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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
COMMISSION FILE NUMBER 000-30135
VALUECLICK, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 77-0495335
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4360 Park Terrace Drive, Suite 100,
Westlake Village, California 91361
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 575-4500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.001 par value The Nasdaq National Market
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of December 31, 2000 the approximate aggregate market value of
voting stock held by non-affiliates of the registrant was $166,493,000 (based
upon the closing price for shares of the Registrant's Common Stock as reported
by The National Market System of the National Association of Securities Dealers
Automated Quotation System on that date). Shares of Common Stock held by each
officer, director, and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of December 31, 2000, there were approximately 33,703,000 shares of
Common Stock outstanding.
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VALUECLICK, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I...........................................................................................................1
ITEM 1. BUSINESS.................................................................................1
ITEM 2. PROPERTIES..............................................................................20
ITEM 3. LEGAL PROCEEDINGS.......................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................20
PART II.........................................................................................................21
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................21
ITEM 6. SELECTED FINANCIAL DATA.................................................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...........................................................................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................................................59
PART III........................................................................................................60
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................60
ITEM 11. EXECUTIVE COMPENSATION..................................................................63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................63
PART IV.........................................................................................................64
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................64
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING INFORMATION INCORPORATED HEREIN BY
REFERENCE, CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE STATEMENTS RELATE TO EXPECTATIONS CONCERNING
MATTERS THAT ARE NOT HISTORICAL FACTS. WORDS SUCH AS "PROJECTS," "BELIEVES,"
"ANTICIPATES," "WILL," "ESTIMATE," "PLANS," "EXPECTS," "INTENDS," AND SIMILAR
WORDS AND EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
ALTHOUGH WE BELIEVE THAT SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE
CANNOT ASSURE YOU THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT
LANGUAGE REGARDING FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH EXPECTATIONS ARE DISCLOSED IN THIS REPORT, INCLUDING
WITHOUT LIMITATION UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 9 OF
THIS REPORT, AND IN OUR REGISTRATION STATEMENT ON FORM S-1 (NO. 333-88765)
DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC") ON MARCH
30, 2000. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO VALUECLICK, INC. ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH LANGUAGE. WE DO NOT UNDERTAKE
ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
PART I.
ITEM 1. BUSINESS
ValueClick, Inc. ("ValueClick" or the "Company") is a leading provider
of performance-based Internet advertising solutions. For marketers seeking
measurable results, we strive to provide the highest return on their advertising
investment through a combination of performance-based pricing, advanced
targeting capabilities, rigorous network quality control and an integrated
product line. Specifically, we provide online advertisers and publishers of Web
sites advertising models known as cost-per-click ("CPC"), cost-per-action
("CPA") and cost-per-lead ("CPL"), in which an advertiser only pays us, and we
in turn only pay a publisher of a Web site, when an Internet user clicks on an
advertiser's banner advertisement or performs a specific action, such as a
software download, an online registration or other transactions.
As one of the largest aggregators of advertising on small- to medium
sized Web sites, we believe that we provide advertisers a cost-effective
solution for purchasing advertising space from thousands of Web publishers
through a single source. Our advertising network, which currently consists of
over 30,000 Web sites worldwide and reaches approximately 36% of U.S.-based
Internet users each month, grew approximately 183% during 2000. In order to join
our network, member Web sites must satisfy our strict quality standards for
content and traffic. In 2000, we served in excess of 42 billion Web
advertisements and delivered over 138 million visitors to advertisers' Web
sites.
THE VALUECLICK SOLUTION
As the results of Internet advertising are scrutinized more and more,
we believe advertisers are progressively seeking performance-based models, such
as CPC, CPA and CPL. These models are intended to reduce the risk of advertising
by only charging for a specific outcome, with the objective of maximizing the
number of responses per advertising dollar. Responses can include an electronic
reply by the Internet user, user registration and actual e-commerce
transactions. Performance-based solutions also encourage consumers to respond
immediately to advertising and interact directly with the advertiser in
real-time.
We offer a suite of CPC, CPA and CPL advertising products to address
the growing demand for cost-effective, performance-based advertising
solutions. Through our core CPC business we offer advertisers an alternative
to the traditional cost-per-thousand-impressions model, known as CPM, in
which advertisers are charged for every impression delivered, regardless of
whether the user responds to the advertisement or not. Instead, our
performance-based CPC model only charges advertisers when an
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Internet user clicks on the advertisers' banner ad and is redirected to their
Web site, thereby reducing the response risk for the advertiser. In December
2000, we added to our CPC business line by completing the acquisition of
ClickAgents.com, Inc., which brought approximately 7,800 new publishers and
200 new advertisers to our network.
With the acquisition of Bach Systems, Inc., dba onResponse.com,
("Bach Systems"), completed in November of 2000, we added cost-per-action
advertising services to our product line. Bach Systems develops customized
cost-per-action and cost-per-lead campaigns on behalf of advertising and
direct marketing clients. These campaigns are tailored to generate the
desired end result for the advertiser, whether that be a registration,
download or purchase, under a pricing structure where the advertiser only
pays for specific results.
In January 2001, we further augmented our performance-based services by
completing the acquisition of Z Media, Inc., a leading co-registration company.
Co-registration is the process of creating lists of registered subscribers who
have opted-in to receive e-mail on topics of interest. These highly-targeted
registered names are then offered to advertisers and direct marketers on a
cost-per-lead basis.
These additions to our product line allow us to offer an integrated
suite of performance-based products for our clients and address the growing
need for solutions that maximize the return on advertising expenditures.
NETWORK OF WEB SITES
In order to fulfill our clients' CPC, CPL and CPA advertising
campaigns, we have become one of the largest aggregators of advertising on
small- to medium sized Web sites. We have developed highly automated systems and
processes which make it easy for Web site publishers to join the ValueClick
network. We have also developed an effective publisher referral program that
facilitates growth and retention of Web publishers. By aggregating this
underutilized inventory of advertising space, we have developed a low-cost
solution for advertisers who want to access the visitors of these Web sites. As
of December 2000, our network grew to approximately 30,000 Web sites. In 2000,
we delivered over 42 billion banner advertisements and registered over 138
million clicks.
We believe the effectiveness of our advertising solution is dependent
on the quality of the Web sites in our network. We currently reject a high
percentage of the Web sites that apply to our network for failure to meet our
quality standards. This includes inappropriate content, insufficient traffic,
illegal activity and fraudulent clicking activity. We enforce our quality
standards using manual auditing and automated processes that continually monitor
and review Web site content. In addition, we eliminate Web sites that encourage
users to click on banner advertisements for reasons other than an interest in
our advertisers' message.
We believe our solutions offer several benefits to both advertisers and
Web publishers. The principal benefits of our solutions to advertisers include:
- CPC, CPA AND CPL PROVIDE ADVERTISERS WITH PERFORMANCE-BASED MODELS.
Using CPC, CPA or CPL, Internet advertisers only pay if Web users click
on their advertisements or perform a defined action, not each time an
advertisement is displayed. For Internet advertisers trying to attract
visitors who are actively looking to make a purchase or who want to
learn more about a product, CPC, CPA and CPL can be more efficient and
cost-effective choices than CPM for measuring and calculating return on
advertising investment.
- A LEADING AGGREGATOR OF SMALL- TO MEDIUM-SIZED WEB SITES. We are a
leading aggregator of small- to medium-sized Web sites, with over
30,000 Web sites currently in our network. This
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extensive network provides advertisers the opportunity to place large
media buys across a broad collection of sites as well as niche
targeting opportunities using our database of 15 categories that have
otherwise been difficult for advertisers to reach.
- RETURN ON INVESTMENT ANALYSIS. Our proprietary tracking management
software, eTraxTM, provides real-time marketing data regarding banner
effectiveness by anonymously tracking the consumer's activity after
they click through to our advertiser's Web site. This tool, which we
acquired with the purchase of StraightUp! in September 2000, provides
useful feedback to advertisers regarding banner ad success rates,
allowing them to maximize the effectiveness and return on investment of
their Internet marketing strategy.
The principal benefits of our solutions to Web publishers include:
- OUTSOURCED ADVERTISING SERVICES FOR PUBLISHERS OF SMALL- TO
MEDIUM-SIZED WEB SITES. Our solution provides small- to medium-sized
Web sites the technology for managing and delivering Internet
advertising. Our solution allows these sites to avoid the hardware,
software and personnel costs associated with building and maintaining
their own ad serving technology and sales force. In addition, small- to
medium-sized Web sites on the ValueClick network benefit from our
experienced management team, our sales and marketing organization and
access to advertisers.
- ADVERTISING REVENUE OPPORTUNITIES FOR PUBLISHERS OF SMALL- TO
MEDIUM-SIZED WEB SITES. Advertisers paying CPM rates often impose
traffic requirements that exclude small- to medium-sized Web sites. By
aggregating those sites, and providing the built-in performance
tracking of CPC, CPA and CPL, we offer a revenue opportunity for
publishers of small- to medium-sized Web sites that may not otherwise
be available. This has allowed us to develop a network of small- to
medium-sized Web sites which meet our quality standards. In addition,
publishers can earn referral commissions for introducing ValueClick to
other publishers whose sites are accepted into our network.
- INCREMENTAL ADVERTISING REVENUE FROM UNSOLD INVENTORY FOR PUBLISHERS
OF HIGH-TRAFFIC WEB SITES. We offer publishers of high-traffic Web
sites a stream of incremental revenue by purchasing ad space from them
that normally would remain unsold under the CPM model. Web publishers
that attract CPM rates rarely sell their entire stock of ad inventory.
By using the ValueClick solution, Web publishers have an opportunity to
sell a significant portion of their unsold inventory to
response-oriented advertisers under the ValueClick brand name. This
protects the value of the Web site's brand name and therefore does not
jeopardize the Web site's published CPM rate card structure.
PRODUCTS AND SERVICES
We develop our products and services to meet the changing needs of our
advertisers and Web publishers and we anticipate these offerings will continue
to evolve and expand. We offer the following products and services for
advertisers:
AD SERVING SOLUTIONS. Our proprietary system for ad serving and
reporting is provided to advertisers at no additional cost. Advertisers deliver
Internet banner advertisements to us in a form ready to be delivered on our
servers. Our proprietary software can determine how many banners are in
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circulation, which banners are appropriately targeted for the consumer, and
whether or not the Web publisher has excluded any particular banners from its
site. Our server then delivers the banner to the Web publisher's site to be
viewed by the user and adds one impression to both the advertiser's and
publisher's counter. If a user clicks on the banner to visit the advertiser's
Web site, our server registers one click to both the advertiser's and the
publisher's counter. If a user on our network clicks on the same advertisement
more than once in a six-hour period, the click is only counted once. This
feature more accurately counts the number of "unique" users clicking on the
advertiser's banner and also provides more accurate marketing data. This entire
process occurs within a matter of seconds.
DISTRIBUTION OF ADVERTISEMENTS ON A COMPREHENSIVE OR TARGETED BASIS. We
sell advertising on our network under two major categories: Comprehensive
Network or Targeted Categories. Our sales representatives work with advertisers
to select the appropriate product based on advertisers' requirements. The
following is a more detailed description of these two products:
COMPREHENSIVE NETWORK. Comprehensive Network offers advertising
placements across our entire network without specifically targeting individual
Web sites. As the lowest-cost option offered by us, it provides the greatest
overall reach for advertisers.
TARGETED CATEGORIES. Targeted Categories allows the advertiser to place
ads in one or more of 15 targeted categories within our network. The use of
these categories enables an advertiser or direct marketer to target a particular
audience. Currently we have the following 15 targeted categories grouped by type
of content:
Automotive Business & Finance Careers Consumer Technology E-Commerce & Portals
E-Commerce & Shopping Entertainment Family & Lifestyles Games Health & Fitness
MIS & Information News & Culture Sports & Recreation Travel Youth & Students
Technology
ROI MEASUREMENT. Our eTraxTM and eTrax EnterpriseTM systems
substantially enhance marketers' ability to understand the financial impact of
their online and offline efforts, allowing them to track gross response,
multiple conversion metrics, cost per action, and lifetime value of newly
acquired customers. The eTraxTM products provide Internet marketers with
effective tools for analyzing key campaign metrics such as visits,
registrations, downloads and sales, while also allowing them to track
longer-term activity such as retention, attrition and lifetime value. By
capturing this data across all media channels and translating it into meaningful
reports, the eTraxTM products allow advertisers to assess the impact of the
entire marketing mix. Overall, eTraxTM reporting helps advertisers dynamically
evaluate their ad budget and refine their current and future advertising
campaigns. These products significantly add to ValueClick's portfolio of
advanced technologies that provide performance-based accountability to
advertisers.
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ANTI-FRAUD SOLUTIONS. Since the launch of our network we have made it a
priority to detect and investigate any fraudulent clicking activity, which are
clicks intentionally made to inflate the number of clicks and generate
additional revenue for the host Web site, on our advertisers' banner ads. Our
system incorporates sophisticated algorithms that detect any Web site within our
network that is receiving an abnormal click pattern during any period with the
goal of protecting advertisers from fraudulent clicking activity and improving
the accuracy of information conveyed to our advertising clients. If fraudulent
clicking activity is detected, the Web site publisher is terminated from the
network and no payment is made for the fraudulent clicks.
We offer the following products and services for Web publishers:
REAL-TIME STATISTICAL REPORTING. Our proprietary Web-based tools for
Web publishers provide them with current, cumulative, historical and referral
statistical information. Information currently available includes the real-time
tabulation of the current day's click activity, relevant ratios, payment
information, and amounts due. Cumulative statistics show all-time impressions,
clicks and click ratios. Historical statistics highlight impressions and clicks
in both daily and weekly format and in either tabular or graphical format.
Referral statistics detail the amount owed the referring Web publisher.
STREAMLINED VALUECLICK NETWORK APPLICATION PROCESS. As part of our
strategy to simplify the advertising sales process for publishers of small- to
medium-sized Web sites, we allow Web publishers to join our network online.
After completing the application, the publisher receives an immediate response
indicating our receipt of the application, and our publisher service department
then reviews the application. Web sites are selected based on traffic and
quality standards and must contain an adequate number of pages. They are also
evaluated for design and content quality. We reject Web sites which contain
restricted content such as profanity, hate speech, pornography or any illegal
activity. Once approved to join the network, we provide the Web publisher with
software to install on each Web page where an advertisement will be placed. This
process provides the publisher with a simple, turnkey solution for entering our
advertising network.
PAYMENT MANAGEMENT. Our publisher payment policy reduces risks to Web
publishers of advertiser bad debts and late payment carrying costs. We pay our
network of publishers monthly regardless of whether an advertiser has paid us or
not. In contrast, most other major Web advertising networks pay their publishers
only upon collection from advertisers.
WEB SITE CATEGORIZATION CAPABILITY. Our categorization capability
enables Web publishers to maximize the value of their advertising inventory by
delivering more targeted banner advertisements for the advertiser. This
capability allows a publisher to categorize not only its entire Web site, but
also each page of its Web site.
ABILITY TO VETO COMPETING ADVERTISER CAMPAIGN. We provide Web
publishers with the tools to exclude any competing advertiser campaign on our
network from their site.
REFERRAL COMMISSION PROGRAM. We provide our Web publishers the
opportunity to earn commissions on clicks generated from Web sites of publishers
they introduce to our network through a referral. The referral program is highly
automated and a referring publisher can monitor the activity of all referred
sites online through our real-time reporting tools.
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INTERNATIONAL OPERATIONS
We currently have established operations in six foreign countries,
covering North and South America, Western Europe and Japan. All operations are
wholly-owned subsidiaries, with the exception of ValueClick Japan, in which we
have a majority ownership position.
ValueClick Japan commenced operations in November 1998. We currently
own a 52.6% interest in ValueClick Japan, which has 69 employees. In May 2000,
ValueClick Japan completed its initial public offering on the Tokyo Stock
Exchange for emerging growth companies. In August 1999, we commenced operations
in the European market with ValueClick Europe, a wholly-owned subsidiary of
ValueClick based in the United Kingdom. In 2000, we expanded in Europe by
opening wholly owned subsidiaries in Paris, France and Munich, Germany. Also in
2000, we continued to expand our international presence outside Europe by
opening wholly-owned subsidiaries in Toronto, Canada and Sao Paolo, Brazil.
Total employees in our wholly-owned international subsidiaries totaled 32 as of
December 31, 2000.
In addition, we continue to build Web publisher networks on a
country-by-country basis from our U.S. office. This network will provide an
operating base for establishing a local presence as each market develops and
provide for easier transition to local operations when appropriate local
partners are identified.
TECHNOLOGY PLATFORM
Our operating infrastructure, including our network of servers, has
been designed to provide maximum performance, reliability and the ability to
increase our capacity without increasing our costs.
Our proprietary ad serving applications reside on servers configured
with the FreeBSD operating system and our primary database servers reside on
servers configured with the Sun operating system. The applications are
developed primarily in Perl, a widely used software development language, and
are served on Apache servers. We maintain tolerance and performance
objectives for banner delivery response time from our network. To ensure that
these standards are met and to facilitate our maintenance procedures, we keep
standby hardware for each component at our data center locations. Our
internal maintenance group assures quick and complete resolution of hardware
concerns.
We currently serve advertisements from three third-party data center
facilities located in Los Angeles, California, Boca Raton, Florida and Tokyo,
Japan. Our U.S. locations also provide redundancy for each other. The entire
network is monitored both electronically and by system administrators and
escalation procedures are designed to resolve abnormalities quickly. All systems
are backed up daily and the data is stored off-site. We have agreements with
Digital Island and Verio to provide us with access to the Internet at our data
centers located in Los Angeles and Boca Raton, respectively.
SALES, MARKETING AND CUSTOMER SERVICE
We market our products and services primarily through direct marketing,
print advertising and online advertising throughout the year. We also market
them through the ValueClick properties' websites, trade show participation and
other media events. In addition, we actively pursue public relations programs to
promote our brand, products and services to potential network Web publishers and
advertisers, as well as to industry analysts.
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WEB PUBLISHERS
Our highly automated, online application process is supported by a team
of 33 network development and customer service professionals across all
ValueClick properties. Their responsibilities include screening and approving or
declining prospective Web publishers; monitoring network quality; maintaining
relationships; consulting with publishers on additional revenue opportunities;
and the trafficking and optimization of client advertising campaigns.
ADVERTISERS
We sell our products and services to online advertisers primarily
through our direct sales force, consisting of 75 sales persons across all
ValueClick properties. These employees are located at our headquarters in
Westlake Village, California, as well as sales offices in San Francisco,
California and New York, New York. Additionally, we now have account executives
in West Palm Beach, Florida and Redwood City and Fremont, California for
companies that we have acquired. We make extensive use of telemarketing and
e-marketing strategies. Each of our account executives assists the advertisers
he or she services, typically advertising, direct marketing and e-commerce
companies, with all aspects of media planning and design of their advertising
campaigns. These services include advertisement purchasing and placement,
assessment of results and optimization of performance.
COMPETITION
We face intense competition in the Internet advertising market. We
expect that this competition will continue to intensify in the future as a
result of industry consolidations and the continuing maturation of the industry.
We compete with a diverse and large pool of advertising, media and Internet
companies.
Our ability to compete depends upon several factors, including the
following:
- our ability to aggregate a large network of small- to medium-sized Web
sites efficiently,
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us,
- our customer service and support efforts,
- our sales and marketing efforts,
- the ease of use, performance, price and reliability of solutions
developed by us, and
- our ability to remain price competitive while maintaining our strong
gross margins.
Additional competitive factors include each competitor's reputation,
knowledge of the advertising market, financial controls, geographical coverage,
relationships with clients, technological capability and quality and breadth of
services. We expect that we will face additional competition from new entrants
into the market in the future.
Our principal competitors are other companies that provide
advertisers with performance-based Internet advertising solutions, such as
cost-per-click ("CPC"), cost-per-lead ("CPL"), and cost-per-action ("CPA").
We directly compete with a number of competitors in the CPC market segment,
such as Advertising.com. We also compete in the performance-based marketing
segment with CPL and CPA performance-based companies such as CyberAgents and
CommissionJunction. We also compete with other Internet advertising networks
that focus on the traditional CPM model, including DoubleClick, Engage and
24/7 Media. Unlike us, these companies primarily deal with publishers of
large Web sites and advertisers seeking increased brand recognition. These
companies have longer operating histories and greater name recognition than
we do. DoubleClick acquired a substantial percentage of our company in
February 2000 - see "Business--The DoubleClick Investment."
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Competition for advertising placements among current and future
suppliers of Internet navigational and informational services, high-traffic Web
sites and ISPs, as well as competition with other media for advertising
placements, could continue to result in significant price competition and
reductions in advertising revenues. In addition, as we continue to expand the
scope of our Web services, we may compete with a greater number of Web
publishers and other media companies across an increasing range of different Web
services, including in vertical markets where competitors may have advantages in
expertise, brand recognition and other areas. If existing or future competitors
develop or offer services that provide significant performance, price, creative
or other advantages over those offered by us, our business, result of operations
and financial condition could be negatively affected.
INTELLECTUAL PROPERTY RIGHTS
We currently rely on a combination of copyright and trademark laws,
trade secret protection, confidentiality and non-disclosure agreements and
contractual provisions with our employees and with third parties to establish
and protect our proprietary rights. We have registered the trademark
"ValueClick" in the United States, the European Union and Japan.
