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, 1998
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
41 MADISON AVENUE, 32ND FLOOR
NEW YORK, NEW YORK 10010
(Address of Principal Executive Officer and Zip Code)
(212) 683-0001
(Registrant's Telephone Number, Including Area Code)
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 preceeding 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 September 30, 1998, there were 16,626,919 shares of the registrant's
common stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
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<S> <C> <C>
ITEM 1: Consolidated Financial Information:
Consolidated Balance Sheet as of December 31, 1997 and September 30, 1998
(unaudited with respect to September 30, 1998) ........................................3
Unaudited Consolidated Statement of Operations for the three and nine
months ended September 30, 1997 and 1998...............................................4
Unaudited Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1998.......................................... ...........5
Notes to Unaudited Consolidated Financial Statements.................. ................6
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. ................9
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings..................................................... ................23
ITEM 2: Changes in Securities and Use of Proceeds............................. ................23
ITEM 3: Defaults Upon Senior Securities....................................... ................24
ITEM 4: Submission of Matters to a Vote of Security Holders................... ................24
ITEM 5: Other Information..................................................... ................24
ITEM 6: Exhibits and Reports on Form 8-K...................................... ................24
ITEM 7: Signatures........................................................... .................25
</TABLE>
2
<PAGE>
DOUBLECLICK INC.
CONSOLIDATED BALANCE SHEET
(Unaudited with respect to September 30, 1998)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...........................................$ 2,671,845 $ 38,587,883
Short-term investments .............................................. 5,874,229 11,325,133
Accounts receivable, less allowances of $1,292,143 at
December 31, 1997 and $2,511,709 at September 30, 1998 ........... 9,909,188 20,932,059
Prepaid expenses and other current assets ........................... 355,841 635,177
-------- -------
Total current assets ........................................... 18,811,103 71,480,252
Property and equipment, net ......................................... 1,997,326 7,578,772
Investments, at cost ................................................ 254,926 632,651
Other assets ........................................................ 98,574 510,682
------- -------
Total assets ................................................. $ 21,161,929 $ 80,202,357
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 8,142,429 $ 13,110,387
Accrued expenses ................................................... 2,828,474 6,256,678
Deferred revenues .................................................. 91,061 1,145,050
Deferred license and service fees .................................. 237,500 420,833
-------- -------
Total current liabilities ..................................... 11,299,464 20,932,948
Deferred license and service fees .................................. 462,500 238,542
Capital lease obligations - 256,813
Stockholders' equity:
Convertible preferred stock, par value $0.001; 40,000 shares
authorized; issued and outstanding 40,000 at December 31, 1997 .. 40 -
Common stock, par value $0.001; 40,000,000 shares authorized;
issued and outstanding 6,118,972 at December 31, 1997;
16,626,919 at Sepember 30, 1998 .................................. 6,119 16,627
Additional paid-in capital .......................................... 46,996,328 109,615,615
Cumulative translation adjustment ................................... (1,271) 57,649
Deferred compensation ............................................... (1,056,773) (554,301)
Unrealized loss on marketable securities ............................ - (1,605)
Accumulated deficit .................................................(36,544,478) (50,359,931)
------------ ------------
Total stockholders' equity ..................................... 9,399,965 58,774,054
---------- ----------
Total liabilities and stockholders' equity ................... $ 21,161,929 $ 80,202,357
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
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DOUBLECLICK INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------------------------------------------------
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 8,189,482 $ 20,776,701 $ 19,657,224 $ 51,073,631
Cost of revenues ............................ 5,559,541 13,970,129 13,047,902 34,538,696
---------- ----------- ----------- ----------
Gross profit ............................ 2,629,941 6,806,572 6,609,322 16,534,935
---------- ---------- ---------- ----------
Operating expenses
Sales and marketing ..................... 2,561,993 7,608,389 6,606,236 20,116,962
General and administrative .............. 1,836,274 2,854,854 3,607,248 7,824,934
Product development ..................... 502,094 1,777,559 1,014,792 4,356,883
-------- ---------- ---------- ---------
Total operating expenses .............. 4,900,361 12,240,802 11,228,276 32,298,779
---------- ----------- ----------- ----------
Loss from operations ....................... (2,270,420) (5,434,230) (4,618,954) (15,763,844)
Interest income ............................ 214,363 720,214 130,149 1,996,851
Interest Expense ........................... 84,213 - 123,638 48,460
------- -- -------- ------
Net loss ................................... $ (2,140,270) $ (4,714,016) $ (4,612,443) $ (13,815,453)
============= ============= ============= ==============
Basic and diluted net loss per share ...... $ (0.19) $ (0.28) $ (0.40) $ (0.88)
-------- -------- -------- --------
Weighted average shares
used in basic and diluted net
loss per share calculation ............. 11,447,042 16,565,517 11,430,500 15,750,739
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE>
DOUBLECLICK INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------
September 30, 1997 September 30, 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................ $ (4,612,443) $ (13,815,453)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization ..................................... 236,320 1,334,173
Amortization of deferred compensation ............................. 197,999 502,472
Provision for bad debts and advertiser rebates .................... 633,607 1,219,566
Changes in operating assets and liabilities:
Accounts receivable ............................................. (3,631,215) (12,242,437)
Prepaid expenses and other assets ............................... (109,640) (414,695)
Accounts payable ................................................ 3,587,883 4,967,958
Accrued expenses ................................................ 1,051,548 3,428,204
Deferred revenues ............................................... 580,909 1,013,364
-------- ---------
Net cash used in operating activities ........................ (2,065,032) (14,006,848)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases, sales and maturities of short-term investments, net ...... (8,099,686) (5,449,427)
Investments ......................................................... (254,926) (377,725)
Other Assets ........................................................ - (279,831)
Purchases of property and equipment ................................. (1,451,129) (6,646,055)
----------- -----------
Net cash used in investing activities ........................ (9,805,741) (12,753,038)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering, net .......................... - 62,560,222
Proceeds from exercise of common stock options ...................... 16,599 69,533
Proceeds from issuance of preferred stock, net ...................... 39,831,994 -
Redemption of common stock .......................................... (25,000,343) -
Advances from related party ......................................... 3,048,096 -
Payments under capital lease obligation ............................. - (12,751)
Repayment of advances from related party ............................ (1,385,832) -
----------- -
Net cash provided by financing activities .................... 16,510,514 62,617,004
----------- ----------
Effect of cumulative translation adjustment ............................ - 58,920
-- ------
Net increase in cash and cash equivalents .............................. 4,639,741 35,916,038
Cash and cash equivalents at beginning of period ....................... - 2,671,845
-- ---------
Cash and cash equivalents at end of period ............................. $ 4,639,741 $ 38,587,883
============ ============
Noncash Investing Activities:
Acquisition of property and equipment under capital lease ........... $ - $ 269,564
==== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
<PAGE>
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--SUMMARY OF OPERATIONS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF OPERATIONS
DoubleClick Inc. (together with its subsidiaries, the "Company") is a
leading provider of comprehensive Internet advertising solutions for advertisers
and Web publishers worldwide. The Company's technology and media expertise
enable it to dynamically deliver highly targeted, measurable and cost-effective
Internet advertising for advertisers and to increase ad sales and improve ad
space inventory management for Web publishers. The Company was organized as a
Delaware corporation on January 23, 1996 and commenced operations on that date.
BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in less
than 20% owned business partners, for which the Company does not have the
ability to exercise significant influence and there is not a readily
determinable market value, are accounted for using the cost method of
accounting. Dividends and other distributions of earnings from investees, if
any, are included in income when declared.
The consolidated balance sheet as of September 30, 1998, the consolidated
statement of operations for the three and nine months ended September 30, 1997
and 1998, and the consolidated statement of cash flows for the nine months ended
September 30, 1997 and 1998 have been prepared by the Company, and are not
audited. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1998 and for all
periods presented have been made. The consolidated balance sheet at December 31,
1997 has been derived from the audited financial statements at that date.
Certain prior period amounts have been restated to conform with current
period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.
The unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto as included in the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on December 16, 1997, as
amended with the Securities and Exchange Commission through February 19, 1998
and its periodic filings with the Securities and Exchange Commission thereafter.
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for any subsequent
quarter or the entire year ending December 31, 1998.
MANAGEMENT'S 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.
6
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DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 1--SUMMARY OF OPERATIONS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash and cash equivalents, short-term investments and trade
receivables.
The Company performs ongoing credit evaluations of its advertiser and DART
Service customers and generally does not require collateral. No single
advertiser or DART Service customer represented more than 10% of revenues for
the three and nine months ended September 30, 1998. The Company is subject to
concentrations of credit risk and interest rate risk related to its short-term
investments. The Company's credit risk is managed by limiting the amount of
investments placed with any one issuer, investing in money market funds, short
term commercial paper, and A1 rated corporate bonds with an average days to
maturity of 47 days as of September 30, 1998.
BASIC AND DILUTED NET LOSS PER SHARE
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 including the shares
resulting from the conversion of the Convertible Preferred Stock as though such
conversion occurred at the beginning of the earliest period presented, less
shares assumed to have been redeemed in connection with the recapitalization of
the Company in June 1997, as though such recapitalization also occurred at the
beginning of the earliest period presented. Options to purchase shares of common
stock could potentially dilute basic earnings per share in the future and have
not been included in the computation of diluted net loss per share because to do
so would have been antidilutive for the periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (Statement 131). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company is currently evaluating its reportable segments and the impact of
the new standard.
NOTE 2--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 the estimated useful life of the
assets. Leasehold improvements are amortized over their estimated useful lives,
or the term of leases, whichever is shorter. <TABLE> <CAPTION>
ESTIMATED DECEMBER 31, SEPT 30,
USEFUL LIFE 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Computer Equipment and Software........................................ 1-3 years $1,768,509 $ 7,176,080
Furniture and Fixtures................................................. 5 years 273,856 928,016
Leasehold Improvements................................................. 1-5 years 389,708 1,297,351
------------ ------------
2,432,073 9,401,447
Less accumulated depreciation and amortization......................... 434,747 1,822,675
------------ ------------
$1,997,326 $ 7,578,772
------------ ------------
</TABLE>
7
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DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 3--STOCKHOLDERS' EQUITY
In February 1998, the Company completed an initial public offering of
4,025,000 shares of the Company's common stock. Proceeds to the Company from
this initial public offering totaled approximately $62.5 million net of offering
costs of approximately $1.1 million. Upon the closing of the initial public
offering, the Company's convertible preferred stock converted into 6,234,434
shares of common stock. Options to purchase 248,513 shares of common stock were
exercised during the nine months ended September 30, 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE
EVENTS AND THE FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1993, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'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 THE COMPANY'S OTHER PUBLIC FILINGS MADE WITH
THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
DoubleClick is a leading provider of comprehensive Internet advertising
solutions for advertisers and Web publishers. The Company currently has two
primary product lines, each offering distinct Internet advertising solutions:
(i) the DoubleClick Network, launched in March 1996, includes DoubleClick
Direct, an Internet direct marketing solution introduced on a limited basis in
September 1997, and DoubleClick Local, an Internet advertising solution for
regional and local advertisers; and (ii) DoubleClick's DART Service, marketed to
Web publishers on a stand-alone basis since January 1997, and a version for Web
advertisers introduced in October 1998 as part of the Closed Loop Marketing
solutions suite of products designed to provide Internet advertisers and ad
agencies real-time, in-depth abilities to control delivery, measurement and
analysis of their online marketing campaigns. The DoubleClick Network and DART
Service are available to Web publishers and advertisers in international
markets. DoubleClick's proprietary DART technology, which dynamically matches
and delivers ads to a target audience within milliseconds, is the platform for
all of the Company's solutions.
The Company completed its initial public offering of 4,025,000 shares of
Common Stock, inclusive of 525,000 shares from the exercise of the underwriters'
over-allotment option, at a price of $17.00 per share on February 25, 1998. The
net proceeds of approximately $62.5 million from the initial public offering
were added to the working capital of the Company. Pending use of the net
proceeds, the Company has invested such funds in short-term, interest bearing
investment grade obligations.
The Company was founded in January 1996 by Kevin J. O'Connor, the Company's
Chief Executive Officer, Dwight A. Merriman, the Company's Chief Technical
Officer, and the DoubleClick Division of Poppe Tyson, a subsidiary of Bozell,
Jacobs, Kenyon & Eckhardt, Inc. ("Poppe Tyson"). The Company has grown from 13
employees as of March 31, 1996 to 373 employees as of September 30, 1998.
Beginning in the fourth quarter of 1996, substantially all of the Company's
revenues have been derived from the DoubleClick Network. The Company offers
advertising on the DoubleClick Network to third party advertisers with pricing
determined on a CPM (cost per thousand ads delivered) basis. Discounts are
offered based on a variety of factors, including the duration and gross dollar
amount of advertising campaigns. Advertisements delivered by the Company are
typically sold pursuant to purchase order agreements, which are subject to
cancellation. The Company's revenues are received from the advertiser that
orders the ad, and the Company pays the Web publisher on whose Web site such
advertisement is delivered a service fee calculated as a percentage of such
revenues, which amount is included in cost of revenues. The Company is
responsible for billing and collecting for ads delivered on the DoubleClick
Network, including DoubleClick Local and DoubleClick Direct, and typically
assumes the risk of non-payment from advertisers. In addition, the Company earns
service fees for providing the DART Service to Web publishers and also to
Internet advertisers and agencies through the Closed Loop Marketing Solutions
suite of products. DoubleClick Direct advertising is priced on a
"cost-per-click", "cost-per-lead" and "cost-per-sale or download" basis. To
date, revenues from DoubleClick's DART Service, DoubleClick Direct, DoubleClick
Local , Closed Loop Marketing Solutions and international operations have not
been significant.
9
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Advertising revenues are recognized in the period that the advertisement is
delivered, provided that no significant obligations remain and collection of the
resulting receivable is probable. The Company also sells sponsorship
advertising, which involves a greater degree of integration among the Company,
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.
The Company expects that revenues generated from the DoubleClick Network
will continue to account for a substantial portion of the Company's revenues for
the foreseeable future. Moreover, ads delivered on Web sites of the top four Web
publishers in the DoubleClick Network, including AltaVista, accounted for
approximately 60.3% of the Company's revenues for the nine months ended
September 30, 1998. The Company 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 the Company's
revenues from the DoubleClick Network, or any reduction in traffic on such Web
sites could have a material adverse effect on the Company's business, results of
operations and financial condition.
In December 1996, the Company entered into an agreement with Digital
Equipment Corporation ("Digital") (acquired by Compaq Computer Corp. ("Compaq")
in June 1998) to be the exclusive third-party provider of advertising services
on specified pages within the AltaVista Web site. The agreement was amended on
January 7, 1998 to extend the term through December 1999 and to provide that the
agreement would survive a change of control of AltaVista or Digital, although
notwithstanding either such provision, either party may terminate the agreement
upon 90 days' prior written notice. The Company has ongoing discussions with
Compaq regarding the Company's relationship and agreement with AltaVista. The
timing and outcome of such discussions are uncertain. As a result of such
discussions, Compaq may elect, or notify the Company of its intention to elect,
to terminate the agreement or demand concessions or contractual terms that are
less favorable to the Company than the existing agreement. The loss of AltaVista
as part of the DoubleClick Network, any reduction in traffic on or through the
AltaVista Web site, the termination of AltaVista's contract with the Company or
the negotiation of new terms to the agreement that are less favorable to the
Company would have a material adverse effect on the Company's business, results
of operations and financial condition. Compaq may also change or limit the type
of advertisers that are acceptable for the AltaVista Web site, which could
materially and adversely impact advertising revenues. Any development materially
affecting the business or financial condition of AltaVista, including any
consequences of the acquisition by Compaq, the sale of AltaVista to a third
party, or the entering into of a strategic relationship with a third party with
a dedicated ad sales force could have a material adverse effect on the Company's
business, results of operations and financial condition.
