-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WckStly3V1zm6+TC2E55i8mmP7HFC540FDajazMA/RHcupBoH+uHFb49xXPMtlZ2 NK+ECHQ+4qonHA0H2BeFXg== 0000950117-02-002716.txt : 20021114 0000950117-02-002716.hdr.sgml : 20021114 20021114135815 ACCESSION NUMBER: 0000950117-02-002716 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOUBLECLICK INC CENTRAL INDEX KEY: 0001049480 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133870996 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23709 FILM NUMBER: 02823961 BUSINESS ADDRESS: STREET 1: 450 W 33RD ST STREET 2: 16TH FL CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2126830001 MAIL ADDRESS: STREET 1: 450 W 33RD ST STREET 2: 16TH FL CITY: NEW YORK STATE: NY ZIP: 10001 10-Q 1 a33674.txt DOUBLECLICK INC. ________________________________________________________________________________ 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 SEPTEMBER 30, 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 October 31, 2002 there were 136,081,893 outstanding shares of the registrant's Common Stock, including 175 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 September 30, 2002 and December 31, 2001......................................... 1 Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001.................. 2 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001......................... 3 Notes to Consolidated Financial Statements.................. 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 17 Item 3: Quantitative and Qualitative Disclosures about Market Risk...................................................... 32 Item 4: Controls and Procedures..................................... 46 PART II: OTHER INFORMATION Item 1: Legal Proceedings........................................... 47 Item 6: Exhibits and Reports on Form 8-K............................ 48
ii PART I: FINANCIAL INFORMATION DOUBLECLICK INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 100,633 $ 99,511 Investments in marketable securities.................... 268,731 339,996 Accounts receivable, net of allowances of $15,641 and $21,579, respectively................................. 55,257 81,412 Prepaid expenses and other current assets............... 27,653 35,180 ---------- ---------- Total current assets................................ 452,274 556,099 Investment in marketable securities......................... 311,707 295,019 Restricted cash............................................. 38,042 17,636 Property and equipment, net................................. 119,445 156,996 Goodwill.................................................... 29,197 57,567 Intangible assets, net...................................... 16,998 21,845 Investment in affiliates.................................... 24,784 24,128 Other assets................................................ 9,545 9,063 ---------- ---------- Total assets........................................ $1,001,992 $1,138,353 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 11,508 $ 32,718 Accrued expenses and other current liabilities.......... 111,970 95,956 Current portion of capital lease obligations............ 7,057 6,936 Deferred revenue........................................ 6,894 13,849 ---------- ---------- Total current liabilities........................... 137,429 149,459 Convertible subordinated notes and capital lease obligations............................................... 156,475 226,066 Other long term liabilities................................. 31,352 40,048 Minority interest in consolidated subsidiaries.............. 18,105 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, 137,554,064 and 134,799,135 shares issued, respectively.......................................... 138 135 Treasury stock, 1,680,670 and 765,170 shares, respectively.......................................... (8,949) (4,466) Additional paid-in capital.............................. 1,280,138 1,265,953 Accumulated deficit..................................... (612,472) (548,552) Other accumulated comprehensive loss.................... (224) (9,747) ---------- ---------- Total stockholders' equity.......................... 658,631 703,323 ---------- ---------- Total liabilities, minority interest and stockholders' equity.............................. $1,001,992 $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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenue............................................ $ 74,625 $ 92,693 $233,932 $ 309,498 Cost of revenue.................................... 26,248 39,888 86,113 136,620 -------- --------- -------- --------- Gross profit................................... 48,377 52,805 147,819 172,878 Operating expenses: Sales and marketing (inclusive of non-cash compensation of $15,233 for the nine months ended September 30, 2001).................... 23,225 40,784 78,685 148,170 General and administrative (inclusive of non-cash compensation of $259 for the nine months ended September 30, 2001)............. 12,228 16,375 36,311 52,790 Product development............................ 9,364 14,036 30,684 42,472 Amortization of goodwill....................... -- 14,385 -- 36,251 Amortization of other intangibles.............. 3,127 2,064 9,281 6,107 Goodwill impairment............................ 45,185 63,287 45,185 63,287 Impairment of intangible assets................ 975 -- 975 -- Purchased in-process research and development.................................. -- -- -- 1,300 Restructuring charge........................... 23,838 5,259 32,596 35,939 -------- --------- -------- --------- Total operating expenses................... 117,942 156,190 233,717 386,316 Loss from operations............................... (69,565) (103,385) (85,898) (213,438) Other income Equity in income (losses) of affiliates........ -- (557) 219 (2,599) Gain on equity transactions of affiliates, net.......................................... -- -- -- 1,924 Impairment of investments in affiliates........ (14,147) (11,735) (14,147) (11,735) Gain on early extinguishment of debt........... 11,855 6,429 11,855 6,429 Gain on sale of businesses, net................ 7,437 -- 17,946 -- Interest and other, net........................ 4,574 7,012 10,772 18,949 -------- --------- -------- --------- Total other income......................... 9,719 1,149 26,645 12,968 Loss before income taxes........................... (59,846) (102,236) (59,253) (200,470) Provision for income taxes......................... 2,620 1,301 6,020 3,053 -------- --------- -------- --------- Loss before minority interest...................... (62,466) (103,537) (65,273) (203,523) Minority interest in results of consolidated subsidiaries..................................... 515 74 1,352 1,718 -------- --------- -------- --------- Net loss........................................... $(61,951) $(103,463) $(63,921) $(201,805) -------- --------- -------- --------- -------- --------- -------- --------- Basic and diluted net loss per share............... $ (0.46) $ (0.77) $ (0.47) $ (1.54) -------- --------- -------- --------- -------- --------- -------- --------- Weighted average shares used in basic and diluted net loss per share............................... 135,945 134,300 135,702 130,869 -------- --------- -------- --------- -------- --------- -------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 2 DOUBLECLICK INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $(63,921) $(201,805) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and leasehold amortization................. 31,473 39,710 Goodwill amortization................................... -- 36,251 Amortization of other intangible assets................. 10,793 6,494 Equity in (income) losses of affiliates................. (219) 2,599 Gain on equity transactions of affiliates, net.......... -- (1,924) Impairment of investments in affiliates................. 14,147 11,735 Goodwill impairment..................................... 45,185 63,287 Loss on disposal of property and equipment.............. 803 964 Write-off of purchased in-process research and development........................................... -- 1,300 Gain on early extinguishment of debt.................... (11,855) (6,429) Minority interest....................................... (1,352) (1,718) Non-cash restructuring charge........................... 3,562 14,004 Non-cash compensation................................... -- 15,492 Gain on sale of businesses, net......................... (19,318) -- Other non-cash items.................................... 2,498 6,421 Provisions for bad debts and advertiser discounts....... 14,924 24,096 Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Accounts receivable................................. 3,468 22,823 Prepaid expenses and other assets................... 3,770 (4,698) Accounts payable.................................... (13,275) (23,789) Accrued expenses and other liabilities.............. 