<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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 JUNE 30, 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)
4360 PARK TERRACE DRIVE, SUITE 100
WESTLAKE VILLAGE, CALIFORNIA 91361
(Address of principal executive offices, including zip code)
(818) 575-4500
(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 [X] No [ ]
The number of shares of the Registrant's common stock outstanding as of August
11, 2000 was 28,008,955.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
VALUECLICK, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2000
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000 (unaudited).................................. 3
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Loss for the
Three-Month Periods Ended June 30, 1999 and 2000................ 4
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Loss for the
Six-Month Periods Ended June 30, 1999 and 2000.................. 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six-Month Periods Ended June 30, 1999 and 2000.................. 6
Unaudited Notes to Condensed Consolidated Financial Statements....... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk......... 32
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings................................................. 33
Item 2. Changes in Securities and Use of Proceeds......................... 33
Item 4. Submission of Matters to a Vote of Security Holders............... 33
Item 6. Exhibits and Reports on Form 8-K.................................. 33
Signatures................................................................. 34
<PAGE>
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VALUECLICK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
--------------- --------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,129,000 $ 116,757,000
Investment in marketable securities, at market value - 21,650,000
Accounts receivable, net 7,022,000 7,391,000
Prepaid expenses and other current assets 548,000 664,000
Income taxes receivable - 386,000
Deferred tax assets 330,000 21,649,000
--------------- --------------
Total current assets 10,029,000 168,497,000
--------------- --------------
Property and equipment, net 912,000 1,327,000
Intangible assets, net 3,859,000 3,256,000
Other assets 173,000 396,000
--------------- --------------
TOTAL ASSETS $ 14,973,000 $ 173,476,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,304,000 $ 4,038,000
Income taxes payable 250,000 -
Deferred revenue 389,000 800,000
Other current liabilities 157,000 10,000
--------------- --------------
Total current liabilities 5,100,000 4,848,000
--------------- --------------
DEFERRED TAX LIABILITIES - 5,463,000
LONG-TERM LIABILITIES 20,000 15,000
MINORITY INTEREST IN VALUECLICK JAPAN 453,000 12,160,000
STOCKHOLDERS' EQUITY:
Preferred stock 3,000 -
Common stock 10,000 28,000
Additional paid-in capital 17,584,000 185,248,000
Deferred stock compensation (5,678,000) (6,007,000)
Accumulated deficit (2,489,000) (1,388,000)
Accumulated other comprehensive loss (30,000) (26,891,000)
--------------- --------------
Total stockholders' equity 9,400,000 150,990,000
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,973,000 $ 173,476,000
--------------- --------------
--------------- --------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-Month Period Ended June 30,
------------------------------------
1999 2000
---------------- ---------------
<S> <C> <C>
Revenues $ 2,899,000 $ 11,305,000
Cost of revenues 1,348,000 5,654,000
---------------- ---------------
Gross profit 1,551,000 5,651,000
---------------- ---------------
Operating expenses:
Sales and marketing 391,000 2,576,000
General and administrative 612,000 2,042,000
Product development 213,000 918,000
Stock-based compensation 441,000 1,397,000
Amortization of intangible assets 13,000 225,000
---------------- ---------------
Total operating expenses 1,670,000 7,158,000
---------------- ---------------
Loss from operations (119,000) (1,507,000)
Equity in loss of ValueClick Japan (10,000) -
Interest income, net 14,000 1,174,000
Loss on sale of marketable securities - (9,006,000)
Gain from ValueClick Japan stock issuance - 13,656,000
---------------- ---------------
Income (loss) before income taxes and minority interest (115,000) 4,317,000
Provision for income taxes 154,000 2,394,000
---------------- ---------------
Income (loss) before minority interest (269,000) 1,923,000
Minority share of income of ValueClick Japan - (22,000)
---------------- ---------------
Net income (loss) $ (269,000) $ 1,901,000
---------------- ---------------
---------------- ---------------
Net income (loss) per share:
Basic (0.03) 0.07
Diluted (0.03) 0.06
---------------- ---------------
---------------- ---------------
Shares used to calculate net income (loss) per share:
Basic 9,919,000 27,982,000