DoubleClick pays AltaVista a service fee calculated as a percentage of the
revenues derived from the delivery of advertisements on or through the AltaVista
Web site. Revenues from advertisements delivered on or through the AltaVista Web
site were $9.2 million, or 44.4% of the Company's revenues and $24.4 million, or
47.8% of the Company's revenues for the three and nine months ended September
30, 1998, respectively. No other web site or publisher accounted for more than
10% of the Company's revenue for the three or nine months ended September 30,
1998.
The Company has incurred significant losses since its inception, and as of
September 30, 1998 had an accumulated deficit of $50.3 million, of which $25.3
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 the Company that occurred simultaneously with the completion
of a private placement of the Company's securities in June 1997. In addition,
the Company recorded deferred compensation of $1.5 million, which represented
the difference between the exercise price and the fair market value of the
Company'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, $0.9 million has been amortized as of September 30, 1998. The Company
believes that period-to-period comparisons of its operating results are not
meaningful and that the results for any period should not be relied upon as an
indication of future performance. The Company currently expects to significantly
increase its operating expenses in order to expand its sales and marketing
operations, to continue to expand internationally, to upgrade and enhance its
DART technology and to market and support its solutions. As a result of these
factors, there can be no assurance that the Company will not incur significant
losses on a quarterly and annual basis for the foreseeable future.
10
<PAGE>
REVENUES
Revenues increased $12.6 million from $8.2 million for the three months
ended September 30, 1997 to $20.8 million, or 153.7%, for the three months ended
September 30, 1998. Revenues increased $31.4 million from $19.7 million for the
nine months ended September 30, 1997 to $51.1 million, or 159.8%, for the nine
months ended September 30, 1998. The increase in revenues, both in absolute
dollars and as a percentage of revenues, was due primarily to an increase in the
number of advertisers and ads delivered on the DoubleClick Network, particularly
ads delivered on or through the AltaVista Web site. Revenues earned from
advertisements delivered on or through the AltaVista Web site were $9.2 million,
or 44.4% of revenues and $24.4 million, or 47.8% of revenues for the three and
nine months ended September 30, 1998, respectively, compared to 50.1% and 42.8%
of revenues for the three and nine months ended September 30, 1997.
Approximately $3.0 million of revenues for the nine months ended September 30,
1998 resulted from sales of inventory on the AltaVista Web site which was
derived from an arrangement between AltaVista and another search engine that
expired on June 30, 1998, and is therefore non-recurring. AltaVista is a
significant part of the DoubleClick Network. No other Web site accounted for
more than 10.0% of revenues for the three or nine months ended September 30,
1998, and no one advertiser accounted for 10.0% of revenues during the same
periods. To date, the Company has not derived significant revenues from its DART
Service, DoubleClick Direct, DoubleClick Local, Closed Loop Marketing Solutions
or international operations.
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 and Internet access costs. Gross margin was 32.1% and
32.8% for the three months ended September 30, 1997 and 1998, respectively. The
increase in gross margin for the quarter ended September 30, 1998 compared to
the quarter ended September 30, 1997 is primarily due to an increase in DART
service revenue, which achieves a higher gross margin, as a percentage of total
revenue during such period. Gross margin was 33.6% and 32.4% for the nine months
ended September 30, 1997 and 1998, respectively. Gross margin decreased for the
nine months ended September 30, 1998 compared to September 30, 1997 primarily
due to a decrease in the Company's revenue from the sale of advertisements on a
commission basis as a percentage of the Company's total revenue. To the extent
revenues from its DART service increase as a percentage of total revenues, the
Company anticipates that its gross margin will increase.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, maintenance of the Company's Web site, trade
show expenses, seminars and costs of marketing materials. Sales and marketing
expenses increased $5.0 million, or 197%, from $2.6 million for the three months
ended September 30, 1997, or 31.3% of revenues, to $7.6 million or 36.6% of
revenue for the three months ended September 30, 1998. Sales and marketing
expenses increased $13.5 million, or 204.5%, from $6.6 million for the nine
months ended September 30, 1997, or 33.6% of revenues, to $20.1 million or 39.4%
of revenue for the nine months ended September 30, 1998. The increase in
absolute dollars was primarily attributable to the increase in sales personnel,
commissions associated with the increase in revenues, costs associated with
expanding international operations, and costs related to the continued
development and implementation of the Company's marketing and branding
campaigns. The increase in sales and marketing expenses as a percentage of
revenues resulted from such expenses increasing more rapidly than revenues as
the Company continued to build its sales and marketing infrastructure. The
Company expects sales and marketing expenses to increase on an absolute dollar
basis but decrease as a percentage of revenues as the Company 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 $1.0 million, or 55.5%,
from $1.8 million for the three months ended September 30, 1997, or 22.4% of
revenues, to $2.9 million or 13.7% of revenues for the three months ended
September 30, 1998. General and administrative expenses increased $4.2 million,
or 116.9%, from $3.6 million for the nine months ended September 30, 1997, or
18.4% of revenues, to $7.8 million or 15.3% of revenues for the nine months
ended September 30, 1998. The increase in absolute dollars from the prior year
nine month period was primarily the result of expenses related to increased
personnel and professional service fees. The Company expects general and
administrative expenses to increase on an absolute dollar basis but decrease as
a percentage of revenues as the Company hires additional personnel and incurs
additional costs related to the growth of its business and its operations as a
public company.
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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 $1.3 million, or 254.0%, from $0.5 million for
the three months ended September 30, 1997, or 6.1% of revenues, to $1.8 million
or 8.6% of revenue for the three months ended September 30, 1998. Product
development expenses increased $3.3 million, or 329.3%, from $1.0 million for
the nine months ended September 30, 1997, or 5.2% of revenues, to $4.4 million
or 8.5% of revenue for the nine months ended September 30, 1998. The increase in
absolute dollars was due primarily to increases in product development personnel
and consulting expenses. The increase in product development expenses as a
percentage of revenues resulted from such expenses increasing more rapidly than
revenues as the Company continued the development of its DART technology,
DoubleClick Direct, DoubleClick Local and Closed Loop Marketing Solutions. The
Company 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.
INTEREST INCOME (EXPENSE)
Net interest income increased $590,063 from net interest income of $130,150
for the three months ended September 30, 1997 to net interest income of $720,213
for the three months ended September 30, 1998. Net interest income increased
$1,941,879 from net interest income of $6,511 for the nine months ended
September 30, 1997 to net interest income of $1,948,390 for the nine months
ended September 30, 1998. The increase in interest income was attributable to an
increase in cash, cash equivalents and short-term investments as a result of the
net proceeds received by the Company from its initial public offering of Common
stock in February 1998. Interest income in future periods may fluctuate as a
result of fluctuations in average cash balances maintained by the Company and
changes in the market rate of its investments.
NET LOSS
The Company's net loss increased $2.6 million, or $.09 per share, from $2.1
million for the three months ended September 30, 1997, or $0.19 per share, to
$4.7 million for the three months ended September 30, 1998, or $0.28 per share.
The Company's net loss increased $9.2 million, or $.48 per share, from $4.6
million for the nine months ended September 30, 1997, or $0.40 per share, to
$13.8 million for the nine months ended September 30, 1998, or $0.88 per share.
The increase in the net loss was primarily due to the hiring of additional
personnel, particularly in sales and marketing, and product development. The
Company expects to hire additional personnel and increase its spending for
marketing and other infrastructure needs.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through the
private placement of equity securities, borrowings from a related party, and its
initial public offering. In June 1997, the Company completed a private placement
of equity securities to new investors and received $39.8 million in net
proceeds, of which $25.0 million was used to redeem shares of Common Stock from
certain stockholders. On December 30, 1997, $5,000,000 in borrowings from a
related party pursuant to a Convertible Promissory Note (the "Convertible Note")
was converted into 779,302 shares of the Company's Common Stock. In February
1998, the Company received net proceeds of approximately $62.5 million from the
initial public offering of 4,025,000 shares of the Company's Common Stock at a
price of $17.00 per share.