In February 2000, in connection with a strategic investment transaction
with DoubleClick, DoubleClick has agreed, as long as it owns or has the right to
acquire at least 5% of our capital stock, not to sue or threaten to sue us or
any of our customers, affiliates or licensees (1) for infringement of any claim
of DoubleClick's U.S. Patent No. 5,948,061 or (2) for infringement of any claim
of any U.S. patent or patent application, or foreign patent or patent
application, that is related to U.S. Patent No. 5,948,061 or that claims
priority from this patent or otherwise makes claims similar to those made in
this patent. DoubleClick's Patent No. 5,948,061 covers the process of using
linked advertising space and compiling statistics on individual users in order
to target advertisements over the Internet or computer networks. DoubleClick has
agreed that if it no longer owns at least 5% of our capital stock, it will in
good faith negotiate with us for a license to use its technology under
commercially reasonable terms. However, there can be no assurance that we will
be able to secure such a license. See "Business - The DoubleClick Investment"
below.
THE DOUBLECLICK INVESTMENT
On February 28, 2000, we completed a strategic investment transaction
with DoubleClick, a leading worldwide provider of Internet advertising solutions
for advertisers and Web publishers. The terms of this agreement involved an
investment by DoubleClick of approximately $95.8 million in ValueClick and
possible additional investments by DoubleClick in the future. DoubleClick's
common stock is quoted on the Nasdaq National Market under the symbol "DCLK."
Under the terms of the investment, DoubleClick acquired approximately 30% of our
fully diluted outstanding common stock and a 15-month warrant to acquire
additional shares of our common stock at $21.76 per share for an amount of
shares so that DoubleClick could own up to 45% of our fully diluted capital
stock.
ValueClick and certain of its principal stockholders have also agreed
to grant certain additional rights to DoubleClick, including an agreement to
elect designees of DoubleClick to our Board of Directors, a right of first offer
in connection with future sales of shares of our capital stock and a right of
first offer in the event of a sale of ValueClick. In addition, we agreed to
enter into a DART services agreement with DoubleClick, which enables us to use
DoubleClick's dynamic ad matching, targeting and delivery technology in our
business.
During May 2000, the we sold 165,000 shares of our DoubleClick common
stock for cash proceeds of $10.3 million. The sale of these shares resulted in a
realized non-cash loss of $9.0 million.
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In December 2000, we made an assessment that the decline in market
value of the remaining DoubleClick stock was other than temporary. Accordingly,
for the year ended December 31, 2000 we recorded a non-cash charge to operations
of $60.2 million representing the unrealized holding losses previously accounted
for as a separate component of stockholders' equity.
EMPLOYEES
As of December 31, 2000, we had 123 employees in the U.S., 69 employees
in Japan and 32 employees in our other international locations. None of these
employees are covered by collective bargaining agreements. Management believes
that our relations with our employees are good.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
SHARES OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT
THE ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING THOSE
RISKS SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" BELOW, MAY ALSO ADVERSELY IMPACT AND IMPAIR OUR
BUSINESS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF
OPERATIONS OR FINANCIAL CONDITION WOULD LIKELY SUFFER. IN SUCH CASE, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF THE
MONEY YOU PAID TO BUY OUR STOCK.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON THE CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT US AND OUR INDUSTRY.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THIS
SECTION AND ELSEWHERE IN THIS REPORT. WE DO NOT UNDERTAKE TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
IF BANNER ADVERTISING ON THE INTERNET LOSES ITS APPEAL TO DIRECT MARKETING
COMPANIES, OUR REVENUES COULD DECLINE.
We currently derive over 90% of our revenues by delivering banner
advertisements that generate click-throughs to our advertisers' Web sites. This
business model may not continue to be effective in the future for a number of
reasons, including the following:
- click rates have always been low and may decline as the number of
banner advertisements on the Web increases;
- Internet users can install "filter" software programs which allow
them to prevent banner advertisements from appearing on their
screens;
- banner advertisements are, by their nature, limited in content
relative to other media;
- direct marketing companies may be reluctant or slow to adopt banner
advertising that replaces, limits or competes with their existing
direct marketing efforts; and
- direct marketing companies may prefer other forms of Internet
advertising, including permission-based e-mail.
If the number of direct marketing companies who purchase banner clicks
from us does not continue to grow, we may experience difficulty in attracting
publishers, and our revenues could decline.
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IF OUR BUSINESS MODEL IS NOT ACCEPTED BY INTERNET ADVERTISERS OR WEB PUBLISHERS,
OUR REVENUES COULD DECLINE.
We conduct primarily all of our business on a cost-per-click ("CPC"),
cost-per-action ("CPA") or cost-per-lead ("CPL") pricing model. These business
models are relatively new and much less common than the cost-per-thousand
impressions or CPM pricing model, which many other Internet advertising
companies use. Our ability to generate significant revenue from advertisers will
depend, in part, on our ability to demonstrate the effectiveness of our pricing
models to advertisers, many of which may be more accustomed to the CPM pricing
model, and to Web publishers; and attract and retain advertisers and Web
publishers by differentiating our technology and services from those of our
competitors.
One component of our strategy is to enhance advertisers' ability to
measure their return on investment and track the performance and effectiveness
of their advertising campaigns. However, we have limited experience in
implementing our strategy. To date, few advertisers have taken advantage of the
most sophisticated tool we offer for tracking Internet users' activities after
they have reached advertisers' Web sites. We cannot assure you that our strategy
will succeed.
Intense competition among Web sites and Internet advertising services
has led to the proliferation of a number of alternative pricing models for
Internet advertising. These alternatives, and the likelihood that additional
pricing alternatives will be introduced, make it difficult for us to project the
levels of advertising revenue or the margins that we, or the Internet
advertising industry in general, will realize in the future. Moreover, an
increase in the amount of advertising on the Web may result in a decline in
click rates. Since we predominantly rely on a performance-based pricing model to
generate revenue, any decline in click rates may make our pricing models less
viable or less attractive solutions for Web publishers and advertisers.
OUR REVENUES COULD DECLINE IF WE FAIL TO EFFECTIVELY MANAGE OUR EXISTING
ADVERTISING SPACE AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW
ADVERTISING SPACE.
Our success depends in part on our ability to effectively manage our
existing advertising space. The Web sites that list their unsold advertising
space with us are not bound by long-term contracts that ensure us a consistent
supply of advertising space, which we refer to as inventory. In addition, Web
sites can change the amount of inventory they make available to us at any time.
If a Web site publisher decides not to make advertising space from its Web sites
available to us, we may not be able to replace this advertising space with
advertising space from other Web sites that have comparable traffic patterns and
user demographics quickly enough to fulfill our advertisers' requests. This
could result in lost revenues. We expect that our customers' requirements will
become more sophisticated as the Web matures as an advertising medium. If we
fail to manage our existing advertising space effectively in order to meet our
customers' changing requirements, our revenues could decline.
Our growth depends on our ability to expand our advertising inventory.
In order to attract new customers, we must maintain a consistent supply of
attractive advertising space. We intend to expand our advertising inventory by
selectively adding to our network new Web sites that offer attractive
demographics, innovative and quality content and growing Web user traffic. Our
ability to attract new Web sites to the ValueClick network and to retain Web
sites currently in our network will depend on various factors, some of which are
beyond our control. These factors include our ability to introduce new and
innovative product lines and services, our ability to efficiently manage our
existing advertising inventory, our pricing policies and the cost-efficiency to
Web publishers of outsourcing their advertising sales. In addition, the number
of competing Internet advertising networks that purchase advertising
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inventory from small- to medium-sized Web sites continues to increase. We cannot
assure you that the size of our inventory will increase or even remain constant
in the future.
WE MAY FACE INTELLECTUAL PROPERTY DISPUTES THAT ARE COSTLY OR COULD HINDER OR
PREVENT OUR ABILITY TO DELIVER ADVERTISEMENTS OVER THE INTERNET.
We may be subject to disputes and legal actions alleging intellectual
property infringement, unfair competition or similar claims against us. One of
our principal competitors, DoubleClick, was awarded a patent on certain aspects
of ad-delivery technology, including the ability to target the delivery of ads
over a network such as the Internet and the ability to compile statistics on
individual Web users and the use of those statistics to target ads. DoubleClick
has previously brought lawsuits against other companies in our industry on the
basis of this patent. We have, however, entered into an agreement with
DoubleClick to use its DART technology, and DoubleClick has agreed to not sue or
threaten to sue us or any of our customers, affiliates or licensees, in
connection with its patent, so long as DoubleClick or any of its subsidiaries
hold at least five percent of our capital stock, including options to purchase
common stock, on a fully diluted basis. Other companies may apply for or be
awarded patents or have other intellectual property rights covering aspects of
our technology or business. In 2000, 24/7 Media was awarded a patent relating to
its technology for delivering content and advertising information over the
Internet. Our failure to prevail in any litigation with any party asserting
intellectual property infringement could result in substantial monetary damages,
including: damages for past infringement, which could be tripled if a court
determines that the infringement was willful; an injunction requiring us to stop
offering our services in their current form; the need to redesign our systems;
or the need to pay significant license fees in order to use technology belonging
to third parties.
IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES, WE COULD LOSE
CUSTOMERS OR ADVERTISING INVENTORY.
The Internet advertising market is characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing customer demands. The introduction of new products
and services embodying new technologies and the emergence of new industry
standards and practices can render existing products and services obsolete and
unmarketable or require unanticipated investments in research and development.
Our success will depend on our ability to adapt to rapidly changing
technologies, to enhance existing solutions and to develop and introduce a
variety of new solutions to address our customers' changing demands.
For example, advertisers are increasingly requiring Internet
advertising networks to have the ability to deliver advertisements utilizing new
formats that surpass stationary images and incorporate rich media, such as video
and audio, interactivity, and more precise consumer targeting techniques. Our
system does not support some types of advertising formats, such as video and
audio, and many of the Web sites in our network have not implemented systems to
allow rich media advertisements. In addition, an increase in the bandwidth of
Internet access resulting in faster data delivery may provide new products and
services that will take advantage of this expansion in delivery capability. If
we fail to adapt successfully to developments such as these, we could lose
customers or advertising inventory.
We purchase most of the software we use in our business from third
parties. We intend to continue to acquire technology necessary for us to conduct
our business from third parties. We cannot assure you that, in the future, these
technologies will be available on commercially reasonable terms, or at all.
11
We may also experience difficulties that could delay or prevent the
successful design, development, introduction or marketing of new solutions. Any
new solution or enhancement we develop will need to meet the requirements of our
current and prospective customers and may not achieve significant market
acceptance. If we fail to keep pace with technological developments and the
introduction of new industry and technology standards on a cost-effective basis,
our expenses could increase, and we could lose customers or advertising
inventory.
IF THE USE OF THE TECHNOLOGY WE CURRENTLY USE TO TARGET THE DELIVERY OF BANNERS
AND TO PREVENT FRAUD ON OUR NETWORK IS RESTRICTED OR BECOMES SUBJECT TO
REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERS OR
ADVERTISING INVENTORY.
Web sites typically place small files of information, commonly known as
"cookies," on an Internet user's hard drive, generally without the user's
knowledge or consent. Cookie information is passed to the Web site through the
Internet user's browser software. We currently use cookies to track an Internet
user's movement through the advertiser's Web site and to monitor and prevent
potentially fraudulent activity on our network. We do not share, collect or sell
any other information concerning Internet users. Most currently available
Internet browsers allow Internet users to modify their browser settings to
prevent cookies from being stored on their hard drive, and some users currently
do so. Internet users can also delete cookies from their hard drives at any
time.
Some Internet commentators and privacy advocates have suggested
limiting or eliminating the use of cookies, and legislation has been introduced
in some jurisdictions to regulate the use of cookie technology. The
effectiveness of our technology could be limited by any reduction or limitation
in the use of cookies. If the use or effectiveness of cookies is limited, we
would have to switch to other technologies in order to gather demographic and
behavioral information. While such technologies currently exist, they are
substantially less effective than cookies. We would also have to develop or
acquire other technology to prevent fraud. Replacement of cookies could require
significant reengineering time and resources, might not be completed in time to
avoid losing customers or advertising inventory, and might not be commercially
feasible. Our use of cookie technology or any other technologies designed to
collect Internet usage information may subject us to litigation or
investigations in the future. Any litigation or government action against us
could be costly and time-consuming, could require us to change our business
practices and could divert management's attention.
CHANGES IN LAWS AND STANDARDS RELATING TO DATA COLLECTION AND USE PRACTICES AND
THE PRIVACY OF INTERNET USERS AND OTHER INDIVIDUALS COULD HARM OUR BUSINESS.
Recently, growing public concern regarding privacy and the collection,
distribution and use of information about Internet users has led to increased
federal and state scrutiny and legislative and regulatory activity concerning
data collection and use practices. Various federal and state governments and
agencies have recently proposed limitations on the collection and use of
information regarding Internet users. In October 1998, the European Union
adopted a directive that limits the collection and use of information regarding
Internet users in Europe. In addition to government activity, a number of
industry and privacy advocacy groups are considering various new, additional or
different self-regulatory standards. This focus, and any legislation,
regulations or standards promulgated, may impact us adversely.
Although our compliance with applicable federal and state laws,
regulations and industry guidelines has not had a material adverse effect on us,
governments, trade associations and industry self-regulatory groups may enact
more burdensome laws, regulations and guidelines, including consumer
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privacy laws, affecting us and our clients. Since many of the proposed laws or
regulations are just being developed, and a consensus on privacy and data usage
has not been reached, we cannot yet determine the impact these regulations may
have on our business. However, these regulations and guidelines could materially
and adversely affect our business.
CHANGES IN GOVERNMENT REGULATION COULD DECREASE DEMAND FOR OUR SERVICES AND
INCREASE OUR COSTS OF DOING BUSINESS.
Laws and regulations that apply to Internet communications, commerce
and advertising are becoming more prevalent. These regulations could affect the
costs of communicating on the Web and adversely affect the demand for our
advertising solutions or otherwise harm our business, results of operations and
financial condition. Recently, the United States Congress enacted Internet
legislation regarding children's privacy, copyrights and taxation. Other laws
and regulations may be adopted, and may address issues such as user privacy,
pricing, acceptable content, taxation and quality of products and services. This
legislation could hinder growth in the use of the Web generally and decrease the
acceptance of the Web as a communications, commercial and advertising medium. In
addition, the growing use of the Web has burdened the existing
telecommunications infrastructure and has, at times, caused interruptions in
telephone service.
Legislation has been proposed recently to prohibit the sending of
unsolicited commercial e-mail. We have a consent-based email delivery business
that we believe should not, as a matter of policy, be affected by this kind of
legislation. However, it is possible that legislation will be passed that
requires us to change our current practices, or subject us to increased
possibility of legal liability for our practices.
Due to the global nature of the Web, it is possible that, although our
transmissions currently originate in California, Florida and Japan, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. 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, including those governing intellectual property, privacy, libel
and taxation, apply to the Internet and Internet advertising. In addition, the
growth and development of the market for Internet 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. Our business, results of operations and financial condition could be
materially and adversely affected by the adoption or modification of laws or
regulations relating to the Internet, or the application of existing laws to the
Internet or Internet-based advertising.
WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY IF WE FAIL TO MEASURE CLICKS ON
BANNER ADVERTISEMENTS IN A MANNER THAT IS ACCEPTABLE TO OUR ADVERTISERS AND WEB
PUBLISHERS.
We earn advertising revenues and make payments to Web publishers based
on the number of clicks on advertisements delivered on our network. Advertisers'
and Web publishers' willingness to use our services and join our network will
depend on the extent to which they perceive our measurements of clicks to be
accurate and reliable. Advertisers and Web publishers often maintain their own
technologies and methodologies for counting clicks, and from time to time we
have had to resolve differences between our measurements and theirs. Any
significant dispute over the proper measurement of clicks or other user
responses to advertisements could cause us to lose customers or advertising
inventory.
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IF WE FAIL TO COMPETE EFFECTIVELY AGAINST OTHER INTERNET ADVERTISING COMPANIES,
WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY AND OUR REVENUES COULD DECLINE.
The market for Internet advertising and related services is intensely
competitive. We expect this competition to continue to increase because there
are no significant barriers to entry. Increased competition may result in price
reductions for advertising space, reduced margins and loss of our market share.
Our principal competitors are other companies that provide
advertisers with performance-based Internet advertising solutions, such as
cost-per-click, or CPC, cost-per-lead, or CPL and cost-per-action, or CPA. We
directly compete with a number of competitors in the CPC market segment, such
as Advertising.com and Datacomm. We also compete in the performance-based
marketing segment with CPL and CPA performance-based companies such as
DirectLeads and CommissionJunction. We also compete with other Internet
advertising networks that focus on the traditional CPM model, including
DoubleClick, Engage and 24/7 Media. Unlike us, these companies primarily deal
with publishers of large Web sites and advertisers seeking increased brand
recognition. These companies have longer operating histories, greater name
recognition and have greater financial and marketing resources than we do.
DoubleClick is a principal stockholder of ValueClick.
Competition for advertising placements among current and future
suppliers of Internet navigational and informational services, high-traffic Web
sites and ISPs, as well as competition with other media for advertising
placements, could result in significant price competition and reductions in
advertising revenues.
In addition, as we expand the scope of our Web services, we may compete
with a greater number of Web publishers and other media companies across an
increasing range of different Web services, including in vertical markets where
competitors may have advantages in expertise, brand recognition and other areas.
If existing or future competitors develop or offer services that provide
significant performance, price, creative or other advantages over those offered
by us, our business, result of operations and financial condition would be
negatively affected.
We also compete with traditional advertising media, such as direct
mail, television, radio, cable and print, for a share of advertisers' total
advertising budgets.
Many of our current and potential competitors enjoy competitive
advantages over us, such as longer operating histories, greater name
recognition, larger customer bases, greater access to advertising space on
high-traffic Web sites, and significantly greater financial, technical and
marketing resources. We may not be able to compete successfully. If we fail to
compete successfully, we could lose customers or advertising inventory and our
revenues could decline.
OUR REVENUE GROWTH DEPENDS ON THE CONTINUED GROWTH OF INTERNET USAGE AND
INFRASTRUCTURE.
Our business and financial results depend on continued growth in the
use of the Internet. Internet usage may be inhibited for a number of reasons,
such as: inadequate network infrastructure; security concerns; inconsistent
quality of service; and unavailability of cost-effective, high-speed service.
If Internet usage grows, its infrastructure may not be able to support
the demands placed on it and its performance and reliability may decline. In
addition, Web sites have experienced interruptions in their service as a result
of outages and other delays occurring throughout the Internet network
infrastructure,
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and as a result of sabotage, such as the recent electronic attacks designed to
interrupt service on many Web sites. The Internet could lose its viability as a
commercial medium due to delays in the development or adoption of new technology
required to accommodate increased levels of Internet activity. If use of the
Internet does not continue to grow, or if the Internet infrastructure does not
effectively support its growth, our revenues could be materially and adversely
affected.
OUR LONG-TERM SUCCESS MAY DEPEND ON THE DEVELOPMENT OF E-COMMERCE BECAUSE MANY
OF OUR CUSTOMERS' ADVERTISEMENTS RELATE TO ONLINE PURCHASING.
Because many of our customers' advertisements encourage online
purchasing, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business would be adversely affected if the growth
or acceptance of e-commerce does not develop, or develops more slowly than
expected. A number of factors outside of our control could hinder the
development of e-commerce, including the following: the network infrastructure
necessary for substantial growth in Internet usage may not develop adequately or
its performance and reliability may decline; insufficient availability of
telecommunication services or changes in telecommunication services could result
in inconsistent quality of service or slower response times on the Internet; and
negative publicity and consumer concern surrounding the security of e-commerce
could impede its acceptance and growth.
In particular, any well-publicized compromise of security involving
Web-based transactions could deter people from purchasing items on the Internet,
clicking on advertisements, or using the Internet generally, any of which could
cause us to lose customers and advertising inventory and could materially,
adversely effect our revenues.
WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HARM OUR BUSINESS.
Our future success is substantially dependent on the continued service
of our key senior management, technical and sales personnel and in particular
our Chairman and Chief Executive Officer, James R. Zarley and our Chief
Operating Officer, Sam Paisley. Our employment agreements with our key personnel
are short-term and on an at-will basis. We do not have key-person insurance on
any of our employees. The loss of the services of any member of our management
team, or of any other key employees, could divert management's time and
attention, increase our expenses and adversely affect our ability to conduct our
business efficiently. Our future success also depends on our continuing ability
to attract, retain and motivate highly skilled employees. Competition for
employees in our industry is intense. We may be unable to retain our key
employees or attract, assimilate or retain other highly qualified employees in
the future. We have experienced difficulty from time to time in attracting the
personnel necessary to support the growth of our business, and we may experience
similar difficulties in the future.
DOUBLECLICK WILL HAVE SIGNIFICANT INFLUENCE OVER OUR BUSINESS, AND IT MAY HAVE
INTERESTS THAT ARE DIFFERENT FROM, OR IN ADDITION TO, YOURS.
DoubleClick, which is one of our competitors, currently owns
approximately 22% of our outstanding common stock. In connection with its
investment in our company, DoubleClick received a warrant entitling it to
increase its ownership of our common stock, at any time prior to May 28, 2001,
to 45% on a fully diluted basis, which assumes that all outstanding options,
warrants and convertible securities have been exercised or converted into common
stock. DoubleClick also has the right to maintain its percentage ownership if we
issue new securities, other than in a public offering or under other specified
exceptions, until February 28, 2003.
