<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
COMMISSION FILE NUMBER 000-30135
VALUECLICK, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0495335
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6450 VIA REAL
CARPINTERIA, CALIFORNIA 93013
(Address of principal executive offices, including zip code)
(805) 684-6060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [ ] No [X]
The number of shares of the Registrant's only class of common stock outstanding
as of April 30, 2000 was approximately 27,965,000.
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<PAGE>
VALUECLICK, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2000
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000 (unaudited).................................. 3
Unaudited Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
Three Months Ended March 31, 1999 and 2000...................... 4
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 2000...................... 5
Unaudited Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk......... 15
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings................................................. 27
Item 2. Changes in Securities and Use of Proceeds......................... 27
Item 4. Submission of Matters to a Vote of Security Holders............... 27
Item 6. Exhibits and Reports on Form 8-K.................................. 27
Signatures................................................................. 28
<PAGE>
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
VALUECLICK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,129,000 $ 10,757,000
Investment in DoubleClick common stock, at market value - 68,614,000
Accounts receivable, net 7,022,000 7,777,000
IPO proceeds receivable - 70,680,000
Prepaid expenses and other current assets 548,000 1,237,000
Deferred income taxes 330,000 7,243,000
--------------- --------------
Total current assets 10,029,000 166,308,000
--------------- --------------
Property and equipment, net 912,000 1,044,000
Intangibles, net 3,859,000 3,649,000
Other assets 173,000 270,000
--------------- --------------
TOTAL ASSETS $ 14,973,000 $ 171,271,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,304,000 $ 4,262,000
Income taxes payable 250,000 728,000
Deferred revenue 389,000 347,000
Other current liabilities 157,000 244,000
--------------- --------------
Total current liabilities 5,100,000 5,581,000
--------------- --------------
LONG-TERM LIABILITIES 20,000 17,000
MINORITY INTEREST IN VALUECLICK JAPAN 453,000 586,000
STOCKHOLDERS' EQUITY:
Preferred stock 3,000 -
Common stock 10,000 28,000
Additional paid-in capital 17,584,000 186,989,000
Deferred stock compensation (5,678,000) (8,278,000)
Accumulated deficit (2,489,000) (3,290,000)
Accumulated other comprehensive loss (30,000) (10,362,000)
--------------- --------------
Total stockholders' equity 9,400,000 165,087,000
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,973,000 $ 171,271,000
--------------- --------------
--------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
- 3 -
<PAGE>
VALUECLICK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1999 2000
---------------- ---------------
<S> <C> <C>
Revenues $ 1,968,000 $ 11,000,000
Cost of revenues 1,087,000 5,513,000
---------------- ---------------
Gross profit 881,000 5,487,000
---------------- ---------------
Operating expenses:
Sales and marketing 257,000 1,903,000
General and administrative 342,000 1,544,000
Product development 108,000 794,000
Stock-based compensation 33,000 1,297,000
Amortization of intangibles and acquired software 13,000 223,000
---------------- ---------------
Total operating expenses 753,000 5,761,000
---------------- ---------------
Income (loss) from operations 128,000 (274,000)
Equity in loss of ValueClick Japan (42,000) -
Interest income, net 5,000 43,000
---------------- ---------------
Income (loss) before income taxes and minority interest 91,000 (231,000)
Provision for income taxes (62,000) (438,000)
---------------- ---------------
Income (loss) before minority interest 29,000 (669,000)
Minority interest in ValueClick Japan - (132,000)
---------------- ---------------
Net income (loss) $ 29,000 $ (801,000)
---------------- ---------------
---------------- ---------------
Weighted average shares outstanding 9,919,000 13,614,000
---------------- ---------------
---------------- ---------------
Basic and diluted net loss per share $ - $ (0.06)
---------------- ---------------
---------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 29,000 $ (801,000)
Other comprehensive loss:
Foreign currency translation adjustment - (23,000)
Unrealized loss on DoubleClick stock - (10,309,000)
---------------- ---------------
Comprehensive income (loss) $ 29,000 $ (11,133,000)
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
- 4 -
<PAGE>
VALUECLICK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1999 2000
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 29,000 $ (801,000)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 34,000 313,000
Provision for doubtful accounts 106,000 216,000
Stock-based compensation 33,000 1,297,000
Minority interest in ValueClick Japan - 133,000
Benefit for deferred taxes (29,000) (40,000)
Changes in operating assets and liabilities:
Accounts receivable (833,000) (971,000)
Receivable from ValueClick Japan 2,000 -
Prepaid expenses and other assets 25,000 (1,443,000)
Accounts payable and accrued liabilities (49,000) (511,000)
Income taxes payable 91,000 478,000
Deferred revenue 25,000 (42,000)
----------------- ---------------
Net cash used in operating activities (566,000) (1,371,000)
----------------- ---------------
Cash flows from investing activities:
Investment in ValueClick Japan (221,000) -
Purchases of property and equipment (137,000) (222,000)
----------------- ---------------
Net cash used in investing activities (358,000) (222,000)
----------------- ---------------
Cash flows from financing activities:
Proceeds from the DoubleClick transaction - 10,000,000
Repayments on short-term debt (200,000) -
Repayments on note payable - (3,000)
Net proceeds from issuance of Series C preferred stock 3,448,000 -
Exercises of common stock options - 247,000
----------------- ---------------
Net cash provided by financing activities 3,248,000 10,244,000
----------------- ---------------
Effect of currency translations - (23,000)
----------------- ---------------
Net increase in cash and cash equivalents 2,324,000 8,628,000
Cash and cash equivalents, beginning of period 262,000 2,129,000
----------------- ---------------
Cash and cash equivalents, end of period $ 2,586,000 $ 10,757,000
----------------- ---------------
----------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,000 $ 1,000
----------------- ---------------
----------------- ---------------
Cash paid for income taxes $ - $ 900,000
----------------- ---------------
----------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Issuance of common stock for DoubleClick common stock $ - $ 85,796,000
----------------- ---------------
----------------- ---------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
- 5 -
<PAGE>
VALUECLICK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION.
The consolidated financial statements are unaudited and, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) that are necessary for a fair presentation of the
results for the periods shown. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year
or for any future period. These consolidated financial statements should be
read in conjunction with the consolidated financial statements as of December
31, 1999 and related notes included in the Company's prospectus related to
its initial public offering filed with the Securities and Exchange Commission
(the "SEC") on March 30, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
2. DOUBLECLICK INVESTMENT.
On February 28, 2000, the Company consummated an investment by
DoubleClick under a common stock and warrant purchase agreement (the
"Agreement") entered into on January 11, 2000 whereby DoubleClick acquired
7,878,562 shares of the Company's common stock for an estimated purchase
price of $12.16 per share to be paid in cash of $10.0 million and 732,860
shares of DoubleClick common stock. The shares of DoubleClick common stock
were valued at approximately $85.8 million for accounting purposes based on
an average price of $117.07 per share for the public announcement date of
January 13, 2000 and the 5 trading days before and 5 trading days thereafter.
Under the Agreement, the Company also issued a warrant to DoubleClick to
acquire additional shares of the Company's common stock at $21.76 per share
payable in DoubleClick common stock which is exercisable for that number of
shares that would result in DoubleClick owning 45% of the Company's
outstanding common stock on a fully diluted basis. The warrant will be
exercisable for the 15 month period commencing on February 28, 2000.
The Company has accounted for the investment in DoubleClick common
stock as an available for sale investment in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No.
115 "Accounting For Certain Investments in Debt and Equity Securities,"
whereby the investment will be carried at market value with unrealized
holding gains and losses from increases and decreases in market value being
recorded as a separate component of stockholders' equity until realized.