Net cash used in operating activities was $2.1 million and $14.0 million for
the nine months ended September 30, 1997 and 1998, respectively. Cash used in
operating activities for the nine months ended September 30, 1998 resulted from
net operating losses and increases in accounts receivable and other current
assets, which were partially offset by increases in accounts payable, accrued
expenses and deferred revenues.
Net cash used in investing activities was $9.8 million and $12.8 million for
the nine months ended September 30, 1997 and 1998, respectively. Cash used in
investing activities for the nine months ended September 30, 1998 resulted from
purchases of property and equipment, Investments, and the acquisition of assets
of Soussy, a Quebec-based network of French web sites, partially offset by
proceeds provided by the purchases, sales and maturities of short-term
investments, net.
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Net cash provided by financing activities was $16.5 million and $62.6
million for the nine months ended September 30, 1997 and 1998, respectively.
Cash provided by financing activities for the nine months ended September 30,
1998 consisted primarily of net proceeds received by the Company in connection
with the closing of its initial public offering in February 1998.
As of September 30, 1998, the Company had $38.6 million of cash and cash
equivalents and $11.3 million in short-term investments. The Company's principal
commitments consisted of obligations under operating and capital leases.
Although the Company has no material commitments for capital expenditures,
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. The Company 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 the Company's cash resources. The Company believes
that the existing cash and cash equivalents and short-term investments will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next twelve months.
YEAR 2000 COMPLIANCE
Many 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.
State of Readiness. The Company has made a preliminary assessment of the
Year 2000 readiness of its information technology ("IT") systems, including the
hardware and software that enable the Company to provide and deliver its
solutions, and its non-IT systems. The Company's assessment plan consists of (i)
quality assurance testing of its internally developed proprietary software
incorporated in its solutions ("Solutions Software"); (ii) contacting
third-party vendors and licensors of material hardware, software and services
that are both directly and indirectly related to the delivery of the Company'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. The Company plans to
perform a Year 2000 simulation on its Solutions Software during the first
quarter of 1999 to test system readiness. Based on the results of its Year 2000
simulation test, the Company intends to revise the code of its Solutions
Software as necessary to improve the Year 2000 compliance of its Solutions
Software. The Company has been informed by many of its vendors of material
hardware and software components of its IT systems that the products used by the
Company are currently Year 2000 compliant. The Company will require vendors of
its other material hardware and software components of its IT systems to provide
assurances of their Year 2000 compliance, and plans to complete this process
during the first half of 1999. The Company is currently assessing the
materiality of its non-IT systems and will seek assurances of Year 2000
compliance from providers of material non-IT systems. Until such testing is
complete and such vendors and providers are contacted, the Company will not be
able to completely evaluate whether its IT systems or non-IT systems will need
to be revised or replaced.
Costs. To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, the Company
does not possess the information necessary to estimate the potential costs of
revisions to its Solutions Software should such revisions be required or the
replacement of third-party software, hardware or services that are determined
not to be Year 2000 compliant. Although the Company does not anticipate that
such expenses will be material, such expenses, if higher than anticipated, could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Risks. The Company is not currently aware of any Year 2000 compliance
problems relating to Solutions Software or its IT or non-IT systems that would
have a material adverse effect on the Company's business, results of operations
and financial condition, without taking into account the Company's efforts to
avoid or fix such problems. There can be no assurance that the Company will not
discover Year 2000 compliance problems in its Solutions Software that will
require
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substantial revisions. In addition, there can be no assurance that third-party
software, hardware or services incorporated into its material IT and non-IT
systems will not need to be revised or replaced, all of which could be time
consuming and expensive. The failure of the Company to fix its Solutions
Software or to fix or replace third-party software, hardware or services on a
timely basis could result in lost revenues, increased operating costs, the loss
of customers and other business interruptions, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in its Software Solutions, and its IT and non-IT systems could
result in claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside the Company's control will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure beyond the
control of the Company, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent the Company from delivering its
services to its customers, decrease the use of the Internet or prevent users
from accessing the Web sites of the Company's publisher customers, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Contingency Plan. As discussed above, the Company is engaged in an ongoing
Year 2000 assessment and has not yet developed any contingency plans. The
results of the Company's Year 2000 simulation testing and the responses received
from third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS
AND THE FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1993, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'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 BELOW AND ELSEWHERE IN THIS REPORT AND IN THE
COMPANY'S OTHER PUBLIC FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXTREMELY LIMITED OPERATING HISTORY; HISTORY OF LOSSES;
ANTICIPATION OF CONTINUED LOSSES
The Company was incorporated in January 1996 and its prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies with extremely limited operating histories,
particularly companies in the new and rapidly evolving markets for the Internet
and Internet services, including the Internet advertising market. There can be
no assurance that the Company will be successful in addressing such risks.
Although the Company has experienced revenue growth in recent periods,
historical growth rates may not be sustained and are not necessarily indicative
of future operating results. Given the level of planned operating and capital
expenditures, the Company anticipates that it will continue to incur operating
losses at least through 1999. There can be no assurance that operating losses
will not increase in the future or that the Company will ever achieve or sustain
profitability. To the extent that revenues do not grow at anticipated rates,
that increases in operating expenses precede or are not subsequently followed by
commensurate increases in revenues or that the Company is unable to adjust
operating expense levels accordingly, the Company's business, results of
operations and financial condition will be materially and adversely affected.
DEPENDENCE ON ALTAVISTA
Revenues from advertisements delivered on or through the AltaVista Web site
represented 44.7% of the Company's revenues for the year ended December 31,
1997, and 44.4% and 47.8% of the Company's revenues for the three months and
nine months ended September 30, 1998, respectively. In December 1996, the
Company entered into an agreement with Digital (acquired by Compaq in June 1998)
to be the exclusive third-party provider of advertising services on
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specified pages within the AltaVista Web site. The agreement was amended on
January 7, 1998 to extend the term through December 1999 and to provide that the
agreement would survive a change of control of AltaVista or Digital, although,
notwithstanding either such provision, either party may terminate the agreement
upon 90 days' prior written notice. The Company has ongoing discussions with
Compaq regarding the Company's relationship and agreement with AltaVista The
timing and outcome of such discussions are uncertain. As a result of such
discussions, Compaq may elect, or notify the Company of its intention to elect,
to terminate the agreement or demand concessions or contractual terms that are
less favorable to the Company than the existing agreement. The loss of AltaVista
as part of the DoubleClick Network, any reduction in traffic on or through the
AltaVista Web site, the termination of AltaVista's contract with the Company or
the negotiation of new terms to the agreement that are less favorable to the
Company would have a material adverse effect on the Company's business, results
of operations and financial condition. Compaq may also change or limit the type
of advertisers that are acceptable for the AltaVista Web site, which could
materially and adversely impact advertising revenues. In addition, any
development materially affecting the business or financial condition of
AltaVista, including any consequences of the acquisition by Compaq, the sale of
AltaVista to a third party, or the entering into of a strategic relationship
with a third party with a dedicated ad sales force, could have a material
adverse effect on AltaVista's business or the Company's relationship with
AltaVista.
WEB PUBLISHER CONCENTRATION
Ads delivered on the Web sites of the top four Web publishers on the
DoubleClick Network, including AltaVista, accounted for approximately 60.3% of
the Company's revenues for the nine months ended September 30, 1998 and
approximately 61.2% of the Company's revenues for the year ended December 31,
1997. The Company anticipates that a substantial portion of the Company's future
revenues will be derived from ads delivered on the Web sites of a limited number
of Web publishers. The Company typically enters into short-term contracts with
Web publishers for inclusion of their Web sites in the DoubleClick Network. The
loss of one or more of the Web sites which account for a significant portion of
the Company's revenues from the DoubleClick Network or any reduction in traffic
on such Web sites could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the loss
of such Web sites may result in the loss of advertisers or Web publishers from
the DoubleClick Network, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Given the
short-term nature of the Company's contracts, the Company may, in the future,
have to negotiate a new contract or renewal which may have terms that are not as
favorable to the Company as its existing contract, and such renegotiations could
have a material adverse effect on the Company's business, results of operations
and financial condition.
