-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TVX3CwpdNSYY78UgRaSnqQCx/HQo0cYim6snCcpB/qkWCuseU6ZdtrBzqKm8AXMx yqptQwqumfGRIZPNlp1j/g== 0000950117-01-500379.txt : 20010516 0000950117-01-500379.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950117-01-500379 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOUBLECLICK INC CENTRAL INDEX KEY: 0001049480 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 133870996 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23709 FILM NUMBER: 1639478 BUSINESS ADDRESS: STREET 1: 450 W 33RD ST STREET 2: 16TH FL CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2126830001 MAIL ADDRESS: STREET 1: 450 W 33RD ST STREET 2: 16TH FL CITY: NEW YORK STATE: NY ZIP: 10001 10-Q 1 a29651.txt DOUBLECLICK 10Q - ------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-23709 ------------------- DOUBLECLICK INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3870996 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
450 WEST 33RD STREET, 16TH FLOOR NEW YORK, NEW YORK 10001 (212) 683-0001 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) 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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] As of May 1, 2001 there were outstanding 130,880,992 shares of the registrant's Common Stock and 827,882 shares exchangeable into the registrant's Common Stock. The exchangeable shares were issued in connection with the registrant's acquisition of FloNetwork Inc., and are exchangeable at any time, subject to certain restrictions, into the registrant's Common Stock on a one-for-one basis. - -------------------------------------------------------------------------------- DOUBLECLICK INC. INDEX TO FORM 10-Q PART I: FINANCIAL INFORMATION Item 1: Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000......................................... 1 Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000...................... 2 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000............................. 3 Notes to Consolidated Financial Statements.................. 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 9 Item 3: Quantitative and Qualitative Disclosures about Market Risk...................................................... 13 PART II: OTHER INFORMATION Item 1: Legal Proceedings........................................... 29 Item 6: Exhibits and Reports on Form 8-K............................ 30
ii ITEM 1. FINANCIAL STATEMENTS DOUBLECLICK INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS EXCEPT SHARE AMOUNTS)
March 31, December 31, 2001 2000 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $232,334 $193,682 Investments in marketable securities 419,939 422,495 Accounts receivable, net of allowances of $26,319 and $26,715, respectively 103,576 120,029 Prepaid expenses and other current assets 39,772 36,934 ---------- ---------- Total current assets 795,621 773,140 Investments in marketable securities 179,186 257,199 Property and equipment, net 162,827 168,192 Intangible assets, net 118,531 52,775 Investments in affiliates 34,831 37,457 Other assets 10,002 9,780 ---------- ---------- Total assets $1,300,998 $1,298,543 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $74,207 $81,038 Accrued expenses and other current liabilities 76,845 96,002 Deferred revenue 29,945 33,590 ---------- ---------- Total current liabilities 180,997 210,630 Long-term obligations and notes 20,173 15,609 Convertible subordinated notes 250,000 250,000 Minority interest 4,615 5,247 STOCKHOLDERS' EQUITY: Common stock, par value $0.001; 400,000,000 shares authorized, 129,028,154 and 123,728,169 shares issued, respectively 129 124 Treasury stock, 133,282 and 160,283 shares, respectively (15,316) (18,419) Additional paid-in capital 1,204,351 1,116,172 Deferred compensation (147) (236) Accumulated deficit (329,334) (265,812) Other accumulated comprehensive loss (14,470) (14,772) ---------- ---------- Total stockholders' equity 845,213 817,057 ---------- ---------- Total liabilities and stockholders' equity $1,300,998 $1,298,543 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 1 DOUBLECLICK INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, ------------------------------------------- 2001 2000 -------- -------- Revenue $ 114,870 $ 110,056 Cost of revenue 50,336 52,477 --------- --------- Gross profit 64,534 57,579 Operating expenses: Sales and marketing (inclusive of non-cash compensation of $4,729 and $4,560 in 2001 and 2000, respectively) 55,148 50,488 General and administrative (inclusive of non-cash compensation of $107 and $62 in 2001 and 2000, respectively) 19,642 20,901 Product development 13,949 9,699 Amortization of intangibles 10,617 8,405 Restructuring charge 29,033 -- --------- --------- Total operating expenses 128,389 89,493 Loss from operations (63,855) (31,914) Other income (expense): Equity in losses of affiliates (1,145) (1,428) Gain (loss) on equity transactions of affiliates (3,757) 8,949 Interest and other, net 8,766 6,950 --------- --------- Total other income 3,864 14,471 Loss before income taxes (59,991) (17,443) Provision for income taxes 1,059 931 --------- --------- Loss before minority interest (61,050) (18,374) Minority interest 631 -- --------- --------- Net loss $ (60,419) $ (18,374) ========= ========= Basic and diluted net loss per share $ (0.48) $ (0.16) ========= ========= Weighted-average shares used in net loss per share- basic and diluted 126,610 116,839
The accompanying notes are an integral part of these consolidated financial statements 2 DOUBLECLICK INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
Three months ended March 31, ----------------------------- 2001 2000 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (60,419) (18,374) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and leasehold amortization 12,717 5,539 Amortization of intangible assets 10,617 8,405 Equity in losses of affiliates 1,145 1,428 (Gain) loss on equity transactions of affiliates 3,757 (8,949) Write-off of fixed assets 500 -- Income tax benefit from exercise of stock options 120 -- Minority interest (631) -- Restructuring charge 29,033 -- Non-cash compensation 4,836 4,622 Provision for bad debts and advertiser discounts 9,264 12,003 Changes in operating assets and liabilities: Accounts receivable 11,021 (32,739) Prepaid expenses and other assets (503) (7,257) Accounts payable (6,985) 6,485 Accrued expenses (9,327) 25,734 Other liabilities 1,291 -- Deferred revenue (5,289) (1,981) --------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,147 (5,084) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments in marketable securities (111,748) (290,827) Maturities of investments in marketable securities 197,659 -- Purchases of property, plant and equipment (29,301) (36,047) Investments in affiliates and other (963) (10,380) Acquisitions of businesses and intangible assets, net of cash acquired (17,630) (5,567) --------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 38,017 (342,821) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of common stock net of issuance costs 1,521 504,254 Proceeds from the exercise of stock options 1,348 46,851 Proceeds from notes payable 510 -- Payment of notes and capital lease obligations (743) (90) Other (250) -- --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,386 551,015 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2,898) (315) --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 38,652 202,795 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 193,682 119,238 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 232,334 $ 322,033 ========= =========
The accompanying notes are an integral part of these consolidated financial statements 3 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS DoubleClick Inc., together with its subsidiaries ("DoubleClick"), is a leading provider of comprehensive global interactive marketing and advertising solutions. DoubleClick offers a broad range of integrated media, technology and data solutions to advertisers, ad agencies, Web publishers and merchants. DoubleClick is organized in three segments: Technology (or "TechSolutions"), Media and Data based on types of service provided. DoubleClick TechSolutions consists of the DART-based service bureau offering, the AdServer family of software products and a suite of email technology services. DoubleClick Media consists of the worldwide DoubleClick networks, which provide fully outsourced and highly effective sales, delivery and related services to a worldwide group of advertisers and publishers. DoubleClick Data includes its Abacus division that utilizes the information contributed to the proprietary Abacus database by Abacus Alliance members to make both online and offline direct marketing more efficient for Abacus Alliance members and other Abacus clients. DoubleClick Data also includes DoubleClick's Research division, Diameter, an online research business that offers a complete suite of research tools, offering media intelligence, audience measurement and advertising effectiveness products. Basis of presentation The accompanying consolidated financial statements include the accounts of DoubleClick, its wholly-owned subsidiaries, and subsidiaries over which it exercises a controlling financial interest. All significant intercompany transactions and balances have been eliminated. Investments in entities in which DoubleClick does not have a controlling financial interest, but over which it has significant influence are accounted for using the equity method. Investments in which DoubleClick does not have the ability to exercise significant influence are accounted for using the cost method. The accompanying interim consolidated financial statements are unaudited, but in the opinion of management, contain all the adjustments (consisting of those of a normal, recurring nature) considered necessary to present fairly the financial position, the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. Results of operations are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements of DoubleClick for the year ended December 31, 2000. Certain reclassifications have been made to the prior period's financial statements to conform to the current period presentation. Basic and diluted net loss per common share Basic net loss per common share excludes the effect of potentially dilutive securities and is computed by dividing the net loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net loss per share adjusts for the effect of convertible securities, stock options and other potentially dilutive financial instruments only in the periods in which such effect would be dilutive. For the three month periods ending March 31, 2001 and 2000, approximately 21.9 million and 22.7 million, respectively, outstanding options to purchase common stock were not included in the computation of diluted net loss per share because to do so would have had an antidilutive effect for the periods presented. Similarly, these computations also exclude the effect of 6,060,606 shares issuable upon the conversion of $250 million, 4.75% Convertible Subordinated Notes due 2006, since their inclusion would also have had an antidilutive effect. As a result, the basic and diluted net loss per share amounts are equal for the three month periods ending March 31, 2001 and 2000. Issuance of stock by affiliates Changes in DoubleClick's interest in its affiliates arising as the result of their issuance of common stock are recorded as gains and losses in the consolidated statement of operations, except for any transactions that must be recorded directly to equity in accordance with the provisions of Staff Accounting Bulletin ("SAB") No. 51. Concentrations of credit risk Financial instruments which potentially subject DoubleClick to concentrations of credit risk consist principally of cash and cash equivalents, investments in marketable securities, accounts receivable and advances. Credit is extended to customers based on the evaluation of their financial condition, and collateral is not required. DoubleClick performs ongoing credit assessments of its customers and maintains an allowance for doubtful accounts. New accounting pronouncements In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which had an initial adoption date of January 1, 2000. In June 1999, the FASB issued SFAS No. 137, which delayed the effective date for implementing SFAS No. 133 until the beginning of 2001. In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No. 133 with the objective of easing the implementation difficulties expected to arise. DoubleClick adopted SFAS No. 133 as amended by SFAS No. 138 effective January 1, 2001. The adoption of SFAS No. 133 had no material impact on DoubleClick's financial conditions or results of operations. 4 NOTE 2 - BUSINESS COMBINATIONS On February 2, 2001, DoubleClick completed its acquisition of @plan.inc ("@plan"), a leading provider of online market research planning systems. In the transaction, which has been accounted for as a purchase, DoubleClick acquired all of the outstanding shares, options and warrants of @plan in exchange for $39.1 million in cash, approximately 3,200,000 shares of DoubleClick common stock valued at $48.7 million, and stock options and warrants to acquire DoubleClick common stock valued at approximately $15.7 million. The aggregate purchase price of $104.3 million, which includes approximately $0.8 million of direct acquisition costs, has been allocated to the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. DoubleClick has recorded approximately $78.1 million in goodwill, which represents the excess of the purchase price over the fair value of net assets acquired. This goodwill is being amortized on a straight-line basis over three years. The results of operations for @plan have been included in DoubleClick's consolidated statements of operations from the date of acquisition. The following pro forma results of operations have been prepared assuming that the acquisition of @plan occurred at the beginning of the respective periods presented. This pro forma financial information should not be considered indicative of the actual results that would have been achieved had the @plan acquisition been consummated on the dates indicated and does not purport to indicate results of operations as of any future date or any future period.
