Technologies. Since 1996, Mr.
Barels has been a Principal of Pacific Capital Resources, an investment
company. Mr. Barels is a director of Miramar Systems, Inc., MSC Software
Corporation and Miravant Medical Technologies. Mr. Barels received his B.A.
degree in Communications from Brigham Young University.
Christopher S. Logan has served as our President, Chief Executive Officer
and a Director since June 1999. Mr. Logan was a Founder and Director of Fabrik
Communications, Inc. and served as Chief Executive Officer from February 1994
to September 1998, and continues to be a director of the company. From July
1992 to September 1993, Mr. Logan was Vice President of Operations and
Development for Trade Reporting and Data Exchange. From December 1990 to July
1992, Mr. Logan held senior marketing and engineer positions at Netopia, Inc.
(formerly Farallon Computing, Inc.) Mr. Logan received his B.S. degree in
Engineering with an emphasis in Control Systems from the University of
California, Davis.
Kent Jarvi has served as our Chief Financial Officer and Secretary since
September 1999. From September 1998 to May 1999, Mr. Jarvi was Vice President
and Chief Financial Officer of Fabrik Communications, Inc. From February 1997
to May 1998, Mr. Jarvi was Chief Financial Officer and Vice President of
Finance & Administration for Optimal Networks Corporation. From January 1995 to
August 1996, Mr. Jarvi was Chief Financial Officer for Airsoft Inc. From
September 1982 to August 1991, Mr. Jarvi co-founded and was the Chief Financial
Officer of XA Systems, Inc. Mr. Jarvi received a B.A. degree in Business and a
M.B.A. degree in Finance from Michigan State University.
46
Philip S. Constantinou has served as our Vice President--Engineering since
November 1999. From March 1995 to May 1999, Mr. Constantinou was a consultant,
senior engineer and director of engineering at Caresoft, Inc. Mr. Constantinou
received a B.S. degree in Computer Science from Stanford University.
Larry Jones has served as our Vice President--Product Marketing since
February 2000. From January 1999 to January 2000, Mr. Jones was the Director of
Marketing of E*Trade Securities, Inc.'s Business Solutions Group. From May 1994
to January 1999, Mr. Jones held various marketing management roles at Lotus
Development Corporation, a subsidiary of IBM Corporation for Lotus Notes and
cc:Mail. From January 1989 to May 1994, Mr. Jones held various product
management positions at Netopia Inc. (formerly Farallon Computing, Inc.). From
September 1978 to January 1989, Mr. Jones held various product management
positions at Nortel Networks Corporation (Northern Telecom). Mr. Jones obtained
a B.A. degree in History from the University of Michigan.
Michael Vanneman has served as our Vice President--Sales since February
2000. From October 1997 to October 1999, Mr. Vanneman was Vice President of
Sales of ReleaseNow.com Corporation. From July 1993 to August 1997, Mr.
Vanneman was the Vice President of Worldwide Sales of RayDream, Inc. From June
1990 to June 1995, Mr. Vanneman was the Director of North American Sales of
Radius, Inc. From November 1988 to July 1990, Mr. Vanneman was the Director of
Sales of Super Mac Technology. During the period from August 1982 to November
1988, Mr. Vanneman worked at Softsel Computer Products and Micro America. Mr.
Vanneman received a B.S. degree in Sociology from University of California, Los
Angeles.
Michael Zukerman has served as our Vice President--Business Development
since July 1999. From October 1996 to July 1999, Mr. Zukerman was the Vice
President of Business Development and General Counsel for SegaSoft Networks,
Inc. From September 1989 to October 1996, Mr. Zukerman was Vice President and
General Counsel of Netopia, Inc. (formerly Farallon Computing, Inc.). From June
1986 to September 1989, Mr. Zukerman was an attorney with the law firm of
Brobeck, Phleger & Harrison LLP. Mr. Zukerman received a B.A. degree in Social
Welfare from the University of California, Berkeley and a J.D. degree from the
American University.
George R. Garrick has served as a member of our Board of Directors since
March 2000. From May 1998 to the present, Mr. Garrick has been the Chief
Executive Officer, President and a Director of Flycast Communications
Corporation. From September 1997 until May 1998, Mr. Garrick owned and operated
his own private venture and consulting company, G2 Ventures, Inc. From April
1997 until September 1997, Mr. Garrick served as Chief Marketing Officer for
PowerAgent, Inc., an Internet media and marketing company. From March 1996
until April 1997, Mr. Garrick founded and operated NetROI LLC, an audience
measurement software company. From November 1993 until March 1996, Mr. Garrick
served as the President and Chief Executive Officer of Information Resources,
Inc.-North America, a marketing measurement company. Other than the period from
July through October 1993, when Mr. Garrick served as President and Chief
Executive Officer of Nielsen Marketing Research U.S.A, a unit of A.C. Nielsen
Co., Mr. Garrick served Information Resources, Inc., a market measurement
company, in various capacities from 1981 until his departure in March 1996. Mr.
Garrick holds B.S. degrees in Mathematics and Engineering and an M.S. degree in
Management from Purdue University.
Gary E. Gigot has served as a member of our Board of Directors since March
1997. From March 1994 to April 1999, Mr. Gigot was Vice President of Worldwide
Marketing of Visio Corporation. From 1990 to 1994, Mr. Gigot was Vice President
of Marketing at Microsoft Corporation. Mr. Gigot received a B.B.A. degree in
Marketing from the University of Notre Dame and a M.A. degree in Advertising
from Michigan State University.
47
John A. Hawkins has served as a member of our Board of Directors since
January 2000. Since 1995, Mr. Hawkins has been a co-founder and a Managing
Partner of Generation Partners. From 1987 to 1995, Mr. Hawkins was a General
Partner of Burr, Egan, Deleage & Co. From 1986 to 1987, Mr. Hawkins worked in
the Corporate Finance Department of Alex Brown & Sons, Inc. Mr. Hawkins
currently serves on the Boards of Hotjobs.com, Ltd., P-COM, Inc., PixTech Inc.,
DiscoverMusic.com, High End Systems, Inc., LinguaTech and OrderFusion, Inc. Mr.
Hawkins obtained a B.A. degree in English from Harvard College and M.B.A.
degree from Harvard Graduate School of Business.
Kenneth P. Lawler has served as a member of our Board of Directors since
November 1995. Since 1995, Mr. Lawler has been a General Partner of Battery
Ventures. From 1990 to January 1995, Mr. Lawler was a Vice President at
Patricof & Co. Ventures, Inc. From 1985 to 1990, Mr. Lawler worked at Berkeley
International Capital Corporation. From 1982 to 1985, Mr. Lawler worked in
product management at Advanced Micro Devices, Inc. and engineering management
at Teradyne, Inc. and Fairchild Semiconductor Corporation. Mr. Lawler received
a B.S. degree and M.S. degree in Industrial Engineering from Stanford
University and an M.B.A. degree from University of California, Los Angeles.
Alan E. Salzman has been a member of our Board of Directors since June 1999.
Since March 1995, Mr. Salzman has served as a Managing Partner of VantagePoint
Venture Partners, Inc. From May 1987 through May 1995, Mr. Salzman was a Senior
General Partner of Canaan Partners. From 1983 to 1987, Mr. Salzman was an
attorney with the law firm of with Brobeck, Phleger & Harrison, LLP.
Mr. Salzman received B.A. degrees in Economics/Business from the London School
of Economics and the University of Toronto, an L.L.M. degree in International
Business from the University of Brussels, Belgium and a J.D. degree from
Stanford Law School.
Shahan D. Soghikian has been a member of our Board of Directors since
January 2000. Since 1990, Mr. Soghikian has been employed by Chase Capital
Partners, the private equity investment arm of The Chase Manhattan Corporation,
and currently is a General Partner. Mr. Soghikian currently serves as a
Director of American Floral Services, Inc., Digital Island, Inc., Nextec
Applications, Inc., Ninth House, Inc., Metro-Optix, DJ Orthopedics, LLC, Halo
Data Devices, Coactive Networks, Kinko's, Inc. and County Line. Mr. Soghikian
received a B.A. degree in Biology from Pitzer College and an M.B.A. degree from
the Anderson Graduate School of Management at University of California,
Los Angeles.
Board Composition
In accordance with the terms of our amended and restated bylaws, effective
upon the closing of this offering, the Board of Directors will be elected at
each annual meeting of the stockholders and will serve until the next annual
meeting. Our bylaws provide that the authorized number of directors may be
changed by resolution of the Board of Directors or by the stockholders at the
annual meeting of stockholders.
Pursuant to an amended and restated voting agreement dated as of March 13,
2000 between certain holders of shares of common stock and preferred stock,
such holders agreed to vote or act with respect to their shares so as to elect
certain persons to our Board of Directors. Pursuant to this agreement, the
board consisted of one member designated by the holders of a majority of the
then outstanding shares of Series A preferred stock (then Ken Lawler), one
member designated by the holders of a majority of the then outstanding shares
of Series B preferred stock (then Alan Salzman),
48
two members designated by the holders of a majority of the then outstanding
shares of Series C preferred stock (then John Hawkins and Shahan Soghikian),
two members designated by the holders of a majority of the then outstanding
shares of common stock (then Larry Barels and Christopher Logan), and three
independent members mutually acceptable to the holders of a majority of the
outstanding shares of common stock and preferred stock (then Gary Gigot and
George Garrick, with one vacancy). The voting agreement will terminate upon
consummation of this offering.
Each officer is elected by, and serves at the discretion of, the Board of
Directors. Each of our officers and directors, other than non-employee
directors, devotes full time to our affairs. Our non-employee directors devote
such time to our affairs as is necessary to discharge their duties. There are
no family relationships among any of our directors, officers or key employees.
Board Committees
The Board of Directors has an Audit Committee and a Compensation Committee.
Audit Committee. The Audit Committee reviews and monitors our corporate
financial reporting and internal accounting procedures, including, among other
things, reviewing the scope and results of audits with the independent auditor
and management, reporting to the Board of Directors on the results of the
audit; reviewing the adequacy of internal accounting, financial and operation
controls; and reviewing reporting requirements of government agencies. In
addition, the Audit Committee has the responsibility to consider and recommend
the selection and retention of our auditors. The current members of the Audit
Committee are John A. Hawkins, Kenneth P. Lawler and Shahan D. Soghikian.
Compensation Committee. The Compensation Committee reviews and recommends to
the Board of Directors the compensation and benefits of all of our executive
officers, administers our stock option plans and establishes and reviews
general policies relating to compensation and benefits of our employees. The
current members of the Compensation Committee are John A. Hawkins and Alan E.
Salzman.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of our Board of Directors are
currently John A. Hawkins and Alan E. Salzman. During the last fiscal year, the
compensation committee consisted of Gary E. Gigot, Alan Higginson and
Christopher S. Logan. Mr. Logan has been our President and Chief Executive
Officer since June 1999. We have issued and sold shares of our common stock to
Mr. Logan and to members of his family. We have also issued and sold shares of
our common stock and our preferred stock to Messrs. Higginson and Gigot.
No interlocking relationships exist between our Board of Directors or
compensation committee and the Board of Directors or compensation committee of
any other company, nor has any such other interlocking relationship existed in
the past.
Director Compensation
Our directors do not currently receive cash compensation from us for their
service as members of the Board of Directors, although non-employee directors
are reimbursed for certain expenses in connection with attendance at board and
committee meetings. We do not provide additional compensation for committee
participation or special assignments of the Board of Directors. From time to
time, certain of our non-employee directors have received grants of options to
purchase shares of our common stock pursuant to the 1997 Stock Option Plan.
49
In March 2000, our Board of Directors adopted our stock option grant program
for non-employee directors. The program will be administered under our 2000
Stock Incentive Compensation Plan. Under this program, each non-employee
director will receive a nonqualified stock option to purchase 100,000 shares of
common stock upon initial election or appointment to the board following this
offering, which will fully vest and become exercisable in 48 equal monthly
installments beginning one month after the grant date. Thereafter, beginning
with the next annual meeting of our stockholders, each non-employee director
that was a director with us prior to this offering will automatically receive
an additional option to purchase 10,000 shares of common stock immediately
following each year's annual meeting of stockholders. These options will be
fully vested upon the grant date. The exercise price for all options granted
under the program will be the fair market value of our common stock on the date
of grant. In the event of the sale of all or substantially all of our assets,
or a merger or consolidation of us with or into another corporation, all
options granted under this program will automatically accelerate and become
100% vested and exercisable. Options will have a ten-year term, except that
options will expire one year after a non-employee director ceases services as a
director, or in the case of death, one year after the date of death. See
"Certain Transactions" and "--Stock Plans."
Executive Compensation
The following table sets forth the total compensation received for services
rendered to us during the fiscal year ended December 31, 1999 by our Chief
Executive Officer, certain other executive officers who received salary and
bonus for such period in excess of $100,000 on an annualized basis, and certain
other executive officers. None of our executive officers received any salary
prior to January 1, 1999. The executive officers listed in the table below are
referred to hereinafter as the "Named Executive Officers."
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
-------------------- -----------------------
Securities
Restricted Underlying All Other
Name and Principal Stock Options/ Compensation
Position Year Salary ($) Bonus ($) Award(s) ($) SARs (#) ($)
- ------------------ ---- ---------- --------- ------------ ---------- ------------
Christopher S.
Logan(1)............... 1999 89,375 35,000 -- -- 158,157(2)
President and Chief
Executive Officer
Larry Barels(3)......... 1999 92,115 450,000 -- -- --
Former President and
Chief Executive Officer
Philip S.
Constantinou(4)........ 1999 62,500 20,000 25,900(5) -- 17,671(6)
Vice President--
Engineering
Kent Jarvi(7)........... 1999 46,833 11,667 -- -- --
Chief Financial Officer
Michael Vanneman(8)..... 1999 -- -- -- -- --
Vice President--Sales
Michael Zukerman(9)..... 1999 70,481 20,000 -- -- 70,051
Vice President--
Business Development
- --------
(1) Mr. Logan was hired as our President and Chief Executive Officer in June
1999. On an annualized basis, Mr. Logan's salary would have been $165,000.
Mr. Logan is also entitled to receive an annual bonus of up to $35,000
upon the achievement of certain objectives.
(2) Consists of compensation received as a result of stock awards made below
fair market value.
50
(3) Mr. Barels served as our President and Chief Executive Officer from
November 1998 to June 1999. Mr. Barels received compensation from January
1, 1999 through July 1, 1999 and his salary is based on an annualized
salary of $150,000.
(4) Mr. Constantinou was employed by us in May 1999 and became our Vice
President--Engineering in October 1999. On an annualized basis, Mr.
Constantinou's salary would have been $100,000. Mr. Constantinou's salary
increased to $150,000 in January 2000. Mr. Constantinou is also entitled to
receive an annual bonus of $20,000 upon achievement of certain objectives.
(5) In May 1999, Mr. Constantinou purchased 185,000 shares of our common stock
pursuant to a Restricted Stock Purchase Agreement at a purchase price of
$0.14 per share.
(6) Consists of loan forgiveness related to the purchase of stock.
(7) Mr. Jarvi was hired as our Chief Financial Officer in August 1999. On an
annualized basis, Mr. Jarvi's salary would have been $130,000. Mr. Jarvi's
annual salary increased to $165,000 in March 2000. Mr. Jarvi is also
entitled to receive a quarterly bonus of up to $5,000 upon the achievement
of certain objectives.
(8) Mr. Vanneman was hired as our Vice President--Sales in February 2000. On an
annualized basis, Mr. Vanneman's salary is $180,000 plus a total possible
bonus on sales commission equal to $120,000.
(9) Mr. Zukerman was hired as our Vice President--Business Development in July
1999. On an annualized basis, Mr. Zukerman's salary would have been
$150,000. Mr. Zukerman is also entitled to receive a quarterly bonus of
$10,000 upon the achievement of certain objectives.
Option Grants in Last Fiscal Year
The following table sets forth certain summary information concerning grants
of stock options to each of our Named Executive Officers for the year ended
December 31, 1999. We have never granted any stock appreciation rights.
Individual Grant
------------------------------------------
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term(3)
Options Employees Price Expiration ----------------------------
Name Granted in 1999(1) ($/Sh)(2) Date 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- ------------- --------------
Christopher S. Logan.... 1,172,714 28.1% $0.14 07/29/2009 $ 103,252 $ 261,661
Larry Barels............ -- -- -- -- -- --
Kent Jarvi.............. -- -- -- -- -- --
Philip Constantinou(4).. -- -- -- -- -- --
Michael Vanneman(5)..... -- -- -- -- -- --
Michael Zukerman........ -- -- -- -- -- --
- --------
(1) Based on an aggregate of 4,174,680 shares underlying options granted by us
during the fiscal year ended December 31, 1999.