3. ACCOUNTS RECEIVABLE.
Accounts receivable are stated net of an allowance for doubtful
accounts of $644,000 and $860,000 at December 31, 1999 and March 31, 2000,
respectively.
- 6 -
<PAGE>
4. PROPERTY AND EQUIPMENT.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---------------- ---------------
<S> <C> <C>
Computer equipment and purchased software $ 928,000 $ 1,150,000
Furniture and equipment 110,000 110,000
Leasehold improvements 28,000 28,000
---------------- ---------------
1,066,000 1,288,000
Less: accumulated depreciation and amortization (154,000) (244,000)
---------------- ---------------
$ 912,000 $ 1,044,000
---------------- ---------------
---------------- ---------------
</TABLE>
5. INTANGIBLES.
Intangible assets are comprised of goodwill which represents the
excess of the cost of the acquired business over the net assets acquired and
is being amortized on a straight-line basis over 5 years. Goodwill is stated
net of accumulated amortization of $351,000 and $561,000 at December 31, 1999
and March 31, 2000, respectively.
The carrying amounts of intangible assets are reviewed if the facts
and circumstances indicate potential impairment of their carrying value. If
this review indicates that intangible assets are not recoverable, as
determined based on the undiscounted cash flows of the entity acquired over
the remaining amortization period, the Company's carrying values related to
the intangible assets are reduced to the fair value of the assets.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES.
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
--------------- -------------
S> <C> <C>
Accounts payable $ 1,952,000 $ 1,049,000
Accrued payments to third-party web sites 684,000 640,000
Other accruals 1,668,000 2,573,000
--------------- -------------
$ 4,304,000 $ 4,262,000
--------------- -------------
--------------- -------------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES.
The Company is not currently a party to any material legal
proceedings.
- 7 -
<PAGE>
8. STOCKHOLDERS' EQUITY.
INITIAL PUBLIC OFFERING
On March 30, 2000 the Company completed its initial public offering
in which the Company sold 4,000,000 shares of its Common Stock at $19.00 per
share. The initial public offering closed on April 5, 2000. The proceeds to
the Company from the offering, after deducting underwriting discounts and
commissions, were $70,680,000. Upon the closing of the offering, all of the
Company's then outstanding Preferred Stock automatically converted into
Common Stock on a one-for-one basis. After the offering, the Company's
authorized capital consists of 120,000,000 shares of capital stock
(100,000,000 shares of Common Stock at a par value of $0.001 per share and
20,000,000 shares of Preferred Stock at a par value of $0.001 per share) of
which 27,963,511 shares of Common Stock were outstanding at March 31, 2000.
STOCK OPTION ISSUANCES
From January 1, 2000 through March 31, 2000, the Company granted
stock options to purchase 487,000 shares of common stock at an exercise price
of $11.00 per share. In connection with these grants, the Company recorded an
additional deferred compensation amount of $3,897,000 during the first
quarter of 2000.
STOCK SPLIT
On March 29, 2000, the Board of Directors approved a one-for-two
reverse stock split of the outstanding shares of common stock. All shares and
per share information included in these consolidated financial statements
have been retroactively adjusted to reflect this reverse stock split.
9. SEGMENTS, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS.
The Company operates in one industry segment, the internet
advertising business and as such has no other separate reportable segments.
The Company's operations are domiciled in the United States with
operations in Japan through its majority owned subsidiary, ValueClick Japan
and with operations in Europe through its wholly owned subsidiary, ValueClick
Europe. The Company's geographic information is as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31, 2000
-----------------------------------------
Long-Lived
Income (loss) Assets at
Revenues from Operations March 31, 2000
------------------- ------------------ -----------------------
<S> <C> <C> <C>
United States $ 9,016,000 $(488,000) $ 4,494,000
Japan 1,896,000 287,000 236,000
Europe 88,000 (73,000) 17,000
------------------- ------------------ -----------------------
Total $ 11,000,000 $(274,000) $ 4,747,000
------------------- ------------------ -----------------------
------------------- ------------------ -----------------------
</TABLE>
- 8 -
<PAGE>
There were no significant foreign operations prior to the
acquisition of majority control of ValueClick Japan in August of 1999.
For the three months ended March 31, 2000, no customer comprised
greater than 10% of revenues.
- 9 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This Report contains forward-looking statements based on our current
expectations, estimates and projections about our industry, management's
beliefs, and certain assumptions made by us. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will"
and variations of these words or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially and adversely
from those expressed in any forward-looking statements as a result of various
factors. The section entitled "Risk Factors" set forth in this Form 10-Q and
similar discussions in our prospectus filed with the SEC on March 31, 2000 and
in our other SEC filings, discuss some of the important risk factors that may
affect our business, results of operations and financial condition. You should
carefully consider those risks, in addition to the other information in this
Report and in our other filings with the SEC, before deciding to invest in our
company or to maintain or increase your investment. We undertake no obligation
to revise or update publicly any forward-looking statements for any reason. The
information contained in this Form 10-Q is not a complete description of our
business or the risks associated with an investment in our common stock. We urge
you to carefully review and consider the various disclosures made by us in this
Report and in our other reports filed with the SEC that discuss our business in
greater detail and advise interested parties of certain risks, uncertainties and
other factors that may affect our business, results of operations or financial
condition.
OVERVIEW
ValueClick, Inc. ("ValueClick" or the "Company") focuses on a
performance-based Internet advertising solution, known as cost-per-click or
CPC, in which an advertiser only pays us, and we in turn only pay a Web
publisher, when an Internet user clicks on an advertiser's banner
advertisement. We provide our advertising customers, primarily e-commerce and
direct marketing companies, an Internet advertising alternative to the
cost-per-thousand-impressions, or CPM, model, in which advertisers pay
whenever their banner ads are displayed. Our solution provides publishers of
over 12,400 small- to medium-sized Web sites the opportunity to generate
advertising revenues. We also provide publishers of large Web sites the
ability to capture incremental revenues from their unsold advertising
inventory.
Our Internet advertising business began in July 1997, as a line of
business within Web-Ignite Corporation. In May 1998, the Internet advertising
business of Web-Ignite was transferred to ValueClick, LLC, a newly-formed
California limited liability company controlled by Web-Ignite's sole
stockholder. On December 31, 1998, ValueClick, LLC reorganized as ValueClick,
Inc., a Delaware corporation.
We generate revenues by delivering banner advertisements to Web
sites in the ValueClick network. Pricing of our advertising is on a
cost-per-click basis and varies depending on whether advertising is delivered
across our entire network or across targeted categories within our network.
At this time, over 95% of our revenues are derived from banner advertising
delivered across our entire network. We sell our services through our sales
and marketing staff located in Carpinteria, California; New York, New York;
Tokyo, Japan and London, England. The advertisements we deliver are sold
under short-term agreements that are subject to cancellation. Revenues are
recognized in the month that clicks on delivered banner advertisements occur,
provided that no significant obligations on our part remain and collection of
the related receivable is probable. To date, our agreements have not required
a guaranteed minimum number of clicks. We pay each Web site in the ValueClick
network a price-per-click, which is based upon the volume of clicks delivered
by the Web site in a given month. These payments made to Web publishers are
included in the cost of revenues. Our agreements with Web publishers are also
subject to cancellation.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH
31, 1999
REVENUES
Our revenues are derived primarily from the sale of clicks on banner
advertisements delivered through the ValueClick network. We charge each
advertiser an amount based on the number of times users click on the
advertiser's banner ad. Net revenues for the three months ended March 31,
2000 were $11.0 million compared to $2.0 million for the same period in 1999,
an increase of $9.0 million or 450%. Revenue growth for the 2000 period was
attributable primarily to growth in the ValueClick network and our ability to
serve a larger advertiser customer base.