Three months ended March 31, --------------------------- 2001 2000 ---- ---- (In thousands, except per share amounts) Revenues $116,145 $112,891 Amortization of intangibles 12,788 14,917 Net loss (63,507) $(25,846) Net loss per basic and diluted share (0.50) (0.22)
NOTE 3 - INVESTMENT IN VALUECLICK, INC In the fourth quarter of 2000, ValueClick completed a purchase acquisition of Bach Systems and consummated a merger with ClickAgents that was accounted for as a pooling of interests. DoubleClick has treated ValueClick's pooling with ClickAgents as a book value purchase of ClickAgents by ValueClick. As a consequence of these transactions, DoubleClick's ownership interest in ValueClick has been reduced to approximately 23.5% and the value of its proportionate share of ValueClick's net assets decreased. Pursuant to its accounting policy, DoubleClick recorded a decrease in the value of its investment in ValueClick of $3.8 million, reduced the carrying amount of treasury stock to approximately $15.3 million and recognized a loss of approximately $3.8 million. This loss has been included in "Gain (loss) on equity transactions of affiliates" in the consolidated statements of operations. NOTE 4 - NON-CASH COMPENSATION Non-cash compensation consists primarily of the expected additional consideration payable to certain former shareholders of DoubleClick Scandinavia. Additional shares of DoubleClick common stock are contingently issuable in March 2002 based on the continued employment of the former shareholders and the attainment of specific revenue objectives for the year ended December 31, 2001. DoubleClick has assessed, and will continue to assess, the probability and amount of the shares payable and expects to incur significant non-cash compensation charges in 2001. The maximum total value of the remaining contingently issuable shares is approximately $35.2 million. See Note 10 to the Consolidated Financial Statements. NOTE 5 - STOCKHOLDERS' EQUITY Pursuant to an underwriting agreement dated February 17, 2000, DoubleClick completed a public offering of 7,500,000 shares of its common stock, of which DoubleClick sold 5,733,411 shares and certain stockholders sold 1,766,589 shares. DoubleClick's net proceeds were approximately $502.9 million, after deducting underwriting discounts, commissions and offering expenses. In January 2000, DoubleClick effected a two-for-one stock split in the form of a 100 percent stock dividend, which was approved for shareholders of record as of December 31, 1999. 5 NOTE 6 - RESTRUCTURING CHARGE 2000 Restructuring In December 2000 management took certain actions to reduce employee headcount in order to better align its sales, development and administrative organization. This involved the involuntary terminations of approximately 180 employees. As a consequence, DoubleClick recorded a $2.4 million charge to operations during the fourth quarter of 2000 related to payments for severance as well as the costs of outplacement services and the provision of continued benefits to terminated personnel. As of March 31, 2001 substantially all of the $2.4 million charge had been paid. DoubleClick expects to pay any remaining costs related to this charge in the second quarter of 2001. 2001 Restructuring In March 2001 management took additional steps to further increase operational efficiencies and bring costs in line with revenues. These measures included the involuntary terminations of approximately 230 employees, primarily from DoubleClick's Media operations, as well as the consolidation of some of its leased office space and the closure of several of its offices. As a result, DoubleClick recorded a $29.0 million charge to operations during the first quarter of 2001 for severance-related payments to terminated employees, the accrual of future lease costs (net of estimated sublease income and deferred rent) and the write-off of fixed assets for office locations that were closed or consolidated. As a result of these restructuring initiatives, DoubleClick expects to achieve annualized savings of approximately $16 million in operating expenses. However, there can be no assurance that such cost reductions can be sustained or that the estimated costs of such actions will not change. Of this $29.0 million charge, approximately $8.9 million and $6.0 million remain accrued in 'Accrued expenses and other current liabilities' and `Long-term obligations and notes', respectively, as of March 31, 2001. DoubleClick expects to pay the remainder of the severance-related costs in fiscal 2001. The following table sets forth a summary of the costs and related charges for DoubleClick's 2000 and 2001 restructurings and the balance of the restructuring reserve established (in thousands):
Fixed asset Future Other write- lease exit Severance offs costs costs Total ------------------------------------------------------------ 2000 Restructuring Balance at January 1, 2001 $ 1,172 $ - $ - $ - $ 1,172 Cash expenditures (1,027) - - - (1,027) Non-cash charges - - - - - ------- ------- --------- ------ -------- Balance at March 31, 2001 $ 145 $ - $ - $ - $ 145 2001 Restructuring Restructuring charge $ 3,657 $15,169 $ 9,274 $ 933 $ 29,033 Cash expenditures (1,420) - - - (1,420) Non-cash charges - (15,169) 2,409 (97) (12,857) ------- ------- ------- ------- ------- Balance at March 31, 2001 $ 2,237 $ - $11,683 $ 836 $14,756 Total reserve balance at March 31, 2001 $ 2,382 $ - $11,683 $ 836 $14,901 ======= ======= ======= ======= =======
NOTE 7 - SEGMENT REPORTING DoubleClick is organized into three segments: Technology, Media and Data. 6 Revenues and gross profit by segment are as follows:
Three months ended March 31, 2001 Three months ended March 31, 2000 Technology Media Data Total Technology Media Data Total Revenue $54,920 $46,094 $18,214 $119,228 $39,778 $60,190 $14,727 $114,695 Intersegment elimination (4,310) - (48) (4,358) (4,639) - - (4,639) ------- ------- ------- -------- ------- ------- ------- -------- Revenue from external customers $50,610 $46,094 $18,166 $114,870 $35,139 $60,190 $14,727 $110,056 ======= ======= ======= ======== ======= ======= ======= ======== Gross profit $36,748 $16,345 $11,441 $64,534 $27,492 $20,571 $9,516 $57,579 ======= ======= ======= ======== ======= ======= ======= ========
NOTE 8 - COMPREHENSIVE LOSS Comprehensive loss consists of net loss, unrealized gains and losses on marketable securities and foreign currency translation adjustments. Comprehensive loss was $60.1 million and $19.2 million for the three months ended March 31, 2001 and 2000, respectively. NOTE 9 - CONTINGENCIES Several civil litigations related to DoubleClick's online data collection practices are currently pending against DoubleClick. These proceedings seek remedies, including damages, of an indeterminable nature and amount, and allege variously that DoubleClick has unlawfully obtained and used consumers' personal information. DoubleClick vigorously contests these DoubleClick allegations. In addition, three class action lawsuits have recently been filed against DoubleClick, Goldman Sachs & Co. and certain of DoubleClick's officers and directors alleging violations of the securities laws in connection with DoubleClick's initial public offering. These cases are in their early stages; however DoubleClick intends to dispute these allegations and defend these lawsuits vigorously. There have been a number of political, legislative, regulatory and other developments relating to online data collection that have received widespread media attention. These developments may negatively affect the outcomes of related legal proceedings and encourage the commencement of additional similar proceedings. Additionally, DoubleClick received a letter from the Federal Trade Commission ("FTC"), dated February 8, 2000, in which the FTC notified DoubleClick that they were conducting an inquiry into DoubleClick's business practices to determine whether, in collecting and maintaining information concerning Internet users, DoubleClick engaged in unfair or deceptive practices. In January 2001, the FTC closed its inquiry into DoubleClick's ad serving and data collection practices without recommending any further action. In addition, DoubleClick's ad serving and data collection practices are also the subject of inquiries by the attorneys general of several states. DoubleClick is cooperating fully with all such inquiries by the various states. DoubleClick may receive additional regulatory inquiries and intends to cooperate fully. It is impossible to predict the outcome of such events on pending litigation or the results of the litigation itself, all of which may have a material adverse effect on DoubleClick's business, financial condition and results of operations. Determinations of liability against other companies that are defendants in similar actions, even if such rulings are not final, could adversely affect the legal proceedings against DoubleClick and its affiliates and could encourage an increase in the number of such claims. DoubleClick believes that, notwithstanding the quality of defenses available, it is possible that our financial condition and results of operations could be materially adversely effected by the ultimate outcome of the pending litigation. As of March 31, 2001, no provision has been made for any damages that may result upon the resolution of these uncertainties. NOTE 10 - SUBSEQUENT EVENTS On April 23, 2001, DoubleClick completed its acquisition of FloNetwork Inc. ("FloNetwork"), a privately-held Canadian provider of email marketing technology services. In the transaction, which will be accounted for as a purchase, DoubleClick acquired all of the outstanding shares, options and warrants of FloNetwork in exchange for a combination of cash, common stock and other equity instruments valued at approximately $46 million, exclusive of direct acquisition costs. The excess of the purchase price over the fair value of FloNetwork's net assets will be allocated to goodwill and amortized over three years. On April 25, 2001, DoubleClick's consolidated subsidiary, DoubleClick Japan, completed an initial public offering of 23,456 of its ordinary shares on the Nasdaq Japan Market. The aggregate proceeds were approximately $27 million, net of underwriting fees and expenses. As a result of this offering, DoubleClick's ownership interest in 7 DoubleClick Japan was decreased to approximately 38.2%. Pursuant to its accounting policy, DoubleClick will recognize a gain of approximately $8 million as the result of this transaction. In May 2001, DoubleClick agreed to fix the amount payable to the former shareholders of DoublClick Scandinavia who were entitled to receive additional shares of DoubleClick common stock. DoubleClick agreed to pay the former shareholders approximately $18.5 million in DoubleClick common stock, which is equal to the minimum consideration they were entitled to receive under the terms of the original agreement. DoubleClick will recognize the remaining unexpensed portion of the consideration, approximately $13.8 million, as non-cash compensation expense when the former shareholders are paid in fiscal 2001. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DOUBLECLICK INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF DOUBLECLICK CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND THE FUTURE PERFORMANCE OF DOUBLECLICK WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. DOUBLECLICK'S ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT AND IN DOUBLECLICK'S OTHER PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. IT IS ROUTINE FOR OUR INTERNAL PROJECTIONS AND EXPECTATIONS TO CHANGE AS THE YEAR OR EACH QUARTER IN THE YEAR PROGRESS, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD THAT THE INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR EXPECTATIONS MAY CHANGE PRIOR TO THE END OF EACH QUARTER OR THE YEAR. ALTHOUGH THESE EXPECTATIONS MAY CHANGE, WE MAY NOT INFORM YOU IF THEY DO. OUR COMPANY POLICY IS GENERALLY TO PROVIDE OUR EXPECTATIONS ONLY ONCE PER QUARTER, BUT WE MAY CHOOSE TO NOT UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER EVEN IF CIRCUMSTANCES CHANGE. OVERVIEW We are a leading provider of technology-driven marketing and advertising solutions to thousands of advertisers, advertising agencies, Web publishers and e-commerce merchants worldwide. We provide a broad range of technology, media and data products and services to our customers to allow them to optimize their advertising and marketing campaigns on the Internet and through other interactive media. Our patented DART technology is the platform for many of our solutions and enables our customers to use preselected criteria to deliver the right ad to the right person at the right time. Our service and product offerings are grouped into three segments: -DoubleClick Technology Solutions ("Technology"); -DoubleClick Media ("Media"); and -DoubleClick Data ("Data"). BUSINESS COMBINATIONS On February 2, 2001, DoubleClick completed its acquisition of @plan.inc ("@plan"), a leading provider of online market research planning systems. In the transaction, which has been accounted for as a purchase, DoubleClick acquired all of the outstanding shares, options and warrants of @plan in exchange for $39.1 million in cash, approximately 3,200,000 shares of DoubleClick common stock valued at $48.7 million, and stock options and warrants to acquire DoubleClick common stock valued at approximately $15.7 million. The aggregate purchase price of $104.3 million, which includes approximately $0.8 million of direct acquisition costs, has been allocated to the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. DoubleClick has recorded approximately $78.1 million in goodwill, which represents the excess of the purchase price over the fair value of net assets acquired. This goodwill is being amortized on a straight-line basis over three years. @plan's financial results have been included in DoubleClick's results of operations since February 2, 2001. On April 23, 2001, DoubleClick completed its acquisition of FloNetwork Inc. ("FloNetwork), a privately-held Canadian provider of email marketing technology services. In the transaction, which has been accounted for as a purchase, DoubleClick acquired all of the outstanding shares, options and warrants of FloNetwork in exchange for a combination of cash, common stock and other equity instruments valued at approximately $46 million, exclusive of direct acquisition costs. The excess of the purchase price over the fair value of FloNetwork's net assets will be allocated to goodwill and amortized over three years. FloNetwork's financial results will be included in DoubleClick's results of operations subsequent to April 23, 2001. 9 THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000 RESULTS OF OPERATIONS Revenues and gross profit by segment are as follows:
Three months ended March 31, 2001 Three months ended March 31, 2000 Technology Media Data Total Technology Media Data Total Revenue $54,920 $46,094 $18,214 $119,228 $39,778 $60,190 $14,727 $114,695 Intersegment elimination (4,310) - (48) (4,358) (4,639) - - (4,639) ------- ------- ------- -------- ------- ------- ------- -------- Revenue from external customers $50,610 $46,094 $18,166 $114,870 $35,139 $60,190 $14,727 $110,056 ======= ======= ======= ======== ======= ======= ======= ======== Gross profit $36,748 $16,345 $11,441 $64,534 $27,492 $20,571 $9,516 $57,579 ======= ======= ======= ======== ======= ======= ======= ========
DoubleClick TechSolutions DoubleClick TechSolutions revenue is derived primarily from sales of our DART, AdServer and email technology services. DoubleClick TechSolutions cost of revenue includes costs associated with the delivery of advertisements, including Internet access costs, depreciation of the ad and email delivery systems, facilities, and personnel-related costs incurred to operate and support our ad and email delivery products. DoubleClick TechSolutions revenue increased 37.9% to $54.9 million for the three months ended March 31, 2001 from $39.8 million for the three months ended March 31, 2000. DoubleClick TechSolutions gross margin was 66.8% for the three months ended March 31, 2001 and 69.1% for the three months ended March 31, 2000. The increase in DoubleClick TechSolutions revenue was due primarily to an increase in the number of DART, AdServer and email clients coupled with an increased volume of impressions delivered for existing clients. Despite the substantial increase in DoubleClick TechSolutions revenue, the weakening of aggregate online advertising spending and growth that affected DoubleClick Media results began to similarly exert downward pressure on TechSolutions revenue growth trends. The decline in gross margin resulted primarily from a lower-margin product mix and a decrease in the fee charged to DoubleClick Media for the provision of technology support. DoubleClick Media DoubleClick Media revenue is derived primarily from the sale and delivery of advertising impressions through third-party Web sites comprising the worldwide DoubleClick Media networks. DoubleClick Media cost of revenue consists primarily of service fees paid to Web publishers for impressions delivered on our worldwide networks, the costs of ad delivery and technology support provided by DoubleClick TechSolutions. Revenue for DoubleClick Media decreased 23.4% to $46.1 million for the three months ended March 31, 2001 from $60.2 million for the three months ended March 31, 2000. DoubleClick Media gross margin was 35.4% for the three months ended March 31, 2001 and 34.2% for the three months ended March 31, 2000. The decrease in DoubleClick Media revenue reflected in part the contraction in the rate of growth of overall online advertising spending. In response to their decreasing access to public and private financing, many cash-intensive Internet-related companies have reduced their advertising budgets, which has had a correspondingly negative impact on aggregate online advertising spending and growth. DoubleClick Media revenue also decreased due to the reduction in advertising impressions delivered to users of the AltaVista Web site associated with the restructuring of our Advertising Services Agreement. Gross margin increased due to lower average site fees remitted to publishers and a reduction in the cost of technology support provided by DoubleClick TechSolutions. This increase was partially offset by increased levels of price competition and increases in the amount of unsold inventory, which diluted the effective price of delivered advertising impressions. DoubleClick Media revenue derived from advertising impressions delivered to the users of the AltaVista Web site was $5.7 million, or 12.4% of DoubleClick Media revenue for the three months ended March 31, 2001, compared to $7.5 million, or 12.5% of DoubleClick Media revenue for the three months ended March 31, 2000. Because of specific contractual terms unique to AltaVista, we recognize revenue from sales commissions, billing and collection fees and DART service fees derived from the sale and delivery of ads on the AltaVista Web site and associated services. 10 AltaVista DART services fees recognized by TechSolutions were $0.7 million and $2.1 million for the three months ended March 31, 2001 and 2000, respectively. On August 7, 2000, we announced a restructuring of our Advertising Services Agreement with AltaVista ("New Agreement"). Pursuant to the New Agreement, AltaVista assumed lead ad sales responsibility for domestic advertisers in the first quarter of 2001, and will assume lead ad sales responsibility for international advertisers by December 2001 (subject to AltaVista's right to assume lead responsibility sooner in certain international markets). After AltaVista assumes lead ad responsibility in a market, DoubleClick will have the right to sell ads on the AltaVista Web sites in that market on a non-exclusive basis, as part of DoubleClick's worldwide ad networks, through December 31, 2004. In addition, under the New Agreement, the DART for Publishers Service will serve ads on AltaVista's Web sites through December 31, 2004 with the ads required to be served through the DART for Publishers Service declining in each year of the agreement, subject to certain minimums. The DART for Advertisers Service will serve the majority of AltaVista'a online advertising campaigns through December 2004. DoubleClick Data DoubleClick Data revenue has historically been derived primarily from its Abacus division, which provides services such as prospecting lists, housefile scoring, list optimization, and marketing research services to the direct and online marketing industry. Following the acquisition of @plan in February 2001, we created Diameter, a separate research division within DoubleClick Data designed to offer market research analysis tools that provide advertisers, brand marketers and e-businesses with analyses of online advertising campaigns, consumer behavior and purchasing patterns. Diameter's revenue is derived principally from the sale of annual subscriptions to its market research systems. DoubleClick Data cost of revenue includes expenses associated with creating, maintaining and updating the Abacus and Diameter databases as well as the technical infrastructure to produce our products and services. DoubleClick Data revenue increased 23.8% to $18.2 million for the three months ended March 31, 2001 from $14.7 million for the three months ended March 31, 2000. Gross margin declined from 64.6% for the three months ended March 31, 2000 to 62.6% for the three months ended March 31, 2001. The increase in DoubleClick Data revenue resulted from the inclusion of @plan's post-acquisition results coupled with higher average prices and strong growth in Abacus' B2B alliance and prospecting list services initiatives. The decline in gross margin was due primarily to the higher fixed costs associated with Diameter's