Diluted 9,919,000 29,605,000
---------------- ---------------
---------------- ---------------
---------------------------------------------------------------------------------------------------
Net income (loss) $ (269,000) $ 1,901,000
Other comprehensive income (loss):
Foreign currency translation adjustment - 316,000
Unrealized loss on marketable securities - (16,845,000)
---------------- ---------------
Comprehensive income loss $ (269,000) $ (14,628,000)
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-Month Period Ended June 30,
------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenues $ 4,867,000 $ 22,305,000
Cost of revenues 2,435,000 11,167,000
------------ ------------
Gross profit 2,432,000 11,138,000
------------ ------------
Operating expenses:
Sales and marketing 648,000 4,479,000
General and administrative 954,000 3,586,000
Product development 321,000 1,712,000
Stock-based compensation 474,000 2,694,000
Amortization of intangibles and acquired software 26,000 448,000
------------ ------------
Total operating expenses 2,423,000 12,919,000
------------ ------------
Income (loss) from operations 9,000 (1,781,000)
Equity in loss of ValueClick Japan (52,000) -
Interest income, net 19,000 1,217,000
Loss on sale of marketable securities - (9,006,000)
Gain from ValueClick Japan stock issuance - 13,656,000
------------ ------------
Income (loss) before income taxes and minority interest (24,000) 4,086,000
Provision for income taxes 216,000 2,832,000
------------ ------------
Income (loss) before minority interest (240,000) 1,254,000
Minority share of income of ValueClick Japan - (154,000)
------------ ------------
Net income (loss) $ (240,000) $ 1,100,000
------------ ------------
------------ ------------
Net income (loss) per share:
Basic (0.02) 0.05
Diluted (0.02) 0.05
------------ ------------
------------ ------------
Shares used to calculate net income (loss) per share:
Basic 9,919,000 20,798,000
Diluted 9,919,000 22,487,000
------------ ------------
------------ ------------
---------------------------------------------------------------------------------------------
Net income (loss) $ (240,000) $ 1,100,000
Other comprehensive loss:
Foreign currency translation adjustment - 293,000
Unrealized loss on DoubleClick stock - (27,154,000)
------------ ------------
Comprehensive loss $ (240,000) $(25,761,000)
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-Month Period Ended June 30,
------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (240,000) $ 1,100,000
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 68,000 662,000
Provision for doubtful accounts, net of write-offs 251,000 (157,000)
Stock-based compensation 475,000 2,694,000
Gain on ValueClick Japan stock issuance - (13,656,000)
Loss on sale of marketable securities - 9,006,000
Minority share of income of ValueClick Japan - 154,000
Deferred taxes (101,000) 1,860,000
Changes in operating assets and liabilities:
Accounts receivable (1,860,000) (212,000)
Receivable from ValueClick Japan 6,000 -
Prepaid expenses and other assets (92,000) (404,000)
Income taxes receivable - (386,000)
Accounts payable and accrued liabilities 55,000 (266,000)
Income taxes payable 317,000 (250,000)
Deferred revenue 362,000 411,000
------------ ------------
Net cash used in operating activities (759,000) 556,000
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of marketable securities - 10,309,000
Purchases of property and equipment (179,000) (631,000)
Investment in ValueClick Japan (211,000) -
------------ ------------
Net cash used in investing activities (390,000) 9,678,000
------------ ------------
Cash flows from financing activities:
Net proceeds from the sale of common stock - 68,559,000
Net proceeds from the ValueClick Japan stock issuance - 25,432,000
Proceeds from the DoubleClick transaction - 10,000,000
Net proceeds from issuance of Series C preferred stock 3,498,000 -
Repayments on short-term debt (200,000) (147,000)
Repayments on note payable - (5,000)
Proceeds from the exercises of common stock options - 261,000
------------ ------------
Net cash provided by financing activities 3,298,000 104,100,000
------------ ------------
Effect of currency translations - 294,000
------------ ------------
Net increase in cash and cash equivalents 2,149,000 114,628,000
Cash and cash equivalents, beginning of period 262,000 2,129,000
------------ ------------
Cash and cash equivalents, end of period $ 2,411,000 $116,757,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,000 $ 6,000
------------ ------------
------------ ------------
Cash paid for income taxes $ - $ 1,661,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Issuance of common stock for DoubleClick common stock $ - $ 85,796,000
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
VALUECLICK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION.