8,834 (7,641) Deferred revenue.................................... 381 (15,177) -------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................................... 29,898 (18,005) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments in marketable securities....... (283,005) (341,086) Maturities of investments in marketable securities...... 336,846 437,009 Purchases of property and equipment..................... (10,021) (56,986) Restricted cash......................................... (6,000) -- Proceeds placed in escrow for acquisition of Protagona............................................. (12,900) -- Acquisition of businesses and intangible assets, net of cash acquired......................................... (6,280) (39,992) Proceeds from sale of businesses........................ 16,927 -- Investments in affiliates and other..................... -- (963) -------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................................... 35,567 (2,018) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of common stock.............. 1,144 2,363 Proceeds from the exercise of stock options............. 3,721 6,201 Proceeds from DoubleClick Japan stock issuance, net of offering cost......................................... -- 25,380 Proceeds used in repurchase of convertible bonds........ (53,578) (12,958) Purchases of treasury stock............................. (4,483) (2,976) Payments under capital lease obligations and notes payable............................................... (14,381) (3,184) Other................................................... (1,000) 510 -------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.................................... (68,577) 15,336 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS............................................... 4,234 (3,063) -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,122 (7,750) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 99,511 193,682 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $100,633 $ 185,932 -------- --------- -------- ---------
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. (together with its subsidiaries, 'DoubleClick') is a leading provider of products and services that enable direct marketers, publishers and advertisers to market to consumers. Combining technology and data expertise, DoubleClick's products and services help its customers optimize their advertising and marketing campaigns on the web and through email as well as direct mail and other media. DoubleClick offers a broad range of technology and data products and services to its customers to allow them to address many 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 based on the types of services provided: Technology (or 'TechSolutions'), Data and Media. 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 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 Media includes revenues from our consolidated subsidiary, DoubleClick Japan. Through July 10, 2002, DoubleClick Media also included its North American Media business, which included the DoubleClick network that provided fully outsourced and effective ad sales and related services to a worldwide group of advertisers and publishers. On July 10, 2002, DoubleClick sold its North American Media business to L90, Inc., which upon completion of the transaction was renamed MaxWorldwide, Inc. 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's 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 September 30, 2002 and 2001, outstanding options of approximately 17.9 million and 22.4 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, the computation of diluted net loss per share at September 30, 2002 and 2001 excludes the effect of 3,752,724 and 5,568,479 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 investments carried under the cost method or 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 Statement of Financial Accounting Standards ('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 Nos. 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. DoubleClick has completed its initial impairment testing and no changes to the carrying value of goodwill and other intangible assets were made as a result of the adoption of SFAS No. 142. Subsequent impairment testing will take place annually, as well as when a triggering event indicating impairment may have occurred. In August 2001, the FASB issued SFAS No. 144, 'Accounting for the Impairment or Disposal of Long-Lived Assets' ('SFAS No. 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. SFAS No. 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 SFAS No. 144 did not have a material impact on DoubleClick's results of operations or financial position. In April 2002, the FASB issued SFAS No. 145, 'Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections' ('SFAS No. 145'). SFAS No. 145, among other things, rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item and amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 is effective for fiscal years beginning after 5 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) May 15, 2002 but earlier adoption is encouraged. DoubleClick has repurchased and may in the future continue to repurchase a portion of its outstanding Convertible Subordinated Notes. DoubleClick adopted SFAS No. 145 effective July 1, 2002 and no longer records gains or losses from the retirement of its Convertible Subordinated Notes as extraordinary items, net of taxes but as a component of other income/(expense) in the Consolidated Statements of Operations. As required under SFAS No. 145, prior periods have been restated to conform to the current period's presentation. In July 2002, the FASB issued SFAS No. 146, 'Accounting for Costs Associated with Exit or Disposal Activities' ('SFAS No. 146'). SFAS No. 146 nullifies EITF Issue No. 94-3, 'Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity including Certain Costs Incurred in a Restructuring' (EITF 94-3). The principal difference between SFAS No. 146 and EITF 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB's conceptual framework. In contrast, EITF 94-3 required recognition of a liability for an exit cost when management committed to an exit plan. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and has no effect on exit or disposal activities begun prior to this date. The provisions of EITF 94-3 apply until adoption of SFAS No. 146. CHANGE IN ACCOUNTING ESTIMATE Effective January 1, 2002, DoubleClick changed its estimate of the useful lives of its production equipment and software. The estimated useful life for these assets was extended from three years to four years in order to recognize depreciation expense over the remaining time that the assets are expected to be in service. The change was based on an analysis performed by DoubleClick's operations department. As a result of this change, net loss was reduced by approximately $3.3 million, or $0.02 per basic and diluted share, for the three months ended September 30, 2002 and approximately $9.4 million, or $0.07 per basic and diluted share, for the nine months ended September 30, 2002. NOTE 2 -- GOODWILL The changes in the carrying amount of goodwill for the nine months ended September 30, 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.................... 29,931 -- -- 29,931 Sale of European Media business................ -- (6,186) -- (6,186) Sale of @Plan research business................ -- -- (7,485) (7,485) Goodwill impairment (See Note 6)............... (45,185) (45,185) Effect of foreign currency translation......... 20 535 555 -------- ------- ------- -------- Balance at September 30, 2002.................. $ 20,572 $ 8,625 $ -- $ 29,197 -------- ------- ------- -------- -------- ------- ------- --------
Upon the adoption of SFAS No. 142, DoubleClick ceased amortizing goodwill. Had SFAS No. 142 been in effect in the first nine months of 2001, DoubleClick would not have recorded goodwill amortization expense of $14.6 million and $37.0 million for the three and nine months ended September 30, 2001, respectively. 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. 6 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reported net loss.......................... $(61,951) $(103,463) $(63,921) $(201,805) Add back: goodwill amortization............ -- 14,585 -- 36,951 -------- --------- -------- --------- Adjusted net loss.......................... $(61,951) $ (88,878) $(63,921) $(164,854) -------- --------- -------- --------- -------- --------- -------- --------- Reported basic and diluted net loss per share.................................... $ (0.46) $ (0.77) $ (0.47) $ (1.54) Add back: goodwill amortization............ -- 0.11 -- 0.28 -------- --------- -------- --------- Adjusted basic and diluted net loss per share.................................... $ (0.46) $ (0.66) $ (0.47) $ (1.26) -------- --------- -------- --------- -------- --------- -------- ---------
