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 ending March 31, 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
DOUBLECLICK INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 7319 13-3870996
(State of (Primary Standard Industrial I.R.S. Employer
Incorporation) Classification Code) Identification Number)
41 MADISON AVENUE, 32ND FLOOR
NEW YORK, NEW YORK 10010
(212) 683-0001
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
KEVIN J. O'CONNOR
CHIEF EXECUTIVE OFFICER
DOUBLECLICK INC.
41 MADISON AVENUE, 32ND FLOOR
NEW YORK, NEW YORK 10010
(212) 683-0001
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 March 31, 1998, there were 16,414,156 shares of the registrant's common
stock outstanding.
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PAGE NUMBER
PART I FINANCIAL INFORMATION
ITEM 1: Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1997 and
March 31, 1998 (unaudited with respect to March 31, 1998) 3
Unaudited Consolidated Statement of Operations for the
three months ended March 31, 1997 and 1998 4
Unaudited Consolidated Statement of Cash Flows for the
three months ended March 31, 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 8
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 18
ITEM 2: Changes in Securities and Use of Proceeds 18
ITEM 3: Defaults Upon Senior Securities 18
ITEM 4: Submission of Matters to a Vote of Security Holders 18
ITEM 5: Other Information 18
ITEM 6: Exhibits and Reports on Form 8-K 18
ITEM 7: Signatures 19
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<TABLE>
DOUBLECLICK INC.
CONSOLIDATED BALANCE SHEET
(Unaudited with respect to March 31, 1998)
December 31, March 31,
1997 1998
---- ----
ASSETS
Current assets:
<CAPTION>
<S> <C> <C>
Cash and cash equivalents ...........................................$ 2,671,845 $ 62,047,845
Short-term investments .............................................. 5,874,229 2,332,399
Accounts receivable, less allowance for doubtful accounts of
$712,075 at December 31, 1997 and $798,437 at
March 31, 1998 ................................................... 10,489,256 15,536,166
Prepaid expenses and other current assets ........................... 355,841 468,400
-------- --------
Total current assets ........................................... 19,391,171 80,384,810
Property and equipment, net ......................................... 1,997,326 4,523,511
Investments, at cost ................................................ 254,926 254,926
Other assets ........................................................ 98,574 110,522
------- -------
Total assets ..................................................$ 21,741,997 $ 85,273,769
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................$ 8,142,429 $ 9,809,014
Accrued expenses .................................................... 3,408,542 5,623,293
Deferred revenues ................................................... 91,061 1,009,217
Deferred license and service fees ................................... 237,500 443,742
-------- -------
Total current liabilities ...................................... 11,879,532 16,885,266
Deferred license and service fees ................................... 462,500 494,265
Capital lease obligations ........................................... - 227,895
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 $0.001; 40,000,000 shares authorized;
issued and outstanding 6,118,972 at December 31, 1997;
16,414,156 at March 31, 1998 ..................................... 6,119 16,414
Additional paid-in capital .......................................... 46,996,328 109,503,361
Cumulative translation adjustment (1,271) (23,376)
Deferred compensation ............................................... (1,056,773) (852,483)
Unrealized loss on marketable securities - (5,842)
Accumulated deficit .................................................(36,544,478) (40,971,731)
------------ ------------
Total stockholders' equity ..................................... 9,399,965 67,666,343
---------- ----------
Total liabilities and stockholders' equity ....................$ 21,741,997 $ 85,273,769
============= ============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
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<TABLE>
DOUBLECLICK INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
------------------------------------------
March 31, 1997 March 31, 1998
-------------- --------------
<CAPTION>
<S> <C> <C>
Revenues ............................... $ 5,329,369 $ 13,003,544
Cost of revenues ....................... 3,394,396 8,844,583
---------- ---------
Gross profit ........................ 1,934,973 4,158,961
---------- ---------
Operating expenses
Sales and marketing ................. 2,120,085 5,624,029
General and administrative .......... 752,423 2,348,602
Product development ................. 232,553 1,025,509
-------- ---------
Total operating expenses .......... 3,105,061 8,998,140
---------- ---------
Loss from operations ................... (1,170,088) (4,839,179)
Interest income ........................ - 428,045
Interest expense ....................... (72,339) (16,119)
-------- --------
Net loss ...............................$ (1,242,427) $ (4,427,253)
============= =============
Basic net loss per share ............... $ (0.14) $ (0.42)
-------- --------
Pro forma basic net loss per share ..... $ (0.11) $ (0.31)
-------- --------
Weighted average shares used in basic net
loss per share calculation .......... 9,059,120 10,582,602
---------- ----------
Weighted average shares used in pro forma
basic net loss per share calculation.. 11,397,417 14,115,448
----------- ----------
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
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<TABLE>