15
As a result of its share ownership, board representation and other
rights, DoubleClick will be able to exert substantial influence over our
management and affairs. DoubleClick may have interests that are different from,
or in addition to, your interests. Because we have agreed to enter into an
agreement to use DoubleClick's DART services in our business and have generally
agreed to use DoubleClick rather than other providers of services similar to
those that DoubleClick makes available, and because we may have additional
commercial relationships with DoubleClick in the future, conflicts of interest
could arise with respect to the nature, quality and pricing of services that
DoubleClick provides to us.
DoubleClick has designated two members of our board of directors. In
addition, the holders of approximately 24% of our outstanding common stock have
agreed to vote their shares in favor of a specified number of DoubleClick's
nominees to our board of directors, depending on DoubleClick's percentage
ownership of our common stock. If DoubleClick exercises its warrant in full,
these stockholders have agreed to vote in favor of three DoubleClick nominees.
Because DoubleClick provides Internet advertising services that compete with
ours, conflicts of interest could arise for DoubleClick's representatives on our
board of directors. We have not implemented specific policies with respect to
these potential conflicts of interest, which could be resolved in a manner
adverse to us.
DOUBLECLICK MAY BE ABLE TO CAUSE A SALE OF OUR COMPANY, EVEN IF IT IS NOT
FAVORED BY OUR STOCKHOLDERS, OR PREVENT A TAKEOVER OF OUR COMPANY EVEN IF SUCH A
TRANSACTION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
As long as DoubleClick continues to own 10% of our common stock on a
fully diluted basis, we must obtain DoubleClick's consent before we take
specified actions such as issuing securities to any company that competes with
DoubleClick and implementing any anti-takeover provision. DoubleClick has agreed
to standstill provisions under which it would not acquire more than 45%
ownership of ValueClick on a fully diluted basis for three years, but after that
time it may acquire additional shares of our common stock. These standstill
provisions would terminate upon the announcement or commencement of a tender or
exchange offer to acquire shares of our common stock which would result in the
offeror owning 50% or more of our common stock. Due to DoubleClick's ownership
and contractual rights, we may be unable to prevent a sale of our company that
DoubleClick favors, even if it is not favored by our other stockholders, and it
may be difficult for our stockholders to receive a control premium in any sale
of our company.
DoubleClick may be able to prevent or impede a change of control
transaction that our other stockholders favor. DoubleClick is our largest
stockholder and as long as it owns 10% of our common stock on a fully diluted
basis, it will have the right to receive prior notice of, and will have the
opportunity to respond to, a proposed sale of our company or an unsolicited
offer to buy our company. These rights may discourage third-party offers for our
company.
SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, WHICH COULD CAUSE US
TO LOSE CUSTOMERS OR ADVERTISING INVENTORY.
Our success depends on the continuing and uninterrupted performance of
our systems. Sustained or repeated system failures that interrupt our ability to
provide our services to our customers, including failures affecting our ability
to deliver advertisements quickly and accurately and to process users' responses
to advertisements, would reduce significantly the attractiveness of our
solutions to advertisers and Web publishers. Our business, results of operations
and financial condition could be materially and adversely affected by any damage
or failure that interrupts or delays our operations.
Our computer systems are vulnerable to damage from a variety of
sources, including telecommunications failures, malicious human acts and natural
disasters. We lease server space in Los
16
Angeles, California; Boca Raton, Florida; and Tokyo, Japan. Therefore, any of
the above factors affecting the Los Angeles, Boca Raton or Tokyo areas would
substantially harm our business. Moreover, despite network security measures,
our servers are potentially vulnerable to physical or electronic break-ins,
computer viruses and similar disruptive problems in part because we cannot
control the maintenance and operation of our third-party data centers. Despite
the precautions we have taken, unanticipated problems affecting our systems
could cause interruptions in the delivery of our solutions in the future. Our
data storage centers incorporate redundant systems, consisting of additional
servers, but our primary system does not switch over to our backup system
automatically. Our insurance policies may not adequately compensate us for any
losses that may occur due to any failures in our systems.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS THAT COULD REDUCE OUR REVENUES.
Our future success depends in part on the efficient performance of our
software and technology, as well as the efficient performance of the systems of
third parties. As the numbers of Web pages and Internet users increase, our
services and infrastructure may not be able to grow to meet the demand. A sudden
and unexpected increase in the volume of advertising delivered through our
servers or in click rates could strain the capacity of the software or hardware
that we have deployed. Any capacity constraints we experience could lead to
slower response times or system failures and adversely affect the availability
of advertisements, the number of advertising views delivered and the level of
user responses received, which would harm our revenues. To the extent that we do
not effectively address capacity constraints or system failures, our business,
results of operations and financial condition could be harmed substantially.
We also depend on the Internet service providers, or ISPs, that provide
consumers with access to the Web sites on which our customers' advertisements
appear. Internet users have occasionally experienced difficulties connecting to
the Web due to failures of their ISPs' systems. Any disruption in Internet
access provided by ISPs or failures by ISPs to handle the higher volumes of
traffic expected in the future could materially and adversely affect our
revenues.
IT MAY BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND YOUR INVESTMENT BECAUSE
WE HAVE A LIMITED OPERATING HISTORY.
Because we have a limited operating history, it may be difficult to
evaluate our business and prospects. You should consider our prospects in light
of the risks, expenses and difficulties frequently encountered by early-stage
companies in the rapidly-changing Internet market. These risks include our
ability to: maintain and increase our inventory of advertising space on Web
sites; maintain and increase the number of advertisers that use our products and
services and offer banner advertisements that generate significant response
rates; continue to expand the number of products and services we offer and the
capacity of our systems; continue to increase the acceptance of the CPC pricing
model; and adapt to changes in Web advertisers' promotional needs and policies,
and the technologies used to generate Web advertisements.
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition could be materially and
adversely affected.
IT MAY BE DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE BECAUSE OUR QUARTERLY
OPERATING RESULTS MAY FLUCTUATE.
Our revenues and operating results may vary significantly from quarter
to quarter due to a variety of factors, many of which are beyond our control.
You should not rely on period-to-period comparisons of our results of operations
as an indication of our future performance. Our results of operations may fall
17
below the expectations of market analysts and investors in some future periods.
If this happens, the market price of our common stock may fall.
The factors that may affect our quarterly operating results include:
fluctuations in demand for our advertising solutions; fluctuations in click
rates; fluctuations in the amount of available advertising space, or views, on
Web sites in our network; the timing and amount of sales and
marketing expenses incurred to attract new advertisers; fluctuations in sales of
different types of advertising, for example, the amount of advertising sold at
higher rates rather than lower rates; changes in our pricing policies, the
pricing policies of our competitors or the pricing policies for advertising on
the Internet generally; timing differences at the end of each quarter between
our payments to Web publishers for a given set of clicks and our collection of
advertising revenue for those clicks; and costs related to acquisitions of
technology or businesses.
Expenditures by advertisers also tend to be cyclical, reflecting
overall economic conditions as well as budgeting and buying patterns. Any
decline in the economic prospects of advertisers or the economy generally may
alter current or prospective advertisers' spending priorities, or may increase
the time it takes us to close sales with advertisers, and could materially and
adversely affect our business, results of operations and financial condition.
WE MAY EXPERIENCE SEASONAL FLUCTUATIONS IN OUR REVENUES.
We believe that our revenues will be subject to seasonal fluctuations
because advertisers generally place fewer advertisements during the first and
third calendar quarters of each year. Additional seasonal patterns in Internet
advertisers' spending may emerge as the industry matures.
OUR FUTURE REVENUES AND OPERATING RESULTS ARE DIFFICULT TO FORECAST AND MANY OF
OUR EXPENSES ARE FIXED.
Our current and future expense estimates are based, in large part, on
our estimates of future revenues and on our investment plans. In particular, we
plan to increase our operating expenses significantly in order to expand our
sales and marketing operations; enhance our technology and software solutions;
acquire additional advertising inventory; enhance our advertising management
platform; and continue our international expansion.
Most of our expenses are fixed in the short term. We may be unable to
reduce spending if our revenues are lower than expected. Any significant
shortfall in revenues in relation to our expectations could materially and
adversely affect our cash flows.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR EXPENSES COULD INCREASE AND OUR
MANAGEMENT'S TIME AND ATTENTION COULD BE DIVERTED.
As we continue to increase the scope of our operations, we will need an
effective planning and management process to implement our business plan
successfully in the rapidly evolving Internet advertising market. Our business,
results of operations and financial condition will be substantially harmed if we
are unable to manage our expanding operations effectively. We plan to continue
to expand our sales and marketing, customer support and research and development
organizations. Past growth has placed, and any future growth will continue to
place, a significant strain on our management systems and resources. We have
recently implemented a new financial reporting system and expect that we will
need to continue to improve our financial and managerial controls and our
reporting systems and procedures. In addition, we will need to expand, train and
manage our work force. Our failure to manage our growth effectively could
increase our expenses and divert management's time and attention.
18
IF WE DO NOT SUCCESSFULLY DEVELOP OUR INTERNATIONAL STRATEGY, OUR REVENUES AND
CASH FLOWS AND THE GROWTH OF OUR BUSINESS COULD BE HARMED.
We initiated operations, through joint ventures and wholly-owned
subsidiaries or divisions, in Japan in 1998, in the United Kingdom in 1999, and
France, Germany, Brazil and Canada in 2000. Our foreign operations subject us to
foreign currency exchange risks. We currently do not utilize hedging instruments
to mitigate foreign exchange risks. Our international expansion will subject us
to additional foreign currency exchange risks and will require management
attention and resources. We expect to pursue expansion through a number of
international alliances and to rely extensively on these business partners
initially to conduct operations, establish local networks, register Web sites as
affiliates and coordinate sales and marketing efforts. Our success in these
markets will depend on the success of our business partners and their
willingness to dedicate sufficient resources to our relationships. We cannot
assure you that we will be successful in our efforts overseas. International
operations are subject to other inherent risks, including: the impact of
recessions in economies outside the United States; changes in and differences
between regulatory requirements, domestic and foreign; export restrictions,
including export controls relating to encryption technologies; reduced
protection for intellectual property rights in some countries; potentially
adverse tax consequences; difficulties and costs of staffing and managing
foreign operations; political and economic instability; tariffs and other trade
barriers; and seasonal reductions in business activity. Our failure to address
these risks adequately could materially and adversely affect our business,
results of operations and financial condition.
WE MAY BE LIABLE FOR CONTENT DISPLAYED ON THE WEB SITES OF OUR PUBLISHERS WHICH
COULD INCREASE OUR EXPENSES.
We may be liable to third parties for content in the advertising we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
result in costly litigation or divert management's attention.
DELAWARE LAW CONTAINS ANTI-TAKEOVER PROVISIONS THAT COULD DETER TAKEOVER
ATTEMPTS, EVEN IF SUCH TRANSACTIONS WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
Section 203 of the Delaware General Corporation Law may make the acquisition of
ValueClick and the removal of incumbent officers and directors more difficult by
prohibiting stockholders holding 15% or more of our outstanding voting stock
from acquiring ValueClick without the Board's consent for at least three years
from the date they first hold 15% or more of the voting stock. DoubleClick is
not subject to this provision of Delaware law with respect to its investment in
ValueClick.
19
ITEM 2. PROPERTIES
Our principal executive offices are located in Westlake Village,
California, where we lease a property with approximately 23,000 square feet of
space. Our lease expires in December 12, 2002. Our current monthly rent due
under this lease is $44,850. We also lease approximately 7,000 square feet of
office space in New York City, 2,750 square feet of office space in Carpinteria,
California, 10,080 square feet of office space in Fremont, California, 1,120
square feet of office space in San Jose, California, 3,090 square feet of office
space in West Palm Beach, Florida, 5,735 square feet of office space in Redwood
City, California, 4,551 square feet of office space in Tokyo, Japan, 1,786
square feet of office space in London, England, 1,080 square feet of office
space in Paris, France, 1,430 square feet of office space in Sao Paulo, Brazil,
1,362 square feet of office space in Ontario, Canada, and 1,791 square feet of
office space in Munich, Germany. We believe that our existing space is adequate
for our current operations, and that suitable replacement and additional space
will be available in the future on commercially reasonable terms if needed.
ITEM 3. LEGAL PROCEEDINGS
On February 22, 2001, a complaint alleging 15 causes of action was
filed in Los Angeles Superior Court (Case No. BC245538) against ValueClick,
its subsidiary ClickAgents, and the two founders of ClickAgents, both of whom
remain employees of ClickAgents. The plaintiff, Adam Powell, alleges that
the founders of ClickAgents entered into a joint venture agreement and other
related agreements with him in early 1999, and that the founders and
ClickAgents breached those agreements in July 1999 when the plaintiff's
relationship with ClickAgent was terminated. Powell also asserted various
other causes of action, including fraud, breach of fiduciary duty, and
conversion, arising from the same set of allegations. Powell claims he is
entitled to a percentage of ClickAgents' profits and a percentage of the
merger consideration from ValueClick, which Powell estimated in his complaint
to exceed $11 million, and to other equitable relief, including appointment
of a receiver. ValueClick believes that Mr. Powell's allegations are without
merit and intends to vigorously defend the lawsuit on behalf of all
defendants. The discovery process in this matter has commenced and the
ValueClick anticipates filing a response to the lawsuit shortly. The Company
has not recorded an accrual related to damages, if any, resulting from this
case, as an unfavorable outcome is, in management's opinion, not probable.
Other than the ClickAgents matter discussed above, we are not a
party to any material legal proceedings, nor are we aware of any pending or
threatened litigation that would have a material adverse effect on our
business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In July and December 2000, stockholders holding a majority of our
common stock approved a resolution by written consent to amend our 1999 Stock
Option Plan to increase the number of shares of common stock reserved for
issuance under the Plan from 4,000,000 to 5,000,000 shares. We intend to
circulate an Information Statement shortly to our stockholders describing the
proposed change.
20
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock has traded on The Nasdaq National Market under the
symbol "VCLK" since our initial public offering on March 30, 2000. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock as reported on the Nasdaq National Market. On December
29, 2000, the last sale price of our common stock reported by the Nasdaq
National Market was $4.94 per share. On March 27, 2001, the last sale price of
our common stock reported by the Nasdaq National Market was $3.69 per share.
HIGH LOW
------------- -------------
2000
- ----
Fourth Quarter $ 6.50 $ 3.69
Third Quarter 12.38 6.44
Second Quarter 18.00 9.13
First Quarter 24.00 20.94
HOLDERS
As of December 31, 2000, there were 265 stockholders of record who held
shares of our common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock
since our inception and we intend to retain future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by ValueClick during our
2000 fiscal year involving sales of our securities that were not registered
under the Securities Act of 1933, as amended:
In January 2000, we issued 496,658 shares of our common stock to three
employees upon exercise of options granted under our 1999 Stock Option Plan. Of
these shares, 495,436 shares were issued at an exercise price of $0.25 per share
and 1,222 of the shares were issued at an exercise price of $1.00 per share. In
February 2000, we issued 1,222 shares of our common stock to one employee upon
exercise of options granted under our 1999 Stock Option Plan at an exercise
price of $4.00 per share. In March 2000, we issued 1,824 shares of our common
stock to three employees, upon exercise of options granted under our 1999 Stock
Option Plan, at an average weighted exercise price of $1.20 per share. The
issuance of these options and shares was exempt from registration under the
Securities Act in reliance on Rule 701 of the Securities Act as securities
issued under a written compensatory benefit plan established by us for the
participation of our employees, directors, officers or consultants and advisors.
In February 2000, we issued 7,878,562 shares of our common stock at a
price of $10.88 per share to DoubleClick Inc. in consideration of $10.0 million
in cash and 732,860 shares of DoubleClick common
21
stock. In this transaction, DoubleClick also received a warrant to purchase that
number of shares of our common stock which would result in DoubleClick owning
45% of our fully diluted shares at a price of $21.76 per share. Our issuance of
ValueClick stock in this transaction was not required to be registered under the
Securities Act in reliance upon the exemption for nonpublic offerings.
In March 2000, we issued 48,836 shares of our common stock to two
stockholders of ValueClick Japan, each of whom are accredited investors, in
exchange for additional shares of ValueClick Japan equal to 3.4% of the
outstanding equity of ValueClick Japan and having a fair market value of
approximately $633,000. The issuance of these shares was exempt from
registration under the Securities Act in reliance on Rule 506 of the Securities
Act.
On November 20, 2000, we acquired all outstanding shares of Bach
Systems, Inc. in a stock for stock transaction. As consideration for this
transaction, we issued 750,000 shares of our common stock to the stockholders of
Bach Systems. Our issuance of ValueClick stock in the acquisition was not
required to be registered under the Securities Act in reliance upon the
exemption for nonpublic offerings. We entered into a Registration Rights
Agreement with the former stockholders of Bach Systems under which we agreed to
file a shelf registration statement on Form S-3 covering the 750,000 shares
issued to the stockholders at the closing and any shares of ValueClick stock
issued to the stockholders pursuant to the earn-out features of the merger
agreement.
On December 8, 2000, we acquired all outstanding shares of
ClickAgents.com, Inc. in a stock for stock transaction. As consideration for
this transaction, we issued 4,904,480 shares of our common stock to the
stockholders of ClickAgents and reserved 428,853 additional shares of our common
stock for issuance upon exercise of outstanding employee stock options of
ClickAgents.com. The issuance of these shares was exempt from registration
pursuant to section 3(a)(10) of the Securities Act and was qualified for
issuance under California law after a fairness hearing held by the California
Commissioner of Corporations.
USE OF PROCEEDS FROM THE IPO
On March 30, 2000, we completed an initial public offering ("IPO") of
4,000,000 shares of our Common Stock at $19.00 per share. The offering closed on
April 5, 2000. The proceeds to us from the IPO, after deducting underwriting
discounts and commissions, were $70.7 million. After deducting the underwriting
discounts and commissions and the offering expenses, we received net proceeds
from the offering of approximately $69.6 million. We have applied the net
proceeds of the IPO toward general corporate purposes, including working capital
and for the purchase of short-term, interest-bearing, investment grade
securities.
22
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with
respect to ValueClick's consolidated statement of operations for each of the
years ended December 31, 2000 and 1999 and the period from May 1, 1998
(inception) through December 31, 1998 and with respect to ValueClick's
consolidated balance sheet as of December 31, 2000 and 1999 have been derived
from the audited financial statements of ValueClick which are included
elsewhere herein. The information contained herein reflects our merger with
ClickAgents, which was accounted for as a pooling-of-interests and,
accordingly, all prior periods have been restated to combine the results of
ValueClick and ClickAgents. The selected consolidated financial data set
forth below is qualified in its entirety by, and should be read in
conjunction with, `Management's Discussion and Analysis of Financial
Condition and Results of Operations' and the consolidated financial
statements and the notes to those statements included elsewhere herein.
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
PERIOD FROM
MAY 1, 1998
(INCEPTION)
THROUGH
YEAR ENDED DECEMBER 31, DECEMBER 31,
2000 1999 1998
--------- --------- -------------
(in thousands, except per share data)
Revenues $ 56,706 $ 24,798 $ 2,052
Cost of revenues 27,527 11,891 1,104
--------- --------- -------------
Gross profit 29,179 12,907 948
Operating expenses:
Sales and marketing 11,001 2,942 516
General and administrative 10,937 4,430 404
Product development 4,575 1,100 155
Stock-based compensation 5,058 3,506 61
Amortization of intangible assets 1,069 401 33
Merger-related costs 353 -- --
--------- --------- -------------
Total operating expenses 32,993 12,379 1,169
--------- --------- -------------
Income (loss) from operations (3,814) 528 (221)
Equity in losses of ValueClick Japan -- (64) (9)
Interest income, net 4,088 45 7
Loss on sale of marketable securities (9,006) -- --
Impairment write-down of marketable securities (60,233) -- --
Gain from ValueClick Japan stock issuance 13,656 -- --
Gain on the sale of ValueClick Japan stock 2,344 -- --
--------- --------- -------------
Income (loss) before income taxes and minority (52,965) 509 (223)
Provision for income taxes 2,237 1,732 --
--------- --------- -------------
Loss before minority interest (55,202) (1,223) (223)
Minority share of income in ValueClick Japan (419) (6) --
--------- --------- -------------
Net loss $ (55,621) (1,229) (223)
========= ========= =============
Basic and diluted net loss per common share: $ (1.89) $ (0.08) $ (0.02)
Shares used to calculate basic and diluted net
loss per common share: 29,423 14,955 9,912
DECEMBER 31,
2000 1999
--------- ---------
CONSOLIDATED BALANCE SHEET DATA
Cash , cash equivalents and marketable securities $ 126,086 2,735
Working capital 127,573 5,943
Total assets 151,264 17,612
Total Stockholders' equity 125,773 10,665
23
QUARTERLY RESULTS
The following table sets forth some of our selected financial
information for our eight most recent fiscal quarters in dollar terms and as
a percentage of revenue. The information contained herein reflects our merger
with ClickAgents, which was accounted for as a pooling-of-interests and,
accordingly, all prior periods have been restated to combine the results of
ValueClick and ClickAgents. In the opinion of our management, this unaudited
financial information has been prepared on the same basis as the audited
financial information, and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present this information fairly
when read in conjunction with our financial statements and the related notes
contained elsewhere herein. These operating results are not
necessarily indicative of results of any future period.
