<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-23709
DOUBLECLICK INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3870996
(STATE OF JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
41 MADISON AVENUE, 32ND FLOOR
NEW YORK, NEW YORK 10010
(212) 683-0001
(ADDRESS, INCLUDING ZIP CODE AND
TELEPHONE NUMBER, INCLUDING AREA CODE
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes /X/ No / /
As of July 31, 1999, there were 39,780,153 shares of the registrant's common
stock outstanding.
<PAGE>
DOUBLECLICK INC.
INDEX TO FORM 10-Q/A
Page
----
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet as of June 30, 1999 and
December 31, 1998 .......................................................1
Consolidated Statement of Operations for the three and six
months ended June 30, 1999 and 1998......................................2
Consolidated Statement of Cash Flows for the six months
ended June 30, 1999 and 1998.............................................3
Consolidated Statement of Stockholders' Equity for the
six months ended June 30, 1999 and 1998..................................4
Notes to Consolidated Financial Statements...............................5
Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................10
Quantitative And Qualitative
Disclosures About Market Risk...........................................21
PART II. OTHER INFORMATION..............................................35
<PAGE>
DOUBLECLICK INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 321,654 $ 127,171
Short-term investments ................................. 51,334 9,643
Accounts receivable, less allowances of $5,501
and $3,929........................................... 20,351 31,342
Prepaid expenses and other current assets .............. 2,033 869
--------- ---------
Total current assets .............................. 395,372 169,025
Property and equipment, net ............................ 21,168 13,741
Investments and other assets ........................... 5,801 855
--------- ---------
Total assets ...................................... $ 422,341 $ 183,621
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 12,465 $ 20,583
Accrued expenses ....................................... 15,590 12,220
Deferred revenues ...................................... 6,482 1,683
Deferred license and service fees ...................... 344 421
--------- ---------
Total current liabilities ......................... 34,881 34,907
Convertible subordinated notes ......................... 250,000 --
Other liabilities ...................................... 295 375
STOCKHOLDERS' EQUITY:
Common stock, par value $0.001;
39,734,929 and 39,135,774 shares outstanding ...... 40 39
Additional paid-in capital ............................. 205,221 203,417
Accumulated deficit .................................... (67,253) (54,717)
Deferred compensation .................................. (265) (441)
Other accumulated comprehensive income (loss) .......... (578) 41
--------- ---------
Total stockholders' equity ........................ 137,165 148,339
--------- ---------
Total liabilities and stockholders' equity ........ $ 422,341 $ 183,621
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
DOUBLECLICK INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................ $ 30,992 $ 17,293 $ 53,079 $ 30,297
Cost of revenues ........................ 14,940 11,724 25,038 20,569
-------- -------- -------- --------
Gross profit ....................... 16,052 5,569 28,041 9,728
-------- -------- -------- --------
Operating expenses
Sales and marketing ................ 14,002 6,885 25,059 12,508
General and administrative ......... 4,485 2,621 8,750 4,970
Product development ................ 4,080 1,554 7,691 2,579
Facility relocation & other ........ 488 -- 2,132 --
-------- -------- -------- --------
Total operating expenses ........... 23,055 11,060 43,632 20,057
-------- -------- -------- --------
Loss from operations .................... (7,003) (5,491) (15,591) (10,329)
Interest and other, net ................. 1,392 817 3,055 1,228
-------- -------- -------- --------
Net loss ................................ ($ 5,611) ($ 4,674) ($12,536) ($ 9,101)
======== ======== ======== ========
Basic and diluted net loss per share .... $ (0.14) $ (0.14) $ (0.32) $ (0.34)
======== ======== ======== ========
Weighted average shares used in basic and
diluted net loss per share calculation .. 39,600 32,918 39,435 27,101
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DOUBLECLICK INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................ $ (12,536) $ (9,101)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation and amortization ...................................... 2,504 762
Facility relocation and other ...................................... 1,363 --
Amortization of deferred compensation .............................. 176 367
Amortization of deferred financing ................................. 142 --
Provision for bad debts and advertisers discounts .................. 1,572 245
Changes in operating assets and liabilities:
Accounts receivable ............................................ 9,419 (9,680)
Prepaid expenses and other current assets ...................... (1,175) (432)
Accounts payable ............................................... (8,118) 4,742
Accrued expenses ............................................... 3,318 2,490
Deferred revenues .............................................. 4,594 989
--------- ---------
Net cash provided by (used in)
operating activities ........................................... 1,259 (9,618)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments ................................ (45,367) (2,790)
Proceeds from maturities of short-term investments ................. 3,262 5,645
Investments ........................................................ -- (282)
Purchases of property and equipment ................................ (11,162) (4,622)
--------- ---------
Net cash used in investing activities .......................... (53,267) (2,049)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Convertible Subordinated Notes,
net of deferred offering costs of $5,253 ........................... 244,747 --
Proceeds from issuance of common stock, net ........................ -- 62,560
Payments under capital lease obligations ........................... (32) --
Proceeds from exercise of stock options ............................ 1,953 24
Other .............................................................. (147) --
--------- ---------
Net cash provided by financing activities ...................... 246,521 62,584
EFFECT OF EXCHANGE RATE ON CASH ......................................... (30) (44)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................... 194,483 50,873
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................ 127,171 2,672
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................. $ 321,654 $ 53,545
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DOUBLECLICK INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD ....................... $ 148,339 $ 9,400
Net loss ............................................. (12,536) (9,101)
Other comprehensive income (loss) .................... (619) (43)
--------- ---------
Comprehensive income (loss) .......................... (13,155) (9,144)
Amortization of deferred compensation ................ 176 367
Common stock issued from exercise of stock options ... 1,952 24
Issuance of common stock ............................. -- 62,560
Other ................................................ (147) --
--------- ---------
BALANCE AT END OF PERIOD ............................. $ 137,165 $ 63,207
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
DoubleClick Inc., together with its subsidiaries ("DoubleClick"), is a
leading provider of comprehensive Internet advertising solutions for advertisers
and Web publishers. DoubleClick's DART technology and media expertise enable it
to dynamically deliver highly targeted, measurable and cost-effective Internet
advertising for advertisers, increase ad sales and improve ad space inventory
management for Web publishers. DoubleClick was organized as a Delaware
corporation on January 23, 1996 and commenced operations on that date.
Inherent in DoubleClick's business are various risks and uncertainties,
including its limited operating history, recent development of the Internet
advertising market and unproven acceptance and effectiveness of Web advertising,
unproven business model, risks associated with technological change, and the
limited history of commerce on the Internet. DoubleClick's success may depend in
part upon the emergence of the Internet as a communications medium, prospective
product development efforts, and the acceptance of DoubleClick's solutions by
the marketplace. See "Risks Relating to Our Company and Business."
BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flows for the periods presented in
conforming with generally accepted accounting principles applicable to interim
periods. Results of operations are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
The accompanying financial statements should be read in conjunction with
the audited consolidated financial statements of DoubleClick for the year ended
December 31, 1998. Certain reclassifications have been made to the prior year's
financial statements to conform to the current period presentation.
In December 1996, DoubleClick entered into a Procurement and Trafficking
Agreement with Digital Equipment Corp. (subsequently acquired by Compaq
Computer Corp. ("Compaq")) to be the exclusive third-party provider of
advertising services on specified pages within the AltaVista Web site.
Effective January 1, 1999, DoubleClick changed its relationship with Compaq
by entering into an Advertising Services Agreement (the "AltaVista
Advertising Services Agreement") that superceded the Procurement and
Trafficking Agreement. Under the AltaVista Advertising Services Agreement,
the manner in which DoubleClick reports its financial results related to the
services it provides to the AltaVista Web site has changed. Through December
31, 1998, DoubleClick recognized as revenues the gross revenues related to
ads delivered by DoubleClick to the AltaVista Web site. Beginning January 1,
1999, pursuant to the AltaVista Advertising Services Agreement, DoubleClick
recognizes DART service fees, sales commissions and billing and collection
fees as revenues derived from the sale and delivery of ads on the AltaVista
Web site and associated services. On June 29, 1999, Compaq agreed to transfer
to CMGI, Inc. a controlling interest in AltaVista. Compaq and its wholly
owned subsidiary Digital Equipment Corporation contributed the assets and
liabilities comprising AltaVista's business, which included the Advertising
Services Agreement, to a new company that CMGI owns approximately 83% of,
with the remainder owned by Compaq.
5
<PAGE>
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MANAGEMENT USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
SHORT TERM INVESTMENTS
DoubleClick recognizes gains and losses on specific identification of
the securities which comprise the short-term investment balance. For the six
months ended June 30, 1999 and 1998, the Company did not realize any gains
or losses as no investments were sold prior to maturity.
REVENUE RECOGNITION
Revenues are derived primarily from the sale and delivery of advertising
impressions through third-party Web sites comprising the DoubleClick Network
(the "Network") and fees earned from independent publishers and advertisers who
use the DART technology to deliver ad impressions. Revenues are recognized in
the period the advertising impressions are delivered provided collection of the
resulting receivable is probable.
DoubleClick becomes obligated to make payments to third-party Web sites,
which have contracted with DoubleClick to be part of the Network, in the
period the advertising impressions are delivered. Such expenses are
classified as cost of revenues in the consolidated statement of operations.
Revenues earned by the Company derived from sales commissions and
administrative services are recognized in the period in which the services
are provided.
Revenues are presented net of a provision for advertiser discounts which is
estimated and established in the period in which the services are provided.
Deferred license and service fees represent payments
received in advance from third parties or affiliated companies for use of
DoubleClick's trademarks, access to DoubleClick's proprietary technology, and
certain personnel during fixed periods of time which range from two to four
years. Such fees will be recognized as revenues ratably over the terms of the
applicable agreements. DoubleClick is obligated to provide any enhancements
or upgrades it develops and other support over the terms of the applicable
agreements.
INTERNAL USE SOFTWARE
On January 1, 1999 the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." This standard requires certain direct development costs
associated with internal use software to be capitalized including external
direct costs of material and services and payroll costs for employees
devoting time to the software projects. These costs are included in property
and equipment and are amortized over the useful life of the software
beginning when the asset is substantially ready for use. Costs incurred
during the preliminary project stage, as well as for maintenance and training
are expensed as incurred. Adoption of this statement did not have a material
impact on the Company's financial statements.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
DoubleClick's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, and accrued
expenses. At June 30, 1999 and December 31, 1998, the fair value of these
instruments approximated their financial statement carrying amount.
Credit is extended to customers based on an evaluation of their financial
condition, and collateral is not required. DoubleClick performs ongoing credit
evaluations of its customers and maintains an allowance for doubtful accounts.
DoubleClick is subject to concentrations of credit risk and interest rate
risk related to its short-term investments. DoubleClick's credit risk is managed
by investing in money market funds, short-term commercial paper, and A1 rated
corporate bonds with an average days to maturity of 150 days at June 30, 1999.
For the three months ended June 30, 1999 and 1998, interest income was $4.5
million and $817,000, respectively. For the six months ended June 30, 1999 and
1998, interest income was $6.5 million and 1.2 million, respectively.