(2) Options to purchase shares of our common stock were granted at an exercise
price equal to the fair market value of our common stock on the date of
grant, as determined by our Board of Directors.
(3) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of the future
common stock price. Actual gains, if any, on stock option exercises are
dependent on our future performance, overall market conditions and the
option holder's continued employment through the vesting period.
(4) On March 13, 2000, Mr. Constantinou received an option to purchase 100,000
shares of common stock at an exercise price of $3.75 per share. 12.5% of
the option shares will vest quarterly beginning June 30, 2001.
(5) On February 2, 2000, Mr. Vanneman received an option to purchase 220,000
shares of our common stock at an exercise price of $2.50 per share. 1/48 of
this option vests each month. On February 2, 2000, Mr. Vanneman also
received an option to purchase 100,000 shares of common stock at an
exercise price of $2.50 per share. 100% of the option shares vest after
five years of service; however, 50% of this option shall vest on December
31, 2000 and 50% of this option shall vest on December 31, 2001 upon the
achievement of certain performance milestones.
51
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table provides certain summary information concerning stock
options held as of December 31, 1999 by each of our Named Executive Officers.
No options were exercised by any Named Executive Officer during such year, and
no stock appreciation rights have ever been granted.
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options
Options at FY-End (#) At FY-End ($)(1)
--------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Christopher S. Logan..... 1,172,714(2) -- -- --
Larry Barels............. -- -- -- --
Philip Constantinou(3)... -- -- -- --
Kent Jarvi............... -- -- -- --
Michael Vanneman(4)...... -- -- -- --
Michael Zukerman......... -- -- -- --
- --------
(1) There was no public trading market for our common stock as of December
31,1999. Accordingly, the value of unexercised in-the-money options as of
that date was calculated on the basis of an assumed initial public offering
price of $ per share.
(2) Immediately exercisable shares issued upon exercise of Mr. Logan's option
are subject to a lapsing right of repurchase by us at the original exercise
price. As of March 13, 2000, our right to repurchase has expired as to
166,664 shares.
(3) On March 13, 2000, Mr. Constantinou received an option to purchase 100,000
shares of our common stock at an exercise price of $3.75 per share. 12.5%
of the option shares vest quarterly beginning June 30, 2001.
(4) On February 2, 2000, Mr. Vanneman received an option to purchase 220,000
shares of our common stock at an exercise price of $2.50 per share. 1/48 of
this option vests each month. On February 2, 2000, Mr. Vanneman also
received an option to purchase 100,000 shares of common stock at an
exercise price of $2.50 per share. 100% of the option shares vest after
five years of service, however, 50% of this option shall vest on December
31, 2000 and 50% of this option shall vest on December 31, 2001 if we
achieve certain revenue performance milestones.
Stock Plans
1997 Stock Option Plan. Our 1997 Plan was adopted by our Board of Directors
and approved by our stockholders on February 5, 1997 and was amended and
restated by the Board of Directors on October 26, 1999 and on March 2, 2000. A
total of 5,700,000 shares of common stock have been reserved for issuance under
the 1997 Plan. As of March 13, 2000, options to purchase 3,729,601 shares of
common stock at a weighted average exercise price of $1.45 per share were
outstanding, 781,776 options have been exercised and are included in the number
of outstanding shares of common stock, and 1,188,623 shares remained available
for future option grants. Simultaneous with the effectiveness of this offering,
our Board of Directors has suspended our 1997 Plan and determined that no
further grants will be made pursuant to it. Any shares remaining for future
option grants and any future cancellations of options from our 1997 Plan will
become available for future grant under our 2000 Incentive Plan.
The purpose of our 1997 Plan is to attract and retain the best available
personnel, to provide additional incentives to our officers, employees,
directors and persons rendering consulting or advisory services to us, and to
promote the success of our business. The 1997 Plan provides for the granting of
incentive and nonqualified options and stock purchase rights. Our 1997 Plan is
52
administered by our Board of Directors or a committee of the Board of
Directors. Currently, the 1997 Plan is administered by the Board of Directors.
The plan administrator determines the terms of options granted under the 1997
Plan, including the number of shares subject to an option and its exercise
price, term, vesting and exercisability.
The terms and conditions for options granted under our 1997 Plan are
substantially similar to those for options granted under our 2000 Incentive
Plan, except as follows: options granted under the 1997 Plan vest at the rate
of 1/4th of the total number of shares subject to the options twelve months
after the date of the grant and 1/16th of the total number of shares subject
to the option each three month period thereafter. In certain instances, the
plan administrator may accelerate vesting or waive forfeiture or other
restrictions regarding an option or stock purchase right. We retain a right to
repurchase any unvested shares obtained pursuant to the restricted stock
purchase agreement at the time of the optionee's termination of employment by
paying an amount equal to the original price paid by the purchaser. No option
may be transferred by the optionee other than by will or the laws of descent
or distribution. Nonstatutory stock options granted under our 1997 Plan must
be granted with an exercise price equal to at least 85% of the fair market
value of the common stock on the date of grant, unless granted to a 10%
stockholder, in which case the exercise price must be at least 110% of the
fair market value on the date of grant.
2000 Stock Incentive Plan. Our Incentive Plan was adopted by our Board of
Directors and approved by our stockholders on March 2, 2000, to be effective
upon completion of this offering. The purpose of our Incentive Plan is to
enhance long-term shareholder value by offering opportunities to our officers,
directors, employees, consultants, agents and independent contractors to
participate in our growth and success, and to encourage them to remain in our
service and to own our stock. Our Incentive Plan provides for awards of stock
options and stock. Our Board of Directors has reserved a total of 8,100,000
shares of common stock, plus:
. any shares reserved but not granted under our 1997 Plan or returned to
the 1997 Plan upon termination of options up to a maximum of 3,000,000
shares; and
. an automatic annual increase, to be added on the first day of our fiscal
year beginning in 2001, equal to the lesser of (1) 1,500,000 shares or
(2) 3% of the average common shares outstanding as used to calculate
fully diluted basis (assuming exercise of all outstanding options and
warrants and conversion of all outstanding convertible preferred stock).
As of March 13, 2000, no options or restricted stock were outstanding under
our Incentive Plan.
Stock Options. Our Incentive Plan provides for the granting to employees,
including officers and directors, of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code and for the granting to
our employees and consultants, agents and independent contractors, including
non-employee directors, of nonqualified stock options. To the extent an
optionee would have the right in any calendar year to exercise for the first
time one or more incentive stock options for shares having an aggregate fair
market value (determined for each share as of the date the option to purchase
the shares was granted) in excess of $100,000, any such excess options shall
be treated as nonqualified stock options. Unless terminated earlier, our
Incentive Plan will terminate ten years after the earlier of the plan's
adoption by our Board of Directors and its approval by our stockholders.
Our Incentive Plan shall be administered by our Board of Directors or a
committee or committees of the Board of Directors. Currently, our Incentive
Plan is administered by the
53
compensation committee of our Board of Directors. The plan administrator has
exclusive authority to determine the terms of options granted under the
Incentive Plan, including the number of shares subject to an option, as well as
the term, exercisability, vesting, and exercise price of the option. For
incentive stock options the exercise price must be at least equal to the fair
market value of the common stock on the date of grant and the exercise price
must be 110% of fair market value for an individual owing more than 10% of the
total voting power of all classes of our stock.
The plan administrator determines the term of options, which may not exceed
ten years or five years in the case of an incentive stock option granted to a
10% stockholder. Optionees may not transfer options other than by will or the
laws of descent or distribution, with the provision that the plan administrator
may grant limited transferability rights in certain circumstances to the extent
permitted by Section 422 of the Internal Revenue Code. We expect that options
granted under the Incentive Plan generally will vest at the rate of 1/4th of
the total number of shares subject to the options twelve months after the date
of grant, and 1/48th of the total number of shares subject to the options each
month thereafter.
Stock Awards. The plan administrator is authorized under our Incentive Plan
to issue shares of our common stock to eligible participants with terms,
conditions and restrictions established by the plan administrator in its sole
discretion. Restrictions may be based on continuous service with us or the
achievement of performance goals. Holders of restricted stock are our
stockholders and have, subject to certain restrictions, all the rights of
stockholders with respect to such shares.
Adjustments. The plan administrator will make proportional adjustments to
the aggregate number of shares subject to and issuable under our Incentive Plan
and to outstanding awards in the event of stock splits or other capital
adjustments.
Corporate Transactions. In the event of the sale of all or substantially all
of our outstanding securities or assets, or a merger or consolidation of
Driveway with or into another corporation, outstanding options outstanding
under the Incentive Plan will terminate and cease to remain outstanding, except
to the extent assumed by the surviving corporation, the successor corporation
or its parent corporation, as applicable pursuant to the terms of the agreement
of merger or consolidation entered into between Driveway and the purchaser or
successor. In the event that an optionee's employment or services should
subsequently terminate within one year following a corporate transaction in
which options are assumed or replaced and do not otherwise accelerate at that
time, the optionee shall be entitled to exercise, in addition to any vested
portion of the option, that portion of the unvested option that would otherwise
be vested and exercisable if the option vested on a pro rata basis after each
full month of employment or service, unless such employment or services are
terminated by the purchaser or successor for cause or by the optionee
voluntarily without good reason.
2000 Employee Stock Purchase Plan. Our Stock Purchase Plan was adopted by
our Board of Directors on March 2, 2000 and will be submitted to our
stockholders for approval in April 2000. We will implement the Stock Purchase
Plan upon the completion of this offering. A total of 600,000 shares of common
stock have been reserved for issuance under the Stock Purchase Plan. The number
of shares reserved will be increased automatically each year on the first day
of our fiscal year beginning in 2001 by an amount equal to the lesser of (1)
800,000 shares, (2) 1.5% of the average common shares outstanding as used to
calculate fully diluted earnings per share as reported in our annual financial
statements for the preceding year and (3) a lesser amount determined by our
Board of Directors. Any shares from increases in previous years that are not
actually issued shall be added to the aggregate number of shares available for
issuance under the Stock Purchase Plan.
54
We intend the Stock Purchase Plan to qualify under Section 423 of the
Internal Revenue Code. We will implement the Stock Purchase Plan by an offering
period commencing upon the completion of this offering and ending on July 31,
2002. Each subsequent offering period will have a duration of twenty-four
months. Each offering period after the first offering period will commence on
February 1st of each year. Each offering period will consist of four
consecutive purchase periods of six months duration, with the last day of each
period being designated a purchase date. The first purchase period under the
Stock Purchase Plan will occur in February 2001, with subsequent purchase dates
to occur every six months thereafter. The Stock Purchase Plan will be
administered by the Compensation Committee of our Board of Directors. Our
employees (including our officers and employee directors) or of any of our
majority-owned subsidiaries designated by our Board of Directors, are eligible
to participate in the Stock Purchase Plan if they are employed by us or any
such subsidiary for at least 20 hours per week and more than five months per
year.
The Stock Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's
compensation. Under the Stock Purchase Plan, no employee may purchase common
stock worth more than $25,000 in any calendar year, valued as of the first day
of each offering period, or more than 5,000 shares in any purchase period. In
addition, owners of 5% or more of our common stock may not participate in the
Stock Purchase Plan. The price of the common stock purchased under the Stock
Purchase Plan will be the lesser of 85% of the fair market value of our common
stock at the beginning of the offering period or the purchase date, except that
the purchase price for the first offering period will be equal to the lesser of
100% of the initial public offering price of the common stock and 85% of the
fair market value on January 31, 2001. If the fair market value of our common
stock on a purchase date is less than the fair market value at the beginning of
the offering period, a new twenty-four month offering period will automatically
begin on the first business day following the purchase date with a new fair
market value. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment with us or a participating subsidiary. If not terminated earlier,
the Stock Purchase Plan will have a term of ten years.
The Stock Purchase Plan provides that in the event of a merger of us with or
into another corporation or a sale of all or substantially all of our assets,
each right to purchase stock under the Stock Purchase Plan will be assumed or
an equivalent right substituted by the successor corporation. If the successor
corporation refuses to assume or substitute for the purchase right, the
offering period during which a participant may purchase stock will be shortened
to a specified date before the proposed merger or sale. Our Board of Directors
has the power to amend or terminate the Stock Purchase Plan as long as such
action does not diminish any outstanding rights to purchase stock under the
Stock Purchase Plan.
401(k) Plan
We maintain our 401(k) Plan, a defined contribution 401(k) salary reduction
plan, which is intended to qualify under Section 401 of the Internal Revenue
Code. Our employees are eligible to participate in such plan on the first day
of each month coinciding with or immediately following the date of their
employment. A participating employee, by electing to defer a portion of his or
her compensation, may make pre-tax contributions to this Plan, subject to
certain limitations, of a percentage (not to exceed 25%) of his or her total
compensation. Employee contributions and the investment earnings thereon will
be fully vested at all times. We are not required to contribute to this Plan
and have made no contributions since the inception of this Plan.
55
Employment Contracts and Change of Control Arrangements
Except as set forth below, all of our Named Executive Officers' employment
is "at-will" and may be terminated at any time.
Under the terms of our employment agreement with Christopher S. Logan dated
May 28, 1999, we agreed to pay Mr. Logan an annual salary of $165,000. Mr.
Logan is also eligible for an annual bonus of up to $35,000 based on the
achievement of objectives determined by our Board of Directors. As long as Mr.
Logan remains our Chief Executive Officer, he will be entitled to a seat on our
Board of Directors. Under a stock subscription and repurchase agreement
executed in connection with this employment agreement, Mr. Logan purchased
714,286 shares of our common stock at a price of $0.14 per share. These shares
are subject to our repurchase option, which lapses over a four year period at a
rate of 2.0833% per month; provided, that if in connection with a change of
control (i) we or our stockholders receive proceeds in excess of $75 million,
25% of the shares remaining subject to our repurchase option shall be released
from this right; and (ii) we or our stockholders receive proceeds in excess of
$250 million, 50% of the shares remaining subject to our repurchase option
shall be released from this right. The purchase price for these shares was paid
by the delivery to us of a full recourse promissory note in the amount of
$100,000.04, due and payable on the earlier of January 1, 2006 or the date upon
which Mr. Logan sells shares of his common stock with net proceeds at least
equal to the amount outstanding under this note. In addition, Mr. Logan was
granted options to purchase 1,172,714 shares of our common stock at an exercise
price of $0.14 per share. This option vests over a four year period at a rate
of 2.0833% per month; provided, that if in connection with a change of control
(i) we or our stockholders receive proceeds in excess of $75 million, 25% of
the unvested portion of these options shall vest; and (ii) we or our
stockholders receive proceeds in excess of $250 million, 50% of the unvested
portion of these options shall vest. If Mr. Logan is terminated without cause,
he will continue to receive his salary for the shorter of twelve months or for
the period he remains unemployed.
Under the terms of our employment agreement with Kent Jarvi dated August 13,
1999, we agreed to pay Mr. Jarvi an annual salary of $130,000, and in March
2000, we increased his annual salary to $165,000. Mr. Jarvi is also eligible
for a quarterly bonus of up to $5,000 for each calendar quarter based upon the
achievement of objectives established by our Chief Executive Officer. Under a
stock subscription and repurchase agreement executed in connection with this
employment agreement, Mr. Jarvi purchased 318,718 shares of our common stock at
a price of $0.25 per share. These shares are subject to our repurchase option,
which lapses over a four year period at a rate 25% after one year of continuous
service and an additional 6.25% per calendar quarter thereafter. Upon
termination of Mr. Jarvi's employment in connection with a change of control,
we have agreed to release 50% of the shares still subject to our repurchase
option. The purchase price for these shares was paid by the delivery of a full
recourse promissory note in the amount of $79,679.50. This note bears interest
at a rate equal to 6% per annum and is due and payable on the earlier of
January 1, 2006 or the date Mr. Jarvi sells shares of his common stock at least
equal to the amount outstanding under this note. If Mr. Jarvi's employment is
terminated without cause, he will continue to receive up to six months of his
salary so long as he remains unemployed, and our repurchase right will lapse
with respect to time served plus six months.
Under the terms of our employment agreement with Michael Zukerman dated June
14, 1999, we agreed to pay Mr. Zukerman an annual salary of $150,000. Mr.
Zukerman is also eligible for a quarterly bonus of up to $10,000 for each
calendar quarter based upon the achievement of objectives established by our
Chief Executive Officer. Under a stock subscription and repurchase agreement
56
executed in connection with this employment agreement, Mr. Zukerman purchased
350,000 shares of our common stock at a price of $0.14 per share. These shares
are subject to our repurchase option, which lapses over a four year period at a
rate of 25% after one year of continuous service and an additional 6.25% per
calendar quarter thereafter. Upon termination of Mr. Zukerman's employment
within one year after a change of control in which our stockholders receive
equitable value in excess of $75 million, we have agreed that our repurchase
right on four quarters of additional shares shall lapse. Upon termination of
Mr. Zukerman's employment within one year of a change of control in which our
stockholders receive equitable value in excess of $250 million, we have agreed
that our repurchase right on an additional six quarters of additional shares
shall lapse.