RELIANCE ON THE DOUBLECLICK NETWORK
Since the third quarter of 1996, the Company's DoubleClick Network has
accounted for substantially all of the Company's revenues. Although the
Company's solutions include the DoubleClick DART Service and the recently
introduced Closed Loop Marketing solutions, the Company expects that revenues
generated from advertisements delivered to Web sites on the DoubleClick Network
will continue to account for a substantial portion of the Company's revenues for
the foreseeable future. The DoubleClick Network consists of Web sites of a
limited number of Web publishers that have contracted for the Company's
solutions pursuant to short-term agreements. There can be no assurance that such
Web publishers will remain associated with the DoubleClick Network, that the Web
sites on the DoubleClick Network will maintain consistent or increasing levels
of traffic over time, or that the Company 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. The failure of the Company to
successfully market the DoubleClick Network or the failure of the Web sites on
the DoubleClick Network to maintain consistent or increasing levels of traffic
would have a material adverse effect on the Company's business, results of
operations and financial condition.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's results of operations may fluctuate significantly in the
future as a result of a variety of factors, many of which are beyond the
Company's control. These factors include the addition or loss of advertisers or
Web publishers that utilize the Company's solutions, the level of user traffic
and number of available impressions on or through the Web sites on the
DoubleClick Network, changes in service fees payable by the Company to Web
publishers, the introduction of new Internet advertising solutions by the
Company or its competitors, the amount and timing of capital expenditures and
other costs relating to the expansion of the Company's operations, the timing
and number of new hires, the mix of solutions
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provided, the mix of domestic and international revenues, the incurrence of
costs relating to acquisitions, demand for, and market acceptance of, Internet
advertising, seasonal trends in Internet usage and advertising placements,
advertisers' budgeting cycles, the commitment of advertising budgets to Internet
advertising, changes in pricing models for Internet advertising, and general
economic conditions.
For the foreseeable future, the Company's revenues will be directly
contingent on the level of user traffic and advertising activity on the Web
sites on the DoubleClick Network in a given period. Accordingly, future revenues
and results of operations are difficult to forecast. The Company plans to
continue to significantly increase its operating expenses in order to increase
its sales and marketing operations, to continue to expand internationally, to
upgrade and enhance its DART technology and to market and support its solutions.
To the extent that such expenses precede or are not subsequently followed by
increased revenues, the Company's business, results of operations and financial
condition would be materially and adversely affected. The Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall, and any significant shortfall in revenues in relation to the
Company's expectations would have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company has been, and expects in the future to be, subject to seasonal
fluctuations in the amount of Internet advertising revenues generated by the
Company, as advertisers historically spend less during the first calendar
quarter of each year. Additional seasonal patterns in Internet advertising
spending and other seasonal fluctuations may emerge as the market matures.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore it is possible that in some future quarters the Company's results of
operations may fall below the expectations of securities analysts and investors.
In such event, the trading price of the Company's Common Stock would likely be
materially and adversely affected.
MANAGEMENT OF GROWTH
The Company has experienced rapid growth in its operations. This rapid
growth has placed, and is expected to continue to place, a significant strain on
the Company's managerial, operational and financial resources. The Company has
grown from 13 employees as of March 31, 1996 to 373 employees as of September
30, 1998. The Company expects that the number of its employees will continue to
increase for the foreseeable future. There can be no assurance that the
Company's systems, procedures, or controls will be adequate to support the
Company's expanding operations, or that the Company's management will be able to
achieve the rapid execution necessary to successfully offer its solutions and
implement its business plan. The Company's data center is currently located in
the Company's executive offices in New York, New York. The Company is
considering relocating its data operations into a new facility in the New York
City metropolitan area. The inability to successfully manage such relocation
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's future results of operations
will also depend on its ability to expand its sales and marketing and customer
support organizations both domestically and internationally. The failure of the
Company to manage its growth effectively would have a material adverse effect on
the Company's business, results of operations and financial condition.
Furthermore, the Company's future performance may depend on the Company's
ability to integrate any acquired business, technologies, services or products,
which, even if successful, may take a significant period of time and expense,
and may place a significant strain on the Company's resources. If the Company is
unable to manage any such acquisition-based growth effectively, the Company's
business, results of operations and financial condition will be materially
adversely affected.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE AND EFFECTIVENESS OF WEB ADVERTISING
The market for Internet advertising has only recently begun to develop, is
rapidly evolving and is characterized by an increasing number of market
entrants. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Since the Company expects to derive
substantially all of its revenues in the foreseeable future from Internet
advertising solutions, the future success of the Company is highly dependent on
the increased use of the Internet as an advertising medium. The Internet as an
advertising medium has not been available for a sufficient period of time to
gauge its effectiveness as compared with traditional advertising media.
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Most of the Company's current or potential advertising customers have
limited or no experience using the Internet as an advertising medium, have not
devoted a significant portion of their advertising expenditures to Internet
advertising and may not find Internet advertising to be effective for promoting
their products and services relative to advertising on traditional media. 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 and exchanging information. In
addition, most of the Company's current and potential Web publisher customers
have limited or no experience in generating revenues from the sale of
advertising space on their Web sites. There can be no assurance that the market
for Internet advertising will continue to emerge or become sustainable. If the
market fails to develop or develops more slowly than expected, the Company's
business, results of operations and financial condition could be materially and
adversely affected.
There are no widely accepted standards for the measurement of the
effectiveness of Internet advertising, and there can be no assurance that such
standards will develop sufficiently to support Internet advertising as a
significant advertising medium. There also can be no assurance that the
Company's advertising customers will accept the Company's or other third-party
measurements of impressions on the Web sites of Web publishers utilizing the
Company's solutions, or that such measurements will not contain errors. In
addition, the effectiveness of Internet advertising is dependent upon the
accuracy of information contained in the databases used to target
advertisements. Like any database, there can be no assurance that the
information in the Company's database will be accurate or that advertisers will
be willing to have advertisements targeted by any database containing such
potential inaccuracies.
Further, there can be no assurance that advertisers will determine that
banner advertising, the delivery of which currently comprises substantially all
of the Company's revenues, is an effective or attractive advertising medium, and
there can be no assurance that the Company will effectively transition to any
other forms of Internet advertising should they develop and achieve market
acceptance. Moreover, "filter" software programs that limit or prevent
advertising from being delivered to a Web user's computer are available.
Widespread adoption of such software by users could have a material adverse
effect upon the commercial viability of Internet advertising, which would have a
material adverse effect on the Company's business, results of operations and
financial condition.
PRIVACY CONCERNS
The Company's DART technology uses cookies to limit the frequency with which
an ad is shown to the user. Cookies are bits of information keyed to a specific
server, file pathway or directory location that are stored on a user's hard
drive and passed to a Web site's server through the user's browser software.
Cookies can be placed on the user's hard drive without the user's knowledge or
consent, but are also removable by the user at any time through the modification
of the user's browser settings. Due to privacy concerns, some Internet
commentators, advocates and governmental bodies have suggested that the use of
cookies be limited or eliminated. In addition, certain currently available
Internet browsers allow a user to delete cookies or prevent cookies from being
stored on the user's hard drive. Any reduction or limitation in the use of
cookies could limit the effectiveness of ad targeting by the Company's DART
technology.
The European Union has recently adopted a directive addressing data privacy
that may result in limitations on the collection and use of certain information
regarding Internet users. These limitations may limit the Company's ability to
target advertising or collect and utilize information in certain European
countries. Since the implementing regulations have not been adopted at this
time, the impact of the directive can not yet be determined.
UNPROVEN BUSINESS MODEL
The Company's business model is to generate revenues solely by providing
Internet advertising solutions to advertisers and Web publishers. The profit
potential of the Company's business model is unproven, and, to be successful,
the Company must, among other things, develop and market solutions that achieve
broad market acceptance by advertisers and Web publishers. There can be no
assurance that Internet advertising, in general, or the Company's solutions, in
particular, will achieve broad market acceptance. The Company's ability to
generate significant revenues from advertisers will depend, in part, on the
development of a large base of Web publishers that utilize the Company's
solutions and have Web sites with adequate available ad space inventory, and
whose Web sites generate sufficient user traffic with demographic
characteristics that are attractive to such advertisers. Furthermore, there is
intense competition among sellers of Internet advertising and a variety of
related pricing models have developed, making it difficult to project future
levels of advertising revenues and applicable gross margins that can be
sustained by the Company or the Internet advertising industry in general.