6
<PAGE>
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
Net revenues derived from advertising impressions delivered to users of the
AltaVista Web site represented 20.3% and 49.4% of DoubleClick's total revenues
for the three months ended June 30, 1999 and 1998, respectively. No other Web
site on the Network was responsible for 10% or more of DoubleClick's total
revenues during the periods presented in the consolidated statement of
operations. Likewise, for the three months ended June 30, 1999 and 1998, no
advertising customer was responsible for 10% or more of DoubleClick's total
revenue or total accounts receivable.
BASIC AND DILUTED NET LOSS PER SHARE
The presentation of basic and diluted net loss per share has been
calculated to give effect to the conversion of the Convertible Preferred Stock
from the date of conversion, which occurred simultaneous with the closing of
DoubleClick's initial public offering on February 25, 1998. Basic net loss per
share is computed by dividing the net loss by the sum of the weighted average
number of shares of common stock outstanding, including the number of common
shares issued upon the conversion of convertible preferred stock, as of the date
of the conversion.
Diluted loss per share is based on the potential dilution that would
occur on exercise or conversion of securities into common stock. At June 30,
1998 and 1999, outstanding options to purchase shares of common stock of 6.0
million and 7.9 million, respectively, with weighted average per share
exercise prices of $2.85 and $14.62, respectively, that could potentially
dilute basic earnings per share were not included in the computation of
diluted net loss per share because to do so would have had an antidilutive
effect for the periods presented. Similarly, the Company had $250 million of
convertible subordinated notes due 2006, convertible into the company's
common stock at $82.50 per share, outstanding at June 30, 1999 that were not
included in the computation of diluted net loss per share because to do so
would have had an antidilutive effect for the period presented. As a result,
the basic and diluted per share amounts are equal for the periods ended June
30, 1998 and 1999.
NOTE 2 - MERGERS
ABACUS MERGER
On June 13, 1999, DoubleClick entered into a definitive agreement to acquire
Abacus Direct Corporation ("Abacus"), a leading provider of specialized
consumer information and analysis for the direct marketing industry. Under the
terms of the merger, which is expected to be accounted for as a pooling of
interests, DoubleClick will issue 1.05 shares of DoubleClick common stock for
each share of Abacus common stock. The transaction is expected to be completed
at the end of the third quarter or early in the fourth quarter of 1999, and is
subject to certain conditions, including approval by both DoubleClick and
Abacus shareholders. The Company expects to record a one-time charge in the
quarter in which the transaction closes relating to expenses incurred with
this transaction.
7
<PAGE>
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - MERGERS (CONTINUED)
NETGRAVITY MERGER
On July 12, 1999, DoubleClick entered into a definitive agreement
to acquire NetGravity, Inc. ("NetGravity"), a leading provider of interactive
online advertising and direct marketing software solutions. Under the terms of
the merger, which is expected to be accounted for as a pooling of
interests, DoubleClick will issue 0.28 shares of DoubleClick common stock for
each share of NetGravity common stock. The transaction is expected to be
completed in the fourth quarter of 1999, and is subject to certain conditions,
including approval by NetGravity shareholders. The Company expects to record a
one-time charge in the fourth quarter of 1999 relating to expenses incurred with
this transaction.
The results of operations for Abacus and NetGravity are not included in the
DoubleClick results of operations as the mergers have not yet been consummated.
It is anticipated that the combined company will incur estimated direct
transaction charges of $16 million related to the proposed merger of
DoubleClick with Abacus and $10.8 million for the NetGravity merger,
principally in the quarter in which the proposed merger is consummated. These
charges include direct transaction costs including estimated investment
banking and financial advisory fees of approximately $12.5 million and $7.3
million for the Abacus and NetGravity merger, respectively, and other
estimated merger related expenses totalling $3.5 million for each of the
Abacus and NetGravity mergers consisting primarily of other professional
services and estimated registration expenses based upon discussions and
arrangements with vendors. Actual amounts ultimately incurred could differ
from the estimated amounts. Additionally, the amounts presented do not
include integration costs which may be incurred. Neither DoubleClick, Abacus
or NetGravity has estimated the amount or nature of integration costs.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the assets. Leasehold
improvements are amortized over their estimated useful lives, or the term of the
leases, whichever is shorter.
<TABLE>
<CAPTION>
ESTIMATED JUNE 30, DECEMBER 31,
USEFUL LIFE 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
(000'S)
- ------------
Computer Equipment and Software...................... 1-3 years $20,484 $12,453
Furniture and Fixtures............................... 5 years 1,443 1,247
Leasehold Improvements............................... 1-5 years 4,493 2,013
Capital Work-In-Progress............................. 1,281 696
------- -------
27,701 16,409
Less accumulated depreciation and amortization....... (6,533) (2,668)
------- -------
$21,168 $13,741
======= =======
</TABLE>
As a result of DoubleClick's planned relocation, expected to be
completed on or about November 30, 1999, DoubleClick incurred a non-recurring
charge for the write-down of fixed assets of approximately $1.4 million on
assets with a carrying value of $2.1 million (primarily leasehold
improvements). These assets will be abandoned and not relocated to
DoubleClick's new headquarters building (see Note 4). DoubleClick's
management made an assessment of the carrying value of the assets to be
disposed of and determined that their carrying value was in excess of their
estimated fair value. The estimated fair value of the assets was determined
based on an estimate of the recoverability of the assets carrying amount over
their remaining useful life to the abandonment date using their initial cost
recovery rate. The other components of the facility relocation charge include
duplicative rental amounts and moving costs of approximately $389,000 and
$99,000, respectively, for the three months ended June 30, 1999 and $659,000
and $109,000, respectively, for the six months ended June 30, 1999.
Duplicative rental and moving costs are expensed in the period incurred. These
charges are included as Facility relocation and other in the Consolidated
Statement of Operations. Depreciation and amortization of $486 thousand
associated with the assets to be disposed of are presented outside of
Facilities relocation and other in the Consolidated Statement of Operations.
8
<PAGE>
DOUBLECLICK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LEASE AGREEMENT
DoubleClick entered into a lease agreement dated January 26, 1999 for over
150,000 square feet of office space for a term of eleven years with an option to
renew the initial term for an additional five years. In 1999, DoubleClick will
make lease payments of approximately $800,000 on this space. In addition,
DoubleClick will pay monthly payments totaling $4.6 million per annum for the
period from January 26, 2000 to January 25, 2004 escalating to $4.85 million for
the period from January 26, 2004 to January 25, 2005 and $5.0 million per annum
for the period from January 26, 2006 to the expiration date of the initial term
on January 25, 2010.
NOTE 5 - CONVERTIBLE SUBORDINATED NOTES
On March 17, 1999, DoubleClick issued 4 3/4% Convertible Subordinated Notes
due 2006 with a principal amount of $250 million (the "Convertible Notes"). The
Convertible Notes are convertible into DoubleClick's common stock at a
conversion price of $82.50 per share, subject to adjustment in certain events
and at the holders' option. Interest on the Convertible Notes is payable
semiannually in arrears on March 15 and September 15 of each year, commencing on
September 15, 1999. The Convertible Notes are unsecured and are subordinated to
all existing and future Senior Indebtedness (as defined in Convertible Notes
indenture) of DoubleClick. If certain events occur (as described in the
Convertible Notes indenture), the Convertible Notes may be redeemed at the
option of DoubleClick, in whole or in part, beginning on March 20, 2001 at the
redemption prices set forth in the Convertible Notes indenture. In May 1999,
DoubleClick filed a shelf registration statement covering resales of the
Convertible Notes and the common stock issuable upon conversion of the
Convertible Notes. This registration statement is expected to be effective in
August 1999.
Upon occurrence of a Designated Event (as defined in the Convertible Notes
indenture) prior to the maturity of the Convertible Notes, each holder of the
Convertible Notes has the right to require DoubleClick to redeem all or any part
of the holder's Convertible Notes at a price equal to 100% of the principal
amount, plus any accrued interest, of the Convertible Notes being redeemed.
DoubleClick has or may use the net proceeds from the offering of the
Convertible Notes for general corporate purposes, including working capital to
fund anticipated operating losses, the expansion of DoubleClick's product
offerings, investments in new business products, technologies and markets,
capital expenditures, and acquisitions or investments in complementary
businesses, products and technologies.
Interest expense relating to the Convertible Notes was approximately $2.995
million and $3.337 million for the three and six months ended June 30, 1999,
respectively.
NOTE 6 - STOCK SPLIT
On March 11, 1999, DoubleClick's Board of Directors approved a two-for-one
Common Stock split in the form of a stock dividend for common stockholders of
record as of March 22, 1999 which became effective on April 5, 1999. All
references to the number of common shares and per share amounts in the financial
statements and notes thereto for all periods presented have been retroactively
adjusted to reflect the two-for-one split.
9
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
DOUBLECLICK CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND
THE FUTURE PERFORMANCE OF DOUBLECLICK WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES. DOUBLECLICK'S ACTUAL RESULTS AND TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN
THIS REPORT AND IN DOUBLECLICK'S OTHER PUBLIC FILINGS MADE FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
References in this report to "DoubleClick", "we", "our" and "us" refer to
DoubleClick Inc., and it's subsidiaries. DoubleClick is a leading provider of
comprehensive Internet advertising solutions for advertisers and Web publishers
worldwide. DoubleClick currently has two principal service offerings. The
DoubleClick Network (ad sales) provides fully-outsourced ad sales, delivery and
related services to publishers of highly-trafficked Web sites, including The
Dilbert Zone, Macromedia, Travelocity, Kelley Blue Book and Major League
Baseball. The DoubleClick Network focuses on meeting the needs of Internet
advertisers who target users on a national, international and/or local basis.
DoubleClick's DART Service (ad serving), consisting of DART for Web publishers
and the recently introduced Closed Loop Marketing Solutions suite of products
for advertisers and ad agencies, provides Web publishers, advertisers and ad
agencies with the ability to control the targeting, delivery, measurement and
analysis of their online marketing campaigns on a real-time basis. DoubleClick's
proprietary DART technology, which dynamically matches and delivers ads to the
target audience within milliseconds, is the platform for all of DoubleClick's
solutions.
DoubleClick completed its initial public offering in February 1998 and
received net proceeds of approximately $62.5 million. In December 1998,
DoubleClick received net proceeds of approximately $93.7 million from an
additional public offering. In March 1999, DoubleClick received net proceeds of
approximately $244.7 million from its issuance of $250 million principal amount
4 3/4% Convertible Subordinated Notes due in 2006. The net proceeds of these
transactions were added to DoubleClick's working capital and, pending their use,
DoubleClick has invested such funds in short-term, interest-bearing investment
grade instruments.
DoubleClick offers advertising on the DoubleClick Network to third party
advertisers with pricing generally determined on a CPM (cost per thousand ads
delivered) or cost per day basis. Discounts are offered based on a variety of
factors, including the duration and gross dollar amount of advertising
campaigns. Advertisements sold by DoubleClick are typically sold pursuant to
purchase order agreements, which are subject to cancellation.