- 10 -
<PAGE>
COST OF REVENUES
Cost of revenues consists primarily of amounts we pay to Web sites
on the ValueClick network. We pay these Web sites on a cost-per-click basis.
Cost of revenues also includes depreciation costs of the advertising delivery
system and Internet access costs. Cost of revenues was $5.5 million for the
three months ended March 31, 2000 compared to $1.1 million for the same
period in 1999, an increase of $4.4 million or 400%. The increase in cost of
revenues was directly attributable to the increased delivery of banner
advertisements and clicks on banner advertisements. Gross profit margin
increased to 50% in the first quarter of 2000 from 45% in 1999, which was due
primarily to an increase in the sales price per click as a result of improved
market conditions.
SALES AND MARKETING
Sales and marketing expenses consist primarily of compensation
(including commissions), travel, advertising, trade show costs and costs of
marketing materials. Sales and marketing expenses for the three months ended
March 31, 2000 were $1.9 million compared to $257,000 for the same period in
1999, an increase of $1.6 million or 623%. The increase in sales and
marketing expenses was due primarily to the addition of sales and marketing
personnel and to increased advertising, public relations and other sales and
marketing activities.
We expect sales and marketing expenses to continue to increase in
future periods as we hire additional personnel in sales and marketing, open
additional sales offices in major domestic markets, expand into international
markets and continue to promote our advertising solutions.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of
compensation and professional service fees. General and administrative
expenses for the three months ended March 31, 2000 were $1.5 million compared
to $342,000 for the same period in 1999, an increase of $1.2 million or 351%.
The increase in general and administrative expenses was due primarily to the
addition of executive and administrative employees over this period. In
addition, we increased our allowance for doubtful accounts by $216,000 as a
result of the significant growth in our revenue and accounts receivable and
our limited historical collection experience.
We also have incurred related expenses associated with hiring
additional personnel, expanding our corporate offices to accommodate our
increased personnel and other professional service expenses that were not
incurred in the 1999 period.
We expect general and administrative expenses to increase in future
periods as we hire additional personnel and incur additional costs related to
the growth of our business and our operations as a public company.
PRODUCT DEVELOPMENT
Product development costs include expenses for the development of
new technologies designed to enhance the performance of our service,
including the salaries and related expenses for our software engineering
department, as well as costs for contracted services and supplies. To date,
all product
- 11 -
<PAGE>
development costs have been expensed as incurred. Product development
expenses for the three months ended March 31, 2000 were $794,000 compared to
$108,000 for the same period in 1999, an increase of $686,000 or 635%. The
increase was due primarily to the hiring of additional engineers and support
personnel. We believe that continued investment in product development is
critical to attaining our strategic objectives and, as a result, we expect
product development expenses to increase in future periods.
STOCK-BASED COMPENSATION
During the first quarter of 2000, we granted stock options to
purchase 487,000 shares of common stock at an exercise price of $11.00 per
share. In connection with these grants, we recorded deferred compensation
expense of $3,897,000. This amount reflects the difference between the deemed
fair value of our common stock for financial accounting purposes and the
exercise price of these options on the date of grant. Stock-based
compensation for the three months ended March 31, 2000 amounted to $1.3
million, which includes the amount related to existing deferred compensation
recorded in prior periods for stock options and restricted shares. The
additional annual amortization for this deferred compensation amount is
estimated to be approximately $1,576,000 for fiscal year 2000, $1,268,000 for
2001, $688,000 for 2002, $312,000 for 2003, and $53,000 for 2004.
AMORTIZATION OF INTANGIBLES AND ACQUIRED SOFTWARE
Amortization of intangibles and acquired software represents
principally the amortization of acquired software purchased from a founding
stockholder in May 1998 and amortization of goodwill created as a result of
the acquisition of a majority interest in ValueClick Japan in August 1999.
MINORITY INTEREST IN VALUECLICK JAPAN
Minority interest in ValueClick Japan was $132,000 for the three
months ended March 31, 2000. We account for our interest in ValueClick Japan
on a consolidated basis for financial reporting purposes, resulting in
minority interest in the net income of ValueClick Japan.
INTEREST INCOME, NET
Interest income, net principally consists of interest earned on our
cash and cash equivalents and is net of interest paid on debt obligations.
Interest income was $43,000 for the three months ended March 31, 2000 and
$5,000 for the same period in 1999.
PROVISION FOR INCOME TAXES
For the three months ended March 31, 2000, our provision for Federal
and state income taxes amounted to $438,000, compared to $62,000 for the same
period in 1999.
- 12 -
<PAGE>
SEGMENT AND GEOGRAPHIC INFORMATION
ValueClick operates in one industry segment and has no other
separate reportable segments.
Our operations are domiciled in the United States with operations in
Japan through our majority-owned subsidiary, ValueClick Japan, with
operations in Europe through our wholly owned subsidiary, ValueClick Europe.
Our geographic information is as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31, 2000
-------------------------------------------
Long-Lived
Income (loss) Assets at
Revenues from Operations March 31, 2000
--------------------- ------------------ -----------------------
<S> <C> <C> <C>
United States $ 9,016,000 $ (488,000) $ 4,494,000
Japan 1,896,000 287,000 236,000
Europe 88,000 (73,000) 17,000
--------------------- ------------------ -----------------------
Total $11,000,000 $ (274,000) $ 4,747,000
--------------------- ------------------ -----------------------
--------------------- ------------------ -----------------------
</TABLE>
There were no significant foreign operations prior to the
acquisition of majority control of ValueClick Japan in August of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through working
capital generated from operations and equity financings. Net cash used in
operating activities was $1.4 million for the quarter ended March 31, 2000,
which resulted principally from an increase in accounts receivable and
prepaid expenses, partially offset by cash generated from operations.
At March 31, 2000, we had no material commitments for capital
expenditures.
Net cash provided by financing activities was $10.2 million for the
quarter ended March 31, 2000 which resulted principally from proceeds
received from the DoubleClick transaction.
On October 21, 1999, we executed a loan and security agreement with
Silicon Valley Bank for a $2.5 million revolving credit line to be used for
general working capital. Interest on the outstanding balances accrues at an
annual rate of one percentage point above the bank's prime rate. As of March
31, 2000, the bank's prime rate was 9.00%. We are also required to pay the
bank on a quarterly basis an unused line fee on the unused portion of the
line of credit at an annual rate of half a percent. The credit facility
contains provisions requiring us to maintain certain financial ratios and
restricts our ability to execute certain transactions including transfers of
our business property, mergers, borrowings, dividends and transactions with
affiliates.
The credit facility expires on and all outstanding balances are due
on the first anniversary of the agreement. In exchange for the credit
facility, we granted the bank a first priority security interest in our goods
and equipment, inventory, accounts receivables and intellectual property. As
of March 31, 2000, we have not borrowed against this credit line.
- 13 -
<PAGE>
Net cash used in investing activities for the quarter ended March
31, 2000 was $222,000 representing purchases of property and equipment.