Under the terms of our employment agreement with Michael Vanneman dated
January 30, 2000, we agreed to pay Mr. Vanneman an annual salary of $180,000.
Mr. Vanneman is also eligible for an annual bonus of up to $120,000 based on
the achievement of sales objectives established by our Chief Executive Officer.
Under an option agreement executed in connection with this employment
agreement, Mr. Vanneman was granted options to purchase 320,000 shares of our
common stock at a price of $2.50 per share. 220,000 of these options vest
monthly over a four year period. 100,000 of these options vest after five years
of service; however, 50% of this option shall vest on December 31, 2000 and 50%
of this option shall vest on December 31, 2000 if we achieve certain
performance milestones. Upon termination of Mr. Vanneman's employment without
cause following a change of control, we have agreed to the acceleration of
vesting of 50% of the remaining unvested options and Mr. Vanneman will continue
to receive his salary for the shorter of six months or for the period he
remains unemployed.
Under the terms of a stock subscription and repurchase agreement with Philip
Constantinou dated August 27, 1999, Mr. Constantinou purchased 185,000 shares
of our common stock at a price of $0.14 per share. All of these shares are
subject to our repurchase option that lapses as to 4.35% of these shares for
each full month of service by Mr. Constantinou after May 1999. Upon a change of
control, we have agreed that our repurchase right on the following number of
shares shall lapse: the number of unvested shares held by Mr. Constantinou
immediately after the change of control multiplied by the fraction obtained by
dividing 1 by the total number of full months during the period from the change
of control through April 30, 2001. The purchase price for these shares was paid
by the delivery to us of a full recourse promissory note in the amount of
$25,900. In addition, on March 13, 2000, we granted Mr. Constantinou an option
to purchase 100,000 shares of our common stock at a price of $3.75 per share.
12 1/2% of the option shares vest quarterly beginning June 30, 2001.
Under the terms of a stock subscription agreement dated May 21, 1999, Mr.
Barels purchased 2,130,000 shares of our common stock at a price of $0.10 per
share. The purchase price for these shares was paid to us by the delivery of a
full recourse promissory note in the amount of $213,000.
Limitation of Liability and Indemnification Matters
Our Amended and Restated Certificate of Incorporation, which will be
effective upon the completion of this offering, limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors except
liability for breach of their duty of loyalty to the corporation or its
stockholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, unlawful payments of dividends or
unlawful stock repurchases or redemptions, or any transaction from which the
director derived an
57
improper personal benefit. Such limitation of liability does not apply to
liabilities arising under the federal or state securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Our Amended and Restated Bylaws provide that we shall indemnify our
directors and executive officers to the fullest extent permitted by law, and
grant to the Board of Directors the power on our behalf to indemnify our other
officers, employees and agents. We believe that indemnification under our
Amended and Restated Bylaws covers at least negligence and gross negligence on
the part of indemnified parties. Our Amended and Restated Bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other
agent.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our amended and
restated bylaws. These agreements, among other things, indemnify our directors
and executive officers for certain expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, services as our director, officer, employee, agent or
fiduciary, any of our subsidiaries or any other company or enterprise to which
the person provides services at our request. We believe that these provisions
and agreements are necessary to attract and retain qualified persons as
directors and executive officers. Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended, may be permitted to our
directors, officers or controlling persons pursuant to the foregoing
provisions, the registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is therefore
unenforceable.
At present, there is no pending litigation or proceeding involving any of
our directors or officers in which indemnification is required or permitted,
and we are not aware of any threatened litigation or proceeding that may result
in a claim for such indemnification.
58
CERTAIN TRANSACTIONS
There has not been within our last fiscal year, nor is there currently
proposed, any transaction or series of similar transactions to which we were or
are to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of any class of our
voting securities or members of such person's immediate family had or will have
a direct or indirect material interest other than (i) compensation agreements
and other arrangements which are described in "Management," and (ii) the
transactions described below.
Series B Preferred Stock
In May 1999, we issued an aggregate of 7,444,770 shares of Series B
Preferred Stock to certain investors at a purchase price of $1.00 per share,
which shares will automatically convert into 7,444,770 shares of common stock
upon the completion of this offering. Affiliates of VantagePoint Venture
Partners, who together hold over 5% of our outstanding capital stock, purchased
3,000,000 shares of Series B Preferred Stock; Battery Ventures III, L.P., a
holder of over 5% of our outstanding capital stock, purchased 444,770 shares of
Series B Preferred Stock and Gary Gigot, one of our directors, purchased
250,000 shares of Series B Preferred Stock. See "Description of Capital Stock."
Series C Preferred Stock
In December 1999 and January 2000, we issued a total of 10,800,507 shares of
Series C Preferred Stock to certain investors at a purchase price of $4.01 per
share, which shares will automatically convert into 10,800,507 shares of common
stock upon the completion of this offering. Generation Capital Partners L.P., a
holder of over 5% of our outstanding capital stock, purchased 3,127,277 shares
of Series C Preferred Stock; affiliates of Vantage Point Venture Partners, who
together hold of over 5% of our outstanding capital stock, purchased 698,254
shares of Series C Preferred Stock; and CB Capital Investors L.P., a holder of
over 5% of our outstanding capital stock, purchased 2,493,766 shares of Series
C Preferred Stock. See "Description of Capital Stock."
Other Transactions
On December 3, 1999, we entered into a $3 million term loan with Silicon
Valley Bank, which has been paid in full. Silicon Valley Bank required a
guaranty of this loan from certain of our stockholders. As consideration for
the guaranty, we issued warrants to purchase an aggregate of 600,000 shares of
Series B Preferred Stock to these shareholders at an exercise price equal to
$1.00 per share, including warrants issued to (i) affiliates of VantagePoint
Venture Partners to purchase an aggregate of 317,340 shares of Series B
Preferred Stock, (ii) Battery Ventures III, L.P. to purchase 60,960 shares of
Series B Preferred Stock, (iii) Larry Barels to purchase 66,720 shares of
Series B Preferred Stock, and (iv) Gary Gigot to purchase 29,340 shares of
Series B Preferred Stock.
We believe that the terms of the transactions described above were no less
favorable to us than would have been obtained from an unaffiliated third party.
Any future transactions between us and any of our officers, directors or
principal stockholders will be on terms no less favorable to us than could be
obtained from unaffiliated third parties and will be approved by a majority of
the independent and disinterested members of the Board of Directors.
59
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock (following automatic conversion of all preferred
stock upon the effectiveness of this offering) as of March 13, 2000, and as
adjusted to reflect the sale of common stock offered hereby under this
prospectus, (i) by each person or entity known by us to own beneficially more
than 5% of our common stock; (ii) by each of our directors; (iii) by each of
our Named Executive Officers; and (iv) by all of our executive officers and
directors as a group.
We determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission, which generally require inclusion of shares
over which a person has voting or investment power. Share ownership in each
case includes shares issuable upon exercise of outstanding options and warrants
that are exercisable within 60 days of March 13, 2000 as described in the
footnotes below. The following calculations of the percentages of outstanding
shares are based on 35,729,980 shares of our common stock outstanding as of
March 13, 2000 on an as-converted basis, and shares of our common
stock outstanding after this offering.
Percentage of Shares
Outstanding
Shares Beneficially --------------------
Owned Prior to the Before After
Name of Beneficial Owner(1) Offering Offering Offering(2)
- --------------------------- ------------------- -------- -----------
Battery Ventures III, L.P.(3)........ 2,018,917 5.64
CB Capital Investors L.P.(4)......... 2,493,766 6.98
Generation Capital Partners L.P.(5).. 3,241,896 9.06
VantagePoint Venture Partners(6)..... 11,527,859 31.97
Larry Barels(7)...................... 2,197,555 6.14
Philip Constantinou(8)............... 285,000 *
George R. Garrick(9)................. 100,000 *
Gary E. Gigot(10).................... 934,301 2.59
John A. Hawkins(5)................... 3,241,896 9.06
Kent Jarvi(11)....................... 318,718 *
Kenneth P. Lawler(3)(12)............. 2,019,117 5.65
Christopher S. Logan(13)............. 1,887,000 5.11
Alan A. Salzman(6)................... 11,527,859 31.97
Shahan D. Soghikian(4)............... 2,493,766 6.98
Michael Vanneman(14)................. 320,000 *
Michael Zukerman(15)................. 350,000 *
All executive officers and directors
as a group (12 persons)(16)......... 25,675,212 69.20
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Unless otherwise indicated, the principal business address of each of the
individuals listed in the table is c/o Driveway Corporation, 380 Brannan
Street, San Francisco, California 94107.
(2) Assumes the underwriters' over-allotment option is not exercised.
(3) Comprised of the following securities held by Battery Partners III, L.P.:
12,599 shares of common stock, 1,500,000 shares of Series A Preferred
Stock, 444,770 shares of Series B Preferred Stock, 588 shares of common
stock issuable upon exercise of immediately exercisable warrants to
purchase common stock, and 60,960 shares of Series B Preferred Stock
issuable upon exercise of immediately exercisable warrants to purchase
Series B Preferred Stock. The address for Battery Partners III, L.P. is
901 Mariners Island Boulevard, Suite 475, San Mateo, California 94404.
(4) Comprised of 2,493,766 shares of Series C Preferred Stock held by CB
Capital Investors L.P. Mr. Soghikian, one of our directors, is a general
partner of Chase Capital Partners, the general partner of CB Capital
Investors L.P. Mr. Soghikian disclaims beneficial ownership in shares of
our capital stock held by CB Capital Investors, L.P., except to the extent
of his pecuniary interest therein. The address for CB Capital Investors,
L.P. and Mr. Soghikian is 50 California Street, Suite 2940, San Francisco,
California 94111.
60
(5) Comprised of 3,127,277 shares of Series C Preferred Stock held by
Generation Capital Partners L.P., 1,146 shares of Series C Preferred Stock
held by Generation Parallel Management Partners, L.P., and 113,473 shares
of Series C Preferred Stock by the State Board Administration of Florida.
Mr. Hawkins, one of our directors, is a managing partner of Generation
Capital Partners L.P. Mr. Hawkins disclaims beneficial ownership in shares
of our capital stock held by Generation Capital Partners L.P., Generation
Parallel Management Partners, L.P. or the State Board of Administration of
Florida, except to the extent of his pecuniary interest therein. The
address for these entities and Mr. Hawkins is c/o Generation Partners, One
Maritime Plaza, Suite 1425, San Francisco, California 94111.
(6) Comprised of 22,256 shares of common stock held by VantagePoint Venture
Partners 1996, 7,125,000 shares of Series A Preferred Stock held by
VantagePoint Venture Partners 1996, 1,000,000 shares of Series B Preferred
Stock held by VantagePoint Venture Partners 1996, 2,000,000 shares of
Series B Preferred Stock held by VantagePoint Communications Partners,
L.P., 349,127 shares of Series C Preferred Stock held by VantagePoint
Venture Partners 1996, 698,254 shares of Series C Preferred Stock held by
VantagePoint Communications Partners, L.P., 15,882 shares of common stock
issuable upon exercise of immediately exercisable warrants to purchase
common stock, and 191,419 shares of Series B Preferred Stock issuable upon
exercise of immediately exercisable warrants to purchase Series B
Preferred Stock held by VantagePoint Communications Partners, L.P. and
125,921 shares of Series B Preferred Stock issuable upon immediately
exercisable warrants to purchase Series B Preferred Stock. Mr. Salzman,
one of our directors, is a principal of VantagePoint Venture Partners.
Mr. Salzman disclaims beneficial ownership of the shares held by
VantagePoint Venture Partners 1996 and VantagePoint Communications
Partners, L.P., except to the extent of his pecuniary interest therein.
The address for these entities and Mr. Salzman is c/o VantagePoint Venture
Partners, 1001 Bayhill Drive, Suite 100, San Bruno, California 94066.
(7) Comprised of 2,130,835 shares of common stock and 66,720 shares of Series
B Preferred Stock issuable upon exercise of immediately exercisable
warrants to purchase Series B Preferred Stock.
(8) Comprised of 185,000 shares of common stock and 100,000 shares of common
stock subject to options that are exercisable currently or within 60 days
of March 13, 2000. As of March 13, 2000, 107,917 of these shares are
subject to our repurchase option and none of these options have vested.
(9) Comprised of 100,000 shares of common stock subject to options that are
exercisable currently or within 60 days of March 13, 2000. None of these
options have vested.
(10) Comprised of 2,248 shares of common stock, 650,000 shares of Series A
Preferred Stock, 250,000 shares of Series B Preferred Stock, 2,088 shares
of common stock issuable upon exercise of immediately exercisable warrants
to purchase common stock, 29,340 shares of Series B Preferred Stock
issuable upon exercise of immediately exercisable warrants to purchase
Series B Preferred Stock, and 625 shares of common stock subject to
options that are exercisable currently or within 60 days of March 13,
2000.
(11) As of March 13, 2000, all of these shares are subject to our repurchase
option.
(12) Comprised of 200 shares of common stock subject to options that are
exercisable currently or within 60 days of March 13, 2000 held by Mr.
Lawler, and shares and warrants held by Battery Partners III, L.P. Mr.
Lawler, one of our directors, is a general partner of Battery Partners
III, L.P. Mr. Lawler disclaims beneficial ownership in shares of our
capital stock held by Battery Partners III, L.P., except to the extent of
his pecuniary interest therein. Mr. Lawler's address is 901 Mariners
Island Boulevard, Suite 475, San Mateo, California 94404.
(13) Comprised of 714,286 shares of common stock and 1,172,714 shares of common
stock subject to options that are exercisable currently or within 60 days
of March 13, 2000. As of March 13, 2000, 625,001 of these shares are
subject to our repurchase option and none of these options have vested.
(14) Comprised of 320,000 shares of common stock subject to options that are
exercisable currently or within 60 days of March 13, 2000. None of these
options have vested.
(15) As of March 13, 2000 all of these shares are subject to our repurchase
option.
(16) Comprised of shares referenced in footnotes (3)-(15).
61
DESCRIPTION OF CAPITAL STOCK
General
Upon completion of this offering, we will be authorized to issue 150,000,000
shares of common stock, par value $0.001 per share, and 10,000,000 shares of
preferred stock, par value $0.001 per share.
The following description of our capital stock is not complete and is
qualified in its entirety by reference to our amended and restated certificate
of incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.
Common Stock
As of March 13, 2000, there were 5,818,037 shares of common stock
outstanding held of record by Rule 144 stockholders and 2,136,887 shares of
common stock held of record by Rule 701 stockholders. In addition, as of March
13, 2000, there were 3,729,601 shares of common stock subject to outstanding
options and 857,562 shares subject to outstanding warrants.
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock issued after
the sale of the common stock offered hereby may be entitled, holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by our Board of Directors out of funds legally
available therefore. See "Dividend Policy." In the event of our liquidation,
dissolution or winding up, holders of our common stock would be entitled to
share in our assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of our common stock are, and the shares of common stock
offered by us in this offering when issued and paid for will be, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate in
the future.
Preferred Stock
Upon the completion of this offering, the Board of Directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 10,000,000 shares of
preferred stock, in one or more series, each of such series to have such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences as shall be determined by our
Board of Directors. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. Issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of our outstanding voting stock. The issuance of
preferred stock may decrease the market price of the common stock and may
adversely affect the voting and other rights of the holders of common stock. At
present, we have no plans to issue any shares of preferred stock.
62
Warrants
Upon completion of this offering, we will have outstanding warrants to
purchase 22,532 shares of our common stock. These warrants expire on dates
ranging from December 20, 2001 to September 7, 2005 and have a weighted average
exercise price of $64.98. We have assumed that 835,030 warrants at a weighted
average exercise price of $1.36 per share will be exercised prior to the
offering. Most of these warrants have net exercise provisions under which the
holder may, in lieu of payment of the exercise price in cash, surrender the
warrant and receive a net amount of shares, based on the fair market value of
our common stock at the time of the exercise of the warrant, after deducting
the aggregate exercise price.
Registration Rights
Pursuant to the terms of an Amended and Restated Investors' Rights Agreement
among us and certain holders of our securities, after the completion of this
offering, the holders of a majority of the registrable securities are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. The holders of at least 35% of the registrable securities are
entitled to up to five demand registrations that require us to file a
registration statement covering their shares of common stock so long as the
aggregate proceeds to such stockholders exceed at least $10 million. We are not
required to effect (1) a registration within 45 days prior to and 180 days
following the filing of a registration statement by us; (2) a registration for
shares that may be registered on a Form S-3; or (3) a registration for a period
not to exceed 120 days, if our Board of Directors has made a good faith
determination that such registration would be seriously detrimental to us or
our stockholders. Furthermore, pursuant to the terms of this agreement, the
holders of registrable securities are entitled to certain piggyback
registration rights in connection with any registration by us of our
securities. In the event that we propose to register any shares of common stock
under the Securities Act, the holders of such piggyback registration rights are
entitled to receive notice of such registration and are entitled to include
their shares therein, subject to certain limitations.