10
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW (CONTINUED)
DoubleClick's revenues from the DoubleClick Network are received from the
advertiser that orders the ad, and DoubleClick typically pays the Web publisher
(on whose Web site such advertisement is delivered) a service fee. This service
fee is calculated as a percentage of such advertising revenues, which amount is
included in cost of revenues. DoubleClick is responsible for billing and
collecting for ads delivered on the DoubleClick Network, and typically assumes
the risk of non-payment from advertisers. In addition, DoubleClick earns service
fees for providing the DART Service to Web publishers and the Closed Loop
Marketing Solutions suite of products to Internet advertisers and ad agencies.
Advertising revenues and DART service fees are generally recognized in the
period that the advertisement is delivered, provided that no significant
obligations remain and collection of the resulting receivable is probable.
DoubleClick also sells sponsorship advertising, which involves a greater degree
of integration among DoubleClick, the advertiser and the Web sites on the
DoubleClick Network. These sponsorships are typically priced based on the length
of time that the sponsorship runs, rather than a CPM basis. Revenues relating to
sponsorship advertising are recognized ratably over the sponsorship period.
DoubleClick expects that revenues generated from the DoubleClick Network
will continue to account for a substantial portion of DoubleClick's revenues for
the foreseeable future. Moreover, ads delivered on Web sites of the top four Web
publishers in the DoubleClick Network accounted for approximately 19% of
DoubleClick's revenues for the six months ended June 30, 1999. DoubleClick
typically enters into short-term contracts with Web publishers for inclusion of
their Web sites in the DoubleClick Network. The failure to successfully market
the DoubleClick Network, the loss of one or more of the Web sites which account
for a significant portion of the Company's revenues from the DoubleClick
Network, or any reduction in traffic on such Web sites could have a material
adverse effect on DoubleClick's business, results of operations and financial
condition. Effective January 1, 1999, AltaVista, historically the largest
DoubleClick Network Publisher, became DoubleClick's largest DART customer. See
"TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS" below.
To take advantage of the global reach of the Internet, DoubleClick has
established DoubleClick Networks in Europe, Asia and other international
markets. DoubleClick currently has operations in Australia, Canada, France,
Germany, United Kingdom, and Benelux (Belgium, the Netherlands and Luxembourg)
and through its business partners in Japan, Iberoamerica, Italy and Scandinavia.
DoubleClick expects to continue to invest in building its international
operations.
DoubleClick has incurred significant losses since its inception and, as of
June 30, 1999, had an accumulated deficit of $67.3 million, of which $42.3
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 DoubleClick that occurred simultaneously with the completion
of a private placement of the Company's securities in June 1997. In addition,
DoubleClick recorded deferred compensation of $1.5 million, which represented
the difference between the exercise price and the fair market value of
DoubleClick's common stock issuable upon the exercise of certain stock options
granted to employees. The deferred compensation is being amortized over the
vesting periods of the related options. Of the total deferred compensation
amount, approximately $1.2 million has been amortized as of June 30, 1999.
11
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW (CONTINUED)
DoubleClick believes that quarter-to-quarter comparisons of its results of
operations should not be relied upon as an indication of future performance.
DoubleClick plans to significantly increase its operating expenses to increase
its sales and marketing operations, to continue its international expansion, to
upgrade and enhance its DART technology and to market and support its solutions.
DoubleClick may be unable to modify its planned spending quickly enough to
offset any unexpected revenue shortfall. If DoubleClick has a shortfall in
revenues in relation to its expenses, or if DoubleClick's expenses precede
increased revenues, then DoubleClick's results of operations and financial
condition may be materially and adversely affected. As a result of these
factors, there can be no assurance that DoubleClick will not incur significant
losses on a quarterly and annual basis for the foreseeable future.
SIGNIFICANT TRANSACTIONS
In 1999, DoubleClick announced two transactions that are expected to have a
significant effect on its results of operations and financial condition. These
transactions were:
ABACUS MERGER
On June 13, 1999, DoubleClick entered into a definitive agreement
to acquire Abacus Direct Corporation ("Abacus"), a leading provider of
specialized consumer information and analysis for the direct marketing industry.
Under the terms of the merger, which is expected to be accounted for
as a pooling of interests, DoubleClick will issue 1.05 shares of DoubleClick
common stock for each share of Abacus common stock. The transaction is expected
to be completed at the end of the third quarter or early in the fourth quarter
of 1999, and is subject to certain conditions, including approval by both
DoubleClick and Abacus shareholders. The Company expects to record a one-time
charge in the quarter in which the transaction closes of 1999 relating
to expenses incurred with this transaction.
NETGRAVITY MERGER
On July 12, 1999, DoubleClick entered into a definitive agreement
to acquire NetGravity, Inc. ("NetGravity"), a leading provider of interactive
online advertising and direct marketing software solutions. Under the terms of
the merger, which is expected to be accounted for as a pooling of
interests, DoubleClick will issue 0.28 shares of DoubleClick common stock for
each share of NetGravity common stock. The transaction is expected to be
completed in the fourth quarter of 1999, and is subject to certain conditions,
including approval by NetGravity shareholders. The Company expects to record a
one-time charge in the fourth quarter of 1999 relating to expenses incurred with
this transaction.
The results of operations for Abacus and NetGravity are not included in the
DoubleClick results of operations as the mergers have not yet been consummated.
It is anticipated that the combined company will incur estimated direct
transaction charges of $16 million related to the proposed merger of
DoubleClick with Abacus and $10.8 million for the NetGravity merger,
principally in the quarter in which the proposed merger is consummated. These
charges include factually supportable direct transaction costs including
estimated investment banking and financial advisory fees of approximately
$12.5 million and $7.3 million for the Abacus and NetGravity merger,
respectively, and other estimated merger related expenses totalling $3.5
million for each of the Abacus and NetGravity mergers consisting primarily of
other professional services and estimated registration expenses based upon
discussions and arrangements with vendors. Actual amounts ultimately incurred
could differ from the estimated amounts. Additionally, the amounts presented
do not include amounts which are not factually supportable or integration
costs which may be incurred. Neither DoubleClick, Abacus or NetGravity has
estimated the amount or nature of integration costs.
12
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS
In December 1996, DoubleClick entered into a Procurement and Trafficking
Agreement with Digital Equipment Corporation (acquired by Compaq in June 1998)
pursuant to which DoubleClick had the exclusive right to sell and deliver all
advertising on specified pages within the AltaVista Web site. In accordance with
this agreement, DoubleClick paid AltaVista a service fee calculated as a
percentage of the revenues derived from the delivery of advertisements on or
through the AltaVista Web site.
Effective January 1, 1999, DoubleClick changed its relationship with
Compaq by entering into an Advertising Services Agreement (the "AltaVista
Advertising Services Agreement") that superceded the Procurement and
Trafficking Agreement. Pursuant to the AltaVista Advertising Services
Agreement, Compaq has agreed to use DoubleClick's DART technology for ad
delivery and to outsource to DoubleClick certain ad sales functions for
domestic, international, and local ad sales. In consideration for such
services performed by DoubleClick, Compaq pays to DoubleClick (i) a DART
Services fee for all advertising delivered by DoubleClick on the AltaVista
Web site, (ii) a sales commission based on the net revenues generated from
all advertisements sold by DoubleClick on behalf of Compaq and (iii) a
billing and collections fee for all billing and collections services
performed by DoubleClick on behalf of Compaq. Under the AltaVista Advertising
Services Agreement, the manner in which DoubleClick reports its financial
results related to the services it provides to the AltaVista Web site has
changed. Through December 31, 1998, DoubleClick recognized as revenues the
gross revenues related to ads delivered by DoubleClick to the AltaVista Web
site. Beginning January 1, 1999, pursuant to the AltaVista Advertising
Services Agreement, DoubleClick recognizes DART service fees, sales
commissions and billing and collection fees as revenues derived from the sale
and delivery of ads on the AltaVista Web site and associated services. As a
result of this change in relationship with AltaVista, overall gross margin
percentage has increased (no significant change in gross profit dollars) as
DoubleClick is no longer required to pay service fees to AltaVista for ads
sold and delivered on the AltaVista Web site and revenues include the fees
earned for services rendered. The AltaVista Advertising Services Agreement
will expire on December 31, 2001, subject to prior termination in certain
limited circumstances or further extension in accordance with the terms of
the AltaVista Advertising Services Agreement. On June 29, 1999, Compaq agreed
to transfer to CMGI, Inc. a controlling interest in AltaVista. Compaq and its
wholly owned subsidiary Digital Equipment Corporation contributed the assets
and liabilities comprising AltaVista's business, which included the
Advertising Services Agreement, to a new company that CMGI owns approximately
83% of, with the remainder owned by Compaq.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ ------------------------------------------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE
1999 1998 CHANGE CHANGE 1999 1998 CHANGE CHANGE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
System
revenues (a) $44,011 $17,293 $26,718 155% $75,152 $30,297 $44,854 148%
======= ======= ======= ==== ======= ======= ======= ====
Revenues $30,992 $17,293 $13,699 79% $53,079 $30,297 $22,782 75%
Cost of
revenues 14,940 11,724 3,216 27% 25,038 20,569 4,469 22%
------- ------ ------- ---- ------- ------ ------- ----
Gross Profit $16,052 $5,569 $10,483 188% $28,041 $9,728 $18,313 188%
======= ====== ======= ==== ======= ====== ======= ====
</TABLE>
(a) System revenues include revenues earned by DoubleClick with respect to
network sales relating to publishers which are part of the DoubleClick
Network, fees earned from independent publishers and advertisers which use
the DART technology to deliver ad impressions, and amounts invoiced on
behalf of Compaq Computer Corp. pursuant to the Procurement and Trafficking
Agreement (in place from December 1996 to December 1998). System revenues
for the six months ended June 30, 1999 exclude DART service fees, sales
commissions and billing and collection fees owed by Compaq Computer Corp.
pursuant to the AltaVista Advertising Services Agreement (effective
January 1, 1999).
13
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenues increased to $31.0 million for the three months ended June 30,
1999, compared to $17.3 million for the three months ended June 30, 1998.
Revenues increased $22.8 million from $30.3 million for the six months ended
June 30, 1998 to $53.1 million, or 75%, for the six months ended June 30, 1999.
The increase in revenues was primarily due to an increase in the number of
advertisers and ads delivered on the DoubleClick Network as well as an increase
in total DART fees earned from publishers and advertisers. Revenues derived
from advertising impressions delivered to users of the AltaVista Web site
represented 20.3% and 49.4% of DoubleClick's revenues and 43.9% and 49.4% of
DoubleClick's systems revenues for the three months ended June 30, 1999 and
1998, respectively. For the six months ended June 30, 1999 and 1998, revenues
derived from advertising impressions delivered to users of the Alta Vista Web
Site represented 20.6% and 50.1% of DoubleClick's revenues and 43.8% and 50.1%
of DoubleClick's systems revenues, respectively. No other Web site accounted
for more than 10% revenues during the three or six months ended June 30, 1999
and 1998, and no one advertiser accounted for 10% of revenues during the same
periods. Revenues derived from advertising impressions delivered to users of
the AltaVista Web site has and will continue to represent a significant portion
of DoubleClick's revenues. The provision for advertiser discounts increased
to $1.8 million for the three months ended June 30, 1999, compared to $624
thousand for the three months ended June 30, 1998. The provision for
advertiser discounts increased to $3.1 million for the six months ended
June 30, 1999, compared to $935 thousand for the six months ended June 30,
1998. The increases in the provision for advertiser discounts are commensurate
with the increase in revenues and the level of business activity.
