U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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: 000-23709
DOUBLECLICK INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3870996
(STATE OF JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
41 MADISON AVENUE, 32ND FLOOR
NEW YORK, NEW YORK 10010
(212) 683-0001
(ADDRESS, INCLUDING ZIP CODE AND
TELEPHONE NUMBER, INCLUDING AREA CODE
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHECK WHETHER THE REGISTRANT: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 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 / /
AS OF OCTOBER 31, 1999, THERE WERE 45,008,492 SHARES OF THE REGISTRANT'S COMMON
STOCK OUTSTANDING.
DOUBLECLICK INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet as of September 30, 1999 and
December 31, 1998............................................ 1
Consolidated Statement of Operations for the three and nine
months ended September 30, 1999 and 1998..................... 2
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1999 and 1998............................ 3
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 1999 and 1998........ 4
Notes to Consolidated Financial Statements................... 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 10
Quantitative and Qualitative
Disclosures about Market Risk................................ 23
PART II. OTHER INFORMATION......................................... 35
ii
DOUBLECLICK INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 68,324 $ 127,171
Investments in marketable securities.................... 294,985 9,643
Accounts receivable, less allowances of $6,906
and $3,929........................................... 30,471 31,342
Prepaid expenses and other current assets .............. 3,495 869
--------- ---------
Total current assets .............................. 397,275 169,025
Property and equipment, net ............................ 26,691 13,741
Other assets............................................ 5,752 855
--------- ---------
Total assets ...................................... $ 429,718 $ 183,621
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 24,199 $ 20,583
Accrued expenses ....................................... 15,938 12,220
Deferred revenue ....................................... 7,463 1,683
Deferred license and service fees ...................... 239 421
--------- ---------
Total current liabilities ......................... 47,839 34,907
Convertible subordinated notes ......................... 250,000 --
Other liabilities ...................................... 269 375
STOCKHOLDERS' EQUITY:
Common stock, par value $0.001;
39,913,048 and 39,135,774 shares outstanding ...... 40 39
Additional paid-in capital ............................. 205,583 203,417
Accumulated deficit .................................... (72,625) (54,717)
Deferred compensation .................................. (197) (441)
Other accumulated comprehensive income (loss) .......... (1,191) 41
--------- ---------
Total stockholders' equity ........................ 131,610 148,339
--------- ---------
Total liabilities and stockholders' equity ........ $ 429,718 $ 183,621
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
1
DOUBLECLICK INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues ................................ $ 44,948 $ 20,777 $ 98,027 $ 51,074
Cost of revenues ........................ 22,031 13,970 47,069 34,539
-------- -------- -------- --------
Gross profit ....................... 22,917 6,807 50,958 16,535
-------- -------- -------- --------
Operating expenses
Sales and marketing ................ 18,629 7,608 43,688 20,117
General and administrative ......... 6,141 2,855 14,891 7,825
Product development ................ 5,177 1,778 12,868 4,357
Facility relocation & other ........ 388 -- 2,520 --
-------- -------- -------- --------
Total operating expenses ........... 30,335 12,241 73,967 32,299
-------- -------- -------- --------
Loss from operations .................... (7,418) (5,434) (23,009) (15,764)
Interest and other, net ................. 2,046 720 5,101 1,949
-------- -------- -------- --------
Net loss ................................ ($ 5,372) ($ 4,714) ($17,908) ($ 13,815)
======== ======== ======== ========
Basic and diluted net loss per share .... ($0.13) ($0.14) ($0.45) ($0.44)
======== ======== ======== ========
Weighted average shares used in basic and
diluted net loss per share calculation .. 39,824 33,131 39,524 31,501
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
DOUBLECLICK INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................ $ (17,908) $ (13,815)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation and amortization ...................................... 11,305 1,334
Facility relocation and other ...................................... 1,363 --
Amortization of deferred compensation .............................. 244 502
Amortization of deferred financing ................................. 192 --
Provision for bad debts and advertiser discounts ................... 2,980 1,220
Changes in operating assets and liabilities:
Accounts receivable ............................................ (2,109) (12,242)
Prepaid expenses and other current assets ...................... (2,538) (415)
Accounts payable ............................................... 3,616 4,968
Accrued expenses ............................................... 3,666 3,428
Deferred revenue ............................................... 5,467 1,013
--------- ---------
Net cash provided by (used in)
operating activities ........................................... 6,278 (14,007)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments in marketable securities .................. (305,828) (5,645)
Proceeds from maturities of investments in marketable securities.... 19,703 196
Purchases of property and equipment ................................ (25,486) (6,646)
Investments in affiliates and other................................. (197) (658)
--------- ---------
Net cash used in investing activities .......................... (311,808) (12,753)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Convertible Subordinated Notes,
net of deferred offering costs of $5,253 ........................... 244,747 --
Proceeds from issuance of common stock, net ........................ -- 62,560
Payments under capital lease obligations ........................... (54) (13)
Proceeds from exercise of stock options ............................ 2,315 70
Other .............................................................. (148) --
--------- ---------
Net cash provided by financing activities ...................... 246,860 62,617
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ............ (177) 59
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................... (58,847) 35,916
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................ 127,171 2,672
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................. $ 68,324 $ 38,588
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
DOUBLECLICK INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
--------- ---------
BALANCE AT BEGINNING OF PERIOD ....................... $ 148,339 $ 9,400
Net loss ............................................. (17,908) (13,815)
Other comprehensive income (loss) .................... (1,232) 57
--------- ---------
Comprehensive income (loss) .......................... (19,140) (13,758)
Amortization of deferred compensation ................ 244 502
Common stock issued from exercise of stock options ... 2,315 70
Issuance of common stock ............................. -- 62,560
Other ................................................ (148) --
--------- ---------
BALANCE AT END OF PERIOD ............................. $131,610 $ 58,774
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
DoubleClick Inc., together with its subsidiaries ("DoubleClick"), is a
leading provider of comprehensive Internet advertising solutions for advertisers
and Web publishers. DoubleClick's DART technology and media expertise enable it
to dynamically deliver highly targeted, measurable and cost-effective Internet
advertising for advertisers, increase ad sales and improve ad space inventory
management for Web publishers. DoubleClick was organized as a Delaware
corporation on January 23, 1996 and commenced operations on that date.
Following its merger with NetGravity, Inc. on October 26, 1999 (see
Note 2), DoubleClick also offers a broad range of high-end, mission-critical
software and transaction-based services designed for e-commerce merchants,
advertising agencies and content publishers.
Inherent in DoubleClick's business are various risks and uncertainties,
including its limited operating history, recent development of the Internet
advertising market and unproven acceptance and effectiveness of Web advertising,
unproven business model, risks associated with technological change, and the
limited history of commerce on the Internet. DoubleClick's success may depend in
part upon the emergence of the Internet as a communications medium, prospective
product development efforts, and the acceptance of DoubleClick's solutions by
the marketplace. See "Risks Relating to Our Company and Business."
BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flows for the periods presented in
conforming with generally accepted accounting principles applicable to interim
periods. Results of operations are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
The accompanying financial statements should be read in conjunction with
the audited consolidated financial statements of DoubleClick for the year ended
December 31, 1998. Certain reclassifications have been made to the prior year's
financial statements to conform to the current period presentation.
In December 1996, DoubleClick entered into a Procurement and Trafficking
Agreement with Digital Equipment Corp. (subsequently acquired by Compaq Computer
Corp. ("Compaq")) to be the exclusive third-party provider of advertising
services on specified pages within the AltaVista Web site. Effective January 1,
1999, DoubleClick changed its relationship with Compaq by entering into an
Advertising Services Agreement (the "AltaVista Advertising Services Agreement")
that superceded the Procurement and Trafficking Agreement. Under the AltaVista
Advertising Services Agreement, the manner in which DoubleClick reports its
financial results related to the services it provides to the AltaVista Web site
has changed. Through December 31, 1998, DoubleClick recognized as revenues the
gross revenues related to ads delivered by DoubleClick to the AltaVista Web
site. Beginning January 1, 1999, pursuant to the AltaVista Advertising Services
Agreement, DoubleClick recognizes DART service fees, sales commissions and
billing and collection fees as revenues derived from the sale and delivery of
ads on the AltaVista Web site and associated services. On June 29, 1999, Compaq
agreed to transfer to CMGI, Inc. a controlling interest in AltaVista. Compaq and
its wholly-owned subsidiary Digital Equipment Corporation contributed the assets
and liabilities comprising AltaVista's business, which included the Advertising
Services Agreement, to AltaVista Company, a new company of which CMGI owns
approximately 83%, with the remainder owned by Compaq.
MANAGEMENT USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
5
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are derived primarily from the sale and delivery of advertising
impressions through third-party Web sites comprising the DoubleClick Network
(the "Network") and fees earned from independent publishers and advertisers who
use the DART technology to deliver ad impressions. Revenues are recognized in
the period the advertising impressions are delivered provided collection of the
resulting receivable is probable.
DoubleClick becomes obligated to make payments to third-party Web sites,
which have contracted with DoubleClick to be part of the Network, in the period
the advertising impressions are delivered. Such expenses are classified as cost
of revenues in the consolidated statement of operations.
Revenues earned by DoubleClick derived from sales commissions and
administrative services are recognized in the period in which the services are
provided.
Revenues are presented net of a provision for advertiser discounts which is
estimated and established in the period in which the services are provided.
Deferred license and service fees represent payments received in advance
from third parties or affiliated companies for use of DoubleClick's trademarks,
access to DoubleClick's proprietary technology, and certain personnel during
fixed periods of time which range from two to four years. Such fees will be
recognized as revenues ratably over the terms of the applicable agreements.
DoubleClick is obligated to provide any enhancements or upgrades it develops and
other support over the terms of the applicable agreements.
INTERNAL USE SOFTWARE
On January 1, 1999, DoubleClick adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires certain direct development costs
associated with internal use software to be capitalized including external
direct costs of material and services and payroll costs for employees devoting
time to the software projects. These costs are included in property and
equipment and are amortized over the useful life of the software beginning when
the asset is substantially ready for use. Costs incurred during the preliminary
project stage, as well as for maintenance and training are expensed as incurred.
Adoption of this statement did not have a material impact on DoubleClick's
financial statements.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
DoubleClick's financial instruments consist of cash and cash equivalents,
investments, accounts receivable, accounts payable, and accrued expenses. At
September 30, 1999 and December 31, 1998, the fair value of these instruments
approximated their financial statement carrying amount.
Credit is extended to customers based on an evaluation of their financial
condition, and collateral is not required. DoubleClick performs ongoing credit
evaluations of its customers and maintains an allowance for doubtful accounts.
DoubleClick is subject to concentrations of credit risk and interest rate
risk related to its investments. DoubleClick's credit risk is managed by
investing in money market funds, short-term commercial paper, and A1 rated
corporate bonds. For the three months ended September 30, 1999 and 1998,
interest income was $5.0 million and $720,000, respectively. For the nine
months ended September 30, 1999 and 1998, interest income was $11.5 million and
$2.0 million, respectively.