THREE-MONTH PERIOD ENDED
--------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
(IN THOUSANDS) 1999 1999 1999 1999 2000 2000 2000 2000
--------------------------------------------------------------------------
Revenues $2,143 $3,619 $6,723 $12,313 $14,105 $14,903 $12,441 $15,257
Cost of revenues 1,096 1,440 3,237 6,118 7,040 7,565 5,745 7,177
--------------------------------------------------------------------------
Gross profit 1,047 2,179 3,486 6,195 7,065 7,338 6,696 8,080
Operating expenses:
Sales and marketing 257 391 819 1,475 1,958 2,673 2,766 3,604
General and administrative 344 624 1,217 2,245 1,864 2,601 3,276 3,196
Product development 108 213 266 513 827 976 1,317 1,455
Stock-based compensation 33 441 1,003 2,029 1,297 1,397 1,223 1,141
Amortization of intangible assets 13 13 160 215 223 225 225 396
Merger-related costs - - - - - - - 353
--------------------------------------------------------------------------
Total operating expenses 755 1,682 3,465 6,477 6,169 7,872 8,807 10,145
--------------------------------------------------------------------------
Income (loss) from operations 292 497 21 (282) 896 (534) (2,111) (2,065)
Equity in losses of ValueClick Japan (42) (10) (12) - - - - -
Interest income, net 5 14 19 7 54 1,190 1,398 1,446
Loss on sale of marketable securities - - - - - (9,006) - -
Impairment write-down of marketable
securities - - - - - - - (60,233)
Gain from ValueClick Japan stock issuance - - - - - 13,656 - -
Gain on the sale of ValueClick Japan stock - - - - - - 1,076 1,268
--------------------------------------------------------------------------
Income (loss) before income taxes
and minority interests 255 501 28 (275) 950 5,306 363 (59,584)
Provision for (benefit form) income taxes 127 400 498 707 959 2,829 685 (2,236)
--------------------------------------------------------------------------
Income (loss) before minority interest 128 101 (470) (982) (9) 2,477 (322) (57,348)
Minority share of (income) loss in
ValueClick Japan - - 28 (34) (132) (22) (126) (139)
--------------------------------------------------------------------------
Net income (loss) $ 128 $ 101 $ (442) $ (1,016) $(141) $2,455 $(448)$ (57,487)
==========================================================================
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to such financial statements included
elsewhere in this Report beginning on page 36. The following discussion
contains forward-looking statements that involve risks and uncertainties. The
statements are based on current expectations and actual results could differ
materially from those discussed herein. Factors that could cause or
contribute to the differences are discussed in "Business - Risk Factors" and
elsewhere in this Report.
OVERVIEW
We focus on a performance-based Internet advertising solutions, known
as cost-per-click ("CPC"), cost-per-action ("CPA") and cost-per-lead ("CPL"), in
which an advertiser only pays us, and we in turn only pay a publisher of a Web
site, when an Internet user clicks on an advertiser's banner advertisement or
performs an action, as specifically defined in each campaign. We provide our
advertising customers, primarily direct marketing companies, an Internet
advertising alternative to the cost-per-thousand-impressions, or CPM, model, in
which advertisers pay whenever their banner ads are displayed. Our solution
provides publishers of over 30,000 small- to medium-sized Web sites the
opportunity to generate advertising revenues. We also provide publishers of
large Web sites the ability to capture incremental revenues from their unsold
advertising inventory.
Our Internet advertising business began in July 1997, as a line of
business within Web-Ignite Corporation. In May 1998, the Internet advertising
business of Web-Ignite was transferred to ValueClick, LLC, a newly-formed
California limited liability company controlled by Web-Ignite's sole
stockholder. On December 31, 1998, ValueClick, LLC reorganized as ValueClick,
Inc., a Delaware corporation. See "Certain Relationships and Related
Transactions " for more detailed information.
We generate revenues by delivering banner and text-link advertisements
to Web sites in the ValueClick network. Pricing of our advertising is on a CPC,
CPA and CPL basis and varies depending on whether advertising is delivered
across our entire network or across targeted categories within our network.
During 2000, approximately 85% of our revenues were derived from banner
advertising delivered across our entire network. We sell our services through
our sales and marketing staff located in Westlake Village, California; San
Francisco, California; New York, New York; Fremont, California; West Palm Beach,
Florida; Tokyo, Japan; London, England; Paris, France; Munich, Germany; Toronto,
Canada; and, Sao Paolo, Brazil. The advertisements we deliver are sold under
short-term agreements that are subject to cancellation. Revenues are recognized
in the month that clicks or action from clicks on delivered banner
advertisements occur or when a customer lead is delivered, provided that no
significant obligations on our part remain and collection of the related
receivable is probable. To date, our agreements have not required a guaranteed
minimum number of clicks or actions. We pay each Web site in the ValueClick
network a price-per-click or price-per-action, which is based upon the
respective volume delivered by the Web site in a given month. These payments
made to Web publishers are included in the cost of revenues. Our agreements with
Web publishers are also subject to cancellation.
We expect to generate most of our revenues in the foreseeable future
from Internet advertising. Our ten largest advertisers accounted for 38% of our
revenues for the year ended December 31, 1999 and 30% of our revenues for the
year ended December 31, 2000. For the year ended December 31, 2000, no single
advertiser accounted for more than 10% of our revenues and no Web site
contributed more than
25
10% of our advertising inventory, as measured by the number of clicks generated
by each Web site in the ValueClick network.
The Company operates in one industry segment, the performance based
Internet advertising industry, and as such has no other separate reportable
industry segments.
The Company's operations are domiciled in the United States with
operations in Japan through its majority owned subsidiary, ValueClick Japan
and with operations in Europe through its wholly owned subsidiary, ValueClick
Europe, ValueClick France and ValueClick Germany. Other international
subsidiaries include ValueClick Canada and ValueClick Brazil. The Company's
geographic information is as follows:
YEAR ENDED
DECEMBER 31, 2000
----------------------------
LONG-LIVED
INCOME (LOSS) ASSETS
FROM AT DECEMBER 31,
REVENUES OPERATIONS 2000
------------------------------------------------------------
United States.................................. $42,568,000 $(3,563,000) $ 9,732,000
Japan.......................................... 11,679,000 1,523,000 471,000
Europe......................................... 2,443,000 (1,140,000) 154,000
Other International............................. 16,000 (634,000) 48,000
------------------------------------------------------------
Total.................................... $56,706,000 $(3,814,000) $10,405,000
============================================================
YEAR ENDED
DECEMBER 31, 1999
----------------------------
LONG-LIVED
INCOME (LOSS) ASSETS
FROM AT DECEMBER 31,
REVENUES OPERATIONS 1999
------------------------------------------------------------
United States.................................. $22,705,000 $685,000 $4,621,000
Japan.......................................... 2,093,000 15,000 200,000
Europe......................................... -- (172,000) 17,000
------------------------------------------------------------
Total.................................... $24,798,000 $528,000 $4,838,000
============================================================
All our operations in 1998 were based in the United States.
VALUECLICK JAPAN
Prior to August 6, 1999, we had a 32% ownership interest in
ValueClick Japan, which was accounted for using the equity method of
accounting. On August 6, 1999, we purchased an additional 22% of ValueClick
Japan stock in exchange for 320,000 shares of our common stock valued at
$12.96 per share, giving us a 54% ownership interest in ValueClick Japan. We
account for our interest in ValueClick Japan on a consolidated basis for
financial reporting purposes. The acquisition was accounted for using the
purchase method. The purchase price was allocated to the estimated fair value
of assets acquired and liabilities assumed, to the extent acquired by us. The
remaining portion of the ValueClick Japan assets and liabilities was recorded
at the historical cost basis of the minority stockholders. The purchase price
allocation indicates additional intangible assets, comprised of goodwill,
totaling $4.2 million, which will be amortized on a straight-line basis over
an estimated life of five years. In January 2000 we purchased an additional
3.4% of ValueClick Japan stock in exchange for 48,836 shares of our common
stock valued at approximately $633,000, which would give us a 57.4% ownership
interest in ValueClick Japan.
On May 31, 2000, ValueClick Japan completed its initial public offering
on Japan's "Mothers Market", in which it sold 1,000 shares of its Common Stock
at $27,822 per share. The proceeds to ValueClick Japan from the offering, after
deducting direct incremental costs and underwriting discounts and commissions,
totaled $25.4 million. A related gain of $13.7 million was recorded in the
consolidated statements of operations for the year ended December 31, 2000
representing the change in net equity for the Company's share of the proceeds
received by ValueClick Japan for its stock issuance.
During 2000, we sold 177 shares of our ValueClick Japan holdings for
aggregate proceeds of $2.6 million and a resulting gain of $2.3 million. We
maintained majority interest in ValueClick Japan with 52.6% ownership subsequent
to the sale of these shares.
DOUBLECLICK INVESTMENT
On February 28, 2000, we consummated an investment by DoubleClick under
a Common Stock And Warrant Purchase Agreement (the "Agreement") entered into on
January 11, 2000 whereby DoubleClick acquired 7,878,562 shares of our common
stock for an estimated purchase price of $12.16 per share paid in cash of $10.0
million and 732,860 shares of DoubleClick common stock. The shares of
DoubleClick common stock were valued at approximately $85.8 million for
accounting purposes based on an average trading price of $117.07 per share.
Under the Agreement, we also issued a warrant to DoubleClick to acquire
additional shares of our common stock at $21.76 per share payable in DoubleClick
common stock, which is exercisable for that number of shares that would result
in DoubleClick owning 45% of our outstanding common stock on a fully diluted
basis. The warrant is exercisable during the 15-month period commencing on
February 28, 2000.
We account for our holdings of DoubleClick common stock as an available
for sale investment in accordance with Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 115 "Accounting For Certain
Investments in Debt and Equity Securities," whereby the investment is
26
carried at market value with unrealized holding gains and losses from increases
and decreases in market value being recorded as a separate component of
stockholders' equity until realized.
During May 2000, we sold 165,000 shares of our DoubleClick common
stock for cash proceeds of $10.3 million. The sale of these shares resulted
in a realized non-cash loss of $9.0 million. In December 2000, we made an
assessment that the decline in market value of our DoubleClick stock was other
than temporary. Accordingly, for the year ended December 31, 2000, we
recorded a non-cash charge to operations of $60.2 million representing the
unrealized holding losses previously accounted for as a separate component of
stockholders' equity.
BUSINESS COMBINATIONS
In November 2000, we completed our acquisition of Bach Systems, Inc.
This acquisition was accounted for under the purchase method, with the
financial results of Bach Systems included in our consolidated operating
results from the date of acquisition forward. In December 2000, we completed
our acquisition of ClickAgents.com Inc. This acquisition was accounted for as
a pooling-of-interests. In January 2001, we completed our acquisition of Z
Media, Inc. for approximately 2.7 million shares of our common stock. This
acquisition was also accounted for as a pooling-of-interests.
Due to the application of pooling-of-interests accounting for our
acquisition of ClickAgents.com, the financial results for all periods
presented in this Report have been restated to reflect the combined results
of ValueClick and ClickAgents.com, Inc.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the
periods indicated as a percentage of revenues:
PERIOD FROM
MAY 1, 1998
(INCEPTION)
THROUGH
DECEMBER 31, YEAR-ENDED DECEMBER 31,
1998 1999 2000
----------------- ------------------ -----------------
Revenues 100% 100% 100%
Cost of revenues 54% 48% 49%
----------------- ------------------ -----------------
Gross profit 46% 52% 51%
Operating expenses:
Sales and marketing 25% 12% 19%
General and administrative 20% 18% 19%
Product development 8% 4% 8%
Stock-based compensation 3% 14% 9%
Amortization of intangible assets 2% 2% 2%
Merger-related costs 0% 0% 1%
----------------- ------------------ -----------------
Total operating expenses 57% 50% 58%
----------------- ------------------ -----------------
Income (loss) from operations (11%) 2% (7%)
Equity in losses of ValueClick Japan 0% 0% 0%
Interest income, net 0% 0% 7%
Loss on sale of marketable securities 0% 0% (16%)
Impairment write-down of marketable securities 0% 0% (106%)
Gain from ValueClick Japan stock issuance 0% 0% 24%
Gain on the sale of ValueClick Japan stock 0% 0% 4%
----------------- ------------------ -----------------
Income (loss) before income taxes and minority interests (11%) 2% (93%)
Provision for income taxes 0% 7% 4%
----------------- ------------------ -----------------
Loss before minority interest (11%) (5%) (97%)
Minority share of income in ValueClick Japan 0% (0%) (1%)
----------------- ------------------ -----------------
Net loss (11%) (5%) (98%)
================= ================== =================
27
FISCAL YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES
Our revenues are derived primarily from the sale of clicks on
advertisements delivered through the ValueClick and ClickAgents networks and
actions delivered through Bach Systems' OnResponse.com network. We charge each
advertiser an amount based on the number of times users click on the
advertiser's banner ad or the number of times users perform actions, as defined
by each specific contract, on the advertiser's website. Net revenues for the
year ended December 31, 2000 were $56.7 million compared to $24.8 million for
1999, an increase of $31.9 million or 128.7%. Revenue growth for 2000 was
attributable primarily to growth in the worldwide ValueClick consolidated
networks and our ability to serve a larger advertiser customer base.
Additionally, the increase in revenue in 2000 over 1999 resulted from the
inclusion of the operating results of Bach Systems for the two-month period
ended December 31, 2000. The ValueClick worldwide network delivered 138.6
million click-throughs during the year ended December 31, 2000, compared to 47.6
million click-throughs during the year ended 1999. The Company also delivered
more than 42.3 billion ad impressions during 2000.
COST OF REVENUES
Cost of revenues consists primarily of amounts we pay to Web site
publishers on the ValueClick consolidated networks. We pay these publishers on
either a cost-per-click, cost-per-action or cost-per-lead basis. Cost of
revenues also includes depreciation costs of the advertising delivery system and
Internet access costs. Cost of revenues was $27.5 million for the year ended
December 31, 2000 compared to $11.9 million for 1999, an increase of $15.6
million or 131.5%. The increase in cost of revenues was directly attributable to
the increased delivery of clicks and actions on advertisements. Gross profit
margins remained consistent at 51.5% for 2000 from 52.0% in 1999.
SALES AND MARKETING
Sales and marketing expenses consist primarily of compensation
(including commissions), travel, advertising, trade show costs and costs of
marketing materials. Sales and marketing expenses for the year ended December
31, 2000 were $11.0 million compared to $2.9 million in 1999, an increase of
$8.1 million or 273.9%. The increase in sales and marketing expenses was due
primarily to the addition of sales and marketing personnel domestically and
worldwide and to increased advertising, public relations and other sales and
marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of facilities
costs, executive and administrative compensation and professional service fees.
General and administrative expenses for the
28
year ended December 31, 2000 were $10.9 million compared to $4.4 million for
1999, an increase of $6.5 million or 146.9%. The increase in general and
administrative expenses was due primarily to expenses associated with hiring
additional executive and administrative personnel, expanding our corporate
offices to accommodate our increased personnel, facilities costs associated with
the opening of new sales and international offices and professional service
expenses that were not incurred in 1999.
PRODUCT DEVELOPMENT
Product development costs include expenses for the development of new
technologies designed to enhance the performance of our service, including the
salaries and related expenses for our software engineering department, as well
as costs for contracted services and supplies. To date, all product development
costs have been expensed as incurred. Product development expenses for the year
ended December 31, 2000 were $4.6 million compared to $1.1 million for 1999, an
increase of $3.5 million or 315.9%. The increase was due primarily to the hiring
of additional engineers and support personnel needed to attain our strategic
objectives.
STOCK-BASED COMPENSATION
Deferred stock compensation included in the accompanying
consolidated balance sheets reflects the difference between the deemed fair
value of our common stock for financial accounting purposes and the exercise
price of options on the date of the options were granted. Stock-based
compensation for the year ended December 31, 2000 amounted to $5.1 million,
which relates primarily to the amortization of existing deferred compensation
recorded in prior periods for stock options and restricted shares. The
increase in stock-based compensation from $3.5 million for the year ended
December 31, 1999 represents a full year of amortization in 2000 as well as
additional deferred compensation recorded in 2000 related to stock options
granted to ClickAgents' employees.
AMORTIZATION OF INTANGIBLE ASSETS AND ACQUIRED SOFTWARE
Amortization of intangibles and acquired software represents
principally the amortization of acquired software purchased from a founding
stockholder in May 1998, goodwill created as a result of the acquisitions of
Bach Systems in November 2000 and a majority interest in ValueClick Japan in
August 1999 and software acquired from StraightUP!, Inc. in September 2000.
MERGER-RELATED COSTS
The merger-related costs incurred in 2000 represent non-recurring
direct incremental costs associated with the merger with ClickAgents accounted
for under the pooling-of-interests method.
INTEREST INCOME, NET
Interest income, net principally consists of interest earned on our
cash and cash equivalents and is net of interest paid on debt obligations.
Interest income was $4.1 million for the year ended December 31, 2000 compared
to $45,000 for 1999. The increase is attributable to the increased balances of
cash and cash equivalents primarily resulting from the proceeds we received from
our initial public stock offering, the DoubleClick investment transaction, the
sale of a portion of our DoubleClick stock holdings and the initial public stock
offerings of our majority owned subsidiary, ValueClick Japan.
29
LOSS ON SALE OF MARKETABLE SECURITIES / IMPAIRMENT WRITE-DOWN OF MARKETABLE
SECURITIES
On February 28, 2000, we consummated an investment by DoubleClick under
which DoubleClick acquired 7,878,562 shares of our common stock for an estimated
purchase price of $10.0 million in cash and 732,860 shares of DoubleClick common
stock. The shares of DoubleClick common stock were valued at approximately $85.8
million for accounting purposes based on an average price of $117.07 per share.
We account for our holdings of DoubleClick common stock as an
available for sale investment, whereby the investment is carried at market
value with unrealized holding gains and losses from increases and decreases
in market value being recorded as a separate component of stockholders'
equity until realized or when losses are determined to be other than
temporary.
During May 2000, we sold 165,000 shares of our DoubleClick common stock
for cash proceeds of $10.3 million. The sale of these shares resulted in a
realized non-cash loss of $9.0 million. In December 2000, we made a judgmental
determination that the decline in market value of our DoubleClick stock was
other than temporary. Accordingly, for the year ended December 31, 2000 we
recorded a non-cash charge to operations of $60.2 million representing the
unrealized holding losses previously accounted for as a separate component of
stockholders' equity.
GAIN ON THE VALUECLICK JAPAN STOCK ISSUANCE
On May 31, 2000, ValueClick Japan, our majority owned subsidiary,
completed its initial public offering on Japan's "Mothers Market" in which it
sold 1,000 shares of its Common Stock at $27,822 per share. The proceeds to
ValueClick Japan from the offering, after deducting direct incremental costs and
underwriting discounts and commissions, were $25.4 million. The gain of $13.7
million recorded in our consolidated statements of operations for the year ended
December 31, 2000 represents the change in net equity for our share of the
proceeds received by ValueClick Japan for their stock issuance.
GAIN ON THE SALE OF VALUECLICK JAPAN STOCK
During 2000, we sold 177 shares of our ValueClick Japan holdings for
aggregate proceeds of $2.6 million and a resulting realized gain of $2.3
million. We maintained majority interest in ValueClick Japan with 52.6%
ownership subsequent to the sale of these shares.
PROVISION FOR INCOME TAXES
For the year ended December 31, 2000, our provision for Federal, state
and foreign income taxes amounted to $2.2 million, compared to $1.7 million for
1999. The provision for income taxes for both periods reflects certain
non-deductible expenses, including the stock-based compensation charges and
goodwill amortization. Additionally, income tax benefits from the impairment
write-down of marketable securities and the net realized capital losses are not
reflected as the realization of theses benefits is not deemed more likely than
not.
MINORITY SHARE OF INCOME OF VALUECLICK JAPAN
Minority share of income of ValueClick Japan was $419,000 for the year
ended December 31, 2000. We account for our interest in ValueClick Japan on a
consolidated basis for financial reporting purposes, resulting in a minority
interest in the net income achieved by ValueClick Japan.
30
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Our revenues were $24.8 million for the year ended December 31, 1999 as
compared to $2.1 million for the period from May 1, 1998 (inception) through
December 31, 1998. The increase in revenues over these periods was due to the
growth of the ValueClick consolidated network and our ability to serve a larger
advertiser customer base.
COST OF REVENUES
For the year ended December 31, 1999 our cost of revenues was $11.9
million compared to $1.1 million for the period from May 1, 1998 (inception)
through December 31, 1998. The increase in cost of revenues over these periods
was directly attributable to the increased delivery of banner advertisements and
clicks on banner advertisements.
SALES AND MARKETING
For the year ended December 31, 1999 our sales and marketing expenses
were $2.9 million compared to $516,000 for the period from May 1, 1998
(inception) through December 31, 1998. The $2.4 million increase in sales and
marketing expense was primarily due to the addition of sales and marketing
personnel, and to increased advertising, public relations and other sales and
marketing activities.
GENERAL AND ADMINISTRATIVE
For the year ended December 31, 1999 we had general and administrative
expenses of $4.4 million compared to $404,000 for the period from May 1, 1998
(inception) through December 31, 1998. The $4.0 million increase in 1999 was
primarily attributable to the addition of executive and administrative
employees. In addition, we increased our allowance for doubtful accounts by
$636,000 as a result of the significant growth in our revenue and accounts
receivable and our limited historical collection experience. We also have
incurred related expenses associated with hiring additional personnel, expanding
our corporate offices to accommodate our increased personnel and other
professional service expenses that were not incurred in 1998.
PRODUCT DEVELOPMENT
For the year ended December 31, 1999, we had product development
expenses of $1.1 million compared to $155,000 on a combined historical basis
for the period from May 1, 1998 (inception) through December 31, 1998. The
increase was primarily attributable to the hiring of additional engineers and
support personnel.