At any time after we become eligible to file a registration statement on
Form S-3, any holders of our registrable securities may require us to file a
registration statement on Form S-3 under the Securities Act for a public
offering of at least $500,000 of shares of registrable securities. Holders of
registration rights are only entitled to one registration on Form S-3 in any
consecutive twelve month period.
Each of the foregoing registration rights is subject to the right of the
underwriters in any underwritten offering to limit the number of shares to be
included therein. The registration rights, with respect to any holder thereof,
terminate upon the later of (1) five years from the effective date of this
offering or (2) such date when the shares held by that holder may be sold under
Rule 144 during any three-month period. We are required to bear all of the
expenses of all registrations, except underwriting discounts and commissions
applicable to the securities registered by the holder. The registration of any
of the shares entitled to registration rights would result in such shares
becoming freely tradable without restriction under the Securities Act
immediately upon effectiveness of such registration. This Agreement also
contains a commitment by us to indemnify the holders of registration rights,
subject to certain limitations.
Effect of Certain Provisions of Our Certificate of Incorporation and Bylaws,
and the Delaware Anti-Takeover Law
Certain provisions of our Amended and Restated Certificate of Incorporation
and Bylaws, which will become effective upon the completion of this offering,
may have the effect of making it more
63
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. Such provisions could limit the price
that certain investors might be willing to pay in the future for shares of our
common stock. Certain of these provisions allow us to issue preferred stock
without any vote or further action by our stockholders, eliminate the right of
our stockholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for stockholders to take certain corporate actions and could
have the effect of delaying or preventing our change in control.
In addition, we are subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder, unless: (1) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (2) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding (a) shares owned by persons who are directors and also officers,
and (b) shares owned by employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or (3) on or
subsequent to such date, the business combination is approved by the Board of
Directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Our Amended and Restated Bylaws eliminate the right of stockholders to call
special meetings of stockholders. The authorization of undesignated preferred
stock makes it possible for the Board of Directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change our control. These and other provisions may have the effect
of deferring hostile takeovers or delaying changes in our control or
management. The amendment of any of these provisions would require approval by
holders of at least a majority of the outstanding common stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, NY 10005.
Listing
The common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "DWAY."
64
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. Future sales of substantial
amounts of our common stock in the public market could reduce prevailing market
prices. Furthermore, since only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale, as described below, sales of substantial amounts of our
common stock in the public market after the restriction lapse could reduce the
prevailing market price and impair our ability to raise equity capital in the
future.
Upon completion of this offering, we will have outstanding
shares of common stock. Of these shares, shares sold in this offering, plus
any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradeable without restriction under the Securities Act, except
for any shares purchased by our "affiliates" as defined in Rule 144 under the
Securities Act (generally, officers, directors or 10% stockholders).
The remaining 34,571,350 shares outstanding are "restricted shares" within
the meaning of Rule 144 under the Securities Act. Restricted shares may be sold
in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of the restricted shares in
the public market, or the availability of such shares for sale could lower the
market price of the common stock. 95.0% of these restricted shares are subject
to lock-up agreements providing that the stockholder will not offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock owned as of the date of this
prospectus or acquired directly from us by the stockholder or with respect to
which they have or may acquire the power of disposition for a period of 180
days after the date of this prospectus without the prior written consent of
FleetBoston Roberston Stephens Inc. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, none of these shares will be resellable until 181
days after the date of this prospectus. FleetBoston Robertson Stephens Inc.
may, in its sole discretion, and at any time without notice, release all or any
portion of the restricted shares subject to lock-up agreements.
Beginning 181 days after the date of this prospectus, approximately
restricted shares will be eligible for sale in the public market. All of these
shares are subject to volume limitations under Rule 144, except shares
eligible for sale under Rule 144(k) and shares eligible for sale under Rule
701, subject in some cases to our repurchase rights.
Rule 144, 144(k) and 701
In general, under Rule 144, and beginning after the expiration of the lock-
up agreements 180 days after the effective date of this offering, a person, or
persons whose shares are combined, who has beneficially owned restricted shares
for at least one year, including the holding period of any prior owner except
an affiliate, would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
. 1.0% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
65
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of our current public
information. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contact may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell their Rule 701 shares in
reliance on Rule 144 without having to comply with the holding period, volume
limitation or notice provisions of Rule 144.
We intend to file a registration statement under the Securities Act to
register shares of our common stock subject to outstanding options or reserved
for future issuance under our stock plans or purchased by our employees outside
of our plans. As a result, these shares and any options exercised under the
1997 Plan or any other benefit plan after the effectiveness of such
registration statement will also be freely tradeable in the public market,
except that shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144 unless otherwise resellable under Rule 701. As of March 13, 2000, there
were outstanding options to purchase a total of 3,729,601 shares of our common
stock under the 1997 Plan, 1,188,623 shares were available for future issuance
and 2,493,004 shares issued to employees outside of our plans. We also have
reserved 8,100,000 shares and 600,000 shares for issuance under our 2000 Stock
Incentive Plan and 2000 Stock Purchase Plan.
66
UNDERWRITING
We are offering the shares of our common stock described in this prospectus
through a number of underwriters. FleetBoston Robertson Stephens Inc., CIBC
World Markets Corp., Thomas Weisel Partners LLC and E*OFFERING Corp. are the
representatives of the underwriters. We have entered into an underwriting
agreement with the representatives. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the underwriters, and each
underwriter has separately agreed to purchase from us, the number of shares of
our common stock listed next to its name below at the public offering price,
less the underwriting discount described on the cover page of this prospectus:
Underwriter Number of Shares
----------- ----------------
FleetBoston Robertson Stephens Inc. ........................
CIBC World Markets Corp. ...................................
Thomas Weisel Partners LLC..................................
E*OFFERING Corp.............................................
-----
Total.....................................................
=====
The underwriting agreement provides that the underwriters must buy all of
these shares from us if they buy any of them. The underwriters will sell these
shares to the public when and if the underwriters buy them from us. The
underwriters are offering our common stock subject to a number of conditions,
including:
. the underwriters' receipt and acceptance of the common stock from us; and
. the underwriters' right to reject orders in whole or in part.
Over-Allotment Option. We have granted the underwriters an option to buy up
to additional shares of our common stock at the same price per share as
they are paying for the shares shown in the table above. The underwriters may
exercise this option only to the extent that they sell more than the total
number of shares shown in the table above. The underwriters may exercise this
option at any time within 30 days after the date of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will be
obligated to purchase the additional shares from us in the same proportions as
they purchased the shares shown in the table above. If purchased, these
additional shares will be sold by the underwriters on the same terms as those
on which the other shares are being sold.
Stock Market Listing. We expect our common stock will be quoted on the
Nasdaq National Market under the symbol "DWAY."
Determination of Offering Price. Before this offering, there has been no
public market for our common stock. The initial public offering price will be
determined through negotiations between us and the representatives. In addition
to prevailing market conditions, the factors to be considered in determining
the initial public offering price will include:
. the valuation multiples of publicly-traded companies that the
representatives believe are comparable to us;
. our financial information;
. our history and prospects and the outlook for our industry;
67
. an assessment of our management, our past and present operations, and the
prospects for, and timing of, our future revenues;
. the present state of our development and the progress of our business
plan; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for our shares may not develop. Even if an active
market does develop, the public price at which our shares trade in the future
may be below the offering price.
Underwriting Discounts and Commissions. The underwriting discount is the
difference between the price the underwriters pay to us and the price at which
the underwriters initially offer the shares to the public. The following table
shows the per share and total underwriting discounts to be paid to the
underwriters. These amounts are shown assuming no exercise and full exercise of
the underwriters' over-allotment option described above:
Per No Full
Share Exercise Exercise
----- -------- --------
Public offering price................................ $ $ $
Underwriting discount................................ $ $ $
Proceeds, before expenses, to us..................... $ $ $
The expenses of this offering, not including the underwriting discount, are
estimated to be approximately $ and will be paid by us. Expenses
include the SEC filing fee, the NASD filing fee, Nasdaq listing fees, printing
expenses, transfer agent and registrar fees and other miscellaneous fees.
Lock-Up Agreements. We and our executive officers, directors and
substantially all of our stockholders, have agreed, with exceptions, not to
sell or transfer any shares of our common stock for 180 days after the date of
this prospectus without first obtaining the written consent of FleetBoston
Robertson Stephens Inc. Specifically, we and these other individuals have
agreed not to, directly or indirectly:
. offer to sell, contract to sell, or otherwise sell or dispose of any
shares of our common stock;
. loan, pledge or grant any rights with respect to any shares of our common
stock;
. engage in any hedging or other transaction that might result in a
disposition of shares of our common stock by anyone;
. execute any short sale, whether or not against the box; or
. purchase, sell or grant any put or call option or other right with
respect to our common stock or with respect to any security other than a
broad-based market basket or index that includes, relates to or derives
any significant part of its value from our common stock.
These lock-up agreements apply to shares of our common stock and also to any
options or warrants to purchase any shares of our common stock or any
securities convertible into or exchangeable for shares of our common stock.
These lock-up agreements apply to all such securities that are owned or later
acquired by the persons executing the agreements. However, FleetBoston
Robertson Stephens Inc. may release any of us from these agreements at any time
during the 180 day period, in its sole discretion and without notice, as to
some or all of the shares covered by these agreements.
68
Indemnification of the Underwriters. We will indemnify the underwriters
against some civil liabilities, including liabilities under the Securities Act
and liabilities arising from breaches of our representations and warranties
contained in the underwriting agreement. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be
required to make in respect of those liabilities.
Dealers' Compensation. The underwriters initially will offer our shares to
the public at the price specified on the cover page of this prospectus. The
underwriters may allow to selected dealers a concession of not more than $
per share. The underwriters may also allow, and any other dealers may reallow,
a concession of not more than $ per share to some other dealers. If all the
shares are not sold at the public offering price, the underwriters may change
the public offering price and the other selling terms. A change in the public
offering price will not affect the amount of proceeds that we receive.
Discretionary Accounts. The underwriters do not expect to sell more than 5%
of the shares of our common stock in the aggregate to accounts over which they
exercise discretionary authority.
Directed Share Program. At our request, the underwriters have reserved for
sale, at the initial public offering price, up to shares, or 5%, of the
shares of our common stock offered by this prospectus for sale to some of our
directors, officers and employees and their family members, and other persons
with relationships with us. The number of shares of our common stock available
for sale to the general public will be reduced to the extent those persons
purchase the reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of this offering may be
offered by the underwriters to the general public on the same terms as the
other shares offered by this prospectus.
Online Activities. A prospectus in electronic format may be made available
on the Internet sites or through other online services maintained by one or
more of the underwriters of this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and, depending upon
the particular underwriter, prospective investors may be allowed to place
orders online. The underwriters may agree with us to allocate a specific number
of shares for sale to online brokerage account holders. Any such allocation for
online distributions will be made by the representatives on the same basis as
other allocations.
In particular, E*OFFERING Corp., one of the underwriters, will allocate for
distribution by E*TRADE Securities, Inc. a portion of the shares that
E*OFFERING is underwriting in this offering. Copies of the prospectus in
electronic format, from which you can link to a "Meet the Management"
presentation through an embedded hyperlink will be made available on Internet
Web sites maintained by E*OFFERING Corp., www.eoffering.com, and E*TRADE
Securities, Inc. Customers of E*TRADE Securities, Inc. who complete and pass an
online eligibility profile may place conditional offers to purchase shares in
this offering through E*TRADE's Internet Web site.
Stabilization and Other Transactions. The rules of the SEC generally
prohibit the underwriters from trading in our common stock on the open market
during this offering. However, the underwriters are allowed to engage in some
open market transactions and other activities during this offering that may
cause the market price of our common stock to be above or below that which
would otherwise prevail in the open market. These activities may include
stabilization, short sales and over-allotments, syndicate covering transactions
and penalty bids.
69
Stabilizing transactions consist of bids or purchases made by the lead
representative for the purpose of preventing or slowing a decline in the market
price of our common stock while this offering is in progress.
. Short sales and over-allotments occur when the representatives, on behalf
of the underwriting syndicate, sell more of our shares than they purchase
from us in this offering. In order to cover the resulting short position,
the representatives may exercise the over-allotment option described
above and/or they may engage in syndicate covering transactions.
. Syndicate covering transactions are bids for or purchases of our common
stock on the open market by the representatives on behalf of the
underwriters in order to reduce a short position incurred by the
representatives on behalf of the underwriters.
. A penalty bid is an arrangement permitting the representatives to reclaim
the selling concession that would otherwise accrue to an underwriter if
the common stock originally sold by that underwriter is repurchased by
the representatives and therefore was not effectively sold to the public
by such underwriter.
If the underwriters commence these activities, they may discontinue them at
any time without notice. The underwriters may carry out these transactions on
the Nasdaq National Market, in the over-the-counter market or otherwise.
Passive Market Making. Prior to the pricing of this offering, and until the
commencement of any stabilizing bid, underwriters and dealers who are qualified
market makers on the Nasdaq National Market may engage in passive market making
transactions. Passive market making is allowed during the period when the SEC's
rules would otherwise prohibit market activity by the underwriters and dealers
who are participating in this offering. Passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess
of the highest independent bid for our common stock; but if all independent
bids are lowered below the passive market maker's bid, the passive market maker
must also lower its bid once it exceeds specified purchase limits. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in our
common stock during a specified period and must be discontinued when such limit
is reached. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
Experience. Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker/dealer in December 1998.
Since December 1998, Thomas Weisel Partners has acted as a lead or co-manager
on numerous public offerings of equity securities. Thomas Weisel Partners does
not have any material relationship with us or any of our officers, directors or
other controlling persons, except with respect to its contractual relationship
with us under the underwriting agreement entered into in connection with this
offering.
Conflicts of Interest. Some of the underwriters have in the past and may in
the future perform financial advisory services for us.
70
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Perkins Coie LLP. As of the consummation of this offering,
Perkins Coie LLP's investment partnership owned an aggregate of 24,938 shares
of Series C Preferred Stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by O'Melveny & Myers LLP.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
For more information with respect to us and the common stock offered by this
prospectus, see the registration statement and the exhibits and schedule filed
by us with the Securities and Exchange Commission on Form S-1 under the
Securities Act. This prospectus does not contain all of the information set
forth in the registration statement and the related exhibits and schedules.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement. A copy of the
registration statement and its exhibits and schedule may be inspected without
charge at the public facilities maintained by the Securities and Exchange
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Securities and Exchange Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of all or any part of the registration statement may be obtained
from these offices upon the payment of the fees prescribed by the Securities
and Exchange Commission. The Securities and Exchange Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the Web site is http://www.sec.gov.
71
Driveway Corporation
Index to Financial Statements
Report of Independent Auditors.............................................. F-2
Financial Statements
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
Driveway Corporation
We have audited the accompanying balance sheets of Driveway Corporation as
of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 Driveway Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California
March 2, 2000
F-2
Driveway Corporation
Balance Sheets
(In thousands except per share data)
Pro Forma
Stockholders'
Equity at
December 31, December 31,
------------------ 1999
1998 1999 (unaudited)
-------- -------- -------------
Assets
Current assets:
Cash and cash equivalents................... $ 406 $ 24,747
Restricted cash............................. 115 115
Receivable from sale of Series C preferred
stock...................................... -- 2,538
Accounts receivable......................... 88 --
Prepaid expenses............................ 136 322
Other current assets........................ -- 70
-------- --------
Total current assets....................... 745 27,792
Property and equipment, net.................. 534 1,678
Other assets................................. 95 88
-------- --------
Total assets............................... $ 1,374 $ 29,558
======== ========
Liabilities and stockholders' equity
(deficit)
Current liabilities:
Accounts payable............................ $ 699 $ 1,980
Accrued liabilities......................... 416 2,807
Deferred revenue............................ 160 167
Notes payable............................... 40 --
Current portion of capital leases........... 239 248
Convertible notes........................... 1,000 --
-------- --------
Total current liabilities.................. 2,554 5,202
Obligations under capital leases............. 176 406
Commitments and contingencies
Redeemable convertible preferred stock,
$0.001 par value; authorized 11,000,000
shares:
Series A, Designated--10,100,000 shares;
issued and outstanding--10,000,000 shares
in 1998, none in 1999, and none pro forma.. 1,911 -- $ --
Series C, Designated--11,000,000 shares;
issued and outstanding--none in 1998,
7,477,562 shares in 1999 ($29,985
liquidation preference), and none
pro forma ................................. -- 28,383 --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par
value: authorized--18,200,000 shares
Series A, Designated--10,100,000 shares;
issued and outstanding--none in 1998,
10,000,000 shares in 1999 ($2,000
liquidation preference), and none
pro forma ................................ -- 1,980 --
Series B, Designated--8,100,000 shares;
issued and outstanding--none in 1998,
7,444,770 shares in 1999 ($7,445
liquidation preference), and none
pro forma ................................ -- 9,352 --
Common stock, $0.001 par value: authorized--
70,800,000 shares; issued and outstanding--
48,201 shares in 1998, 5,298,547 shares in
1999, and 30,220,879 shares pro forma...... -- 5 30
Additional paid-in capital.................. 17,686 27,078 66,768
Deferred compensation....................... -- (4,139) (4,139)
Notes receivable from stockholders.......... -- (537) (537)
Accumulated deficit......................... (20,953) (38,172) (38,172)
-------- -------- --------
Total stockholders' equity (deficit)....... (3,267) (4,433) $ 23,950
-------- -------- ========
Total liabilities and stockholders' equity
(deficit)................................. $ 1,374 $ 29,558
======== ========
See accompanying notes.