We received $10,000,000 in cash and 732,860 shares of DoubleClick
common stock on February 28, 2000, upon the closing of the investment by
DoubleClick in ValueClick. In connection with this transaction, we obtained
the right to require DoubleClick to register these shares with the SEC and
list them with the Nasdaq National Market in order that we may sell some or
all of these shares. In addition, we have the right to include these shares
in any registration of DoubleClick stock with the SEC, either on behalf of
DoubleClick or for other DoubleClick stockholders, subject to certain
exceptions. In April 2000, all of the DoubleClick shares that we own were
registered for sale by DoubleClick in a registration statement that is
effective through June 11, 2000. We plan to liquidate our holdings of
DoubleClick stock in order to raise additional capital for our capital needs.
We account for the investment in DoubleClick common stock as an available for
sale investment in accordance with Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 115, "Accounting For Certain
Investments in Debt and Equity Securities," whereby the investment will be
carried at market value with unrealized holding gains and losses from
increases and decreases in market value recorded as a separate component of
stockholders' equity until realized. DoubleClick's stock price will likely be
volatile, and we cannot predict the value we will ultimately realize from our
DoubleClick shares.
We believe that our existing cash and cash equivalents, our
available bank credit and the proceeds from our initial public offering will
be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Accounting Standards Executive Committee issued
Statement of Accounting Standards No. 133, or SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding
gains and losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging
relationship that exists. SFAS 133 will be effective for fiscal years
beginning after June 15, 2000. We do not currently hold derivative
instruments or engage in hedging activities. Accordingly, management believes
the adoption of this statement will not have a significant impact on our
financial position, results of operations or cash flows.
RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN
ADDITION TO THE OTHER INFORMATION IN THIS REPORT AND OUR OTHER FILINGS WITH
THE SEC, INCLUDING OUR PROSPECTUS FILED WITH THE SEC ON MARCH 31, 2000. THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT
WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN SUCH CASE, THE
MARKET PRICE FOR OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART
OF YOUR INVESTMENT.
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IF BANNER ADVERTISING ON THE INTERNET LOSES ITS APPEAL TO DIRECT MARKETING
COMPANIES, OUR REVENUES COULD DECLINE.
We currently derive over 99% of our revenues by delivering banner
advertisements that generate clicks to our advertisers' Web sites. This business
model may not continue to be effective in the future for a number of reasons,
including the following:
- click rates have always been low and may decline as the number of
banner advertisements on the Web increases;
- Internet users can install "filter" software programs which allow
them to prevent banner advertisements from appearing on their screens;
- banner advertisements are, by their nature, limited in content
relative to other media;
- direct marketing companies may be reluctant or slow to adopt
banner advertising that replaces, limits or competes with their
existing direct marketing efforts; and
- direct marketing companies may prefer other forms of Internet
advertising, including permission-based e-mail.
If the number of direct marketing companies who purchase banner
clicks from us does not continue to grow, we may experience difficulty in
attracting publishers, and our revenues could decline.
IF OUR BUSINESS MODEL IS NOT ACCEPTED BY INTERNET ADVERTISERS OR WEB PUBLISHERS,
OUR REVENUES COULD DECLINE.
We conduct all of our business on a cost-per-click or CPC pricing
model. This business model is relatively new and much less common than the
cost-per-thousand impressions or CPM pricing model, which many other Internet
advertising companies use. Our ability to generate significant revenue from
advertisers will depend, in part, on our ability to demonstrate the
effectiveness of our CPC pricing model to Internet advertisers, many of which
may be more accustomed to the CPM pricing model, and to Web publishers; and
attract and retain advertisers and Web publishers by differentiating our
technology and services from those of our competitors.
One component of our strategy is to enhance advertisers' ability to
measure their return on investment and track the performance and
effectiveness of their advertising campaigns. However, we have limited
experience in implementing our strategy. To date, few advertisers have taken
advantage of the most sophisticated tool we offer for tracking Internet
users' activities after they have reached advertisers' Web sites. We cannot
assure you that our strategy will succeed.
Intense competition among Web sites and Internet advertising
services has led to the proliferation of a number of alternative pricing
models for Internet advertising. These alternatives, and the likelihood that
additional pricing alternatives will be introduced, make it difficult for us
to project the levels of advertising revenue or the margins that we, or the
Internet advertising industry in general, will realize in the future.
Moreover, an increase in the amount of advertising on the Web may result in a
decline in click rates. Since we predominantly rely on a performance-based
pricing model to generate revenue, any decline in click rates may make our
CPC pricing model a less viable or less attractive solution for Web
publishers and advertisers.
OUR REVENUES COULD DECLINE IF WE FAIL TO EFFECTIVELY MANAGE OUR EXISTING
ADVERTISING SPACE AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW
ADVERTISING SPACE.
Our success depends in part on our ability to effectively manage our
existing advertising space. The Web sites that list their unsold advertising
space with us are not bound by long-term contracts that ensure us a consistent
supply of advertising space, which we refer to as inventory. In addition, Web
sites can change the amount of inventory they make available to us at any time.
If a Web site publisher decides not to make advertising space from its Web sites
available to us, we may not be able to replace this advertising space with
advertising space from other Web sites that have comparable traffic patterns and
user demographics quickly enough to fulfill our advertisers' requests. This
could result in lost revenues. We expect that our customers' requirements will
become more sophisticated as the Web matures as an advertising medium. If we
fail to manage our existing advertising space effectively in order to meet our
customers' changing requirements, our revenues could decline.
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Our growth depends on our ability to expand our advertising
inventory. In order to attract new customers, we must maintain a consistent
supply of attractive advertising space. We intend to expand our advertising
inventory by selectively adding to our network new Web sites that offer
attractive demographics, innovative and quality content and growing Web user
traffic. Our ability to attract new Web sites to the ValueClick network and
to retain Web sites currently in our network will depend on various factors,
some of which are beyond our control. These factors include our ability to
introduce new and innovative product lines and services, our ability to
efficiently manage our existing advertising inventory, our pricing policies
and the cost-efficiency to Web publishers of outsourcing their advertising
sales. In addition, the number of competing Internet advertising networks
that purchase advertising inventory from small- to medium-sized Web sites
continues to increase. We cannot assure you that the size of our inventory
will increase or even remain constant in the future.
WE MAY FACE INTELLECTUAL PROPERTY DISPUTES THAT ARE COSTLY OR COULD HINDER OR
PREVENT OUR ABILITY TO DELIVER ADVERTISEMENTS OVER THE INTERNET.
We may be subject to disputes and legal actions alleging
intellectual property infringement, unfair competition or similar claims
against us. One of our principal competitors, DoubleClick, was recently
awarded a patent on certain aspects of ad-delivery technology, including the
ability to target the delivery of ads over a network such as the Internet and
the ability to compile statistics on individual Web users and the use of
those statistics to target ads. DoubleClick has brought a lawsuit against at
least two other companies in our industry on the basis of this patent. We
have, however, recently agreed with DoubleClick to enter into an agreement
which would enable us to use its DART technology, and DoubleClick has agreed
to not sue or threaten to sue us or any of our customers, affiliates or
licensees, in connection with its patent, so long as DoubleClick or any of
its subsidiaries hold at least five percent of our capital stock, including
options to purchase common stock, on a fully diluted basis. We cannot assure
you, however, that we will be able to enter into a DART services agreement on
mutually acceptable terms. In addition, other companies may apply for or be
awarded patents or have other intellectual property rights covering aspects
of our technology or business. In May 2000, 24/7 Media filed a patent
infringement suit against DoubleClick, which alleges that DoubleClick
infringes, and is inducing and contributing to the infringement of, a patent
owned by 24/7 Media. Our failure to prevail in any litigation with any party
asserting intellectual property infringement could result in substantial
monetary damages, including: damages for past infringement, which could be
tripled if a court determines that the infringement was willful; an
injunction requiring us to stop offering our services in their current form;
the need to redesign our systems; or the need to pay significant license fees
in order to use technology belonging to third parties.
IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES, WE COULD LOSE
CUSTOMERS OR ADVERTISING INVENTORY.
The Internet advertising market is characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing customer demands. The introduction of new products
and services embodying new technologies and the emergence of new industry
standards and practices can render existing products and services obsolete
and unmarketable or require unanticipated investments in research and
development. Our success will depend on our ability to adapt to rapidly
changing technologies, to enhance existing solutions and to develop and
introduce a variety of new solutions to address our customers' changing
demands.
For example, advertisers are increasingly requiring Internet
advertising networks to have the ability to deliver advertisements utilizing
new formats that surpass stationary images and incorporate rich media, such
as video and
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audio, interactivity, and more precise consumer targeting techniques. Our
system does not support some types of advertising formats, such as video and
audio, and many of the Web sites in our network have not implemented systems
to allow rich media advertisements. In addition, an increase in the bandwidth
of Internet access resulting in faster data delivery may provide new products
and services that will take advantage of this expansion in delivery
capability. If we fail to adapt successfully to developments such as these,
we could lose customers or advertising inventory.
We purchase most of the software we use in our business from third
parties. We intend to continue to acquire technology necessary for us to
conduct our business from third parties. We cannot assure you that, in the
future, these technologies will be available on commercially reasonable
terms, or at all.
We may also experience difficulties that could delay or prevent the
successful design, development, introduction or marketing of new solutions.
Any new solution or enhancement we develop will need to meet the requirements
of our current and prospective customers and may not achieve significant
market acceptance. If we fail to keep pace with technological developments
and the introduction of new industry and technology standards on a
cost-effective basis, our expenses could increase, and we could lose
customers or advertising inventory.
IF THE USE OF THE TECHNOLOGY WE CURRENTLY USE TO TARGET THE DELIVERY OF
BANNERS AND TO PREVENT FRAUD ON OUR NETWORK IS RESTRICTED OR BECOMES SUBJECT
TO REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERS OR
ADVERTISING INVENTORY.
Web sites typically place small files of information, commonly known
as "cookies," on an Internet user's hard drive, generally without the user's
knowledge or consent. Cookie information is passed to the Web site through
the Internet user's browser software. We currently use cookies to track an
Internet user's movement through the advertiser's Web site and to monitor and
prevent potentially fraudulent activity on our network. We do not share,
collect or sell any other information concerning Internet users. Most
currently available Internet browsers allow Internet users to modify their
browser settings to prevent cookies from being stored on their hard drive,
and some users currently do so. Internet users can also delete cookies from
their hard drives at any time.
Some Internet commentators and privacy advocates have suggested
limiting or eliminating the use of cookies and legislation has been
introduced that would restrict their use. The effectiveness of our technology
could be limited by any reduction or limitation in the use of cookies. If the
use or effectiveness of cookies is limited, we would have to switch to other
technologies in order to gather demographic and behavioral information. While
such technologies currently exist, they are substantially less effective than
cookies. We would also have to develop or acquire other technology to prevent
fraud. Replacement of cookies could require significant reengineering time
and resources, might not be completed in time to avoid losing customers or
advertising inventory, and might not be commercially feasible. Our use of
cookie technology or any other technologies designed to collect Internet
usage information may subject us to litigation or investigations in the
future. Any litigation or government action against us could be costly and
time-consuming, could require us to change our business practices and could
divert management's attention.
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CHANGES IN LAWS AND STANDARDS RELATING TO DATA COLLECTION AND USE PRACTICES
AND THE PRIVACY OF INTERNET USERS AND OTHER INDIVIDUALS COULD HARM OUR
BUSINESS.
Recently, growing public concern regarding privacy and the
collection, distribution and use of information about Internet users has led
to increased federal and state scrutiny and legislative and regulatory
activity concerning data collection and use practices. Various federal and
state governments and agencies have recently proposed limitations on the
collection and use of information regarding Internet users. In October 1998,
the European Union adopted a directive that limits the collection and use of
information regarding Internet users in Europe. In addition to government
activity, a number of industry and privacy advocacy groups are considering
various new, additional or different self-regulatory standards. This focus,
and any legislation, regulations or standards promulgated, may impact us
adversely.
Although our compliance with applicable federal and state laws,
regulations and industry guidelines has not had a material adverse effect on
us, governments, trade associations and industry self-regulatory groups may
enact more burdensome laws, regulations and guidelines, including consumer
privacy laws, affecting us and our clients. Since many of the proposed laws
or regulations are just being developed, and a consensus on privacy and data
usage has not been reached, we cannot yet determine the impact these
regulations may have on our business. However, these regulations and
guidelines could materially and adversely affect our business.
INCREASED GOVERNMENT REGULATION COULD DECREASE DEMAND FOR OUR SERVICES AND
INCREASE OUR COSTS OF DOING BUSINESS.
Laws and regulations that apply to Internet communications, commerce
and advertising are becoming more prevalent. These regulations could affect
the costs of communicating on the Web and adversely affect the demand for our
advertising solutions or otherwise harm our business, results of operations
and financial condition. Recently, the United States Congress enacted
Internet legislation regarding children's privacy, copyrights and taxation.
Other laws and regulations may be adopted, and may address issues such as
user privacy, pricing, acceptable content, taxation and quality of products
and services. This legislation could hinder growth in the use of the Web
generally and decrease the acceptance of the Web as a communications,
commercial and advertising medium. In addition, the growing use of the Web
has burdened the existing telecommunications infrastructure and has, at
times, caused interruptions in telephone service. Telephone carriers have
petitioned the government to regulate and impose fees on ISPs and online
service providers in a manner similar to long distance carriers.
Due to the global nature of the Web, it is possible that, although
our transmissions currently originate in California, Florida and Japan, the
governments of other states or foreign countries might attempt to regulate
our transmissions or levy sales or other taxes relating to our activities.
The laws governing the Internet remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine
whether and how existing laws, including those governing intellectual
property, privacy, libel and taxation, apply to the Internet and Internet
advertising. In addition, the growth and development of the market for
Internet commerce may prompt calls for more stringent consumer protection
laws, both in the United States and abroad,
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that may impose additional burdens on companies conducting business over the
Internet. Our business, results of operations and financial condition could
be materially and adversely affected by the adoption or modification of laws
or regulations relating to the Internet, or the application of existing laws
to the Internet or Internet-based advertising.
WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY IF WE FAIL TO MEASURE CLICKS
ON BANNER ADVERTISEMENTS IN A MANNER THAT IS ACCEPTABLE TO OUR ADVERTISERS
AND WEB PUBLISHERS.
We earn advertising revenues and make payments to Web publishers
based on the number of clicks on advertisements delivered on our network.
Advertisers' and Web publishers' willingness to use our services and join our
network will depend on the extent to which they perceive our measurements of
clicks to be accurate and reliable. Advertisers and Web publishers often
maintain their own technologies and methodologies for counting clicks, and
from time to time we have had to resolve differences between our measurements
and theirs. Any significant dispute over the proper measurement of clicks or
other user responses to advertisements could cause us to lose customers or
advertising inventory.
IF WE FAIL TO COMPETE EFFECTIVELY AGAINST OTHER INTERNET ADVERTISING
COMPANIES, WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY AND OUR REVENUES
COULD DECLINE.
The market for Internet advertising and related services is
intensely competitive. We expect this competition to continue to increase
because there are no significant barriers to entry. Increased competition may
result in price reductions for advertising space, reduced margins and loss of
our market share.