6
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
Net revenues derived from advertising impressions delivered to users of the
AltaVista Web site represented 16.4% and 47.1% of DoubleClick's total revenues
for the three months ended September 30, 1999 and 1998, respectively. No other
Web site within the Network was responsible for 10% or more of DoubleClick's
total revenues during the periods presented in the consolidated statement of
operations. Likewise, for the three months ended September 30, 1999 and 1998, no
advertising customer was responsible for 10% or more of DoubleClick's total
revenue or total accounts receivable.
BASIC AND DILUTED NET LOSS PER SHARE
The presentation of basic and diluted net loss per share has been
calculated to give effect to the conversion of the Convertible Preferred Stock
from the date of conversion, which occurred simultaneous with the closing of
DoubleClick's initial public offering on February 25, 1998. Basic net loss per
share is computed by dividing the net loss by the sum of the weighted average
number of shares of common stock outstanding, including the number of common
shares issued upon the conversion of convertible preferred stock, as of the date
of the conversion.
Diluted loss per share is based on the potential dilution that would occur
on exercise or conversion of securities into common stock. At September 30, 1999
and 1998, outstanding options to purchase shares of common stock of 5.8 million
and 4.7 million, respectively, with weighted average per share exercise prices
of $22.33 and $3.50, respectively, that could potentially dilute basic earnings
per share were not included in the computation of diluted net loss per share
because to do so would have had an antidilutive effect for the periods
presented. Similarly, DoubleClick had $250 million of convertible subordinated
notes due 2006, convertible into DoubleClick's common stock at $82.50 per share,
outstanding at September 30, 1999 that were not included in the computation of
diluted net loss per share because to do so would have had an antidilutive
effect for the period presented. As a result, the basic and diluted per share
amounts are equal for the periods ended September 30, 1999 and 1998.
NOTE 2 - MERGERS
NETGRAVITY MERGER
On October 26, 1999, DoubleClick consummated its merger with NetGravity,
Inc. ("NetGravity"), a leading provider of interactive online advertising and
direct marketing software solutions. Under the terms of the merger, which will
be accounted for as a pooling of interests, DoubleClick issued 0.28 shares of
DoubleClick common stock for each share of NetGravity common stock. DoubleClick
expects to record certain one-time charges in the fourth quarter of 1999
relating to expenses incurred with this transaction.
The following pro forma results for the three and nine months ended
September 30, 1999 and 1998 assume the merger occurred as of January 1, 1998:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(000's, except per share amounts) 1999 1998 1999 1998
- --------------------------------- ---- ---- ---- ----
Revenues $ 51,706 $ 23,836 $ 115,005 $ 58,469
Net loss (6,931) (7,537) (25,301) (22,448)
Basic and diluted loss
per share ($0.15) ($0.21) ($0.57) ($0.67)
7
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - MERGERS (CONTINUED)
ABACUS MERGER
On June 13, 1999, DoubleClick entered into a definitive agreement to
acquire Abacus Direct Corporation ("Abacus"), a leading provider of specialized
consumer information and analysis for the direct marketing industry. Under the
terms of the merger, which is expected to be accounted for as a pooling of
interests, DoubleClick will issue 1.05 shares of DoubleClick common stock for
each share of Abacus common stock. The transaction is expected to be completed
in the fourth quarter of 1999, and is subject to certain conditions, including
approval by both DoubleClick and Abacus shareholders. DoubleClick expects to
record certain one-time charges in the fourth quarter relating to expenses
incurred with this transaction.
It is anticipated that the combined company will incur estimated direct
transaction charges of $16 million related to the proposed merger of DoubleClick
with Abacus and $10.8 million for the NetGravity merger, principally in the
quarter when each respective merger is consummated. These charges include direct
transaction costs including estimated investment banking and financial advisory
fees of approximately $12.5 million and $7.3 million for the Abacus and
NetGravity merger, respectively, and other estimated merger related expenses
totaling $3.5 million for each of the Abacus and NetGravity mergers consisting
primarily of other professional services and estimated registration expenses
based upon discussions and arrangements with vendors. Actual amounts ultimately
incurred could differ from the estimated amounts. Additionally, the amounts
presented do not include integration costs which may be incurred. Neither
DoubleClick, Abacus or NetGravity has estimated the amount or nature of
integration costs.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the assets. Leasehold
improvements are amortized over their estimated useful lives, or the term of the
leases, whichever is shorter.
ESTIMATED SEPTEMBER 30, DECEMBER 31,
USEFUL LIFE 1999 1998
------------ ------------ ------------
(000'S)
- ------------
Computer Equipment and Software...................... 1-3 years $26,735 $12,453
Furniture and Fixtures............................... 5 years 2,552 1,247
Leasehold Improvements............................... 1-5 years 12,740 2,013
Capital Work-In-Progress............................. -- 696
------- -------
42,027 16,409
Less accumulated depreciation and amortization....... (15,336) (2,668)
------- -------
$26,691 $13,741
======= =======
As a result of DoubleClick's planned relocation, expected to be completed
on or about November 30, 1999, DoubleClick incurred a non-recurring charge for
the write-down of fixed assets of approximately $1.4 million on assets with a
carrying value of $2.1 million (primarily leasehold improvements). These assets
will be abandoned and not relocated to DoubleClick's new headquarters building
(see Note 4). DoubleClick's management made an assessment of the carrying value
of the assets to be disposed of and determined that their carrying value was in
excess of their estimated fair value. The estimated fair value of the assets was
determined based on an estimate of the recoverability of the assets carrying
amount over their remaining useful life to the abandonment date using their
initial cost recovery rate. Facility relocation and other for the nine
months ended September 30, 1999 also includes duplicative rental and moving
costs incurred in the amounts of $1,058,000 and $109,000, respectively. The
amount of $388,000 for the three months ended September 30, 1999 represents
duplicative rental costs. Depreciation and amortization of $729,000 associated
with assets to be disposed of is presented outside of Facility relocation and
other in the Consolidated Statements of Operations.
8
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - LEASE AGREEMENT
DoubleClick entered into a lease agreement dated January 26, 1999 for over
150,000 square feet of office space for a term of eleven years with an option to
renew the initial term for an additional five years. In 1999, DoubleClick will
make lease payments of approximately $800,000 on this space. In addition,
DoubleClick will pay monthly payments totaling $4.6 million per annum for the
period from January 26, 2000 to January 25, 2004 escalating to $4.85 million for
the period from January 26, 2004 to January 25, 2005, and $5.0 million per annum
for the period from January 26, 2006 to the expiration date of the initial term
on January 25, 2010.
NOTE 5 - CONVERTIBLE SUBORDINATED NOTES
On March 17, 1999, DoubleClick issued 4 3/4% Convertible Subordinated Notes
due 2006 with a principal amount of $250 million (the "Convertible Notes"). The
Convertible Notes are convertible into DoubleClick's common stock at a
conversion price of $82.50 per share, subject to adjustment in certain events
and at the holders' option. Interest on the Convertible Notes is payable
semiannually in arrears on March 15 and September 15 of each year, commencing on
September 15, 1999. The Convertible Notes are unsecured and are subordinated to
all existing and future Senior Indebtedness (as defined in Convertible Notes
indenture) of DoubleClick. If certain events occur (as described in the
Convertible Notes indenture), the Convertible Notes may be redeemed at the
option of DoubleClick, in whole or in part, beginning on March 20, 2001 at the
redemption prices set forth in the Convertible Notes indenture. In May 1999,
DoubleClick filed a shelf registration statement covering resales of the
Convertible Notes and the common stock issuable upon conversion of the
Convertible Notes. This registration statement was declared effective in
August 1999.
Upon occurrence of a Designated Event (as defined in the Convertible Notes
indenture) prior to the maturity of the Convertible Notes, each holder of the
Convertible Notes has the right to require DoubleClick to redeem all or any part
of the holder's Convertible Notes at a price equal to 100% of the principal
amount, plus any accrued interest, of the Convertible Notes being redeemed.
DoubleClick has or may use the net proceeds from the offering of the
Convertible Notes for general corporate purposes, including working capital to
fund anticipated operating losses, the expansion of DoubleClick's product
offerings, investments in new business products, technologies and markets,
capital expenditures, and acquisitions or investments in complementary
businesses, products and technologies.
Interest expense relating to the Convertible Notes was approximately $3.0
million and $6.3 million for the three and nine months ended September 30,
1999, respectively.
NOTE 6 - STOCK SPLIT
On March 11, 1999, DoubleClick's Board of Directors approved a two-for-one
Common Stock split in the form of a stock dividend for common stockholders of
record as of March 22, 1999 which became effective on April 5, 1999. All
references to the number of common shares and per share amounts in the financial
statements and notes thereto for all periods presented have been retroactively
adjusted to reflect the two-for-one split.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the nine months ended September 30, 1999 was
$5.7 million. There was no such interest paid for the nine months ended
September 30, 1998.
During the nine months ended September 30, 1999 and 1998, DoubleClick
incurred $133,000 and $270,000, respectively, in capital lease obligations.
9
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
DOUBLECLICK CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND
THE FUTURE PERFORMANCE OF DOUBLECLICK WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES. DOUBLECLICK'S ACTUAL RESULTS AND TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN
THIS REPORT AND IN DOUBLECLICK'S OTHER PUBLIC FILINGS MADE FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
References in this report to "DoubleClick", "we", "our" and "us" refer to
DoubleClick Inc., and its subsidiaries. DoubleClick is a leading provider of
comprehensive Internet advertising solutions for advertisers, ad agencies, Web
publishers, and e-commerce merchants worldwide. DoubleClick currently has three
principal product offerings. The DoubleClick Network (ad sales) provides
fully-outsourced ad sales, delivery and related services to publishers of
highly-trafficked Web sites, including The Dilbert Zone, Macromedia,
Travelocity, Kelley Blue Book and Food TV. The DoubleClick Network focuses
on meeting the needs of Internet advertisers who target users on a national,
international and/or local basis. DoubleClick offers to Web publishers seeking
an ad delivery and reporting solution both the DART for Publishers service
(service bureau) and and AdServer family of products (software solution formerly
offered by NetGravity, Inc.), and to e-commerce merchants the AdServer family
of products. Through the DART for Advertisers service, DoubleClick provides
advertisers and ad agencies the ability to control the targeting, delivery,
measurement and analysis of their online marketing campaigns on a real-time
basis. DoubleClick also performs technology consulting services for its
DART service and with the acquisition of NetGravity as of October 26, 1999,
AdServer clients. DoubleClick's proprietary DART technology, which dynamically
matches and delivers ads to the target audience within milliseconds, is the
platform for all of DoubleClick's service bureau solutions. DoubleClick's
proprietary AdServer family of products is the platform for all DoubleClick's
software solutions.
DoubleClick completed its initial public offering in February 1998 and
received net proceeds of approximately $62.5 million. In December 1998,
DoubleClick received net proceeds of approximately $93.7 million from an
additional public offering. In March 1999, DoubleClick received net proceeds of
approximately $244.7 million from its issuance of $250 million principal amount
4 3/4% Convertible Subordinated Notes due in 2006. The net proceeds of these
transactions were added to DoubleClick's working capital and, pending their use,
DoubleClick has invested such funds in interest-bearing investment grade
instruments.