F-3
Driveway Corporation
Statements of Operations
(In thousands except per share data)
Years Ended December 31,
---------------------------
1997 1998 1999
--------- ------- -------
Revenue.......................................... $ 7 $ 187 $ 264
Cost of revenue.................................. 276 1,179 2,155
--------- ------- -------
Gross margin..................................... (269) (992) (1,891)
Operating expenses:
Sales and marketing............................. 1,752 1,787 4,147
Technology development.......................... 2,457 1,434 2,136
General and administrative ..................... 1,212 1,023 2,387
Stock-based compensation (Note 1)............... 38 18 4,651
--------- ------- -------
Total operating expenses...................... 5,459 4,262 13,321
--------- ------- -------
Loss from operations............................. 5,728 5,254 15,212
Other income (expense):
Interest expense................................ (48) (586) (2,154)
Interest income................................. 149 36 89
Other income.................................... -- 28 58
--------- ------- -------
Total other income (expense).................. 101 (522) (2,007)
--------- ------- -------
Net loss......................................... $ 5,627 $ 5,776 $17,219
========= ======= =======
Basic and diluted net loss per common share...... $1,125.00 $152.00 $ 8.78
========= ======= =======
Shares used to compute basic and diluted net loss
per common share................................ 5 38 1,962
========= ======= =======
Pro forma basic and diluted net loss per common
share (unaudited)............................... $ 1.00
=======
Shares used to compute pro forma basic and
diluted net loss per common share (unaudited)... 17,162
=======
See accompanying notes
F-4
Driveway Corporation
Statements of Stockholders' Equity (Deficit)
For the years ended December 31, 1997, 1998 and 1999
(In thousands, except share data)
Convertible Preferred Stock
----------------------------------
Notes
Series A Series B Common Stock Additional Receivable
----------------- ---------------- ---------------- Paid-in Deferred from Accumulated
Shares Amount Shares Amount Shares Amount Capital Compensation Stockholders Deficit
---------- ------ --------- ------ --------- ------ ---------- ------------ ------------ -----------
Balance at
December 31,
1996............. -- $ -- -- $ -- 5,248 $ -- $ 9,176 $ -- $ -- $ (9,550)
Issuance of
options to
purchase common
stock to
consultants..... -- -- -- -- -- -- 38 -- -- --
Issuance of
common stock
upon exercise of
warrants........ -- -- -- -- 105 -- 3 -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- -- (5,627)
---------- ------ --------- ------ --------- ---- ------- ------- ----- --------
Balance at
December 31,
1997............. -- -- -- -- 5,353 -- 9,217 -- -- (15,177)
Issuance of
common stock
upon exercise of
options......... -- -- -- -- 478 -- 14 -- -- --
Issuance of
options to
purchase common
stock to
consultants..... -- -- -- -- -- -- 18 -- -- --
Conversion of
redeemable
preferred stock
into common
stock........... -- -- -- -- 42,370 -- 8,437 -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- -- (5,776)
---------- ------ --------- ------ --------- ---- ------- ------- ----- --------
Balance at
December 31,
1998............. -- -- -- -- 48,201 -- 17,686 -- -- (20,953)
Reclassification
of redeemable
preferred stock
due to
elimination of
redemption
provisions...... 10,000,000 1,911 7,444,770 7,349 -- -- -- -- -- --
Issuance of
warrants to
purchase
preferred stock
to a lender and
guarantors...... -- 69 -- 2,003 -- -- -- -- -- --
Issuance of
common stock
upon exercise of
options......... -- -- -- -- 261,809 -- 10 -- -- --
Issuance of
common stock to
a consultant.... -- -- -- -- 365,533 -- 1,551 (378) -- --
Issuance of
common stock to
employees....... -- -- -- -- 4,623,004 5 5,620 (2,046) (597) --
Forgiveness of
notes
receivable...... -- -- -- -- -- -- -- -- 60 --
Compensation
related to grant
of stock
options......... -- -- -- -- -- -- 2,211 (2,211) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 496 -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- -- (17,219)
---------- ------ --------- ------ --------- ---- ------- ------- ----- --------
Balance at
December 31,
1999............. 10,000,000 $1,980 7,444,770 $9,352 5,298,547 $ 5 $27,078 $(4,139) $(537) $(38,172)
========== ====== ========= ====== ========= ==== ======= ======= ===== ========
Total
Stockholders'
Equity
(Deficit)
-------------
Balance at
December 31,
1996............. $ (374)
Issuance of
options to
purchase common
stock to
consultants..... 38
Issuance of
common stock
upon exercise of
warrants........ 3
Net loss and
comprehensive
loss............ (5,627)
-------------
Balance at
December 31,
1997............. (5,960)
Issuance of
common stock
upon exercise of
options......... 14
Issuance of
options to
purchase common
stock to
consultants..... 18
Conversion of
redeemable
preferred stock
into common
stock........... 8,437
Net loss and
comprehensive
loss............ (5,776)
-------------
Balance at
December 31,
1998............. (3,267)
Reclassification
of redeemable
preferred stock
due to
elimination of
redemption
provisions...... 9,260
Issuance of
warrants to
purchase
preferred stock
to a lender and
guarantors...... 2,072
Issuance of
common stock
upon exercise of
options......... 10
Issuance of
common stock to
a consultant.... 1,173
Issuance of
common stock to
employees....... 2,982
Forgiveness of
notes
receivable...... 60
Compensation
related to grant
of stock
options......... --
Amortization of
deferred
compensation.... 496
Net loss and
comprehensive
loss............ (17,219)
-------------
Balance at
December 31,
1999............. $ (4,433)
=============
See accompanying notes.
F-5
Driveway Corporation
Statements of Cash Flows
(In thousands)
Year Ended December 31
--------------------------
1997 1998 1999
------- ------- --------
Operating activities
Net loss.......................................... $(5,627) $(5,776) $(17,219)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 845 502 423
Loss (gain) on disposal of fixed assets.......... -- (28) 114
Stock-based compensation......................... 38 18 4,651
Non-cash interest expense........................ -- 469 2,031
Changes in operating assets and liabilities:
Accounts receivable............................. -- (85) 88
Prepaid expenses................................ 54 (123) (186)
Other assets.................................... -- 10 (63)
Accounts payable................................ 20 292 1,281
Accrued liabilities............................. 6 353 848
Deferred revenue................................ -- 35 7
------- ------- --------
Net cash used in operating activities............. (4,664) (4,333) (8,025)
Investing activities
Purchases of fixed assets......................... (295) (454) (1,179)
Proceeds from sale of fixed assets................ 385 86 12
------- ------- --------
Net cash provided by (used in) investing
activities....................................... 90 (368) (1,167)
Financing activities
Payments on notes payable......................... (156) (19) (40)
Payments on capital leases........................ (146) (116) (275)
Restricted cash................................... (49) -- --
Proceeds from issuance of redeemable convertible
preferred stock.................................. 1,775 2,161 31,838
Proceeds from issuance of common stock............ 3 14 10
Proceeds from issuance of convertible notes....... -- 1,000 2,000
------- ------- --------
Net cash provided by financing activities......... 1,427 3,040 33,533
------- ------- --------
Net increase (decrease) in cash................... (3,147) (1,661) 24,341
Cash and cash equivalents, beginning of period.... 5,214 2,067 406
------- ------- --------
Cash and cash equivalents, end of period.......... $ 2,067 $ 406 $ 24,747
======= ======= ========
Supplemental disclosure of cash flow information
Cash paid for interest............................ $ 47 $ 62 $ 49
======= ======= ========
Schedule of noncash transactions
Equipment acquired under capital leases........... $ 397 $ 102 $ 514
======= ======= ========
Issuance of common stock for subscription
receivable....................................... $ -- $ -- $ 537
======= ======= ========
Conversion of debt to preferred stock............. $ -- $ 1,675 $ 3,000
======= ======= ========
Conversion of Series I and Series II preferred
stock into common stock.......................... $ -- $ 8437 $ --
======= ======= ========
See accompanying notes.
F-6
Driveway Corporation
Notes to Financial Statements
December 31, 1999
1. Significant Accounting Policies
Description of Business
Driveway Corporation ("Driveway" or the "Company") is a provider of online
information management solutions. Driveway was originally incorporated in
Washington in October 1993 and in February 1998, was reincorporated in
Delaware.
Revenue Recognition
The Company's revenue currently consist of service fees paid by users for
additional information storage space and fees paid by users of other premium
services. Revenue is recognized over the period the related service is
provided. Billings in advance of services being performed are recorded in
deferred revenue in the accompanying balance sheets.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash in a domestic financial institution and performs periodic
evaluations of the relative credit standing of this institution. The Company
provides services to users over the Internet and generally bills its users in
advance of providing the services; accordingly, credit losses have historically
been insignificant.
Cash and Cash Equivalents
Cash and cash equivalents include bank demand deposits and short-term,
highly liquid investments. Investments with original maturity dates of three
months or less from the date of purchase are considered cash equivalents.
Restricted Cash
The Company maintains cash deposits as required under the terms of capital
lease and other financing agreements. These amounts are invested with a
domestic financial institution in short-term highly liquid investments and are
recorded as restricted cash in the accompanying balance sheets.
Property and Equipment
Property and equipment are recorded at cost and depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally three to seven years. Leasehold improvements are depreciated over the
shorter of the life of the asset or the remaining term of the lease. The cost
of maintenance and repairs is expensed as incurred; renewals and betterments
are capitalized.
The Company capitalizes internal use software costs meeting the criteria of
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Capitalized software costs
are amortized on the straight line basis over estimated useful lives of three
years.
F-7
Driveway Corporation
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Fair Value of Financial Instruments
At December 31, 1999, the carrying values of financial instruments, such as
restricted cash, accounts receivable, accounts payable, and accrued liabilities
approximate their fair values based on the short-term maturities of these
instruments. The carrying value of capital leases approximate fair value based
upon the Company's incremental borrowing rate for similar types of instruments.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs, which are
included in sales and marketing expenses, were $451,000 , $306,000 and $1.3
million for the years ended December 31, 1997, 1998 and 1999, respectively.
Technology Development
Technology development expenses consist primarily of payroll and related
expenses for Web site development, systems personnel and consultants. As the
Company believes that its website is subject to continual and substantial
change, expenditures relating to technology development are expensed as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax liabilities and
assets are measured based upon differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes using enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123").
F-8
Driveway Corporation
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Company records stock-based compensation based on the fair value of
stock options granted to employees and stock options and warrants granted to
non-employees, using the Black-Scholes option pricing valuation model with the
following weighted-average assumptions:
Year ended
December 31,
----------------
1997 1998 1999
---- ---- ----
Risk-free interest rate................................... 5.5% 5.5% 5.5%
Dividend yield............................................ 0% 0% 0%
Volatility factor......................................... 0.8 0.8 0.8
Expected option term life in years for employee stock
option grants............................................ 5 5 5
Stock-based compensation expense included in the accompanying Statement of
Operations is composed of the following expense categories (in thousands):
Year ended December 31,
-------------------------
1997 1998 1999
------- ------- ---------
Cost of revenue................................... $ -- $ -- $ 12
Sales and marketing............................... -- -- 1,238
Technology development............................ 38 6 513
General and administrative........................ -- 12 2,888
------- ------- ---------
$ 38 $ 18 $ 4,651
======= ======= =========
Computation of Net Loss Per Common Share
The Company computes net loss per common share based on Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share" ("FAS
128"). In accordance with FAS 128, basic net loss per common share is
calculated as net loss available to common stockholders divided by the
weighted-average number of common shares outstanding. Diluted net loss per
common share is computed using the weighted-average number of common shares
outstanding. Dilutive common stock equivalents resulting from stock options
(using the treasury stock method) and convertible preferred stock (using the
if-converted method) have been excluded from the calculation of diluted net
loss per common share as their effect is antidilutive.
Pro forma net loss per common share has been computed as described above
and also gives effect, under Securities and Exchange Commission guidance, to
the conversion of preferred shares not included above that will automatically
convert to common shares upon completion of the Company's initial public
offering, using the if-converted method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-9
Driveway Corporation
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Segment Information
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. FAS 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The adoption of FAS 131 did not affect results of
operations, financial position or disclosure of segment information. The
Company conducts business in one operating segment. The Company is a provider
of online information management solutions. The Company's management has
determined the operating segment based upon how the business is managed and
operated.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction, and, if so, the type of hedge
transaction.
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137 ("FAS 137"), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" ("FAS
137"), which amends FAS 133 to be effective for all quarters for all years
beginning after June 15, 2000 or January 1, 2001 for the Company. Management
does not currently expect that adoption of FAS 133 will have a material impact
on the Company's financial position or results of operations.
2. Balance Sheet Details
Details of balance sheet items are as follows:
Property and equipment at December 31 consist of the following (in
thousands):
1998 1999
------ ------
Computer equipment............................................ $1,395 $1,577
Software...................................................... 308 541
Office equipment and automobiles.............................. 121 182
Leasehold improvements........................................ 131 50
------ ------
1,955 2,350
Less accumulated depreciation and amortization................ 1,421 672
------ ------
$ 534 $1,678
====== ======
F-10
Driveway Corporation
Notes to Financial Statements (continued)
2. Balance Sheet Details (continued)
At December 31, 1998 and 1999, property and equipment includes amounts held
under capital leases of $1.4 million, and $1 million, respectively, and the
related accumulated amortization of $1.1 million and $425,000, respectively.
Amortization of these assets is included in depreciation expense.
At December 31, 1999, the Company has capital expenditure commitments
amounting to $2.9 million.
Accrued liabilities at December 31 consist of the following (in thousands):
1998 1999
---- ------
Accrued marketing costs......................................... $167 $ 332
Accrued underwriting fees--Series C preferred stock............. -- 1,543
Accrued bonuses................................................. -- 428
Other accrued liabilities....................................... 249 504
---- ------
$416 $2,807
==== ======
3. Redeemable Convertible Preferred Stock
In December 1999, the Company sold 7,477,562 shares of Series C preferred
stock for $4.01 per share, resulting in net proceeds of $28.4 million. Of this
amount $2.5 million was recorded as a receivable at December 31, 1999 and was
subsequently received on January 4, 2000. In connection with the Series C
preferred stock financing, the Company issued to the placement agent warrants
to purchase 94,780 shares of Series C preferred stock at an exercise price of
$4.01 per share. The value ascribed to the warrants of approximately $290,000
was offset against the Series C preferred stock proceeds. The value was based
on a Black-Scholes valuation model as described in Note 1 using a fair value of
the Company's Series C preferred stock on the grant date of $4.01 per share and
a contractual life of 5 years.
The holder of each share of Series C preferred stock has the right to one
vote for each share of common stock into which such Series C could then be
converted and, with respect to such vote, has full voting rights and powers
equal to those of the holder of common stock. In the event of liquidation, the
holders of Series C have preferential rights to liquidation payments of $4.01
per share, plus any declared but unpaid dividends. The Series C preferred stock
is convertible into common stock at the option of the holder, or automatically
upon the closing of an initial public offering of the Company's common stock
for which the aggregate proceeds are not less than $30 million or $8.02 per
share. Currently, each share of Series C converts into one share of common
stock. The conversion rate is subject to adjustment, as provided by the
Company's Certificate of Incorporation. The preferred stock is also redeemable
at the option of the holder after December 2004 at a redemption price equal to
$4.01 per share plus a ten percent annual return from date of issuance. The
Series C holders have the right to receive dividends at an annual rate of
$0.321 per share when and if declared by the Board of Directors.