NOTE 3 -- INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, SEPTEMBER 30, 2002 2001 WEIGHTED --------------------------------- ------------ AVERAGE GROSS AMORTIZATION CARRYING ACCUMULATED PERIOD AMOUNT AMORTIZATION NET NET ------ ------ ------------ --- --- (IN THOUSANDS) Intangible assets: Patents and trademarks.... 36 months $ 9,722 $ (6,256) $ 3,466 $ 5,896 Customer lists............ 27 months 22,152 (14,047) 8,105 11,507 Purchased technology and other................... 42 months 8,195 (2,768) 5,427 4,442 --------- ------- -------- ------- ------- 32 months $40,069 $(23,071) $16,998 $21,845 --------- ------- -------- ------- ------- --------- ------- -------- ------- -------
Amortization expense for the three and nine months ended September 30, 2002 was $3.8 million and $10.8 million, respectively. For the three and nine months ended September 30, 2002, $0.7 million and $1.5 million, respectively, of amortization expense has been included as a component of cost of revenue in the Consolidated Statements of Operations. Amortization expense for the three and nine months ended September 30, 2001 was $2.5 million and $6.5 million, respectively. For the three and nine months ended September 30, 2001, $0.4 million of amortization expense has been included as a component of cost of revenue in the Consolidated Statements of Operations. Based on the balance of intangible assets at September 30, 2002, the annual amortization expense for each of the succeeding five years is estimated to be $10.0 million, $1.5 million, $0.8 million, $0.8 million, and $0.4 million in 2003, 2004, 2005, 2006 and 2007, respectively. 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 has allowed 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 7 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 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 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.............................................. $ 4.6 Other intangible assets..................................... 1.9 Goodwill.................................................... 29.9 Other non-current assets.................................... 4.1 ------ Total assets acquired................................... $ 40.5 Total liabilities assumed............................... $(29.2) ------ 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 two years. DoubleClick recorded approximately $29.9 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 No. 142, will be and has been periodically tested for impairment. (See Note 6.) 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 ('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 ('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. EBITDA, as defined in the option agreement, is earnings before interest, taxes, depreciation, amortization, and one-time charges such as restructuring costs, mergers and acquisition related costs, and other extraordinary items, determined in accordance with generally accepted accounting principles 8 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) in the United States. Should AdLINK fail to achieve these results, the option will expire unexerciseable in December 2003. During the three months ended June 30, 2002 and March 31, 2002, AdLINK did not achieve EBITDA-positive results. AdLINK's results for the three months ended September 30, 2002 were not publicly available as of the date of this filing. 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. 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. Revenue recognized from sales to AdLINK was approximately $0.5 million and $1.4 million during the three and nine months ended September 30, 2002. @PLAN On May 6, 2002, DoubleClick sold its @plan research product line to NetRatings Inc. ('NetRatings'), a provider of technology-driven Internet audience information solutions for media and commerce, in exchange for $12.0 million in cash and 505,739 shares of NetRatings common stock. The approximately $6.1 million value of the shares of NetRatings common stock has been determined based on these shares' average market prices, as quoted on the Nasdaq National Market, for the day before and the day the number of shares due to DoubleClick became irrevocably fixed pursuant to its agreements with NetRatings. DoubleClick recognized a gain of $12.3 million on the sale of the @plan research product line during the three months ended June 30, 2002, which has been included in 'Gain on sale of businesses, net' in the Consolidated Statements of Operations. DoubleClick's investment in NetRatings is included in 'Investments in affiliates' in the Consolidated Balance Sheets. ABACUS DIRECT EUROPE On June 26, 2002, DoubleClick acquired the remaining 50% of the Abacus Direct Europe B.V. ('Abacus Direct Europe') joint venture that it did not previously own from VNU Marketing Information Europe & Asia B.V., an affiliate of Claritas (UK) Limited. The joint venture was formed in November 1998 and provides database-marketing services to the direct marketing industry, primarily in the United Kingdom. The results of operations for Abacus Direct Europe have been included in DoubleClick's Consolidated Statements of Operations from the date of acquisition. DoubleClick's investment in the joint venture was previously accounted for under the equity method of accounting. DoubleClick acquired all the outstanding shares of Abacus Direct Europe held by VNU in exchange for approximately $3.7 million in cash and direct acquisition costs. The purchase price has been allocated to the assets acquired and the liabilities assumed according to their fair value at the date of acquisition as follows (in millions): 9 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) Current assets.............................................. $ 3.1 Property and equipment...................................... 0.3 Other intangibles assets.................................... 4.6 ----- Total assets acquired................................... $ 8.0 Total liabilities assumed............................... (3.2) ----- $ 4.8 Less: proportionate share of net assets held through equity investment................................................ (1.1) ----- Net assets acquired......................................... $ 3.7 ----- -----
Approximately $4.6 million of the purchase price has been allocated to customer lists, the Abacus Alliance and customer database. These intangibles are being amortized on a straight-line basis over two to five years based on each intangibles estimated useful life. NORTH AMERICAN MEDIA BUSINESS On July 10, 2002, DoubleClick sold its North American Media business to L90, Inc. Upon completion of the transaction, L90, Inc. was renamed MaxWorldwide, Inc. ('MaxWorldwide'). In exchange for the North American Media business, DoubleClick received 4.8 million shares in MaxWorldwide and $5 million in cash. The 4.8 million shares represented 16.1% of outstanding MaxWorldwide common stock and were valued at approximately $3.1 million. DoubleClick may also receive an additional $6 million if, during the three-year period subsequent to consummation of the transaction, MaxWorldwide has achieved EBITDA-positive results for two out of three consecutive quarters. EBITDA, as defined in the merger agreement, is earnings before interest, taxes, depreciation and amortization, excluding certain non-recurring items. As a result of this transaction, DoubleClick recognized a gain of $8.1 million during the third quarter of 2002, which has been included in 'Gain on sale of businesses, net' in the Consolidated Statements of Operations. On August 13, 2002, MaxWorldwide repurchased 5,596,972 shares of its common stock. As the result of this repurchase, DoubleClick's ownership percentage increased to 19.8%. DoubleClick accounts for this investment under the equity method of accounting. The investment is included in 'Investments in affiliates' in the Consolidated Balance Sheets. MaxWorldwide's results for the three months ended September 30, 2002 were not publicly available as of the date of this filing. DoubleClick will report its share of MaxWorldwide's results on a 90-day lag. The following unaudited pro forma results of operations have been prepared assuming that the acquisitions of MessageMedia and Abacus Direct Europe described above, the FloNetwork Inc. acquisition consummated during 2001, and the dispositions of the European and North American Media businesses and @plan research product line completed during 2002, occurred at the beginning of the respective periods presented. This pro forma financial information should not be considered indicative of the actual results that would have been achieved had the acquisitions and disposals been completed on the dates indicated and does not purport to indicate results of operations as of any future date or any future period.