data collection, which were partially offset by decreases in personnel- and facility-related costs. OPERATING EXPENSES Sales and marketing Sales and marketing expenses consist primarily of compensation and related benefits, sales commissions, general marketing costs, advertising, bad debt expense, and other operating expenses associated with the sales and marketing departments. Sales and marketing expenses were $55.1 million, or 48.0% of revenue for the three months ended March 31, 2001 and $50.5 million, or 45.9% of revenue for the three months ended March 31, 2000. This increase was primarily attributable to increased compensation and related benefits associated with our growth and an increase in the provision for doubtful accounts, partially offset by reductions in marketing and recruiting costs. We expect sales and marketing expenses to decrease in absolute dollars as we begin to realize increased operational efficiencies from the headcount reductions undertaken as part of our restructuring activities in March 2001. General and administrative General and administrative expenses consist primarily of compensation and related benefits, professional services fees and facility-related costs. General and administrative expenses were $19.6 million, or 17.1% of revenue for the three months ended March 31, 2001 and $20.9 million, or 19.0% of revenue for the three months ended March 31, 2000. The decrease was primarily the result of overall reductions in professional services fees and facility-related costs, partially offset by increases in compensation and related benefits associated with our growth. Decreased professional services fees resulted in part from a reduction in consulting fees associated with system conversion and integration. We expect general and administrative expenses to continue to decline as a percentage of revenue due to restructuring-related reductions in our facility costs and decreases in other general operating costs. Product development Product development expenses consist primarily of compensation and related benefits, consulting fees, and other operating expenses associated with the product development departments. To date, all product development costs have been expensed as incurred. Product development expenses were $13.9 million, or 12.1% of revenues for the three 11 months ended March 31, 2001 and $9.7 million, or 8.8% of revenues for the three months ended March 31, 2000. This increase was primarily attributable to growth-related increases in compensation and related benefits for product development personnel, which were partially offset by reductions in consulting expenses. Although we anticipate that professional services fees will decrease as we reduce our reliance on external consultants, we continue to believe that on-going investment in product development is critical to the attainment of our strategic objectives and, as a result, expect total product development expenses to remain fairly constant in absolute dollars. Amortization of intangible assets Amortization of intangible assets consists primarily of goodwill amortization. Amortization expense was $10.6 million for the three months ended March 31, 2001 and $8.4 million for the three months ended March 31, 2000. The increase was primarily the result of the amortization of goodwill related to our acquisitions of @plan and DoubleClick Japan, partially offset by reductions in amortization expense associated with DoubleClick Scandinavia and DoubleClick Iberoamerica as the result of their impairment write-downs in the fourth quarter of 2000. Restructuring charge In March 2001 our management took certain actions to further increase operational efficiencies and bring costs in line with revenues. These measures included the involuntary terminations of approximately 230 employees, primarily from our Media operations, as well as the consolidation of some of our leased office space and the closure of several of our offices. As a consequence, we recorded a $29.0 million charge to operations during the first quarter of 2001 for severance-related payments to terminated employees, the accrual of future lease costs (net of estimated sublease income and deferred rent) and the write-off of fixed assets for office locations that were closed or consolidated. As a result of these restructuring initiatives, we expect to achieve annualized savings of approximately $16 million in operating expenses. However, there can be no assurance that such cost reductions can be sustained or that the estimated costs of such actions will not change. We incurred no such restructuring charges for the three months ended March 31, 2000. Loss from operations Our operating loss was $63.9 million for the three months ended March 31, 2001 and $31.9 million for the three months ended March 31, 2000. The increase in operating loss is primarily attributable to our restructuring charges and the increase in the amortization of intangible assets discussed above. We plan to continue to grow and expand our business and therefore anticipate that we may incur future losses from operations. We continue to manage our operations with a focus on productivity and will manage headcount accordingly as our business evolves. Equity in losses of affiliates Equity in losses of affiliates was $1.1 million for the three months ended March 31, 2001 and $1.4 million for the three months ended March 31, 2000. In addition to our $0.9 million share of our investees' losses, equity in losses of affiliates for the three months ended March 31, 2001 included approximately $0.2 million in expense related to the amortization of goodwill associated with our investment in ValueClick. For the three months ended March 31, 2000, equity in losses of affiliates included approximately $1.1 million of such goodwill amortization. Gain (loss) on equity transactions of affiliates For the three months ended March 31, 2001, we recognized an approximately $3.8 million loss related to the decrease in value of our proportionate share of the net assets of our equity-method investee ValueClick resulting from its completion of two business combinations. For the three months ended March 31, 2000, we recognized an approximately $8.9 million gain related to the increase in value of our investment as the result of ValueClick's initial public offering. Interest and other, net Interest and other, net was $8.8 million for the three months ended March 31, 2001 and $7.0 million for the three months ended March 31, 2000. Interest and other, net included $13.0 million in interest income for the three months ended March 31, 2001 partially offset by $3.2 million of interest expense, and $10.7 million of interest income for the three months ended March 31, 2000, partially offset by $3.0 million of interest expense. The increase in interest income was attributable to increases in the average quarterly balances of our cash and cash equivalents and investments in marketable securities, partially offset by decreases in average investment yields due to declines in interest rates. Interest and other, net in future periods may fluctuate as a result of the average cash, investment and future debt balances we maintain as well as changes in the market rates of our investments. 12 Income taxes The provision for income taxes does not reflect the benefit of our historical losses due to limitations and uncertainty surrounding our prospective realization of the benefit. The provision for income taxes recorded for the three months ended March 31, 2001 primarily relates to corporate income taxes on the earnings of some of our foreign subsidiaries. The provision for the three months ended March 31, 2000 principally relates to a change in estimated tax refunds receivable for taxes paid by Abacus in fiscal 1999. Liquidity and capital resources Since inception we have financed our operations primarily through private placements of equity securities, and public offerings of our common stock and Convertible Subordinated Notes. Operating activities generated $1.1 million for the three months ended March 31, 2001, and used $5.1 million for the three months ended March 31, 2000. The increase in cash provided by operating activities in 2001 resulted primarily from a decrease in net loss, excluding non-cash items, and decreases in accounts receivable, which were partially offset by decreases in accounts payable and accrued expenses. Investing activities generated $38.0 million for the three months ended March 31, 2001, and used $342.8 million for the three months ended March 31, 2000. Cash provided by investing activities for the three months ended March 31, 2001 resulted primarily from the maturity of some of our investments in marketable securities, which was partially offset by cash paid for the purchase of equipment and the acquisition of businesses and intangible assets. Cash used by investing activities for the three months ended March 31, 2000 resulted primarily from equipment purchases and the investment of the proceeds from our common stock issuance in marketable securities. Net cash provided by financing activities was $2.4 million for the three months ended March 31, 2001 and $551.0 million for the three months ended March 31, 2000. Cash provided by financing activities consisted primarily of the proceeds from the issuance of common stock in connection with our employee stock purchase and stock option plans for the three months ended March 31, 2001, and the net proceeds from our public offering of common stock for the three months ended March 31, 2000. As of March 31, 2001 we had $232.3 million in of cash and cash equivalents and $599.1 million in investments in marketable securities. As of March 31, 2001, our principal commitments consisted of our Convertible Subordinated Notes and our obligations under operating and capital leases. Although we have no material commitments for capital expenditures, we continue to anticipate that our capital expenditures and lease commitments will be a material use of our cash resources consistent with the levels of our operations, infrastructure and personnel. Pursuant to an underwriting agreement dated February 17, 2000, we completed a public offering of 7,500,000 shares of our common stock, of which we sold 5,733,411 shares and certain stockholders sold 1,766,589 shares. Our net proceeds were approximately $502.9 million after deducting underwriting discounts, commissions and offering expenses. We believe that our existing cash and cash equivalents and investments in marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and marketable securities in a variety of government and corporate obligations and money market funds. As of March 31, 2001, our investments in marketable securities had a weighted average time to maturity of 220 days. 13 The following table presents the amounts of our financial instruments that are subject to interest rate risk by expected maturity and average interest rates as of March 31, 2001.