Accordingly, no assurance can be given that the Company's business model will be
successful or that it can sustain revenue growth and maintain sufficient gross
margins.
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Market acceptance of the Company's new products, including DoubleClick Local
and Closed Loop Marketing solutions, will depend on the continued emergence of
Internet commerce and market demand for the services. There can be no assurance
that the market for the Company's new products will develop or that demand for
the Company's new products will emerge or become sustainable.
RISK OF SYSTEM FAILURE; YEAR 2000 COMPLIANCE
Many 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.
State of Readiness. The Company has made a preliminary assessment of the
Year 2000 readiness of its information technology ("IT") systems, including the
hardware and software that enable the Company to provide and deliver its
solutions, and its non-IT systems. The Company's assessment plan consists of (i)
quality assurance testing of its internally developed proprietary software
incorporated in its solutions ("Solutions Software"); (ii) contacting
third-party vendors and licensors of material hardware, software and services
that are both directly and indirectly related to the delivery of the Company'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. The Company plans to
perform a Year 2000 simulation on its Solutions Software during the first
quarter of 1999 to test system readiness. Based on the results of its Year 2000
simulation test, the Company intends to revise the code of its Solutions
Software as necessary to improve the Year 2000 compliance of its Solutions
Software. The Company has been informed by many of its vendors of material
hardware and software components of its IT systems that the products used by the
Company are currently Year 2000 compliant. The Company will require vendors of
its other material hardware and software components of its IT systems to provide
assurances of their Year 2000 compliance, and plans to complete this process
during the first half of 1999. The Company is currently assessing the
materiality of its non-IT systems and will seek assurances of Year 2000
compliance from providers of material non-IT systems. Until such testing is
complete and such vendors and providers are contacted, the Company will not be
able to completely evaluate whether its IT systems or non-IT systems will need
to be revised or replaced.
Costs. To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, the Company
does not possess the information necessary to estimate the potential costs of
revisions to its Solutions Software should such revisions be required or the
replacement of third-party software, hardware or services that are determined
not to be Year 2000 compliant. Although the Company does not anticipate that
such expenses will be material, such expenses, if higher than anticipated, could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Risks. The Company is not currently aware of any Year 2000 compliance
problems relating to Solutions Software or its IT or non-IT systems that would
have a material adverse effect on the Company's business, results of operations
and financial condition, without taking into account the Company's efforts to
avoid or fix such problems. There can be no assurance that the Company will not
discover Year 2000 compliance problems in its Solutions Software that will
require substantial revisions. In addition, there can be no assurance that
third-party software, hardware or services incorporated into its material IT and
non-IT systems will not need to be revised or replaced, all of which could be
time consuming and expensive. The failure of the Company to fix its Solutions
Software or to fix or replace third-party software, hardware or services on a
timely basis could result in lost revenues, increased operating costs, the loss
of customers and other business interruptions, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in its Software Solutions, and its IT and non-IT systems could
result in claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time-consuming to defend.
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In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside the Company's control will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure beyond the
control of the Company, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent the Company from delivering its
services to its customers, decrease the use of the Internet or prevent users
from accessing the Web sites of the Company's publisher customers, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Contingency Plan. As discussed above, the Company is engaged in an ongoing
Year 2000 assessment and has not yet developed any contingency plans. The
results of the Company's Year 2000 simulation testing and the responses received
from third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
COMPETITION
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to continue to increase.
There are no substantial barriers to entry in this market and the Company
believes that its ability to compete depends upon many factors within and beyond
its control, including the timing and market acceptance of new solutions and
enhancements to existing solutions developed by the Company and its competitors,
customer service and support, sales and marketing efforts, and the ease of use,
performance, price and reliability of the Company's solutions.
The Company competes for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Yahoo!,
Excite, Lycos and Infoseek. Further, the DoubleClick Network competes with a
variety of Internet advertising networks, including 24/7 Media. In marketing the
DoubleClick Network and its DART Service to Web publishers, the Company also
competes with providers of ad servers and related services, including NetGravity
and AdForce. The Company also encounters 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 the Company's 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 the Company. As a result, they
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products and services than the Company. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
employees, strategic partners, advertisers and Web publishers. Further, there
can be no assurance that the Company's competitors will not develop Internet
products or services that are equal or superior to the solutions developed by
the Company or that achieve greater market acceptance than the Company's
solutions. The Company also expects that competition may increase as a result of
industry consolidation. 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 the Company's prospective advertising and Web publisher customers.
Accordingly, it is possible that new competitors or alliances among existing or
potential 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, any of which would have a material adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that the Company will be able to compete successfully
against existing or potential competitors or that competitive pressures will not
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Internet, in general, and the Company, in particular, also must compete
for a share of advertisers' total advertising budgets with traditional
advertising media such as television, radio, cable and print. To the extent that
the Internet is perceived to be a limited or ineffective advertising medium,
advertisers may be reluctant to devote a significant portion of their
advertising budget to Internet advertising, which could limit the growth of
Internet advertising and would have a material adverse effect on the Company's
business, results of operations and financial condition.
19
<PAGE>
RISKS RELATED TO ACQUISITIONS AND INVESTMENTS
A key component of the Company's growth strategy may be the acquisition of,
or investments in, complementary businesses, technologies, services or products.
The successful implementation of this strategy depends on the Company's ability
to identify suitable acquisition or investment candidates, acquire or invest in
such businesses, technologies, services or products on acceptable terms and,
with respect to acquisitions, integrate their operations successfully with those
of the Company. From time to time, the Company has entered into discussions with
various companies regarding acquisition of, and/or investment in, their
respective businesses, technologies, services or products. However, the Company
has no present understandings, commitments or agreements with respect to any
material acquisition of, or investment in, other businesses, technologies,
services of products. There can be no assurance that the Company will be able to
identify suitable acquisition or investment candidates or that the Company will
be able to acquire or make an investment in such candidates on acceptable terms.
In addition, competition for these acquisition and investment targets likely
could also result in increased prices of acquisition and investment targets and
a diminished pool of businesses, technologies, services and products available
for acquisition or investment. Acquisitions also involve a number of other
risks, including adverse effects on the company's reported operating results
from increases in goodwill amortization, acquired in-process technology, stock
compensation expense and increased compensation expense resulting from newly
hired employees, the diversion of management attention, potential disputes with
the sellers of one or more acquired businesses, technologies, services or
products and the possible failure to retain key acquired personnel. Furthermore,
any acquired business could significantly underperform relative to the Company's
expectations. For all these reasons, the Company's pursuit of an overall
acquisition and investment strategy or any individual acquisition or investment
may have a material adverse effect on the Company's business, results of
operations and financial condition. To the extent the Company chooses to use
cash consideration for acquisitions or investments, the Company may be required
to obtain additional financing, and there can be no assurance that such
financing will be available on favorable terms, if at all. As the Company issues
stock to complete acquisitions, existing stockholders will experience ownership
dilution.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends, in significant part, upon the
continued service of its key technical, sales and senior management personnel,
particularly Kevin J. O'Connor, Chief Executive Officer and Chairman of the
Board of Directors, Kevin P. Ryan, President and Chief Operating Officer and
Dwight A. Merriman, Chief Technical Officer, none of whom has entered into an
employment agreement with the Company. The loss of the services of one or more
of the Company's key personnel could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical, sales and marketing, customer support, financial and
accounting, and managerial personnel. Competition for such personnel in the
Internet industry is intense, and there can be no assurance that the Company
will be able to retain its key personnel or that it can attract, assimilate or
retain other highly qualified personnel in the future. The Company has from time
to time in the past experienced, and expects to continue to experience in the
future, difficulty in hiring and retaining candidates with appropriate
qualifications.