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2002 2001 ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $216,247 $ 249,379 Amortization of intangible assets........................... 9,361 25,896 Goodwill impairment......................................... 45,185 10,003 Net loss.................................................... $(77,947) $(129,930) Net loss per basic and diluted share........................ $ (0.57) $ (0.91)
10 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 5 -- INVESTMENT IN VALUECLICK, INC. In the first quarter of 2001, DoubleClick recorded the effects of the issuance by ValueClick, Inc. ('ValueClick') 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. In the third quarter of 2001, DoubleClick wrote down its investment in ValueClick and recognized an impairment charge of approximately $11.7 million. (See Note 7). For the three and nine month periods ended September 30, 2001, DoubleClick recognized approximately $0.2 million and $0.7 million, respectively of goodwill amortization associated with its investment in ValueClick. As the result of the impairment charge incurred in the third quarter of 2001, all of the remaining goodwill associated with DoubleClick's investment in ValueClick has been written off. 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 was able to exercise significant influence over its investment in ValueClick as of December 31, 2001. 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. As of September 30, 2002, DoubleClick's ownership interest in ValueClick was reduced to approximately 9% as the result of ValueClick's issuance of stock in connection with another business combination, offset by its repurchases of outstanding shares. NOTE 6 -- IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS The persistence of unfavorable economic conditions led DoubleClick management to undertake a review of the recoverability of certain of its investments in the third quarter of 2001. As a result of significantly lower-than-expected revenues generated to date and considerably reduced estimates of future performance, management concluded that its investments in @plan.inc ('@plan') and Flashbase, Inc. ('Flashbase') were impaired. Accordingly, DoubleClick recognized an approximately $63.3 million impairment charge equal to the difference between its investments in and the estimated fair value of these entities in the third quarter of 2001. Of this amount, approximately $53.3 million related to @plan and $10.0 million related to Flashbase. The amount of the goodwill impairment was calculated based on discounted analyses of these entities' expected future cash flows, which were no longer deemed adequate to support the value of the goodwill associated with these investments. In both cases, sharply-reduced estimates of anticipated revenue growth and operating results, triggered primarily by the continued softness in aggregate on-line advertising spending, generated correspondingly lowered expectations of future cash flows and formed the basis for the recording of the charge in the third quarter of 2001. These entities' expected future cash flows and terminal values are based on management's budgeted forecasts and estimates. In its calculation to determine the impairment charge for its investment in @plan, DoubleClick used a discount rate of 15% and assumed a remaining useful life of 11 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 2.5 years, which represented the estimated remaining useful life of the goodwill associated with this investment. In its calculation to determine the impairment charge for Flashbase, DoubleClick used a discount rate of 15% and a useful life of 1.75 years, which represented the remaining useful life of the goodwill associated with this investment. In the third quarter of 2002, based upon the prolonged softness in the economy and the lower than anticipated revenues generated to date and decline in estimates of future performance of DoubleClick's email reporting unit, DoubleClick initiated a third-party valuation of its email reporting unit to determine whether the recorded balance of goodwill related to this reporting unit was recoverable. The outcome of this valuation resulted in an impairment charge of approximately $45.2 million being recorded during the quarter. The fair market value of the email reporting unit was determined based on revenue projections, recent transactions involving similar businesses and price/revenue multiples at which they were bought and sold, and price/revenue multiples of our competitors in the email marketplace. As a result of the third party valuation of its email reporting unit, it was also determined that the fair value of certain intangibles assets were considered impaired. DoubleClick recorded an impairment charge of $1.0 million based on the difference between the carrying value and estimated fair value of the intangible assets. NOTE 7 -- IMPAIRMENT OF INVESTMENTS IN AFFILIATES As a result of the significant decline in the market value of Internet-based companies and the declining access of these companies to public and private financing, management performed an assessment of the carrying values of its investments in affiliates. In the course of its analysis, DoubleClick determined that the carrying value of its cost-method investment in Return Path, Inc. ('Return Path') was no longer recoverable. As a consequence, DoubleClick wrote off its entire investment in Return Path and recognized an impairment charge of $4.5 million during the second quarter of 2001. In the third quarter of 2001, DoubleClick determined that the carrying value of its equity method investment in ValueClick was impaired. Consequently, DoubleClick wrote down its investment in ValueClick and recognized an impairment charge of approximately $11.7 million, which represented the difference between DoubleClick's carrying value and the estimated fair value of its investment in ValueClick. The estimated fair value of DoubleClick's investment in ValueClick was determined based on the closing market price of ValueClick stock on September 30, 2001. In the third quarter of 2002, DoubleClick determined that the carrying value of certain of its investments, principally its cost-method investments in AdLINK Internet Media AG ('AdLINK') and NetRatings Inc. ('NetRatings') and its equity-method investment in MaxWorldwide, Inc. ('MaxWorldwide') were impaired based on the continued decline in the fair market value of these investments. As a result, DoubleClick recorded an impairment charge of $11.7 million, which represented the difference between DoubleClick's carrying value and the estimated fair value of these investments. The estimated fair values of DoubleClick's investments in AdLINK, NetRatings and MaxWorldwide were determined based on the closing market price of their stock on September 30, 2002. Additionally, DoubleClick's cost method investment in the joint venture, DoubleClick Asia, will be liquidated and has no continuing value. As a consequence, DoubleClick wrote-off its entire investment in DoubleClick Asia and recognized an impairment charge of $2.4 million. NOTE 8 -- INITIAL PUBLIC OFFERING OF DOUBLECLICK JAPAN On April 25, 2001, DoubleClick's consolidated subsidiary, DoubleClick Japan Inc. ('DoubleClick Japan'), completed its initial public offering of common stock on the Nasdaq Japan Market, issuing 23,456 shares at approximately $1,236 per share. DoubleClick Japan's net proceeds, after deducting underwriting discounts, commissions and direct offering costs, were approximately $25.4 million. As a 12 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) result of this offering, DoubleClick's ownership interest in DoubleClick Japan decreased from 