DOUBLECLICK INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
----------------------------------
March 31, 1997 March 31, 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<CAPTION>
<S> <C> <C>
Net loss .....................................................$ (1,242,427) $ (4,427,253)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization .............................. 47,540 204,580
Amortization of deferred compensation expense .............. - 204,290
Provision for bad debt debts ............................... 75,000 86,362
Changes in operating assets and liabilities:
Accounts receivables ..................................... (661,361) (5,133,272)
Prepaid expenses and other current assets ................ (1,466) (124,507)
Accounts payable ......................................... 618,845 1,666,585
Accrued expenses ......................................... (394,573) 2,214,751
Deferred revenues ........................................ (95,041) 1,156,163
-------- ---------
Net cash used in operating activities ................. (1,653,483) (4,152,301)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales and maturities of short-term investments ............... - 3,535,987
Purchases of property and equipment .......................... (512,841) (2,730,765)
--------- -----------
Net cash (used in) provided by investing activities ... (512,841) 805,222
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering, net ................... - 62,505,885
Proceeds from exercise of common stock options ............... - 11,404
Capital lease obligations .................................... - 227,895
Advances from related party .................................. 2,182,244 -
---------- -
Net cash provided by financing activities ............. 2,182,244 62,745,184
---------- ----------
Effect of cumulative translation adjustment ..................... - (22,105)
-- --------
Net increase in cash and cash equivalents ....................... 15,920 59,376,000
Cash and cash equivalents at beginning of period ................ - 2,671,845
-- ---------
Cash and cash equivalents at end of period ...................... $ 15,920 $ 62,047,845
========= ============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
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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. The Company's DART technology and media expertise enable it
to dynamically deliver highly targeted, measurable and cost-effective Internet
advertising for advertisers, increase ad sales and improve ad space inventory
management for Web publishers. The Company was organized as a Delaware
corporation on January 23, 1996 and commenced operations on that date.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the limited
history of commerce on the Internet. The Company's success may depend in part
upon the emergence of the Internet as a communications medium, prospective
product development efforts, and the acceptance of the Company's solutions by
the marketplace.
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 whom 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 March 31, 1998, and the consolidated
statement of operations and cash flows for the three months ended March 31, 1997
and 1998 have been prepared by the Company, without audit. 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 March 31, 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 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.
These 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 Statements 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.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire fiscal 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.
MARKETABLE SECURITIES
The Company accounts for investments in marketable securities in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company classifies its
short-term investments as available-for-sale. Accordingly, these investments,
primarily corporate bonds with maturities ranging from four to eight months, are
carried at fair value. Changes in market values are reflected as unrealized
gains or losses, calculated on the specific identification method, and reported
as a net amount in a separate component of stockholders' equity.
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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 customers and
generally does not require collateral. No single customer represented more than
10% of revenues for the three months ended March 31, 1998. Revenues derived from
customers outside the United States have not been material. 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 16 days as of March 31, 1998.
PRO-FORMA NET LOSS PER SHARE
Pro-forma 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 and the shares
resulting from the assumed conversion of all outstanding convertible preferred
stock as though such conversion occurred at the beginning of the period, less
shares assumed to have been redeemed in connection with the Company
recapitalization of the Company in June 1997, as though such recapitalization
also occurred at the beginning of the period. 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. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements.
Statement 130, which is effective for fiscal years beginning after December 15,
1997, requires reclassification of financial statements for earlier periods to
be provided for comparative purposes. The Company anticipates that implementing
the provisions of Statement 130 will not have a significant impact on the
Company's existing disclosures.
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 anticipates that implementing the provisions of Statement 131 will
not have a significant impact on the Company's existing disclosures.