DoubleClick offers advertising on the DoubleClick Network to third party
advertisers with pricing generally determined on a CPM (cost per thousand ads
delivered) or cost per day basis. Discounts are offered based on a variety of
factors, including the duration and gross dollar amount of advertising
campaigns. Advertisements sold by DoubleClick are typically sold pursuant to
purchase order agreements, which are subject to cancellation.
DoubleClick's revenues from the DoubleClick Network are received from the
advertiser that orders the ad, and DoubleClick typically pays the Web publisher
(on whose Web site such advertisement is delivered) a service fee. This service
fee is calculated as a percentage of such advertising revenues, and included in
cost of revenues. DoubleClick is responsible for billing and collecting for ads
delivered on the DoubleClick Network, and typically assumes the risk of
non-payment from advertisers. In addition, DoubleClick earns service fees for
providing the DART Service to Web publishers and the Closed Loop Marketing
Solutions suite of products to Internet advertisers and ad agencies.
10
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW (CONTINUED)
Advertising revenues and DART service fees are generally recognized in the
period that the advertisement is delivered, provided that no significant
obligations remain and collection of the resulting receivable is probable.
DoubleClick also sells sponsorship advertising, which involves a greater degree
of integration among DoubleClick, the advertiser and the Web sites on the
DoubleClick Network. These sponsorships are typically priced based on the length
of time that the sponsorship runs, rather than a CPM basis. Revenues relating to
sponsorship advertising are recognized ratably over the sponsorship period.
DoubleClick expects that revenues generated from the DoubleClick Network
will continue to account for a substantial portion of DoubleClick's revenues for
the foreseeable future. Moreover, ads delivered on Web sites of the top four Web
publishers in the DoubleClick Network accounted for approximately 18.1% of
DoubleClick's revenues for the nine months ended September 30, 1999. DoubleClick
typically enters into short-term contracts with Web publishers for inclusion of
their Web sites in the DoubleClick Network. The failure to successfully market
the DoubleClick Network, the loss of one or more of the Web sites which account
for a significant portion of DoubleClick's revenues from the DoubleClick
Network, or any reduction in traffic on such Web sites could have a material
adverse effect on DoubleClick's business, results of operations and financial
condition. Effective January 1, 1999, AltaVista, historically the largest
DoubleClick Network Publisher, became DoubleClick's largest DART customer. See
"TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS" below.
To take advantage of the global reach of the Internet, DoubleClick has
established DoubleClick Networks in Europe, Asia and other international
markets. DoubleClick currently has operations in Australia, Canada, France,
Germany, United Kingdom, and Benelux (Belgium, the Netherlands and Luxembourg)
and operates through its business partners in Japan, Iberoamerica, Italy and
Scandinavia. DoubleClick expects to continue to invest in building its
international operations.
DoubleClick has incurred significant losses since its inception and, as of
September 30, 1999, had an accumulated deficit of $72.6 million, of which $47.6
million related to cumulative losses and $25.0 million related to the redemption
of shares of Common Stock from certain stockholders in connection with the
recapitalization of DoubleClick that occurred simultaneously with the completion
of a private placement of DoubleClick's securities in June 1997. In addition,
DoubleClick recorded deferred compensation of $1.5 million, which represented
the difference between the exercise price and the fair market value of
DoubleClick's common stock issuable upon the exercise of certain stock options
granted to employees. The deferred compensation is being amortized over the
vesting periods of the related options. Of the total deferred compensation
amount, approximately $1.3 million has been amortized as of September 30, 1999.
DoubleClick believes that quarter-to-quarter comparisons of its results of
operations should not be relied upon as an indication of future performance.
DoubleClick plans to significantly increase its operating expenses to increase
its sales and marketing operations, to continue its international expansion, to
upgrade and enhance its DART technology and to market and support its solutions.
DoubleClick may be unable to modify its planned spending quickly enough to
offset any unexpected revenue shortfall. If DoubleClick has a shortfall in
revenues in relation to its expenses, or if DoubleClick's expenses precede
increased revenues, then DoubleClick's results of operations and financial
condition may be materially and adversely affected. As a result of these
factors, there can be no assurance that DoubleClick will not incur significant
losses on a quarterly and annual basis for the foreseeable future.
11
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SIGNIFICANT TRANSACTIONS
NETGRAVITY MERGER
On October 26, 1999, DoubleClick consummated its merger with NetGravity,
Inc. ("NetGravity"), a leading provider of interactive online advertising and
direct marketing software solutions. Under the terms of the merger, which will
be accounted for as a pooling of interests, DoubleClick issued 0.28 shares of
DoubleClick common stock for each share of NetGravity common stock. DoubleClick
expects to record certain one-time charges in the fourth quarter of 1999
relating to expenses incurred with this transaction.
The following pro forma results for the three and nine months ended
September 30, 1999 and 1998 assume the merger occurred as of January 1, 1998:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(000's except per
share amounts) 1999 1998 1999 1998
- ----------------------- ---- ---- ---- ----
Revenues $51,706 $23,836 $115,005 $58,469
Net loss (6,931) (7,537) (25,301) (22,448)
Basic and diluted loss
per share ($0.15) ($0.21) ($0.57) ($0.67)
ABACUS MERGER
On June 13, 1999, DoubleClick entered into a definitive agreement to
acquire Abacus Direct Corporation ("Abacus"), a leading provider of specialized
consumer information and analysis for the direct marketing industry. Under the
terms of the merger, which is expected to be accounted for as a pooling of
interests, DoubleClick will issue 1.05 shares of DoubleClick common stock for
each share of Abacus common stock. The transaction is expected to be completed
in the fourth quarter of 1999, and is subject to certain conditions, including
approval by both DoubleClick and Abacus shareholders. DoubleClick expects to
record certain one-time charges when the transaction closes relating to expenses
incurred with this transaction.
It is anticipated that the combined company will incur estimated direct
transaction charges of $16 million related to the proposed merger of DoubleClick
with Abacus and $10.8 million for the NetGravity merger, principally in the
quarter in which the proposed merger is consummated. These charges include
direct transaction costs including estimated investment banking and financial
advisory fees of approximately $12.5 million and $7.3 million for the Abacus and
NetGravity merger, respectively, and other estimated merger related expenses
totaling $3.5 million for each of the Abacus and NetGravity mergers consisting
primarily of other professional services and estimated registration expenses
based upon discussions and arrangements with vendors. Actual amounts ultimately
incurred could differ from the estimated amounts. Additionally, the amounts
presented do not include integration costs which may be incurred. Neither
DoubleClick, Abacus or NetGravity has estimated the amount or nature of
integration costs.
12
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS
In December 1996, DoubleClick entered into a Procurement and Trafficking
Agreement with Digital Equipment Corporation (acquired by Compaq in June 1998)
pursuant to which DoubleClick had the exclusive right to sell and deliver all
advertising on specified pages within the AltaVista Web site. In accordance with
this agreement, DoubleClick paid AltaVista a service fee calculated as a
percentage of the revenues derived from the delivery of advertisements on or
through the AltaVista Web site.
Effective January 1, 1999, DoubleClick changed its relationship with Compaq
by entering into an Advertising Services Agreement (the "AltaVista Advertising
Services Agreement") that superceded the Procurement and Trafficking Agreement.
Pursuant to the AltaVista Advertising Services Agreement, Compaq has agreed to
use DoubleClick's DART technology for ad delivery and to outsource to
DoubleClick certain ad sales functions for domestic, international, and local ad
sales. In consideration for such services performed by DoubleClick, Compaq pays
to DoubleClick (i) a DART Services fee for all advertising delivered by
DoubleClick on the AltaVista Web site, (ii) a sales commission based on the net
revenues generated from all advertisements sold by DoubleClick on behalf of
Compaq and (iii) a billing and collections fee for all billing and collections
services performed by DoubleClick on behalf of Compaq. Under the AltaVista
Advertising Services Agreement, the manner in which DoubleClick reports its
financial results related to the services it provides to the AltaVista Web site
has changed. Through December 31, 1998, DoubleClick recognized as revenues the
gross revenues related to ads delivered by DoubleClick to the AltaVista Web
site. Beginning January 1, 1999, pursuant to the AltaVista Advertising Services
Agreement, DoubleClick recognizes DART service fees, sales commissions and
billing and collection fees as revenues derived from the sale and delivery of
ads on the AltaVista Web site and associated services. As a result of this
change in relationship with AltaVista, overall gross margin percentage has
increased (no significant change in gross profit dollars) as DoubleClick is no
longer required to pay service fees to AltaVista for ads sold and delivered on
the AltaVista Web site and revenues include the fees earned for services
rendered. The AltaVista Advertising Services Agreement will expire on December
31, 2001, subject to prior termination in certain limited circumstances or
further extension in accordance with the terms of the AltaVista Advertising
Services Agreement. On June 29, 1999, Compaq agreed to transfer to CMGI, Inc. a
controlling interest in AltaVista. Compaq and its wholly owned subsidiary
Digital Equipment Corporation contributed the assets and liabilities comprising
AltaVista's business, which included the Advertising Services Agreement, to
AltaVista Company, a new company of which CMGI owns approximately 83%, with
the remainder owned by Compaq.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ ------------------------------------------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE
(000's) 1999 1998 CHANGE CHANGE 1999 1998 CHANGE CHANGE
- -------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
System
revenues (a) $60,436 $20,777 $39,659 191% $135,588 $51,074 $84,514 165%
======= ======= ======= ==== ======= ======= ======= ====
Revenues $44,948 $20,777 $24,171 116% $98,027 $51,074 $46,953 92%
Cost of
revenues 22,031 13,970 8,061 58% 47,069 34,539 12,530 36%
------- ------- ------- ------- ------- -------
Gross Profit $22,917 $ 6,807 $16,110 237% $50,958 $16,535 $34,423 208%
======= ======= ======= ==== ======= ======= ======= ====
(a) System revenues include revenues earned by DoubleClick with respect to
network sales relating to publishers which are part of the DoubleClick
Network, fees earned from independent publishers and advertisers which use
the DART technology to deliver ad impressions, and amounts invoiced on
behalf of Compaq Computer Corp. pursuant to the Procurement and
Trafficking Agreement (in place from December 1996 to December 1998).
System revenues for the nine months ended September 30, 1999 exclude DART
service fees, sales commissions and billing and collection fees owed by
Compaq Computer Corp. pursuant to the AltaVista Advertising Services
Agreement (effective January 1, 1999).
13
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenues increased to $44.9 million for the three months ended September
30, 1999, compared to $20.8 million for the three months ended September 30,
1998. Revenues increased $46.9 million from $51.1 million for the nine months
ended September 30, 1998 to $98.0 million, or 92%, for the nine months ended
September 30, 1999.