The condensed 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. As contemplated by the Securities and Exchange
Commission (the "SEC") under Rule 10-01 of Regulation S-X, the accompanying
condensed consolidated financial statements and related footnotes have been
condensed and do not contain certain information that may be included in the
Company's annual consolidated financial statements and footnotes thereto.
These condensed 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 SEC on March 31, 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 is 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.
During May 2000, the Company sold 165,000 shares of its DoubleClick
common stock for cash proceeds of $10.3 million. The sale of these shares
resulted in a realized non-cash loss of $9.0 million.
7
<PAGE>
3. ACCOUNTS RECEIVABLE.
Accounts receivable are stated net of an allowance for doubtful
accounts of $644,000 and $487,000 at December 31, 1999 and June 30, 2000,
respectively.
4. PROPERTY AND EQUIPMENT.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ------------
<S> <C> <C>
Computer equipment and purchased software $ 928,000 $1,351,000
Furniture and equipment 110,000 303,000
Leasehold improvements 28,000 43,000
------------ ------------
1,066,000 1,697,000
Less: accumulated depreciation and amortization (154,000) (370,000)
------------ ------------
$ 912,000 $1,327,000
------------ ------------
------------ ------------
</TABLE>
5. INTANGIBLES.
Intangible assets are comprised primarily 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.
Intangible assets are stated net of accumulated amortization of $351,000 and
$772,000 at December 31, 1999 and June 30, 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, June 30,
1999 2000
------------ ------------
<S> <C> <C>
Accounts payable $1,952,000 $ 816,000
Accrued payments to third-party web sites 684,000 951,000
Other accruals 1,668,000 2,271,000
------------ ------------
$4,304,000 $4,038,000
------------ ------------
------------ ------------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES.
The Company is not currently a party to any material legal proceedings.
8
<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 direct incremental costs and
underwriting discounts and commissions, were $68.6 million. 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 28,007,830 shares of Common Stock were outstanding at
June 30, 2000.
STOCK OPTION ISSUANCES
From January 1, 2000 through June 30, 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 condensed consolidated financial
statements have been retroactively adjusted to reflect this reverse stock
split.
9. VALUECLICK JAPAN
On May 31, 2000 ValueClick Japan, the Company's majority owned
subsidiary, completed its initial public offering on Japan's "Mothers Market"
in which it sold 1,000 shares of its Common Stock at $27,822 per share. The
proceeds to ValueClick Japan from the offering, after deducting direct
incremental costs and underwriting discounts and commissions, were $25.4
million. A related gain of $13.7 million was recorded in the condensed
consolidated statements of operations for the three and six-month periods
ended June 30, 2000 representing the change in net equity for the Company's
share of the proceeds received by ValueClick Japan for its stock issuance.
10. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represents net earnings (loss)
divided by the weighted-average number of common shares outstanding for the
period. Diluted earnings (loss) per share represents net earnings (loss)
divided by the weighted-average number of shares outstanding, inclusive of
the dilutive impact of common stock equivalents unless anti-dilutive. During
the three-month and six-month periods ended June 30, 2000, the difference
between the weighted average number of shares used in the basic computation
compared to that used in the diluted computation was due to the dilutive
impact of options to purchase common stock and unvested restricted stock.