Our principal competitors are other companies that provide
advertisers with performance-based Internet advertising solutions, such as
cost-per-click, or CPC; cost-per-lead, or CPL and cost-per-action, or CPA. We
directly compete with a number of competitors in the CPC market segment, such
as Flycast, Advertising.com, eAds, Datacomm, and ClickAgents. We also compete
in the performance-based marketing segment with CPL and CPA performance-based
companies such as DirectLeads and CommissionJunction. We also compete with
other Internet advertising networks that focus on the traditional CPM model,
including DoubleClick, 24/7 Media and Flycast. Unlike us, these companies
primarily deal with publishers of large Web sites and advertisers seeking
increased brand recognition. These companies have longer operating histories,
greater name recognition and have greater financial and marketing resources
than we do. DoubleClick recently agreed to acquire a substantial percentage
of our company.
Competition for advertising placements among current and future
suppliers of Internet navigational and informational services, high-traffic
Web sites and ISPs, as well as competition with other media for advertising
placements, could result in significant price competition and reductions in
advertising revenues. In addition, as we expand the scope of our Web
services, we may compete with a greater number of Web publishers and other
media companies across an increasing range of different Web services,
including in vertical markets where competitors may have advantages in
expertise, brand recognition and other areas. If existing or future
competitors
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develop or offer services that provide significant performance, price,
creative or other advantages over those offered by us, our business, result
of operations and financial condition would be negatively affected.
We also compete with traditional advertising media, such as direct
mail, television, radio, cable and print, for a share of advertisers' total
advertising budgets.
Many of our current and potential competitors enjoy competitive
advantages over us, such as longer operating histories, greater name
recognition, larger customer bases, greater access to advertising space on
high-traffic Web sites, and significantly greater financial, technical and
marketing resources. We may not be able to compete successfully. If we fail
to compete successfully, we could lose customers or advertising inventory and
our revenues could decline.
OUR REVENUE GROWTH DEPENDS ON THE CONTINUED GROWTH OF INTERNET USAGE AND
INFRASTRUCTURE.
Our business and financial results depend on continued growth in the
use of the Internet. Internet usage may be inhibited for a number of reasons,
such as: inadequate network infrastructure; security concerns; inconsistent
quality of service; and unavailability of cost-effective, high-speed service.
If Internet usage grows, its infrastructure may not be able to
support the demands placed on it and its performance and reliability may
decline. In addition, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network infrastructure, and as a result of sabotage, such as the
recent electronic attacks designed to interrupt service on many Web sites.
The Internet could lose its viability as a commercial medium due to delays in
the development or adoption of new technology required to accommodate
increased levels of Internet activity. If use of the Internet does not
continue to grow, or if the Internet infrastructure does not effectively
support its growth, our revenues could be materially and adversely affected.
OUR LONG-TERM SUCCESS MAY DEPEND ON THE DEVELOPMENT OF E-COMMERCE BECAUSE MANY
OF OUR CUSTOMERS' ADVERTISEMENTS RELATE TO ONLINE PURCHASING.
Because many of our customers' advertisements encourage online
purchasing, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business would be adversely affected if the
growth or acceptance of e-commerce does not develop, or develops more slowly
than expected. A number of factors outside of our control could hinder the
development of e-commerce, including the following: the network
infrastructure necessary for substantial growth in Internet usage may not
develop adequately or its performance and reliability may decline;
insufficient availability of telecommunication services or changes in
telecommunication services could result in inconsistent quality of service or
slower response times on the Internet; and negative publicity and consumer
concern surrounding the security of e-commerce could impede its acceptance
and growth.
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In particular, any well-publicized compromise of security involving
Web-based transactions could deter people from purchasing items on the Internet,
clicking on advertisements, or using the Internet generally, any of which could
cause us to lose customers and advertising inventory and could materially,
adversely effect our revenues.
WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HARM OUR BUSINESS.
Our future success is substantially dependent on the continued
service of our key senior management, technical and sales personnel and in
particular our Chairman and Chief Executive Officer, James R. Zarley; our
Vice Chairman, Brian Coryat; and our President and Chief Operating Officer,
Earle A. Malm II. Our employment agreements with our key personnel are
short-term and on an at-will basis. We do not have key-person insurance on
any of our employees, other than Brian Coryat, our Vice Chairman. The loss of
the services of any member of our management team, or of any other key
employees, could divert management's time and attention, increase our
expenses and adversely affect our ability to conduct our business
efficiently. Our future success also depends on our continuing ability to
attract, retain and motivate highly skilled employees. Competition for
employees in our industry is intense. We may be unable to retain our key
employees or attract, assimilate or retain other highly qualified employees
in the future. We have experienced difficulty from time to time in attracting
the personnel necessary to support the growth of our business, and we may
experience similar difficulties in the future.
DOUBLECLICK WILL HAVE SIGNIFICANT INFLUENCE OVER OUR BUSINESS, AND IT MAY
HAVE INTERESTS THAT ARE DIFFERENT FROM, OR IN ADDITION TO, YOURS.
DoubleClick, which is one of our competitors, owns approximately
28.2% of our outstanding common stock. In connection with its investment in
our company, DoubleClick has received a warrant entitling it to increase its
ownership of our common stock, at any time prior to May 28, 2001, to 45% on a
fully diluted basis, which assumes that all outstanding options, warrants and
convertible securities have been exercised or converted into common stock.
DoubleClick also has the right to maintain its percentage ownership if we
issue new securities, other than in a public offering or under other
specified exceptions, until February 28, 2003.
As a result of its share ownership, board representation and other
rights, DoubleClick will be able to exert substantial influence over our
management and affairs. DoubleClick may have interests that are different
from, or in addition to, your interests. Because we have agreed to enter into
an agreement to use DoubleClick's DART services in our business and have
generally agreed to use DoubleClick rather than other providers of services
similar to those that DoubleClick makes available, and because we may have
additional commercial relationships with DoubleClick in the future, conflicts
of interest could arise with respect to the nature, quality and pricing of
services that DoubleClick provides to us.
DoubleClick has designated two members of our board of directors. In
addition, the holders of 31.1% of our outstanding common stock have agreed to
vote their shares in favor of a specified number of DoubleClick's nominees to
our board of directors, depending on DoubleClick's percentage ownership of
our common stock. If DoubleClick exercises its warrant in full, these
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stockholders have agreed to vote in favor of three DoubleClick nominees.
Because DoubleClick provides Internet advertising services that compete with
ours, conflicts of interest could arise for DoubleClick's representatives on
our board of directors. We have not implemented specific policies with
respect to these potential conflicts of interest, which could be resolved in
a manner adverse to us.
DOUBLECLICK MAY BE ABLE TO CAUSE A SALE OF OUR COMPANY, EVEN IF IT IS NOT
FAVORED BY OUR STOCKHOLDERS, OR PREVENT A TAKEOVER OF OUR COMPANY EVEN IF
SUCH A TRANSACTION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
As long as DoubleClick continues to own 10% of our common stock on a
fully diluted basis, we must obtain DoubleClick's consent before we take
specified actions such as issuing securities to any company that competes
with DoubleClick and implementing any anti-takeover provision. DoubleClick
has agreed to standstill provisions under which it would not acquire more
than 45% ownership of ValueClick on a fully diluted basis for three years,
but after that time it may acquire additional shares of our common stock.
These standstill provisions would terminate upon the announcement or
commencement of a tender or exchange offer to acquire shares of our common
stock which would result in the offeror owning 50% or more of our common
stock. Due to Doubleclick's ownership and contractual rights, we may be
unable to prevent a sale of our company that DoubleClick favors, even if it
is not favored by our other stockholders, and it may be difficult for our
stockholders to receive a control premium in any sale of our company.
