10-Q 1 a32681.txt DOUBLECLICK INC. FORM 10-Q ________________________________________________________________________________ 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, 2002 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, 2002 there were 136,125,057 outstanding shares of the registrant's Common Stock, including 207,325 shares exchangeable into shares of the registrant's common stock, which were issued in connection with the registrant's acquisition of FloNetwork Inc. ________________________________________________________________________________ DOUBLECLICK INC. INDEX TO FORM 10-Q PART I: FINANCIAL INFORMATION Item 1: Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001......................................... 1 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001............................. 2 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001............................. 3 Notes to Consolidated Financial Statements.................. 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 12 Item 3: Quantitative and Qualitative Disclosures about Market Risk...................................................... 18 PART II: OTHER INFORMATION Item 1: Legal Proceedings........................................... 32 Item 6: Exhibits and Reports on Form 8-K............................ 33
ii ITEM 1. FINANCIAL STATEMENTS DOUBLECLICK INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 2002 2001 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 121,801 $ 99,511 Investments in marketable securities.................... 295,052 339,996 Accounts receivable, net of allowances of $20,235 and $21,579, respectively................................. 62,354 81,412 Prepaid expenses and other current assets............... 39,447 35,180 ---------- ---------- Total current assets................................ 518,654 556,099 Investments in marketable securities........................ 309,111 295,019 Restricted cash............................................. 19,210 17,636 Property and equipment, net................................. 144,783 156,996 Goodwill.................................................... 76,627 57,567 Intangible assets, net...................................... 20,588 21,845 Investments in affiliates................................... 31,550 24,128 Other assets................................................ 8,952 9,063 ---------- ---------- Total assets........................................ $1,129,475 $1,138,353 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 22,340 $ 32,718 Accrued expenses and other current liabilities.......... 93,336 102,892 Deferred revenue........................................ 14,200 13,849 ---------- ---------- Total current liabilities........................... 129,876 149,459 Long-term obligations and notes............................. 49,010 46,414 Convertible subordinated notes.............................. 219,700 219,700 Minority interest........................................... 19,270 19,457 STOCKHOLDERS' EQUITY: Preferred stock, par value $0.001; 5,000,000 shares authorized, none outstanding.......................... -- -- Common stock, par value $0.001; 400,000,000 shares authorized, 136,829,677 and 134,799,135 shares issued, respectively.......................................... 137 135 Treasury stock, 765,170 shares.......................... (4,466) (4,466) Additional paid-in capital.............................. 1,277,919 1,265,953 Accumulated deficit..................................... (554,596) (548,552) Other accumulated comprehensive loss.................... (7,375) (9,747) ---------- ---------- Total stockholders' equity.......................... 711,619 703,323 ---------- ---------- Total liabilities and stockholders' equity.......... $1,129,475 $1,138,353 ---------- ---------- ---------- ----------
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, ------------------- 2002 2001 ---- ---- Revenue..................................................... $ 83,656 $114,870 Cost of revenue............................................. 31,999 50,336 -------- -------- Gross profit............................................ 51,657 64,534 Operating expenses: Sales and marketing (inclusive of non-cash compensation of $4,729 in 2001).................................... 29,821 55,148 General and administrative (inclusive of non-cash compensation of $107 in 2001)......................... 12,027 19,642 Product development..................................... 10,902 13,949 Goodwill amortization................................... -- 8,674 Amortization of intangibles............................. 3,144 1,943 Restructuring charge.................................... 1,440 29,033 -------- -------- Total operating expenses............................ 57,334 128,389 Loss from operations........................................ (5,677) (63,855) Other income (expense): Equity in income (losses) of affiliates................. 60 (1,145) Loss on sale of business................................ (1,372) -- Loss on equity transactions of affiliate................ -- (3,757) Interest and other, net................................. 3,392 8,766 -------- -------- Total other income (expense)........................ 2,080 3,864 Loss before income taxes.................................... (3,597) (59,991) Provision for income taxes.................................. (2,634) (1,059) -------- -------- Loss before minority interest............................... (6,231) (61,050) Minority interest........................................... 187 631 -------- -------- Net loss.................................................... $ (6,044) $(60,419) -------- -------- -------- -------- Basic and diluted net loss per share........................ $ (0.04) $ (0.48) -------- -------- -------- -------- Weighted-average shares used in net loss per share -- basic and diluted............................................... 135,218 126,610 -------- -------- -------- --------
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, --------------------- 2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $ (6,044) $ (60,419) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and leasehold amortization................. 10,753 12,717 Goodwill amortization................................... -- 8,674 Amortization of intangible assets....................... 3,586 1,943 Equity in (income) losses of affiliates................. (60) 1,145 Loss on equity transactions of affiliate................ -- 3,757 Write-off of fixed assets............................... 690 500 Minority interest....................................... (187) (631) Non-cash restructuring charge........................... -- 12,857 Non-cash compensation................................... -- 4,836 Other non-cash charges.................................. 778 120 Provision for bad debts and advertiser discounts........ 4,821 9,264 Changes in operating assets and liabilities: Accounts receivable................................. 9,149 11,021 Prepaid expenses and other assets................... (3,738) (503) Accounts payable.................................... (5,294) (6,985) Accrued expenses.................................... (12,760) 6,849 Other liabilities................................... 3,899 1,291 Deferred revenue.................................... 1,104 (5,289) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES....... 6,697 1,147 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments in marketable securities....... (113,279) (111,748) Maturities of investments in marketable securities...... 138,048 197,659 Purchases of property, plant and equipment.............. (1,712) (29,301) Investments in affiliates and other..................... -- (963) Proceeds from sale of email List Services division...... 1,960 -- Acquisitions of businesses and intangible assets, net of cash acquired......................................... (2,574) (17,630) --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES....... 22,443 38,017 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of common stock.............. 761 1,521 Proceeds from the exercise of stock options............. 2,681 1,348 Proceeds from notes payable............................. -- 510 Payment of notes and capital lease obligations.......... (8,737) (743) Other................................................... (1,000) (250) --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.................................... (6,295) 2,386 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS............................................... (555) (2,898) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 22,290 38,652 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 99,511 193,682 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 121,801 $ 232,334 --------- --------- --------- ---------
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 OTHER DESCRIPTION OF BUSINESS DoubleClick Inc. is a leading provider of products and services that enable direct marketers, publishers and advertisers to market to consumers in the digital world (together with its subsidiaries, 'DoubleClick'). Combining technology, media and data expertise, DoubleClick's products and services help its customers optimize their advertising and marketing campaigns on the Internet and through other media. DoubleClick offers a broad range of technology, media and data products and services to its customers to allow them to address all aspects of the digital marketing process, from pre-campaign planning and testing, to execution, measurement and campaign refinements. DoubleClick derives its revenues from three business units: Technology (or 'TechSolutions'), Media and Data based on the types of services provided. DoubleClick TechSolutions includes our ad management products consisting of the DART for Publishers Service, the DART Enterprise ad serving software product, the DART for Advertisers Service and a suite of email products based on DoubleClick's DARTmail Service. DoubleClick Media consists of the DoubleClick network, which provides fully outsourced and effective ad sales and related services to a worldwide group of advertisers and publishers. DoubleClick Data includes its Abacus division which utilizes the information contributed to the proprietary Abacus database by Abacus Alliance members to make direct marketing more effective for Abacus Alliance members and other clients. DoubleClick Data also includes DoubleClick's research division, which primarily consists of the @plan products and services. Our research division offers Web publishers sophisticated research about online market and advanced campaign tools and planning systems. On May 6, 2002, DoubleClick sold its @plan research product line to NetRatings, Inc. a provider of technology-driven Internet audience information solutions for media and commerce. 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 normal, recurring adjustments 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, 2001. 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 reporting period. Diluted net loss per share adjusts this calculation to reflect the impact of outstanding convertible securities, stock options and other potentially dilutive financial instruments to the extent that their inclusion would have a dilutive effect on net loss per share for the reporting period. 4 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) At March 31, 2002, and 2001, outstanding options of approximately 21.7 million and 21.9 million, respectively, to purchase shares of 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, at March 31, 2002 and 2001, the computation of diluted net loss per share excludes the effect of 5,326,055 and 6,060,606 shares, respectively, issuable upon the conversion of 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 all periods presented. 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. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, `Business Combinations' and SFAS No. 142, `Goodwill and Other Intangible Assets.' SFAS No. 141 established new standards for accounting and reporting requirements for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. SFAS No. 142 established new standards for goodwill acquired in a business combination, eliminated amortization of goodwill and set forth methods to periodically evaluate goodwill for impairment. Intangible assets with a determinable useful life will continue to be amortized over that life. SFAS 141 and 142 are effective for business combinations completed after June 30, 2001. DoubleClick adopted these statements on January 1, 2002; however, as noted above, certain provisions of these new standards apply to acquisitions concluded subsequent to June 30, 2001. Management is in the process of testing goodwill for impairment in connection with the adoption of SFAS No. 142, and will record such impairment, if any, as a cumulative effect of change in accounting principle. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, `Accounting for the Impairment or Disposal of Long-Lived Assets' (FAS 144), which supersedes FASB Statement No. 121, `Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'. This new statement also supercedes certain aspects of APB 30, `Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions', with regard to reporting the effects of a disposal of a segment of a business. FAS 144 will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred rather than as of the measurement date as presently required by APB 30. In addition, more dispositions may qualify for discontinued operations treatment. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of FAS 144 did not have a material impact on DoubleClick's results of operations or financial position. CHANGE IN ACCOUNTING ESTIMATE Effective January 1, 2002, DoubleClick changed its estimate relating to the useful lives of production equipment and software. The estimated useful life for these assets was extended from three years to four years to recognize depreciation expense over the remaining time that the assets will be in service. The change was based on an analysis performed by DoubleClick's operations department. As a result of the change, net income was increased approximately $2.9 million or $.02 per basic and diluted share in the first quarter of 2002. 5 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 2 -- GOODWILL The changes in the carrying amount of goodwill for the three months ended March 31, 2002 are as follows:
TECH MEDIA DATA TOTAL ---- ----- ---- ----- (IN THOUSANDS) Balance at January 1, 2002....................... $35,806 $14,276 $7,485 $57,567 Acquisition of MessageMedia...................... 25,346 -- -- 25,346 Sale of European Media business.................. -- (6,186) -- (6,186) Effect of foreign currency translation........... -- (100) -- (100) ------- ------- ------ ------- Balance at March 31, 2002........................ $61,152 $ 7,990 $7,485 $76,627 ------- ------- ------ ------- ------- ------- ------ -------
Due to the adoption of SFAS No. 142, the Company ceased amortizing goodwill. Had SFAS No. 142 been in effect in the first quarter of 2001, the Company would not have recorded goodwill amortization expense of $8.7 million. The following adjusts reported net loss and basic and diluted net loss per share as if the adoption of SFAS No. 142 occurred as of January 1, 2001.
THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 2002 2001 ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reported net loss............................. $(6,044) $(60,419) Add back: goodwill amortization............... -- 8,674 ------- -------- Adjusted net loss............................. $(6,044) $(51,745) ------- -------- ------- -------- Reported basic and diluted net loss per share....................................... $ (0.04) $ (0.48) Add back: goodwill amortization............... -- 0.07 ------- -------- Adjusted basic and diluted net loss per share....................................... $ (0.04) $ (0.41) ------- -------- ------- --------
NOTE 3 -- INTANGIBLE ASSETS Intangible assets consists of the following:
MARCH 31, 2002 ESTIMATED ------------------------------------------------- DECEMBER 31, 2001 USEFUL GROSS CARRYING ACCUMULATED ----------------- LIFE AMOUNT AMORTIZATION NET NET ---- ------ ------------ --- --- (IN THOUSANDS) Intangible assets: Patents and trademarks..... 3 years $ 9,723 $ (4,637) $ 5,086 $ 5,896 Customer lists... 2 years 21,913 (10,253) 11,660 11,507 Purchased technology and other.......... 3 years 5,506 (1,664) 3,842 4,442 ------- -------- ------- ------- $37,142 $(16,554) $20,588 $21,845 ------- -------- ------- ------- ------- -------- ------- -------
Amortization expense for the quarter ended March 31, 2002 was $3.6 million. Amortization expense relating to these intangible assets is estimated to be $13.7 million, $9.7 million, and $0.8 million in 2002, 2003 and 2004, respectively. 6 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 4 -- BUSINESS TRANSACTIONS MESSAGEMEDIA On January 18, 2002, DoubleClick completed its acquisition of MessageMedia, Inc. ('MessageMedia'), a provider of permission-based, email marketing and messaging solutions. The acquisition of MessageMedia allows DoubleClick to expand its suite of email product and service offerings as well as broaden its client base. DoubleClick acquired all the outstanding shares, options and warrants of MessageMedia in exchange for approximately one million shares of DoubleClick common stock valued at approximately $7.5 million, and stock options and warrants to acquire DoubleClick common stock valued at approximately $0.2 million. In connection with the acquisition, DoubleClick loaned $2.0 million to MessageMedia to satisfy MessageMedia's operating requirements. The loan was extinguished upon the closing of the acquisition and included as a component of the purchase price. The purchase price, inclusive of approximately $1.6 million of direct acquisition costs, was approximately $11.3 million. The value of the approximately one million shares of DoubleClick common stock issued was determined based on the average market price of DoubleClick common stock, as quoted on the Nasdaq National Market, for the day immediately prior to, the day of, and the day immediately after the number of shares due to MessageMedia shareholders became irrevocably fixed pursuant to the agreement under which MessageMedia was acquired. The MessageMedia options and warrants assumed by DoubleClick as the result of this merger converted into options and warrants to acquire approximately 120,000 shares of DoubleClick common stock and have been valued using the Black-Scholes option pricing model with the following weighted-average assumptions: Expected dividend yield..................................... 0.0% Risk-free interest rate..................................... 3.7% Expected life (in years).................................... 3.6 Volatility.................................................. 100%
The aggregate purchase price of $11.3 million, has been preliminarily allocated to the assets acquired and the liabilities assumed according to their fair values at the date of acquisition as follows (in millions): Current assets.............................................. $ 4.7 Other intangible assets..................................... 1.9 Goodwill.................................................... 25.3 Other non-current assets.................................... 4.3 ------ Total assets acquired................................... $ 36.2 Total liabilities assumed............................... $(24.9) ------ Net assets acquired......................................... $ 11.3 ------ ------
Approximately $1.9 million of the purchase price has been allocated to customer lists and is being amortized on a straight-line basis over 2 years. DoubleClick has also recorded approximately $25.3 million in goodwill, which represents the remainder of the excess of the purchase price over the fair value of net assets acquired. This goodwill is not tax deductible and in accordance with SFAS 142, goodwill will be periodically tested for impairment. DoubleClick is still awaiting information regarding certain assets and liabilities we acquired pertaining to MessageMedia's European operations. Any potential adjustment to goodwill will be recorded during the three months ended June 30, 2002 and is not expected to be material. The results of operations for MessageMedia have been included in DoubleClick's consolidated statements of operations from the date of acquisition. The following unaudited pro forma results of operations have been prepared assuming that the acquisition of MessageMedia described above, and the FloNetwork and @plan acquisitions consummated during 2001, 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 7 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) achieved had the acquisitions 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, ---------------------- 2002 2001 ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $85,057 $129,961 Amortization of intangible assets........................... 3,224 17,083 Net loss.................................................... $(8,406) $(85,647) Net loss per basic and diluted share........................ $ (0.06) $ (0.65)
NOTE 5 -- INVESTMENT IN VALUECLICK, INC. In the first quarter of 2001, DoubleClick recorded the effects of ValueClick's issuance of approximately 5.7 million shares to complete a purchase acquisition of Bach Systems, Inc. ('Bach Systems') and to consummate ValueClick's pooling of interests merger with ClickAgents.com, Inc. ('ClickAgents'). DoubleClick has treated ValueClick's pooling with ClickAgents as a book value purchase of ClickAgents by ValueClick. As a result of these transactions, DoubleClick's ownership interest was reduced from 28.1% to 23.5% and the value of its proportionate share of ValueClick's net assets decreased. DoubleClick recorded a decrease in the value of its investment in ValueClick and recognized a loss of approximately $3.8 million. This loss has been included in 'Loss on equity transactions of affiliate' in the Consolidated Statements of Operations. As a result of the cumulative dilutive effects of ValueClick's issuance of stock in connection with the Bach Systems, ClickAgents and other business combinations consummated during 2001, DoubleClick's ownership interest in ValueClick was reduced to 15.2% as of December 31, 2001. DoubleClick does not believe that it is able to exercise significant influence over its investment in ValueClick as of December 31, 2001 and accordingly, DoubleClick no longer records its proportionate share of ValueClick's results but instead carries this investment at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. DoubleClick's investment in ValueClick is included in 'Investments in affiliates' in the Consolidated Balance Sheets. NOTE 6 -- NON-CASH COMPENSATION Non-cash compensation primarily represents the consideration paid to certain former shareholders of DoubleClick Scandinavia. Shares of DoubleClick common stock were issued based upon the continued employment of the former shareholders and the attainment of specific revenue objectives for the year ended December 31, 2001. In May 2001, DoubleClick agreed to pay the former shareholders approximately $18.0 million in DoubleClick common stock, which was equal to the minimum consideration they were entitled to receive under the terms of the original agreement. As of March 31, 2001, DoubleClick had accrued approximately $7.5 million in compensation expense related to these payments. The remaining unexpensed portion of the contingent consideration, approximately $10.5 million, was charged to earnings during the three months ended June 30, 2001. NOTE 7 -- SALE OF EUROPEAN MEDIA BUSINESS On January 28, 2002, DoubleClick completed the sale of its European Media business to AdLINK, a German provider of Internet advertising solutions, in exchange for $26.3 million and the assumption by AdLINK of liabilities associated with DoubleClick's European Media business. Intercompany liabilities in an amount equal to $4.3 million were settled through a cash payment by AdLINK to DoubleClick at the closing of the transaction. Following the closing of the transaction described above, United Internet AG, or United Internet, AdLINK's largest shareholder, exercised its right to sell to DoubleClick 15% of the outstanding common shares of AdLINK in exchange for $30.6 million. Pursuant to its agreement with United Internet, the exercise of this right caused DoubleClick's option to acquire an additional 21% of 8 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) AdLINK common shares from United Internet to vest. This option is only exercisable over a two-year period if AdLINK has achieved EBITDA-positive results for two out of three consecutive fiscal quarters before December 2003. Should AdLINK fail to achieve these results, the option will expire unexerciseable in December 2003. During the three months ended March 31, 2002, AdLINK did not achieve EBITDA-positive results. As the result of the transactions described above, DoubleClick sold its European Media business and received a 15% interest in AdLINK. DoubleClick's option to acquire an additional 21% of the outstanding common shares of AdLINK from United Internet also vested. The approximately $8.3 million value of the 15% of the outstanding common stock of AdLINK, representing approximately 3.9 million shares, has been determined based on these shares' average market prices, as