COST OF REVENUES
Cost of revenues consists primarily of service fees paid to Web publishers
for ads delivered to the Web sites on the DoubleClick Network. Cost of revenues
also includes other costs of delivering advertisements, including depreciation
of the ad delivery system, facilities and personnel-related costs incurred to
operate our ad delivery system and Internet access costs. Gross margin was 51.8%
and 32.2% for the three months ended June 30, 1999 and 1998, respectively. Gross
margin was 52.8% and 32.1% for the six months ended June 30, 1999 and 1998,
respectively.
The increase in gross margin percent was primarily the result of an
increase in revenues from higher margin DART services as a percentage of total
revenues, including the impact of the AltaVista Advertising Service Agreement.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF SYSTEM
REVENUES (A) REVENUES (A)
------------------------------ -------------------------
1999 1998 1999 1998 1999 1998
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales and Marketing $14,002 $6,885 45.2% 39.8% 31.8% 39.8%
General and Administrative $ 4,485 $2,621 14.5% 15.2% 10.2% 15.2%
Product Development $ 4,080 $1,554 13.2% 9.0% 9.3% 9.0%
Facility Relocation &
Other $ 488 -- 1.6% -- 1.1% --
</TABLE>
14
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF SYSTEM
REVENUES (A) REVENUES (A)
------------------------------ -------------------------
1999 1998 1999 1998 1999 1998
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales and Marketing $25,059 $12,508 47.2% 41.3% 33.3% 41.3%
General and Administrative $ 8,750 $ 4,970 16.5% 16.4% 11.6% 16.4%
Product Development $ 7,691 $ 2,579 14.5% 8.5% 10.2% 8.5%
Facility Relocation &
Other $ 2,132 -- 4.0% -- 2.8% --
</TABLE>
(a) All references to revenues take into consideration the change in
relationship with Compaq, as discussed above. On June 29, 1999, Compaq
agreed to transfer to CMGI, Inc. a controlling interest in AltaVista.
Compaq and its wholly owned subsidiary Digital Equipment Corporation
contributed the assets and liabilities comprising AltaVista's business,
which included the Advertising Services Agreement, to a new company that
CMGI owns approximately 83% of, with the remainder owned by Compaq.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, trade show expenses, seminars and costs
of marketing materials. Sales and marketing expenses increased to $14.0
million for the three months ended June 30, 1999, compared to $6.9 million
for the three months ended June 30, 1998. The increase was primarily
attributable to the increase in sales personnel and costs associated with the
expansion of international operations of approximately $5.3 million,
commissions associated with the increase in revenues of approximately $1.2
million and costs related to the continued development and implementation of
DoubleClick's marketing and branding campaigns. Sales and marketing expenses
increased to $25.1 million for the six months ended June 30, 1999, compared
to $12.5 million for the six months ended June 30, 1998. The increase was
primarily attributable to the increase in sales personnel and costs associated
with the expansion of international operations of approximately $10 million,
commissions associated with the increase in revenues of approximately $1.9
million and costs related to the continued development and implementation of
DoubleClick's marketing and branding campaigns. Moreover, DoubleClick
expects sales and marketing expenses to increase on an absolute dollar basis
but decrease as a percentage of revenues as DoubleClick hires additional
personnel, expands into new markets and continues to promote the DoubleClick
brand.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation and professional service fees and related supplies
and materials. General and administrative expenses increased to $4.5 million
for the three months ended June 30, 1999, compared to $2.6 million for the
three months ended June 30,1998. The increase was due primarily to costs
associated with increased personnel of approximately $1 million and increased
professional fees of approximately $300 thousand. General and administrative
expenses increased to $8.8 million for the six months ended June 30, 1999,
compared to $5.0 million for the six months ended June 30, 1998. The increase
was due primarily to costs associated with increased personnel of
approximately $2.4 million and increased professional fees of approximately
$700 thousand. In addition, the provision for doubtful accounts increased to
$1.1 million for the three months ended June 30, 1999, compared to $457
thousand for the three months ended June 30, 1998. The provision for doubtful
accounts increased to $1.4 million for the six months ended June 30, 1999,
compared to $676 thousand for the six months ended June 30, 1998. The
increases in the provision for doubtful accounts are commensurate with the
increase in revenues and the level of business activity. DoubleClick expects
general and administrative expenses to increase on an absolute dollar basis
but decrease as a percentage of revenues as DoubleClick hires additional
personnel and incurs additional costs related to the growth of its business.
15
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
PRODUCT DEVELOPMENT. Product development expenses consist primarily
of compensation and consulting expenses and enhancements to the DART
technology. To date, all product development costs have been expensed as
incurred. Product development expenses increased to $4.1 million for the
three months ended June 30, 1999, compared to $1.6 million for the three
months ended June 30,1998. The increase was primarily due to increases in
product development personnel and related expenses of approximately $2.1
million and consulting and other miscellaneous expense. Product development
expenses increased to $7.7 million for the six months ended June 30, 1999,
compared to $2.6 million for the six months ended June 30, 1998. The increase
was primarily due to increases in product development personnel and related
expenses of approximately $4.1 million and consulting and other miscellaneous
expenses. DoubleClick believes that continued investment in product
development is critical to attaining its strategic objectives and, as a
result, expects product development expenses to increase on an absolute
dollar basis but remain relatively constant as a percentage of revenues.
FACILITY RELOCATION AND OTHER. During the three and six months ended
June 30, 1999, DoubleClick recorded a charge of $488 thousand and $2.1
million, respectively, for expenses related to its planned move to a new
headquarters facility. The move, expected to be completed by on or about
November 30, 1999, will consolidate two leased facilities in New York, in
which DoubleClick's executive offices and principal operations are located,
into approximately 150,000 square feet of office space located at 450 West
33rd Street, New York, New York. The charges relate primarily to the
write-down of fixed assets of approximately $1.4 million (primarily leasehold
improvements) that will be abandoned and not relocated to DoubleClick's new
headquarters building. DoubleClick's management made an assessment of the
carrying value of the assets to be disposed of and determined that their
carrying value was in excess of their estimated fair value. The estimated
fair value of the assets was determined based on an estimate of the
recoverability of the assets carrying amount over their remaining useful life
to the abandonment date using their initial cost recovery rate. The other
components of Facility relocation and other include duplicative rental
amounts and moving costs of approximately $389,000 and $99,000, respectively,
for the three months ended June 30, 1999 and $659,000 and $109,000,
respectively, for the six months ended June 30, 1999. Duplicative rental and
moving costs are expensed in the period incurred. Depreciation and
amortization of $486 thousand associated with the assets to be disposed of
are presented outside of the Facility relocation and other in the
Consolidated Statement of Operations.
INTEREST INCOME (EXPENSE)
Net interest income increased to $1.4 million for the three months ended
June 30, 1999, compared to net interest income of $817,000 for the three months
ended June 30,1998. Net interest income increased to $3.1 million for the six
months ended June 30, 1999, compared to net interest income of $1.2 million for
the six months ended June 30, 1998. The increase in net interest income was
attributable to an increase in cash, cash equivalents and short-term investments
as a result of the net proceeds received by DoubleClick from its additional
public offering of common stock in December 1998 and issuance of its 4 3/4%
Convertible Subordinated Notes in March 1999, offset in part by interest expense
associated with the 4 3/4% Convertible Subordinated Notes.
NET LOSS
DoubleClick's net loss increased to $5.6 million for the three months ended
June 30, 1999, compared to $4.7 million for the three months ended June 30,
1998. DoubleClick's net loss increased to $12.5 million for the six months ended
June 30, 1999, compared to $9.1 million for the six months ended June 30, 1998.
The increase in the net loss was primarily due to expenses related to
DoubleClick's planned move to a new headquarters facility in addition to the
hiring of additional personnel, particularly in sales and marketing and product
development, offset in part by an increase in net interest income.
16
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
As of June 30, 1999, DoubleClick had $321.7 million of cash and cash
equivalents and $51.3 million in short-term investments. As of June 30, 1999,
DoubleClick's principal commitments consist of $250 million of 4 3/4%
Convertible Subordinated Notes due 2006 and operating and capital lease
obligations.
Management anticipates that it will experience a substantial increase in
its capital expenditures and lease commitments consistent with its anticipated
growth in operations, infrastructure and personnel, and the scheduled build-out
of its newly leased New York headquarters facilities. DoubleClick currently
anticipates that it will continue to experience significant growth in its
operating expenses for the foreseeable future and that its operating expenses
will be a material use of DoubleClick's cash resources. DoubleClick believes
that its existing cash and cash equivalents and 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.
CONVERTIBLE SUBORDINATED NOTES
In March, 1999, DoubleClick issued 4 3/4% Convertible Subordinated Notes
due 2006 in an aggregate principal amount of $250 million (the "Convertible
Notes"). The Convertible Notes are convertible into DoubleClick's common stock
at a conversion price of $82.50 per share, subject to adjustment in certain
events and at the holders' option. Interest on the Convertible Notes is payable
semiannually in arrears on March 15 and September 15 of each year, commencing on
September 15, 1999. The Convertible Notes are unsecured and are subordinated to
all existing and future Senior Indebtedness (as defined in the Convertible Notes
indenture) of DoubleClick. If certain events occur (as described in the
Convertible Notes indenture), the Convertible Notes may be redeemed at the
option of DoubleClick, in whole or in part, beginning on March 20, 2001 at the
redemption prices set forth in the Convertible Notes indenture.
In May 1999, DoubleClick filed a shelf registration statement covering
resales of the Convertible Notes and the common stock issuable upon conversion
of the Convertible Notes. This registration statement is expected to be
effective in August 1999.
Upon the occurrence of a Designated Event (as defined in the Convertible
Notes indenture) prior to the maturity of the Convertible Notes, each holder of
the Convertible Notes has the right to require DoubleClick to redeem all or any
part of the holder's Convertible Notes at a price equal to 100% of the principal
amount, plus any accrued interest, of the Convertible Notes being redeemed.
DoubleClick has or may use the net proceeds from the offering of the
Convertible Notes for general corporate purposes, including working capital to
fund anticipated operating losses, the expansion of DoubleClick's core business,
investments in new business segments and markets, capital expenditures,
acquisitions or investments in complementary businesses, products and
technologies.
17
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
CASH FLOWS
Net cash provided by operating activities equaled $1.3 million for the six
months ended June 30, 1999, compared to net cash used in operating activities of
$9.6 million for the six months ended June 30, 1998. Cash provided by operating
activities for the six months ended June 30, 1999 resulted from a decrease in
accounts receivable and increases in accrued expenses and deferred revenue;
which were offset by net losses, a decrease in accounts payable and an increase
in prepaid expenses and other current assets.
Net cash used in investing activities equaled $53.3 million for the six
months ended June 30, 1999, compared to $2.0 million for the six months ended
June 30, 1998. Cash used in investing activities for the six months ended June
30, 1999 resulted from purchases of property and equipment, and purchases, sales
and maturities of short-term investments.