STOCK-BASED COMPENSATION
In connection with the grant of stock options to employees and the
imposition of restrictions on common shares held by certain founding employees,
during the year ended December 31, 1999, we recorded a deferred compensation
balance of approximately $8.6 million. This deferred compensation represented
the difference between the deemed fair value of our common stock for financial
accounting purposes and the exercise price of these options at the date of grant
or the purchase price of these restricted shares at the date of issuance,
resulting in an expense charge of $2.9 million for the year ended December 31,
1999 related to amortization of this deferred compensation. Deferred
compensation is presented as a reduction of stockholders' equity and amortized
over the vesting period of applicable
31
options or restricted shares which is generally four years. Stock-based
compensation for the year ended December 31, 1999 also included a charge of
approximately $563,000 related to the issuance of stock and stock options to
non-employees for services provided.
AMORTIZATION OF INTANGIBLE ASSETS AND ACQUIRED SOFTWARE
Amortization of intangibles and acquired software represents
principally the amortization of acquired software purchased from a founding
stockholder in May 1998 and amortization of goodwill created as a result of the
acquisition of a majority interest in ValueClick Japan in August 1999.
EQUITY IN LOSSES OF VALUECLICK JAPAN
Equity in loss of ValueClick Japan increased from $9,000 for the period
from May 1, 1998 (inception) through December 31, 1998 to $64,000 for the year
ended December 31, 1999. The loss is primarily a result of the increase in
operating expenses required to grow the ValueClick Japan business, which began
full operation in November 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income principally consists of interest earned on
our cash and cash equivalents and is net of interest paid on debt obligations.
Interest expense was $7,000 for the period from May 1, 1998 (inception) through
December 31, 1998 and $45,000 for the year ended December 31, 1999.
INCOME TAXES
For the period from May 1, 1998 (inception) through December 31, 1998,
we were a limited liability company, or LLC, and as such, were subject to the
provisions of Subchapter K of the Internal Revenue Code. Under those provisions,
we did not pay Federal income taxes on any taxable income. Instead, the members
of the LLC were liable for individual Federal income taxes on our taxable
income. Upon conversion to a C-corporation on December 31, 1998, we commenced
using the asset and liability method of accounting for income taxes. Our
conversion from an LLC to a C-corporation did not have a material impact on our
financial position or results of operations. Following the conversion, we have
been operating as a C-corporation and are subject to Federal and state income
taxes. For the year ended December 31, 1999, our provision for Federal and state
income taxes amounted to $1.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through working
capital generated from operations and equity financings. Net cash provided by
operating activities was $6.9 million for the fiscal year December 31, 2000.
The net cash provided by investing activities for the fiscal year ended
December 31, 2000 of $8.2 million was the result of $10.3 million in proceeds
received from the sale of 165,000 shares of our DoubleClick holdings, $2.6
million in proceeds received from the sale of 177 shares of our ValueClick Japan
holdings offset by $4.8 million of cash used to purchase property and
equipment, core technologies, and business acquisitions.
Net cash provided by financing activities was $103.6 million for the
fiscal year ended December 31, 2000, which resulted principally from the
following transactions:
32
DOUBLECLICK TRANSACTION
We received $10 million in cash and 732,860 shares of DoubleClick
common stock on February 28, 2000, upon the closing of the investment by
DoubleClick in ValueClick.
INITIAL PUBLIC STOCK OFFERING
On March 30, 2000 we completed our initial public offering in which we
sold 4,000,000 shares of our Common Stock at $19.00 per share. The initial
public offering closed on April 5, 2000. Our proceeds from the offering, after
deducting direct incremental costs and underwriting discounts and commissions,
were $68.6 million.
VALUECLICK JAPAN'S STOCK ISSUANCE
On May 31, 2000 ValueClick Japan, our majority owned subsidiary,
completed its initial public offering on Japan's "Mothers Market" in which it
sold 1,000 shares of its Common Stock at $27,822 per share. The proceeds to
ValueClick Japan from the offering, after deducting direct incremental costs and
underwriting discounts and commissions, were $25.4 million.
CREDIT FACILITY
On October 21, 1999, we executed a loan and security agreement with
Silicon Valley Bank for a $2.5 million revolving credit line to be used for
general working capital. Interest on the outstanding balances accrues at an
annual rate of one percentage point above the bank's prime rate. As of December
31, 2000, the bank's prime rate was 9.5%. The credit facility contains
provisions requiring us to maintain certain financial ratios and restricts our
ability to execute certain transactions including transfers of our business
property, mergers, borrowings, dividends and transactions with affiliates.
The credit facility expires and all outstanding balances are due on the
first anniversary of the agreement. In exchange for the credit facility, we
granted the bank a first priority security interest in our goods and equipment,
accounts receivables and intellectual property. At December 31, 2000, we had no
outstanding borrowings against this credit line.
We believe that our existing cash and cash equivalents, our available
bank credit and the proceeds from our initial public offering are sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards (SFAS) issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133, as amended by SFAS
No. 137 and 138, establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133, as amended, requires
that all derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains and losses be reported
either in the statement of operations or as a component of comprehensive
loss, depending on the type of hedging relationship that exists. We are
required to follow the guidance in SFAS 133 for our fiscal year beginning
January 1, 2001. We have not held derivative instruments or engaged in
hedging activities. Accordingly, we do not believe the adoption of SFAS No.
133, as amended, will have a significant impact on our consolidated financial
position, results of operations or cash flows.
33
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. We are required to follow the
guidance in the SAB no later than the fourth quarter ended December 31, 2000.
The SEC recently issued additional guidance in the form of its Frequently Asked
Questions publication issued on October 13, 2000. Based on this guidance, we
believe the adoption of the SAB will not have a material impact on our financial
position or results of operations.
In March 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions involving Stock Compensation." FIN No. 44
provides guidance for issues arising in applying APB Opinion No. 25, "Accounting
for Stock Issued to Employees". FIN No. 44 applies specifically to new awards,
exchanges of awards in a business combination, modification to outstanding
awards, and changes in grantee status that occur on or after July 1, 2000,
except for the provisions related to repricings and the definition of an
employee which apply to awards issued after December 15, 1998. Application of
FIN No. 44 did not have an impact on our financial reporting.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Serving of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS No. 125, which revised standards for accounting for
securitizations and other transfers of financial assets and collateral. SFAS No.
140 carries over most the provisions of SFAS No. 125 without reconsideration. To
date, we have not engaged in any transactions that would fall under SFAS No. 140
and do not believe that adoption of SFAS No. 140 will have a significant impact
on our consolidated financial position, results of operations or cash flows.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not hold any derivative instruments and do not engage in hedging
activities. The interest rate of our line of credit with Silicon Valley Bank
varies depending on the bank's prime rate. Currently, we do not have any
outstanding borrowings against this credit facility.
Our investment in ValueClick Japan subjects us to foreign currency
exchange risks as ValueClick Japan denominates its transactions in the Japanese
Yen. Our exposure is limited to the extent of the amount of ValueClick Japan's
net assets which totaled $25.6 million at December 31, 2000. We also transact
business in various foreign countries and are thus subject to exposure from
adverse movements in other foreign currency exchange rates. This exposure is
primarily related to revenue and operating expenses for ValueClick Europe, which
denominates its transactions in U.K. pounds. The effect of foreign exchange rate
fluctuations for the year ended December 31, 2000 was not material.
Historically, we have not hedged our exposure to exchange rate fluctuations.
Accordingly, we may experience economic loss and a negative impact on earnings
or equity as a result of foreign currency exchange rate fluctuations.
Our international business is subject to risks typical of an
international business, including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially and adversely affected by changes in
these or other factors.
As part of the consideration for DoubleClick's investment in our
company, we received 732,860 shares of DoubleClick common stock valued at
approximately $85.8 million based on an average value of $117.07 per share for
the public announcement date of January 13, 2000 and the five trading days
before and after that date. In April 2000, all of the DoubleClick shares that we
own were registered for sale by DoubleClick in a registration statement that
went effective September 11, 2000. During 2000, we sold 165,000 shares of the
DoubleClick common stock for cash proceeds of $10.3 million. The sale of these
shares resulted in a realized non-cash loss of $9.0 million. In December 2000,
we made an assessment that the decline in market value of the remaining
DoubleClick stock was other than temporary. Accordingly, for the year ended
December 31, 2000 we recorded a non-cash charge to operations of $60.2 million
representing the unrealized holding losses previously accounted for a separate
component of stockholders' equity. Further downward fluctuations in the market
price of DoubleClick's common stock could have a material effect on the value
that we ultimately realize from the remaining shares.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
----
ValueClick, Inc. Consolidated Financial Statements
Report of Independent Accountants................................................................................... 37
Consolidated Balance Sheets at December 31, 2000 and 1999........................................................... 38
Consolidated Statements of Operations for the years ended December 31, 2000 and 1999 and the period from May 1, 1998
(inception) through December 31, 1998............................................................................. 39
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000 and 1999 and the period from
May 1, 1998 (inception) through December 31, 1998................................................................. 40
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999 and the period from May 1, 1998
(inception) through December 31, 1998............................................................................. 41
Notes to Consolidated Financial Statements.......................................................................... 42
Schedule II - Valuation and Qualifying Accounts..................................................................... 59
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ValueClick, Inc.
In our opinion, the accompanying consolidated financial statements
listed in the accompanying index present fairly, in all material
respects, the financial position of ValueClick, Inc. and its
subsidiaries (the "Company") at December 31, 2000 and 1999, and the
results of their operations and their cash flows for the years ended
December 31, 2000 and 1999 and the period from May 1, 1998
(inception) through December 31, 1998, in conformity with accounting
principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respect, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted
in the United States of America, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the our opinion.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
February 22, 2001
37
VALUECLICK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------------
2000 1999
--------------------------------------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 119,840,000 $ 2,735,000
Marketable securities.............................................. 6,246,000 --
Accounts receivable, net of allowance for doubtful accounts of
$1,454,000 and $762,000 as of December 31, 2000 and 1999,
respectively..................................................... 12,005,000 8,729,000
Prepaid expenses and other current assets.......................... 889,000 554,000
Deferred income taxes.............................................. 1,373,000 384,000
--------------------------------------
Total current assets....................................... 140,353,000 12,402,000
Property and equipment, net.............................................. 2,978,000 1,169,000
Acquired software, net................................................... 414,000 67,000
Intangibles, net......................................................... 7,013,000 3,859,000
Other assets............................................................. 506,000 115,000
--------------------------------------
Total assets............................................... $ 151,264,000 $ 17,612,000
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................. $ 9,919,000 $ 4,789,000
Income taxes payable.................................................. 2,405,000 1,124,000
Deferred revenue...................................................... 446,000 389,000
ValueClick Japan short term borrowings................................ -- 147,000
Note payable, current portion......................................... 10,000 10,000
--------------------------------------
Total current liabilities.................................. 12,780,000 6,459,000
Note payable, less current portion....................................... 13,000 20,000
Deferred tax liabilites.................................................. -- 15,000
Minority interest in ValueClick Japan.................................... 12,698,000 453,000
Commitments and contingencies (Note 13)..................................
Stockholders' equity:
Preferred stock, $0.001 par value; 20,000,000 shares authorized at
December 31, 2000 and 1999; Series A Convertible - 0 and
297,132 shares issued and outstanding at December 31,
2000 and 1999, respectively........................................ -- 1,000
Series B Convertible - 0 and 1,047,804 shares issued and outstanding
at December 31, 2000 and 1999, respectively...................... -- 1,000
Series C Convertible - 0 and 1,301,850 shares issued and outstanding
at December 31, 2000 and 1999, respectively...................... -- 1,000
Common stock, $0.001 par value; 100,000,000 shares authorized;
33,702,947 and 15,147,991 shares issued and outstanding at
December 31, 2000 and 1999, respectively;.......................... 34,000 15,000
Additional paid-in capital............................................ 189,312,000 17,584,000
Treasury stock, at cost, 123,500 and 0 shares at December 31, 2000 and
1999, respectively................................................. (574,000) -
Deferred stock compensation........................................... (4,529,000) (5,678,000)
Cumulative other comprehensive loss................................... (1,620,000) (30,000)
Accumulated deficit................................................... (56,850,000) (1,229,000)
--------------------------------------
Total stockholders' equity....................................... 125,773,000 10,665,000
--------------------------------------
Total liabilities and stockholders' equity................. $ 151,264,000 $17,612,000
======================================
The accompanying notes are an integral part of these
consolidated financial statements.
38
VALUECLICK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
MAY 1, 1998
YEAR (INCEPTION)
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
-----------------------------------------
2000 1999 1998
-------------------------------------------------------
Revenues.................................................................. $ 56,706,000 $ 24,798,000 $ 2,052,000
Cost of revenues.......................................................... 27,527,000 11,891,000 1,104,000
-------------------------------------------------------
Gross profit........................................................... 29,179,000 12,907,000 948,000
Operating expenses:
Sales and marketing.................................................... 11,001,000 2,942,000 516,000
General and administrative............................................. 10,937,000 4,430,000 404,000
Product development.................................................... 4,575,000 1,100,000 155,000
Stock-based compensation............................................... 5,058,000 3,506,000 61,000
Amortization of intangibles and acquired software...................... 1,069,000 401,000 33,000
Merger-related costs................................................... 353,000 -- --
-------------------------------------------------------
Total operating expenses.......................................... 32,993,000 12,379,000 1,169,000
-------------------------------------------------------
Income (loss) from operations.......................................... (3,814,000) 528,000 (221,000)
Equity in loss of ValueClick Japan........................................ -- (64,000) (9,000)
Interest income, net...................................................... 4,088,000 45,000 7,000
Loss on sale of marketable securities..................................... (9,006,000) -- --
Impairment write-down of marketable securities............................ (60,233,000) -- --
Gain from ValueClick Japan stock issuance................................. 13,656,000 -- --
Gain on sale of ValueClick Japan stock.................................... 2,344,000 -- --
-------------------------------------------------------
Income (loss) before income taxes and minority interest................ (52,965,000) 509,000 (223,000)
Provision for income taxes................................................ 2,237,000 1,732,000 --
-------------------------------------------------------
Net loss before minority interest......................................... (55,202,000) (1,223,000) (223,000)
Minority interest in ValueClick Japan..................................... (419,000) (6,000) --
-------------------------------------------------------
Net loss.......................................................... $(55,621,000) $ (1,229,000) $ (223,000)
=======================================================
Basic and diluted net loss per common share (Note 10)..................... $ (1.89) $ (0.08) $ (0.02)
=======================================================
Shares used to calculate basic and diluted net loss per common share
(Note 10).............................................................. 29,423,000 14,955,000 9,912,000
=======================================================
The accompanying notes are an integral part of these
consolidated financial statements.
39
VALUECLICK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
LLC MEMBERSHIP
INTERESTS PREFERRED STOCK COMMON STOCK
----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
Balance at May 1, 1998 (inception)
Issuance of LLC membership interests.................. 1,885,000 926,000 -- -- -- --
Charge for issuance of LLC interests to employees..... 609,000 61,000 -- -- -- --
Net loss.............................................. -- -- -- -- -- --
Exchange of LLC membership interests to stock in
the C-corporation upon reincorporation and
conversion............................................ (2,494,000) (987,000) 1,344,936 1,000 9,919,004 10,000
----------------------------------------------------------------------
Balance at December 31, 1998............................. -- -- 1,344,936 1,000 9,919,004 10,000
Issuance of Series C preferred stock, net............. -- -- 1,301,850 2,000 -- --
Deferred stock compensation........................... -- -- -- -- -- --
Charge for issuance of stock and stock options to
non-employees..................................... -- -- -- -- -- --
Amortization of stock-based compensation.............. -- -- -- -- -- --
Issuance of common stock to acquire ValueClick
Japan.............................................. -- -- -- -- 320,000 --
Issuance of ClickAgents shares........................ -- -- -- -- 4,906,071 5,000
Exercise of common stock options...................... -- -- -- -- 2,916 --
Comprehensive loss:
Net loss.......................................... -- -- -- -- -- --
Foreign currency translation...................... -- -- -- -- -- --
----------------------------------------------------------------------
Total comprehensive loss.............................. -- -- -- -- -- --
----------------------------------------------------------------------
Balance at December 31, 1999............................. -- -- 2,646,786 3,000 15,147,991 15,000
----------------------------------------------------------------------
Conversion of preferred stock......................... -- -- (2,646,786) (3,000) 5,293,572 5,000
Stock issuance in DoubleClick transaction............. -- -- -- -- 7,878,562 8,000
Sale of common stock in initial public offering....... -- -- -- -- 4,000,000 4,000
Stock issued in purchase business combination......... -- -- -- -- 750,000 1,000
Purchase of treasury shares........................... -- -- -- -- -- --
Common stock issuance to ValueClick Japan............. -- -- -- -- 48,836 --
Deferred stock compensation........................... -- -- -- -- -- --
Amortization of stock-based compensation.............. -- -- -- -- -- --
Exercise of common stock options...................... -- -- -- -- 583,986 1,000
Comprehensive loss:
Net loss.......................................... -- -- -- -- -- --
Foreign currency translation...................... -- -- -- -- -- --
----------------------------------------------------------------------
Total comprehensive loss.............................. -- -- -- -- --
----------------------------------------------------------------------
Balance at December 31, 2000............................. -- -- -- -- 33,702,947 $34,000
======================================================================
CUMULATIVE
ADDITIONAL DEFERRED OTHER TOTAL
PAID-IN TREASURY STOCK COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
CAPITAL STOCK COMPENSATION LOSS DEFICIT EQUITY
-------------------------------------------------------------------------------
Balance at May 1, 1998 (inception)
Issuance of LLC membership interests............. -- -- -- -- -- 926,000
Charge for issuance of LLC interests to
employees...................................... -- -- -- -- -- 61,000
Net loss......................................... -- -- -- -- (223,000) (223,000)
Exchange of LLC membership interests to
stock in the C-corporation upon
reincorporation and conversion.................. 753,000 -- -- -- 223,000 --
-------------------------------------------------------------------------------
Balance at December 31, 1998........................ 753,000 -- -- -- -- 764,000
Issuance of Series C preferred stock, net........ 3,497,000 -- -- -- -- 3,499,000
Deferred stock compensation...................... 8,621,000 -- (8,621,000) -- -- --
Charge for issuance of stock and stock options to
non-employees................................ 563,000 -- -- -- -- 563,000
Amortization of stock-based compensation......... -- -- 2,943,000 -- -- 2,943,000
Issuance of common stock to acquire ValueClick
Japan........................................ 4,147,000 -- -- -- -- 4,147,000
Issuance of ClickAgents Shares................... -- -- -- -- -- 5,000
Exercise of common stock options................. 3,000 -- -- -- -- 3,000
Comprehensive loss:
Net loss..................................... -- -- -- -- (1,229,000) (1,229,000)
Foreign currency translation................. -- -- -- (30,000) -- (30,000)
-------------------------------------------------------------------------------
Total comprehensive loss......................... -- -- -- (30,000) (1,229,000) (1,259,000)
-------------------------------------------------------------------------------
Balance at December 31, 1999........................ 17,584,000 -- (5,678,000) (30,000) 1,229,000) 10,665,000
-------------------------------------------------------------------------------
Conversion of preferred stock.................... (2,000) -- -- -- -- --
Stock issuance in DoubleClick transaction........ 95,788,000 -- -- -- -- 95,796,000
Sale of common stock in initial public offering.. 68,580,000 -- -- -- -- 68,584,000
Stock issued in purchase business combinations... 3,119,000 -- -- -- -- 3,120,000
Purchase of treasury shares...................... -- (574,000) -- -- -- (574,000)
Common stock issuance to ValueClick Japan........ -- -- -- -- -- --
Deferred stock compensation...................... 3,910,000 -- (3,910,000) -- -- --
Amortization of stock-based compensation......... -- -- 5,059,000 -- -- 5,059,000
Exercise of common stock options................. 333,000 -- -- -- -- 334,000
Comprehensive loss:
Net loss..................................... -- -- -- -- (55,621,000) (55,621,000)
Foreign currency translation................. -- -- -- (1,590,000) -- (1,590,000)
-------------------------------------------------------------------------------
Total comprehensive loss......................... -- -- -- (1,590,000) (55,621,000) (57,211,000)
-------------------------------------------------------------------------------
Balance at December 31, 2000........................ $189,312,000 $(574,000) $(4,529,000) $(1,620,000) $(56,850,000) $125,773,000
===============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
40
VALUECLICK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
MAY 1, 1998
YEAR YEAR (INCEPTION)
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
-----------------------------------------------------
Cash flows from operating activities:
Net loss................................................................. $(55,621,000) $(1,229,000) $(223,000)
Adjustments to reconcile net loss to net
Cash provided by (used in) operating activities:
Depreciation and amortization......................................... 1,867,000 553,000 43,000
Provision for doubtful accounts....................................... 605,000 625,000 8,000
Equity in loss of ValueClick Japan.................................... -- 64,000 9,000
Stock-based compensation.............................................. 5,058,000 3,506,000 61,000
Gain on the ValueClick Japan stock issuance........................... (13,656,000) -- --
Loss on sale of marketable securities................................. 9,006,000 -- --
Gain on the sale of ValueClick Japan stock............................ (2,344,000) -- --
Impairment write-down of marketable securities........................ 60,233,000 -- --
Minority interest in ValueClick Japan................................. 419,000 6,000 --
Benefit from deferred taxes........................................... (987,000) (369,000) --
Changes in operating assets and liabilities:
Accounts receivable................................................. (2,169,000) (8,165,000) (723,000)
Receivable from ValueClick Japan.................................... -- -- (10,000)
Prepaid expenses and other assets................................... (693,000) (553,000) (24,000)
Accounts payable and accrued liabilities............................ 3,885,000 4,273,000 343,000
Income taxes payable................................................ 1,281,000 1,124,000 --
Deferred revenue.................................................... 42,000 173,000 15,000
-----------------------------------------------------
Net cash provided by (used in) operating activities........... 6,926,000 8,000 (501,000)
-----------------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of marketable securities.......................... 12,941,000 -- --
Net cash paid for business acquisitions.................................. (1,533,000) -- --
Purchases of property and equipment...................................... (2,569,000) (1,189,000) (113,000)
Purchases of Intangible assets........................................... (655,000) -- --
Investment in ValueClick Japan........................................... -- (263,000) (100,000)
Acquisition of ValueClick Japan, net of cash received.................... -- 413,000 --
Proceeds from ValueClick Japan minority shareholder...................... -- 67,000 --
-----------------------------------------------------
Net cash provided by (used in) investing activities........... 8,184,000 (972,000) (213,000)
-----------------------------------------------------
Cash flows from financing activities:
Net proceeds received from the sale of common stock...................... 68,580,000 -- --
Net proceeds received from the ValueClick Japan stock issuance........... 25,425,000 -- --
Proceeds received from the DoubleClick transaction....................... 10,000,000 -- --
Purchase of treasury shares.............................................. (574,000) -- --
Net proceeds from issuance of Series C preferred stock................... -- 3,499,000 --
Proceeds from the issuance of short-term debt............................ -- 141,000 200,000
Repayments on short-term debt............................................ (147,000) (204,000) --
Repayments on note payable............................................... (11,000) (1,000) --
Proceeds from issuance of LLC membership interests....................... -- -- 776,000
Proceeds from issuance of common stock................................... 334,000 3,000 --
-----------------------------------------------------
Net cash provided by financing activities..................... 103,607,000 3,438,000 976,000
-----------------------------------------------------
Effect of currency translations............................... (1,612,000) (1,000) --
-----------------------------------------------------
Net increase in cash and cash equivalents..................... 117,105,000 2,473,000 262,000
Cash and cash equivalents, beginning of period.............................. 2,735,000 262,000 --
-----------------------------------------------------
Cash and cash equivalents, end of period.................................... 119,840,000 $2,735,000 $262,000
=====================================================
Supplemental disclosures of cash flow information:
Cash paid for interest................................................... 28,000 $1,000 $--
=====================================================
Cash paid for taxes...................................................... $956,000 $977,000 $--
=====================================================
Non-cash investing and financing activities:
Issuance of common stock in the Bach Systems, Inc. acquisition........... $3,120,000 $-- $--
=====================================================
Issuance of common stock in the DoubleClick transaction.................. $85,788,000 $-- $--
=====================================================
Issuance of LLC membership interests for acquired software............... $-- $-- $150,000
=====================================================
Issuance of LLC membership interests for employee services............... $-- $-- $61,000
=====================================================
Conversion of LLC membership interests into Series A and B preferred
stock................................................................. $-- $-- $776,000
=====================================================
Conversion of LLC membership interests into common stock................. $-- $-- $211,000
=====================================================
Equipment obtained under note payable.................................... $-- $30,000 $--
=====================================================
The accompanying notes are an integral part of these
consolidated financial statements.