43.2% to 38.2%. DoubleClick recorded a $16.6 million increase in minority interest, reduced the carrying amount of the goodwill associated with its acquisition of DoubleClick Japan by $1.6 million and recognized a gain of approximately $7.2 million, which represented the incremental increase in consolidated net equity related to its proportionate share of the proceeds from DoubleClick Japan's stock offering. This gain has been included in 'Gain on equity transactions of affiliates, net' in the Consolidated Statements of Operations. NOTE 9 -- NON-CASH COMPENSATION Non-cash compensation primarily represents the consideration paid to certain former shareholders of DoubleClick Scandinavia AB ('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 the minimum consideration they were entitled to receive for the 2001 fiscal year under the terms of the original agreement. As a result, DoubleClick recognized approximately $15.2 million in non-cash compensation expense, which represented the remaining unaccrued portion of this accelerated payment. NOTE 10 -- RESTRUCTURING CHARGE During the nine months ended September 30, 2002, management took additional steps to realign the sales organization and reduce corporate overhead. This involved the involuntary termination of approximately 230 employees, primarily from the TechSolutions division, as well as the closure of several offices. As a consequence, DoubleClick recorded a $1.4 million charge to operations during the first quarter of 2002, primarily related to payments for severance, and a charge of $7.3 million in the second quarter of 2002, primarily associated with future lease costs and other facility-related charges, and a charge of $23.8 million during the third quarter of 2002 primarily related to additional future lease costs, net of estimated sublease income. In determining the restructuring charge associated with its future lease commitments, DoubleClick engaged a third party real estate firm to provide it with estimates of the future sublease income for its excess and idle space, which also includes an estimate of the time period required to identify new sublessees. This analysis was performed based on the current real estate market conditions in the local markets where DoubleClick's facilities are located. This real estate firm also provided estimates of lease termination/buyout fees landlords may charge to terminate existing leases rather than subleasing idle and excess space. DoubleClick's restructuring charge relating to future lease commitments is based on its review of this information. Should market conditions or other circumstances change, this information may be updated and additional charges may be required. 13 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 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 ASSET WRITE- OFFS & OTHER SEVERANCE EXIT COSTS TOTAL --------- ---------- ----- (IN THOUSANDS) 2001 Restructuring Balance at January 1, 2002.............................. $ 915 $48,706 $49,621 Cash expenditures....................................... (915) (9,707) (10,622) Non-cash charges........................................ -- (7,830) (7,830) ------- ------- ------- Balance at September 30, 2002........................... $ -- $31,169 $31,169 2002 Restructuring Restructuring charge.................................... $ 4,701 $27,895 $32,596 Cash expenditures....................................... (3,782) (1,195) (4,977) Non-cash charges........................................ -- (3,562) (3,562) ------- ------- ------- Balance at September 30, 2002........................... $ 919 $23,138 $24,057 ------- ------- ------- Total reserve balance at September 30, 2002......... $ 919 $54,307 $55,226 ------- ------- ------- ------- ------- -------
As of September 30, 2002, approximately $30.6 million and $24.6 million remain accrued in 'Accrued expenses and other current liabilities' and 'Other long term liabilities', respectively. NOTE 11 -- CONVERTIBLE SUBORDINATED NOTES In the third quarter of 2001, DoubleClick repurchased $20.3 million of its outstanding 4.75% Convertible Subordinated Notes for approximately $13.6 million in cash. DoubleClick wrote off approximately $0.3 million in deferred issuance costs and recognized a gain of approximately $6.4 million. In the third quarter of 2002, DoubleClick repurchased $64.9 million of its outstanding 4.75% Convertible Subordinated Notes for approximately $53.6 million in cash. DoubleClick wrote off approximately $0.7 million in deferred issuance costs and recognized a gain of approximately $11.9 million. NOTE 12 -- STOCKHOLDERS' EQUITY On September 17, 2001, DoubleClick announced that its Board of Directors authorized a stock repurchase program that permits the repurchase of up to $100 million of outstanding DoubleClick common stock or Convertible Subordinated Notes over a one-year period. In the third quarter of 2001, DoubleClick purchased 765,000 shares of its common stock at an average price of $5.84 per share. In the third quarter of 2002, DoubleClick purchased 915,500 shares of its common stock at an average price of $4.86 per share. NOTE 13 -- SEGMENT REPORTING DoubleClick is organized into three segments: Technology, Data and Media. The results of its Media segment includes revenues from its consolidated subsidiary DoubleClick Japan, and through July 10, 2002, its North American Media business when DoubleClick sold this business to L90, Inc. (now MaxWorldwide, Inc.). 14 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) Revenues and gross profit by segment are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2002 THREE MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------- ------------------------------------------ TECHNOLOGY DATA MEDIA TOTAL TECHNOLOGY DATA MEDIA TOTAL ---------- ---- ----- ----- ---------- ---- ----- ----- (IN THOUSANDS) (IN THOUSANDS) Revenue........................ $ 45,098 $26,811 $ 3,130 $ 75,039 $ 48,533 $24,130 $ 22,249 $ 94,912 Intersegment elimination....... (277) (137) -- (414) (1,858) (361) -- (2,219) -------- ------- ------- -------- -------- ------- -------- -------- Revenue from external customers..................... $ 44,821 $26,674 $ 3,130 $ 74,625 $ 46,675 $23,769 $ 22,249 $ 92,693 -------- ------- ------- -------- -------- ------- -------- -------- -------- ------- ------- -------- -------- ------- -------- -------- Segment gross profit........... $ 28,102 $19,644 $ 768 $ 48,514 $ 29,309 $17,334 $ 6,289 $ 52,932 -------- ------- ------- -------- -------- ------- -------- -------- -------- ------- ------- -------- -------- ------- -------- -------- Data commission fee............ (137) (127) -------- -------- Consolidated gross profit...... $ 48,377 $ 52,805 -------- -------- -------- --------
NINE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------- ------------------------------------------ TECHNOLOGY DATA MEDIA TOTAL TECHNOLOGY DATA MEDIA TOTAL ---------- ---- ----- ----- ---------- ---- ----- ----- (IN THOUSANDS) (IN THOUSANDS) Revenue........................ $143,534 $62,921 $30,250 $236,705 $155,249 $61,683 $102,142 $319,074 Intersegment elimination....... (2,472) (301) -- (2,773) (8,997) (579) -- (9,576) -------- ------- ------- -------- -------- ------- -------- -------- Revenue from external customers..................... $141,062 $62,620 $30,250 $233,932 $146,252 $61,104 $102,142 $309,498 -------- ------- ------- -------- -------- ------- -------- -------- -------- ------- ------- -------- -------- ------- -------- -------- Segment gross profit........... $ 93,717 $45,057 $ 9,338 $148,112 $ 99,199 $40,880 $ 32,956 $173,035 -------- ------- ------- -------- -------- ------- -------- -------- -------- ------- ------- -------- -------- ------- -------- -------- Data commission fee............ (293) (157) -------- -------- Consolidated gross profit...... $147,819 $172,878 -------- -------- -------- --------