quoted on the Neuer Markt, for the day before, the day of, and the day immediately after the number of shares due to DoubleClick became irrevocably fixed pursuant to its agreements with AdLINK and United Internet. DoubleClick was partially reimbursed $2.0 million for its cash outlays related to the acquisitions of, and payments with respect to, the minority interests in certain of its European subsidiaries pursuant to its agreement to sell its European Media business. DoubleClick's investment in AdLINK is included in 'Investments in affiliates' in the Consolidated Balance Sheets. NOTE 8 -- RESTRUCTURING CHARGE Throughout 2001, our management took certain actions to increase operational efficiencies and bring costs in line with revenues. These measures included the involuntary terminations of approximately 605 employees, primarily from our Media and TechSolutions divisions, as well as the consolidation of some of our leased office space and the closure of several of our offices. In March 2002, management took additional steps to realign our sales organization. This involved the involuntary termination of approximately 60 employees, primarily from our Media and TechSolutions divisions. As a consequence, DoubleClick recorded a $1.4 million charge to operations during the first quarter of 2002 primarily related to payments for severance. As of March 31, 2002, approximately $11.0 million and $33.1 million remain accrued in 'Accrued expenses and other current liabilities' and 'Long-term obligations and notes', respectively. The following table sets forth a summary of the costs and related charges for DoubleClick's 2002 restructuring and the balance of the 2002 and 2001 restructuring reserves established:
FUTURE LEASE COSTS & RELATED OTHER ASSET EXIT SEVERANCE WRITE-OFFS COSTS TOTAL --------- ---------- ----- ----- (IN THOUSANDS) 2001 Restructuring Balance at January 1, 2002......................... $ 915 $48,440 $ 266 $49,621 Cash expenditures.................................. (863) (2,401) (49) (3,313) Non-cash charges................................... -- (2,700) -- (2,700) ------ ------- ----- ------- Balance at March 31, 2002.......................... $ 52 $43,339 $ 217 $43,608 ------ ------- ----- ------- ------ ------- ----- ------- 2002 Restructuring Restructuring charge............................... $1,250 $ -- $ 190 $ 1,440 Cash expenditures.................................. (752) -- (145) (897) Non-cash charges................................... -- -- (45) (45) ------ ------- ----- ------- Balance at March 31, 2002.......................... $ 498 $ -- -- $ 498 ------ ------- ----- ------- Total reserve balance at March 31, 2002........ $ 550 $43,339 $ 217 $44,106 ------ ------- ----- ------- ------ ------- ----- -------
9 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 9 -- SEGMENT REPORTING DoubleClick is organized into three segments: Technology, Media and Data. Revenues and gross profit by segment are as follows:
THREE MONTHS ENDED MARCH 31, 2002 THREE MONTHS ENDED MARCH 31, 2001 ---------------------------------------- ----------------------------------------- TECHNOLOGY MEDIA DATA TOTAL TECHNOLOGY MEDIA DATA TOTAL ---------- ----- ---- ----- ---------- ----- ---- ----- Revenue............................... $50,426 $16,337 $18,218 $84,981 $54,920 $46,094 $18,214 $119,228 Intersegment elimination.............. (1,262) -- (63) (1,325) (4,310) -- (48) (4,358) ------- ------- ------- ------- ------- ------- ------- -------- Revenue from external customers....... $49,164 $16,337 $18,155 $83,656 $50,610 $46,094 $18,166 $114,870 ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------- Segment gross profit.................. $34,359 $ 4,669 $12,683 $51,711 $36,748 $16,345 $11,441 $ 64,534 ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------- Data commission fee................... (54) ------- Consolidated gross profit............. $51,657 ------- -------
NOTE 10 -- COMPREHENSIVE LOSS Comprehensive loss consists of net loss, unrealized gains and losses on marketable securities and foreign currency translation adjustments. Comprehensive loss was $3.7 million and $60.1 million for the three months ended March 31, 2002 and 2001, respectively. NOTE 11 -- CONTINGENCIES We are a defendant in 20 lawsuits concerning Internet user privacy and data collection and other business practices in both state and federal court. On March 28, 2001, the federal cases against DoubleClick were dismissed by Judge Buchwald in the Southern District of New York. In conjunction with a proposed settlement, the plaintiffs have recently withdrawn their appeal to the Second Circuit Court of Appeals. In March 2002, the parties filed a settlement agreement with the federal court that would resolve the federal lawsuits and the state lawsuits in California and Texas, to which the court gave preliminary approval on March 29, 2002. On March 29, 2002, the parties issued a joint press release outlining the terms of the settlement. A hearing concerning final approval of the settlement is scheduled before Judge Buchwald on May 21, 2002. We intend to defend any remaining actions vigorously. In addition, beginning in May 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws in connection with DoubleClick's initial public offering were filed in the United States District Court for the Southern District of New York naming as defendants DoubleClick, some of its officers and directors and certain underwriters of DoubleClick's initial public offering. These actions were dismissed against us and the other defendants without prejudice. However, the plaintiffs filed an amended complaint against us, certain of our officers and directors and the underwriters of the Company's follow-on offerings alleging substantially similar disclosure violations as in the initial complaint. These cases are in their early stages; however, DoubleClick intends to dispute these allegations and defend these lawsuits vigorously. Separately, 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. 10 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) DoubleClick believes that, notwithstanding the quality of defenses available, it is possible that our financial condition and results of operations could be materially adversely affected by the ultimate outcome of the pending litigation. As of March 31, 2002, DoubleClick has recorded a provision of approximately $1.8 million relating to the settlement of the pending privacy lawsuits. NOTE 12 -- SUBSEQUENT EVENT On May 6, 2002, DoubleClick sold its @plan research product line to NetRatings Inc., a provider of technology-driven Internet audience information solutions for media and commerce, in exchange for approximately $18.5 million in cash and stock. 11 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 AND WE MAY CHOOSE TO NOT UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER IF CIRCUMSTANCES CHANGE. OVERVIEW We are a leading provider of products and services that enable direct marketers, publishers and advertisers to market to consumers in the digital world. Combining technology, media and data expertise, our products and services help our customers optimize their advertising and marketing campaigns on the Internet and through other media. We offer a broad range of technology, media and data products and services to our customers to allow them to address all aspects of the digital marketing process, from pre-campaign planning and testing, to execution, measurement and campaign refinements. Our service and product offerings are grouped into three segments: DoubleClick Technology Solutions ('Technology' or 'TechSolutions'); DoubleClick Media ('Media'); and DoubleClick Data ('Data'). BUSINESS TRANSACTIONS MESSAGEMEDIA On January 18, 2002, DoubleClick completed its acquisition of MessageMedia, Inc. ('MessageMedia'), a provider of permission-based, email marketing and messaging solutions. DoubleClick acquired all the outstanding shares, options and warrants of MessageMedia in exchange for one million shares of DoubleClick common stock valued at approximately $7.5 million, and stock options and warrants to acquire DoubleClick common stock valued at approximately $0.2 million. In connection with the acquisition, DoubleClick loaned $2.0 million to MessageMedia to satisfy MessageMedia's operating requirements. The loan was extinguished upon the closing of the acquisition and included as a component of the purchase price. The purchase price, of approximately $11.3 million inclusive of approximately $1.6 million of direct acquisition costs, has been preliminarily allocated to the assets acquired and the liabilities assumed based on their respective fair values at the acquisition date. Approximately $1.9 million of the purchase price has been allocated to customer lists and is being amortized on a straight-line basis over 2 years. DoubleClick has also recorded approximately $25.3 million in goodwill, which represents the remainder of the excess of the purchase price over the fair value of net assets acquired. This goodwill is not tax deductible and in accordance with SFAS 142, goodwill will be periodically tested for impairment. DoubleClick is still awaiting information regarding certain assets and liabilities we acquired pertaining to MessageMedia's European operations. Any potential adjustment to goodwill will be recorded during the three months ended June 30, 2002 and is not expected to be material. 