41
VALUECLICK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
ValueClick, Inc. ("ValueClick" or the "Company") is an Internet based
advertising network that provides a performance based advertising solutions on a
cost-per-click, cost-per-action and cost-per-lead basis to advertisers and
e-commerce companies.
ValueClick commenced operations as ValueClick, LLC, a California
limited liability company, on May 1, 1998 (inception). Prior to the formation of
ValueClick, LLC, the ValueClick Internet advertising delivery business began in
July 1997 as a line of business within Web-Ignite Corporation, an S-corporation
wholly owned by the founding member of ValueClick, LLC. The reorganization and
formation of ValueClick, LLC was accounted for as a transaction by entities
under common control and was effected by the founding member causing Web-Ignite
to transfer the rights to the ValueClick trademarks, domain names, the
trademark, license, software license and copyright agreements with Trans-Pacific
Ltd., predecessor to ValueClick Japan, and the rights to the advertising
delivery software used in the business to ValueClick, LLC. On December 31, 1998,
ValueClick, LLC completed its conversion and reincorporation from a California
LLC to a Delaware C-corporation by completing a merger with ValueClick, Inc., a
Delaware C-corporation formed by ValueClick, LLC. The accompanying consolidated
financial statements reflect the conversion and reincorporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its majority owned subsidiary ValueClick Japan, and its wholly-owned
subsidiaries, ClickAgents.com, Inc. ("ClickAgents"), Bach Acquisition Corp.,
ValueClick Europe, ValueClick France, ValueClick Germany, ValueClick Brazil
and ValueClick Canada. All material intercompany transactions have been
eliminated in consolidation.
The consolidated financial statements include the accounts of the
Company and its subsidiaries from the dates of their respective acquisitions,
acquisition of majority voting control or date of formation, for subsidiaries
accounted for as a pooling of interests, all prior period financial
statements have been restated to include the results of their operations. As
more fully discussed in Note 2, the Company consummated its merger with
ClickAgents.com, Inc., in December 2000 and all prior period financial
statements have been restated to include the results of ClickAgents.com, Inc.
INITIAL PUBLIC OFFERING
On March 30, 2000 the Company completed its initial public offering
in which the Company sold 4,000,000 shares of its Common Stock at $19.00 per
share. The initial public offering closed on April 5, 2000. The proceeds to
the Company from the offering, after deducting direct incremental costs and
underwriting discounts and commissions, were $68.6 million. Upon the closing
of the offering, all of the Company's then outstanding Preferred Stock
automatically converted into Common Stock on a one-for-one basis. After the
offering, the Company's authorized capital consists of 120,000,000 shares of
capital stock (100,000,000 shares of Common Stock at a par value of $0.001
per share and 20,000,000 shares of Preferred Stock at a par value of $0.001
per share.)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the
42
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original
maturity at date of purchase of three months or less to be cash equivalents. At
December 31, 2000 and 1999, cash equivalents consist of money market funds.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated useful
lives of the assets ranging from 3 to 5 years. Leasehold improvements are
amortized over their estimated useful lives, or the term of the lease, whichever
is shorter.
ACQUIRED SOFTWARE
Acquired software represents certain software used in the Internet
advertising delivery, tracking and performance analysis. The delivery software
was acquired from a founding member of ValueClick, LLC in exchange for a 15%
ownership interest in ValueClick, LLC on May 1, 1998. The acquisition of the
advertising delivery software was accounted for as a nonmonetary exchange and
the acquired software was valued at $150,000. The tracking and performance
analysis software was acquired through the purchase of the core technologies of
StraightUP!, Inc. in September 2000, for a net purchase price of $395,000. The
acquired software is being amortized on a straight-line basis over an estimated
useful life of 3 years with accumulated amortization amounting to $168,000 and
$83,000 at December 31, 2000 and 1999, respectively.
INTANGIBLES
Intangible assets are primarily comprised of goodwill which represents
the excess of the cost of the acquired business over the net assets acquired and
is being amortized on a straight-line basis over 5 years. Accumulated
amortization at December 31, 2000 and 1999 amounted to $1,334,000 and $351,000,
respectively.
The carrying amounts of intangible assets are reviewed if the facts and
circumstances indicate potential impairment of their carrying value. If this
review indicates that intangible assets are not recoverable, as determined based
on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying values related to the intangible
assets are reduced to the fair value of the assets.
REVENUE RECOGNITION
The Company's revenues are principally derived from the delivery of
advertising click-throughs, actions ,as specifically defined, from
click-throughs and customer leads delivered from third-party Web sites
comprising the ValueClick Consolidated Network (the "Network"). Revenue is
recognized in the period that the advertising click-throughs or actions occur or
when lead-based information is delivered, provided that no significant Company
obligations remain and collection of the resulting receivable is probable. To
date, the Company's agreements have not required guaranteed a minimum number of
click-throughs or actions.
The Company becomes obligated to make payments to third-party Web
sites, which have contracted with the Company to be part of the Network, in the
period the advertising click-throughs or actions are
43
delivered. Such expenses are classified as cost of revenues in the accompanying
consolidated statements of operations.
Deferred revenue represents payments received in advance of the
delivery of performance based advertising products. Such fees will be recognized
as revenues once the advertising delivery is made and no significant Company
obligations remain.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The adoption of the guidance in SAB
No. 101 during the year ended December 31, 2000 did not have a material impact
on the Company's financial position or results of operations.
COST OF REVENUES
Cost of revenues consists of payments to third-party web sites in the
Company's Network, telecommunication costs and depreciation of equipment used
for ad delivery related to the Company's ad delivery infrastructure.
SALES AND MARKETING
Sales and marketing expenses include salaries, sales commissions,
employee benefits, travel and related expenses for the Company's sales force,
and advertising costs.
Advertising costs are expensed as incurred and totaled approximately
$1.7 million and $1.0 million for the years ended December 31, 2000 and 1999,
respectively, and $318,000 for the period from May 1, 1998 (inception) through
December 31, 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include salaries, related benefits
and expenses for the executive, finance, legal and human resources personnel,
and other general overhead costs.
PRODUCT DEVELOPMENT
Product development costs are expensed as incurred and include costs
for the development of new technologies designed to enhance the Company's
service and include salaries and related expenses of the software engineering
department, contract services, and supplies.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plan in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation expense related to employee stock options is recorded
only if, on the date of the grant, the fair value of the underlying stock
exceeds the exercise price.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation (FIN) No. 44, "Accounting for Certain Transactions involving
Stock Compensation." FIN No. 44 provides guidance for issues arising in applying
APB Opinion No. 25. FIN No. 44 applies specifically to new awards, exchanges of
awards in a business combination, modification to outstanding awards, and
44
changes in grantee status that occur on or after July 1, 2000, except for the
provisions related to repricings and the definition of an employee which apply
to awards issued after December 15, 1998. The Company's application of FIN No.
44 during the year ended December 31, 2000 did not have an impact on its
financial reporting.
The Company adopted the disclosure-only requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123"), which allows entities to continue to apply
the provisions of APB Opinion No. 25 for transactions with employees and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock grants made in 1999 and future years as if the fair-value based method of
accounting in Statement No. 123 had been applied to these transactions.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries measure their operations in the
local currency and translate these operations into U.S. dollars for purposes of
consolidation.
These operations subject the Company to foreign currency exchange
risks, which are limited to the extent of their related net assets, which
amounted to approximately $24.6 million and $846,000 at December 31, 2000 and
1999, respectively.
Assets and liabilities of the Company's foreign subsidiaries are
translated at the period-end exchange rate while revenues and expenses are
translated at the average rates in effect for the period. The effects of these
translation adjustments are reported in a separate component of stockholders'
equity. Transaction gains and losses are included in the statement of operations
and were not significant for the period subsequent to the acquisitions through
December 31, 2000.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with major financial
institutions; at times, such balances with any one financial institution may be
in excess of FDIC insurance limits. Credit is extended to customers based on an
evaluation of their financial condition. The Company generally does not require
collateral or other security to support accounts receivable. The Company
performs ongoing credit evaluations of its customers and maintains an allowance
for potential bad debts. To date such losses, if any, have been within
management's expectations. At December 31, 2000 and 1999, no customer comprised
more than 10% of accounts receivable. For the years ended December 31, 2000 and
1999, no customer comprised more than 10% of total revenue. For the period from
May 1, 1998 (Inception) through December 31, 1998, one customer comprised 23% of
revenues
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses and
short-term debt, are carried at historical cost. At December 31, 2000 and
1999, the fair values of these instruments approximated their financial
statement carrying amounts because of the short-term maturity of these
instruments.
45
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets or intangibles 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 undiscounted 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. To date, no such impairment has been recorded.
BASIC AND DILUTED NET LOSS PER SHARE
The Company has adopted the provisions of FASB SFAS No. 128, "Earnings
Per Share". Basic and diluted net loss per share is computed by dividing the net
loss by the weighted average shares of common stock outstanding for the period.
COMPREHENSIVE LOSS
The Company has adopted the provisions of FASB SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The only elements of comprehensive
income, other than net loss, relate to foreign currency translation
adjustments.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133, as amended, as
amended by SFAS No. 137 and 138, establishes new standards of accounting and
reporting for derivative instruments and hedging activities. SFAS 133
requires that all derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains and losses be reported
either in the statement of operations or as a component of comprehensive
loss, depending on the type of hedging relationship that exists. The Company
is required to follow the guidance in SFAS 133, as amended, for its fiscal
year beginning January 1, 2001. To date, the Company has not held derivative
instruments or engaged in hedging activities. Accordingly, the Company does
not believe the adoption of SFAS No. 133, as amended, will have a significant
impact on its consolidated financial position, results of operations or cash
flows.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Serving of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS No. 125, which revised standards for accounting for
securitizations and other transfers of financial assets and collateral. SFAS No.
140 carries over most the provisions of SFAS No. 125 without reconsideration. To
date, the Company has not engaged in any transactions that would fall under SFAS
No. 140 and does not believe that adoption of SFAS No. 140 will have a
significant impact on its consolidated financial position, results of operations
or cash flows.
2. BUSINESS COMBINATIONS AND INVESTMENTS
CLICKAGENTS.COM, INC.
On November 1, 2000, ValueClick, ClickAgents and ValueClick
Acquisition Corp., a wholly-owned subsidiary of ValueClick, entered into an
Agreement and Plan of Merger, under which ValueClick agreed to acquire
ClickAgents. The merger was completed on
46
December 8, 2000. On that date, the ValueClick Acquisition Corp. was merged with
and into ClickAgents and ClickAgents remained as the surviving corporation and a
wholly-owned subsidiary of ValueClick. ValueClick accounted for the merger as a
pooling-of-interests, and as such, the consolidated financial statements have
been restated to included ClickAgents' financial data as if the ClickAgents had
always been a part of ValueClick.
ClickAgents, founded on January 26, 1999, is a provider of
performance-based Internet advertising solutions for ad agencies, advertisers
and Web publishers focused a cost-per-click model.
In connection with the merger, ValueClick issued an aggregate of
4,906,071 shares of its Common Stock in exchange for all outstanding shares of
ClickAgents and reserved 427,261 additional shares of Common Stock for issuance
upon exercise of outstanding employee stock options of ClickAgents. The
Company recorded a charge to operations relating to non-recurring merger
costs of $353,000, comprised of direct incremental transaction costs.
The following table presents the historical results of ValueClick
for the years ended December 31, 2000 and 1999 and ClickAgents for year ended
December 31, 2000 and for the period from January 26, 1999 (inception)
through December 31, 1999 prior to the consummation of the merger of the two
entities:
2000 1999
----------- -----------
Revenues:
ValueClick $ 43,756,000 $20,288,000
ClickAgents 12,950,000 4,510,000
----------- -----------
$ 56,706,000 $24,798,000
=========== ===========
Net income (loss):
ValueClick $(57,486,000) $(2,489,000)
ClickAgents 1,865,000 1,260,000
------------ ------------
$(55,621,000) $(1,229,000)
============ ============
BACH SYSTEMS, INC.
On November 20, 2000, ValueClick completed its acquisition of Bach
Systems, Inc. ("Bach Systems"), a Florida corporation, by means of an Agreement
and Plan of Merger dated as of November 17, 2000 by and between ValueClick, Bach
Systems, Inc. and Bach Acquisition Corp. The acquisition was accomplished
through a forward triangular merger by which Bach Systems, Inc. merged into Bach
Acquisition Corp., a wholly owned subsidiary of ValueClick. The surviving
corporation is Bach Acquisition Corp.
Bach Systems does business as onResponse.com and is an online
affiliate advertising firm. onResponse.com conducts customized
cost-per-action and cost-per-lead campaigns on behalf of advertising and
direct marketing clients.
ValueClick accounted for the acquisition under the purchase method.
Accordingly, and the results of Bach Systems' operations are included in the
Company's consolidated financial statements from the date of acquisition. The
aggregate consideration constituting the purchase price is approximately $5.5
million at closing, includes, $825,000 in cash paid on the closing date of the
transaction, 750,000 shares of common stock, $1.0 million in cash payments to a
member of Bach Systems' management with a residual equity interest, and
transaction costs of approximately $200,000, which include legal fees,
accounting fees, and fees for other related professional services. The
consideration may increase by up to an additional $16.6 million depending on the
actual amount of potential earnout payments. The potential earnout would be paid
out in common stock over the eight successive calendar quarters after the
closing date if certain revenue and income before taxes, as defined, milestones
are achieved. These earnout opportunities will be included in the purchase price
for accounting purposes when the outcome of the contingency is determinable
beyond a reasonable doubt. At this time, we have not deemed any of the of the
contingencies related to the earnout as determinable beyond a reasonable doubt;
The excess purchase price over the fair value of the tangible net
assets acquired of approximately $4.1 million at the closing date was allocated
to identifiable intangible assets, including goodwill and amortized over three
to five years.
The historical operating results of the Bach Systems prior to the
acquisition date have not been included in the Company's historical
operatings results. Pro forma data (unaudited) for the years ended December
31, 2000 and 1999 as if Bach Systems acquisitions had been effective as of
January 1, 1999 is as follows:
For the year ended
December 31,
------------------------------
2000 1999
----------- -----------
Revenues $65,445,000 $26,054,000
=========== ===========
Net loss attributable
to its common shareholders $53,824,000 $ (983,000)
=========== ===========
Basic and diluted
net loss per share $ (1.79) $ (0.07)
=========== ===========
Historical operating results for 1998 were not significant.
47
VALUECLICK JAPAN
At December 31, 1998, the Company owned approximately 31.7% of the
outstanding common stock of ValueClick Japan which is engaged in the web-based
advertising business in Japan. In February 1999, the Company contributed an
additional $264,000 to ValueClick Japan in order to maintain its 31.7%
investment in ValueClick Japan in connection with additional equity financing
raised by ValueClick Japan. The Company accounted for this investment using the
equity method accounting and has reported its proportional share of ValueClick
Japan's net loss for periods up through the acquisition date of majority control
as discussed below.
The Company and ValueClick Japan are subject to the Trademark License,
Software License and Copyright Agreement to use the ValueClick advertising
network in Japan, which has been subsequently amended to the License and Option
Agreement. This agreement requires a monthly license fee based on ValueClick
Japan's revenue, subject to monthly and quarterly minimum thresholds. $42,000
was earned from activity for the years ended December 31, 2000 and 1999.
On August 6, 1999, the Company entered into a Stock Purchase
Agreement (the "Agreement") to acquire a controlling interest in ValueClick
Japan. Under the Agreement, ValueClick purchased an additional 22.3% of the
ValueClick Japan stock for an aggregate purchase price of approximately $4.2
million that was comprised of $78,000 in cash and 320,000 shares of
ValueClick common stock with an estimated fair value of $4.1 million giving
ValueClick a 54% controlling ownership interest in ValueClick Japan. In
January 2000 we purchased an additional 3.4% of ValueClick Japan stock in
exchange for 48,836 shares of our common stock valued at approximately
$633,000, which would give us a 57.4% ownership interest in ValueClick Japan.
These acquisition was accounted for using the purchase method and the
purchase price was allocated to the estimated fair value of assets acquired
and liabilities assumed to the extent acquired by the Company. The remaining
portion of the ValueClick Japan assets and liabilities were recorded at the
historical cost basis of the minority stockholders. The estimated fair value
of the tangible assets acquired and the liabilities assumed approximated the
historical cost basis and the excess of purchase price over the net tangible
assets acquired was allocated to goodwill. The purchase price allocation
resulted in goodwill of approximately $4.2 million which is being amortized
on a straight-line basis over an estimated useful life of 5 years. Direct
transaction costs related to the acquisition amounted to $32,000.
On May 31, 2000 ValueClick Japan, the Company's majority owned
subsidiary, completed its initial public offering on Japan's "Mothers Market" in
which it sold 1,000 shares of its Common Stock at $27,822 per share. The
proceeds to ValueClick Japan from the offering, after deducting direct
incremental costs and underwriting discounts and commissions, were $25.4
million. A related gain of $13.7 million was recorded in the consolidated
statements of operations for the year ended December 31, 2000 representing the
change in net equity for the Company's share of the proceeds received by
ValueClick Japan for its stock issuance.
During 2000, the Company sold 177 shares of its ValueClick Japan
holdings for aggregate proceeds of $2.6 million and a resulting gain of $2.3
million. The Company maintained majority interest in ValueClick Japan with 52.6%
ownership subsequent to the sale of these shares.
VALUECLICK EUROPE
On August 17, 1999, the Company entered into a license
agreement and invested $99,000 for a 20% interest in ValueClick Europe, Limited,
formed in August 1999 to engage in the web-based advertising business in the
United Kingdom. As part of the formation of ValueClick Europe, the founding
shareholders entered into an agreement which gave the Company an option to
acquire all of the shares of ValueClick Europe owned by the other founders in
the event the shareholder proposed to sell or transfer their shares or upon
change of control of ValueClick Europe. In December 1999, the Company purchased
all of the shares of ValueClick Europe for a total consideration of
approximately $430,000, that is to be comprised
48
of cash payments to the other founding shareholders of approximately $275,000,
which includes the reimbursement of approximately $18,000 of out-of-pocket
expenses incurred by one of the founding shareholders and the assumption of one
of the founding shareholders obligation to pay ValueClick Europe approximately
$148,000 for the outstanding balance owed on the original purchase of their
shares from ValueClick Europe. The acquisition was accounted for as a purchase
and the estimated fair value of the tangible assets acquired and liabilities
assumed equaled the purchase price less expenses incurred. Accordingly, no
intangible assets were created as a result of the acquisition.