NOTE 2--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 $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. There were 35,750 shares of stock options exercised during the three
months ended March 31, 1998.
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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 WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1993 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. 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" AND ELSEWHERE IN THIS QUARTERLY REPORT.
OVERVIEW
DoubleClick is a leading provider of comprehensive Internet advertising
solutions for advertisers and Web publishers. The Company offers three distinct
Internet advertising solutions: (i) the DoubleClick Network, launched in March
1996; (ii) DoubleClick's DART Service, marketed to Web publishers since January
1997; and (iii) DoubleClick Direct, an Internet-based direct marketing solution
introduced on a limited basis in September 1997. 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 was formed 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 248 employees as of March 31, 1998.
The Company has derived substantially all of its revenues 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 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. DoubleClick Direct advertising is
priced on a "cost-per-click", "cost-per-lead" and "cost-per-sale or download"
basis.
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. 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 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 survives a change of control of AltaVista or Digital
Equipment Corporation, although, notwithstanding either such provision, either
party may terminate the agreement upon 90 days' prior written notice.
DoubleClick pays AltaVista a service fee calculated as a percentage of the
revenues derived from delivery of advertisements on the AltaVista Web site.
Revenues from advertisements delivered on the AltaVista Web site were $6.6
million, or 50.9% of the Company's revenues for the three months ended March 31,
1998. No other web site or publisher accounted for more than 10% of the
Company's revenue for the three months ended March 31, 1998.
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In February 1998, the Company sold 4,025,000 shares of the Company's Common
Stock at a price of $17.00 per share through an initial public offering. Net
proceeds from this offering totaled approximately $62.5 million. With the
proceeds, the Company plans to enhance and expand the DoubleClick Network,
expand sales and marketing, establish and enhance DART service and DoubleClick
Direct, and expand internationally.
The Company has incurred significant losses since its inception, and as of
March 31, 1998 had an accumulated deficit of $41.0 million, of which $16.0
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 has recorded deferred compensation of $1.5 million, which represents
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. Of the total deferred compensation amount, $0.6 million
has been amortized as of March 31, 1998. The remaining deferred compensation
amount will be amortized over the remaining vesting periods of the related
options. 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.
REVENUES
Revenues increased from $5.3 million for the three months ended March 31,
1997 to $13.0 million for the three months ended March 31, 1998, or an increase
of 144.0%. The increase in revenues was due primarily to an increase in the
number of advertisers and ads delivered on the DoubleClick Network, including
ads delivered on or through the AltaVista Web site. Revenues earned from
advertisements delivered on the AltaVista Web site were $6.6 million, or 50.9%
of revenues for the three months ended March 31, 1998, compared to $1.9 million,
or 36.4% of revenues for the three months ended March 31, 1997. AltaVista is a
significant part of the DoubleClick Network and is expected to continue to
account for a significant portion of the Company's revenues for the next few
years. No other Web site accounted for more than 10.0% of revenues for the three
months ended March 31, 1998, and no one advertiser accounted for 10.0% of
revenues during the same period. To date, the Company has not derived
significant revenues from its DART Service, DoubleClick Direct 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 margins were 36.3%
and 32.0% for the three months ended March 31, 1997 and 1998, respectively.
Gross margins decreased for the three months ended March 31, 1998 due to the
shift in the Company's revenue mix away from the sale of advertisements on a
commission basis. The Company anticipates that its service fees, depreciation of
the ad delivery system and Internet access costs will continue to increase in
absolute dollars with the increase in revenue and ad volume. To the extent
revenues from its DART Service and DoubleClick Direct increase, the Company
anticipates that gross margins will increase.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $2.1 million and $5.6
million for the three months ended March 31, 1997 and 1998, respectively, or
39.8% and 43.2% of revenues, respectively. The increase in absolute dollars was
primarily attributable to the increase in sales personnel, commissions
associated with the increase in revenues, the costs associated with expanding
international operations and costs related to the continued development and
implementation of the Company's marketing and branding campaigns. The Company
expects sales and marketing expenses to increase on an absolute dollar basis but
remain relatively constant 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 were $0.8
million and $2.3 million for the three months ended March 31, 1997 and 1998,
respectively, or 14.1% and 18.1% of revenues, respectively. The increase in
absolute dollars was primarily a 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 were $0.2 million and $1.0
million for the three months ended March 31, 1997 and 1998, respectively, or
4.4% and 7.9% of revenues, respectively. The increase in absolute dollars was
due primarily to increases in product development personnel and consulting
expenses. Product development expenses incurred were primarily related to
enhancements to the DART technology and the development of DoubleClick Direct.