12 The results of operations for MessageMedia have been included in DoubleClick's Consolidated Statements of Operations from the date of acquisition. EUROPEAN MEDIA BUSINESS On January 28, 2002, DoubleClick completed the sale of its European Media business to AdLINK Internet Media AG, a German provider of Internet advertising solutions, in exchange for $26.3 million and the assumption by AdLINK of liabilities associated with DoubleClick's European Media business. Intercompany liabilities in an amount equal to $4.3 million were settled through a cash payment by AdLINK to DoubleClick at the closing of the transaction. Following the closing of the transaction described above, United Internet AG, or United Internet, AdLINK's largest shareholder, exercised its right to sell to DoubleClick 15% of the outstanding common shares of AdLINK in exchange for $30.6 million. Pursuant to its agreement with United Internet, the exercise of this right caused DoubleClick's option to acquire an additional 21% of AdLINK common shares from United Internet to vest. This option is only exercisable over a two-year period if AdLINK has achieved EBITDA-positive results for two out of three consecutive fiscal quarters before December 2003. Should AdLINK fail to achieve these results, the option will expire unexerciseable in December 2003. During the three months ended March 31, 2002 AdLINK did not achieve EBITDA- positive results. As the result of the transactions described above, DoubleClick sold its European Media business and received a 15% interest in AdLINK. DoubleClick's option to acquire an additional 21% of the outstanding common shares of AdLINK from United Internet also vested. The approximately $8.3 million value of the 15% of the outstanding common stock of AdLINK, approximately 3.9 million shares, has been determined based on these shares' average market prices, as quoted on the Neuer Markt, for the day before, the day of, and the day immediately after the number of shares due to DoubleClick became irrevocably fixed pursuant to its agreements with AdLINK and United Internet. @PLAN On May 6, 2002, DoubleClick sold its @plan research product line to NetRatings Inc., a provider of technology-driven Internet audience information solutions for media and commerce, in exchange for approximately $18.5 million in cash and stock. THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2001 RESULTS OF OPERATIONS Revenues and gross profit by segment are as follows:
THREE MONTHS ENDED MARCH 31, 2002 THREE MONTHS ENDED MARCH 31, 2001 ---------------------------------------- ----------------------------------------- TECHNOLOGY MEDIA DATA TOTAL TECHNOLOGY MEDIA DATA TOTAL ---------- ----- ---- ----- ---------- ----- ---- ----- Revenue................... $50,426 $16,337 $18,218 $84,981 $54,920 $46,094 $18,214 $119,228 Intersegment elimination............. (1,262) -- (63) (1,325) (4,310) -- (48) (4,358) ------- ------- ------- ------- ------- ------- ------- -------- Revenue from external customers............... $49,164 $16,337 $18,155 $83,656 $50,610 $46,094 $18,166 $114,870 ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------- Segment gross profit...... $34,359 $ 4,669 $12,683 $51,711 $36,748 $16,345 $11,441 $ 64,534 ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------- Data commission fee....... (54) ------- Consolidated gross profit.................. $51,657 ------- -------
DOUBLECLICK TECHSOLUTIONS DoubleClick TechSolutions revenue is derived primarily from sales of our ad management products and services, including our DART for Publishers Service, our DART Enterprise ad serving software solution, DART for Advertisers and our email technology products and services. DoubleClick TechSolutions cost of revenue includes costs associated with the delivery of our advertisements and our email product offerings, including Internet access costs, depreciation of the ad and email delivery 13 systems, facilities and personnel-related costs incurred to operate and support our ad and email delivery products. DoubleClick TechSolutions revenue decreased 8.2% to $50.4 million for the three months ended March 31, 2002 from $54.9 million for the three months ended March 31, 2001. DoubleClick TechSolutions gross margin was 68.1% for the three months ended March 31, 2002 and 66.9% for the three months ended March 31, 2001. The decrease in TechSolutions ad management revenues reflected in large part the decline in overall online advertising spending. In response to the continued deterioration of general economic conditions, many companies, particularly Internet-related companies, have significantly scaled back their advertising and marketing budgets, which has had a correspondingly negative impact on aggregate online advertising spending. These trends exerted increasing downward pressure on TechSolutions ad management revenues, which was partially offset by acquisition-related growth in our email business associated with our purchase of FloNetwork and MessageMedia. While it is impossible to determine the duration or severity of this downturn, we do not expect substantial growth in DoubleClick TechSolutions revenue to occur until economic concerns subside and the Internet advertising industry achieves a more meaningful balance between supply and demand for advertising inventory. The increase in gross margin was primarily attributable to the reduction in depreciation expense resulting from our extension of the useful life of our ad delivery hardware and software from three to four years to recognize depreciation expense over the remaining time that the assets will be in service. In addition, we renegotiated many of our contracts with our Internet service providers, which also contributed to the increase in gross margin. This was partially offset by increased levels of price competition and a shift in product mix. DOUBLECLICK MEDIA DoubleClick Media revenue is derived primarily from the sale and delivery of advertising impressions through third-party Web sites comprising the DoubleClick Media network. DoubleClick Media cost of revenue consists primarily of service fees paid to Web publishers for impressions delivered on our network, and the costs of ad delivery and technology support provided by DoubleClick TechSolutions. Revenue for DoubleClick Media decreased 64.6% to $16.3 million for the three months ended March 31, 2002 from $46.1 million for the three months ended March 31, 2001. DoubleClick Media gross margin was 28.6% for the three months ended March 31, 2002 and 35.4% for the three months ended March 31, 2001. The decrease in DoubleClick Media revenue reflected in large part the decline in overall online advertising spending mentioned above. In addition, DoubleClick Media revenue for the three months ended March 31, 2001 included approximately $5.7 million or 12.4% of revenue for advertising impressions delivered to users of the AltaVista Web site. No such revenue was recognized in DoubleClick Media's results during the three months ended March 31, 2002. DoubleClick Media's revenues also decreased as a result of the sale of its European Media business. On January 28, 2002, DoubleClick completed the sale of its European Media operations to AdLINK Internet Media AG, a German provider of Internet advertising solutions. Revenue recognized by the European Media business prior to its sale was $1.1 million and $10.2 million for the three months ended March 31, 2002 and 2001, respectively. Excluding its European Media business, DoubleClick Media revenues would have been approximately $15.2 million and $35.9 million for the three months ended March 31, 2002 and 2001, respectively. DoubleClick Media gross margin decreased primarily due to the reduction in revenue derived from advertising impressions delivered to the users of the Alta Vista Web site. Because of specific contractual terms unique to AltaVista, DoubleClick Media recognizes net revenue from sales commissions, billing and collection fees from the sale of ads on the AltaVista Web site and associated services, with no corresponding site compensation, thus resulting in higher gross margins. In addition, increased levels of price competition contributed to the decrease in gross margin. This decrease was partially offset by lower average site fees remitted to Web publishers, and a reduction in the cost of ad delivery and technology support provided by DoubleClick TechSolutions. Excluding DoubleClick Media's European business, DoubleClick Media's gross profit would have been approximately $4.2 million and $11.6 million for the three months ended March 31, 2002 and 2001, respectively. 14 On March 11, 2002, DoubleClick completed the sale of its email List Services division to infoUSA for $2.0 million, subject to post-closing adjustments. Revenue and gross profits recognized by the email List Services division was approximately $2.7 and $0.6 million, respectively for the three months ended March 31, 2002. Revenue and gross profit recognized for the email List Services division during the three months ended March 31, 2001 were insignificant to DoubleClick Media's results. As a result of the sale of our email List Services division, we anticipate DoubleClick Media's revenues to decrease in the second quarter of 2002. Gross margin is expected to increase in the second quarter of 2002 as a result of lower site fee arrangements. DOUBLECLICK DATA DoubleClick Data revenue has historically been derived primarily from its Abacus division, which provides services such as prospecting lists, housefile scoring and list optimization to the direct marketing industries. Following the acquisition of @plan in February 2001, we created 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. Research revenue is derived primarily 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 Research databases as well as the technical infrastructure to produce our products and services. DoubleClick Data revenue was $18.2 million for the three months ended March 31, 2002 and 2001. Gross margin increased from 62.8% for the three months ended March 31, 2001 to 69.6% for the three months ended March 31, 2002. These results represent a slight decrease in revenues generated by our Abacus division, which was offset by an additional month of revenues from our research division during the three months ended March 31, 2002. The increase in gross margin was primarily attributable to the reduction in amortization expense of purchased third party names associated with the Abacus email alliance and a decrease in consulting and survey fees. On May 6, 2002, DoubleClick sold its @plan research product line to NetRatings Inc., a provider of technology-driven Internet audience information solutions for media and commerce, in exchange for approximately $18.5 million in cash and stock. Revenue and gross profits recognized by the @plan research product line was approximately $2.3 million and approximately $1.4 million, respectively, for the three months ended March 31, 2002. As a result of the sale of the @plan research product line, DoubleClick Data anticipates decreases in absolute dollar amounts of both revenues and gross profits in the second quarter of 2002. 