3. DOUBLECLICK INVESTMENT
On February 28, 2000, the Company consummated an investment by
DoubleClick, Inc. ("DoubleClick") under a common stock and warrant purchase
agreement entered into on January 11, 2000 whereby DoubleClick acquired
7,878,562 shares of the Company's common stock for an estimated purchase price
of $12.16 per share to be paid in cash of $10.0 million and 732,860 shares of
DoubleClick common stock. The shares of DoubleClick common stock were valued at
approximately $85.8 million for accounting purposes based on an average price of
$117.07 per share for the public announcement date of January 13, 2000 and the 5
trading days before and 5 trading days thereafter. Under the Agreement, the
Company also issued a warrant to DoubleClick to acquire additional shares of the
Company's common stock at $21.76 per share payable in DoubleClick common stock
which is exercisable for that number of shares that would result in DoubleClick
owning 45% of the Company's outstanding common stock on a fully diluted basis.
The warrant will be exercisable for the 15-month period commencing on February
28, 2000.
The Company has accounted for the investment in DoubleClick common
stock as an available for sale investment in accordance with FASB SFAS No.
115 "Accounting For Certain Investments in Debt and Equity Securities,"
whereby the investment is carried at market value with unrealized holding
gains and losses from increases and decreases in market value being recorded
as a separate component of stockholders' equity until realized or when losses
are determined to be other than temporary.
During May 2000, the Company sold 165,000 shares of its DoubleClick
common stock for cash proceeds of $10.3 million. The sale of these shares
resulted in a realized non-cash loss of $9.0 million.
In December 2000, the Company's management made an assessment that the
decline in market value of the remaining DoubleClick stock was other than
temporary. Accordingly, for the year ended December 31, 2000 the Company
recorded a non-cash charge to operations of $60.2 million representing the
unrealized holding losses previously accounted for a separate component of
stockholders' equity.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
2000 1999
-----------------------------------
Computer equipment and purchased software................................. $2,772,000 $974,000
Furniture and equipment................................................... 947,000 274,000
Vehicles.................................................................. 56,000 56,000
Leasehold improvements.................................................... 205,000 28,000
-----------------------------------
3,980,000 1,332,000
Less: accumulated depreciation and amortization........................... (1,002,000) (163,000)
-----------------------------------
$2,978,000 $1,169,000
===================================
49
5. RELATED PARTIES
In December 1998, the Company borrowed $200,000 from a majority
stockholder at 10% interest rate under an unsecured note agreement. Principal
and interest payments were due on demand. In January 1999, the note and accrued
interest were repaid in full.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
DECEMBER 31,
2000 1999
---------------------------------
Accounts payable................................................................. $6,241,000 $2,186,000
Accrued payments to third-party web sites........................................ 769,000 938,000
Other accruals................................................................... 2,909,000 1,668,000
---------------------------------
$9,919,000 $4,792,000
=================================
7. INCOME TAXES
For the period from May 1, 1998 (inception) through December 31, 1998,
the Company was subject to the provisions of Subchapter K of the Internal
Revenue Code and as such the Company did not pay Federal income taxes. Instead,
the members were liable for individual Federal income taxes on the Company's
taxable income. California generally conforms to federal treatment, except for
the imposition of a minimum tax based on gross receipts. The Company's
conversion from a LLC to a C-corporation did not have a material impact on the
Company's financial position or results of operations. The tax provision on a
pro forma basis assuming a C corporation status would not differ from the
historical presentation as a result of the Company's operating loss in 1998.
Upon conversion to a C-corporation, ValueClick commenced using the
asset and liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for future taxable
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and to operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in results of operations in the period that
includes the enactment date.
Management established a valuation allowance for the portion of
deferred tax assets related to the impairment write-down of marketable
securities as the tax benefits can only be realized as capital losses and the
realization of such benefits would be dependent upon the generation of
adequate capital gain amounts to offset these losses.
The provision for income taxes for the years ended December 31, 2000
and 1999 is comprised of the following:
50
YEAR ENDED
DECEMBER 31,
2000 1999
--------------------------------
Current:
Federal......................................................................... $2,079,000 $1,673,000
State........................................................................... $569,000 $428,000
Foreign......................................................................... 497,000 -
--------------------------------
$3,145,000 $2,101,000
Deferred
Federal......................................................................... $(789,000) $(309,000)
State........................................................................... (119,000) (60,000)
--------------------------------
$(908,000) $(369,000)
--------------------------------
Provision for income taxes......................................................... $2,237,000 $1,732,000
================================
The components of the deferred tax assets at December 31, 2000 and 1999
are as follows:
DECEMBER 31,
2000 1999
----------------------------
Deferred tax assets:
Impairment write-down of marketable securities....................................... $ 24,543,000 -
Capital loss carryforward............................................................ 2,715,000 -
Allowance for doubtful accounts...................................................... 432,000 $384,000
Accrued expenses..................................................................... 528,000 -
Current state taxes.................................................................. 163,000 -
Depreciation and amortization........................................................ 77,000 -
Other................................................................................ 173,000 -
----------------------------
Gross deferred tax assets......................................................... 28,631,000 $384,000
Valuation allowance.................................................................. (21,693,000) -
----------------------------
Net deferred tax assets........................................................... $ 6,938,000 $384,000
============================
Deferred tax liabilities:
Capital gains from ValueClick Japan stock issuance................................. 5,565,000 -
Other............................................................................. - 15,000
----------------------------
Total deferred tax liabilities.................................................... 5,565,000 15,000
----------------------------
Net deferred tax assets........................................................... 1,373,000 369,000
============================
The overall effective tax rate differs from the statutory Federal tax
rate for the years ended December 31, 2000 and 1999 as follows:
YEAR ENDED
DECEMBER 31,
2000 1999
--------------------------------
Tax benefit based on the federal statutory rate.................................. (34.0)% 34.0%
State income taxes, net of federal benefit....................................... (6.1) 6.1
Equity in loss of ValueClick Japan............................................... - (5.0)
Stock based compensation......................................................... 3.8 275.5
Non-deductible amortization...................................................... 0.8 31.5
Impairment write-down of marketable securities................................... 45.5 -
Gain on ValueClick Japan stock issuance.......................................... (10.3) -
Capital losses................................................................... 5.0 -
Other, net....................................................................... (0.5) (1.8)
--------------------------------
4.2% 340.3%
================================
51
8. CAPITALIZATION
On December 31, 1998, in connection with the Company's LLC conversion
and reincorporation as a Delaware C-corporation, membership interests were
exchanged for an equivalent number of common and preferred shares.
PREFERRED STOCK
In May and June 1998, the Company sold membership interests in
ValueClick, LLC for total proceeds of approximately $776,000. On December 31,
1998, in connection with the Company's conversion and reincorporation, the
membership interests were exchanged for Series A and Series B preferred stock.
The exchange of the membership interests for preferred stock is summarized as
follows:
Shares issued to exchange membership interests for Series A preferred stock................. 297,132
Shares issued to exchange membership interests for Series B preferred stock................. 1,047,804
---------------
Total............................................................................ 1,344,936
===============
In the first and second quarter of 1999, the Company sold 1,301,850
shares of Series C preferred stock at $2.70 per share, for total gross proceeds
of approximately $3,515,000. Costs associated with the Series C financing
amounted to $17,864 and were netted against the proceeds received.
Convertible preferred stock at December 31, 1999 consist of the
following:
SHARES LIQUIDATION
OUTSTANDING PREFERENCE
Series A convertible.................................................... 297,132 $60,000
Series B convertible.................................................... 1,047,804 716,000
Series C convertible.................................................... 1,301,850 3,515,000
Significant terms of the preferred stock are as follows:
VOTING. Holders of preferred stock have the same voting rights (on a
converted basis) as the holders of common stock, except where a class vote may
be required by law or Certificate of Incorporation.
DIVIDENDS. The preferred stock has no right to receive dividends.
LIQUIDATION. In the event of any liquidation of the Company (not including
the acquisition of the Company by another entity), the holders of the preferred
stock have a liquidation preference over common stock. Upon payment of all
preferred stock liquidation preferences, any remaining proceeds will be
allocated to the common stockholders and the preferred stockholders according to
their respective shares and priorities on a converted basis.
CONVERSION. At the option of the holder, each share of preferred stock is
convertible at any time into one share of common stock, subject to adjustment
for certain dilutive issuances. As of December 31, 1999, giving effect to the
four-for-one common stock split and the one-for-two reverse stock split, each
share of the Series A, Series B and Series C shares is convertible into 2 shares
of common stock. The preferred shares automatically convert into common stock
upon consummation of an underwritten public offering pursuant to
52
an effective registration statement under the Securities Act of 1933, with an
aggregate proceeds greater than or equal to $20,000,000.
Upon the closing of the Company's initial public stock offering, all of
the Company's then outstanding Preferred Stock automatically converted into
Common Stock on a one-for-one basis.
FOUNDING EMPLOYEE RESTRICTED STOCK
In May and June of 1998, the Company issued LLC ownership interests to
six founding employees for no consideration and recorded a charge to stock-based
compensation of $61,375 for the estimated fair value of the LLC ownership
interests issued to these employees. The ownership interests were converted into
707,923 shares of common stock upon completion of the LLC conversion and
reincorporation on December 31, 1998. In May 1999, the Company entered into
stock restriction agreements with these founding employees' restricting 608,878
of their shares to monthly vesting over a 48-month period from their original
dates of employment with the unvested shares subject to repurchase upon the
employees termination. The Company recorded deferred stock compensation
amounting to $1.4 million for the remeasurement of these shares covered under
the restriction agreements. The deferred amount will be recognized as
compensation expense over the vesting period. During the years ended December
31, 2000 and 1999, such compensation expense included in stock-based
compensation in the accompanying consolidated statement of operations amounted
to approximately $527,000 and $549,000, respectively. At December 31, 2000 and
1999, 209,263 and 361,483 shares of common stock, respectively, were subject to
repurchase under the restricted stock agreements.
COMMON STOCK SPLIT
On October 8, 1999, the Company authorized and implemented a
four-for-one stock split and increased the authorized number of common shares
and preferred shares to 100,000,000 and 20,000,000, respectively. On March 29,
2000, the Company authorized and implemented a one-for-two reverse stock split
of the outstanding shares of common stock. All share and per share information
included in these consolidated financial statements have been retroactively
adjusted to reflect the effects of both stock splits.
9. STOCK OPTIONS
1999 STOCK OPTION PLAN
On May 13, 1999, the Board of Directors adopted and the stockholders
approved, the 1999 Stock Option Plan (the "1999 Stock Plan"). A total of
5,000,000 shares of common stock have been reserved for issuance under the 1999
Stock Plan, of which 1,059,294 shares were available for future grant at
December 31, 2000.
In January 1999, options to purchase 750,000 shares of common stock
were granted outside the 1999 Stock Plan and were subsequently included in the
shares reserved under the 1999 plan. 600,000 of these shares were granted to the
Chairman of the Board.
The 1999 Stock Option Plan provides for the granting of nonstatutory
and incentive stock options to employees, officers, directors and consultants of
the Company. Options granted generally begin vesting on the employee's date of
employment, and vest pro rata monthly over periods ranging from 12 to 42 months
or annually over 4 years and generally expire ten years from the date of grant.
53
CLICKAGENTS STOCK OPTION PLAN
Pursuant to the merger with ClickAgents, the Company assumed the
Stock Option Plan of ClickAgents (the "ClickAgents Plan"), including
incentive stock options to purchase 428,853 shares of common stock with
exercise prices ranging from $0.07 to $3.95. The Company will not grant any
additional options under the ClickAgents Plan. Options granted under the
ClickAgents Plan are generally exercisable over a maximum term of ten years
from the date of grant and generally vest over periods of up to four years.
The following table summarizes activity under the Stock Option Plan
and also includes the 750,000 shares of common stock granted outside the plan
and options granted to non-employees for the years ended December 31, 2000
and 1999 and the period from May 1, 1998 (inception) through December 31,
1998:
WEIGHTED
NUMBER AVERAGE
OF PRICE PER EXERCISE
SHARES SHARE PRICE
---------------------------------------------------
Options outstanding at May 1, 1998 (inception).................. -- $ -- $ --
Granted...................................................... -- -- --
Exercised.................................................... -- -- --
Forfeited/expired............................................ -- -- --
---------------------------------------------------
Options outstanding at December 31, 1998........................ -- -- --
Granted...................................................... 2,878,822 $0.26 to $11.00 $1.22
Assumed from ClickAgents..................................... 428,853 0.07 to 3.95 .76
Exercised.................................................... (2,916) 1.00 1.00
Forfeited/expired............................................ (13,084) 1.00 to 2.00 1.08
---------------------------------------------------
Options outstanding at December 31, 1999........................ 2,862,822 $0.26 to $11.00 $1.20
Granted...................................................... 1,499,416 5.06 to 11.00 9.84
Assumed from ClickAgents..................................... 428,853 0.07 to 3.95 .76
Exercised.................................................... (585,111) 0.25 to 2.00 .57
Forfeited/expired............................................ (426,032) 0.25 to 11.00 4.01
---------------------------------------------------
Options outstanding at December 31, 2000........................ 3,779,948 $0.07 to $11.00 $4.32
===================================================
Options granted during the year ended December 31, 2000 and 1999, net
of cancellations, resulted in a total deferred compensation amount of
approximately $3,910,000 and $7,270,000, respectively, which was included in
deferred stock compensation in stockholders' equity. Deferred compensation
expense is recognized over the service period by using the aggregate percentage
of compensation accrued by the end of each year of service (the vesting period).
During the year ended December 31, 2000 and 1999, such compensation expense
included in stock-based compensation in the statement of operations amounted to
approximately $4,531,000 and $2,394,000, respectively.
54
Additional information with respect to the outstanding options as of
December 31, 2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AVERAGE
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL LIFE EXERCISE NUMBER OF EXERCISE
SHARES (IN YEARS) PRICES SHARES PRICE
- ------------------------------------------------------------------------------
351,077 9.6 $0.07 49,760 $ 0.07
500,000 8.4 0.25 383,333 0.25
1,275,225 8.4 1.00 816,766 1.00
124,721 9.6 2.00 37,409 2.00
76,192 9.7 3.95 1,443 3.95
24,000 9.8 5.00 7,001 5.00
79,500 9.8 5.06 -- 5.06
341,000 9.5 8.03 -- 8.03
1,008,233 9.1 11.00 127,128 11.00
- ---------------- ------------------------------------------
3,779,948 $ 4.32 1,422,840 $ 1.71
================ ==========================================
The Company calculated the minimum fair value of each option grant on
the date of grant using the minimum value option-pricing model as prescribed by
Statement No. 123 using the following assumptions:
MAY 1, 1998
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------
Risk-free interest rates............................ 5% 5% 5%
Expected lives (in years)........................... 4 4 4
Dividend yield...................................... 0% 0% 0%
Expected volatility................................. 109% 0% 0%
FAIR VALUE DISCLOSURES
The Company applies the provisions of APB 25 and related
interpretations in accounting for employee stock-based compensation
arrangements. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant dates
for the awards under the method prescribed by SFAS No. 123, the Company's
net loss for the years ended December 31, 2000 and 1999 would have been as
follows:
Year Ended
December 31,
---------------------------
2000 1999
------------ ------------
Net loss:
As reported.......................... $(55,621,000) $(1,229,000)
Pro forma............................ $(62,998,000) $(3,838,000)
Net loss per share-basic and diluted:
As reported.......................... $ (1.89) $ (0.08)
Pro forma............................ $ (2.14) $ (0.26)
OPTIONS ISSUED TO NON-EMPLOYEES
In October 1999, the Company granted 24,000 stock options to a
non-employee consultant for services provided that are non-forfeitable and
immediately exercisable into the Company's common stock. In addition, in
December 1999, the Company agreed to issue 6,000 shares of common stock in
exchange for services provided by consultants to ValueClick Europe during 1999.
The stock and stock options were valued at the estimated value of the services
provided, and the Company recorded a charge of approximately $563,000 to
stock-based compensation in the accompanying consolidated statement of
operations for the year ended December 31, 1999.
55
10. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted
net loss per share for the periods indicated:
PERIOD FROM MAY 1, 1998
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, (INCEPTION) THROUGH
2000 1999 DECEMBER 31, 1998
-----------------------------------------------------------------------------
Numerator:
Net loss...................... $(55,621,000) $(1,229,000) $(223,000)
Denominator:
Weighted average common shares 29,423,000 14,955,000 9,912,000
-----------------------------------------------------------------------------
Basic and diluted net loss per
common share.................. $(1.89) $(0.08) $(0.02)
=============================================================================
The diluted per share computations exclude convertible preferred
stock, unvested restricted shares, and common stock options which were
antidilutive. The numbers of shares excluded from the diluted net loss per
common share computation were 1,614,000 and 8,412,000 for the years ended
December 31, 2000 and 1999, respectively, and 3,163,000 for the period from
May 1, 1998 (inception) through December 31, 1998.
11. LINE OF CREDIT AND SHORT TERM BORROWINGS
In October 1999, the Company entered into a loan and security agreement
with Silicon Valley Bank for a $2.5 million revolving line of credit. Interest
on outstanding balances will accrue at an annual rate of one percentage point
above the Bank's Prime Rate (9.5% at December 31, 2000). The credit facility has
a revolving maturity date that is the anniversary date of the agreement and is
collateralized by substantially all the Company's assets. The credit facility
also has certain covenants the Company must maintain including minimum net worth
requirements and financial ratios. As of December 31, 2000, no amounts were
outstanding under this line of credit.
In December 1999, ValueClick Japan borrowed $146,730 from a financial
institution under an unsecured note agreement with interest accruing at 16.5%.
Principal and interest payments were due on demand. In January 2000, the note
and accrued interest were fully repaid.
12. DEFINED CONTRIBUTION PLAN
The Company has a Savings Plan (the "Savings Plan") that qualifies
as a defined contribution plan under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating employees may defer a percentage
(not to exceed 20%) of their eligible pretax earnings up to the Internal
Revenue Service's annual contribution limit. All full time employees on the
payroll of the Company are eligible to participate in the plan. Company
matching and profit sharing contributions are discretionary. Contributions to
the Plan amounted to $75,000 and $24,000 for the years ended December 31,
2000 and 1999, respectively.
56
13. COMMITMENTS AND CONTINGENCIES
LEASES
Future minimum net lease payments, net of sublease income, under
noncancellable operating leases with initial or remaining lease terms in excess
of one year as of December 31, 2000 are as follows:
YEAR ENDING DECEMBER 31:
2001......................................................................................... $2,129,000
2002......................................................................................... 2,107,000
2003......................................................................................... 1,215,000
2004......................................................................................... 442,000
2005......................................................................................... 442,000
Thereafter................................................................................... 2,174,000
--------------
Total.................................................................................. $8,509,000
==============
Total rent expense under operating leases, net of sublease income
for the years ended December 31, 2000 and 1999 was $1.1 million and $183,000
respectively, and $30,000 for the period from May 1, 1998 (inception) through
December 31, 1998.
EMPLOYMENT AGREEMENTS
The Company is subject to employment agreements with certain members of
management.
LEGAL ACTIONS
In February 2001, a complaint alleging 15 causes of action was filed
in Los Angeles Superior Court (Case No. BC245538) against ValueClick, its
subsidiary ClickAgents, and the two founders of ClickAgents, both of whom
remain employees of ClickAgents. The plaintiff, Adam Powell, alleges that
the founders of ClickAgents entered into a joint venture agreement and other
related agreements with him in early 1999, and that the founders and
ClickAgents breached those agreements in July 1999 when the plaintiff's
relationship with ClickAgents terminated. Powell also asserted various other
causes of action, including fraud, breach of fiduciary duty, and conversion,
arising from the same set of allegations. Powell claims he is entitled to a
percentage of ClickAgents' profits and a percentage of the merger
consideration from ValueClick, which Powell estimated in his complaint to
exceed $11 million, and to other equitable relief, including appointment of a
receiver. ValueClick believes that Mr. Powell's allegations are without
merit and intends to vigorously defend the lawsuit on behalf of all
defendants. The discovery process in this matter has commenced and the
ValueClick anticipates filing a response to the lawsuit shortly. The Company
has not recorded an accrual related to damages, if any, resulting from this
case, as an unfavorable outcome is, in management's opinion, not probable.
Other than the ClickAgents matter discussed above, the Company is
not a party to any material legal proceedings, nor is the Company aware of
any pending or threatened litigation that would have a material adverse
effect on its business, operating results or financial condition.
14. SEGMENTS, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company operates in one industry segment, the Internet advertising
business and as such has no other separate reportable industry segments.