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 was $412,000 for the three months ended March 31, 1998,
compared to net interest expense of $72,000 for the three months ended March 31,
1997. The increase in interest income is attributable to a higher cash, cash
equivalents and short-term investments balance as a result of public offering
proceeds received 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 recorded a net loss of $1.2 million and $4.4 million for the
three months ended March 31, 1997 and 1998 respectively, or $0.11 and $0.31 per
share on a pro forma basis, respectively. The increase in the net loss was
primarily due to the hiring of additional personnel in all areas of the Company
as it continued to build its infrastructure, expand its markets and increase its
brand awareness.
LIQUIDITY AND CAPITAL RESOURCES
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 to 779,302 shares of the Company's Common Stock. In February 1998, the
Company sold 4,025,000 shares of the Company's Common Stock at a price of $17.00
per share through an initial public offering. Net proceeds from this offering
were approximately $62.5 million.
Net cash used in operating activities was $1.7 million and $4.2 million for
the three months ended March 31, 1997 and 1998, respectively. Cash used in
operating activities for the three months ended March 31, 1998 resulted from net
operating losses and an increase in accounts receivable, which were partially
offset by increases in accounts payable, accrued expenses and deferred revenues.
Net cash used in investing activities was $0.5 million for the three months
ended March 31, 1997, compared to net cash provided by investing activities of
$0.8 for the three months ended March 31, 1998. Cash provided by investing
activities for the three months ended March 31, 1998 resulted from proceeds
provided by the sales and maturities of short-term investments, partially offset
by an increase in purchases of property and equipment.
Net cash provided by financing activities was $2.2 million and $62.7 million
for the three months ended March 31, 1997 and 1998, respectively. Cash provided
by financing activities for the three months ended March 31, 1998 consisted
primarily of $62.5 million in net proceeds from the initial public offering.
As of March 31, 1997, the Company had $62.0 million of cash and cash
equivalents and $2.3 million in short-term investments. The Company's principal
commitments consisted of obligations under operating and capital leases.
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.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company believes that results of operations in any quarterly period
may be impacted by factors that have occurred in the past, and may occur in the
future, such as the Company's limited operating history, history of losses and
anticipation of continue losses, the Web publisher concentration and dependence
on AltaVista, reliance on the DoubleClick Network, dependence on a limited
number of advertisers, management of growth, dependence on key personnel, the
developing market for Internet advertising, the Company's unproven business
model, system failure, dependence on proprietary rights, increased competition,
technological changes, product development risks and risks associated with
international expansion.
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 into 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.
Web Publisher Concentration; Dependence On Altavista
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.
Revenues from advertisements delivered on the AltaVista Web site represented
50.9% of the Company's revenues for the three months ended March 31, 1998.
AltaVista is a significant part of the DoubleClick Network and the Company
expects AltaVista to continue to account for a significant portion of the
Company's revenues for the next few years. While the stated term of the
Company's agreement with AltaVista expires in December 1998, either party may
terminate the agreement upon 90 days' prior written notice. Further, any
development materially affecting the business or financial condition of
AltaVista, including any change in control of AltaVista, a subsidiary of Digital
Equipment Corporation, could have a material adverse effect on the Company's
relationship with AltaVista. The loss of AltaVista as part of the DoubleClick
Network, any reduction in traffic on the AltaVista Web site or through
AltaVista, or a termination of AltaVista's contract with the Company, would have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, given the short-term nature of the AltaVista
contract, as is the case with most of the Company's Web publisher contracts, the
Company will have to negotiate new contracts or renewals which may have terms
that are not as favorable to the Company as the existing contracts, 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
recently began providing its DART Service to Web publishers and introduced
DoubleClick Direct, 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
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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.