The increase in revenues was primarily due to an increase in the number of
advertisers and ads delivered on the DoubleClick Network as well as an increase
in total DART fees earned from publishers and advertisers. Revenues derived from
advertising impressions delivered to users of the AltaVista Web site represented
16.4% and 47.1% of DoubleClick's revenues for the three months ended September
30, 1999 and 1998, respectively. AltaVista billings were approximately 37.8% and
47.1% of DoubleClick's systems revenues for the three months ended September 30,
1999 and 1998, respectively. For the nine months ended September 30, 1999 and
1998, revenues derived from advertising impressions delivered to users of the
AltaVista Web Site represented 18.7% and 49.5% of DoubleClick's revenues. And,
for the nine months ended September 30, 1999 and 1998, AltaVista billings were
approximately 41.2% and 49.5% of DoubleClick's systems revenues, respectively.
No other Web site accounted for more than 10% revenues during the three or nine
months ended September 30, 1999 and 1998, and no one advertiser accounted for
10% of revenues during the same periods. Revenues derived from advertising
impressions delivered to users of the AltaVista Web site has and will continue
to represent a significant portion of DoubleClick's revenues. The provision for
advertiser discounts increased to $2.3 million for the three months ended
September 30, 1999, compared to $1.1 million for the three months ended
September 30, 1998. The provision for advertiser discounts increased to $5.4
million for the nine months ended September 30, 1999, compared to $2.1 million
for the nine months ended September 30, 1998. The increases in the provision for
advertiser discounts are commensurate with the increase in revenues and the
level of business activity.
COST OF REVENUES
Cost of revenues consists primarily of service fees paid to Web publishers
for ads delivered to the Web sites on the DoubleClick Network. Cost of revenues
also includes other costs of delivering advertisements, including depreciation
of the ad delivery system, facilities and personnel-related costs incurred to
operate our ad delivery system and Internet access costs. Gross margin was 51.0%
and 32.8% for the three months ended September 30, 1999 and 1998, respectively.
Gross margin was 52.0% and 32.4% for the nine months ended September 30, 1999
and 1998, respectively.
The increase in gross margin percent was primarily the result of an
increase in revenues from higher margin DART services as a percentage of total
revenues, including the impact of the AltaVista Advertising Service Agreement.
OPERATING EXPENSES
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF SYSTEM
REVENUES (a) REVENUES (a)
------------------------------ -------------------------
(000's) 1999 1998 1999 1998 1999 1998
- -------------------------- -------- ------- -------- -------- -------- --------
Sales and Marketing $18,629 $7,608 41.4% 36.6% 30.8% 36.6%
General and Administrative $ 6,141 $2,855 13.7% 13.7% 10.2% 13.7%
Product Development $ 5,177 $1,778 11.5% 8.6% 8.6% 8.6%
Facility Relocation &
Other $ 388 -- .9% -- .6% --
14
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF SYSTEM
REVENUES (a) REVENUES (a)
------------------------------ -------------------------
(000's) 1999 1998 1999 1998 1999 1998
- -------------------------- -------- ------- -------- -------- -------- --------
Sales and Marketing $43,688 $20,117 44.6% 39.4% 32.2% 39.4%
General and Administrative $14,891 $ 7,825 15.2% 15.3% 11.0% 15.3%
Product Development $12,868 $ 4,357 13.1% 8.5% 9.5% 8.5%
Facility Relocation &
Other $ 2,520 -- 2.6% -- 1.9% --
(a) All references to revenues take into consideration the change in
relationship with Compaq, as discussed above. On June 29, 1999, Compaq
agreed to transfer to CMGI, Inc. a controlling interest in AltaVista.
Compaq and its wholly owned subsidiary Digital Equipment Corporation
contributed the assets and liabilities comprising AltaVista's business,
which included the Advertising Services Agreement, to AltaVista Company,
a new company of which CMGI owns approximately 83%, with the remainder
owned by Compaq.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, trade show expenses, seminars and costs of
marketing materials. Sales and marketing expenses increased to $18.6 million for
the three months ended September 30, 1999, compared to $7.6 million for the
three months ended September 30, 1998. The increase was primarily attributable
to the increase in sales personnel associated with our expansion, including
international operations, of approximately $7.5 million, commissions associated
with the increase in revenues of approximately $2.0 million, and costs related
to the continued development and implementation of DoubleClick's marketing and
branding campaigns. Sales and marketing expenses increased to $43.7 million for
the nine months ended September 30, 1999, compared to $20.1 million for the nine
months ended September 30, 1998. The increase was primarily attributable to the
increase in sales personnel associated with our expansion, including
international operations of approximately $19.7 million, commissions associated
with the increase in revenues of approximately $1.2 million, and costs related
to the continued development and implementation of DoubleClick's marketing and
branding campaigns. In addition, the provision for doubtful accounts was $1.0
million for the three months ended September 30, 1999, compared to $300,000 for
the three months ended September 30, 1998. The provision for doubtful accounts
increased to $2.5 million for the nine months ended September 30, 1999, compared
to $1.0 million for the nine months ended September 30, 1998. The increases in
the provision for doubtful accounts are commensurate with the increase in
revenues and the level of business activity. Moreover, DoubleClick expects sales
and marketing expenses to increase on an absolute dollar basis but decrease as a
percentage of revenues as DoubleClick hires additional personnel, expands into
new markets and continues to promote the DoubleClick brand.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation and professional service fees and related supplies and
materials. General and administrative expenses increased to $6.1 million for the
three months ended September 30, 1999, compared to $2.9 million for the three
months ended September 30,1998. The increase was due primarily to costs
associated with increased personnel of approximately $2.6 million and increased
professional fees of approximately $700,000. General and administrative expenses
increased to $14.9 million for the nine months ended September 30, 1999,
compared to $7.8 million for the nine months ended September 30, 1998. The
increase was due primarily to costs associated with increased personnel of
approximately $5.7 million and increased professional fees of approximately $1.4
million. DoubleClick expects general and administrative expenses to increase on
an absolute dollar basis but decrease as a percentage of revenues as DoubleClick
hires additional personnel and incurs additional costs related to the growth of
its business.
15
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
compensation and consulting expenses and enhancements to the DART technology. To
date, all product development costs have been expensed as incurred. Product
development expenses increased to $5.2 million for the three months ended
September 30, 1999, compared to $1.8 million for the three months ended
September 30, 1998. The increase was primarily due to increases in product
development personnel and related expenses of approximately $2.8 million and
consulting and other miscellaneous expense. Product development expenses
increased to $12.9 million for the nine months ended September 30, 1999,
compared to $4.4 million for the nine months ended September 30, 1998. The
increase was primarily due to increases in product development personnel and
related expenses of approximately $7.0 million and consulting and other
miscellaneous expenses. DoubleClick believes that continued investment in
product development is critical to attaining its strategic objectives and, as a
result, expects product development expenses to increase on an absolute dollar
basis but remain relatively constant as a percentage of revenues.
FACILITY RELOCATION AND OTHER. During the three and nine months ended
September 30, 1999, DoubleClick recorded a charge of $388,000 and $2.5 million,
respectively, for expenses related to its planned move to a new headquarters
facility. The move, expected to be completed on or about November 30, 1999,
will consolidate two leased facilities in New York, in which DoubleClick's
executive offices and principal operations are located, into approximately
150,000 square feet of office space located at 450 West 33rd Street, New York,
New York. The charges relate primarily to the write-down of fixed assets of
approximately $1.4 million (primarily leasehold improvements) that will be
abandoned and not relocated to DoubleClick's new headquarters building.
DoubleClick's management made an assessment of the carrying value of the assets
to be disposed of and determined that their carrying value was in excess of
their estimated fair value. The estimated fair value of the assets was
determined based on an estimate of the recoverability of the assets carrying
amount over their remaining useful life to the abandonment date using their
initial cost recovery rate. Also included in facility relocation and other, for
the nine months ended September 30, 1999, are duplicative rental and moving
costs when incurred of approximately $1.1 million and $109,000, respectively.
The amount of $388,000 for the three months ended September 30, 1999 represents
duplicative rental costs. Depreciation and amortization of $729,000 associated
with the assets to be disposed of are presented outside of the facility
relocation and other in the Consolidated Statements of Operations.
INTEREST INCOME (EXPENSE)
Net interest income increased to $2.0 million for the three months ended
September 30, 1999, compared to net interest income of $720,000 for the three
months ended September 30,1998. Net interest income increased to $5.1 million
for the nine months ended September 30, 1999, compared to net interest income of
$1.9 million for the nine months ended September 30, 1998. The increase in net
interest income was attributable to an increase in cash and cash equivalents and
investments as a result of the net proceeds received by DoubleClick from its
additional public offering of common stock in December 1998 and issuance of its
4 3/4% Convertible Subordinated Notes in March 1999, offset in part by interest
expense associated with the 4 3/4% Convertible Subordinated Notes.
NET LOSS
DoubleClick's net loss increased to $5.4 million for the three months ended
September 30, 1999, compared to $4.7 million for the three months ended
September 30, 1998. DoubleClick's net loss increased to $17.9 million for the
nine months ended September 30, 1999, compared to $13.8 million for the nine
months ended September 30, 1998. The increase in the net loss was primarily due
to expenses related to DoubleClick's planned move to a new headquarters facility
in addition to the hiring of additional personnel, particularly in sales and
marketing and product development, offset in part by an increase in net interest
income.
16
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
As of September 30, 1999, DoubleClick had $68.3 million of cash and cash
equivalents, and $295.0 million in investments in marketable securities. As of
September 30, 1999, DoubleClick's principal commitments consist of $250 million
of 4 3/4% Convertible Subordinated Notes due 2006 and operating and capital
lease obligations.
Management anticipates that it will experience a substantial increase in
its capital expenditures and lease commitments consistent with its anticipated
growth in operations, infrastructure and personnel, and the scheduled build-out
of its newly leased New York headquarters facilities. DoubleClick currently
anticipates that it will continue to experience significant growth in its
operating expenses for the foreseeable future and that its operating expenses
will be a material use of DoubleClick's cash resources. DoubleClick believes
that its existing cash and cash equivalents and investments will be sufficient
to meet its anticipated cash needs for working capital and capital expenditures
for at least the next twelve months.
CONVERTIBLE SUBORDINATED NOTES
In March 1999, DoubleClick issued 4 3/4% Convertible Subordinated Notes due
2006 in an aggregate principal amount of $250 million (the "Convertible Notes").
The Convertible Notes are convertible into DoubleClick's common stock at a
conversion price of $82.50 per share, subject to adjustment in certain events
and at the holders' option. Interest on the Convertible Notes is payable
semiannually in arrears on March 15 and September 15 of each year, commencing on
September 15, 1999. The Convertible Notes are unsecured and are subordinated to
all existing and future Senior Indebtedness (as defined in the Convertible Notes
indenture) of DoubleClick. If certain events occur (as described in the
Convertible Notes indenture), the Convertible Notes may be redeemed at the
option of DoubleClick, in whole or in part, beginning on March 20, 2001 at the
redemption prices set forth in the Convertible Notes indenture.