Time to Maturity -------------------------------------------------- One Year One to Two to Greater than or Less Two Years Four Years Four Years Fair Value -------- -------- ---------- ---------- ---------- Cash and cash equivalents $232,334 - - - $232,334 Average interest rate 4.50% Fixed-rate investments in marketable securities $419,939 $179,186 - - $599,125 Average interest rate 6.50% 6.28% Convertible Subordinated Notes - - - $250,000 $175,625 Average interest rate 4.75%
We did not hold derivative financial instruments as of March 31, 2001 and have never held these instruments in the past. FOREIGN CURRENCY RISK We transact business in various foreign countries and are thus subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to revenue and operating expenses denominated in European and Asian currencies. The effect of foreign exchange rate fluctuations on our operations for the three months ended March 31, 2001 was not material. We do not use financial instruments to hedge operating activities denominated in foreign currencies. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. As of March 31, 2001, we had $29.0 million in cash and cash equivalents denominated in foreign currencies. The introduction of the euro has not had a material impact on how we conduct business and we do not anticipate any changes in how we conduct business as a result of increased price transparency. Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors. 14 RISK FACTORS An investment in our company involves a high degree of risk. You should carefully consider the risks below, together with the other information contained in this report, before you decide to invest in our company. If any of the following risks actually occur, our business, results of operations and financial condition could be harmed, the trading price of our common stock could decline, and you could lose all or part of your investment. RISKS RELATED TO OUR COMPANY AND OUR BUSINESS OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT We were incorporated in January 1996 and have a limited operating history. An investor in our common stock must consider the risks and difficulties frequently encountered by companies in new and rapidly evolving industries, including the digital marketing industry. Our risks include: o ability to sustain historical revenue growth rates; o ability to manage our operations; o competition; o attracting, retaining and motivating qualified personnel; o maintaining our current, and developing new, strategic relationships with Web publishers; o ability to anticipate and adapt to the changing Internet advertising and direct marketing industries; o ability to develop and introduce new products and services and continue to develop and upgrade technology; o attracting and retaining a large number of advertisers from a variety of industries; and o relying on the DoubleClick networks. We also depend on the growing use of the Internet for advertising, commerce and communication, and on general economic conditions. We cannot assure you that our business strategy will be successful or that we will successfully address these risks. If we are unsuccessful in addressing these risks, our revenues may not grow in accordance with our business model and may fall short of expectations of market analysts and investors, which could negatively affect the price of our stock. WE HAVE A HISTORY OF LOSSES AND ANTICIPATE CONTINUED LOSSES We incurred net losses each year since inception, including net losses of $156.0 million and $55.8 million for the years ended December 31, 2000 and 1999, respectively. For the three months ended March 31, 2001, we incurred a net loss of $60.4 million and, as of March 31, 2001, our accumulated deficit was $329.3 million. We have not achieved profitability on an annual basis and expect to incur operating losses in the future. We expect to continue to incur significant operating and capital expenditures and, as a result, we will need to generate significant revenue to achieve and maintain profitability. We cannot assure you that we will generate sufficient revenue to achieve or sustain profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenue does not meet our expectations, or if operating expenses exceed what we anticipate or cannot be reduced accordingly, our business, results of operations and financial condition will be materially and adversely affected. 15 WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM WEB SITES OF A LIMITED NUMBER OF WEB PUBLISHERS AND THE LOSS OF THESE WEB PUBLISHERS AS CUSTOMERS COULD HARM OUR BUSINESS We derive a substantial portion of our DoubleClick Media revenue from ad impressions we deliver on the Web sites of a limited number of Web publishers. For the three months ended March 31, 2001, approximately 11.5% of our revenue resulted from ads delivered on the Web sites of the top five Web publishers on our DoubleClick networks. Our business, results of operations and financial condition could be materially and adversely affected by the loss of one or more of the Web publishers that account for a significant portion of our revenue or any significant reduction in traffic on these Web publishers' Web sites. The loss of these Web publishers could also cause advertisers or other Web publishers to leave our networks or cease to use our technology services. Either result could materially and adversely affect our business, results of operations and financial condition. Typically we enter into short-term contracts with Web publishers for our offerings. Since these contracts are short-term, we will have to negotiate new contracts or renewals in the future, which may have terms that are not as favorable to us as the terms of the existing contracts. Our business, results of operations and financial condition could be materially and adversely affected by such new contracts or renewals. OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED BY LAWSUITS RELATED TO PRIVACY AND OUR BUSINESS PRACTICES We are a defendant in several pending lawsuits alleging, among other things, that we unlawfully obtain and use Internet users' personal information, and that our use of cookies violates various federal and state laws. We are the subject of an inquiry involving the attorneys general of several states relating to our practices in the collection, maintenance and use of information about, and our disclosure of these information practices to, Internet users. We may in the future receive additional regulatory inquiries and we intend to cooperate fully. Class action litigation and regulatory inquiries of these types are often expensive and time consuming and their outcome is uncertain. We cannot quantify the amount of monetary or human resources that we will be required to use to defend ourselves in these proceedings. We may need to spend significant amounts on our legal defense, senior management may be required to divert their attention from other portions of our business, new product launches may be deferred or canceled as a result of these proceedings, and we may be required to make changes to our present and planned products or services, any of which could materially and adversely affect our business, financial condition and results of operations. If, as a result of any of these proceedings, a judgment is rendered or a decree is entered against us, it may materially and adversely affect our business, financial condition and results of operations. WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM ADVERTISEMENTS WE DELIVER TO WEB SITES, AND THE CONTINUED DECREASE IN TRAFFIC LEVELS COULD HARM OUR BUSINESS We derive a large portion of our revenue from advertisements we deliver to Web sites on our DoubleClick networks and from the technology and services we provide to Web publishers, advertisers and agencies. We expect that our DoubleClick networks and our technology services will continue to account for a significant portion of our revenue for the foreseeable future. Our contracts with our customers are generally short-term. We cannot assure you that our customers will remain associated with our DoubleClick networks or continue to use our technology and other services, that the Web sites of our customers will maintain consistent or increasing levels of traffic over time, that the number of ad units on our customers' Web sites will not diminish over time, or that we will be able to replace in a timely or effective manner departing customers with new customers with comparable traffic patterns, mix of ad impressions, or user demographics. Our failure to successfully market our products and develop and sustain long-term relationships with our customers, the loss of one or more customers that account for a significant portion of our 16 revenue, the failure of our customers' Web sites to maintain consistent or increasing levels of traffic or number of ad units, or the failure to keep pace with the introduction of new technological developments would materially and adversely affect our business, results of operations and financial condition. OUR ADVERTISING CUSTOMERS AND THE COMPANIES WITH WHICH WE HAVE OTHER BUSINESS RELATIONSHIPS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS Some of our customers may experience difficulty in supporting their current operations and implementing their business plans. These customers may reduce their spending on our products and services, or may not be able to discharge their payment and other obligations to us. The non-payment or late payment of amounts due to us from a significant customer would negatively impact our financial condition. These circumstances are influenced by general economic and industry conditions, and could have a material adverse impact on our business, financial condition and results of operations. In addition to intense competition, the overall market for Internet advertising has been characterized in recent quarters by increasing softness of demand, the reduction or cancellation of advertising contracts, an increased risk of uncollectible receivables from advertisers, and the reduction of Internet advertising budgets, especially by Internet-related companies. Our customers that are Internet-related companies may experience difficulty raising capital, or may be anticipating such difficulties, and therefore may elect to scale back the resources they devote to advertising, including on our system. Other companies in the Internet industry have depleted their available capital, and could cease operations or file for bankruptcy protection. If the current environment for Internet advertising does not improve, our business, results of operations and financial condition could be materially adversely affected. OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF FUTURE OPERATING PERFORMANCE Our revenue and results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include: o advertiser, Web publisher and direct marketer acceptance and demand for our solutions; o Internet user traffic levels; o number and size of ad units per page on our customers' Web sites; o changes in fees paid by advertisers; o changes in service fees payable by us to Web publishers in our networks; o the introduction of new Internet advertising products or services by us or our competitors; o variations in the levels of capital or operating expenditures and other costs relating to the expansion of our operations; and o general industry and economic conditions. For the foreseeable future, our revenue from DoubleClick TechSolutions and DoubleClick Media will also remain dependent on user traffic levels and advertising activity on our DoubleClick networks. This future revenue is difficult to forecast. Our operating expenses will include upgrading and enhancing our DART technology, expanding our product and service offerings, marketing and supporting our solutions and supporting our sales and marketing operations. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenue in relation to our expenses, or if our expenses exceed revenue, then our business, results of operations and financial condition could be materially and adversely affected. These results would likely affect the market price of our common stock in a manner which may be unrelated to our long-term operating performance. As a result, we believe that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on past periods as indicators of future performance. 17 RAPID CHANGES IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL, FINANCIAL AND INFORMATION SYSTEM RESOURCES In recent years, we have experienced significant growth and other changes that have placed considerable demands on our managerial, operational and financial resources. We continue to increase the scope of our product and service offerings both domestically and internationally, and to deploy our resources in accordance with changing business conditions and opportunities. To continue to successfully implement our business plan in our rapidly evolving industry requires an effective planning and management process. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to train and manage our workforce. We cannot assure you that management will be effective in attracting and retaining additional qualified personnel, integrating acquired businesses, or otherwise responding to new business conditions. We also cannot assure you that our information systems, procedures or controls will be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan. Our future performance may also depend on our effective integration of acquired businesses. Even if successful, this integration may take a significant period of time and expense, and may place a significant strain on our resources. Our inability to effectively respond to changing business conditions could materially and adversely affect our business, financial condition and results of operations. OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS MODEL A significant part of our business model is to generate revenue by providing digital marketing solutions to advertisers, ad agencies and Web publishers. The profit potential for this business model is unproven. To be successful, digital marketing will need to achieve broad acceptance by advertisers, ad agencies and Web publishers. Our ability to generate significant revenue from our customers will depend, in part, on our ability to contract with Web publishers that have Web sites with adequate available ad space inventory, and with advertisers that have continuing plans for Internet advertising. Further, the Web sites in our networks must generate sufficient user traffic with demographic characteristics attractive to our advertisers. We are affected by general industry conditions governing the supply and demand of Internet advertising. The intense competition among Internet advertising sellers has led to the creation of a number of pricing alternatives for Internet advertising. These alternatives make it difficult for us to project future levels of advertising revenue and applicable gross margin that can be sustained by us or the Internet advertising industry in general. Intensive marketing and sales efforts may be necessary to educate prospective advertisers regarding the uses and benefits of, and to generate demand for, our products and services. Enterprises may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems. In addition, since online direct marketing is emerging as a new and distinct business apart from online advertising, potential adopters of online direct marketing services will increasingly demand functionality tailored to their specific requirements. We may be unable to meet the demands of these clients. Acceptance of our new solutions will depend on the continued development of Internet commerce, communication and advertising, and demand for our solutions. We cannot assure you that there will be a demand for our new solutions or that any demand would be sustainable. DISRUPTION OF OUR SERVICES OR MISAPPROPRIATION OF CONFIDENTIAL INFORMATION DUE TO UNANTICIPATED PROBLEMS OR FAILURES COULD HARM OUR BUSINESS Our DART technology resides in our data centers in New York City, New Jersey, Virginia, California and Colorado, and in Europe, Asia and Latin America. Continuing and uninterrupted performance of our technology is critical to our success. Customers may become dissatisfied by 18 any system failure that interrupts our ability to provide our services to them, including failures affecting our ability to deliver advertisements without significant delay to the viewer. Sustained or repeated system failures would reduce the attractiveness of our solutions to advertisers, ad agencies and Web publishers and result in contract terminations, fee rebates and makegoods, thereby reducing revenue. Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of advertising delivered through our servers. To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition could be materially and adversely affected. Our operations are dependent on our ability to protect our computer systems against damage from fire, power loss, water damage, telecommunications failures, vandalism and other malicious acts, and similar unexpected adverse events. In addition, interruptions in our solutions could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require. Despite precautions we have taken, unanticipated problems affecting our systems have from time to time in the past caused, and in the future could cause, interruptions in the delivery of our solutions. 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. We currently retain highly confidential information of our customers in a secure database server. Although we observe security and access measures throughout our operations, we cannot assure you that we will be able to prevent unauthorized individuals from gaining access to this database server. Any unauthorized access to our servers, or abuse by our employees, could result in the theft of confidential customer information. COMPETITION IN INTERNET ADVERTISING, DIRECT MARKETING AND RELATED PRODUCTS AND SERVICES IS INTENSE AND LIKELY TO INCREASE IN THE FUTURE, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY The market for digital marketing products and services is very competitive. We expect this competition to continue to increase because there are low barriers to entry. Competition may also increase as a result of industry consolidation. We believe that our ability to compete depends on many factors both within and beyond our control, including the following: o the timing and acceptance of new solutions and enhancements to existing solutions developed either by us or our competitors; o customer service and support efforts; o our ability to adapt and scale our technology, and develop and introduce new technologies, as customer needs change and grow; o sales and marketing efforts; o the features, ease of use, performance, price and reliability of solutions developed either by us or our competitors; and o the relative impact of general economic and industry conditions on either us or our competitors. We compete directly or indirectly with companies in the following categories: o large Web publishers, Web portals and Internet advertising networks that offer advertising inventory; o providers of software and service bureau ad delivery solutions for Web publishers and advertisers; o email services companies, ISPs and other companies in the email services business; o direct mail and email list providers, and providers of information products and marketing research services to the direct marketing industry; o Web ratings companies, advertisement performance measurement companies, providers of Web advertising management, online research and consulting services and providers of syndicated market research in traditional publishing; and 19 o others, such as providers of customer relationship management services, content aggregation companies, companies engaged in advertising sales networks, advertising agencies and other companies that facilitate digital marketing. Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than us. These factors may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development, promotion and sale of their products and services. These competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees, strategic partners, advertisers, direct marketers and Web publishers. We cannot assure you that our competitors will not develop products or services that are equal or superior to our solutions or that achieve greater acceptance than our solutions. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or services to address the needs of our prospective advertising, ad agency and Web publisher customers. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share. We cannot assure you that we will be able to compete successfully or that competitive pressures will not materially and adversely affect our business, results of operations or financial condition. WE MAY NOT COMPETE SUCCESSFULLY WITH TRADITIONAL ADVERTISING MEDIA FOR ADVERTISING DOLLARS Companies doing business on the Internet, including ours, must also compete with television, radio, cable and print (traditional advertising media) for a share of advertisers' total advertising budgets. Advertisers may be reluctant to devote a significant portion of their advertising budget to Internet advertising if they perceive the Internet to be a limited or ineffective advertising medium. In addition, in response to adverse economic or business conditions, many advertisers reduce their advertising and marketing spending. These circumstances would increase the competition we face to sell our products and services, and could materially and adversely affect our business, results of operations or financial condition. OUR REVENUE IS SUBJECT TO SEASONAL AND CYCLICAL FLUCTUATIONS We believe that our business is subject to seasonal fluctuations. Advertisers generally place fewer advertisements during the first and third calendar quarters of each year, which directly affects our DoubleClick Media and DoubleClick TechSolutions businesses, and the direct marketing industry generally mails substantially more marketing materials in the third calendar quarter, which directly affects our DoubleClick Data business. Further, Internet user traffic typically drops during the summer months, which reduces the amount of advertising to sell and deliver. Expenditures by advertisers and direct marketers also tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns. Our revenue has in the past and may in the future be materially and adversely affected by a decline in the economic prospects of our customers or in the economy or industry in general, which could alter our current or prospective customers' spending priorities or budget cycles or change our sales cycle. Due to the risks discussed in this section, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. 20 WE MAY NOT BE ABLE SUCCESSFULLY TO MAKE ACQUISITIONS OF OR INVESTMENTS IN OTHER COMPANIES We may acquire or make investments in other complementary businesses, products, services or technologies. From time to time we have had discussions with other companies regarding our acquiring, or investing in, their businesses, products, services or technologies. We cannot assure you that we will be able to identify other suitable acquisition or investment candidates. Even if we do identify suitable candidates, we cannot assure you that we will be able to make other acquisitions or investments on commercially acceptable terms, if at all. Even if we agree to buy a company, we cannot assure you that we will be successful in consummating the purchase. Reasons for failing to consummate a purchase could include our refusal to increase the agreed upon purchase price to match an offer made by a subsequent competing bidder. If we buy a company, we could have difficulty in integrating that company's personnel and operations. In addition, the key personnel of the acquired company may decide not to work for us. If we acquire different types of businesses, we could have difficulty in integrating the acquired products, services, technologies or personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations due to accounting requirements such as amortization of goodwill. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. WE MUST MANAGE THE INTEGRATION OF ACQUIRED COMPANIES SUCCESSFULLY IN ORDER TO ACHIEVE DESIRED RESULTS As a part of our business strategy, we expect to enter into a number of business combinations and acquisitions. Achieving the benefits of acquisition transactions, including our recent acquisitions of @plan and FloNetwork, depends on the successful execution of post-acquisition events including: o integrating operations and personnel; o offering the existing products and services of each company to the other company's customers; and o developing new products and services that utilize the assets of both companies. In addition, acquisitions are accompanied by a number of risks, including: o the difficulty of assimilating the operations and personnel of the acquired companies; o the potential disruption of the ongoing businesses and distraction of our management and management of the acquired company; o the difficulty of incorporating acquired technology and rights into our products and services; o unanticipated expenses related to technology integration; o difficulties in maintaining uniform standards, controls, procedures and policies; o the impairment of relationships with employees and customers as a result of any integration of new management personnel; and o potential unknown liabilities associated with acquired businesses. We may not succeed in addressing these risks or any other problems encountered in connection with business combinations and acquisitions. Our failure to do so could have a material adverse effect on our business, financial condition and operating results and could result in the loss of key personnel. In addition, the attention and effort devoted to integration will significantly divert management's attention from other important issues, and could seriously harm our business. 21 IF WE FAIL TO SUCCESSFULLY CROSS-MARKET OUR PRODUCTS TO CUSTOMERS OF BUSINESSES WE ACQUIRE, OR TO DEVELOP NEW PRODUCTS TO SERVE THOSE AND OUR EXISTING CUSTOMERS, WE MAY NOT INCREASE OR MAINTAIN OUR CUSTOMER BASE OR OUR REVENUE We offer to our collective customers the respective products and services historically offered by DoubleClick and companies we have acquired. We cannot assure you that any company's customers will have any interest in the other companies' products and services. The failure of our cross-marketing efforts may diminish the benefits we realize from these acquisitions. In addition, we intend to develop new products and services that combine the knowledge and resources of our company and the businesses we acquire. We cannot assure you that these products or services will be developed or, if developed, will be successful or that we can successfully integrate or realize the anticipated benefits of these acquisitions. As a result, we may not be able to increase or maintain our customer base. We cannot assure you that we will be able to overcome the obstacles in developing new products and services, or that there will be a demand for the new products or services developed by us after the acquisitions. An inability to overcome these obstacles or a failure of demand to develop could materially and adversely affect our business, financial condition and results of operations or could result in loss of key personnel. WE DEPEND ON THIRD-PARTY INTERNET AND TELECOMMUNICATIONS PROVIDERS OVER WHOM WE HAVE NO CONTROL TO OPERATE OUR SERVICES. INTERRUPTIONS IN OUR SERVICES CAUSED BY ONE OF THESE PROVIDERS COULD HAVE AN ADVERSE EFFECT ON REVENUE. We depend heavily on several third-party providers of Internet and related telecommunication services, including of hosting and co-location facilities, in operating our products and services. These companies may not continue to provide services to us without disruptions in service, at the current cost, or at all. Although we believe that we could obtain these services from other sources if need be, the costs associated with any transition to a new service provider would be substantial, requiring us to reengineer our computer systems and telecommunications infrastructure to accommodate a new service provider. This process would be both expensive and time-consuming. In addition, failure of our Internet and related telecommunications providers to provide the data communications capacity in the time frame required by us could cause interruptions in the services we provide. Despite precautions taken by us, unanticipated problems affecting our computer and telecommunications systems in the future could cause interruptions in the delivery of our services, causing a loss of revenue and potential loss of customers. WE ARE DEPENDENT ON KEY PERSONNEL AND ON EMPLOYEE RETENTION AND RECRUITING FOR OUR FUTURE SUCCESS Our future success depends to a significant extent on the continued service of our key technical, sales and senior management personnel. We do not have employment agreements with most