Dependence On A Limited Number Of Advertisers
The Company's revenues to date have been derived from a limited number of
customers which advertise on the DoubleClick Network and the Company expects
that a limited number of advertisers will continue to account for a significant
percentage of the Company's revenues for the foreseeable future. Although no one
advertiser accounted for more than 10.0% of the Company's total revenue, the
Company's top ten advertisers accounted for an aggregate of 22.1% of the
Company's revenues for the three months ended March 31, 1998. Further,
advertisements delivered by the Company are typically sold pursuant to purchase
order agreements which are subject to cancellation. There can be no assurance
that current advertisers will continue to purchase advertising from the Company
or that the Company will be able to successfully attract additional advertisers.
The loss of one or more of the advertisers that represent a material portion of
the revenues generated on the DoubleClick Network could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, the non-payment or late payment of amounts due by a significant
advertiser could have a material adverse effect on the Company's business,
results of operations and financial conditions.
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 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.
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.
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. 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
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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.
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 are placed on the user's hard drive without the user's knowledge or
consent, but can be removed 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.
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.
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.
Market acceptance of DoubleClick Direct will depend, in large part, on the
adoption of the Internet as a direct marketing vehicle and the continued
emergence of Internet commerce. No assurance can be given that the Company's
cost-per-action pricing model for DoubleClick Direct will achieve market
acceptance by direct marketers, generate significant revenues, or provide
acceptable gross margins.
Risk Of System Failure
The Company's solutions utilize its DART technology, which resides on a
computer system located at the Company's headquarters in New York City. The
continuing and uninterrupted performance of such computer system is critical to
the success of the Company's business. Any system failure that causes
interruptions in the Company's ability to service its customers, including
failures that affect the ability of the Company to deliver advertisements
without significant delay to the viewer, could reduce customer satisfaction and,
if sustained or repeated, would reduce the attractiveness of the Company's
solutions to advertisers and Web publishers. An increase in the volume of
advertising delivered through the Company's servers could strain the capacity of
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the software or hardware deployed by the Company, which could lead to slower
response time or system failures. To the extent that any capacity constraints
are not effectively addressed by the Company, such constraints would have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company's operations are dependent upon its ability to protect its
computer systems against damage from fire, power loss, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events. In addition, failure of the Company's telecommunications providers to
provide the data communications capacity in the time frame required by the
Company for any reason could cause interruptions in the solutions provided by
the Company. Despite precautions taken by the Company, unanticipated problems
affecting the Company's systems have from time to time in the past caused, and
in the future could cause, interruptions in the delivery of the Company's
solutions. The Company is currently in the planning stages of acquiring and
implementing a back-up, off-site system capable of supporting its operations in
the event of a system failure at its headquarters. The Company plans to have
such system operational during the first half of 1998. Any damage or failure
that interrupts or delays the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial condition.
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 and Infoseek. Further, the DoubleClick Network competes with a variety of
Internet advertising networks. 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. 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.
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 248 employees as of March 31,
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1998. The Company expects that the number of its employees will continue to
increase for the foreseeable future. Furthermore, the Company must continue to
improve its financial and management controls, reporting systems and procedures,
and expand, train and manage its work force. 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 Company management will be able to
achieve the rapid execution necessary to successfully offer its solutions and
implement its business plan. 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.
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, Dwight
A. Merriman, Chief Technical Officer, Wenda Harris Millard, Executive Vice
President, Marketing and Sales, John L. Heider, Vice President of Engineering,
and Barry M. Salzman, Vice President, International, 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.
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, 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 one patent application with the United States Patent and
Trademark Office to protect certain aspects of its DART 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
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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 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.
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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), Scandinavia, and most
recently, Italy, 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 content, 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 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 37.4% of the outstanding Common Stock. As a result, these
stockholders will 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.
Possible Volatility Of Stock Price
Due to the factors noted above, the trading price of the Company's Common
Stock may 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
and other events or factors, many of which are beyond the Company's control. In
addition, the stock market in general 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities:
NONE
(b) Use of Proceeds
On February 25, 1998, the Company completed the initial public
offering of 4,025,000 shares of its Common Stock (the "Offering"). Net
proceeds to the Company from the Offering were approximately $62.5
million. During the three months ended March 31, 1998, the Company used
$3.1 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 1, 1998, in a Written Consent in Lieu of a Special
Meeting of the Stockholders of the Company, a majority of the holders of
the then outstanding shares of Common Stock of the Company (which
majority included the majority of the holders of the Preferred Stock of
the Company, voting on an as converted basis) approved the Amendment of
the Restated Certificate of Incorporation of the Company, and the
Amended and Restated By-laws of the Company.