The reconciliations of basic to diluted weighted average shares are as
follows:
9
<PAGE>
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
JUNE 30,
-------------------------------
1999 2000
---------- ----------
<S> <C> <C>
Weighted average shares used in basic computation 9,919,000 27,982,000
Dilutive stock options and unvested restricted stock ---- 1,623,000
---------- ----------
Weighted average shares used for diluted computation
9,919,000 29,605,000
========== ==========
</TABLE>
Options to purchase 1.1 million weighted shares of common stock at prices
ranging from $0.25 to $1.00 were outstanding during the three-month period
ended June 30, 1999, but were not included in the computation of diluted loss
per share because the options were anti-dilutive, as the Company incurred a
net loss. Options to purchase 489,000 weighted shares of common stock at
prices at $11.00 were outstanding during the three-month period ended June
30, 2000, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average
market price of the common shares during the period and, therefore, were
anti-dilutive.
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
JUNE 30,
-------------------------------
1999 2000
---------- ----------
<S> <C> <C>
Weighted average shares used in basic computation 8,673,000 20,798,000
Dilutive stock options and unvested restricted stock ---- 1,689,000
---------- ----------
Weighted average shares used for diluted computation
8,673,000 22,487,000
</TABLE>
Options to purchase 567,000 weighted shares of common stock at prices ranging
from $0.25 to $1.00 were outstanding during the six-month period ended June
30, 1999, but were not included in the computation of diluted loss per share
because the options were anti-dilutive, as the Company incurred a net loss.
Options to purchase 660,000 weighted shares of common stock at prices at
$11.00 were outstanding during the six-month period ended June 30, 2000, but
were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of
the common shares during the period and, therefore, were anti-dilutive.
11. 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:
10
<PAGE>
<TABLE>
<CAPTION>
Six-Month Period Ended June 30, 2000
------------------------------------ Long-Lived
Income (loss) Assets at
Revenues from Operations June 30, 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
United States $17,383,000 $(2,071,000) $4,211,000
Japan 4,562,000 475,000 304,000
Europe 360,000 (179,000) 68,000
Other - (6,000) -
--------------- --------------- ---------------
Total $22,305,000 $(1,781,000) $4,583,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
There were no signfiicant foreign operations prior to the
acquisition of majority control of ValueClick Japan in August of 1999.
For the three-month period ended June 30, 2000, no customer
comprised greater than 10% of revenues.
11
<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 14,300 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
12
<PAGE>
network or across targeted categories within our network. During the second
quarter of 2000, 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 Westlake Village and San Francisco,
California; New York, New York; Tokyo and Osaka, Japan; London, England;
Munich, Germany; Paris, France; Toronto, Canada and Sao Paolo, Brazil. 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-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO
JUNE 30, 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-month period ended June 30,
2000 were $11.3 million compared to $2.9 million for the same period in 1999, an
increase of $8.4 million or 290%. Revenue growth for the 2000 period was
attributable primarily to growth in the worldwide ValueClick network and our
ability to serve a larger advertiser customer base. The ValueClick worldwide
network delivered 26.1 million click-throughs during the second quarter of 2000,
compared to 8.6 million click-throughs during the corresponding period in 1999.
The Company also delivered more than 7.3 billion ad impressions during the
second quarter of 2000. An increase in the average sales price per click also
contributed to the sales growth in the 2000 period.
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 $5.7 million for the three-month
period ended June 30, 2000 compared to $1.4 million for the same period in 1999,
an increase of $4.3 million or 307%. The increase in cost of revenues was
directly attributable to the increased delivery of banner advertisements and
clicks on banner advertisements. Gross profit margin decreased to 50.0% in the
second quarter of 2000 from 53.5% in 1999, which was due primarily to an
increase in the average cost per click as a result of increased competitive
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-month period
ended June 30, 2000 were $2.6 million compared to $391,000 for the same period
in 1999, an increase of $2.2 million or 565%. The increase in sales and
marketing expenses was due primarily to the addition of sales and marketing
personnel and to
13
<PAGE>
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-month period ended June 30, 2000 were $2.0 million compared to $612,000
for the same period in 1999, an increase of $1.4 million or 227%. The increase
in general and administrative expenses was due primarily to the addition of
executive and administrative employees over this period.