In May 1999, DoubleClick filed a shelf registration statement covering
resales of the Convertible Notes and the common stock issuable upon conversion
of the Convertible Notes. This registration statement was effective in August
1999.
Upon the occurrence of a Designated Event (as defined in the Convertible
Notes indenture) prior to the maturity of the Convertible Notes, each holder of
the Convertible Notes has the right to require DoubleClick to redeem all or any
part of the holder's Convertible Notes at a price equal to 100% of the principal
amount, plus any accrued interest, of the Convertible Notes being redeemed.
DoubleClick has or may use the net proceeds from the offering of the
Convertible Notes for general corporate purposes, including working capital to
fund anticipated operating losses, the expansion of DoubleClick's core business,
investments in new business segments and markets, capital expenditures,
acquisitions or investments in complementary businesses, products and
technologies.
17
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
CASH FLOWS
Net cash provided by operating activities equaled $6.3 million for the nine
months ended September 30, 1999, compared to net cash used in operating
activities of $14.0 million for the nine months ended September 30, 1998. Cash
provided by operating activities for the nine months ended September 30, 1999
resulted from increases in accounts payable, accrued expenses and deferred
revenue; offset by net losses, and increases in accounts receivable and prepaid
expenses and other current assets.
Net cash used in investing activities equaled $311.8 million for the nine
months ended September 30, 1999, compared to $12.8 million for the nine months
ended September 30, 1998. Cash used in investing activities for the nine months
ended September 30, 1999 resulted from purchases of investments with the
proceeds received from the issuance of the Convertible Notes in March 1999 and
of property and equipment.
Net cash provided by financing activities equaled $246.9 million for the
nine months ended September 30, 1999, compared to $62.6 million for the nine
months ended September 30, 1998. Cash provided by financing activities for the
nine months ended September 30, 1999 consisted primarily of net proceeds
received by DoubleClick in connection with the issuance of the Convertible Notes
in March 1999.
YEAR 2000
OVERVIEW
Currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
DOUBLECLICK (EXCLUDING FORMER NETGRAVITY PRODUCTS, SERVICES AND OPERATIONS)
The disclosure under this heading relates to DoubleClick's products,
services and operations other than those resulting from DoubleClick's merger
with NetGravity, Inc. on October 26, 1999.
STATE OF READINESS
As discussed in more detail in the discussion below, DoubleClick has
completed all material elements of its Year 2000 readiness assessment, testing
and remediation plan for its material information technology ("IT") systems,
which includes the hardware and software that enable DoubleClick to provide and
deliver its solutions, and its material non-IT systems. DoubleClick's plan for
assessing its Year 2000 readiness consists of (i) quality assurance testing of
its internally developed proprietary software incorporated into its solutions
("DART Technology"); (ii) contacting third-party vendors and licensors of
material hardware, software and services that are both directly and indirectly
related to the delivery of DoubleClick's solutions to its Web publisher and
advertiser customers; (iii) contacting vendors of material non-IT systems; (iv)
assessment of repair or replacement requirements; (v) repair or replacement;
(vi) implementation; and (vii) creation of contingency plans in the event of
Year 2000 failures.
18
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DART TECHNOLOGY
DoubleClick has completed Year 2000 simulation testing and remediation of
the DART Technology, and believes that the DART Technology is Year 2000
compliant. DoubleClick is continually conducting quality assurance testing to
ensure Year 2000 compliance of all new internally developed proprietary code
incorporated into the DART Technology.
THIRD PARTY HARDWARE AND SOFTWARE
Most of the vendors of the material hardware and software components of
DoubleClick's IT systems have informed DoubleClick that the products used by
DoubleClick are currently Year 2000 compliant. To the extent Year 2000
remediation is required of any third party hardware or software component,
DoubleClick has completed the installation of the software that has been
provided to date by DoubleClick's vendors for this purpose. Some of the non-U.S.
companies providing server hosting services to DoubleClick's international data
centers have informed DoubleClick that they have not yet completed their Year
2000 readiness assessment. DoubleClick is further investigating the status of
the Year 2000 readiness of these companies. Notwithstanding the status of any
non-U.S. data center, DoubleClick believes that the design of its network of ad
servers to reroute traffic to functioning data centers minimizes the effect of
intermittent failures of any non-U.S. hosting service to be Year 2000 compliant.
DoubleClick has completed an assessment of the materiality of its non-IT
systems, and has obtained Year 2000 assurances from its vendors, including the
electrical utility and telephone company. DoubleClick, like all businesses, is
dependent on the continued functioning, domestically and internationally, of
basic services such as electrical utilities, telephony, mail delivery, and
transportation in order to conduct its business. While DoubleClick is taking
steps to attempt to ensure that the third parties on which it is reliant are
Year 2000 compliant, it cannot predict the likelihood of such compliance nor the
direct or indirect costs to DoubleClick of non-compliance by those third parties
or of securing alternate services from Year 2000 compliant parties.
COST
To date, DoubleClick has not incurred any material expenditures in
connection with identifying, evaluating or remediating Year 2000 compliance
issues. Most of its expenses have related to, and are expected to include, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. Although DoubleClick does
not anticipate incurring material costs in connection with its Year 2000
preparations. However, such expenses, if higher than anticipated, could have a
material adverse effect on DoubleClick's business, results of operations and
financial condition.
19
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RISKS
DoubleClick believes it has established an effective program to resolve
material Year 2000 issues in its sole control in a timely manner. DoubleClick
believes that it has completed all material elements of its Year 2000
assessment, testing and remediation plan. It is not possible to predict with
certainty the adverse events that could occur notwithstanding DoubleClick's
completion of its Year 2000 assessment, testing and remediation plan. However,
DoubleClick currently projects that its most reasonably likely worst-case
scenario could involve periodic, sporadic, localized Internet outages outside of
DoubleClick's control, and the failure of some Web sites to which DoubleClick
delivers advertising to function for a period of time. In the event of sporadic
Internet outages, DoubleClick believes that it will likely be able to continue
to deliver advertising by diverting delivery ad delivery to one or more of its
data centers around the world. However, if the Internet outages are extensive
and prolonged, DoubleClick may find that the demand for the excess capacity
reserved at its data centers exceeds supply, resulting in sporadic and temporary
failures by DoubleClick to deliver ads. In addition, DoubleClick relies on the
Web sites to which it delivers advertising to be functional, because DoubleClick
delivers ads (and accrues revenue) only when a Web site is visited by a user.
Any failure by these Web sites to function will likely diminish DoubleClick's
revenue for the period that the Web site is not functional. In addition,
although DoubleClick will have completed extensive efforts to ensure the Year
2000 compliance of the DART Technology and its internal IT systems, it is still
possible that one or after January 1, 2000, there may be failures of the DART
technology to deliver or create reports properly, or of its internal IT systems
to deliver ads. DoubleClick anticipates that any failure of the DART Technology
or of DoubleClick's internal IT systems will be minor, temporary and quickly
repaired. DoubleClick intends to have sufficient operations and engineering
staff on hand for an immediate response.
CONTINGENCY PLAN
As discussed above, some of DoubleClick's non-U.S. server hosting companies
have not yet provided adequate assurance of Year 2000 compliance.
Notwithstanding the status of any non-U.S. data center, DoubleClick believes
that the design of its network of ad servers to reroute traffic to functioning
data centers minimizes the effect of intermittent failures of any non-U.S.
hosting service to be Year 2000 compliant. DoubleClick will continue to make
other contingency plans in those cases in which DoubleClick determines such
plans are warranted.
NETGRAVITY PRODUCTS, SERVICES AND OPERATIONS
The disclosure under this heading relates solely to the products, services
and operations of NetGravity. Prior to October 26, 1999, the date of
NetGravity's merger into DoubleClick, all references to the Company under this
heading will refer to NetGravity. On and after that date, all references to the
Company under this heading will refer to DoubleClick.
20
The Company has completed its assessment of the impact of the Year 2000
issue on its business and operations. The Company has formed an ad-hoc Year 2000
project team to identify and address Year 2000 issues, including potential
issues with the significant non-IT systems in its buildings, plant, equipment
and other infrastructure. The Company has not identified any significant
non-compliance issues with its products that have not already been corrected.
The Company has been assured by its vendors that the material IT and non-IT
systems of its United States, Asia Pacific and European operations are Year 2000
compliant.
In September 1998, the Company released version 3.5 of its AdServer product
which included enhancements designed to correctly accept and process 21st
century dates and, as a result, the Company now believes that the current
versions of its AdServer family of software products are Year 2000 compliant.
However, given the complexity of software systems such as AdServer and the need
for them to interoperate with other systems, the Company can give no assurances
that its products will not experience Year 2000 problems in the future. Any such
Year 2000 issues could result in:
-- a decrease in sales of the Company's products;
-- deferral of revenue recognition on contracts in which the Company has
warranted (or may in the future warrant) compliance with Year 2000
requirements;
-- an increase in the allocation of resources to address Year 2000
problems of the Company's customers without additional revenue
commensurate with such dedicated resources; or
-- an increase in litigation costs relating to losses suffered by the
Company's customers due to Year 2000 problems.
In addition, if the Company's customers or its potential customers are
required to expend significant resources to address their Year 2000 issues (or
if they fail to appropriately address such Year 2000 issues), the Company's
business, results of operation and financial condition could be adversely
affected due to resulting changes in purchasing patterns. Furthermore, if Year
2000 problems experienced by any of the Company's significant suppliers or
service providers cause or contribute to delays or interruptions in the delivery
of products or services, such delays or interruptions could have a material and
adverse effect on the Company's business, results of operations and financial
condition. Although the Year 2000 project team has not yet determined the most
likely worst-case Year 2000 scenarios or quantified the likely impact of such
scenarios, it is clear that the occurrence of one or more of the risks described
above could have a material and adverse effect on the Company's business,
financial condition or results of operations.
The Company does not separately account for Year 2000 related expenses but
estimates that the expenses it has incurred to date to address Year 2000 issues
have not been material, and does not expect to incur material expenses in
connection with any required future remediation efforts. However, the Company's
Year 2000 compliance efforts related to AdServer consumed significant software
engineering resources that would otherwise have been devoted to product
development efforts. To the extent that significant additional software
engineering resources are required to address other Year
21
2000 issues that may be discovered, the Company's product development efforts
may be significantly hampered which, in turn, could have a material and
adverse effect on the Company's business, financial condition and results of
operations.
FORWARD-LOOKING STATEMENTS
The foregoing Year 2000 discussion and the information contained herein is
provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998 and contains "forward-looking statements"
within the meaning of the Private Securities Litigation reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which DoubleClick expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material difference include, but are not limited to, the ability to
identify and remediate all relevant systems, results of Year 2000 testing,
adequate resolution of Year 2000 issues by governmental agencies, businesses and
other third parties who are outsourcing service providers, suppliers, and
vendors of DoubleClick, unanticipated system costs, the adequacy of and ability
to implement contingency plans and uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and DoubleClick undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
22
DOUBLECLICK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The primary objective of DoubleClick's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, DoubleClick maintains its portfolio
of cash equivalents and investments in a variety of securities, including both
government and corporate obligations and money market funds.