of these executives. The loss of the services of one or more of our key employees could materially and adversely affect our business, results of operations and financial condition. Our future success also depends on our continuing to attract, retain and motivate highly skilled employees. There is significant competition for qualified employees in our industry. We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR DAMAGES Our success and ability to effectively compete are substantially dependent on the protection of our proprietary technologies and our trademarks, which we protect through a combination of patent, trademark, copyright, trade secret, unfair competition and contract law. Despite our diligent efforts, we cannot assure you that any of our proprietary rights will be viable or of value in the future. In September 1999, the U.S. Patent and Trademark Office issued to us a patent that covers our DART technology. We own other patents, and have patent applications pending, for our technology. We cannot assure you that patents applied for will be issued or that patents issued or acquired by us now or in the future will be valid and enforceable, or provide us with any meaningful protection. We also have rights in the trademarks that we use to market our solutions. These trademarks include DOUBLECLICK'R', DART'R', DARTMAIL'TM' and ABACUS'R'. We have applied to register our trademarks in the United States and internationally. We have received registrations for the marks DOUBLECLICK, DART and ABACUS and have applied for registration of others. We cannot assure you that any of our current or future trademark applications will be approved. Even if they are approved, these trademarks may be successfully challenged by others or invalidated. If our trademark registrations are not approved because third parties own these trademarks, our use of these trademarks will be restricted unless we enter into arrangements with these parties which may be unavailable on commercially reasonable terms, if at all. In addition, we have licensed, and 22 may license in the future, our trademarks, trade dress and similar proprietary rights to third parties. While we endeavor to ensure that the quality of our brands are maintained by our licensees, our licensees may take actions that could materially and adversely affect the value of our proprietary rights and reputation. In order to secure and protect our proprietary rights, we generally enter into confidentiality, proprietary rights and license agreements, as appropriate, with our employees, consultants and business partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, we cannot be certain that the steps we take to prevent unauthorized use of our proprietary rights are sufficient to prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. In addition, we cannot assure you that we will be able to adequately enforce the contractual arrangements which we have entered into to protect our proprietary technologies. Furthermore, third parties may assert infringement claims against us, which could adversely affect our reputation and the value of our proprietary rights. From time to time we have been, and we expect to continue to be, subject to claims in the ordinary course of our business, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our customers. In particular, we do not conduct exhaustive patent searches to determine whether our technology infringes patents held by others. In addition, the protection of proprietary rights in Internet-related industries is inherently uncertain due to the rapidly evolving technological environment. As such, there may be numerous patent applications pending, many of which are confidential when filed, that provide for technologies similar to ours. Third party infringement claims and any resultant litigation, should it occur, could subject us to significant liability for damages or restrict us from using our intellectual property. Even if we prevail, litigation could be time-consuming and expensive to defend, and could result in the diversion of management's time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into royalty, licensing or other similar agreements with the third parties asserting these claims. Such agreements, if required, may be unavailable on terms acceptable to us, or at all. If a successful claim of infringement is brought against us and we fail to develop non-infringing technology or to license the infringed or similar technology on a timely basis, it could materially adversely affect our business, financial condition and results of operations. OUR RIGHT TO KEEP AND USE INFORMATION COLLECTED IN OUR DATABASES MAY BE CHALLENGED IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS We collect and compile information in databases for the product offerings of all our businesses. Individuals have claimed, and may claim in the future, that our collection of this information is illegal. Although we believe that we have the right to use and compile the information in these databases, we cannot assure you that our ability to do so will remain lawful, that any trade secret, copyright or other intellectual property protection will be available for our databases, or that statutory protection that is or becomes available for databases will enhance our rights. In addition, others may claim rights to the information in our databases. Further, pursuant to our contracts with Web publishers using our solutions, we are obligated to keep certain information regarding each Web publisher confidential and, therefore, may be restricted from further using that information in our businesses. WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS OR WE WILL NOT BE COMPETITIVE The digital marketing business is characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands. Our future success will depend on our ability to adapt to rapidly changing technologies and to enhance existing solutions and develop and introduce a variety of new solutions and 23 services to address our customers' changing demands. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our solutions and services. In addition, our new solutions or enhancements must meet the requirements of our current and prospective customers and must achieve significant acceptance. Material delays in introducing new solutions and enhancements may cause customers to forego purchases of our solutions and purchase those of our competitors. Our failure to successfully design, develop, test and introduce new services, or the failure of our recently introduced services to achieve acceptance, could prevent us from maintaining existing client relationships, gaining new clients or expanding our business and could materially and adversely affect our business, financial condition and results of operations. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL SUCCESSFULLY TO MANAGE OUR INTERNATIONAL OPERATIONS AND SALES AND MARKETING EFFORTS We have operations in a number of countries. We have limited experience in developing localized versions of our solutions and in marketing, selling and distributing our solutions internationally. We sell our products and services through our directly and indirectly owned subsidiaries in Australia, the Benelux countries, Canada, France, Germany, Spain, Ireland, Italy, Scandinavia and the United Kingdom. We also operate our media business through business partners in Japan and Asia (Hong Kong, Taiwan, Korea, China and Singapore) and generally operate our technology business through our directly or indirectly owned subsidiaries in these jurisdictions. A great deal of our success in these markets is directly dependent on the success of our business partners and their dedication of sufficient resources to our relationship. Our international operations are subject to other inherent risks, including: o the high cost of maintaining international operations; o uncertain demand for our products and services; o the impact of recessions in economies outside the United States; o changes in regulatory requirements; o more restrictive privacy regulation; o reduced protection for intellectual property rights in some countries; o potentially adverse tax consequences; o difficulties and costs of staffing and managing foreign operations; o political and economic instability; o fluctuations in currency exchange rates; and o seasonal fluctuations in Internet usage. These risks may have a material and adverse impact on the business, results of operations and financial condition of our operations in a particular country, and could result in a decision by us to reduce or discontinue operations in that country. The combined impact of these risks in each country may also materially and adversely affect the business, results of operations and financial condition of DoubleClick as a whole. WE HAVE INCURRED SIGNIFICANT DEBT OBLIGATIONS WHICH COULD HARM OUR BUSINESS We incurred $250 million of indebtedness in March 1999 from the sale of our 4.75% Convertible Subordinated Notes due 2006. Our ratio of long-term debt to total equity was approximately 32.0% as of March 31, 2001. The degree to which we are leveraged could materially and adversely affect our ability to obtain additional financing and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our 24 debt service obligations will depend on our future performance, which will be subject to financial, business, and other factors affecting our operations, many of which are beyond our control. EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY Some of the provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately: o discourage potential acquisition proposals; o delay or prevent a change in control; o impede the ability of our stockholders to change the composition of our board of directors in any one year; or o limit the price that investors might be willing to pay in the future for shares of our common stock. OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile and could be subject to wide fluctuations. In addition, the stock market has experienced extreme price and volume fluctuations. The market prices of the securities of Internet-related companies have been especially volatile. Investors may be unable to resell their shares of our common stock at or above their purchase price. IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. Many companies in our industry have been subject to this type of litigation in the past. We may also become involved in this type of litigation. Litigation is often expensive and diverts management's attention and resources, which could materially and adversely affect our business, financial condition and results of operations. FUTURE SALES OF OUR COMMON STOCK MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK As of March 31, 2001, we had 128,894,872 shares of common stock outstanding, excluding 21,944,597 shares subject to options outstanding as of such date under our stock option plans that are exercisable at prices ranging from $0.03 to $124.56 per share. Additionally, certain holders of our common stock have registration rights with respect to their shares. We intend to file one or more registration statements in compliance with these registration rights. We cannot predict the effect, if any, that future sales of common stock or the availability of shares of common stock for future sale, will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of common stock (including shares included in such registration statements, issued upon the exercise of stock options or issued upon the conversion of our convertible subordinated notes), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock. RISKS RELATED TO OUR INDUSTRY OUR BUSINESS MAY BE ADVERSELY AFFECTED IF DEMAND FOR INTERNET ADVERTISING FAILS TO GROW AS PREDICTED OR DIMINISHES Our future success is highly dependent on an increase in the use of the Internet as an advertising medium. The Internet advertising industry is new and rapidly evolving, and it cannot yet be compared with traditional advertising media to gauge its effectiveness. As a result, demand and acceptance for Internet advertising solutions is uncertain. Many of our current or potential 25 advertising customers have limited experience using the Internet for advertising purposes and they have allocated only a limited portion of their advertising budgets to Internet advertising. The adoption of Internet advertising, particularly by those entities that have historically relied upon traditional media for advertising, requires the acceptance of a new way of conducting business, exchanging information and advertising products and services. These customers may find Internet advertising to be less effective for promoting their products and services relative to traditional advertising media. In addition, some of our current and potential Web publisher customers have little experience in generating revenue from the sale of advertising space on their Web sites. We cannot assure you that current or potential advertising customers will allocate a portion of their advertising budget to Internet advertising or that the demand for Internet advertising will continue to develop to sufficiently support Internet advertising as a significant advertising medium. If the demand for Internet advertising decreases or develops more slowly than we expect, then our business, results of operations and financial condition could be materially and adversely affected. There are currently no generally accepted standards or tools for the measurement of the effectiveness of Internet advertising or the planning of advertising purchases, and generally accepted standard measurements and tools may need to be developed to support and promote Internet advertising as a significant advertising medium. Our advertising customers may challenge or refuse to accept ours or third-party's measurements of advertisement delivery results, or the market research information that we provide. Our customers may not accept any errors in such measurements. In addition, the accuracy of database information used to target advertisements is essential to the effectiveness of Internet advertising that may be developed in the future. The information in our database, like any database, may contain inaccuracies which our customers may not accept. A significant portion of our revenue is derived from the delivery of advertisements placed on Web sites which are designed to contain the features and measuring capabilities requested by advertisers. If advertisers determine that those ads are ineffective or unattractive as an advertising medium or if we are unable to deliver the features or measuring capabilities requested by advertisers, the long-term growth of our online advertising business could be limited and our revenue levels could decline. There are also 'filter' software programs that limit or prevent advertising from being delivered to a user's computer. The commercial viability of Internet advertising, and our business, results of operations and financial condition, would be materially and adversely affected by Web users' widespread adoption of this software. CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUE AND INCREASE OUR COSTS Laws applicable to Internet communications, e-commerce, digital advertising, data protection and direct marketing are becoming more prevalent. Any legislation enacted or regulation issued could dampen the growth and acceptance of the digital marketing industry in general and of our offerings in particular. Existing and proposed legislation in the United States, Europe (following the directive of the European Union), Canada, and Japan may impose limits on our collection and use of certain kinds of information about individuals, whether collected offline or online. Various U.S. state and foreign governments may also attempt to regulate our transmissions or levy sales or other taxes relating to our activities. Moreover, 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 such as those governing intellectual property, data protection, libel and taxation apply to the Internet and Internet advertising. In addition, the growth and development of 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 our businesses. 