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 development
costs have been expensed as incurred. Product development expenses for the
three-month period ended June 30, 2000 were $918,000 compared to $213,000 for
the same period in 1999, an increase of $705,000 or 331%. 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 additional deferred compensation
expense of $3.9 million. This amount, as well as the $5.7 million recorded as of
December 31, 1999, 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-month
period ended June 30, 2000 amounted to $1.4 million, which relates to the
amortization of existing deferred compensation recorded in prior periods for
stock options and restricted shares.
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
14
<PAGE>
May 1998 and amortization of goodwill created as a result of the acquisition
of a majority interest in ValueClick Japan in August 1999.
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 $1.2 million for the three-month period ended June 30, 2000
compared to $14,000 for the same period in 1999. The increase is attributable to
the increased balances of cash and cash equivalents primarily resulting from the
proceeds we received from our initial public stock offering, as well as the
initial public stock offerings of our majority owned subsidiary, ValueClick
Japan.
LOSS ON SALE OF MARKETABLE SECURITIES
On February 28, 2000, we 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 our 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.
We have accounted for the investment in DoubleClick common stock as an
available for sale investment in accordance with current accepted accounting
principles, whereby the investment is 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.
During May 2000, we sold 165,000 shares of our DoubleClick common stock
for cash proceeds of $10.3 million. The sale of these shares resulted in a
realized non-cash loss of $9.0 million.
GAIN FROM VALUECLICK JAPAN STOCK ISSUANCE
On May 31, 2000 ValueClick Japan, our majority owned subsidiary,
completed its initial public offering on Japan's "Mothers Market" in which it
sold 1,000 shares of its Common Stock at $27,822 per share. The proceeds to
ValueClick Japan from the offering, after deducting direct incremental costs and
underwriting discounts and commissions, were $25.4 million. The gain of $13.7
million recorded in our condensed consolidated statements of operations for the
three-month period ended June 30, 2000 represents the change in net equity for
our share of the proceeds received by ValueClick Japan for their stock issuance.
PROVISION FOR INCOME TAXES
For the three-month period ended June 30, 2000, our provision for
Federal, state and foreign income taxes amounted to $2,394,000, compared to
$154,000 for the same period in 1999. Income taxes for interim periods are
computed using the effective tax rate estimated to be applicable for the full
fiscal year, which is subject to our ongoing review and evaluation. The
effective tax rate of 55% for the three-month period ended June 30, 2000
reflects certain permanent differences, including the stock-based compensation
charges and goodwill amortization.
MINORITY SHARE OF INCOME OF VALUECLICK JAPAN
15
<PAGE>
Minority share of income of ValueClick Japan was $22,000 for the
three-month period ended June 30, 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.
RESULTS OF OPERATIONS - SIX-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO JUNE
30, 1999
REVENUES
Net revenues for the six-month period ended June 30, 2000 were $22.3
million compared to $4.9 million for the same period in 1999, an increase of
$17.4 million or 355%. Revenue growth for the 2000 period was attributable
primarily to growth in the worldwide ValueClick network and our ability to serve
a larger advertiser customer base. The ValueClick worldwide network delivered
48.0 million click-throughs during the six-month period ended June 30, 2000,
compared to 15.4 million click-throughs during the corresponding period in 1999.
The Company also delivered more than 13.0 billion ad impressions during the
second quarter of 2000. An increase in the average sales price per click also
contributed to the sales growth in the 2000 period.
COST OF REVENUES
Cost of revenues was $11.2 million for the six-month period ended June
30, 2000 compared to $2.4 million for the same period in 1999, an increase of
$8.8 million or 367%. The increase in cost of revenues was directly attributable
to the increased delivery of banner advertisements and clicks on banner
advertisements. Gross profit margin remained consistent at 50.0% for both
six-month periods ended June 30, 2000 and 1999.