The following table presents the amounts of DoubleClick's cash equivalents
and investments that are subject to interest rate risk by year of expected
maturity and average interest rates as of September 30, 1999.
(000's) 1999 2000 2001 Total Fair Value
- --------------------------------------------- ------- -------- ------- ------- ----------
Cash equivalents.............................. $51,328 -- -- $ 51,328 $ 51,328
Average interest rates........................ 5.4% -- --
Investments in marketable securities.......... $64,787 $140,148 $90,050 $294,985 $294,985
Average interest rates........................ 5.2% 5.5% 6.0%
DoubleClick did not hold derivative financial instruments as of September
30, 1999 and has never held such instruments in the past. As of September 30,
1999, DoubleClick had outstanding $250 million of Convertible Notes with a
fixed interest rate of 4 3/4%.
Foreign Currency Risk
Foreign currency risk related to DoubleClick's international sales are
derived mostly from DoubleClick's delivery of advertising impressions through
third-party Web sites that are a part of DoubleClick's U.S. or International
Networks and are typically denominated in the local currency of each country.
These subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency.
DoubleClick's 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,
DoubleClick's future results could be materially adversely impacted by changes
in these or other factors.
DoubleClick is also exposed to foreign exchange rate fluctuations,
primarily with respect to the British Pound and the Euro, as the financial
results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall expected profitability.
The effect of foreign exchange rate fluctuations on DoubleClick in the quarter
ended September 30, 1999 was not material.
23
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT DOUBLECLICK AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
DOUBLECLICK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. DOUBLECLICK UNDERTAKES
NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
RISKS RELATING TO OUR COMPANY AND OUR BUSINESS
LIMITED OPERATING HISTORY
We were incorporated in January 1996 and have a limited operating history.
An investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, including the Internet advertising market. These risks include our:
- ability to sustain historical revenue growth rates;
- dependence on a continuing relationship with AltaVista;
- reliance on the DoubleClick Network;
- need to manage our expanding operations;
- competition;
- ability to attract, retain and motivate qualified personnel;
- ability to maintain our current, and develop new, strategic
relationships with Web publishers;
- ability to anticipate and adapt to the changing Internet market; and
- ability to attract and retain a large number of advertisers from a
variety of industries.
We also depend on the growing use of the Internet for advertising, commerce
and communication, and on general economic conditions. We cannot assure you that
our business strategy will be successful or that we will successfully address
these risks. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our limited
operating history.
24
HISTORY OF LOSSES AND ANTICIPATION OF CONTINUED LOSSES
We incurred net losses of $3.2 million for the period from January 23, 1996
(inception) through December 31, 1996, $8.4 million for the year ended December
31, 1997, and $18.2 million for the year ended December 31, 1998. For the nine
months ended September 30, 1999 we incurred a net loss of $17.9 million and, as
of September 30, 1999, our accumulated deficit was $72.6 million. We have not
achieved profitability and expect to continue to incur operating losses at least
into the year 2000. We expect to continue to incur significant operating and
capital expenditures and, as a result, we will need to generate significant
revenues to achieve and maintain profitability. Although our revenues have grown
in recent quarters, we cannot assure you that we will achieve sufficient
revenues for profitability. Even if we do achieve profitability, we cannot
assure you that we can sustain or increase profitability on a quarterly or
annual basis in the future. If revenues grow slower than we anticipate, or if
operating expenses exceed our expectations or cannot be adjusted accordingly,
our business, results of operations and financial condition will be materially
and adversely affected.
OUR DEPENDENCE ON ALTAVISTA
Approximately 18.7% and 49.5% of revenues for the nine months ended
September 30, 1999 and 1998, respectively, resulted from advertisements
delivered on or through the AltaVista Web site. Approximately 41.2% and 49.5%
of systems revenues for the nine months ended September 30, 1999 and 1998,
respectively, resulted from AltaVista billings. On January 20, 1999, DoubleClick
agreed with Compaq to enter into an Advertising Services Agreement to replace
the existing Procurement and Trafficking Agreement. The Advertising Services
Agreement is effective as of January 1, 1999 and will expire on December 31,
2001, subject to prior termination in certain limited circumstances or further
extension in accordance with the terms of the Advertising Services Agreement.
On June 29, 1999, Compaq agreed to transfer to CMGI, Inc. a controlling interest
in AltaVista. Compaq and its wholly owned subsidiary, Digital Equipment
Corporation, contributed the assets and liabilities comprising AltaVista's
business, which included the Advertising Services Agreement, to AltaVista
Company, a new company of which CMGI owns approximately 83%, with the remainder
owned by Compaq. The loss of AltaVista as a customer or any significant
reduction in traffic on or through the AltaVista Web site would materially and
adversely affect our business, results of operations and financial condition.
WEB PUBLISHER CONCENTRATION
We derive a substantial portion of our DoubleClick Network revenues from
ads we deliver on the Web sites of a limited number of Web publishers.
Approximately 18.1% and 60.3% of our revenues for the nine months ended
September 30, 1999 and 1998, respectively, resulted from ads delivered on the
Web sites of the top four Web publishers on the DoubleClick Network. Our
business, results of operations and financial condition could be materially
and adversely affected by the loss of one or more of the Web publishers which
account for a significant portion of our DoubleClick Network revenues or any
significant reduction in traffic on such Web publisher's Web sites. In addition,
advertisers or Web publishers may leave the DoubleClick Network because of such
a loss, which could materially and adversely affect our business, results of
operations and financial condition. Typically we enter into short-term contracts
with Web publishers for inclusion of their Web sites in the DoubleClick Network.
Since these contracts are short-term, we will have to negotiate new contracts
or renewals in the future, which may have terms that are not as favorable to us
as the terms of the existing contracts. Our business, results of operations and
financial condition could be materially and adversely affected by such new
contracts or renewals.
OUR RELIANCE ON THE DOUBLECLICK NETWORK
Since the third quarter of 1996, we have derived substantially all of our
revenues from advertisements we deliver to Web sites on the DoubleClick Network.
We expect that the DoubleClick Network will continue to account for a
substantial portion of our revenues for the foreseeable future. The DoubleClick
Network consists of Web sites of a limited number of Web publishers with which
we
25
OUR RELIANCE ON THE DOUBLECLICK NETWORK (CONTINUED)
have short-term contracts. We cannot assure you that such Web publishers will
remain associated with the DoubleClick Network, that any DoubleClick Network Web
site will maintain consistent or increasing levels of traffic over time, or that
we will be able to timely or effectively replace any exiting DoubleClick Network
Web site with other Web sites with comparable traffic patterns and user
demographics. Our failure to successfully market the DoubleClick Network, the
loss of one or more of the Web publishers which account for a significant
portion of our revenues from the DoubleClick Network, or the failure of the Web
sites on the DoubleClick Network to maintain consistent or increasing levels of
traffic would materially and adversely affect our business, results of
operations and financial condition.
QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. These
factors include:
- advertiser and Web publisher demand for our solutions;
- user traffic levels and the number of available impressions on the
DoubleClick Network's Web sites;
- seasonal fluctuations in Internet usage;
- changes in service fees we pay to Web publishers;
- changes in the growth rate of Internet usage;
- the commitment of advertising budgets to Internet advertising;
- the mix of revenues from our Internet advertising solutions;
- the timing and amount of costs relating to the expansion of our
operations;
- changes in our pricing policies or those of our competitors;
- the introduction of new solutions by us or our competitors;
- the mix of domestic and international sales;
- costs related to acquisitions of technology or businesses; and
- general economic and market conditions.
Our revenues for the foreseeable future will remain dependent on user
traffic levels and advertising activity on the DoubleClick Network. Such
future revenues are difficult to forecast. In addition, we plan to significantly
increase our operating expenses to increase our sales and marketing operations,
to continue our international expansion, to upgrade and enhance our DART
technology, and to market and support our solutions. We may be unable to adjust
spending quickly enough to offset any unexpected revenue shortfall. If we have
a shortfall in revenues in relation to our expenses, or if our expenses precede
increased revenues, then our business, results of operations and financial
condition.
26
QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
(CONTINUED)
would be materially and adversely affected. Such a result would likely affect
the market price of our common stock in a manner which may be unrelated to our
long-term operating performance.
We believe that advertising sales in traditional media, such as television
and radio, generally are lower in the first calendar quarter of each year. If
our market makes the transition from an emerging to a more developed medium,
seasonal and cyclical patterns may develop in our industry. Our revenues may
also be affected by seasonal and cyclical patterns in Internet advertising
spending if they emerge.
Due to all of the foregoing factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the price of our common stock may
fall.
NEED TO MANAGE GROWTH
To successfully implement our business plan in the rapidly evolving market
for Internet advertising requires an effective planning and management process.
We continue to increase the scope of our operations both domestically and
internationally, and we have grown our workforce substantially. As of June 30,
1996, we had a total of 25 employees and, as of September 30, 1999, we had a
total of 729 employees. In addition, we plan to continue to expand our sales and
marketing and customer support organizations both domestically and
internationally. This growth has placed, and our anticipated future growth in
our operations will continue to place, a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial and managerial controls and reporting systems and procedures, and will
need to continue to expand, train and manage our workforce. Our future
performance may also depend on the effective integration of acquired businesses.
Such integration, even if successful, may take a significant period of time and
expense, and may place a significant strain on our resources. Our business,
results of operations and financial condition will be materially and adversely
affected if we are unable to effectively manage our expanding operations or the
relocation of our data operations.
RECENT DEVELOPMENT OF THE INTERNET ADVERTISING MARKET AND
UNPROVEN ACCEPTANCE AND EFFECTIVENESS OF WEB ADVERTISING
Our future success is highly dependent on an increase in the use of the
Internet as an advertising medium. The Internet advertising market is new and
rapidly evolving, and it cannot yet be compared with traditional advertising
media to gauge its effectiveness. As a result, demand and market acceptance for
Internet advertising solutions is uncertain. Most of our current or potential
advertising customers have little or no experience using the Internet for
advertising purposes and they have allocated only a limited portion of their
advertising budgets to Internet advertising. The adoption of Internet
advertising, particularly by those entities that have historically relied upon
traditional media for advertising, requires the acceptance of a new way of
conducting business, exchanging information and advertising products and
services. Such customers may find Internet advertising to be less effective for
promoting their products and services relative to traditional advertising media.
In addition, most of our current and potential Web publisher customers have
little or no experience in generating revenues from the sale of advertising
space on their Web sites. We cannot assure you that the market for Internet
advertising will continue to emerge or become sustainable. If the market for
Internet advertising fails to develop or develops more slowly than we expect,
then our business, results of operations and financial condition could be
materially and adversely affected.
There are currently no standards for the measurement of the effectiveness
of Internet advertising and standard measurements may need to be developed to
support and promote Internet advertising as a
27
significant advertising medium. Our advertising customers may challenge or
refuse to accept our or third-party measurements of advertisement delivery
results, and our customers may not accept any errors in such measurements. In
addition, the accuracy of database information used to target advertisements is
essential to the effectiveness of Internet advertising that may be developed in
the future. The information in our database, like any database, may contain
inaccuracies which our customers may not accept.