Through December 1997, the Company sold 351,143 shares of Series I preferred
stock and 66,668 shares of Series II preferred stock resulting in net proceeds
of $5.9 million and $2.0 million, respectively. In October 1998, the Company
converted all outstanding Series I and II preferred stock
F-11
Driveway Corporation
Notes to Financial Statements (continued)
3. Redeemable Convertible Preferred Stock (continued)
into common shares, based upon a 100 to 1 conversion ratio. Subsequent to this
conversion, the Company canceled its Series I and II preferred stock and
completed a 1,000 to 1 reverse stock split of its common stock. Accordingly,
42,370 shares of common stock have been issued in the Series I and II preferred
stock conversion (the related common share and per share data in the
accompanying financial statements have been retroactively restated to reflect
the reverse stock split).
In June 1998, the Company entered into promissory notes with stockholders
for $775,000 of bridge financing for the Company. The notes had interest rates
of 10%, matured in 45 days, and were converted into Series A preferred stock
(Note 4). The Company issued additional notes payable of $900,000 during August
and October 1998. In connection with the issuance of the notes, the Company
issued warrants to purchase Series II preferred stock and based on the Black-
Scholes valuation model described in Note 1, using the fair value of the
Company's Series II preferred stock, the value of the warrants of $469,000 was
recorded as interest expense in the year ended December 31, 1998. These
warrants were subsequently converted into warrants to purchase common stock
(Note 4).
4. Stockholders' Equity (Deficit)
Convertible Preferred Stock
In October 1998, the Company converted outstanding notes payable of $1.7
million into Series A preferred stock at an exchange rate of $0.20 per share.
In addition, the Company sold an additional 1,625,000 shares of Series A
preferred stock for $0.20 per share for net proceeds of $236,000.
In November 1998 and January 1999, the Company entered into convertible
notes payable agreements for $1.0 million and $2.0 million, respectively, with
two institutional investors. The debentures were convertible to and in
conjunction with the Company's next round of preferred equity financing. In May
1999, the Company converted all outstanding convertible notes payable into
3,000,000 shares of Series B preferred stock at an exchange rate of $1.00 per
share. In addition, the Company sold an additional 4,444,770 shares of Series B
preferred stock for $1.00 per share for net proceeds of $4.3 million. In
October 1999, the holders of Series A and B preferred stock agreed to eliminate
their right to request redemption of the preferred stock. Accordingly, Series A
and B have been reclassified as of December 31,1999 to Convertible Preferred
Stock in the accompanying balance sheet. In addition, the Company completed a
five-to-one stock split of its Series A and B preferred stock and the
accompanying financial statements have been retroactively restated to give
effect to this stock split.
The holder of each share of Series A and B preferred stock has the right to
one vote for each share of common stock into which such Series A and B could
then be converted and, with respect to such vote, has full voting rights and
powers equal to those of the holder of common stock. In the event of
liquidation, the holders of Series A and B have preferential rights to
liquidation payments of $0.20 and $1.00 per share, respectively, plus any
declared but unpaid dividends. The Series A and B preferred stock is
convertible into common stock at the option of the holder, or automatically
upon the closing of an initial public offering of the Company's common stock
for which the aggregate
F-12
Driveway Corporation
Notes to Financial Statements (continued)
4. Stockholders' Equity (Deficit) (continued)
proceeds are not less than $30 million and $8.02 per share. Currently, each
share of Series A and B converts into one share of common stock. The conversion
rate is subject to adjustment, as provided by the Company's Certificate of
Incorporation. The Series A and B holders have the right to receive dividends
at an annual rate of $0.016 per share and $0.08 per share, respectively, when
and if declared by the Board of Directors.
Common Stock Option Plan
The 1997 Stock Option Plan (the "1997 Plan") provides for the issuance of
incentive and nonqualified stock options to employees. There are 4,177,484
shares of common stock reserved for issuance under the 1997 Plan. Options are
granted by the Company's Board of Directors and expire after ten years. Options
granted under this plan shall become vested with respect to 25% of the shares
of common stock covered by the option on the first anniversary date of
employment, with the remaining shares vesting at 6.25% every three months
thereafter, with all shares becoming fully vested on the fourth anniversary
date of the date of grant.
Stock option activity and price information for the years ended December 31,
1997, 1998 and 1999 are as follows:
Outstanding options Weighted-
Options ---------------------- average
Available Number of Price exercise
for grant shares per share price
---------- ---------- ---------- ---------
Balance at December 31,
1996.................... -- -- -- --
Authorized.............. 4,177,484 -- --
Granted................. (11,415) 11,415 $ 10-20 $19.87
Canceled................ 845 (845) 20 20.00
---------- ---------- ---------- ------
Balance at December 31,
1997.................... 4,166,914 10,570 10-20 19.88
Granted................. (3,542) 3,542 30 30.00
Exercised............... -- (478) 20 20.00
Canceled................ 5,899 (5,897) 10-30 20.65
---------- ---------- ---------- ------
Balance at December 31,
1998.................... 4,169,271 7,737 10-30 26.50
Granted................. (4,174,680) 4,174,680 0.02-1.50 0.22
Exercised............... -- (261,809) 0.02-0.25 0.04
Canceled................ 1,046,023 (1,046,023) 0.02-30 0.16
---------- ---------- ---------- ------
Balance at December 31,
1999.................... 1,040,614 2,874,585 $0.02-30 $ 0.32
========== ========== ========== ======
The weighted-average remaining contractual life of all outstanding options
at December 31, 1999 is 9.59 years. As of December 31, 1999, options to
purchase 489,615 shares are exercisable.
F-13
Driveway Corporation
Notes to Financial Statements (continued)
4. Stockholders' Equity (Deficit) (continued)
The following table summarizes information about stock options at December
31, 1999:
Options Exercisable
Not Subject to
Options Outstanding Repurchase
-----------------------------------------------------------------------------
Range of Weighted-Average Weighted- Weighted-
Exercise Options Remaining Average Options Average
Prices Outstanding Contractual Life Exercise Price Vested Exercise Price
-------- ----------- ---------------- -------------- ------- --------------
$0.02-
0.02 583,689 9.03 $0.02 476,811 $ 0.02
$0.10-
0.25 1,960,714 9.68 0.18 10,166 0.25
$1.50-
30.00 330,182 9.95 1.69 2,638 21.34
--------- ------- ------
2,874,585 489,615 $ 0.14
========= ======= ======
Shares Reserved for Future Issuance
At December 31, 1999, the Company has reserved shares of common stock for
future issuance as follows:
Preferred stock, including effect of preferred stock warrants:
Series A....................................................... 10,081,250
Series B....................................................... 8,098,770
Series C....................................................... 7,577,342
Stock options outstanding....................................... 2,874,585
Stock options, available for grant.............................. 1,040,614
Warrants to purchase common stock............................... 22,532
----------
29,695,093
==========
Deferred Compensation
The Company has recorded deferred compensation charges of $2.2 million
during the year ended December 31, 1999, representing the difference between
the exercise price of the stock option and the fair value of common stock as of
the date of grant. The Company recorded stock-based compensation expense of
$185,000 for the year ended December 31, 1999 and, using a graded method, over
the vesting periods of the individual stock options (four years), the deferred
compensation charges will amortize $1.2 million, $509,000, $240,000 and $62,000
in the years 2000 through 2003, respectively.
Options Issued to Consultants
In 1999, the Company issued to consultants options to purchase 163,556
shares of common stock at exercise prices ranging from $0.14 to $1.50 per
share. These options vest in varying amounts through December 2001. The Company
recorded deferred compensation charges of $378,000 based on the Black-Scholes
valuation model, described in Note 1, using fair values for the Company's
common stock ranging from $0.50 to $3.21 per share and contractual lives of 10
years. These charges are subject to adjustment based upon the fair value of the
stock at the final vesting of these options. The Company recorded stock-based
compensation expense of $18,000 for the year ended December 31, 1999 related to
these options.
F-14
Driveway Corporation
Notes to Financial Statements (continued)
4. Stockholders' Equity (Deficit) (continued)
In February 1999, the Company awarded 365,533 shares of common stock to a
consultant. Under the terms of the agreement, the Company had the right to
repurchase the shares based on the achievement of certain milestones. At
December 31, 1999, none of the shares remain subject to the repurchase rights.
For the year ended December 31, 1999, the Company recorded stock-based
compensation expense in 1999 of $1.2 million related to these shares.
Notes Receivable From Stockholders
In May 1999, the Company sold 2,130,000 shares of its common stock to a then
senior executive officer and now Chairman of the Company for $213,000 in
exchange for a promissory note. The note is full recourse, has an interest rate
of 5.22%, is due the earlier of an initial public offering of common stock of
the Company or January 2006, and requires annual interest payments equal to 20%
of the annual interest accrual. For the year ended December 31, 1999, the
Company recorded stock-based compensation expense of $3.0 million related to
these shares based upon the difference between the issuance price of the stock
and the fair value of the stock.
In 1999, the Company issued 1,383,004 shares of common stock to key officers
and 1,110,000 shares to employees of the Company in exchange for promissory
notes in the aggregate amount of $384,000. The notes are full recourse, bear
interest at 5%, and are due with accrued interest on varying dates from April
2001 through August 2003. The shares issued are subject to repurchase by the
company at the original issuance price in the event the officers and employees
terminate their employment. These repurchase rights lapse in varying amounts
through August 2003. Shares subject to repurchase total 2,055,561 at December
31, 1999. In addition, the Company has agreed to forgive the notes from the
employees ratably through April 2001 based upon continued employment with the
Company. The Company recorded deferred compensation charges of $2.0 million
based on the difference between the issuance price of the stock and its fair
value on the date of issuance. The Company recorded stock-based compensation
expense of $293,000 in the year ended December 31, 1999 related to these notes
and will amortize $757,000, $440,000, $328,000, and $228,000 relating to these
shares in the years 2000 through 2003, respectively.
Common and Preferred Stock Warrants
During the years 1995 through 1998, the Company issued warrants to purchase
common stock and Series I and Series II preferred stock to non-employees. In
1998, all warrants to purchase Series I and Series II preferred stock were
converted into warrants to purchase common stock. At December 31, 1999,
warrants to purchase 22,532 shares of common stock remain outstanding, with
exercise prices ranging from $30 to $2,400 per share. The warrants expire on
various dates through September 2005.
In May 1999, the Company issued 81,250 warrants (expiring in August 2002) to
purchase Series A preferred stock at an exercise price of $1.00 per share to a
leasing company in connection with an existing lease. Based on the Black-
Scholes option valuation model described in Note 1 using a fair value of $1.00
per share and a contractual life of 3 years, the Company will record the value
of the warrants of approximately $69,000 as additional interest expense over
the remaining lease term.
F-15
Driveway Corporation
Notes to Financial Statements (continued)
4. Stockholders' Equity (Deficit) (continued)
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding net income and net income per common share
is required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"), and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of FAS 123. For purposes of pro forma disclosures, the estimated fair
value of the stock option is amortized to expense over the option's vesting
period. The fair value of these stock options was estimated at the date of
grant using the Black-Scholes option pricing valuation model, described in Note
1.
The weighted-average fair value of these options granted was $10.86, $17.17
and $0.68 for 1997, 1998 and 1999, respectively.
Option valuation models were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
Option valuation models require the input of highly subjective assumptions,
including expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, subjective input assumptions can materially affect the fair value
estimate.
Had compensation costs for the Company's stock option plan been determined
using the fair value at the grant dates for awards under that plan consistent
with the method of FAS 123, the Company's historical net loss applicable to
common shareholders and basic and diluted net loss per share would have been
decreased to the pro forma amounts indicated below (in thousands, except per
share data):
Year ended December 31,
-------------------------
1997 1998 1999
--------- ------- -------
Net loss:
As reported...................................... $ 5,627 $ 5,776 $17,219
Pro forma........................................ 5,650 5,811 17,305
Basic and diluted net loss per common share:
As reported...................................... 1,125.00 152.00 8.78
Pro forma........................................ 1,130.00 152.92 8.82
The pro forma impact of options on the operating results is not
representative of the effects on net income (loss) for future years, as future
years will include the effects of additional years of stock option grants.
F-16
Driveway Corporation
Notes to Financial Statements (continued)
5. Net Loss Per Common Share
The calculation of historical and pro forma basic and diluted net loss per
common share is as follows (in thousands, except share and per share data):
Years ended December 31,
----------------------------
1997 1998 1999
--------- ------- ----------
Historical:
Net loss..................................... $ 5,627 $ 5,776 $ 17,219
========= ======= ==========
Weighted-average shares of common stock
outstanding................................. 5,000 38,000 2,534,000
Less: weighted-average shares subject to
repurchase.................................. -- -- 572,000
--------- ------- ----------
Weighted-average shares used in computing
basic and diluted net loss per common
share....................................... 5,000 38,000 1,962,000
========= ======= ==========
Basic and diluted net loss per common share.. $1,125.00 $152.00 $ 8.78
========= ======= ==========
Year ended
December 31,
1999
------------
Pro forma:
Net loss..................................................... $ 17,219
==========
Weighted-average shares used in computing basic and diluted
net loss per common share................................... 1,962,000
Adjustment to reflect the effect of the assumed conversion of
preferred stock from the date of issuance................... 15,200,000
----------
Weighted-average shares used in computing pro forma basic and
diluted net loss per common share........................... 17,162,000
==========
Pro forma basic and diluted net loss per common share
(unaudited)................................................. $ 1.00
==========
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 1,475,000 common equivalent shares related to outstanding stock
options not included above (determined using the treasury stock method) for the
year ended December 31 1999, and approximately an additional 40,000, 2,500,000
and 15,200,000 common equivalent shares related to the conversion of preferred
shares (including warrants to purchase preferred stock) using the if-converted
method for the years ended December 31, 1997, 1998 and 1999, respectively. For
the years ended December 31, 1997 and 1998, the common equivalent shares
related to outstanding stock options are not significant.
6. Income Taxes
No income tax expense was recorded for the years ended December 31, 1997,
1998 and 1999 as the Company has incurred operating losses in all periods and
for all jurisdictions.
F-17
Driveway Corporation
Notes to Financial Statements (continued)
6. Income Taxes (continued)
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate:
Years ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
Statutory federal income tax benefit ................ 34.0% 34.0% 34.0%
State tax benefit.................................... -- -- 7.3%
Change in valuation allowance........................ (33.9%) (33.9%) (41.2%)
Other................................................ (0.1%) (0.1%) (0.1%)
------- ------- -------
-- -- --
======= ======= =======
Significant components of the Company's deferred tax assets are as follows
(in thousands):
December 31
--------------------------
1997 1998 1999
------- ------- --------
Net operating loss carryforwards................ $ 4,741 $ 6,707 $ 12,929
Research and development credit carryforwards... 31 31 31
Other........................................... 333 328 390
------- ------- --------
Total deferred tax assets....................... 5,105 7,066 13,350
Valuation allowance............................. (5,105) (7,066) (13,350)
------- ------- --------
Net deferred tax assets......................... $ -- $ -- $ --
======= ======= ========
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes the Company's historical operating
performance and the reported cumulative net losses in all prior years, the
Company has provided a full valuation allowance against its net deferred tax
assets. The Company will continue to evaluate the realizability of the deferred
tax assets on a quarterly basis.
The net valuation allowance increased by $1.9 million during the year ended
December 31, 1997, by $2.0 million during the year ended December 31, 1998, and
by $6.3 million during the year ended December 31, 1999.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $35 million, which expire in
the tax years 2008 through 2019. The Company has net operating loss
carryforwards for state income tax purposes of approximately $11.9 million
which expire in tax year 2019. The Company has federal tax credit carryforwards
of approximately $31,000 which begin to expire in 2008.
Because of the "change in ownership" provisions of the Internal Revenue Code
of 1986, a portion of the Company's net operating loss carryforwards and tax
credit carryforwards may be subject to an annual limitation regarding their
utilization against taxable income in future periods. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce future income tax liabilities. The Company has not
determined the amount, if any, which will be lost as a result of the
application of these rules.
F-18
Driveway Corporation
Notes to Financial Statements (continued)
7. Commitments and Contingencies
Line of Credit
In 1999, the Company entered into a non-revolving line of credit agreement
for borrowing up to $3 million. In connection with the Series C preferred stock
financing (Note 4), the Company repaid all outstanding amounts under this
agreement and the facility was terminated. Under the terms of this facility,
the Company issued to the lender warrants to purchase 5,000 shares of Series C
preferred stock at an exercise price of $4.01 per share. The value ascribed to
the warrants of approximately $14,000, based on the Black-Scholes valuation
model described in Note 1 using a fair value of $4.01 per share and a
contractural life of 5 years, was recorded as interest expense in the
accompanying statements of operations. In addition, certain stockholders and
officers of the Company provided personal guaranties for the line of credit
agreement. As consideration for the guaranties, the Company issued warrants to
purchase 600,000 shares of Series B preferred stock at an exercise price of
$1.00 per share. The value ascribed to the warrants of $1.9 million, based on
the Black-Scholes valuation model described in Note 1 using a fair value of
$3.61 per share and a contractual life of 7 years, was recorded as interest
expense in the accompanying statements of operations.