Net cash provided by financing activities equaled $246.5 million for the
six months ended June 30, 1999, compared to $62.6 million for the six months
ended June 30, 1998. Cash provided by financing activities for the six months
ended June 30, 1999 consisted primarily of net proceeds received by DoubleClick
in connection with the issuance of the Convertible Notes in March 1999.
Y2000
OVERVIEW
Currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
STATE OF READINESS
As discussed in more detail in the discussion below, DoubleClick has
substantially completed many elements of its Year 2000 readiness assessment,
testing and remediation plan for its material information technology ("IT")
systems, which includes the hardware and software that enable DoubleClick to
provide and deliver its solutions, and its material non-IT systems, and plans to
complete all remaining elements of the plan as early in the fourth quarter of
1999 as practicable. DoubleClick's plan for assessing its Year 2000 readiness
consists of (i) quality assurance testing of its internally developed
proprietary software incorporated into its solutions ("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
DoubleClick's solutions to its Web publisher and advertiser customers; (iii)
contacting vendors of material non-IT systems; (iv) assessment of repair or
replacement requirements; (v) repair or replacement; (vi) implementation; and
(vii) creation of contingency plans in the event of Year 2000 failures.
18
<PAGE>
DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SOLUTIONS SOFTWARE
DoubleClick is continually conducting quality assurance testing to ensure
Year 2000 compliance of all new internally developed proprietary code
incorporated into its Solutions Software. During the second quarter of 1999,
DoubleClick completed a Year 2000 simulation test of the ad delivery functions
of its Solutions Software. In the third quarter of 1999, DoubleClick
anticipates that it will complete a Year 2000 simulation test of the ad
reporting functions of its Solutions Software. As a result of the testing to
date, DoubleClick has identified aspects of the Solutions Software that will
require minor code revisions to become Year 2000 compliant. DoubleClick is
continuously implementing these code revisions, and is planning to complete the
necessary revisions as early in the fourth quarter of 1999 as practicable. To
date, DoubleClick's Year 2000 simulation testing has not identified any
material way in which the DoubleClick's Solutions Software is not currently
Year 2000 compliant.
THIRD PARTY HARDWARE AND SOFTWARE
Most of the vendors of the material hardware and software components of
DoubleClick's IT systems have informed DoubleClick that the products used by
DoubleClick are currently Year 2000 compliant. To the extent Year 2000
remediation is required of any third party hardware or software component,
DoubleClick has nearly completed the installation of the software that has been
provided to date by DoubleClick's vendors for this purpose, and anticipates that
installation of all such software will be completed in the third quarter of
1999. Some of the non-U.S. companies providing server hosting services to
DoubleClick's international data centers have informed DoubleClick that they
have not yet completed their Year 2000 readiness assessment. DoubleClick is
further investigating the status of the Year 2000 readiness of these companies,
and commencing in the third quarter of 1999 will make contingency plans in those
cases in which the Company determines that such plans are warranted..
DoubleClick has completed an assessment of the materiality of its non-IT
systems, and is in the process of obtaining Year 2000 assurances from such
vendors, including the electrical utility and telephone company. DoubleClick,
like all businesses, is dependent on the continued functioning, domestically and
internationally, of basic services such as electrical utilities, telephony, mail
delivery, and transportation in order to conduct its business. While DoubleClick
is taking steps to attempt to ensure that the third parties on which it is
reliant are Year 2000 compliant, it cannot predict the likelihood of such
compliance nor the direct or indirect costs to DoubleClick of non-compliance by
those third parties or of securing alternate services from Year 2000 compliant
parties.
COST
To date, DoubleClick has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to, and are expected to include, the operating costs
associated with time spent by employees in the evaluation process and Year 2000
compliance matters generally. At this time, DoubleClick 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 DoubleClick does not anticipate that such expenses
will be material, such expenses, if higher than anticipated, could have a
material adverse effect on DoubleClick's business, results of operations and
financial condition.
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DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RISKS
DoubleClick believes that it has established an effective program to
resolve material Year 2000 issues in its sole control in a timely manner.
As noted above, however, DoubleClick has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. The failure by such third parties to be Year 2000 compliant could
result in a systematic failure beyond the control of DoubleClick from
delivering its services to its customers, decrease the use of the Internet or
prevent users from accessing the Web sites of its Web publishers customers,
which could have material adverse effect on DoubleClick's business, results
of operations and financial condition. In addition, there can be no assurance
that DoubleClick will not discover Year 2000 compliance problems in our
Solutions Software that will require substantial revisions which could be
costly and time-consuming to remedy. In the event that DoubleClick does not
complete any of its currently planned additional remediation prior to the Year
2000, DoubleClick could experience significant difficulty in producing and
delivering solutions and conducting its business in the Year 2000 as it has in
the past, which 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 DoubleClick's business, results of operations and
financial condition. Moreover, the failure to adequately address Year 2000
compliance issues could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
CONTINGENCY PLAN
As discussed above, DoubleClick is engaged in an ongoing Year 2000
assessment. DoubleClick is currently assessing the Year 2000 readiness status
of those non-U.S. server hosting companies that have not yet provided adequate
assurance of Year 2000 compliance. Commencing in the third quarter, DoubleClick
will make contingency plans in those cases in which the Company determines that
such plans are warranted.
FORWARD-LOOKING STATEMENTS
The foregoing Year 2000 discussion and the information contained herein is
provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998 and contains "forward-looking statements"
within the meaning of the Private Securities Litigation reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which DoubleClick expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially form those anticipated. Specific factors that might
cause such material difference include, but are not limited to, the ability to
identify and remediate all relevant systems, results of Year 2000 testing,
adequate resolution of Year 2000 issues by governmental agencies, businesses and
other third parties who are outsourcing service providers, suppliers, and
vendors of DoubleClick, unanticipated system costs, the adequacy of and ability
to implement contingency plans and uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and DoubleClick undertakes no obligation
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DOUBLECLICK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
to update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The primary objective of DoubleClick's investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, DoubleClick
maintains its portfolio of cash equivalents and short-term investments in a
variety of securities, including both government and corporate obligations
and money market funds. As of June 30, 1999, approximately 93% of the
Company's total portfolio matures in one year or less, with the remainder
maturing in less than two years.
The following table presents the amounts of DoubleClick's cash
equivalents and short-term investments that are subject to interest rate risk
by year of expected maturity and average interest rates as of June 30, 1999.
<TABLE>
<CAPTION>
2000 2001 Total Fair Value
------- ------- ------- ----------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Cash equivalents and short-term investments......... $284,364 $20,620 $304,984 $304,984
Average interest rates.............................. 5.1% 5.5%
</TABLE>
DoubleClick did not hold derivative financial instruments as of June
30, 1999 and has never held such instruments in the past. As of June 30,
1999, DoubleClick had outstanding $250 million of Convertible Notes with a
fixed interest rate of 4.75%.
Foreign Currency Risk
Foreign currency risk related to the Company's international sales are
derived mostly from the Company's delivery of advertising impressions through
third-party Web Sites that are a part of DoubleClick's U.S. or International
Networks and are typically denominated in the local currency of each country.
These subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their
functional currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely
impacted by changes in these or other factors.
The Company is also exposed to foreign exchange rate fluctuations,
primarily with respect to the British Pound and the Euro, as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rate vary, these results, when translated, may
vary from expectations and adversely impact overall expected profitability.
The effect of foreign exchange rate fluctuations on the Company in the
quarter ended June 30, 1999 was not material.
- -------------------------------------------------------------------------------
Item 8: Financial Statements and Supplementary Data
- -------------------------------------------------------------------------------
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT DOUBLECLICK AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
DOUBLECLICK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. DOUBLECLICK UNDERTAKES
NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
RISKS RELATING TO OUR COMPANY AND OUR BUSINESS
LIMITED OPERATING HISTORY
We were incorporated in January 1996 and have a limited operating history.
An investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, including the Internet advertising market. These risks include our:
- ability to sustain historical revenue growth rates;
- dependence on a continuing relationship with AltaVista;
- reliance on the DoubleClick Network;
- need to manage our expanding operations;
- competition;
- ability to attract, retain and motivate qualified personnel;
- ability to maintain our current, and develop new, strategic relationships
with Web publishers;
- ability to anticipate and adapt to the changing Internet market; and
- ability to attract and retain a large number of advertisers from a
variety of industries.
We also depend on the growing use of the Internet for advertising, commerce
and communication, and on general economic conditions. We cannot assure you that
our business strategy will be successful or that we will successfully address
these risks. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our limited
operating history.
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HISTORY OF LOSSES AND ANTICIPATION OF CONTINUED LOSSES
We incurred net losses of $3.2 million for the period from January 23, 1996
(inception) through December 31, 1996, $8.4 million for the year ended December
31, 1997, and $18.2 million for the year ended December 31, 1998. For the six
months ended June 30, 1999 we incurred a net loss of $12.5 million and, as of
June 30, 1999, our accumulated deficit was $67.3 million. We have not achieved
profitability and expect to continue to incur operating losses at least into the
year 2000. We expect to continue to incur significant operating and capital
expenditures and, as a result, we will need to generate significant revenues to
achieve and maintain profitability. Although our revenues have grown in recent
quarters, we cannot assure you that we will achieve sufficient revenues for
profitability. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or annual basis in the
future. If revenues grow slower than we anticipate, or if operating expenses
exceed our expectations or cannot be adjusted accordingly, our business, results
of operations and financial condition will be materially and adversely affected.
OUR DEPENDENCE ON ALTAVISTA
Approximately 20.6% and 50.1% of revenues and 43.8% and 50.1% of systems
revenues for the six months ended June 30, 1999 and 1998, respectively,
resulted from advertisements delivered on or through the AltaVista Web site.
On January 20, 1999, DoubleClick agreed with Compaq to enter into an
Advertising Services Agreement to replace the existing Procurement and
Trafficking Agreement. The Advertising Services Agreement is effective as of
January 1, 1999 and will expire on December 31, 2001, subject to prior
termination in certain limited circumstances or further extension in
accordance with the terms of the Advertising Services Agreement. On June 29,
1999, Compaq agreed to transfer to CMGI, Inc. a controlling interest in
AltaVista. Compaq and its wholly owned subsidiary Digital Equipment
Corporation contributed the assets and liabilities comprising AltaVista's
business, which included the Advertising Services Agreement, to a new company
that CMGI owns approximately 83% of, with the remainder owned by Compaq. The
loss of AltaVista as a customer or any significant reduction in traffic on or
through the AltaVista Web site would materially and adversely affect our
business, results of operations and financial condition.
WEB PUBLISHER CONCENTRATION
We derive a substantial portion of our DoubleClick Network revenues from
ads we deliver on the Web sites of a limited number of Web publishers.