The Company's operations are domiciled in the United States with
operations in Japan through its majority owned subsidiary, ValueClick Japan
and with operations in Europe through its wholly owned subsidiary, ValueClick
Europe, ValueClick France and ValueClick Germany. Other international
subsidiaries include ValueClick Canada and ValueClick Brazil. The Company's
geographic information is as follows:
YEAR ENDED
DECEMBER 31, 2000
-----------------------------
LONG-LIVED
INCOME (LOSS) ASSETS
FROM AT DECEMBER 31,
REVENUES OPERATIONS 2000
------------------------------------------------------------
United States.................................. $42,568,000 $(3,563,000) $ 9,732,000
Japan.......................................... 11,679,000 1,523,000 471,000
Europe......................................... 2,443,000 (1,140,000) 154,000
Other Internationl............................. 16,000 (634,000) 48,000
------------------------------------------------------------
Total.................................... $56,706,000 $(3,814,000) $10,405,000
============================================================
57
YEAR ENDED
DECEMBER 31, 1999
-----------------------------
LONG-LIVED
INCOME (LOSS) ASSETS
FROM AT DECEMBER 31,
REVENUES OPERATIONS 1999
------------------------------------------------------------
United States.................................. $22,705,000 $685,000 $4,621,000
Japan.......................................... 2,093,000 15,000 200,000
Europe......................................... -- (172,000) 17,000
------------------------------------------------------------
Total.................................... $24,798,000 $528,000 $4,838,000
============================================================
There were no significant foreign operations prior to the acquisition
of majority control of ValueClick Japan in August of 1999.
15. SUBSEQUENT EVENTS
On December 18, 2000, ValueClick, Z Media, Inc. ("Z Media") and Z Media
Acquisition Corp., a wholly-owned subsidiary of ValueClick, entered into an
Agreement and Plan of Merger, under which ValueClick agreed to acquire Z Media.
The merger was completed on January 31, 2000. On that date, the Z Media
Acquisition Corp. was merged with and into Z Media and Z Media remained as the
surviving corporation and a wholly-owned subsidiary of ValueClick. ValueClick
accounted for the merger as a pooling-of-interests, and as such, the future
consolidated financial statements will be restated to included Z Media's
financial data as if the Z Media had always been a part of ValueClick.
Z Media is a co-registration company that provides highly qualified
email subscribers to advertisers and direct marketers.
In connection with the merger, ValueClick issued an aggregate of
2,767,689 shares of its Common Stock in exchange for all outstanding shares
of Z Media and reserved 457,329 additional shares of Common Stock for
issuance upon exercise of outstanding employee stock options of Z Media.
58
SCHEDULE II
VALUECLICK, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND BALANCE AT END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------------------------------------------------------------------------
2000:
Allowance for
doubtful accounts... $762,000 $692,000 - $1,454,000
1999:
Allowance for
doubtful accounts... $8,000 $754,000 - $762,000
1998:
Allowance for
doubtful accounts... - 8,000 - $8,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
59
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is information concerning our directors, executive
officers and other key employees.
NAME AGE POSITION(S)
- ----- ---- -----------
James R. Zarley 56 Chairman of the Board, Chief Executive Officer and President
Samuel Paisley 51 Chief Operating Officer, Executive Vice President of Corporate Development
Kurt A. Johnson 38 Chief Financial Officer and Secretary
Peter Wolfert 37 Chief Technology Officer
Steven J. Umberger 39 President, ValueClick International
Earle A. Malm II 51 Vice Chairman
Brian Coryat 39 Founder and Director
David S. Buzby 41 Director
Robert D. Leppo 57 Director
Martin T. Hart 65 Director
Jeffery E. Epstein 44 Director
Barry Salzman 38 Director
JAMES R. ZARLEY is the Chairman of the Board and Chief Executive
Officer of ValueClick. He has served as Chairman, and has been an advisor to
ValueClick, since May 1998. In February 1999, Mr. Zarley joined ValueClick in a
full-time capacity and in May 1999 he became Chief Executive Officer. In January
of 2001, Mr. Zarley assumed the added position of President of ValueClick, Inc.
Prior to joining ValueClick, from April 1987 to December 1996, Mr. Zarley was
Chief Executive Officer of Quantech Investments, an information services
company. From December 1996 to May 1998, Mr. Zarley was the Chairman and Chief
Executive Officer of Best Internet, until its merger with Hiway Technologies, a
Web hosting company, in May 1998. From May 1998 to January 1999, Mr. Zarley was
the Chief Operating Officer of Hiway Technologies until its merger with Verio.
Mr. Zarley has more than 30 years of technology business experience as a senior
executive.
SAMUEL PAISLEY is the Chief Operating Officer and Executive Vice
President of Corporate Development of ValueClick. Mr. Paisley joined ValueClick
in his initial role of Executive Vice President in April 2000 and assumed the
added position of Chief Operating Officer in January 2001. Mr. Paisley
previously served as Chief Financial Officer & Executive Vice President of
Automata International from June 1998 to March 2000. Between August 1980 and
June 1998 he held several positions at KPMG Peat Marwick LLP, finishing his
employment as a partner in Information, Communications and Entertainment. Mr.
Paisley brings nearly 30 years of financial experience to the ValueClick team.
Mr. Paisley graduated with a B.A. from Washington & Jefferson College and an
M.B.A. from the University of Pittsburgh.
KURT A. JOHNSON joined ValueClick as its Chief Financial Officer in May
1999 and has also served as its Secretary since September 1999. Mr. Johnson
brings over 15 years of financial management experience to the ValueClick team.
From February 1998 to May 1999, Mr. Johnson was an investment banker at Olympic
Capital Partners, specializing in mergers and acquisitions and Internet company
investments. Mr. Johnson also served as Vice President of Investments for
Bozarth & Turner Securities from March 1995 through January 1998. He served as
Chief Financial Officer of HSD Corporation, a privately held industrial
automation company, from April 1994 to March 1995, and was a divisional
60
controller for Ogden Corporation from February 1990 to April 1994. Mr. Johnson
graduated with a B.A. from Eastern Washington University and an M.B.A. from
Gonzaga University and is also a Certified Management Accountant.
PETER WOLFERT joined ValueClick as its Chief Technology Officer in June
2000. Previously, Mr. Wolfert was the Senior Vice President & Director of
Information Technology for Mellon Capital Management, an investment management
firm in San Francisco, from October 1998 until June 2000. Prior to that he
served as Senior Vice President of Information Technology at AIM Funds in San
Francisco from October 1995 to October 1998. From January 1992 until October
1995, Mr. Wolfert was Senior Vice President of Information Technology at Trust
Company of the West (TCW) in Los Angeles. Mr. Wolfert has over nine years
experience in driving Information Technology strategic direction and tactical
initiatives in technology dependent organizations. Mr. Wolfert graduated with a
B.S. from the University of California at Davis, and also earned an M.B.A. with
emphasis in Management Information Systems from the University of California at
Irvine.
STEVEN J. UMBERGER has been a director since May 1998 and President of
ValueClick International since March 2000. Mr. Umberger also served as the
President of ValueClick Europe, Limited from August 1999 until February 2000.
From April 1995 to June 1999, he was employed as the Chief Marketing Officer of
Hiway Technologies, a Web hosting company and later a division of Verio. Prior
to that, he served as Chief Executive Officer of IAAI, a computer reseller
company from March 1991 to March 1995. From March 1993 to June 1997, Mr.
Umberger was also the co-owner of Acme Barricades Company, a construction rental
company. Mr. Umberger graduated with a B.A. from the Virginia Military Institute
and an M.B.A. from the College of William and Mary.
EARLE A. MALM II has been Vice Chairman of the Board since January 2001
and a director since July of 1999. Previously, Mr. Malm was ValueClick's
President and Chief Operating Officer from February 2000 until January 2001. Mr.
Malm joined ValueClick in June 1999 as its Chief Marketing Officer and served in
this capacity until February 2000. Prior to joining ValueClick, Mr. Malm was the
Chief Operating Officer for AIM Funds, an investment management company in San
Francisco, from June 1998 to March 1999. From March 1990 to May 1998, Mr. Malm
served in various capacities at GT Global, an investment management company,
including Senior Vice President of Institutional Marketing, Executive Vice
President of Business Development and Chief Operating Officer. In addition, Mr.
Malm has over 25 years of business experience in consumer, commercial,
industrial and financial services businesses, where he has held senior
management positions with GE and RCA. Mr. Malm graduated with a B.S. from
Bowling Green State University.
BRIAN CORYAT is the founder of ValueClick and has served as a director
since the Company's inception. Mr. Coryat served as the Company's Vice Chairman
from February 2000 to January 2001. He also served as the Company's President
from its inception until February 2000 and acted as the Chief Operating Officer
from May 1999 until February 2000. Mr. Coryat's prior experience includes the
formation, development and direction of Web-Ignite Corporation, an Internet
promotions company, from May 1996 through December 1998. From September 1994
through May 1996, Mr. Coryat served as Chief Executive Officer of AAA Internet
Promotions, an Internet directory listing service.
DAVID S. BUZBY has been a director since May 1999. Mr. Buzby is an
investor and operator of entrepreneurial companies. Most recently, he was Chief
Operating Officer and a founding investor of BarterTrust, an international
business-to-business e-commerce barter exchange, from June 1999 to September
2000. Previously, Mr. Buzby worked with Best Internet, a web hosting company,
from August 1994 to January 1999. Mr. Buzby held various positions at Best
Internet including Chief Financial Officer and Vice Chairman of the Board and
was a founding investor. From 1991 through 1995, Mr. Buzby co-founded and was
the CEO of Resource Holdings, a company that acquired and re-sold multiple
recycling
61
operations in Northern California. From 1988 through 1990, he worked with
Springboard Partners, a leveraged buy-out partnership based in Denver, Colorado,
acquiring and operating manufacturing and distribution businesses. From 1982
through 1986, Mr. Buzby held various positions in commercial banking with Chase
Manhattan and Lloyds Bank International. . Mr. Buzby has numerous private
investments and serves on the Board of Directors of several private companies.
Mr. Buzby graduated with a B.A. from Middlebury College and an M.B.A. from
Harvard Business School.
ROBERT D. LEPPO has been a director of ValueClick since May 1998. Mr.
Leppo's primary occupation since 1977 has been as a private investor. He serves
on the Board of Directors of several private companies. Mr. Leppo graduated with
a B.A. from Stanford University and an M.B.A. from Harvard Business School.
MARTIN T. HART has been a director since March 1999. Mr. Hart's primary
occupation since 1969 has been as a private investor. Mr. Hart is also a
director of PJ America, a foods service company, MassMutual Corporate Investors,
an investment company, MassMutual Participation Investors, an investment
company, Schuler Homes, a builder of homes, Optical Securities, a manufacturer
of security systems, T-Netix, a communications company, Vail Banks, a multi-bank
holding company, and Ardent Software, a software company, and he continues to
serve on the Board of Directors of several private companies. Mr. Hart graduated
with a B.A. from Regis University and is a Certified Public Accountant.
JEFFERY E. EPSTEIN has been a director since February 2000. Mr. Epstein
has served as the Executive Vice President of DoubleClick, Inc., a provider of
Internet advertising solutions for advertisers and Web publishers, since April
1999. From March 1998 to April 1999, Mr. Epstein served as DoubleClick's Chief
Financial Officer. From May 1997 to February 1998, Mr. Epstein served as Chief
Financial Officer of Trans National Group Inc., a consumer services company.
From January 1995 to March 1997, Mr. Epstein served as Senior Vice President of
CUC International Inc., a membership based consumer services company. From
February 1988 to December 1994, Mr. Epstein served as Chief Financial Officer of
King World Productions, Inc., a television production company. Mr. Epstein
received his B.A. from Yale University and his M.B.A. from Stanford University.
BARRY SALZMAN has been a director since February 2000. Mr. Salzman has
served as the President of Global Media for DoubleClick, Inc., a provider of
Internet advertising solutions for advertisers and Web publishers, since
November 2000. Prior to that he served as the President of DoubleClick
International since joining the company in February 1997. From August 1994 to
January 1997, Mr. Salzman served as President of BMS Associates, Inc., a
consulting firm. From June 1993 to July 1994, Mr. Salzman served as an associate
for AEA Investors, Inc., a principal investment firm. From June 1989 to June
1993, Mr. Salzman served as an Engagement Manager for McKinsey & Company, a
management consulting firm. Mr. Salzman received his B.S. from the University of
Cape Town and his M.B.A. from Harvard University.
BOARD OF DIRECTORS
Our Board is currently composed of nine members. Each director serves
until the next annual meeting or until his or her successor is duly elected and
qualified.
BOARD COMMITTEES
In March 1999, the Board established an audit committee and a
compensation and incentive plan committee. Mr. Leppo, Mr. Hart, Mr. Buzby and
Mr. Epstein serve on the audit committee and Mr. Leppo, Mr. Buzby and Mr.
Salzman comprise the compensation and incentive plan committee.
62
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information in our Proxy Statement
for the 2001 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this Report relates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information in our Proxy Statement
for the 2001 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this Report relates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information in our Proxy Statement
for the 2001 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this Report relates.
63
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS. The following financial statements of
ValueClick, Inc. are included in a separate section of this Annual Report on
Form 10-K commencing on the pages referenced below:
Page
-----
ValueClick, Inc. Consolidated Financial Statements
Report of Independent Accountants................................................................................... 37
Consolidated Balance Sheets as of December 31, 2000 and 1999........................................................ 38
Consolidated Statements of Operations for the years ended December 31, 2000 and 1999 and the period from May 1, 1998
(inception) through December 31, 1998............................................................................. 39
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000 and 1999 and the Period from
May 1, 1998 (inception) through December 31, 1998................................................................. 40
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999 and the Period from May 1, 1998
(inception) through December 31, 1998............................................................................. 41
Notes to Consolidated Financial Statements.......................................................................... 42
2. FINANCIAL STATEMENT SCHEDULE. All schedules other than noted below have been omitted
because they are not applicable, not required, or the information is included in the financial
statements or notes thereto.
Schedule II - Valuation and Qualifying Accounts..................................................................... 59
3. EXHIBITS. The following Exhibits are attached hereto and incorporated herein by reference:
- ----------------- ----------------------------------------------------------------------------------------------------
NUMBER DESCRIPTION
- ----------------- ----------------------------------------------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect.
- ----------------- ----------------------------------------------------------------------------------------------------
3.2* Bylaws of the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
3.3* Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the
Registrant, dated March 29, 2000.
- ----------------- ----------------------------------------------------------------------------------------------------
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation
and Bylaws for the Registrant defining the rights of holders of Common Stock of the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
4.2* Specimen Stock Certificate.
- ----------------- ----------------------------------------------------------------------------------------------------
10.1* Deed of Assignment, dated January 1, 1999, between Web-Ignite Corporation and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.2* Trademark Assignment, dated as of May 1, 1998, from Web-Ignite Corporation to the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.3* Exchange Agreement, dated December 31, 1998, between the Registrant and ValueClick, LLC.
- ----------------- ----------------------------------------------------------------------------------------------------
10.4* Bill of Sale and Assignment and Assumption of Liabilities, dated December 31, 1998.
- ----------------- ----------------------------------------------------------------------------------------------------
10.5* Loan and Share Issuance Agreement, dated October 22, 1998, between ValueClick, LLC and Jonathan
Hendriksen.
- ----------------- ----------------------------------------------------------------------------------------------------
10.6* License and Option Agreement, dated January 1, 1999, between ValueClick, LLC and ValueClick Japan,
Inc. in effect from January 1, 1999 to December 17, 1999.
- ----------------- ----------------------------------------------------------------------------------------------------
10.7* Stock Purchase Agreement, dated August 6, 1999, between Jonathan Hendriksen and Timothy Williams
and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.8* Share Purchase Agreement, dated December 31, 1999, between the Registrant and Steve Umberger.
- ----------------- ----------------------------------------------------------------------------------------------------
10.9* License Agreement, dated August 17, 1999, between the Registrant and ValueClick Europe, Limited.
- ----------------- ----------------------------------------------------------------------------------------------------
10.10* 1999 Stock Option Plan, as amended, and form of option agreement.
- ----------------- ----------------------------------------------------------------------------------------------------
10.11* Key Employee Agreement between the Registrant and Kurt A. Johnson.
- ----------------- ----------------------------------------------------------------------------------------------------
10.12* Key Employee Agreement between the Registrant and James R. Zarley.
- ----------------- ----------------------------------------------------------------------------------------------------
10.13* Key Employee Agreement between the Registrant and Earle A. Malm II.
- ----------------- ----------------------------------------------------------------------------------------------------
10.14* Key Employee Agreement between the Registrant and John H. Schwenk.
- ----------------- ----------------------------------------------------------------------------------------------------
10.15* Form of Employee Confidentiality, Noncompetition and Invention Agreement between the Company each
of its directors and officers and certain employees.
- ----------------- ----------------------------------------------------------------------------------------------------
10.16* Sublease, dated April 1, 1999, between QAD, Inc. and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.17* Lease, dated August 30, 1999, between William D. and Edna J. Wright, dba South Coast Business Park
and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.18* Service Agreement, dated August 17, 1999, between SoftAware, Inc. and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.19* Service Agreement, dated June 8, 1999, between Verio and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
64
- ----------------- ----------------------------------------------------------------------------------------------------
10.20* Form of Indemnification Agreement between the Company and each of its directors and officers.
- ----------------- ----------------------------------------------------------------------------------------------------
10.21* Loan and Security Agreement, dated October 21, 1999, between Silicon Valley Bank and the
Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.22* Intellectual Property Security Agreement, dated October 21, 1999, between Silicon Valley Bank and
the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.24* Share Purchase Agreement, dated as of December 31, 1999, between the Registrant and Todd Treusdell.
- ----------------- ----------------------------------------------------------------------------------------------------
10.25* Share Purchase Agreement, dated as of December 31, 1999, between the Registrant and James R.
Zarley.
- ----------------- ----------------------------------------------------------------------------------------------------
10.26* Share Purchase Agreement, dated as of December 31, 1999, between the Registrant and Brian Coryat.
- ----------------- ----------------------------------------------------------------------------------------------------
10.27* Common Stock and Warrant Purchase Agreement, dated January 11, 2000, between the Registrant and
DoubleClick Inc.
- ----------------- ----------------------------------------------------------------------------------------------------
10.28* Form of Common Stock Purchase Warrant dated February 28, 2000 and issued to DoubleClick Inc.
- ----------------- ----------------------------------------------------------------------------------------------------
10.29* Investor Rights Agreement dated as of February 28, 2000 between the Registrant and DoubleClick Inc.
- ----------------- ----------------------------------------------------------------------------------------------------
10.30* Voting Agreement dated February 28, 2000 among the Registrant, Michael J. Bueno, Brian Coryat,
Steven J. Umberger, and James R. Zarley and DoubleClick Inc.
- ----------------- ----------------------------------------------------------------------------------------------------
10.31* Registration Rights Agreement dated February 28, 2000 between the Registrant and DoubleClick Inc.
- ----------------- ----------------------------------------------------------------------------------------------------
10.32* Intercompany License Agreement dated December 17, 1999, between the Registrant and ValueClick
Japan, Inc.
- ----------------- ----------------------------------------------------------------------------------------------------
10.33* Stock Purchase Agreement, dated January 20, 2000, between Jonathan Hendriksen and Timothy Williams
and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.34* Employment Agreement dated as of February 14, 2000 between the Registrant and Earle Malm.
- ----------------- ----------------------------------------------------------------------------------------------------
10.35 Sublease, dated June 1, 2000, between Coyote Network Systems, Inc. and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
10.36 Lease, dated September 12, 2000, between Manrock LLC and the Registrant.
- ----------------- ----------------------------------------------------------------------------------------------------
21.1 Subsidiaries of the Registrant
- ----------------- ----------------------------------------------------------------------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP.
- ----------------- ----------------------------------------------------------------------------------------------------
* This exhibit was previously filed as an exhibit to the Company's Registration
Statement on Form S-1 declared effective March 30, 2000 (File No. 333-88765)
under the same exhibit number, and is incorporated by reference herein.
65
(b) Reports on Form 8-K:
On December 5, 2000, we filed a report on Form 8-K to report our
acquisition of Bach Systems, Inc. Financial statements for that transaction were
provided in an amendment filed under Form 8-K/A dated February 5, 2001.
On December 22, 2000, we filed a report on Form 8-K to report our
acquisition of ClickAgents.com, Inc. Financial statements for that transaction
were provided in an amendment filed under Form 8-K/A dated February 22, 2001.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Chatsworth, State of California, on the 31st day of March, 2001.
ValueClick, Inc.
By: /s/ JAMES ZARLEY
--------------------------------
Name: James Zarley
Title: President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint each of James Zarley and Kurt Johnson their true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for them and in their name, place and stead, in any and all capacities, to sign
any and all amendments to this Report, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in connection therewith, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his respective substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ James R. Zarley Chairman of the Board of Directors, Chief March 31, 2001
- --------------------------- Executive Officer and President (Principal
James R. Zarley Executive Officer)
/s/ Brian Coryat Founder and Director March 31, 2001
- ---------------------------
Brian Coryat
/s/ Earle A. Malm II Vice Chairman of the Board of Directors March 31, 2001
- ---------------------------
Earle A. Malm II
/s/ Kurt A. Johnson Chief Financial Officer (Principal Financial March 31, 2001
- --------------------------- and Accounting Officer)
Kurt A. Johnson
/s/ David S. Buzby Director March 31, 2001
- ---------------------------
David S. Buzby
/s/ Jeffrey E. Epstein Director March 31, 2001
- ---------------------------
Jeffrey E. Epstein
/s/ Martin T. Hart Director March 31, 2001
- ---------------------------
Martin T. Hart
/s/ Robert D. Leppo Director March 31, 2001
- ---------------------------
Robert D. Leppo
/s/ Barry Salzman Director March 31, 2001
- ---------------------------
Barry Salzman
/s/ Steven J. Umberger Director March 31, 2001
- ---------------------------
Steven J. Umberger
67