DEPENDENCE ON THE WEB INFRASTRUCTURE
The Company's 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. To the extent that the Web continues to experience increased
numbers of users, frequency of use or increased bandwidth requirements of users,
there can be no assurance that the Web infrastructure will continue to be able
to support the demands placed on it or that the performance or reliability of
the Web will not be adversely affected. Furthermore, the Web has experienced a
variety of outages and other delays as a result of damage to portions of its
infrastructure, and such outages and delays could adversely affect the Web sites
of Web publishers utilizing the Company's solutions and the level of traffic on
such Web sites on the DoubleClick Network. In addition, the Web could lose its
viability as a form of media due to delays in the development or adoption of new
standards and protocols (for example, the next-generation Internet protocol)
that can handle increased levels of activity. There can be no assurance that the
infrastructure or complementary products or services necessary to establish and
maintain the Web as a viable commercial medium will be developed, or, if they
are developed, that the Web will become a viable commercial medium for
advertisers. If the necessary infrastructure, standards or protocols or
complementary products, services or facilities are not developed, or if the Web
does not become a viable commercial medium, the Company's business, results of
operations and financial condition will be materially and adversely affected.
20
<PAGE>
Even if such infrastructure, standards or protocols or complementary products,
services or facilities are developed, there can be no assurance that the Company
will not be required to incur substantial expenditures in order to adapt its
solutions to changing or emerging technologies, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Moreover, critical issues concerning the commercial use and
government regulation of the Internet (including security, cost, ease of use and
access, data privacy, intellectual property ownership and other legal liability
issues) remain unresolved and could materially and adversely impact both the
growth of the Internet and the Company's business, results of operations and
financial condition.
DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
The Company regards its intellectual property as critical to its success,
and the Company relies upon patent, trademark, copyright and trade secret laws
in the United States and other jurisdictions to protect its proprietary rights.
The Company has filed three patent applications with the United States Patent
and Trademark Office and one patent application pursuant to international treaty
to protect certain aspects of its technology. The Company pursues the protection
of its trademarks by applying to register the trademarks in the United States
and (based upon anticipated use) internationally, and is the owner of a
registration for the DOUBLECLICK trademark in the United States. There can be no
assurance that any of the Company's trademark registrations or patent
applications will be approved or granted and, if they are granted, that they
will not be successfully challenged by others or invalidated through
administrative process or litigation. Further, if the Company's trademark
registrations are not approved or granted due to the prior issuance of
trademarks to third parties or for other reasons, there can be no assurance that
the Company would be able to enter into arrangements with such third parties on
commercially reasonable terms allowing the Company to continue to use such
trademarks. Patent, trademark, copyright and trade secret protection may not be
available in every country in which the Company's solutions are distributed or
made available. In addition, the Company seeks to protect its proprietary rights
through the use of confidentiality agreements with employees, consultants,
advisors and others. There can be no assurance that such agreements will provide
adequate protection for the Company's proprietary rights in the event of any
unauthorized use or disclosure, that employees of the Company, consultants,
advisors or others will maintain the confidentiality of such proprietary
information, or that such proprietary information will not otherwise become
known, or be independently developed, by competitors. The Company's DART
technology collects and utilizes data derived from user activity on the
DoubleClick Network and the Web sites of Web publishers using the Company's
solutions. This data is used for ad targeting and predicting ad performance.
Although the Company believes that it has the right to use such data and the
compilation of such data in the Company's database, there can be no assurance
that any trade secret, copyright or other protection will be available for such
information or that others will not claim rights to such information. Further,
pursuant to its contracts with Web publishers using the Company's solutions, the
Company is obligated to keep certain information regarding the Web publisher
confidential.
The Company has licensed in the past, and expects that it may license in the
future, elements of its trademarks, trade dress and similar proprietary rights
to third parties, including in connection with the establishment of its
international business relationships which may be controlled operationally by
such third parties. While the Company attempts to ensure that the quality of its
brand is maintained by such business partners, no assurances can be given that
such partners will not take actions that could materially and adversely affect
the value of the Company's proprietary rights or the reputation of its solutions
and technologies. The Company currently licenses certain aspects of its
predictive modeling technologies from a third party. The failure by the Company
to maintain this license, or to find a replacement for such technology in a
timely and cost-effective manner, could have a material adverse effect on the
Company's business, results of operations and financial condition.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company or other companies
within the industry. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate or that third parties
will not infringe or misappropriate the Company's proprietary rights. Any such
infringement or misappropriation, should it occur, could have a material adverse
effect on the Company's business, results of operations and financial condition.
Furthermore, there can be no assurance that the Company's business activities
will not infringe upon the proprietary rights of others, or that other parties
will not assert infringement claims against the Company. From time to time the
Company has been, and expects to continue to be, subject to claims in the
ordinary course of its business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by the
Company and its business partners. Although such claims have not resulted in
litigation or had a material adverse effect on the Company's business, results
of operations or financial
21
<PAGE>
condition, such claims and any resultant litigation, should it occur, could
subject the Company to significant liability for damages and could result in
invalidation of the Company's proprietary rights and, even if not meritorious,
could be time-consuming and expensive to defend, and could result in the
diversion of management time and attention, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new product and
service announcements, introductions and enhancements, and changing customer
demands. These market characteristics are heightened by the emerging nature of
the Web and Internet advertising. Accordingly, the Company's future success will
depend on its ability to adapt to rapidly changing technologies, its ability to
adapt its solutions to meet evolving industry standards and its ability to
continually improve the performance, features and reliability of its solutions
in response to both changing customer demands and competitive product and
service offerings. The failure of the Company to successfully adapt to such
changes in a timely manner could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, there can
be no assurance that the Company will not experience difficulties that could
delay or prevent the successful design, development, testing, introduction or
marketing of solutions, or that any new solutions or enhancements to existing
solutions will adequately meet the requirements of its current and prospective
customers and achieve any degree of significant market acceptance. If the
Company is unable, for technological or other reasons, to develop and introduce
new solutions or enhancements to existing solutions in a timely manner or in
response to changing market conditions or customer requirements, or if its
solutions or enhancements contain errors or do not achieve a significant degree
of market acceptance, the Company's business, results of operations and
financial condition would be materially and adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
The Company has recently commenced operations in a number of international
markets and a component of the Company's strategy is to continue to expand its
international operations and international sales and marketing efforts. To date,
the Company has limited experience in developing localized versions of its
solutions and in marketing, selling and distributing its solutions
internationally. There can be no assurance that the Company will be able to
successfully market, sell and deliver its solutions in these markets. In Japan,
Iberoamerica (Spain, Portugal and Latin America), Italy and Scandinavia, the
Company is relying on its business partners for conducting operations,
establishing local networks, aggregating Web publishers and coordinating sales
and marketing efforts. The Company's agreements with its business partners have
terms ranging from two to four years. Accordingly, the Company's success in such
markets is directly dependent on the success of its business partners in such
activities. No assurance can be given that such business partners will be
successful or that such business partners will dedicate sufficient resources to
the business relationship. The failure of the Company's business partners to
successfully establish operations and sales and marketing efforts in such
markets could have a material adverse effect on the Company's business, results
of operations and financial condition.
There are certain risks inherent in doing business in international markets,
such as unexpected changes in regulatory requirements, potentially adverse tax
consequences, export restrictions, export controls relating to encryption
technology, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, political instability, fluctuations in currency
exchange rates, and seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world, any of which could have a
material adverse effect on the success of the Company's international operations
and, consequently, on the Company's business, results of operations and
financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Due to concerns arising in connection with the increasing popularity and use
of the Web, a number of laws and regulations may be adopted covering issues such
as user privacy, pricing, characteristics, acceptable Web site and advertising
content, commercial activities, taxation and quality of products and services.