DoubleClick may be able to prevent or impede a change of control
transaction that our other stockholders favor. DoubleClick is our largest
stockholder and as long as it owns 10% of our common stock on a fully diluted
basis, it will have the right to receive prior notice of, and will have the
opportunity to respond to, a proposed sale of our company or an unsolicited
offer to buy our company. These rights may discourage third-party offers for
our company.
SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, WHICH COULD CAUSE
US TO LOSE CUSTOMERS OR ADVERTISING INVENTORY.
Our success depends on the continuing and uninterrupted performance
of our systems. Sustained or repeated system failures that interrupt our
ability to provide our services to our customers, including failures
affecting our ability to deliver advertisements quickly and accurately and to
process users' responses to advertisements, would reduce significantly the
attractiveness of our solutions to advertisers and Web publishers. Our
business, results of operations and financial condition could be materially
and adversely affected by any damage or failure that interrupts or delays our
operations.
Our computer systems are vulnerable to damage from a variety of
sources, including telecommunications failures, malicious human acts and
natural disasters. We lease server space in Los Angeles, California; Boca
Raton, Florida; and Tokyo, Japan. Therefore, any of the above factors
affecting the Los Angeles, Boca Raton or Tokyo areas would substantially harm
our business. Moreover, despite network security measures, our servers are
potentially vulnerable to physical or electronic break-ins, computer viruses
and similar disruptive problems in part because
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we cannot control the maintenance and operation of our third-party data
centers. Despite the precautions we have taken, unanticipated problems
affecting our systems could cause interruptions in the delivery of our
solutions in the future. Our data storage centers incorporate redundant
systems, consisting of additional servers, but our primary system does not
switch over to our backup system automatically. Our insurance policies may
not adequately compensate us for any losses that may occur due to any
failures in our systems.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS THAT COULD REDUCE OUR REVENUES.
Our future success depends in part on the efficient performance of
our software and technology, as well as the efficient performance of the
systems of third parties. As the numbers of Web pages and Internet users
increase, our services and infrastructure may not be able to grow to meet the
demand. A sudden and unexpected increase in the volume of advertising
delivered through our servers or in click rates could strain the capacity of
the software or hardware that we have deployed. Any capacity constraints we
experience could lead to slower response times or system failures and
adversely affect the availability of advertisements, the number of
advertising views delivered and the level of user responses received, which
would harm our revenues. To the extent that we do not effectively address
capacity constraints or system failures, our business, results of operations
and financial condition could be harmed substantially.
We also depend on the Internet service providers, or ISPs, that
provide consumers with access to the Web sites on which our customers'
advertisements appear. Internet users have occasionally experienced
difficulties connecting to the Web due to failures of their ISPs' systems.
Any disruption in Internet access provided by ISPs or failures by ISPs to
handle the higher volumes of traffic expected in the future could materially
and adversely affect our revenues.
IT MAY BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND YOUR INVESTMENT
BECAUSE WE HAVE A LIMITED OPERATING HISTORY.
Because we have a limited operating history, it may be difficult to
evaluate our business and prospects. You should consider our prospects in
light of the risks, expenses and difficulties frequently encountered by
early-stage companies in the rapidly-changing Internet market. These risks
include our ability to: maintain and increase our inventory of advertising
space on Web sites; maintain and increase the number of advertisers that use
our products and services and offer banner advertisements that generate
significant response rates; continue to expand the number of products and
services we offer and the capacity of our systems; continue to increase the
acceptance of the CPC pricing model; and adapt to changes in Web advertisers'
promotional needs and policies, and the technologies used to generate Web
advertisements.
If we are unsuccessful in addressing these risks and uncertainties,
our business, results of operations and financial condition could be
materially and adversely affected.
IT MAY BE DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE BECAUSE OUR
QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
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Our revenues and operating results may vary significantly from
quarter to quarter due to a variety of factors, many of which are beyond our
control. You should not rely on period-to-period comparisons of our results
of operations as an indication of our future performance. Our results of
operations may fall below the expectations of market analysts and investors
in some future periods. If this happens, the market price of our common stock
may fall.
The factors that may affect our quarterly operating results include:
fluctuations in demand for our advertising solutions; fluctuations in click
rates; fluctuations in the amount of available advertising space, or views,
on Web sites in the ValueClick network; the timing and amount of sales and
marketing expenses incurred to attract new advertisers; fluctuations in sales
of different types of advertising, for example, the amount of advertising
sold at higher rates rather than lower rates; changes in our pricing
policies, the pricing policies of our competitors or the pricing policies for
advertising on the Internet generally; timing differences at the end of each
quarter between our payments to Web publishers for a given set of clicks and
our collection of advertising revenue for those clicks; and costs related to
acquisitions of technology or businesses.
Expenditures by advertisers also tend to be cyclical, reflecting
overall economic conditions as well as budgeting and buying patterns. Any
decline in the economic prospects of advertisers or the economy generally may
alter current or prospective advertisers' spending priorities, or may
increase the time it takes us to close sales with advertisers, and could
materially and adversely affect our business, results of operations and
financial condition.
WE MAY EXPERIENCE SEASONAL FLUCTUATIONS IN OUR REVENUES.
We believe that our revenues will be subject to seasonal
fluctuations because advertisers generally place fewer advertisements during
the first and third calendar quarters of each year. Additional seasonal
patterns in Internet advertisers' spending may emerge as the industry matures.
OUR FUTURE REVENUES AND OPERATING RESULTS ARE DIFFICULT TO FORECAST AND MANY
OF OUR EXPENSES ARE FIXED.
Our current and future expense estimates are based, in large part,
on our estimates of future revenues and on our investment plans. In
particular, we plan to increase our operating expenses significantly in order
to expand our sales and marketing operations; enhance our technology and
software solutions; acquire additional advertising inventory; enhance our
advertising management platform; and continue our international expansion.
Most of our expenses are fixed in the short term. We may be unable
to reduce spending if our revenues are lower than expected. Any significant
shortfall in revenues in relation to our expectations could materially and
adversely affect our cash flows.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR EXPENSES COULD INCREASE AND
OUR MANAGEMENT'S TIME AND ATTENTION COULD BE DIVERTED.
As we continue to increase the scope of our operations, we will need
an effective planning and management process to implement our business plan
successfully in the rapidly evolving
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<PAGE>
Internet advertising market. Our business, results of operations and
financial condition will be substantially harmed if we are unable to manage
our expanding operations effectively. We plan to continue to expand our sales
and marketing, customer support and research and development organizations.
Past growth has placed, and any future growth will continue to place, a
significant strain on our management systems and resources. We have recently
implemented a new financial reporting system and expect that we will need to
continue to improve our financial and managerial controls and our reporting
systems and procedures. In addition, we will need to expand, train and manage
our work force. Our failure to manage our growth effectively could increase
our expenses and divert management's time and attention.
IF WE DO NOT SUCCESSFULLY DEVELOP OUR INTERNATIONAL STRATEGY, OUR REVENUES
AND CASH FLOWS AND THE GROWTH OF OUR BUSINESS COULD BE HARMED.