NOTE 14 -- COMPREHENSIVE LOSS Comprehensive loss consists of net loss, unrealized gains and losses on marketable securities and foreign currency translation adjustments. Comprehensive loss was $62.8 million and $98.8 million for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, comprehensive loss was $54.4 million and $197.7 million, respectively. NOTE 15 -- CONTINGENCIES DoubleClick was a defendant in class action lawsuits concerning Internet user privacy and data collection and other business practices in both state and federal court. On March 29, 2002, the parties issued a joint press release outlining the terms of a settlement of these lawsuits. The court gave final approval of the settlement at a hearing held on May 21, 2002 and the judge signed a Final Judgment and Order of Dismissal of the actions on May 23, 2002. One person objected to the settlement and filed a notice of appeal of the court's order on June 19, 2002, which was dismissed pursuant to a settlement agreement with plaintiffs. These lawsuits have all been dismissed with prejudice. On October 16, 2002, the action brought by the State's Attorney of Cook County, Illinois was dismissed with prejudice pursuant to a settlement agreement between the parties. In addition, DoubleClick's ad serving and data collection practices were also the subject of inquiries by the attorneys general of several states. These inquiries were resolved by an agreement between DoubleClick and the attorneys general of ten states. The terms of the settlement are disclosed in a press release issued by DoubleClick on August 24, 2002, and in a Current Report on Form 8-K filed on August 30, 2002. Separately, in April 2002, a consolidated amended class action complaint alleging violations of the federal securities laws in connection with DoubleClick's follow-on offerings was 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 follow-on offerings. In October 2002, 15 DOUBLECLICK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) the action was dismissed against the named officers and directors without prejudice. However, claims against the Company remain. DoubleClick intends to dispute these allegations and defend this lawsuit vigorously. NOTE 16 -- RECENT DEVELOPMENTS On November 4, 2002, DoubleClick completed its acquisition of Protagona plc ('Protagona'), a UK-based marketing software company. The acquisition of Protagona will allow DoubleClick to expand its suite of tools for direct marketers to plan, manage, execute, measure and analyze marketing programs across multiple channels. Under the terms of the acquisition, Protagona shareholders will receive approximately $0.037 per Protagona share, valuing Protagona at approximately $12.9 million. 16 ITEM 2. 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 EVEN IF CIRCUMSTANCES CHANGE. OVERVIEW We are a leading provider of products and services that enable direct marketers, publishers and advertisers to market to consumers. Combining technology and data expertise, our products and services help our customers optimize their advertising and marketing campaigns on the web and through email as well as direct mail and other media. We offer a broad range of technology and data products and services to our customers to allow them to address many 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 Data ('Data'); and DoubleClick Media ('Media'). 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 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 two years. DoubleClick has also recorded approximately $29.9 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 No. 42, goodwill has and will be periodically tested for impairment. 17 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 ('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 ('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. EBITDA, as defined in the option agreement, is earnings before interest, taxes, depreciation, amortization, and one-time charges such as restructuring costs, mergers and acquisition related costs, and other extraordinary items, determined in accordance with generally accepted accounting principles in the United States. Should AdLINK fail to achieve these results, the option will expire unexerciseable in December 2003. During the three months ended June 30, 2002 and March 31, 2002, AdLINK did not achieve EBITDA-positive results. AdLINK's results for the three months ended September 30, 2002 were not publicly available as of the date of this filing. 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. 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. @PLAN On May 6, 2002, DoubleClick sold its @plan research product line to NetRatings Inc. ('NetRatings'), a provider of technology-driven Internet audience information solutions for media and commerce, in exchange for $12.0 million in cash and 505,739 shares of NetRatings common stock. The approximately $6.1 million value of the shares of NetRatings common stock has been determined based on these shares' average market prices, as quoted on the Nasdaq National Market, for the day before and the day the number of shares due to DoubleClick became irrevocably fixed pursuant to its agreements with NetRatings. DoubleClick recognized a gain of approximately $12.3 million on the sale of the @plan research product line during the nine months ended September 30, 2002, which has been included in 'Gain on sale of businesses, net' in the Consolidated Statements of Operations. DoubleClick's investment in NetRatings is included in 'Investments in affiliates' in the Consolidated Balance Sheets. ABACUS DIRECT EUROPE On June 26, 2002, DoubleClick acquired the remaining 50% of the Abacus Direct Europe B.V. ('Abacus Direct Europe') joint venture that it did not previously own from VNU Marketing Information Europe & Asia B.V., an affiliate of Claritas (UK) Limited. The joint venture was formed in November 1998 and provides database-marketing services to the direct marketing industry, primarily in 18 the United Kingdom. The results of operations for Abacus Direct Europe have been included in DoubleClick's Consolidated Statements of Operations from the date of acquisition. DoubleClick's investment in the joint venture was previously accounted for under the equity method of accounting. DoubleClick acquired all the outstanding shares of Abacus Direct Europe held by VNU in exchange for approximately $3.7 million in cash and direct acquisition costs. The purchase price has been allocated to the assets acquired and the liabilities assumed according to their fair value at the date of acquisition. Approximately $4.6 million of the purchase price has been allocated to customer lists, the Abacus Alliance and customer database. These intangibles are being amortized on a straight-line basis over two to five years based on each intangibles' estimated useful life. NORTH AMERICAN MEDIA BUSINESS On July 10, 2002, DoubleClick sold its North American Media business to L90, Inc. ('L90'). Upon completion of the transaction, L90 was renamed MaxWorldwide, Inc. ('MaxWorldwide'). In exchange for the North American Media business, DoubleClick received 4.8 million shares in MaxWorldwide and $5 million in cash. The 4.8 million shares represented 16.1% of outstanding MaxWorldwide common stock and were valued at approximately $3.1 million. DoubleClick may also receive an additional $6 million if, during the three-year period subsequent to consummation of the transaction, MaxWorldwide has achieved EBITDA-positive results, for two out of three consecutive quarters. EBITDA, as defined in the merger agreement, is