Approximately 19.0% and 57% of our revenues for the six months ended June 30,
1999 and 1998, respectively, resulted from ads delivered on the Web sites of the
top four Web publishers on the DoubleClick Network. Our business, results of
operations and financial condition could be materially and adversely affected by
the loss of one or more of the Web publishers which account for a significant
portion of our DoubleClick Network revenues or any significant reduction in
traffic on such Web publisher's Web sites. In addition, advertisers or Web
publishers may leave the DoubleClick Network because of such a loss, which could
materially and adversely affect our business, results of operations and
financial condition. Typically we enter into short-term contracts with Web
publishers for inclusion of their Web sites in the DoubleClick Network. Since
these contracts are short-term, we will have to negotiate new contracts or
renewals in the future, which may have terms that are not as favorable to us as
the terms of the existing contracts. Our business, results of operations and
financial condition could be materially and adversely affected by such new
contracts or renewals.
OUR RELIANCE ON THE DOUBLECLICK NETWORK
Since the third quarter of 1996, we have derived substantially all of our
revenues from advertisements we deliver to Web sites on the DoubleClick Network.
We expect that the DoubleClick Network will continue to account for a
substantial portion of our revenues for the foreseeable future. The DoubleClick
Network consists of Web sites of a limited number of Web publishers with which
we
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have short-term contracts. We cannot assure you that such Web publishers will
remain associated with the DoubleClick Network, that any DoubleClick Network Web
site will maintain consistent or increasing levels of traffic over time, or that
we will be able to timely or effectively replace any exiting DoubleClick Network
Web site with other Web sites with comparable traffic patterns and user
demographics. Our failure to successfully market the DoubleClick Network, the
loss of one or more of the Web publishers which account for a significant
portion of our revenues from the DoubleClick Network, or the failure of the Web
sites on the DoubleClick Network to maintain consistent or increasing levels of
traffic would materially and adversely affect our business, results of
operations and financial condition
QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. These
factors include:
- advertiser and Web publisher demand for our solutions;
- user traffic levels and the number of available impressions on the
DoubleClick Network's Web sites;
- seasonal fluctuations in Internet usage;
- changes in service fees we pay to Web publishers;
- changes in the growth rate of Internet usage;
- the commitment of advertising budgets to Internet advertising;
- the mix of revenues from our various Internet advertising solutions;
- the timing and amount of costs relating to the expansion of our
operations;
- changes in our pricing policies or those of our competitors;
- the introduction of new solutions by us or our competitors;
- the mix of domestic and international sales;
- costs related to acquisitions of technology or businesses; and
- general economic and market conditions.
Our revenues for the foreseeable future will remain dependent on user
traffic levels and advertising activity on the DoubleClick Network. Such future
revenues are difficult to forecast. In addition, we plan to significantly
increase our operating expenses to increase our sales and marketing operations,
to continue our international expansion, to upgrade and enhance our DART
technology, and to market and support our solutions. We may be unable to adjust
spending quickly enough to offset any unexpected revenue shortfall. If we have a
shortfall in revenues in relation to our expenses, or if our expenses precede
increased revenues, then our business, results of operations and financial
condition
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would be materially and adversely affected. Such a result would likely affect
the market price of our common stock in a manner which may be unrelated to our
long-term operating performance.
We believe that advertising sales in traditional media, such as television
and radio, generally are lower in the first calendar quarter of each year. If
our market makes the transition from an emerging to a more developed medium,
seasonal and cyclical patterns may develop in our industry. Our revenues may
also be affected by seasonal and cyclical patterns in Internet advertising
spending if they emerge.
Due to all of the foregoing factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the price of our common stock may
fall.
NEED TO MANAGE GROWTH
To successfully implement our business plan in the rapidly evolving
market for Internet advertising requires an effective planning and management
process. We continue to increase the scope of our operations both
domestically and internationally, and we have grown our workforce
substantially. As of June 30, 1996, we had a total of 25 employees and, as of
June 30, 1999, we had a total of 658 employees. In addition, we plan to
continue to expand our sales and marketing and customer support organizations
both domestically and internationally. This growth has placed, and our
anticipated future growth in our operations will continue to place, a
significant strain on our management systems and resources. We expect that we
will need to continue to improve our financial and managerial controls and
reporting systems and procedures, and will need to continue to expand, train
and manage our workforce. Our future performance may also depend on the
effective integration of acquired businesses. Such integration, even if
successful, may take a significant period of time and expense, and may place
a significant strain on our resources. Our business, results of operations
and financial condition will be materially and adversely affected if we are
unable to effectively manage our expanding operations or the relocation of
our data operations.
RECENT DEVELOPMENT OF THE INTERNET ADVERTISING MARKET AND
UNPROVEN ACCEPTANCE AND EFFECTIVENESS OF WEB ADVERTISING
Our future success is highly dependent on an increase in the use of the
Internet as an advertising medium. The Internet advertising market is new and
rapidly evolving, and it cannot yet be compared with traditional advertising
media to gauge its effectiveness. As a result, demand and market acceptance for
Internet advertising solutions is uncertain. Most of our current or potential
advertising customers have little or no experience using the Internet for
advertising purposes and they have allocated only a limited portion of their
advertising budgets to Internet advertising. The adoption of Internet
advertising, particularly by those entities that have historically relied upon
traditional media for advertising, requires the acceptance of a new way of
conducting business, exchanging information and advertising products and
services. Such customers may find Internet advertising to be less effective for
promoting their products and services relative to traditional advertising media.
In addition, most of our current and potential Web publisher customers have
little or no experience in generating revenues from the sale of advertising
space on their Web sites. We cannot assure you that the market for Internet
advertising will continue to emerge or become sustainable. If the market for
Internet advertising fails to develop or develops more slowly than we expect,
then our business, results of operations and financial condition could be
materially and adversely affected.
There are currently no standards for the measurement of the effectiveness
of Internet advertising and standard measurements may need to be developed to
support and promote Internet advertising as a
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<PAGE>
significant advertising medium. Our advertising customers may challenge or
refuse to accept our or third-party measurements of advertisement delivery
results, and our customers may not accept any errors in such measurements. In
addition, the accuracy of database information used to target advertisements is
essential to the effectiveness of Internet advertising that may be developed in
the future. The information in our database, like any database, may contain
inaccuracies which our customers may not accept.
Substantially all of our revenues are derived from the delivery of banner
advertisements. If advertisers determine that banner advertising is an
ineffective or unattractive advertising medium, we cannot assure you that we
will be able to effectively make the transition to any other form of Internet
advertising. Also, there are "filter" software programs that limit or prevent
advertising from being delivered to a user's computer. The commercial viability
of Internet advertising, and our business, results of operations and financial
condition, would be materially and adversely affected by Web users' widespread
adoption of such software.
PRIVACY CONCERNS
In recent months, the U.S. federal and various state governments have
proposed limitations on the collection and use of information regarding Internet
users. In October 1998, the European Union adopted a directive that may result
in limitations on our collection and use of information regarding Internet users
in Europe. Our DART technology targets advertising to users through the use of
"cookies" and other non-personally-identifying information. The effectiveness of
our DART technology could be limited by any regulation or limitation in the
collection or use of information regarding Internet users. Since many of the
limitations are still in the proposal stage, we cannot yet determine the full
impact of these regulations on our business.
UNPROVEN BUSINESS MODEL
Our business model is to generate revenues solely by providing Internet
advertising solutions to advertisers, ad agencies and Web publishers. The profit
potential for our business model is unproven. To be successful, both Internet
advertising and our solutions will need to achieve broad market acceptance by
advertisers, ad agencies and Web publishers. Our ability to generate significant
revenues from advertisers will depend, in part, on our ability to contract with
Web publishers that have Web sites with adequate available ad space inventory.
Further, these Web sites must generate sufficient user traffic with demographic
characteristics attractive to our advertisers. The intense competition among
Internet advertising sellers has led to the creation of a number of pricing
alternatives for Internet advertising. These alternatives make it difficult for
us to project future levels of advertising revenues and applicable gross margin
that can be sustained by us or the Internet advertising industry in general.
Market acceptance of our new solutions, including DoubleClick Local and the
Closed Loop Marketing Solutions suite of products, will depend on the continued
emergence of Internet commerce, communication and advertising, and market demand
for our solutions. We cannot assure you that the market for our new solutions
will develop or that demand for our new solutions will emerge or become
sustainable.
YEAR 2000 RISKS
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
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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.
We have substantially completed many elements of our Year 2000 readiness
assessment, testing and remediation plan, and plan to complete all remaining
elements of the plan as early in the fourth quarter of 1999 as practicable.
We have completed a Year 2000 similation test on the ad delivery functions of
our software, and will perform a similar test on the ad reporting functions
of our software in third quarter of 1999. As a result of the testing to date,
we have identified aspects of our software that will require minor code
revisions to become Year 2000 compliant, and we plan to complete the
necessary revisions as early in the fourth quarter of 1999 as practicable. To
date, we have not identified any material way in which our software is not
currently Year 2000 compliant, but it remains possible that our ongoing
testing will identify material ways in which our software is not Year 2000
compliant. In the process of contacting our material vendors for Year 2000
assurances, we have identified certain non-U.S. companies providing server
hosting services to DoubleClick's international data centers that have been
unable to provide adequate assurances of Year 2000 readiness. Beginning in
the third quarter, we will continue our investigation of these vendors, and
will develop contingency plans in those cases in which we determine that such
plans are warranted. Notwithstanding the Year 2000 assurances we will have
received from our material vendors, or any contingency plans we will have
made, it is possible that the third parties on which we rely may experience
problems after January 1, 2000 that could prevent DoubleClick from delivering
its services to its customers, decrease use of the Internet or prevent users
from accessing the Web Sites of its Web publisher customers. These failures,
which are beyond our control, could adversely affect our business, results of
operations and financial condition.
RISK OF SYSTEM FAILURE
The DART technology resides on a computer system located in our New York
City offices and in DoubleClick data centers in New Jersey, California,
Australia, Brazil, England, France, Germany, the Netherlands and Sweden. This
system's continuing and uninterrupted performance is critical to our success.
Customers may become dissatisfied by any system failure that interrupts our
ability to provide our services to them, including failures affecting our
ability to deliver advertisements without significant delay to the viewer.
Sustained or repeated system failures would reduce the attractiveness of our
solutions to advertisers, ad agencies and Web publishers. Slower response time
or system failures may also result from straining the capacity of our deployed
software or hardware due to an increase in the volume of advertising delivered
through our servers. To the extent that we do not effectively address any
capacity constraints or system failures, our business, results of operations and
financial condition would be materially and adversely affected.
Our operations are dependent on our ability to protect our computer systems
against damage from fire, power loss, water damage, telecommunications failures,
vandalism and other malicious acts, and similar unexpected adverse events. In
addition, interruptions in our solutions could result from the failure of our
telecommunications providers to provide the necessary data communications
capacity in the time frame we require. Despite precautions we have taken,
unanticipated problems affecting our systems have from time to time in the past
caused, and in the future could cause, interruptions in the delivery of our
solutions. DoubleClick's ad serving capabilities, operational information and
data storage are presently redundant, as well as archived. We currently have
in operation a disaster recovery site. Our business, results of operations
and financial condition could be materially and adversely affected by any
damage or failure that interrupts or delays our operations.
OUR MARKETS ARE HIGHLY COMPETITIVE
Our markets, namely Internet advertising and related products and services,
are intensely competitive. We expect such competition to continue to increase
because our markets pose no substantial barriers to entry. Competition may also
increase as a result of industry consolidation. We believe that our ability to
compete depends upon many factors both within and beyond our control, including
the following:
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed either by us or our competitors;
- customer service and support efforts;
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- sales and marketing efforts; and
- the ease of use, performance, price and reliability of solutions
developed either by DoubleClick or its competitors.