We initiated operations, through joint ventures, in Japan in March
1998, and in the United Kingdom in August 1999, and we expect to commence
operations in other selected international markets in 2000. Our foreign
operation subject us to foreign currency exchange risks. We currently do not
utilize hedging instruments to mitigate foreign exchange risks. Our
international expansion will subject us to additional foreign currency
exchange risks and will require management attention and resources. We expect
to pursue expansion through a number of international alliances and to rely
extensively on these business partners initially to conduct operations,
establish local networks, register Web sites as affiliates and coordinate
sales and marketing efforts. Our success in these markets will depend on the
success of our business partners and their willingness to dedicate sufficient
resources to our relationships. We cannot assure you that we will be
successful in our efforts overseas. International operations are subject to
other inherent risks, including: the impact of recessions in economies
outside the United States; changes in and differences between regulatory
requirements, domestic and foreign; export restrictions, including export
controls relating to encryption technologies; reduced protection for
intellectual property rights in some countries; potentially adverse tax
consequences; difficulties and costs of staffing and managing foreign
operations; political and economic instability; tariffs and other trade
barriers; and seasonal reductions in business activity. Our failure to
address these risks adequately could materially and adversely affect our
business, results of operations and financial condition.
WE MAY BE LIABLE FOR CONTENT DISPLAYED ON THE WEB SITES OF OUR PUBLISHERS
WHICH COULD INCREASE OUR EXPENSES.
We may be liable to third parties for content in the advertising we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
result in costly litigation or divert management's attention.
THE YEAR 2000 PROBLEM COULD CAUSE SIGNIFICANT HARM TO OUR OPERATIONS.
Prior to January 1, 2000, there was a great deal of concern
regarding the ability of computers to adequately recognize 21st century dates
from 20th century dates due to the two-digit
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<PAGE>
date fields used by many systems. To date, our computer systems are
functioning normally and our compliance and remediation efforts leading up to
2000 have been effective to prevent any problems. However, computer experts
have warned that there may still be residual consequences of the change in
centuries and any such difficulties could disrupt our ability to deliver
advertisements to our Web publishers the ability of Web users to click to our
advertisers.
DELAWARE LAW CONTAINS ANTI-TAKEOVER PROVISIONS THAT COULD DETER TAKEOVER
ATTEMPTS, EVEN IF SUCH TRANSACTIONS WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our
stockholders. Section 203 of the Delaware General Corporation Law may make
the acquisition of ValueClick and the removal of incumbent officers and
directors more difficult by prohibiting stockholders holding 15% or more of
our outstanding voting stock from acquiring ValueClick without the Board's
consent for at least three years from the date they first hold 15% or more of
the voting stock. DoubleClick is not subject to this provision of Delaware
law with respect to its investment in ValueClick.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold any derivative instruments and do not engage in
hedging activities. The interest rate of our line of credit with Silicon
Valley Bank varies depending on the bank's prime rate. Currently, we have not
made any borrowings under this credit facility.
Our investment in ValueClick Japan subjects us to foreign currency
exchange risks as ValueClick Japan denominates its transactions in the
Japanese Yen. Our exposure is limited to the extent of the amount of
ValueClick Japan's assets which totaled $1.9 million at March 31, 2000. We
also will have foreign currency exchange risks for ValueClick Europe, which
denominates its transactions in U.K. pounds. Historically, we have not hedged
our exposure to exchange rate fluctuations. Accordingly, we may experience
economic loss and a negative impact on earnings or equity as a result of
foreign currency exchange rate fluctuations. For all of our other advertising
services provided in foreign countries, including Canada, Australia, Belgium,
Brazil, China, England, France, Mexico and Spain, the transactions were
denominated in U.S. dollars and we receive payment from these foreign
customers prior to delivering our services.
As part of the consideration for DoubleClick's investment in our
company, we received 732,860 shares of DoubleClick common stock valued at
approximately $85.8 million based on an average value of $117.07 per share
for the public announcement date of January 13, 2000 and the five trading
days before and after that date. Fluctuations in the market price of
DoubleClick's common stock could have a material effect on the value that we
ultimately realize from these shares. Although we plan to sell this stock
pursuant to a registration statement that DoubleClick has filed for us, we
cannot assure you as to when we will sell the stock, what price we will
receive for the stock, or how many shares we will be able to sell at any
price. In April 2000, all of the DoubleClick shares that we own were
registered for sale by DoubleClick in a registration statement that is
effective through June 11, 2000.
- 26 -
<PAGE>
PART II - OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Sales of Unregistered Securities.
During the three months ended March 31, 2000, following the exercise
of options to purchase shares of common stock that had been granted under our
1999 Stock Option Plan by nine employees, we issued an aggregate of 500,621
shares of common stock for an aggregate purchase price of $247,000. All sales
were made pursuant to the exemption from registration afforded by Rule 701
promulgated under the Securities Act of 1933.
(d) Use of Proceeds From Sales of Registered Securities
On March 30, 2000, we completed an initial public offering ("IPO")
of 4,000,000 shares of our Common Stock at $19.00 per share. The offering
closed on April 5, 2000. The proceeds to us from the IPO, after deducting
underwriting discounts and commissions, were $70,680,000. All shares sold in
the IPO were sold by ValueClick. Goldman, Sachs & Co., Salomon Smith Barney
Inc. and Wit Soundview Corporation were the managing underwriters of the
offering. The shares of Common Stock sold in the IPO were registered under
the Securities Act of 1933 on an S-1 Registration Statement (Reg. No.
333-88765) that was declared effective by the SEC on March 30, 2000. The
purchase price to the public was $19.00 per share and, after deducting
underwriting discounts and commissions, the proceeds to ValueClick was $17.67
per share. We paid an aggregate of $5,320,000 in underwriting discounts and
commissions. In addition, the following table sets forth an estimate of all
expenses incurred in connection with the offering, other than underwriting
discounts and commissions. All amounts shown are estimated except for the
fees payable to the SEC, NASD and Nasdaq National Market.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 17,584
NASD filing fee............................................. 6,825
Nasdaq National Market listing fee.......................... 95,000
Blue Sky fees and expenses.................................. 7,500
Printing and engraving expenses............................. 275,000
Legal fees and expenses..................................... 425,000
Accounting fees and expenses................................ 300,000
Transfer Agent and Registrar Fees........................... 30,000
Miscellaneous............................................... 43,091
---------
Total..................................................... 1,200,000
</TABLE>
After deducting the underwriting discounts and commissions and the
offering expenses described above, we received net proceeds from the offering
of approximately $69,480,000. As of March 31, 2000, ValueClick has applied
the net proceeds of the IPO toward general corporate purposes, including
working capital and for the purchase of short-term, interest-bearing,
investment grade securities. None of the net proceeds of the IPO were paid
directly or indirectly to any director, officer, general partner of
ValueClick or any of their associates, persons owning 10 percent or more of
any class of equity securities of ValueClick, or an affiliate of ValueClick.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 28, 2000, holders of the requisite majority of the then
outstanding shares of Common Stock of ValueClick (voting on an as-converted
basis, in the case of holders of the Company's convertible preferred stock)
approved a resolution by written consent approving a one-for-two reverse
split of the Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule (EDGAR version only)
(b) Report on Form 8-K filed during the quarter ended March 31, 2000:
None.
- 27 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALUECLICK, INC.
(Registrant)
By: /s/ KURT A. JOHNSON
-------------------------------------------------
Kurt A. Johnson
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: May 15, 2000
- 28 -
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,757
<SECURITIES> 68,614
<RECEIVABLES> 8,637
<ALLOWANCES> 860
<INVENTORY> 0
<CURRENT-ASSETS> 166,308
<PP&E> 1,288
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<TOTAL-ASSETS> 171,271
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0
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<COMMON> 28
<OTHER-SE> 165,059
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<INCOME-TAX> 438
<INCOME-CONTINUING> (801)
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