Such legislation could dampen the growth in use of the Web generally and
decrease the acceptance of the Web as a communications and commercial medium,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, because the growing popularity
and use of the Web has burdened the existing telecommunications infrastructure
and many areas with high Web use have begun to experience interruptions in phone
service, certain local telephone carriers have petitioned governmental bodies to
regulate Internet service providers ("ISPs") and online service providers
("OSPs") in a manner similar to long distance telephone carriers and to impose
access fees on ISPs and OSPs. If any of these
22
<PAGE>
petitions or the relief sought therein is granted, the costs of communicating on
the Web could increase substantially, potentially adversely affecting the growth
in use of the Web. Further, due to the global nature of the Web, it is possible
that, although transmissions relating to the Company's solutions originate in
the State of New York, the governments of other states or foreign countries
might attempt to regulate the Company's transmissions or levy sales or other
taxes relating to the Company's activities. There can be no assurance that
violations of local laws will not be alleged or charged by state or foreign
governments, that the Company might not unintentionally violate such laws or
that such laws will not be modified, or new laws enacted, in the future. Any of
the foregoing developments could have a material adverse effect on the Company's
business, results of operations and financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
The directors and executive officers and their affiliates beneficially own
approximately 38.6% of the outstanding Common Stock. As a result, these
stockholders may be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could materially and adversely affect the
market price of the Common Stock or the future ability of the Company to raise
capital through an offering of its equity securities. A substantial portion of
the shares of the Company's Common Stock outstanding are restricted securities
and are eligible for immediate sale in the public market without restriction. In
the event that all or a significant portion of the stockholders holding such
shares elect to sell their shares, the price of the Company's Common Stock could
be materially adversely affected, irrespective of the Company's operating
performance.
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Company's initial public offering in February 1998, there was
no public market for the Company's Common Stock. Due to the factors noted above,
the trading price of the Company's Common Stock is likely to continue to be
highly volatile and could be subject to wide fluctuations, particularly in
response to variations in quarterly results of operations, the gain or loss of
significant advertisers or Web publisher customers, changes in earning estimates
by analysts, announcements of technological innovations or new solutions by the
Company or its competitors, general conditions in Internet-related industries,
the respective market prices of companies in Internet-related industries and
other events or factors, many of which are beyond the Company's control. In
addition, the stock market, which has recently been at or near historic highs,
has experienced extreme price and volume fluctuations which have affected the
market price for many companies in industries similar or related to that of the
Company and which have been unrelated to the operating performance of these
companies. These market fluctuations may have a material adverse effect on the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
possible sale of a significant number of shares of the Company's Common Stock by
the holders thereof may have an adverse affect on the price of the Company's
Common Stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities:
NONE
23
<PAGE>
(b) Use of Proceeds
On February 19, 1998, the Securities and Exchange Commission declared
effective the Company'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, the Company 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 the Company, 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. During the nine months ended
September 30, 1998, the Company used $26.8 million of the proceeds from the
Offering toward general corporate purposes, including working capital, and
toward the expansion of the Company'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
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:
11.1 Statement re: Computation of Basic and Diluted Net Loss Per
Share
27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
24
<PAGE>
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DOUBLECLICK INC.
Date: November 10, 1998 By: /s/ JEFFREY EPSTEIN
-----------------------------------------
Jeffrey Epstein
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
25
EXHIBIT 11.1
DOUBLECLICK INC.
COMPUTATION OF BASIC AND PRO-FORMA NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Number of
Common and
Common Weighted
Equivalent Days Average
Shares Outstanding Shares
----------- ----------- ---------
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
Class A common stock outstanding at January 1, 1997, and exchange
for Common stock ........................................................... 3,940,890 273 3,940,890
Class B common stock outstanding at January 1, 1997, and exchange
for Common stock ........................................................... 5,118,228 273 5,118,228
Class C common stock outstanding at January 1, 1997, and exchange
for Common stock ........................................................... 2 273 2
Stock options exercised ........................................................ 99,250 Various 33,083
Assumed issuance and conversion of convertible preferred stock as of
January 1, 1997 ............................................................ 6,234,434 273 6,234,434
Assumed redemption of Class B and C Common stock from assumed
proceeds and conversion of convertible preferred stock ..................... (3,896,137) 273 (3,896,137)
-----------
Weighted average shares used in basic net loss
per share computation ............................................................................................. 11,430,500
Net loss for the nine months ended September 30, 1997 ................................................................$ (4,612,443)
-------------
Basic and diluted net loss per share ......................................................................................$ (0.40)
--------
NINE MONTHS ENDED SEPTEMBER 30, 1998
Common stock outstanding at January 1, 1998 .................................... 6,118,972 273 6,118,972
Stock options exercised ........................................................ 248,513 Various 124,257
Issuance of common stock ....................................................... 4,025,000 222 3,273,077
Issuance of common stock upon conversion of convertible preferred stock
upon February 20, 1998 initial public offering ............................. 6,234,434 222 5,069,760
Assumed issuance of conversion of convertible preferred stock for the
period from January 1, 1998 through February 20, 1998 ...................... 6,234,434 51 1,164,674
---------
Weighted average shares used in basic and diluted net loss
per share computation ..............................................................................................15,750,739
Net loss for the nine months ended September 30, 1998 ...............................................................$ (13,815,453)
--------------
Basic and diluted net loss per share ................................................................................$ (0.88)
--------------
</TABLE>
<PAGE>
EXHIBIT 11.1
DOUBLECLICK INC.
COMPUTATION OF BASIC AND PRO-FORMA NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Number of
Common and
Common Weighted
Equivalent Days Average
Shares Outstanding Shares
----------- ------------ ---------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1997
Class A common stock outstanding at June 31, 1997, and exchange
for Common stock ........................................................... 3,940,890 91 3,940,890
Class B common stock outstanding at June 31, 1997, and exchange
for Common stock ........................................................... 5,118,228 91 5,118,228
Class C common stock outstanding at June 31, 1997, and exchange
for Common stock ........................................................... 2 91 2
Stock options exercised ........................................................ 99,250 Various 49,625
Assumed issuance and conversion of convertible preferred stock as of
June 30, 1997 .............................................................. 6,234,434 91 6,234,434
Assumed redemption of Class B and C Common stock from assumed
proceeds and conversion of convertible preferred stock ..................... (3,896,137) 91 (3,896,137)
-----------
Weighted average shares used in basic net loss
per share computation ...................................................... 11,447,042
Net loss for the three months ended September 30, 1997 ......................... $ (2,140,270)
-------------
Basic and diluted net loss per share ........................................... $ (0.19)
-------------
THREE MONTHS ENDED SEPTEMBER 30, 1998
Common stock outstanding at June 30, 1998 ...................................... 16,504,114 91 16,504,114
Stock options exercised ........................................................ 122,805 Various 61,403
------
Weighted average shares used in basic net loss per share ....................... .......................................16,565,517
Net loss for the three months ended September 30, 1998 ......................... .....................................$ (4,714,016)
-------------
Basic and diluted net loss per share ........................................... .....................................$ (0.28)
-------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 38,587,883 38,587,883
<SECURITIES> 11,325,133 11,325,133
<RECEIVABLES> 20,932,059 20,932,059
<ALLOWANCES> (2,511,709) (2,511,709)
<INVENTORY> 0 0
<CURRENT-ASSETS> 71,480,252 71,480,252
<PP&E> 9,401,447 9,401,447
<DEPRECIATION> (1,822,675) (1,822,675)
<TOTAL-ASSETS> 80,202,357 80,202,357
<CURRENT-LIABILITIES> 20,932,948 20,932,948
<BONDS> 0 0
0 0
0 0
<COMMON> 16,627 16,627
<OTHER-SE> 58,757,425 58,757,425
<TOTAL-LIABILITY-AND-EQUITY> 80,202,357 80,202,357
<SALES> 20,776,701 51,073,631
<TOTAL-REVENUES> 20,776,701 51,073,631
<CGS> 13,970,129 34,538,696
<TOTAL-COSTS> 13,970,129 34,538,696
<OTHER-EXPENSES> 12,240,802 32,298,779
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (4,714,017) (13,815,454)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,714,017) (13,815,454)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,714,017) (13,815,454)
<EPS-PRIMARY> (0.28) (0.88)
<EPS-DILUTED> (0.28) (0.88)
</TABLE>