We compete for Internet advertising revenues with large Web publishers and
Web search engine companies, such as America Online, Excite, Lycos, Microsoft,
Infoseek and Yahoo!. Further, our DoubleClick Network competes with a variety of
Internet advertising networks, including 24/7 Media. In marketing our
DoubleClick Network and DART Service to Web publishers, we also compete with
providers of ad servers and related services, including NetGravity and AdForce.
We also encounter competition from a number of other sources, including content
aggregation companies, companies engaged in advertising sales networks,
advertising agencies, and other companies which facilitate Internet advertising.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. These factors may allow them to respond more quickly than
we can to new or emerging technologies and changes in customer requirements. It
may also allow them to devote greater resources than we can to the development,
promotion and sale of their products and services. Such competitors may also
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to existing and potential employees, strategic partners,
advertisers and Web publishers. We cannot assure you that our competitors will
not develop products or services that are equal or superior to our solutions or
that achieve greater market acceptance than our solutions. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective advertising,
ad agency and Web publisher customers. As a result, it is possible that new
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share. We cannot assure you that we will be able to compete
successfully or that competitive pressures will not materially and adversely
affect our business, results of operations or financial condition.
Companies doing business on the Internet, including ours, must also compete
with television, radio, cable and print (traditional advertising media) for a
share of advertisers' total advertising budgets. Advertisers may be reluctant to
devote a significant portion of their advertising budget to Internet advertising
if they perceive the Internet to be a limited or ineffective advertising medium.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR INVESTMENTS
We may acquire or make investments in complementary businesses, products,
services or technologies. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products,
services or technologies, including our proposed acquisitions of Abacus and
NetGravity. We cannot assure you that we will be able to identify suitable
acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to make such acquisitions
or investments on commercially acceptable terms. If we buy a company, we could
have difficulty in assimilating that company's personnel and operations. In
addition, the key personnel of the acquired company may decide not to work for
us. If we make other types of acquisitions, we could have difficulty in
assimilating the acquired products, services or technologies into our
operations. These difficulties could disrupt our ongoing business, distract our
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management and employees, increase our expenses and adversely affect our results
of operations due to accounting requirements such as goodwill. Furthermore, we
may incur debt or issue equity securities to pay for any future acquisitions.
The issuance of equity securities could be dilutive to our existing
stockholders.
DEPENDENCE ON KEY PERSONNEL
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel, in particular,
Kevin J. O'Connor, our Chief Executive Officer and Chairman of the Board of
Directors, Kevin P. Ryan, our President and Chief Operating Officer, and Dwight
A. Merriman, our Chief Technical Officer. We have no employment agreements with
any of these executives. The loss of the services of Messrs. O'Connor, Ryan or
Merriman, or certain other key employees, would likely have a material adverse
effect on our business, results of operations and financial condition. Our
future success also depends on our continuing to attract, retain and motivate
highly skilled employees. Competition for employees in our industry is intense.
We may be unable to retain our key employees or attract, assimilate or retain
other highly qualified employees in the future. We have from time to time in the
past experienced, and we expect to continue to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications.
DEPENDENCE ON THE WEB INFRASTRUCTURE
Our success will depend, in large part, upon the maintenance of the Web
infrastructure, such as a reliable network backbone with the necessary speed,
data capacity and security, and timely development of enabling products such as
high speed modems, for providing reliable Web access and services and improved
content. We cannot assure you that the Web infrastructure will continue to
effectively support the demands placed on it as the Web continues to experience
increased numbers of users, frequency of use or increased bandwidth requirements
of users. Even if the necessary infrastructure or technologies are developed, we
may have to spend considerable amounts to adapt our solutions accordingly.
Furthermore, the Web has experienced a variety of outages and other delays due
to damage to portions of its infrastructure. Such outages and delays could
impact the Web sites of Web publishers using our solutions and the level of user
traffic on Web sites on the DoubleClick Network.
DEPENDENCE ON PROPRIETARY RIGHTS AND RISK OF INFRINGEMENT
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of patent, copyright, trade secret and trademark law. We have filed
three patent applications in the United States and one patent application
internationally. In addition, we apply to register our trademarks in the United
States and internationally. (We own the registration for the DoubleClick
trademark in the United States.) We cannot assure you that any of our patent
applications or trademark applications will be approved. Even if they are
approved, such patents or trademarks may be successfully challenged by others or
invalidated. If our trademark registrations are not approved because third
parties own such trademarks, our use of such trademarks will be restricted
unless we enter into arrangements with such third parties which may be
unavailable on commercially reasonable terms.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary
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rights from unauthorized use or disclosure, parties may attempt to disclose,
obtain or use our solutions or technologies. We cannot assure you that the steps
we have taken will prevent misappropriation of our solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
Our DART technology collects and utilizes data derived from user activity
on the DoubleClick Network and the Web sites of Web publishers using our
solutions. This data is used for ad targeting and predicting ad performance.
Although we believe that we have the right to use such data and the compilation
of such data in our database, we cannot assure you that any trade secret,
copyright or other protection will be available for such information. In
addition, others may claim rights to such information. Further, pursuant to our
contracts with Web publishers using our solutions, we are obligated to keep
certain information regarding each Web publisher confidential.
We have licensed, and we may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. While
we attempt to ensure that the quality of our brand is maintained by these
business partners, such partners may take actions that could materially and
adversely affect the value of our proprietary rights or our reputation.
We cannot assure you that any of our proprietary rights will be viable or
of value in the future since the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries is
uncertain and still evolving. Furthermore, third parties may assert infringement
claims against us. From time to time we have been, and we expect to continue to
be, subject to claims in the ordinary course of our business, including claims
of alleged infringement of the trademarks and other intellectual property rights
of third parties by us or the Web publishers with Web sites in the DoubleClick
Network. Such claims and any resultant litigation, should it occur, could
subject us to significant liability for damages and could result in the
invalidation of our proprietary rights. In addition, even if we prevail, such
litigation could be time-consuming and expensive to defend, and could result in
the diversion of our time and attention, any of which could materially and
adversely affect our business, results of operations and financial condition.
Any claims or litigation from third parties may also result in limitations on
our ability to use the trademarks and other intellectual property subject to
such claims or litigation unless we enter into arrangements with the third
parties responsible for such claims or litigation which may be unavailable on
commercially reasonable terms.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE
The Internet and Internet advertising markets are characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, and changing customer demands. Our future success will
depend on our ability to adapt to rapidly changing technologies and to enhance
existing solutions and develop and introduce a variety of new solutions to
address our customers' changing demands. We may experience difficulties that
could delay or prevent the successful design, development, introduction or
marketing of our solutions. In addition, our new solutions or enhancements must
meet the requirements of our current and prospective customers and must achieve
significant market acceptance. Material delays in introducing new solutions and
enhancements may cause customers to forego purchases of our solutions and
purchase those of our competitors.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
We have operations in a number of international markets. We intend to
continue to expand our international operations and international sales and
marketing efforts. To date, we have limited experience in developing localized
versions of our solutions and in marketing, selling and distributing our
solutions internationally. We have established DoubleClick Networks in
Australia,
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Canada, France, Germany, Benelux (Belgium, the Netherlands and Luxembourg) and
the United Kingdom. In Japan, Iberoamerica (Spain, Portugal and Latin America),
Italy and Scandinavia (Sweden, Norway, Finland, and Denmark), we are relying on
our business partners to conduct operations, establish local networks, aggregate
Web publishers and coordinate sales and marketing efforts. Our success in such
markets is directly dependent on the success of our business partners and their
dedication of sufficient resources to our relationship.
International operations are subject to other inherent risks, including:
- the impact of recessions in economies outside the United States;
- changes in regulatory requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences;
- difficulties and costs of staffing and managing foreign operations;
- political and economic instability;
- fluctuations in currency exchange rates; and
- seasonal fluctuations in Internet usage.
These risks may materially and adversely affect our business, results of
operations or financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The prior session of the
United States Congress resulted in Internet laws regarding children's privacy,
copyrights and taxation. Such legislation could dampen the growth in use of the
Web generally and decrease the acceptance of the Web as a communications,
commercial and advertising medium. The governments of other states or foreign
countries might attempt to regulate our transmissions or levy sales or other
taxes relating to our activities. The European Union recently enacted its own
privacy regulations that may result in limits on the collection and use of
certain user information. The laws governing the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing intellectual property, privacy, libel and taxation apply to the
Internet and Internet advertising. In addition, the growth and development of
the market for Internet commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet. Our
business, results of operations and financial condition could be adversely
affected by the adoption or modification of laws or regulations relating to the
Internet.
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SUBSTANTIAL INFLUENCE BY OFFICERS AND DIRECTORS
The executive officers, directors and entities affiliated with them
beneficially own a significant percentage of our outstanding common stock. These
stockholders may be able to exercise substantial influence over all matters
requiring approval by our stockholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing a change in control of
DoubleClick.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the stock market has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet-related
companies have been especially volatile. Investors may be unable to resell their
shares of our common stock at or above the offering price. In the past,
companies that have experienced volatility in the market price of their stock
have been the object of securities class action litigation. If we were the
object of securities class action litigation, it could result in substantial
costs and a diversion of management's attention and resources.
RISKS RELATED TO THE PENDING MERGERS WITH ABACUS AND NETGRAVITY
IF WE DO NOT SUCCESSFULLY INTEGRATE ABACUS'S AND NETGRAVITY'S OPERATIONS AND
PERSONNEL OR EFFECTIVELY MANAGE THE COMBINED COMPANY, WE MAY NOT ACHIEVE THE
BENEFITS OF THE MERGERS AND MAY LOSE KEY PERSONNEL AND CUSTOMERS.
We entered into merger agreements with Abacus and NetGravity with the
expectations that these mergers will result in significant benefits. Achieving
the benefits of each merger depends on the timely, efficient and successful
execution of a number of post-merger events, including integrating the
operations and personnel of the acquired company. We will need to overcome
significant issues, however, in order to realize any benefits or synergies from
the mergers. The successful execution of these post-merger events will involve
considerable risk and may not be successful. Abacus is a provider of information
products and marketing research services to the direct marketing industry.
NetGravity is a provider of online interactive marketing solutions. NetGravity's
business model has principally been to license software designed to enable its
customers to directly manage their online interactive marketing activities.
DoubleClick is a provider of advertising solutions for advertisers and Web
publishers. DoubleClick provides outsourced, service-based solutions to
customers who choose not to directly manage their online interactive marketing
activities. DoubleClick has virtually no experience in Abacus's business and
little direct experience with NetGravity's primary business model. Furthermore,
Abacus's principal offices are located in Broomfield, Colorado, and NetGravity's
principal offices are located in San Mateo, California, while DoubleClick's
principal offices are located in New York, New York. There are currently no
plans to relocate any of these principal offices. In order for the mergers to be
successful, we must successfully integrate Abacus's operations and personnel and
NetGravity's operations and personnel with DoubleClick's operations and
personnel. Our failure to complete the integration successfully could result in
the loss of key personnel and customers.