earnings before interest, taxes, depreciation and amortization, excluding certain non-recurring items. As a result of this transaction, DoubleClick recognized a gain of $8.1 million during the third quarter of 2002 which has been included in 'Gain on sale of businesses, net' in the Consolidated Statements of Operations. On August 13, 2002, MaxWorldwide repurchased 5,596,972 shares of its common stock. As the result of this repurchase, DoubleClick's ownership percentage increased to 19.8%. DoubleClick accounts for this investment under the equity method of accounting. The investment is included in 'Investments in affiliates' in the Consolidated Balance Sheets. MaxWorldwide's results for the three months ended September 30, 2002 were not publicly available as of the date of this filing. DoubleClick will report its share of MaxWorldwide's results on a 90-day lag. THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 RESULTS OF OPERATIONS Revenues and gross profit by segment are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2002 THREE MONTHS ENDED SEPTMEBER 30, 2001 --------------------------------------- ---------------------------------------- TECHNOLOGY DATA MEDIA TOTAL TECHNOLOGY DATA MEDIA TOTAL ---------- ---- ----- ----- ---------- ---- ----- ----- (IN THOUSANDS) (IN THOUSANDS) Revenue.................... $45,098 $26,811 $3,130 $75,039 $48,533 $24,130 $22,249 $94,912 Intersegment elimination... (277) (137) -- (414) (1,858) (361) -- (2,219) ------- ------- ------ ------- ------- ------- ------- ------- Revenue from external customers................ $44,821 $26,674 $3,130 $74,625 $46,675 $23,769 $22,249 $92,693 ------- ------- ------ ------- ------- ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Segment gross profit....... $28,102 $19,644 $ 768 $48,514 $29,309 $17,334 $ 6,289 $52,932 ------- ------- ------ ------- ------- ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Data commission fee........ (137) (127) ------- ------- Consolidated gross profit................... $48,377 $52,805 ------- ------- ------- -------
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, our DART for Advertisers Service and our email technology products and services. DoubleClick TechSolutions cost of revenue includes costs associated with the delivery of our 19 advertisements and our email product offerings, including Internet access costs, depreciation of the ad and email delivery systems, facility- and personnel-related costs incurred to operate and support our ad and email delivery products. DoubleClick TechSolutions revenue decreased 7.1% to $45.1 million for the three months ended September 30, 2002 from $48.5 million for the three months ended September 30, 2001. DoubleClick TechSolutions gross margin was 62.3% for the three months ended September 30, 2002 and 60.4% for the three months ended September 30, 2001. The decrease in DoubleClick TechSolutions revenues was primarily the result of overall decreases in the volume of impressions delivered to customers, partially offset by a favorable shift in product mix and acquisition-related growth in our email business associated with our purchases of FloNetwork and MessageMedia. 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. In response to general economic conditions, many companies have significantly scaled back their advertising and marketing budgets, which has had a correspondingly negative impact on aggregate online advertising spending and increased the overall level of pricing pressure we face. As a result of these trends of decreases in online advertising spending among our customers, we anticipate slight decreases in both the absolute dollar amount of TechSolutions revenues and gross profit during the fourth quarter of 2002. 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.inc 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 was derived primarily from the sale of annual subscriptions to its market research systems. DoubleClick Data cost of revenue includes expenses associated with maintaining and updating the Abacus database, the technical infrastructure to produce our products and services, facility and personnel related expenses to operate and support our production environment, and subscriptions to third party providers of lifestyle and demographic data that is used to supplement our transaction-based database. 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 $12.0 million in cash and 505,739 shares of NetRatings common stock, valued at approximately $6.1 million. Revenue and gross profits recognized by the @plan research product line were approximately $2.0 million and $0.4 million, respectively, for the three months ended September 30, 2001. On June 26, 2002, DoubleClick acquired the remaining 50% of the Abacus Direct Europe B.V. joint venture that it did not previously own from VNU Marketing Information Europe & Asia B.V., an affiliate of Claritas (UK) Limited. The joint venture was formed in November 1998 and provides database-marketing services to the direct marketing catalog industry, primarily in the United Kingdom. The results of operations for Abacus Direct Europe have been included in DoubleClick's Consolidated Statements of Operations from the date of acquisition. DoubleClick Data revenue increased 11.1% to $26.8 million during the three months ended September 30, 2002 from $24.1 million for the three months ended September 30, 2001. Gross margin increased from 71.8% for the three months ended September 30, 2001 to 73.3% for the three months ended September 30, 2002. DoubleClick Data's results represent an increase in revenues generated from the Abacus U.S. business of $2.3 million and revenues generated from Abacus Direct Europe of $2.4 million, offset by the sale of the @plan research product line in May 2002. 20 The increase in gross margin was primarily attributable to the reduction in data costs and depreciation expense on production equipment and a decrease in consulting and survey fees, in addition to growing revenues from the Abacus division. DoubleClick expects fourth quarter revenue and gross profit for DoubleClick Data to decrease compared to the three months ended September 30, 2002 as the third quarter is normally Abacus' busiest season as mailers commence their fall campaigns. 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 85.9% to $3.1 million for the three months ended September 30, 2002 from $22.2 million for the three months ended September 30, 2001. DoubleClick Media gross margin was 24.5% for the three months ended September 30, 2002 and 28.3% for the three months ended September 30, 2001. The decrease in DoubleClick Media revenue is a result of the sale of its European and North American Media businesses. On January 28, 2002, DoubleClick completed the sale of its European Media business to AdLINK, a German provider of Internet advertising solutions. Revenue and gross profit recognized by the European Media business prior to its sale was $4.5 million and $1.6 million, respectively, for the three months ended September 30, 2001. On July 10, 2002, DoubleClick completed the sale of the North American Media business to L90 (subsequently renamed MaxWorldwide). Revenue recognized by the North American Media business was approximately $0.7 million and $12.5 million for the three months ended September 30, 2002 and 2001, respectively. Gross profits recognized by the North American Media business was approximately $0.3 million and $4.1 million for the three months ended September 30, 2002 and 2001, respectively. On March 11, 2002, DoubleClick completed the sale of its email List Services division to infoUSA, Inc. Revenue recognized for the Email List Services division during the three months ended September 30, 2001 was approximately $1.8 million. Excluding its European and North American Media businesses, DoubleClick Media revenues and gross profits would have been approximately $5.3 million and $0.7 million, respectively, for the three months ended September 30, 2001. As a result of the sale of the North American Media business, DoubleClick anticipates a decrease in absolute dollar amounts of both revenues and gross profits for its Media segment in the fourth quarter of 2002 and for the foreseeable future. Future revenues and gross profits of DoubleClick Media will only consist of the media operations of our consolidated subsidiary, DoubleClick Japan. 