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 Pro-Forma
Net Loss Per Share
27.1 Financial Data Schedule
(b) The Company did not file and reports on Form 8-K during the three
months ended March 31, 1998.
-18-
<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: April 30, 1998 By: /s/ KEVIN P. RYAN
Kevin P. Ryan
President, Chief Operating Officer
By: /s/ JEFFREY EPSTEIN
Jeffrey Epstein
Chief Financial Officer (Principal Financial Officer)
By: /s/ STEPHEN R. COLLINS
Stephen R. Collins
Controller (Principal Accounting Officer)
-19-
<PAGE>
<TABLE>
EXHIBIT 11.1
DOUBLECLICK INC.
COMPUTATION OF BASIC AND PRO-FORMA NET LOSS PER COMMON SHARE
Number of
Common and
Common Weighted
Equivalent Days Average
Shares Outstanding Shares
----------- ----------- --------
PERIOD ENDED MARCH 31, 1997
Class A common stock outstanding at January 1, 1997, and exchange
<CAPTION>
<S> <C> <C> <C>
for Common stock ..................................................... 3,940,890 90 3,940,890
Class B common stock outstanding at January 1, 1997, and exchange
for Common stock ..................................................... 5,118,228 90 5,118,228
Class C common stock outstanding at January 1, 1997, and exchange
for Common stock ..................................................... 2 90 2
-
Weighted average shares used in basic and diluted net loss per share ..... 9,059,120
Assumed issuance and conversion of convertible preferred stock as of
January 1, 1997 ...................................................... 6,234,434 90 6,234,434
Assumed redemption of Class B and C Common stock from assumed
proceeds and conversion of convertible preferred stock ...............(3,896,137) 90 (3,896,137)
-----------
Pro forma weighted average shares used in basic and diluted net loss
per share computation ................................................ 11,397,417
Net loss for the period March 31, 1997 ................................... $ (1,242,427)
-------------
Basic net loss per share ................................................. $ (0.14)
--------
Pro forma basic net loss per share ....................................... $ (0.11)
--------
PERIOD ENDED MARCH 31, 1998
Common stock outstanding at January 1, 1998 .............................. 6,118,972 90 6,118,972
Stock options exercised .................................................. 35,750 Various 17,875
Issuance of common stock ................................................. 4,025,000 39 1,744,167
Issuance of common stock upon conversion of convertible preferred stock
upon February 20, 1998 initial public offering ....................... 6,234,434 39 2,701,588
---------
Weighted average shares used in basic and diluted net loss per share ..... 10,582,602
Assumed issuance of conversion of convertible preferred stock for the
period from January 1, 1998 through February 20, 1998 ................ 6,234,434 51 3,532,846
---------
Pro forma weighted average shares used in basic and diluted net loss
per share computation ................................................ 14,115,448
Net loss for the period March 31, 1998 ................................... $ (4,427,253)
-------------
Basic net loss per share ................................................. $ (0.42)
--------
Pro forma basic net loss per share ....................................... $ (0.31)
--------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 62,047,845
<SECURITIES> 2,332,399
<RECEIVABLES> 16,334,603
<ALLOWANCES> (798,437)
<INVENTORY> 0
<CURRENT-ASSETS> 80,384,810
<PP&E> 5,213,493
<DEPRECIATION> (689,982)
<TOTAL-ASSETS> 85,273,769
<CURRENT-LIABILITIES> 16,885,266
<BONDS> 0
0
0
<COMMON> 16,414
<OTHER-SE> 67,649,929
<TOTAL-LIABILITY-AND-EQUITY> 85,273,769
<SALES> 13,003,544
<TOTAL-REVENUES> 13,003,544
<CGS> 8,844,583
<TOTAL-COSTS> 8,998,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,119
<INCOME-PRETAX> (4,427,253)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,427,253)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,427,253)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