IF WE FAIL TO SUCCESSFULLY CROSS-MARKET DOUBLECLICK'S, ABACUS'S AND NETGRAVITY'S
PRODUCTS OR DEVELOP NEW PRODUCTS, WE WILL NOT INCREASE OR MAINTAIN OUR CUSTOMER
BASE OR OUR REVENUES.
We intend that DoubleClick, Abacus and NetGravity will initially offer its
respective products and services to the customers of the other companies. We
cannot assure you that any company's customers will have any interest in the
other company's products and services. The failure of such cross-marketing
efforts would diminish the benefits realized by the mergers.
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In addition, we intend after the mergers to develop new products and services
that combine the knowledge and resources of the DoubleClick, Abacus and
NetGravity businesses. We cannot assure you that these products or services will
be successful or that we can successfully integrate or realize the anticipated
benefits of the mergers. As a result, we may not be able to increase or maintain
our customer base. We cannot assure you that the transactions or other data
in Abacus's database will be predictive or useful in other sales channels,
including Internet advertising. To date, the companies have not thoroughly
investigated the obstacles, technological, market-driven or otherwise, to
developing and marketing these new products and services in a timely and
efficient way. We cannot assure you that we will be able to overcome the
obstacles in developing new products and services, or that there will be a
market for the new products or services developed by us after the mergers. A
failure or inability like this could have a material adverse effect on the
combined company's business, financial condition and operating results or
could result in loss of key personnel. In addition, the attention and effort
devoted to the integration of the acquired companies will significantly
divert management's attention from other important issues, and could
seriously harm the combined company.
IF THE COSTS ASSOCIATED WITH THE MERGERS EXCEED THE BENEFITS REALIZED, WE MAY
EXPERIENCE INCREASED LOSSES.
DoubleClick expects to incur one-time charges related to the Abacus and
NetGravity mergers. If the benefits of the mergers do not exceed the costs
associated with them, including any dilution to our stockholders resulting from
the issuance of shares in connection with the mergers, our financial results
could be adversely affected.
IF WE DO NOT SUCCESSFULLY INTEGRATE ABACUS AND NETGRAVITY OR THE MERGERS'
BENEFITS DO NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE
MARKET PRICE FOR OUR COMMON STOCK MAY DECLINE.
The market price of our common stock may decline as a result of the mergers with
Abacus or NetGravity if:
o The integration of DoubleClick with either company is unsuccessful;
o We do not achieve the perceived benefits of either merger as rapidly or to
the extent anticipated by financial or industry analysts; or
o The effect of either merger on our financial results is not consistent with
the expectations of financial or industry analysts.
IF EITHER MERGER FAILS TO QUALIFY AS A POOLING OF INTERESTS, WE WOULD BE
REQUIRED TO TAKE CHARGES AGAINST EARNINGS IN FUTURE PERIODS, WHICH WOULD
INCREASE THE AMOUNT OF OUR LOSSES.
If we cannot account for either merger as a pooling of interests, a
significant portion of the purchase price for the merger will be allocated to
goodwill and other intangible assets, which we would amortize over their
estimated useful lives. As a result, we would take charges against our
earnings in the future, which may materially and adversely affect our
reported financial results and, likely, the price of our common stock.
The availability of pooling-of-interests accounting treatment for the mergers
depends upon circumstances and events occurring both before and after each
merger's completion. For example, no significant changes in the business of
the combined company may occur, including significant dispositions of assets,
for a period of two years following the effective time of the merger.
Further, affiliates of DoubleClick, Abacus and NetGravity must not sell any
shares of either DoubleClick, Abacus or NetGravity, as applicable, capital
stock for a period beginning before the merger and ending on the day that we
publicly announce financial results covering at least 30 days of combined
operations of DoubleClick and the applicable company after the merger. We do
not expect that 30 days of combined financial results would be published
sooner than January 2000. If affiliates of DoubleClick, Abacus or Net Gravity
sell their shares of DoubleClick common stock prior to that time, despite a
contractual obligation restricting this sale, the applicable merger may not
qualify for accounting as a pooling of interests for financial reporting
purposes.
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CHANGING REQUIREMENTS FOR FAIR INFORMATION COLLECTION PRACTICES AND
POTENTIALLY HEIGHTENED SCRUTINY OF OUR PRODUCTS OR SERVICES COULD REQUIRE
ADVERSE CHANGES IN THE WAY THE COMBINED COMPANY CONDUCTS OR PLANS TO CONDUCT
ITS BUSINESS
There has been public debate about how fair information collection practices
should be formulated for the online and offline collection, distribution and
use of information about a consumer. Some of the discussion has focused on
the fair information collection practices that should apply when information
about an individual that is collected in the offline environment is
associated with information that is collected over the Internet about that
individual. Following the announcement of the Abacus merger with DoubleClick,
some of the public discussion has included, and may continue in the future to
include, speculation about the information collection practices that will be
employed in the combined company's new products and services. We have
publicly committed that no personally identifiable offline information about
a consumer will be associated with online information about that consumer for
the delivery of personally-targeted Internet advertising without first
providing the consumer notice and a choice to opt out of the targeted
advertising. However, as a consequence of governmental legislation or
regulation or evolving standards of fair information collection practices,
the combined company may be required to make changes to its products or
services in ways that could diminish the effectiveness of the product or
service or its attractiveness to potential customers, which could have a
material adverse effect on the combined company.
RISKS RELATED TO ABACUS'S AND NETGRAVITY'S BUSINESSES
Assuming the proposed Abacus merger and NetGravity merger are consummated, these
companies will constitute meaningful portions of DoubleClick's business. As a
result, we will become subject to additional risks that are specific to Abacus's
and NetGravity's respective businesses. For a detailed discussion of these
risks, please see the risk factors included in each of Abacus's and NetGravity's
reports filed with the Securities Exchange Commission under the Securities
Exchange Act of 1934, which reports are hereby incorporated herein by reference.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 29, 1999, a putative class action entitled MARGIE ELSTEIN V.
JOHN W. DONNER, ET AL (Case No. 17339NC), was commenced in the Chancery Court in
the state of Delaware, New Castle County, on behalf of the stockholders of
NetGravity against NetGravity, certain directors of NetGravity and DoubleClick.
The complaint alleges that NetGravity and its directors committed a breach of
their fiduciary duty to NetGravity stockholders and that DoubleClick aided and
abetted that breach by agreeing to the $30 million termination fee set forth in
the Agreement and Plan of Merger and Reorganization, dated as of July 12, 1999,
by and among DoubleClick, NJ Merger Corporation and NetGravity, Inc. Plaintiff
seeks recission of the termination fee and unspecified damages. The action
remains in its early stages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities:
NONE
(b) Use of Proceeds
On February 19, 1998, the Securities and Exchange Commission declared
effective 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, DoubleClick completed the initial public offering of 4,025,000 shares
of its Common Stock at an initial public offering price of $17.00 per share
(the "Offering"). The Offering was managed by Goldman, Sachs & Co., BT
Alex.Brown and Cowen & Company. Proceeds to DoubleClick, after calculation
of the underwriters discount and commission, from the Offering totaled
approximately $62.5 million net of offering costs of $1.1 million. None of
the expenses incurred in the offering were direct or indirect payments to
directors, officers, general partners of the issuer or their associates, to
persons owning ten percent or more of any class of equity securities of the
issuer or to affiliates of the issuer. As of June 30, 1999, DoubleClick has
used approximately $43 million of the proceeds from the Offering toward
general corporate purposes, including working capital, and toward the
expansion of DoubleClick's international operations and sales and marketing
capabilities. None of these expenses were direct or indirect payments to
directors, officers, general partners of the issuer or their associates, to
persons owning ten percent or more of any class of equity securities of the
issuer or to affiliates of the issuer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DoubleClick held its 1999 Annual Meeting of Stockholders on May 24, 1999. At
that meeting, the stockholders approved the following proposals: (i) election
of Dwight A. Merriman and David N. Strohm as Class II directors to serve on the
Board of Directors, (ii) amendment of DoubleClick's 1997 Stock Incentive Plan
(the "Plan") to increase the number of shares of Common Stock authorized for
issuance over the term of the Plan by an additional 8,000,000 and limit the
annual automatic share increase to 1,200,000 shares annually; (iii) amendment
of DoubleClick's Amended and Restated Certificate of Incorporation (the
"Certificate") to increase the number of authorized shares of Common Stock from
60,000,000 to 400,000,000, and (v) selection of PricewaterhouseCoopers LLP as
independent auditors of DoubleClick for the fiscal year ending December 31,
1999.
There were 15,371,782 votes cast for, 0 votes cast against, 59,379 votes
withheld and 29,002 abstentions in connection with the election of Dwight A.
Merriman and David N. Strohm as Class II Directors. The remainder of
DoubleClick's Board of Directors remains as previously reported. There were
7,984,193 votes cast for, 2,222,700 votes cast against and 14,964 abstentions in
connection with the amendment of the Plan. There were 13,857,890 votes cast for,
1,526,742 votes cast against and 18,152 abstentions in connection with the
amendment of the Certificate. There were 15,378,685 votes cast for, 9,646 votes
cast against and 12,453 abstentions in connection with the selection of
PricewaterhouseCoopers LLP as independent auditors.
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:
2.1 Agreement and Plan of Merger and Reorganization dated as of June 13,
1999, by and among DoubleClick, Atlanta Merger Corp. and Abacus Direct
Corporation (incorporated by reference to Exhibit 2.1 of DoubleClick's
Current Report on Form 8-K dated June 17, 1999).
2.2 Agreement and Plan of Merger and Reorganization dated as of July 12,
1999, by and among DoubleClick, NJ Merger Corporation and NetGravity, Inc.
(incorporated by reference to Exhibit 2.1 of DoubleClick's Current Report
on Form 8-K dated July 22, 1999).
10.1 Stock Option Agreement, dated as of June 13, 1999, by and between
DoubleClick and Abacus Direct Corporation (incorporated by reference to
Exhibit 10.1 of DoubleClick's Current Report on Form 8-K dated June 17,
1999).
10.2 Agreement of Lease, dated as of January 26, 1999, between John Hancock
Mutual Life Insurance Company as Owner and Landlord and DoubleClick Inc. as
Tenant (filed herewith).
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(b) Reports on Form 8-K
DoubleClick filed two reports on Form 8-K during the three months ended on
June 30, 1999. One Form 8-K was filed on June 17, 1999 announcing the
Agreement and Plan of Merger and Reorganization, dated as of June 13, 1999,
by and among DoubleClick, Atlanta Merger Corp. and Abacus Direct Corporation
pursuant to which DoubleClick agreed to acquire Abacus Direct Corporation.
The second Form 8-K was filed on July 22, 1999 announcing the Agreement and Plan
of Merger and Reorganization, dated as of July 12, 1999, by and among
DoubleClick, NJ Merger Corporation and NetGravity, Inc., pursuant to which
DoubleClick agreed to acquire NetGravity.
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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: October 15, 1999 By: /s/ STEPHEN COLLINS
-------------------
Stephen Collins
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
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