26 CHANGES IN LAWS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE PRIVACY OF INTERNET USERS AND OTHER INDIVIDUALS COULD HARM OUR BUSINESS New limitations on the collection and use of information relating to Internet users are currently being considered by legislatures and regulatory agencies in the United States and internationally. We are unable to predict whether any particular proposal will pass, or the nature of the limitations in those proposals that do pass. Since many of the proposals are in their development stage, we cannot yet determine the impact these may have on our business. In addition, it is possible that changes to existing law, including new interpretations of existing law, could have a material and adverse impact on our business, financial condition and results of operations. The following are examples of proposals currently being considered in the United States and internationally: o Legislation has been proposed in some jurisdictions to regulate the use of cookie technology. Our technology uses cookies for ad targeting and reporting, among other things, and we may be required to change our technology in order to comply with the new laws. It is possible that the changes required for compliance are commercially unfeasible, or that we are simply unable to comply and therefore may be required to discontinue the relevant business practice. o Data protection officials in certain European countries have voiced the opinion that an IP address is personally-identifiable information. In those countries in which this opinion prevails, the applicable national data protection law could be interpreted to subject us to a more restrictive regulatory regime. Although we believe our current policies and procedures would meet these more restrictive standards, we cannot assure you that the applicable authorities would make the same determination. The cost of such compliance could be material, and we may not be able to comply with the applicable national regulations in a timely or cost-effective manner. o Legislation has been proposed to prohibit the sending of 'unsolicited commercial email' or 'spam.' We have a consent-based email delivery and list services business that we believe should not, as a matter of policy, be affected by this kind of legislation. However, it is possible that legislation will be passed that requires us to change our current practices, or subject us to increased possibility of legal liability for our practices. o Legislation is under consideration that would regulate the practice of online preference marketing, as practiced by DoubleClick and other Network Advertising Initiative member companies. Such legislation, if passed, could require DoubleClick to change or discontinue its plans for online preference marketing services. The changes we are required to make could diminish the market acceptance of our offerings. o The Federal Trade Commission is currently reviewing the need to regulate the manner in which offline information about consumers is collected and used by businesses. The value of the Abacus database, and the future viability of the DoubleClick Data business, could be adversely affected by legislation or regulation that limits the manner in which offline information about consumers is collected and used. These and other circumstances leading to changes in the existing law could have a material and adverse impact on our business, financial condition and results of operations. In addition, DoubleClick is a member of the Network Advertising Initiative and the Direct Marketing Association, both industry self-regulatory organizations. Although our compliance with the these self-regulatory principles to date has not had a material adverse effect on us, we cannot assure you that these organizations will not adopt additional, more burdensome guidelines, which could materially and adversely affect the business, financial condition and results of operations of DoubleClick. 27 OUR BUSINESS MAY BE ADVERSELY AFFECTED BY PRODUCTS OFFERED BY THIRD PARTIES Our business may be adversely affected by the adoption by computer users of technologies that harm the performance of our products and services. For example, computer users may use software designed to filter or prevent the delivery of Internet advertising, or Internet browsers set to block the use of cookies. We cannot assure you that the number of computer users who employ these or other similar technologies will not increase, thereby diminishing the efficacy of our products and services. In the case that one or more of these technologies are widely adopted, our business, financial condition and results of operations could be materially and adversely affected. OUR BUSINESS MAY SUFFER IF THE WEB INFRASTRUCTURE IS UNABLE TO EFFECTIVELY SUPPORT THE GROWTH IN DEMAND PLACED ON IT Our success will depend, in large part, upon the maintenance of the Web infrastructure, such as a reliable network backbone with the necessary speed, data capacity and security, and timely development of enabling products such as high speed modems, for providing reliable Web access and services and improved content. We cannot assure you that the Web infrastructure will continue to effectively support the demands placed on it as the Web continues to experience increased numbers of users, frequency of use or increased bandwidth requirements of users. Even if the necessary infrastructure or technologies are developed, we may have to spend considerable amounts to adapt our solutions accordingly. Furthermore, the Web has experienced a variety of outages and other delays due to damage to portions of its infrastructure. These outages and delays could impact the Web sites of Web publishers using our solutions and the level of user traffic on Web sites on our DoubleClick networks. DOUBLECLICK DATA IS DEPENDENT ON THE SUCCESS OF THE DIRECT MARKETING INDUSTRY FOR ITS FUTURE SUCCESS The future success of DoubleClick Data is dependent in large part on the continued demand for our services from the direct marketing industry, including the catalog industry, as well as the continued willingness of catalog operators to contribute their data to us. Most of our Abacus clients are large consumer merchandise catalog operators in the United States. A significant downturn in the direct marketing industry generally, including the catalog industry, or withdrawal by a substantial number of catalog operators from the Abacus Alliance, would have a material adverse effect on our business, financial condition and results of operations. Many industry experts predict that electronic commerce, including the purchase of merchandise and the exchange of information via the Internet or other media, will increase significantly in the future. To the extent this increase occurs, companies that now rely on catalogs or other direct marketing avenues to market their products may reallocate resources toward these new direct marketing channels and away from catalog-related marketing or other direct marketing avenues, which could adversely affect demand for some DoubleClick Data services. In addition, the effectiveness of direct mail as a marketing tool may decrease as a result of consumer saturation and increased consumer resistance to direct mail in general. INCREASES IN POSTAL RATES AND PAPER PRICES COULD HARM DOUBLECLICK DATA The direct marketing activities of our Abacus Alliance clients are adversely affected by postal rate increases, especially increases that are imposed without sufficient advance notice to allow adjustments to be made to marketing budgets. Higher postal rates may result in fewer mailings of direct marketing materials, with a corresponding decline in the need for some of the direct marketing services offered by us. Increased postal rates can also lead to pressure from our clients to reduce our prices for our services in order to offset any postal rate increase. Higher paper prices may also cause catalog companies to conduct fewer or smaller mailings which could cause a corresponding decline in the need for our services. Our clients may aggressively seek price reductions for our services to offset any increased materials cost. Any of these occurrences could materially and adversely affect the business, financial condition and results of operations of our Abacus business. 28 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Following the announcement of our proposed merger with NetGravity on July 27, 1999, a complaint was filed in the San Mateo County, California, Superior Court against NetGravity and several of its directors. The complaint alleges that the directors of NetGravity breached their fiduciary duties to NetGravity's stockholders in connection with the negotiation of the proposed merger. The complaint asked the court to enjoin the consummation of the merger, or, alternatively, sought to rescind the merger or an award of unspecified damages from the defendants in the event the merger was consummated. We believe the claims asserted in this complaint are without merit and vigorously contest them. We are a defendant in 20 lawsuits concerning Internet user privacy and our data collection and other business practices. These lawsuits were filed throughout 2000. 18 of these actions are styled as class actions, one action is brought on behalf of the general public of the State of California and one is brought against us and ClearStation, Inc. on behalf of the State of Illinois by the State's Attorney of Cook County, Illinois. The actions seek, among other things, injunctive relief, civil penalties and unspecified damages. Five of the actions were filed in California state court, 13 in federal court, one in Texas state court and one in Illinois state court. On March 31, 2000, the plaintiff in one of the California state court proceedings filed a petition, ordered by the court on May 11, 2000, to coordinate the four actions then pending in the California state courts. The Judicial Panel on Multidistrict Litigation granted our motions to transfer, coordinate and consolidate the federal actions before Judge Buchwald in the Southern District of New York. On March 28, 2001, Judge Buchwald dismissed all federal lawsuits against DoubleClick. The plaintiffs have noticed their appeal to the Second Circuit Court of Appeals. We believe that these lawsuits are without merit and we intend to vigorously defend ourselves against them. Additionally, we received a letter from the Federal Trade Commission ('FTC'), dated February 8, 2000, in which the FTC notified us that they were conducting an inquiry into our business practices to determine whether, in collecting and maintaining information concerning Internet users, we have engaged in unfair or deceptive practices. In January 2001, the Federal Trade Commission closed its inquiry into our ad serving and data collection practices without recommending any further action. Our ad serving and data collection practices are also the subject of inquiries by the attorneys general of several states. We are cooperating fully with all such inquiries. We may receive additional regulatory inquiries and intend to cooperate fully. In May 2001, three lawsuits, styled as class actions, have been filed in the Southern District of New York against DoubleClick, Goldman Sachs & Co. and certain of the officers and directors of DoubleClick. The lawsuits allege various violations of the securities laws with respect to the commissions earned by Goldman Sachs in connection with DoubleClick's initial public offering. DoubleClick has not yet been served in connection with these lawsuits and these cases are in their early stages; however, DoubleClick intends to dispute these allegations and to defend these lawsuits vigoursly. 29 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) None. 30 (b) Reports on Form 8-K We filed a Current Report on Form 8-K/A, Item 5, on January 22, 2001, announcing that we entered into a Letter Agreement with @plan.inc, which amended our Amended and Restated Agreement and Plan of Merger and Reorganization with @plan.inc. We filed a Current Report on Form 8-K, Item 5, on February 2, 2001, attaching the press release that announced the final terms of our acquisition of @plan.inc. We filed a Current Report on Form 8-K, Item 5, on February 5, 2001, attaching the press release that announced the consummation of our acquisition of @plan.inc. We filed a Current Report on Form 8-K, Item 5, on March 22, 2001, attaching the press release that announced the strategic changes to our global media business. 31 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. Date: May 15, 2001 DOUBLECLICK INC. By: /s/ Thomas Etergino ................................. THOMAS ETERGINO VICE PRESIDENT OF CORPORATE FINANCE (CHIEF ACCOUNTING OFFICER AND DULY AUTHORIZED OFFICER) 32 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as..................................'TM' The registered trademark symbol shall be expressed as........................'R' -----END PRIVACY-ENHANCED MESSAGE-----