SALES AND MARKETING
Sales and marketing expenses for the six-month period ended June 30,
2000 were $4.5 million compared to $648,000 for the same period in 1999, an
increase of $3.9 million or 594%. 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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the six-month period ended June
30, 2000 were $3.6 million compared to $954,000 for the same period in 1999, an
increase of $2.6 million or 277%. The increase in general and administrative
expenses was due primarily to the addition of executive and administrative
employees over this period.
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.
PRODUCT DEVELOPMENT
Product development expenses for the six-month period ended June 30,
2000 were $1.7 million compared to $321,000 for the same period in 1999, an
increase
16
<PAGE>
of $1.4 million or 430%. The increase was due primarily to the hiring of
additional engineers and support personnel.
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 additional deferred compensation
expense of $3.9 million. This amount, as well as the $5.7 million recorded as of
December 31, 1999, 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 six-month period
ended June 30, 2000 amounted to $2.7 million, which reflects the amortization
deferred compensation recorded in the current and prior periods for stock
options and restricted shares.
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.
INTEREST INCOME, NET
Interest income was $1.2 million for the six-month period ended June
30, 2000 compared to $19,000 for the same period in 1999. The increase is
attributable to the increased balances of cash and cash equivalents primarily
resulting from the proceeds we received from our initial public stock offering,
the DoubleClick investment transaction, the sale of a portion of our DoubleClick
stock holdings and the initial public stock offerings of our majority owned
subsidiary, ValueClick Japan.
LOSS ON SALE OF MARKETABLE SECURITIES
On February 28, 2000, we 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 our 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.
We have accounted for the investment in DoubleClick common stock as an
available for sale investment in accordance with current accepted accounting
principles, whereby the investment is 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.
During May 2000, we sold 165,000 shares of our DoubleClick common stock
for cash proceeds of $10.3 million. The sale of these shares resulted in a
realized non-cash loss of $9.0 million.
GAIN FROM VALUECLICK JAPAN STOCK ISSUANCE
On May 31, 2000 ValueClick Japan, our majority owned subsidiary,
completed its initial public offering on Japan's "Mothers Market" in which it
sold 1,000
17
<PAGE>
shares of its Common Stock at $27,822 per share. The proceeds to ValueClick
Japan from the offering, after deducting direct incremental costs and
underwriting discounts and commissions, were $25.4 million. The gain of $13.7
million recorded in our condensed consolidated statements of operations for
the six-month period ended June 30, 2000 represents the change in net equity
for our share of the proceeds received by ValueClick Japan for their stock
issuance.
PROVISION FOR INCOME TAXES
For the six-month period ended June 30, 2000, our provision for
Federal, state and foreign income taxes amounted to $2,832,000, compared to
$216,000 for the same period in 1999. Income taxes for interim periods are
computed using the effective tax rate estimated to be applicable for the full
fiscal year, which is subject to our ongoing review and evaluation. The
effective tax rate of 69% for the six-month period ended June 30, 2000 reflects
certain permanent differences, including the stock-based compensation charge and
goodwill amortization.
MINORITY SHARE OF INCOME OF VALUECLICK JAPAN
Minority share of income of ValueClick Japan was $154,000 for the
six-month period ended June 30, 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.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through working
capital generated from operations and equity financings. Net cash provided by
operating activities was $556,000 for the six-month period ended June 30, 2000.
The net cash provided by investing activities for the six-month period
ended June 30, 2000 of $9.7 million was the result of the $10.3 million in
proceeds received from the sale of 165,000 shares of our DoubleClick holdings,
offset by $631,000 of cash used to purchase property and equipment.
Net cash provided by financing activities was $104.1 million for the
six-month period ended June 30, 2000 which resulted principally from the
following transactions:
DOUBLECLICK TRANSACTION
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 went effective June 11, 2000.