Leases
In August 1999, the Company entered into a loan facility under which the
lender committed to finance equipment purchases up to $1.5 million through July
2000. As of December 31, 1999, outstanding borrowings totaling $498,000 and are
included in obligations under capital leases in the accompanying balance sheet.
Under the terms of this facility, the Company issued to the lender warrants to
purchase 54,000 shares of Series B preferred stock at an exercise price of
$1.00 per share. The value ascribed to the warrants of approximately $70,000,
based on the Black-Scholes valuation model described in Note 1 using a fair
value of $1.50 per share and a contractual life of 10 years, is being amortized
to interest expense.
The Company leases its office facilities under operating leases. Future
minimum lease payments under capital leases and minimum lease payments under
noncancellable operating leases are as follows (in thousands):
Capital Operating
Leases Leases
------- ---------
Years ending December 31:
2000...................................................... $ 318 $ 530
2001...................................................... 183 325
2002...................................................... 167 240
2003...................................................... 134 218
2004...................................................... -- 187
----- ------
Total minimum lease payments............................... 802 $1,500
======
Amount representing interest............................... (148)
-----
Present value of minimum lease payments.................... 654
Current portion of capital lease obligations............... (248)
-----
Noncurrent portion of capital lease obligations............ $ 406
=====
F-19
Driveway Corporation
Notes to Financial Statements (continued)
7. Commitments and Contingencies (continued)
Rent expense for the years ended December 31, 1997, 1998, and 1999 was
$160,000 $185,000 and $239,000 respectively.
Marketing Agreements
The Company enters into various advertising, marketing and co-marketing
agreements which provide for certain advertising and promotional and customer
acquisition activities. Such agreements generally have terms not in excess of
12 months. Under these agreements, the Company's partners display the Driveway
logo and certain of the Company's services on their websites with direct links
to the Driveway website. The Company normally pays for these services based on
the first time a customer clicks on one of the Driveway links and registers for
the Driveway service and/or becomes an active user of the Driveway site. The
costs of these services are expensed as incurred. In addition, some agreements
include minimum monthly and quarterly payments and in some cases, an up-front
advertising placement fee. Advertising placement fees are deferred and expensed
throughout the term of the contract. At December 31, 1999, deferred placement
fees total $98,000 and are included in prepaid expenses in the accompanying
balance sheet. The Company recorded $648,000 in placement fee expenses for the
year ended December 31, 1999. Future minimum payments under these agreements
are $4.3 million 2000 and $425,000 in 2001.
Advertising
The Company has commitments for expenditures on media advertising in 2000.
The aggregate commitments at December 31, 1999 are approximately $5.4 million.
Pending Litigation
While currently the Company is not aware of any significant pending
litigation, the Company may from time to time become involved in various
litigation arising in the ordinary course of business and the resolution of
these matters could have a material effect on the Company's financial position
or results of operations.
Defined Contribution Pension Plan
Beginning July 1997, the Company sponsored a defined contribution pension
plan (the Plan) for its employees who have completed six months of service with
the Company. Contributions to the Plan are based on a percentage of the
employee's gross compensation, limited by IRS guidelines for such plans. The
Company does not match contributions made by employees, but does pay the Plan's
administrative expenses. Administrative expenses for the Plan totaled $3,000
for the year ended December 31, 1999.
8. Subsequent Events
Proposed Public Offering of Common Stock
On March 2, 2000, the Board authorized Driveway to proceed with an initial
public offering of its common stock. If the offering is consummated as
presently anticipated, all of the outstanding redeemable convertible preferred
stock and convertible preferred stock will automatically convert to
F-20
Driveway Corporation
Notes to Financial Statements (continued)
8. Subsequent Events (continued)
common stock. The unaudited pro forma shareholders' equity at December 31,
1999 gives effect to the conversion of all outstanding shares of redeemable
convertible preferred stock and convertible preferred stock at that date into
24,922,332 shares of common stock upon the completion of the offering.
Series C Preferred Stock
In January 2000, the Company sold an additional 3,322,945 shares of Series
C preferred stock for $4.01 per share, resulting in net proceeds of $12.6
million.
1997 Stock Option Plan
On March 2, 2000 the number of shares reserved under this plan was
increased to 5,700,000.
2000 Stock Incentive Compensation Plan
On March 2, 2000 the Board of Directors adopted, and the stockholders
approved, the 2000 Stock Incentive Compensation Plan to be effective upon
completion of the Company's initial public offering of its common stock. The
Company has reserved a total of 8,100,000 shares of common stock for issuance
under the plan. The plan provides for the issuance of stock options as well as
stock awards. Simultaneous with the effectiveness of the Company's initial
public offering, the 1997 Stock Option Plan will be suspended, no further
grants will be made under this plan and all shares reserved if not granted
under this plan will become shares reserved under the 2000 stock incentive
plan.
9. Events (unaudited) subsequent to date of independent auditors' report
Series D Convertible Preferred Stock
On March 10, 2000, the Company, sold 1,666,666 shares of Series D
Convertible Preferred Stock at $6.00 per share.
F-21
APPENDIX A
"MEET THE MANAGEMENT" PRESENTATION FOR
DRIVEWAY CORPORATION
Prospective investors will be able to log on to a website maintained by
E*OFFERING Corp. at www.eoffering.com, where a prospectus is available for
review. Within designated sections of the prospectus, including the table of
contents and the Underwriting Section of the prospectus, an embedded hyperlink
{click here for "Meet the Management" Presentation} will provide exclusive
access to the "Meet the Management" Presentation. This presentation highlights
selected information contained elsewhere in the prospectus. This presentation
does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the "Risk Factors" and our financial statements and notes to those
financial statements, before making an investment decision.
Visual 1: Disclaimer
Imagery: Company logo.
Visual Text: The "Meet the Management" Presentation is part of our prospectus.
This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain
all of the information that you should consider before investing
in our common stock. You should read the entire prospectus
carefully, including the "Risk Factors" and our financial
statements and notes to those financial statements, before making
an investment decision.
Script: (Christopher Logan) The "Meet the Management" Presentation is part
of our prospectus. This presentation highlights selected information
contained elsewhere in this prospectus. This presentation does not
contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus
carefully, including the "Risk Factors" and our financial statements
and notes to those financial statements, before making an investment
decision.
Visual 2: Introduction
Imagery: See Description of Artwork contained in this Registration Statement
for a description of the image located on the inside front cover of
the prospectus.
Script: (Christopher Logan) Welcome to the "Meet the Management"
Presentation for Driveway. I'm Christopher Logan, President and CEO.
I would like to introduce you to Michael Zuckerman, Vice President
of Business Development and Kent Jarvi, our Chief Financial Officer.
We would like to talk to you about Driveway, an easy to use online
information management service that allows our members to store,
manage and share their personal and business information from a
single virtual location on the Web.
Visual 3: Industry Background
Imagery: Border and Company logo. Page with four arrows on the left of the
page pointing right.
Visual Text: Title: Industry Background. Bullets: "Multiple Web Access Points",
"Web-enabled Devices", "Voluminous Data", "Rich Media".
A-1
Script: (Christopher Logan) (see "Business--Industry Background--Expanding
Uses of the Internet Driving the Need for Online Storage"): The
Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct
business electronically. Some of the many contributors to this
growth have been the rapid technological improvements to Internet
infrastructure and bandwidth capacity, which have allowed users to
quickly download and upload information in multiple formats, run
Web-based applications and complete commerce transactions. These
uses represent a significant shift in usage patterns, as
traditionally the Internet was used primarily to acquire information
most often stored in simple text-based format. As the Internet
continues to expand and evolve, we believe users will increasingly
move towards online management and storage solutions to accommodate
this shift. There are several characteristics that drive the demand
of online information management. First, many users frequently use
more than one personal computer for Internet access and we believe
they are looking for ways to remotely access all their files form a
single virtual location that is not limited by multiple computers.
Second, the Internet has expanded beyond personal computers to
personal digital assistants, cellular phones and other thin client
devices, which have limited storage capability. This expansion has
created new challenges for users who are looking for ways to access
information from these devices. Third, the Internet is a virtual
marketplace, providing vast quantities of information from different
sources. Finally, the introduction onto the Web of rich media,
including music, video and picture downloads, has created new
possibilities for ecommerce and user interactivity.
Visual 4: The Driveway Solution
Imagery: Border and Web Site shot.
Visual Text: Title: The Driveway Solution.
Script: (Christopher Logan) (see "Business--The Driveway Solution"):
Driveway is an easy to use online information management service
that allows our members to store, manage and share their personal
and business information. Our solution is available to any Internet
user and for nearly all types of electronic data including URL's,
desktop files and rich multimedia content. Our system is designed to
be completely device and platform agnostic, a feature that offers
our members the greatest freedom and flexibility to manage their
online personal and business information. In addition, we actively
partner with highly trafficked Web sites to help them increase their
value to their users.
Visual 5: The Driveway Solution (2)
Imagery: Border and Company logo. Page with Driveway logo in center of page
with two boxes connecting below with the headings "Benefits to our
members" and "Benefits to our strategic partners".
Visual Text: Title: The Driveway Solution. Under Benefits to our members list
as bullets: "Ubiquitous access to information from multiple
devices.", "Ability to securely share private information.", "Ease
of use.", "Integration with existing Web sites and applications."
Under Benefits to our partners list as bullets: "Adds
functionality.", "Aids in customer acquisition and retention.",
"Enhances stickiness.", "Facilitates new revenue opportunities."
A-2
Script: (Christopher Logan) (see "Business--The Driveway Solution"): We
believe our solution provides significant benefits to both our
members and our strategic partners.
Benefits to our members include the following. We allow members
to store and access information at any time from any standard Web-
enabled device. Secondly, we enable information-sharing by allowing
our members to provide secure password-protected, highly
customizable access to other Internet users. Third, our solution is
compatible with all browsers, version 2.1 and above, and does not
require users to download client software. Finally, our online
information management solution is accessible from all of our
strategic partners and more than 4,000 affiliates.
Benefits to our strategic partners include the following. Our
online information management services provide an additional
service to our strategic partners' Web site offerings. Our online
information management application can be seamlessly integrated
into existing and emerging Web site applications. Second, by
providing a more complete set of services to users, our strategic
partners can differentiate themselves from their competitors,
attract new users, and retain existing users. Third, because we can
integrate our online information management solution with a
strategic partner's Web site applications, users have all relevant
information centrally located, potentially increasing the time a
user is active on our strategic partner's Web site. Finally, our
strategic partners can share revenues generated from paid services
from members we receive through that strategic partner. We provide
our strategic partners access to our extensive member base for opt-
in marketing programs and other advertising opportunities.
Visual 6: Our Strategy
Imagery: Border and Company logo. Driveway logo in center of page. Circles
filled with text heading will be connected to the logo as spokes.
Visual Text: Title: The Driveway Strategy. Inside circled spokes: "Capitalize
on Growing Member Base to Drive Multiple Revenue Streams",
"Leverage Existing Strategic Partnerships and Develop New
Relationships", "Build Driveway Brand", "Enable Additional
Applications and Services", "Enable Functionality to Mobile
Devices", "Capitalize on Web-Based Business-to-Business
Opportunity", "Pursue International Market Opportunity".
Script: (Christopher Logan) (see "Business--Strategy"): We intend to be the
leading provider of online information management services. The
primary elements of our strategy are the following.
We intend to expand and capitalize on our large and growing
membership base. We believe continued enhancements of our services
and continued integration of Driveway into our member's Internet
activities will allow us to grow and retain an increasingly active
user base. As we expand the number of members and increase the
amount and duration of activity on our site, we intend to utilize
this customer engagement to drive multiple streams of revenue.
We intend to reach to new prospective members through our
strategic partnerships and leverage our growing membership base to
develop new strategic relationships. Partner-driven growth is an
important element of our strategy and has accounted for
approximately 80% of our membership base. As our membership base
A-3
grows, we believe that a strategic partner's access to our members
combined with the value in an integrated Driveway service may to
cause a decrease in our membership acquisition costs.
We intend to establish Driveway as the leading brand for online
information management. Our branding efforts are designed to foster
new strategic partnerships and increase direct membership
recruitment and retention. We believe that as Web sites and users
begin to encounter our solution more frequently and understand the
value of online information management, we will experience a
dramatic increase in the number of strategic partnerships as well
as continued growth in our membership base.
We intend to further enable our strategic partners to create and
manage new applications that utilize our Driveway services. We plan
to integrate our online information management platform into online
application providers' Web sites to provide a central location to
store, manage and share the activities of these applications.
We intend to add features to our solution that will allow our
members to access their information through a variety of wireless
devices, such as mobile telephones, personal digital assistants or
personal computers that are connected to the Internet by wireless
service. We plan to enter into relationships to enable access to a
Driveway account from a wireless device.
We intend to private label our Driveway service offering for Web
sites that are focused on business-to-business opportunities. By
private labeling our services, we intend to further spread our
solution across the Web and generate revenue directly from
business-to-business Web sites.
We intend to form international strategic partnerships because
we believe that worldwide demand for online information management
presents a significant opportunity for us to acquire new members.
To facilitate this effort, we developed our interface to easily
allow translation into different languages. In December of 1999, we
formed an exclusive partnership with Lycos Europe, a joint venture
of Lycos and Bertelsmann and one of the most highly trafficked Web
sites in Europe, to expand our online information management
platform.
And with that, I will turn it over to Michael Zukerman to
discuss our affiliates and strategic relationships.
Visual 7: Affiliates and Strategic Partnerships
Imagery: Border and Company logo. Page with table in center of page.
Visual Text: Title: Affiliates and Strategic Partnerships. Within table, list
the following: "Lycos", "Lycos-Bertelsmann", "Microsoft",
"Looksmart", "USA.Net", "MSN", "McAfee.com", "Backup Buddy",
"PhoenixNet", "Juno Online Services".
Script: (Michael Zukerman) (see "Business--Affiliates and Strategic
Partnerships") We have entered into strategic relationships with ten
partners, and over 4,000 Web sites have opted into our affiliate
program. To date, we have acquired more than 80% of our members
through our strategic partnerships and affiliates. Our affiliates
provide their
A-4
visitors with a link to our Web site and we pay these affiliates a
fee for member conversions. We believe that our strategic
partnerships aid in customer acquisition, development of new
applications and services and also increase our revenues.
For example, our strategic relationship with Microsoft provides
a web folder feature to their site.
In November 1999, Driveway signed an agreement with Lycos to
provide the Driveway service to users of the various Lycos network
sites. The agreement calls for integration and promotion within
Lycos' Tripod and Angelfire, two of Lycos' most heavily trafficked
Web-page building sites, and also contemplates further integration
with the popular MyLycos personal page service.
Since December 1999, our online information management service
has been offered to McAfee.com visitors and subscribers through a
variety of banners, tiles, text links and registration options.
Now I'll turn it back over to Chris to discuss our competition.
Visual 8: Competition
Imagery: Border and Company logo. Page with five arrows on the left of the
page pointing right.
Visual Text: Title: Competition. Bullets: "Internet portal and content
companies", "Online community sites", "Online music services that
offer storage space for digital music files", "Internet desktop
companies".
Script: (Christopher Logan) (see "Business--Competition") The market for
online information management is emerging and rapidly evolving.
There are several companies that offer online information management
solutions. None of these companies is currently dominant in our
space. In addition, many companies may develop in-house solutions to
provide online information management, which may compete with us for
users and strategic partnerships and offer similar services as the
following: Internet portal and content companies, such as America
Online and Yahoo!; online community sites such as iVillage; online
personal homepage services such as Yahoo! Geocities; online music
services that offer storage space for digital music files such as
MP3.com and Real Networks; and Internet desktop companies such as
Visto and desktop.com.
And with that, I will turn it over to Kent Jarvi for an overview
of our financial results.
Visual 9: Financial Summary
Imagery: (See "Selected Financial Data") Statement of Operations and Balance
Sheet Data.
Visual Text: (See "Selected Financial Data") Statement of Operations and
Balance Sheet Data.