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 $29.8 million, or 35.6% of revenue for the three months ended March 31, 2002 and $55.1 million, or 48.0% of revenue for the three months ended March 31, 2001. The $25.3 million decrease in sales and marketing expense was primarily attributable to a $9.8 million decrease in compensation and related benefits and sales commissions due to reductions in headcount associated with our restructuring activities. Reductions in other personnel-related costs lowered sales and marketing expenses by approximately $2.2 million, and non-cash compensation expense decreased by approximately $4.7 million as a result of DoubleClick issuing the remaining consideration payable to the former shareholders of DoubleClick Scandinavia in 2001. There was no such non-cash compensation expense during the three months ended March 31, 2002. In addition, marketing and bad debt expenses decreased $2.3 million and $2.7 million, respectively, and rent and utilities decreased by $2.3 million dollars. These decreases are commensurate with the decline in our revenues and the level of business activity. We expect sales and marketing expenses to remain relatively consistent as a percentage of revenues. 15 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 $12.0 million, or 14.4% of revenue for the three months ended March 31, 2002, and $19.6 million, or 17.1% of revenue for the three months ended March 31, 2001. The $7.6 million decrease in general and administrative expense was primarily the result of overall reductions in professional services fees of $2.8 million and decreases in personnel-related costs of $2.5 million. Decreased professional services fees resulted from a decrease in legal fees and a reduction in consulting fees associated with system conversion and integration. Personnel-related costs declined commensurate with the headcount reductions undertaken as part of our restructuring activities. We expect general and administrative expenses to remain relatively consistent as a percentage of revenues. PRODUCT DEVELOPMENT Product development expenses consist primarily of compensation and related benefits, consulting fees and other operating expenses associated with the product development departments. Product development expenses were $10.9 million, or 13.0% of revenue for the three months ended March 31, 2002 and $13.9 million, or 12.1% of revenue for the three months ended March 31, 2001. The $3.0 million decrease in product development expenses was primarily the result of decreases in compensation and related benefits for product development personnel of $2.1 million, and a decrease in consulting fees of approximately $0.8 million. Although we will continue to concentrate on the efficient allocation of our personnel resources and reduce our reliance on external consultants, we believe that on-going investment in product development is critical to the attainment of our strategic objectives and, as a result, we expect product development expenses to remain relatively consistent as a percentage of revenues. AMORTIZATION OF INTANGIBLE ASSETS Amortization of intangible assets consists primarily of the amortization of customer lists and patents. Amortization expense was $3.1 million for the three months ended March 31, 2002 and $1.9 million for the three months ended March 31, 2001. The increase was primarily the result of the amortization of customer lists acquired in business combinations consummated subsequent to March 31, 2001. GOODWILL AMORTIZATION In accordance with SFAS No. 142, goodwill is no longer amortized as of January 1, 2002 but is periodically tested for impairment. Goodwill amortization was approximately $8.7 million for the three months ended March 31, 2001 and primarily related to the goodwill associated with our acquisitions of @plan, Flashbase and DoubleClick Japan. RESTRUCTURING CHARGE In March 2002, management took additional steps to realign our sales organization. This involved the involuntary termination of approximately 60 employees, primarily from our TechSolutions and Media operations. As a consequence, DoubleClick recorded a $1.4 million charge to operations during the three months ended March 31, 2002, primarily related to payments for severance. We expect to achieve annualized savings of approximately $5.0 million as a result of the restructuring initiatives undertaken during the three months ended March 31, 2002. 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 three months ended March 31, 2001 for severance-related payments to terminated employees, the accrual of future lease costs, net of estimated sublease 16 income and deferred rent, and the write-off of fixed assets for office locations that were closed or consolidated. LOSS FROM OPERATIONS Our operating loss was $5.7 million for the three months ended March 31, 2002 and $63.9 million for the three months ended March 31, 2001. The decrease in our operating loss of $58.2 million is primarily attributable to the decrease in our restructuring charge of $27.6 million, a decrease in goodwill amortization of $8.7 million, and a decrease in other operating expenses of approximately $36.0 million as a result of our restructuring activities and other cost cutting initiatives during 2001. This was partially offset by a decrease in gross profits of approximately $12.9 million and an increase in amortization of intangibles of approximately $1.2 million. We continue to manage our operations with a focus on productivity and manage our headcount accordingly, but due to the general economic trends we expect to incur future losses from operations. EQUITY IN INCOME (LOSSES) OF AFFILIATES Equity in income (losses) of affiliates was approximately $0.1 million for the three months ended March 31, 2002 and ($1.1) million for the three months ended March 31, 2001. The increase in our equity in income of affiliates was primarily a result of our investment in ValueClick being accounted for as a marketable security during the three months ended March 31, 2002. As a result of the cumulative dilutive effects of ValueClick's issuance of stock in connection with business combinations consummated during 2001, DoubleClick's ownership interest had been reduced to 15.2%. DoubleClick does not believe that it is able to exercise significant influence over its investment in ValueClick and accordingly, DoubleClick no longer records its proportionate share of ValueClick's results but instead carries this investment at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. 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 ValueClick resulting from its completion of two business combinations. INTEREST AND OTHER, NET Interest and other, net was $3.4 million for the three months ended March 31, 2002 and $8.8 million for the three months ended March 31, 2001. Interest and other, net included $7.5 million in interest income for the three months ended March 31, 2002, partially offset by $3.0 million of interest expense, and $13.0 million of interest income for the three months ended March 31, 2001, partially offset by $3.2 million of interest expense. The decrease in interest income was primarily attributable to decreases in the average quarterly balances of our investments in marketable securities and decreases in average investment yields due to declines in interest rates. Interest and other, net in future periods may fluctuate in correlation with the average cash, investment and debt balances we maintain and as a result of changes in the market rate of our investments. 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, 2002 primarily relates to an approximately $1.5 million tax provision associated with the sale of our European Media business, approximately $0.4 million of corporate income taxes on the earnings of some of our foreign subsidiaries and approximately $0.6 million of state and local taxes. The provision for the three months ended March 31, 2001 principally related to corporate income taxes on the earnings of some of our foreign subsidiaries. 17 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 $6.7 million for the three months ended March 31, 2002 and $1.1 million for the three months ended March 31, 2001. The increase in cash provided by operating activities for the three months ended March 31, 2002 resulted primarily from a decrease in net loss, excluding non-cash items, and increases in deferred revenue and other liabilities, which were partially offset by decreases in accounts payable and accrued expenses, and increases in prepaid expenses and other assets. Investing activities provided $22.4 million and $38.0 million for the three months ended March 31, 2002 and 2001, respectively. Cash provided by investing activities for the three months ended March 31, 2002 and 2001 resulted primarily from the maturity of some of our investments in marketable securities, which were partially offset by cash paid for the purchase of equipment and the acquisition of businesses and intangible assets. Net cash used in financing activities was $6.3 million for the three months ended March 31, 2002 and net cash provided by financing activities was $2.4 million for the three months ended March 31, 2001. Net cash used from financing activities resulted primarily from payments of notes and capital lease obligations offset by proceeds from the issuance of common stock in connection with our employee stock purchase and stock option plans. 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, offset by payments under capital lease obligations. As of March 31, 2002, we had $121.8 million of cash and cash equivalents, $604.2 million in investments in marketable securities and $19.2 million in restricted cash. As of March 31, 2002, 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. 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, 2002, our investments in marketable securities had a weighted average time to maturity of 385 days. 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, 2002.