INITIAL PUBLIC STOCK OFFERING
18
<PAGE>
On March 30, 2000 we completed our initial public offering in which we
sold 4,000,000 shares of our Common Stock at $19.00 per share. The initial
public offering closed on April 5, 2000. Our proceeds from the offering, after
deducting direct incremental costs and underwriting discounts and commissions,
were $68.6 million. Upon the closing of the offering, all of our then
outstanding Preferred Stock automatically converted into Common Stock on a
one-for-one basis. After the offering, our 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 28,007,830 shares of Common Stock were
outstanding at June 30, 2000.
VALUECLICK JAPAN'S STOCK ISSUANCE
On May 31, 2000 ValueClick Japan, our majority owned subsidiary,
completed its initial public offering on Japan's "Mothers Market" in which it
sold 1,000 shares of its Common Stock at $27,822 per share. The proceeds to
ValueClick Japan from the offering, after deducting direct incremental costs and
underwriting discounts and commissions, were $25.4 million. A related gain of
$13.7 million was recorded in our condensed consolidated statements of
operations for the three and six-month periods ended June 30, 2000 representing
our share of the proceeds from ValueClick Japan's stock issuance.
CREDIT FACILITY
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 June 30,
2000, the bank's prime rate was 9.0%. 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 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,
accounts receivables and intellectual property. At June 30, 2000, we had no
outstanding borrowings against this credit line.
We believe that our existing cash and cash equivalents, our available
bank credit and the proceeds from our initial public offering are 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 (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS No. 137 and
138, 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
19
<PAGE>
relationship that exists. We are required to follow the guidance in SFAS 133
for our fiscal year beginning January 1, 2001. 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. We are required to follow the
guidance in the SAB no later than the fourth quarter ended December 31, 2000.
The SEC has recently indicated it intends to issue further guidance with respect
to adoption of specific issues addressed by SAB No. 101. Until such time as this
additional guidance is issued, we are unable to assess the impact, if any, it
may have, however based on current guidance the we believe the adoption of the
SAB will not have a material impact on our financial position or results of
operations.
In March 2000, the Financial Accounting Standards Board
issued FASB Interpretation (FIN) No. 44, "Accounting for Certain
Transactions involving Stock Compensation." FIN No. 44 provides guidance
for issues arising in applying APB Opinion No. 25, "Accounting for
Stock Issued to Employees". FIN No. 44 applies specifically to new
awards, exchanges of awards in a business combination, modification to
outstanding awards, and changes in grantee status that occur on or
after July 1, 2000, except for the provisions related to repricings and
the definition of an employee which apply to awards issued after December
15, 1998. Application of FIN No. 44 did not have an affect on our financial
reporting.
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.
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;
20
<PAGE>
- 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
21
<PAGE>
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.
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 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, 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.
22
<PAGE>
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 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.
23
<PAGE>
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.
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
24
<PAGE>
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,
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 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, Engage and 24/7 Media. 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.
25
<PAGE>
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 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
26
<PAGE>
consumer concern surrounding the security of e-commerce could impede its
acceptance and growth.
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 stockholders
27
<PAGE>
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.s
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 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
28
<PAGE>
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.
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.
29
<PAGE>
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 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
30
<PAGE>
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 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
31
<PAGE>
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
net assets which totaled $27.0 million at June 30, 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. In April 2000, all of the DoubleClick shares that we
own were registered for sale by DoubleClick in a registration statement that
went effective June 11, 2000. During May 2000, the Company sold 165,000 shares
of its DoubleClick common stock for cash proceeds of $10.3 million. The sale of
these shares resulted in a realized non-cash loss of $9.0 million. Fluctuations
in the market price of DoubleClick's common stock could have a material effect
on the value that we ultimately realize from the remaining shares. Although we
plan to sell this stock pursuant to the registration statement, 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.
32
<PAGE>
PART II - OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
None.
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 June 30, 2000:
None.
33
<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: August 11, 2000
34