Script: (Kent Jarvi) (See "Management Discussion and Anlysis of Financial
Condition and Results of Operations"): [ ]
A-5
We launched our online information management service in
February 1999. Comparison of our financial results from year to
year prior to 1999 may therefore not be indicative of our future
performance due to the adoption of our new business model in
February 1999. We have derived substantially all our revenue to
date from subscribers who pay a monthly fee for online storage
services. We have recently transitioned our business model whereby
registered members of our Driveway services receive an initial
allocation of storage, free of charge, with the potential to
purchase additional storage. Our revenue in the future will consist
of service fees paid by users for additional information storage
space and for other premium services. In addition, we expect to
derive a substantial part of our services revenue from fees we
generate from private label service offerings. We also expect to
derive a significant amount of our revenue from the sale of
advertisements delivered to users of our Web site. We began to
generate advertising revenue in the first quarter of 2000. We also
expect to derive revenue from sponsorships in which fees are paid
for selective positioning and promotion of our sponsor's logo,
marketing messages and site links.
Revenue increased 41% to $264,000 in 1999 as compared to
$187,000 in 1998. Revenue increased 2,571% in 1998 from $7,000 in
1997. The increase in total revenue in 1999 was primarily the
result of the launch of our initial online information management
service and the increase in registered users of this platform. The
increase in revenue in 1998 was primarily due to revenue derived
from our data warehousing and backup services launched in January
1998.
Cost of revenue increased 83% to $2.2 million in 1999 as
compared to $1.2 million in 1998. Cost of revenue increased 335% in
1998 from $276,000 in 1997. The increase in cost of revenue in 1999
was primarily attributable to the costs associated with the launch
of our initial online information management service and additional
costs related to increased personnel, facilities and other costs
associated with growing our Web site infrastructure. The increase
in 1998 was primarily due to the launch of our data warehousing and
backup services.
Sales and marketing expenses increased 128% to $4.1 million in
1999, as compared to $1.8 million in 1998. Sales and marketing
expenses were relatively unchanged in 1998, with expenses of $1.8
million in 1997. The increases in these periods in absolute dollars
are primarily attributable to an increase in advertising and
distribution costs associated with our aggressive brand-building
strategy and increases in personnel associated with growth in
marketing and business development. We anticipate that sales and
marketing expenses in absolute dollars will increase in future
periods as we continue to pursue an aggressive brand-building
strategy through advertising and distribution, continue to expand
our international operations, and continue to build our global
direct sales organization.
Technology development expenses increased 50% to $2.1 million in
1999, as compared to $1.4 million in 1998. Technology and
development expenses decreased 44% from $2.5 million in 1997. The
increase in 1999 was primarily attributable to increases in the
number of engineers and consultants that develop and enhance our
services. The decrease in 1998 was primarily attributable to a
decrease in personnel primarily due to a refocusing of our
business. We believe a significant investment in technology is
required to remain competitive in the online information management
A-6
market. Accordingly, we expect to incur increased product
development expenditures in absolute dollars in future periods.
General and administrative expenses increased 140% to $2.4
million in 1999 as compared to $1.0 million in 1998. General and
administrative expenses decreased 17% in 1998 from $1.2 million in
1997. The increase in 1999 was primarily attributable to additional
finance, administrative and human resource personnel and higher
occupancy costs related to the move of our corporate headquarters
to San Francisco, California in the fourth quarter of 1999. The
decrease in 1998 was primarily attributable to a decrease in
personnel primarily due to a refocusing of our business. We believe
that the absolute dollar level of general and administrative
expenses will increase in future periods, as a result of an
increase in personnel to support expanding operations, incur
additional costs related to the growth of our business and assume
the reporting requirements of a public company.
Other expense increased 283% to $2.0 million in 1999 as compared
to $522,000 in 1998. Other expense increased 617% in 1998 from
other income of $101,000 in 1997. The increase in other expense in
1999 was primarily the result of interest charges from warrants
issued in exchange for guarantees in connection with our bridge
financing in the fourth quarter of 1999. The increase in other
expense in 1998 was primarily due to additional bank and equipment
lease financings.
And with that, I will turn it back over to Chris. Chris. . . .
Visual 10: End of Presentation
Imagery: See Description of Artwork contained in this Registration Statement
for a description of the image located on the inside front cover of
the prospectus.
Script: (Christopher Logan): We hope that this presentation was helpful in
understanding the business model of Driveway and the strategy that
our management team intends to execute. We encourage you to refer
back to the prospectus for additional support and disclosure as well
as to take a look at the "Risk Factors" in detail. Again, thank you
for your interest in Driveway.
A-7
[ARTWORK]
[ARTWORK]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with this offering
areas follows. All amounts are estimates other than the SEC registration fee
and the NASD filing fees.
Securities and Exchange Commission Registration Fee................. $
National Association of Securities Dealers filing fee...............
Nasdaq National Market listing fee.................................. *
Printing fees....................................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue sky fees and expenses.......................................... *
Transfer agent and registrar fees................................... *
Miscellaneous fees.................................................. *
-------
Total............................................................. $*
=======
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities including reimbursement for expenses
incurred arising under the Securities Act of 1933, as amended. Article VIII of
our Amended and Restated Certificate of Incorporation, which will be effective
upon the completion of this offering, and Article XI of our Amended and
Restated Bylaws provide for indemnification of our directors, officers,
employees and other agents to the maximum extent permitted by Delaware law. The
Underwriting Agreement (Exhibit 1.01) also provides for cross-indemnification
among Driveway and the Underwriters with respect to certain matters, including
matters arising under the Securities Act of 1933, as amended.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions involving sales of the
Registrant's securities that were not registered under the Securities Act in
the three years preceding the filing of this registration statement. Prior to
our reincorporation as a Delaware corporation in 1998, we had been operating as
a corporation organized under the laws of Washington.
1. On December 31, 1997, we issued an aggregate of 66,668 shares of Series II
preferred stock to 5 investors for an aggregate consideration of $2,000,000.
These shares of Series II preferred stock were converted into 6,667 shares
of common stock on October 20, 1998.
2. On June 11, 1998, we issued two convertible promissory notes in an aggregate
principal amount of $600,000 to two investors. The notes were cancelled and
converted into 3,000,000 shares of Series A Preferred Stock on October 26,
1998.
3. On June 16, 1998, we issued one convertible promissory note in the principal
amount of $75,000 to investor. The note was cancelled and converted into
375,000 shares of Series A Preferred Stock on October 26, 1998
II-1
4. On June 24, 1998, we issued one convertible promissory note in the
principal amount of $100,000 to one investor. The note was cancelled and
converted into 500,000 shares of Series A Preferred Stock on October 26,
1998.
5. On August 13, 1998, we issued one convertible promissory note in the
principal amount of $500,000 to one investor. The note was cancelled and
converted into 2,500,000 shares of Series A Preferred Stock on October 26,
1998.
6. On September 22, 1998, we issued one convertible promissory note in the
principal amount of $100,000 to one investor. The note was cancelled and
converted into 500,000 shares of Series A Preferred Stock on October 26,
1998.
7. On September 29, 1998, we issued one convertible promissory note in the
principal amount of $100,000 to one investor. The note was cancelled and
converted into 500,000 shares of Series A Preferred Stock on October 26,
1998.
8. On October 13, 1998, we issued one convertible promissory note in the
principal amount of $100,000 to one investor. The note was cancelled and
converted into 500,000 shares of Series A Preferred Stock on October 26,
1998.
9. On October 15, 1998, we issued one convertible promissory note in the
principal amount of $100,000 to one investor. The note was cancelled and
converted into 500,000 shares of Series A Preferred Stock on October 26,
1998.
10. On October 26, 1998, we issued an aggregate of 1,625,000 shares of Series A
Preferred Stock to five investors for an aggregate consideration of
$325,000.
11. On November 20, 1998, we issued convertible promissory notes in an
aggregate principal amount of $1,000,000 to two investors. The notes were
cancelled and converted into 1,000,000
12. On January 29, 1999, we issued convertible promissory notes in an aggregate
principal amount of $1,500,000 to two investors. The notes were cancelled
and converted into 1,500,000 shares of Series B Preferred Stock on May 27,
1999.
13. On May 5, 1999, we issued one convertible promissory note in the principal
amount of $500,000 to one investor. The note was cancelled and converted
into 500,000 shares of Series B Preferred Stock on May 27, 1999.
14. On May 20, 1999, we issued an aggregate of 2,495,533 shares of common stock
to a founder and to a consultant for an aggregate consideration of
$249,533.
15. On May 17, 1999, we issued one warrant to purchase up to 81,250 shares of
Series A Preferred Stock to one investor, at an exercise price of $1.00 per
share.
16. On May 27, 1999, we issued an aggregate of 7,444,770 shares of Series B
Preferred Stock to fifteen investors for an aggregate consideration of
$7,444,770.
17. On July 30, 1999, we issued aggregate of 1,064,286 shares of common stock
to two founders for an aggregate consideration of $149,000.
18. On August 25, 1999, we issued two warrants to purchase up to 54,000 shares
of Series B Preferred Stock to two investors, at an exercise price of $1.00
per share.
19. On August 27, 1999, we issued an aggregate of 1,100,000 shares of common
stock to six founders for an aggregate consideration of $155,400.
II-2
20. On September 14, 1999, we issued an aggregate of 318,718 shares of common
stock to one founder for consideration of $79,679.50.
21. On November 3, 1999, we issued 12 warrants to purchase an aggregate of up
to 600,000 shares of Series B Preferred Stock to two investors at an
exercise price of $1.00 per share.
22. On December 3, 1999, we issued one warrant to purchase up to 5,000 shares
of Series C Preferred Stock to one investor, at an exercise price of $4.01
per share.
23. On December 30, 1999, we issued one warrant to purchase up to 94,780 shares
of Series C Preferred Stock to one investor, at an exercise price of $4.01
per share.
24. On December 30, 1999, we issued an aggregate of 7,477,562 shares of Series
C Preferred Stock to 37 investors for an aggregate consideration of
$29,985,023.62.
25. On January 8, 2000, we issued an aggregate of 3,322,945 shares of Series C
Preferred Stock to 10 investors for an aggregate consideration of
$13,325,009.45. E*OFFERING Corporation, an underwriter of this offering,
was issued a warrant to purchase 94,780 shares of Series C Preferred Stock
at an exercise price of $4.01 per share.
26. On March 10, 2000, we issued an aggregate of 1,666,666 shares of Series D
Preferred Stock to 2 investors for an aggregate consideration of
$9,999,996.000.
The issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering,
or, in the case of options to purchase common stock, Rule 701 of the Securities
Act. The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
II-3
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed herewith:
Exhibit No Description
---------- -----------
1.01* --Form of Underwriting Agreement.
1.02 --Form of Lock-Up Agreement.
3.01 --Certificate of Incorporation, as amended to date.
3.02 --Form of Amended and Restated Certificate of Incorporation to be
filed upon the completion of this offering.
3.03 --Bylaws.
3.04 --Form of Bylaws to be adopted following the completion of this
offering.
4.01* --Form of Common Stock Certificate.
5.01* --Opinion of Perkins Coie LLP regarding legality of securities
being issued.
10.01 --Company's 1997 Stock Option Plan, as amended.
10.02 --Form of Notice of Option Grant and Stock Option Agreement.
10.03* --Form of 2000 Employee Stock Purchase Plan.
10.04* --Form of 2000 Stock Incentive Plan.
10.05* --Stock Option Grant Program for Non-employee Directors.
10.06 --Notice of Stock Option Grant to Christopher S. Logan dated
July 30, 1999.
10.07 --Notice of Stock Option Grant to Michael Vanneman dated
February 2, 2000.
10.08* --Notice of Stock Option Grant to George R. Garrick dated March 13,
2000.
10.09* --Notice of Stock Option Grant to Philip S. Constantinou dated
March 13, 2000.
10.10+ --Stock Subscription and Repurchase Agreement, with attached
Promissory Note and Pledge Agreement to Promissory Note, executed
by Christopher S. Logan in favor of the Registrant dated
September 30, 1999.
10.11+ --Stock Subscription and Repurchase Agreement, with attached
Promissory Note and Pledge Agreement to Promissory Note, executed
by Kent Jarvi in favor of the Registrant dated October 10, 1999.
10.12+* --Stock Subscription and Repurchase Agreement, with attached
Promissory Note and Pledge Agreement to Promissory Note, executed
by Michael Zukerman in favor of the Registrant dated September
30, 1999.
10.13+ --Stock Subscription and Repurchase Agreement, with attached
Promissory Note and Pledge Agreement to Promissory Note, executed
by Larry Barels in favor of the Registrant dated May 21, 1999.
10.14+* --Stock Subscription and Repurchase Agreement, with attached
Promissory Note and Pledge Agreement to Promissory Note, executed
by Philip Constantinou in favor of the Registrant dated August
17, 1999.
10.15 --Warrant to purchase common stock issued to Comdisco, Inc. dated
as of September 1, 1995.
10.16 --Warrant to purchase Series I Preferred Stock issued to Brentwood
Associates VII, L.P. dated December 20, 1996.
10.17 --Warrant to purchase Series B Preferred Stock issued to Phoenix
Leasing Incorporated dated August 25, 1999.
10.18 --Warrant to purchase Series B Preferred Stock issued to Robert
Kingsbrook dated August 25, 1999.
10.19 --Warrant to purchase common stock issued to Preston, Gates and
Ellis, a general partnership including a professional service
corporation, dated December 13, 1994.
10.20 --Series A-1 Preferred Stock Purchase Agreement dated October 29,
1998.
10.21 --Series B Preferred Stock Purchase Agreement dated May 17, 1999.
10.22 --Series C Preferred Stock Purchase Agreement dated December 30,
1999.
10.23* --Addendum to Series C Preferred Stock Purchase Agreement dated
January 8, 2000.
10.24 --Series D Preferred Stock Purchase Agreement dated March 10, 2000.
II-4
Exhibit No Description
---------- -----------
10.25 --Fifth Amended and Restated Investor's Rights Agreement dated
March 10, 2000.
10.26 --Form of Indemnification Agreement between the Registrant and each
of its directors and officers.
10.27 --Form of Proprietary Information and Inventions Assignment
Agreement.
10.28+ --Employment Agreement between the Registrant and Christopher S.
Logan dated May 28, 1999.
10.29+ --Employment Agreement between the Registrant and Kent Jarvi dated
August 13, 1999.
10.30+ --Employment Agreement between the Registrant and Michael Zukerman
dated June 14, 1999.
10.31+ --Employment Agreement between the Registrant and Michael Vanneman
dated January 30, 2000.
10.32+ --Employment Agreement between the Registrant and Larry Jones dated
December 20, 2000.
10.33+* --Managed Storage Services Agreement between the Registrant and
Storage Technology Corporation dated August 25, 1998.
10.34+* --Managed Storage Services Agreement between the Registrant and
Storage Technology Corporation dated September 29, 1998.
10.35+* --Agreement between the Registrant and Level 3 Communications, LLC
dated .
10.36+* --Exodus Communications, Inc. Internet Data Center Services Order
Form dated February 25, 1997.
10.37+ --Supply Agreement between the Registrant and EMC Corporation dated
March 9, 2000.
10.38+ --Lease Agreement between the Registrant and Union Square Limited
Partnership dated January 27, 1998.
10.39+ --Lease Agreement between the Registrant and Bryant Street
Associates dated November 29, 1999.
10.40+* --Sublease Agreement between the Registrant and the Kenwood Group
dated May 26, 1999.
12.01* --Statement regarding computation of ratios.
23.01 --Consent of Ernst and Young LLP Independent Auditors.
23.02 --Consent of Perkins Coie LLP (included in Exhibit 5.01).
24.01 --Power of Attorney (see page II-7 of the Registration Statement).
27.01 --Financial Data Schedule.
- --------
* To be filed by amendment.
+ Confidential treatment requested.
(b) Financial Statement Schedules
No financial statement schedules are provided, because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the Delaware General Corporation Law, the
Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection
II-5
with the securities being registered hereunder, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933, as amended, shall be deemed to be
part of this Registration Statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Francisco, State of California, on this
14th day of March, 2000.
DRIVEWAY CORPORATION
/s/ Christopher S. Logan
By: _________________________________
Christopher S. Logan
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Christopher S. Logan and Kent Jarvi, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto and all 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 requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Christopher S. Logan President, Chief Executive and March 14, 2000
______________________________________ member of the Board of Directors
Christopher S. Logan
/s/ Kent Jarvi Chief Financial Officer March 14, 2000
______________________________________
Kent Jarvi
/s/ Larry Barels Director March 14, 2000
______________________________________
Larry Barels
Director
______________________________________
George R. Garrick
II-7
Signature Title Date
--------- ----- ----
/s/ Gary E. Gigot Director March 14, 2000
______________________________________
Gary E. Gigot
/s/ John A. Hawkins Director March 14, 2000
______________________________________
John A. Hawkins
/s/ Alan E. Salzman Director March 14, 2000
______________________________________
Alan E. Salzman
/s/ Shahan D. Soghikian Director March 14, 2000
______________________________________
Shahan D. Soghikian
II-8