TIME TO MATURITY ---------------------------------------------- ONE YEAR ONE TO TWO TO OR LESS TWO YEARS FOUR YEARS FAIR VALUE ------- --------- ---------- ---------- Cash and cash equivalents.......................... $121,801 -- -- $121,801 Average interest rate.............................. 1.34% Fixed-rate investments in marketable securities.... $295,052 $305,002 $ 4,109 $604,163 Average interest rate.............................. 4.91% 3.61% 4.00% Restricted cash.................................... $ 18,055 $ 1,155 -- $ 19,210 Average interest rate.............................. 2.13% 2.94% Convertible subordinated notes..................... -- -- $219,700 $183,450 Average interest rate.............................. 4.75%
18 We did not hold derivative financial instruments as of March 31, 2002 and have not 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, 2002 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, 2002, we had $40.1 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. 19 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 RELATING TO OUR COMPANY AND OUR BUSINESS WE HAVE A LIMITED OPERATING HISTORY AND OUR FUTURE FINANCIAL RESULTS MAY FLUCTUATE, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE. 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: ability to achieve historical revenue growth rates; ability to manage our operations; competition; attracting, retaining and motivating qualified personnel; maintaining our current and developing new, strategic relationships with Web publishers, advertisers, ad agencies and direct marketers; ability to anticipate and adapt to the changing Internet advertising and direct marketing industries; and ability to develop and introduce new products and services, and continue to develop and upgrade technology. We also depend on the use of the Internet for advertising and as a communications medium, the demand for advertising services in general, 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 decline or 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 have incurred net losses each year since inception, including net losses of $265.8 million, $156.0 million and $55.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. We incurred a net loss of approximately $6.0 million for the three months ended March 31, 2002 and as of March 31, 2002, our accumulated deficit was $554.6 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. 20 WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM ADVERTISEMENTS AND ADVERTISING SERVICES, WHICH REVENUES TEND TO BE CYCLICAL AND DEPENDENT ON THE ECONOMIC PROSPECTS OF ADVERTISERS AND DIRECT MARKETERS AND THE ECONOMY IN GENERAL. A CONTINUED DECREASE IN EXPENDITURES BY ADVERTISERS AND DIRECT MARKETERS OR A CONTINUED DOWNTURN IN THE ECONOMY COULD CAUSE OUR REVENUES TO DECLINE SIGNIFICANTLY IN ANY GIVEN PERIOD. We derive, and expect to continue to derive for the foreseeable future, a large portion of our revenue from products and services we provide to Web publishers, advertisers, direct marketers and agencies and from advertisements we deliver to Web sites on the DoubleClick network. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. The overall market for advertising, including Internet advertising, has been characterized in recent quarters by increasing softness of demand, lower prices for advertisements, the reduction or cancellation of advertising contracts, an increased risk of uncollectible receivables from customer and the reduction of marketing and advertising budgets, especially for online advertising and by Internet-related companies. As a result of these reductions, advertising spending across traditional media, as well as the Internet, has decreased. We cannot assure you that further reductions will not occur. The revenue outlook for DoubleClick TechSolutions and DoubleClick Media are adversely affected by an environment where the supply of advertising inventory exceeds advertisers' demand. Under these circumstances, Web publishers tend to remove ad space from their Web sites in an effort to correct the supply-demand imbalance; other publishers may cut back on their Web presence or go out of business. Faced with smaller budgets, advertisers and ad agencies purchase less advertising inventory and tend not to experiment with newer advertising media, like the Internet. Consequently, the number of ad impressions delivered by DoubleClick TechSolutions may decline or fail to grow, which would adversely affect our revenues. DoubleClick Data, which provides services to direct marketers, may face similar pressures. Direct marketers may respond to economic downturns by reducing the number of catalogs mailed and the number of households to which these catalogs are mailed, thereby reducing the demand for DoubleClick Data's serivces. If direct marketing activities fail to grow or decline our revenues could be adversely affected. We cannot assure you that further reductions in advertising spending will not occur. We also cannot assure you that if economic conditions improve, marketing budgets and advertising spending will increase from current levels. A continued decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers' spending priorities or increase the time it takes to close a sale with a customer. As a result, our revenues from advertisements and advertising services may decline significantly in any given period. WE DO NOT ALWAYS MAINTAIN LONG-TERM AGREEMENTS WITH OUR CUSTOMERS AND MAY BE UNABLE TO RETAIN CUSTOMERS, ATTRACT NEW CUSTOMERS OR REPLACE DEPARTING CUSTOMERS WITH CUSTOMERS THAT CAN PROVIDE COMPARABLE REVENUES. Many of our contracts with our customers are short-term. We cannot assure you that our customers will continue to use our products and services or that we will be able to replace in a timely or effective manner departing customers with new customers that generate comparable revenues. Further, we cannot assure you that our customers will continue to generate consistent amounts of revenues over time. Our failure to develop and sustain long-term relationships with our customers would materially and adversely affect our results of operations. OUR CUSTOMERS CONTINUE TO EXPERIENCE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS. Our customers, in particular Internet-related companies, have experienced and may continue to experience difficulty raising capital and supporting their current operations and implementing their business plans, or may be anticipating such difficulties and, therefore, may elect to scale back the resources they devote to advertising in general and our offerings in particular. Many other companies in the Internet industry have depleted their available capital and either have or could cease operations or 21 file for bankruptcy protection. These customers 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 our customers could negatively impact our financial condition. If the current environment for advertising and for Internet-related companies does not improve, our business, results of operations and financial condition could be materially adversely affected. INDUSTRY SHIFTS, RAPID EXPANSION OF OUR PRODUCTS AND SERVICES AND OTHER CHANGES HAVE STRAINED OUR MANAGERIAL, OPERATIONAL, FINANCIAL AND INFORMATION SYSTEM RESOURCES. In recent years, we have had to respond to significant changes in our industry. As a result, we have experienced industry shifts, rapid expansion of product and service offerings and other changes that have increased the complexity of our business and 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 changing industry requires effective planning and management processes. 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 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 offer our products and services and implement our business plan successfully. Our inability to effectively respond to changing business conditions could materially and adversely affect our business, financial condition and results of operations. OUR BUSINESS MODEL IS UNPROVEN, AND WE MAY NOT BE ABLE TO GENERATE PROFITS FROM MANY OF OUR PRODUCTS AND SERVICES. A significant part of our business model is to generate revenue by providing digital marketing products and services to advertisers, ad agencies, Web publishers and direct marketers. The profit potential for our business model has not yet been proven, and we have not yet achieved full-year profitability. The profitability of our business model is subject to external and internal factors. Any single factor or combination of factors could limit the profit potential, long term and short term, of our business model. Like other businesses in the advertising and marketing sector, our revenue outlook is sensitive to downturns in the economy followed by declines in advertisers' marketing budgets. The profit potential of our business model is also subject to the acceptance of our products and services by marketers, advertisers, ad agencies and publishers. Digital marketing remains a new discipline. Intensive marketing and sales efforts may be necessary to educate prospective customers 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 existing techniques, or may feel that our offerings fall short of their needs. If these outcomes occur, it would have an adverse effect on the profit potential of our business model. Internal factors also influence the profit potential of our business model. In order to be profitable, our revenue must exceed the expense incurred by us to run our technology infrastructure, research and development, sales and marketing, and all other operations. However, we cannot assure you that the expenses associated with even the most efficient operation of our business will yield profits, or that we will be able to manage our business for optimal efficiency and cost containment. Our failure to achieve these results would adversely affect the profit potential of our business model. 22 DISRUPTION OF OUR SERVICES DUE TO UNANTICIPATED PROBLEMS OR FAILURES COULD HARM OUR BUSINESS. Our DART ad management technology resides in our data centers in New York City, 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 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 products and services to our customers 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 technology 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 products or services could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require. 