Substantially all of our revenues are derived from the delivery of banner
advertisements. If advertisers determine that banner advertising is an
ineffective or unattractive advertising medium, we cannot assure you that we
will be able to effectively make the transition to any other form of Internet
advertising. Also, there are "filter" software programs that limit or prevent
advertising from being delivered to a user's computer. The commercial viability
of Internet advertising, and our business, results of operations and financial
condition, would be materially and adversely affected by Web users' widespread
adoption of such software.
PRIVACY CONCERNS
In recent months, the U.S. federal and various state governments have
proposed limitations on the collection and use of information regarding Internet
users. In October 1998, the European Union adopted a directive that may result
in limitations on our collection and use of information regarding Internet users
in Europe. Our DART technology targets advertising to users through the use of
"cookies" and other non-personally-identifying information. The effectiveness of
our DART technology could be limited by any regulation or limitation in the
collection or use of information regarding Internet users. Since many of the
limitations are still in the proposal stage, we cannot yet determine the full
impact of these regulations on our business.
UNPROVEN BUSINESS MODEL
Our business model is to generate revenues solely by providing Internet
advertising solutions to advertisers, ad agencies and Web publishers. The profit
potential for our business model is unproven. To be successful, both Internet
advertising and our solutions will need to achieve broad market acceptance by
advertisers, ad agencies and Web publishers. Our ability to generate significant
revenues from advertisers will depend, in part, on our ability to contract with
Web publishers that have Web sites with adequate available ad space inventory.
Further, these Web sites must generate sufficient user traffic with demographic
characteristics attractive to our advertisers. The intense competition among
Internet advertising sellers has led to the creation of a number of pricing
alternatives for Internet advertising. These alternatives make it difficult for
us to project future levels of advertising revenues and applicable gross margin
that can be sustained by us or the Internet advertising industry in general.
Market acceptance of our new solutions, including DoubleClick Local and the
Closed Loop Marketing Solutions suite of products, will depend on the continued
emergence of Internet commerce, communication and advertising, and market demand
for our solutions. We cannot assure you that the market for our new solutions
will develop or that demand for our new solutions will emerge or become
sustainable.
28
OUR MARKETS ARE HIGHLY COMPETITIVE
Our markets, namely Internet advertising and related products and services,
are intensely competitive. We expect such competition to continue to increase
because our markets pose no substantial barriers to entry. Competition may also
increase as a result of industry consolidation. We believe that our ability to
compete depends upon many factors both within and beyond our control, including
the following:
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed either by us or our competitors;
- customer service and support efforts;
- sales and marketing efforts; and
- the ease of use, performance, price and reliability of solutions
developed either by DoubleClick or its competitors.
We compete for Internet advertising revenues with large Web publishers and
Web search engine companies, such as America Online, Excite, Microsoft, Infoseek
and Yahoo!. Further, our DoubleClick Network competes with a variety of Internet
advertising networks, including 24/7 Media. In marketing our DoubleClick Network
and DART Service to Web publishers, we also compete with providers of ad servers
and related services. Recently, CMGI, Inc. has announced that it has agreed to
acquire several Internet advertising and marketing companies, including AdForce,
AdKnowledge, and Flycast Communications. Following the consummation of these
transactions, CMGI, Inc. will own several companies, including AdSmart Network
and Engage Technologies, that compete with DoubleClick's Internet advertising
solutions. We also encounter competition from a number of other sources,
including content aggregation companies, companies engaged in advertising sales
networks, advertising agencies, and other companies which facilitate Internet
advertising.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. These factors may allow them to respond more quickly than
we can to new or emerging technologies and changes in customer requirements. It
may also allow them to devote greater resources than we can to the development,
promotion and sale of their products and services. Such competitors may also
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to existing and potential employees, strategic partners,
advertisers and Web publishers. We cannot assure you that our competitors will
not develop products or services that are equal or superior to our solutions or
that achieve greater market acceptance than our solutions. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective advertising,
ad agency and Web publisher customers. As a result, it is possible that new
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share. We cannot assure you that we will be able to compete
successfully or that competitive pressures will not materially and adversely
affect our business, results of operations or financial condition.
Companies doing business on the Internet, including ours, must also compete
with television, radio, cable and print (traditional advertising media) for a
share of advertisers' total advertising budgets. Advertisers may be reluctant to
devote a significant portion of their advertising budget to Internet advertising
if they perceive the Internet to be a limited or ineffective advertising medium.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR INVESTMENTS
We may acquire or make investments in complementary businesses, products,
services or technologies. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products,
services or technologies, including our acquisition of NetGravity and pending
acquisition of Abacus. We cannot assure you that we will be able to identify
suitable acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to make such acquisitions
or investments on commercially acceptable terms. If we buy a company, we could
have difficulty in assimilating that company's personnel and operations. In
addition, the key personnel of the acquired company may decide not to work for
us. If we make other types of acquisitions, we could have difficulty in
assimilating the acquired products, services or
29
technologies into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees, increase our expenses and
adversely affect our results of operations due to accounting requirements such
as goodwill. Furthermore, we may incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities could be dilutive
to our existing stockholders.
DEPENDENCE ON KEY PERSONNEL
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel, in particular,
Kevin J. O'Connor, our Chief Executive Officer and Chairman of the Board of
Directors, Kevin P. Ryan, our President and Chief Operating Officer, and Dwight
A. Merriman, our Chief Technical Officer. We have no employment agreements with
any of these executives. The loss of the services of Messrs. O'Connor, Ryan or
Merriman, or certain other key employees, would likely have a material adverse
effect on our business, results of operations and financial condition. Our
future success also depends on our continuing 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 from time to time in the
past experienced, and we expect to continue to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications.
DEPENDENCE ON THE WEB INFRASTRUCTURE
Our success will depend, in large part, upon the maintenance of the Web
infrastructure, such as a reliable network backbone with the necessary speed,
data capacity and security, and timely development of enabling products such as
high speed modems, for providing reliable Web access and services and improved
content. We cannot assure you that the Web infrastructure will continue to
effectively support the demands placed on it as the Web continues to experience
increased numbers of users, frequency of use or increased bandwidth requirements
of users. Even if the necessary infrastructure or technologies are developed, we
may have to spend considerable amounts to adapt our solutions accordingly.
Furthermore, the Web has experienced a variety of outages and other delays due
to damage to portions of its infrastructure. Such outages and delays could
impact the Web sites of Web publishers using our solutions and the level of user
traffic on Web sites on the DoubleClick Network.
DEPENDENCE ON PROPRIETARY RIGHTS AND RISK OF INFRINGEMENT
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of patent, copyright, trade secret and trademark law. We have filed
two patent applications in the United States and two patent applications
internationally. In addition, we apply to register our trademarks in the United
States and internationally. (We own the registration for the DoubleClick
trademark in the United States.) On September 7, 1999, the U.S. Patent Office
issued a patent for DoubleClick's Web-based dynamic advertising delivery
solution. We cannot assure you that any of our patent applications or trademark
applications will be approved. Even if they are approved, such patents or
trademarks may be successfully challenged by others or invalidated. If our
trademark registrations are not approved because third parties own such
trademarks, our use of such trademarks will be restricted unless we enter
into arrangements with such third parties which may be unavailable on
commercially reasonable terms.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our solutions or technologies. We cannot assure you that the steps we have taken
will prevent misappropriation of our solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
Our DART technology collects and utilizes data derived from user activity
on the DoubleClick Network and the Web sites of Web publishers using our
solutions. This data is used for ad targeting and predicting ad performance.
Although we believe that we have the right to use such data and the compilation
of such data in our database, we cannot assure you that any trade secret,
copyright or other protection will be available for such information. In
addition, others may claim rights to such information. Further, pursuant to our
contracts with Web publishers using our solutions, we are obligated to keep
certain information regarding each Web publisher confidential.
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We have licensed, and we may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. While
we attempt to ensure that the quality of our brand is maintained by these
business partners, such partners may take actions that could materially and
adversely affect the value of our proprietary rights or our reputation.
We cannot assure you that any of our proprietary rights will be viable or
of value in the future since the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries is
uncertain and still evolving. Furthermore, third parties may assert infringement
claims against us. From time to time we have been, and we expect to continue to
be, subject to claims in the ordinary course of our business, including claims
of alleged infringement of the trademarks and other intellectual property rights
of third parties by us or the Web publishers with Web sites in the DoubleClick
Network. Such claims and any resultant litigation, should it occur, could
subject us to significant liability for damages and could result in the
invalidation of our proprietary rights. In addition, even if we prevail, such
litigation could be time-consuming and expensive to defend, and could result in
the diversion of our time and attention, any of which could materially and
adversely affect our business, results of operations and financial condition.
Any claims or litigation from third parties may also result in limitations on
our ability to use the trademarks and other intellectual property subject to
such claims or litigation unless we enter into arrangements with the third
parties responsible for such claims or litigation which may be unavailable on
commercially reasonable terms.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE
The Internet and Internet advertising markets are characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, and changing customer demands. Our future success will
depend on our ability to adapt to rapidly changing technologies and to enhance
existing solutions and develop and introduce a variety of new solutions to
address our customers' changing demands. We may experience difficulties that
could delay or prevent the successful design, development, introduction or
marketing of our solutions. In addition, our new solutions or enhancements must
meet the requirements of our current and prospective customers and must achieve
significant market acceptance. Material delays in introducing new solutions and
enhancements may cause customers to forego purchases of our solutions and
purchase those of our competitors.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
We have operations in a number of international markets. We intend to
continue to expand our international operations and international sales and
marketing efforts. To date, we have limited experience in developing localized
versions of our solutions and in marketing, selling and distributing our
solutions internationally. We have established DoubleClick Networks in
Australia, Brazil, Canada, France, Germany, Benelux (Belgium, the Netherlands
and Luxembourg), Spain and the United Kingdom. In Asia (Taiwan, Singapore, and
Hong Kong), and under separate agreement, Japan, Italy and Scandinavia (Sweden,
Norway, Finland, and Denmark), we are working with our business partners to
conduct operations, establish local networks, aggregate Web publishers and
coordinate sales and marketing efforts. Our success in such markets is directly
dependent on the success of our business partners and their dedication of
sufficient resources to our relationship.
International operations are subject to other inherent risks, including:
- the impact of recessions in economies outside the United States;
- changes in regulatory requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences;
- difficulties and costs of staffing and managing foreign operations;
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- political and economic instability;
- fluctuations in currency exchange rates; and
- seasonal fluctuations in Internet usage.
These risks may materially and adversely affect our business, results of
operations or financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The prior session of the
United States Congress resulted in Internet laws regarding children's privacy,
copyrights and taxation. Such legislation could dampen the growth in use of the
Web generally and decrease the acceptance of the Web as a communications,
commercial and advertising medium. 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 European Union recently enacted its own
privacy regulations that may result in limits on the collection and use of
certain user information. The laws governing the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing intellectual property, 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 adversely
affected by the adoption or modification of laws or regulations relating to the
Internet.