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 products and services. Our business, results of operations and financial condition could be materially and adversely affected by any damage or failure that interrupts, or delays or destroys our operations. MISAPPROPRIATION OF CONFIDENTIAL INFORMATION COULD CAUSE US TO LOSE CUSTOMERS. We currently retain highly confidential information of our customers in a secure database server. Although we observe security 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. If confidential customer information is compromised, we could lose customers or become subject to litigation and our reputation could be harmed, any of which could materially and adversely affect our business and results of operations. COMPETITION IN INTERNET ADVERTISING, DIRECT MARKETING AND RELATED PRODUCTS AND SERVICES IS INTENSE, 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 because there are low barriers to entry. Also, industry consolidation may lead to stronger, better capitalized entities against which we must compete. We expect that we will encounter additional competition from new sources as we expand our product and service offerings. We believe that our ability to compete depends on many factors both within and beyond our control, including the following: the features, performance, price and reliability of products and services offered either by us or our competitors; the launch timing and market success of products and services developed either by us or our competitors; our ability to adapt and scale our products and services, and to develop and introduce new products and services that respond to market needs; our ability to adapt to evolving technology and industry standards; our customer service and support efforts; our sales and marketing efforts; and the relative impact of general economic and industry conditions on either us or our competitors. Our divisions face competition from a variety of sources. DoubleClick TechSolutions competes with providers of software and service bureau solutions for the delivery of Web ads and email for direct 23 marketers, Web publishers and advertisers as well as with inhouse solutions. DoubleClick Media competes with large Web publishers, Web portals and Internet advertising networks. Abacus competes with data aggregation companies and providers of information products and marketing research services to the direct marketing industry. DoubleClick Research competes with Web ratings companies, providers of Web advertising management, online research and consulting services and providers of syndicated market research in traditional publishing. We also compete indirectly with 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 ours. These factors could allow them to compete more effectively than we can, including devoting greater resources to the development, promotion and sale of their products and services, engaging in more extensive research and development, undertaking more far-reaching marketing campaigns, adopting more aggressive pricing policies and making 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 products and services or that achieve greater acceptance than our products and services. 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 may 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. 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: advertiser, Web publisher and direct marketer demand for our products and services; Internet user traffic levels; number and size of ad units per page on our customers' Web sites; the introduction of new products or services by us or our competitors; variations in the levels of capital, operating expenditures and other costs relating to our operations; pricing trends for advertising inventory on the DoubleClick network and for the portion payable to the Web publishers in the DoubleClick network; general seasonal and cyclical fluctuations; and general industry and economic conditions. We may not be able to adjust spending quickly enough to offset any unexpected revenue shortfall. Our operating expenses include upgrading and enhancing our ad management and email delivery technology, expanding our product and service offerings, marketing and supporting our products and services, and supporting our sales and marketing operations. 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. 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 the DoubleClick 24 TechSolutions and DoubleClick Media businesses. The direct marketing industry generally mails substantially more marketing materials in the third calendar quarter, which directly affects the DoubleClick Data business. The email technology business may experience seasonal patterns similar to the traditional direct marketing industry, which typically generates lower revenues earlier in the calendar year and higher revenues during the calendar year-end months. Further, Internet user traffic typically drops during the summer months, which reduces the amount of advertising to sell and deliver. 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. 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. WE MAY NOT BE ABLE TO CONTINUE TO GROW THROUGH ACQUISITIONS OF OR INVESTMENTS IN OTHER COMPANIES. Our business has expanded rapidly in part as a result of acquisitions or investments in other companies, including the acquisitions of Abacus Direct, NetGravity, FloNetwork and MessageMedia. We may seek to acquire or make investments in other complementary businesses, products, services or technologies as a means to grow our business. 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. If we are unable to continue to expand through acquisitions, our revenue may decline or fail to grow. WE MAY NOT MANAGE THE INTEGRATION OF ACQUIRED COMPANIES SUCCESSFULLY OR ACHIEVE DESIRED RESULTS. As a part of our business strategy, we could enter into a number of business combinations and acquisitions. Acquisitions are accompanied by a number of risks, including: the difficulty of assimilating the operations and personnel of the acquired companies; the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; the difficulty of incorporating acquired technology and rights into our products and services; unanticipated expenses related to technology and other integration; difficulties in maintaining uniform standards, controls, procedures and policies; the impairment of relationships with employees and customers as a result of any integration of new management personnel; the inability to develop new products and services that combine our knowledge and resources and our acquired businesses or the failure for a demand to develop for the combined companies' new products and services; potential failure to achieve additional sales and enhance our customer base through cross-marketing of the combined company's products to new and existing customers; and potential unknown liabilities associated with acquired businesses. We may not succeed in addressing these risks or other problems encountered in connection with these business combinations and acquisitions. If so, these risks and problems 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 write-offs due to impairment 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. 25 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 AND SECURING ALTERNATE SOURCES OF THESE SERVICES COULD SIGNIFICANTLY INCREASE EXPENSES. We depend heavily on several third-party providers of Internet and related telecommunication services, including hosting and co-location facilities, in delivering 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. 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 we require could cause interruptions in the services we provide. 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 KEY 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 and do not maintain key person life insurance on any of these executives. The loss of the services of one or more of our key employees could significantly delay or prevent the achievement of our product development and other business objectives, including acquisitions, and could harm our business. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees for key positions. There is 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, WE COULD LOSE OUR INTELLECTUAL PROPERTY RIGHTS. Our success and ability to effectively compete are substantially dependent on the protection of our proprietary technologies, trademarks, copyrights and trade secrets, which we protect through a combination of patent, trademark, copyright, trade secret, unfair competition and contract law. 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 ad management 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 products and services. These trademarks include DOUBLECLICK'r', DART'r', DARTMAILTM and ABACUSTM. We have applied to register our trademarks in the United States and internationally. 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. We also 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 26 certain that the steps we take to prevent unauthorized use of our proprietary rights are sufficient to prevent misappropriation of our products and services 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 that we have entered into to protect our proprietary technologies. If we lose our intellectual property rights, this could have a material and adverse impact on our business, financial condition and results of operations. IF WE FACE A CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE MAY BE LIABLE FOR DAMAGES AND BE REQUIRED TO MAKE CHANGES TO OUR TECHNOLOGY OR BUSINESS. 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, restrict us from using our technology or operating our business generally, or require changes to be made to our technology. Even if we prevail, litigation is time consuming and expensive to defend and would 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 we are unable to enter into these types of agreements, we would be required to either cease offering the subject product or change the technology underlying the applicable product. 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 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 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. 27 OUR BUSINESS DEPENDS IN PART ON SUCCESSFUL ADAPTATION OF OUR BUSINESS TO INTERNATIONAL MARKETS, IN WHICH WE HAVE LIMITED EXPERIENCE. FAILURE TO SUCCESSFULLY MANAGE THE RISKS OF INTERNATIONAL OPERATIONS AND SALES AND MARKETING EFFORTS WOULD HARM OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We have operations in a number of countries and have limited experience in developing localized versions of our products and services and in marketing, selling and distributing our products and services internationally. We sell our technology products and services through our directly and indirectly owned subsidiaries primarily located in Australia, Canada, France, Germany, Spain, Ireland, the United Kingdom, Hong Kong and Japan. We operate our media business through business partners in Japan and Asia (Hong Kong, Taiwan, Korea, China and Singapore). 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: the high cost of maintaining international operations; uncertain demand for our products and services; the impact of recessions in economies outside the United States; changes in regulatory requirements; more restrictive data protection regulation; reduced protection for intellectual property rights in some countries; potentially adverse tax consequences; difficulties and costs of staffing and managing foreign operations; political and economic instability; fluctuations in currency exchange rates; and seasonal fluctuations in Internet usage. These risks may 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 our business, results of operations and financial condition as a whole. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Some of the provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately: discourage potential acquisition proposals; delay or prevent a change in control; or impede the ability of our stockholders to change the composition of our board of directors in any one year. As a result, it could be more difficult to acquire us, even if doing so might be beneficial to our stockholders. Difficulty in acquiring us could, in turn, limit the price that investors might be willing to pay for shares of our common stock. OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS, AND THIS VOLATILITY COULD RESULT IN US BECOMING SUBJECT TO SECURITIES LITIGATION, WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES. The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile and subject to wide fluctuations. In addition, the stock market has experienced extreme 28 price and volume fluctuations. Investors may be unable to resell their shares of our common stock at or above their purchase price. Additionally, 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, 2002, we had 136,064,507 shares of common stock outstanding, excluding 21,672,126 shares subject to options outstanding as of such date under our stock option plans that are exercisable at prices ranging from $0.01 to $1,272.35 per share. 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 issued upon the exercise of stock options, or the perception that such sales could occur, may materially reduce prevailing market prices for our common stock. RISKS RELATED TO OUR INDUSTRY ADVERTISERS MAY BE RELUCTANT TO DEVOTE A PORTION OF THEIR BUDGETS TO INTERNET ADVERTISING AND DIGITAL MARKETING PRODUCTS AND SERVICES. Companies doing business on the Internet, including DoubleClick, must compete with traditional advertising media, including television, radio, cable and print, for a share of advertisers' total marketing budgets. Potential customers may be reluctant to devote a significant portion of their marketing budget to Internet advertising or digital marketing products and services if they perceive the Internet to be a limited or ineffective marketing medium. Any shift in marketing budgets away from Internet advertising spending or digital marketing products and services could materially and adversely affect our business, results of operations or financial condition. THE LACK OF APPROPRIATE ADVERTISING MEASUREMENT STANDARDS OR TOOLS MAY CAUSE US TO LOSE CUSTOMERS OR PREVENT US FROM CHARGING A SUFFICIENT AMOUNT FOR OUR PRODUCTS AND SERVICES. Because digital marketing remains a new discipline, there are currently no generally accepted methods or tools for measuring the efficacy of digital marketing as there are for advertising in television, radio, cable and print. Many traditional advertisers may be reluctant to spend sizable portions of their budget on digital marketing until there exist widely accepted methods and tools that measure the efficacy of their campaigns. We could lose customers or fail to gain customers if our products and services do not utilize the measuring methods and tools that may become generally accepted. Further, new measurement standards and tools could require us to change our business and the means used to charge our customers, which could result in a loss of customer revenues. NEW LAWS IN THE UNITED STATES AND INTERNATIONALLY COULD HARM OUR BUSINESS. Laws applicable to Internet communications, e-commerce, Internet advertising, data protection and direct marketing are becoming more prevalent in the United States and worldwide. For example, various U.S. state and foreign governments may attempt to regulate our ad delivery or levy sales or other taxes on our activities. In addition, the laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action. It is difficult to determine whether and how existing laws such as those governing intellectual property, data protection, libel and taxation apply to the Internet, Internet advertising and our business. 29 The growth and development of Internet commerce has prompted calls for more stringent consumer protection laws, both in the United States and abroad. These proposals may seek to impose additional burdens on companies conducting business over the Internet. In particular, new limitations on the collection and use of information relating to Internet users are 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. 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 both amendments to existing law and 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: Legislation has been proposed in the United States and elsewhere in the world to regulate the use of cookie technology. Our technology uses cookies for ad targeting and reporting, among other things. 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. Data protection officials in certain European countries have voiced the opinion that Internet protocol addresses and cookies are intrinsically 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. We cannot assure you that our current policies and procedures would meet more restrictive standards. 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. Legislation has been proposed to prohibit the sending of 'unsolicited commercial email.' Although our email delivery is consent-based, it is possible that legislation will be passed that requires us to change our current practices or subjects us to increased liabilities. Any legislation enacted or regulation issued could dampen the growth and acceptance of the digital marketing industry in general and of our offering in particular. In response to evolving legal requirements, we may be compelled to change or discontinue an existing offering, business or business model, or to cancel a proposed offering or new business. Any of these circumstances could have a material and adverse impact on our business, financial condition and results of operations. These changes could also require us to incur significant expenses, and we may not find ourselves able to replace the revenue lost as a consequence of the changes. We are a member of the Network Advertising Initiative and the Direct Marketing Association, both industry self-regulatory organizations. We cannot assure you that these organizations will not adopt additional, more burdensome guidelines, which could materially and adversely affect our business, financial condition and results of operations. DEMAND FOR OUR PRODUCTS AND SERVICES MAY DECLINE DUE TO THE PROLIFERATION OF SOFTWARE DESIGNED TO PREVENT THE DELIVERY OF INTERNET ADVERTISING OR BLOCK THE USE OF COOKIES. 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, demand for our products and services would decline. 30 OUR BUSINESS MAY SUFFER IF THE WEB INFRASTRUCTURE IS UNABLE TO EFFECTIVELY SUPPORT THE GROWTH IN DEMAND PLACED ON US. 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 us 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 products and services 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 products and services and the level of user traffic on Web sites on the DoubleClick network. DOUBLECLICK DATA IS DEPENDENT ON THE SUCCESS OF THE DIRECT MARKETING INDUSTRY FOR OUR 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 customers 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 customers 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 customers 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 customers 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. 31 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Beginning in May 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York naming us and certain of our officers and directors and certain underwriters of our initial public offering as defendants. All of the initial complaints filed against us and our officers and directors were dismissed without prejudice. However, the plaintiff's filed an amended complaint on April 24, 2002 against us, certain of our officer and directors and certain underwriters of our follow-on offerings alleging, among other things, that the underwriters violated the securities laws by failing to disclose in the offering's registration statements certain alleged compensation arrangements entered into by the underwriters (such as commission payments or stock stabilization practices) and by engaging in manipulative practices to artificially inflate the price of our stock. We and some of our officers and directors are named in the suit pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act 1934 on the basis of an alleged failure to disclose the underwriters' alleged compensation and manipulative practices. These actions seek, among other things, unspecified damages and costs, including attorneys fees. 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. Eighteen 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 all thirteen federal actions before Judge Buchwald in the Southern District of New York. On March 28, 2001, Judge Buchwald dismissed all federal lawsuits against us. In conjunction with a proposed settlement, the plaintiffs have withdrawn their appeal to the Second Circuit Court of Appeals. In March 2002, the parties filed a settlement agreement with the federal court that would resolve the federal lawsuits and the state lawsuits in California and Texas, to which the court gave preliminary approval on March 29, 2002. On March 29, 2002, the parties issued a joint press release outlining the terms of the settlement. A hearing concerning final approval of the settlement is scheduled before Judge Buchwald on May 21, 2002. 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. Following the announcement of our proposed merger with NetGravity on July 27, 1999, a complaint, styled as a class action, 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. The parties have filed a settlement agreement with the court, to which the court gave preliminary approval. A hearing concerning final approval of the settlement is scheduled for July 23, 2002. The settlement, which we believe will be covered by our insurer, would require the payment of $270,000 into an escrow account to cover the reasonable fees and expenses incurred by plaintiff and his counsel. We believe that the claims asserted by these lawsuits are without merit. We intend to defend these actions vigorously, however, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome in litigation could materially and adversely affect our business, financial condition and results of operations. 32 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) None. (b) Reports on Form 8-K We filed a Current Report on Form 8-K, Items 5 and 7, on January 16, 2002, attaching the press release we issued on January 15, 2002 announcing our financial results for the quarter and fiscal year ended December 31, 2001 and announcing that MessageMedia, Inc. elected to extend to February 8, 2002 the termination date with respect to the merger agreement between DoubleClick and MessageMedia, Inc. We filed a Current Report on Form 8-K, Items 5 and 7, on January 29, 2002, attaching the press release that announced the consummation of our acquisition of MessageMedia, Inc. We filed a Current Report on Form 8-K, Items 2 and 7, on February 11, 2002, attaching the press release that announced the consummation of the sale of our European Media business to AdLINK Internet Media AG and attaching related pro forma financial information. 33 SIGNATURE 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, 2002 DOUBLECLICK INC. By: /s/ THOMAS BOYLE .................................. THOMAS BOYLE CORPORATE CONTROLLER (CHIEF ACCOUNTING OFFICER AND DULY AUTHORIZED OFFICER) 34