SUBSTANTIAL INFLUENCE BY OFFICERS AND DIRECTORS
The executive officers, directors and entities affiliated with them
beneficially own a significant percentage of our outstanding common stock. These
stockholders may be able to exercise substantial influence over all matters
requiring approval by our stockholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing a change in control of
DoubleClick.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the stock market has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet-related
companies have been especially volatile. Investors may be unable to resell their
shares of our common stock at or above the purchase price. In the past,
companies that have experienced volatility in the market price of their stock
have been the object of securities class action litigation. If we were the
object of securities class action litigation, it could result in substantial
costs and a diversion of management's attention and resources.
RISKS RELATED TO THE PENDING MERGER WITH ABACUS AND THE RECENT MERGER
WITH NETGRAVITY
IF WE DO NOT SUCCESSFULLY INTEGRATE ABACUS'S AND NETGRAVITY'S OPERATIONS AND
PERSONNEL OR EFFECTIVELY MANAGE THE COMBINED COMPANY, WE MAY NOT ACHIEVE THE
BENEFITS OF THE MERGERS AND MAY LOSE KEY PERSONNEL AND CUSTOMERS.
We entered into merger agreements with Abacus and NetGravity with the
expectations that these mergers will result in significant benefits. Achieving
the benefits of each merger depends on the timely, efficient and successful
execution of a number of post-merger events, including integrating the
operations and personnel of the acquired company. We will need to overcome
significant issues, however, in order to realize any benefits or synergies from
the mergers. The successful execution of these post-merger events will involve
considerable risk and may not be successful. Abacus is a provider of information
products and marketing research services to the direct marketing industry.
NetGravity is a provider of online interactive marketing solutions. NetGravity's
business model has principally been to license software designed to enable its
customers to directly manage their online interactive marketing activities.
DoubleClick is a provider of advertising solutions for advertisers and Web
publishers. DoubleClick provides outsourced, service-based solutions to
customers who choose not to directly manage their
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online interactive marketing activities. DoubleClick has virtually no experience
in Abacus's business and little direct experience with NetGravity's primary
business model. Furthermore, Abacus's principal offices are located in
Broomfield, Colorado, and NetGravity's principal offices are located in San
Mateo, California, while DoubleClick's principal offices are located in New
York, New York. There are currently no plans to relocate any of these principal
offices. In order for the mergers to be successful, we must successfully
integrate Abacus's operations and personnel and NetGravity's operations and
personnel with DoubleClick's operations and personnel. Our failure to complete
the integration successfully could result in the loss of key personnel and
customers.
IF WE FAIL TO SUCCESSFULLY CROSS-MARKET DOUBLECLICK'S, ABACUS'S AND NETGRAVITY'S
PRODUCTS OR DEVELOP NEW PRODUCTS, WE WILL NOT INCREASE OR MAINTAIN OUR CUSTOMER
BASE OR OUR REVENUES.
We intend that DoubleClick, Abacus and NetGravity will initially offer its
respective products and services to the customers of the other companies. We
cannot assure you that any company's customers will have any interest in the
other company's products and services. The failure of such cross-marketing
efforts would diminish the benefits realized by the mergers.
In addition, we intend after the mergers to develop new products and
services that combine the knowledge and resources of the DoubleClick, Abacus and
NetGravity businesses. We cannot assure you that these products or services will
be successful or that we can successfully integrate or realize the anticipated
benefits of the mergers. As a result, we may not be able to increase or maintain
our customer base. We cannot assure you that the transactions or other data in
Abacus's database will be predictive or useful in other sales channels,
including Internet advertising. To date, the companies have not thoroughly
investigated the obstacles, technological, market-driven or otherwise, to
developing and marketing these new products and services in a timely and
efficient way. We cannot assure you that we will be able to overcome the
obstacles in developing new products and services, or that there will be a
market for the new products or services developed by us after the mergers. A
failure or inability like this could have a material adverse effect on the
combined company's business, financial condition and operating results or could
result in loss of key personnel. In addition, the attention and effort devoted
to the integration of the acquired companies will significantly divert
management's attention from other important issues, and could seriously harm the
combined company.
IF THE COSTS ASSOCIATED WITH THE MERGERS EXCEED THE BENEFITS REALIZED, WE MAY
EXPERIENCE INCREASED LOSSES.
DoubleClick expects to incur certain one-time charges related to the Abacus
and NetGravity mergers. If the benefits of the mergers do not exceed the costs
associated with them, including any dilution to our stockholders resulting from
the issuance of shares in connection with the mergers, our financial results
could be adversely affected.
IF WE DO NOT SUCCESSFULLY INTEGRATE ABACUS AND NETGRAVITY OR THE MERGERS'
BENEFITS DO NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE
MARKET PRICE FOR OUR COMMON STOCK MAY DECLINE.
The market price of our common stock may decline as a result of the
mergers with Abacus or NetGravity if:
The integration of DoubleClick with either company is unsuccessful;
We do not achieve the perceived benefits of either merger as rapidly or to
the extent anticipated by financial or industry analysts; or
The effect of either merger on our financial results is not consistent
with the expectations of financial or industry analysts.
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IF EITHER MERGER FAILS TO QUALIFY AS A POOLING OF INTERESTS, WE WOULD BE
REQUIRED TO TAKE CHARGES AGAINST EARNINGS IN FUTURE PERIODS, WHICH WOULD
INCREASE THE AMOUNT OF OUR LOSSES.
If we cannot account for either merger as a pooling of interests, a
significant portion of the purchase price for the merger will be allocated to
goodwill and other intangible assets, which we would amortize over their
estimated useful lives. As a result, we would take charges against our earnings
in the future, which may materially and adversely affect our reported financial
results and, likely, the price of our common stock.
The availability of pooling of interests accounting treatment for the
mergers depends upon circumstances and events occurring both before and after
each merger's completion. For example, no significant changes in the business of
the combined company may occur, including significant dispositions of assets,
for a period of two years following the effective time of the merger. Further,
affiliates of DoubleClick and Abacus and former affiliates of NetGravity must
not sell any shares of either DoubleClick, Abacus or NetGravity, as applicable,
capital stock for a period beginning before the merger and ending on the day
that we publicly announce financial results covering at least 30 days of
combined operations of DoubleClick and the applicable company after the merger.
We do not expect that 30 days of combined financial results would be published
sooner than January 2000. If affiliates of DoubleClick, Abacus or NetGravity
sell their shares of DoubleClick common stock prior to that time, despite a
contractual obligation restricting this sale, the applicable merger may not
qualify for accounting as a pooling of interests for financial reporting
purposes.
CHANGING REQUIREMENTS FOR FAIR INFORMATION COLLECTION PRACTICES AND POTENTIALLY
HEIGHTENED SCRUTINY OF OUR PRODUCTS OR SERVICES COULD REQUIRE ADVERSE CHANGES IN
THE WAY THE COMBINED COMPANY CONDUCTS OR PLANS TO CONDUCT ITS BUSINESS
There has been public debate about how fair information collection
practices should be formulated for the online and offline collection,
distribution and use of information about a consumer. Some of the discussion has
focused on the fair information collection practices that should apply when
information about an individual that is collected in the offline environment is
associated with information that is collected over the Internet about that
individual. Following the announcement of the Abacus merger with DoubleClick,
some of the public discussion has included, and may continue in the future to
include, speculation about the information collection practices that will be
employed in the combined company's new products and services. We have publicly
committed that no personally identifiable offline information about a consumer
will be associated with online information about that consumer for the delivery
of personally-targeted Internet advertising without first providing the consumer
notice and a choice to opt out of the targeted advertising. However, as a
consequence of governmental legislation or regulation or evolving standards of
fair information collection practices, the combined company may be required to
make changes to its products or services in ways that could diminish the
effectiveness of the product or service or its attractiveness to potential
customers, which could have a material adverse effect on the combined company.
RISKS RELATED TO ABACUS'S BUSINESS
Assuming the proposed Abacus merger is consummated, Abacus will constitute
a meaningful portion of DoubleClick's business. As a result, we will become
subject to additional risks that are specific to Abacus's business. For a
detailed discussion of these risks, please see the risk factors included in
Abacus's reports filed with the Securities Exchange Commission under the
Securities Exchange Act of 1934, which reports are hereby incorporated herein by
reference.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following the announcement of the proposed merger between DoubleClick and
NetGravity, complaints were filed in the San Mateo County, California, Superior
Court and the Chancery Court of the State of Delaware against NetGravity and
several of its directors. DoubleClick was also named as a defendant in the
Delaware action. The complaints allege that the directors of NetGravity breached
their fiduciary duties to NetGravity's stockholders in connection with the
negotiation of the proposed merger. The California complaint asks the court to
enjoin the consummation of the merger or, alternatively, seeks to rescind the
merger or an award of unspecified damages from the defendants in the event the
merger is consummated. The Delaware complaint asks the court to invalidate the
termination fee provision of the merger agreement by and between NetGravity and
DoubleClick. The Company believes the claims asserted in the complaints are
without merit and intends to vigorously contest them.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities
NONE
(b) Use of Proceeds
On February 19, 1998, the Securities and Exchange Commission declared
effective DoubleClick's Registration Statement on Form S-1 (File No.
333-42323). Pursuant to this Registration Statement, and the Abbreviated
Registration Statement filed on February 19, 1998 pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, as amended, on February 25,
1998, DoubleClick completed the initial public offering of 4,025,000
shares of its Common Stock at an initial public offering price of $17.00
per share (the "Offering"). The Offering was managed by Goldman, Sachs &
Co., BT Alex.Brown and Cowen & Company. Proceeds to DoubleClick, after
calculation of the underwriters discount and commission, from the Offering
totaled approximately $62.5 million net of offering costs of $1.1 million.
None of the expenses incurred in the offering were direct or indirect
payments to directors, officers, general partners of the issuer or their
associates, to persons owning ten percent or more of any class of equity
securities of the issuer or to affiliates of the issuer. As of September
30, 1999, DoubleClick has used approximately $49 million of the proceeds
from the Offering toward general corporate purposes, including working
capital, and toward the expansion of DoubleClick's international
operations and sales and marketing capabilities. None of these expenses
were direct or indirect payments to directors, officers, general partners
of the issuer or their associates, to persons owning ten percent or more
of any class of equity securities of the issuer or to affiliates of the
issuer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following Exhibits are filed as part of this report
27.01 -- Financial Data Schedule
(b) Reports on Form 8-K
DoubleClick filed one report on Form 8-K, on July 22, 1999, during the
three months ended September 30, 1999, announcing the Agreement and Plan of
Merger and Reorganization, dated as of July 12, 1999, by and among DoubleClick,
NJ Merger Corporation and NetGravity, Inc., pursuant to which DoubleClick agreed
to acquire NetGravity.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOUBLECLICK INC.
Date: November 12, 1999 By: /s/ STEPHEN COLLINS
-------------------
Stephen Collins
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
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