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 $23.2 million or 31.1% of revenue for the three months ended September 30, 2002, and $40.8 million or 44.0% of revenue for the three months ended September 30, 2001. The $17.6 million decrease in sales and marketing expense was primarily attributable to an $8.3 million decrease in compensation and related benefits associated with restructuring related headcount reductions. In addition, sales and marketing expenses were reduced by $2.5 million as a result of lower marketing expenditures, a decline in bad debt expense of $2.4 million, and a reduction in travel and entertainment expenses of $0.8 million. These decreases are commensurate with the decline in our revenues and the level of business activity. We expect the absolute dollar amount of sales and marketing expenses to remain relatively consistent, but to increase as a percentage of revenues in fourth quarter of 2002 due to anticipated lower revenues. 21 GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of compensation and related benefits, professional services, and other operating expenses associated with our executive, finance, human resources, legal, facilities, and administrative departments. General and administrative expenses were $12.2 million or 16.4% of revenue for the three months ended September 30, 2002, and $16.4 million or 17.7% of revenue for the three months ended September 30, 2001. The $4.1 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 $0.8 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 the absolute dollar amount of general and administrative expenses to decrease significantly as a result of corporate headcount reductions but to only decrease slightly as a percentage of revenues in the fourth quarter of 2002 due to anticipated lower 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. The product development departments perform research and development, enhance and maintain existing products, and provide quality assurance. Product development expenses were $9.4 million or 12.5% of revenue for the three months ended September 30, 2002, and $14.0 million or 15.1% of revenue for the three months ended September 30, 2001. The $4.7 million decrease in product development expenses was primarily the result of decreases in compensation and related benefits for product development personnel of $2.6 million and decreases in outside services fees of $1.0 million and professional fees of $0.6 million. Compensation and related benefits declined as the result of headcount reductions associated with our restructuring activities. The decrease in outside service costs and professional fees were associated with the implementation of tighter cost controls. Although we will continue to concentrate on the efficient allocation of our personnel resources and reduce our reliance on external consultants, we believe that ongoing investment in product development is critical to the attainment of our strategic objectives and, as a result, we expect the absolute dollar amount of product development expenses to remain relatively consistent but to increase as a percentage of revenues during the fourth quarter of 2002 due to anticipated lower 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 September 30, 2002 and $2.1 million for the three months ended September 30, 2001. The increase was primarily the result of the amortization of customer lists acquired in various business combinations. AMORTIZATION OF GOODWILL 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 $14.4 million for the three months ended September 30, 2001 and primarily related to the goodwill associated with our acquisitions of @plan, Flashbase, Inc. ('Flashbase'), FloNetwork Inc., DoubleClick Scandinavia AB ('DoubleClick Scandinavia') and DoubleClick Japan. GOODWILL IMPAIRMENT The persistence of unfavorable economic conditions led DoubleClick management to undertake a review of the recoverability of certain of its investments in the third quarter of 2001. As a result of significantly lower-than-expected revenues generated to date and considerably reduced estimates of future performance, management concluded that that its investments in @plan and Flashbase were impaired. Accordingly, DoubleClick recognized an approximately $63.3 million impairment charge 22 equal to the difference between its investments in and the estimated fair value of these entities in the third quarter of 2001. Of this amount, approximately $53.3 million related to @plan and $10.0 million related to Flashbase. The amount of the goodwill impairment was calculated based on discounted analyses of these entities' expected future cash flows, which were no longer deemed adequate to support the value of the goodwill associated with these investments. In both cases, sharply-reduced estimates of anticipated revenue growth and operating results, triggered primarily by the continued softness in aggregate on-line advertising spending, generated correspondingly lowered expectations of future cash flows and formed the basis for the recording of the charge in the third quarter of 2001. These entities' expected future cash flows and terminal values are based on management's budgeted forecasts and estimates. In the third quarter of 2002, based upon the prolonged softness in the economy and the lower than anticipated revenues generated to date and decline in estimates of future performance of DoubleClick's email reporting unit, DoubleClick initiated a third-party valuation of its email reporting unit to determine whether the recorded balance of goodwill related to this reporting unit was recoverable. The outcome of this valuation resulted in an impairment charge of approximately $45.2 million being recorded during the quarter. The fair market value of the email reporting unit was determined based on revenue projections, recent transactions involving similar businesses and price/revenue multiples at which they were bought and sold, and price/revenue multiples of our competitors in the email marketplace. DoubleClick continues to evaluate its acquired intangible assets for evidence of impairment. If economic conditions continue to deteriorate and/or our investments do not perform in line with expectations, additional impairment charges related to our acquired intangible assets could be recorded in future periods. IMPAIRMENT OF INTANGIBLE ASSETS In the third quarter of 2002, as a result of the third party valuation of its email reporting unit, the fair value of certain intangibles assets were considered impaired. As a result, DoubleClick recorded an impairment charge of $1.0 million based on the difference between the carrying value and estimated fair value of the intangible assets. RESTRUCTURING CHARGE During the three months ended September 30, 2002, DoubleClick recorded restructuring provisions totaling approximately $23.8 million. This charge included estimated costs of approximately $21.2 million for the accrual of future lease costs, net of estimated sublease income and deferred rent, as well as approximately $2.6 million in severance charges. In determining the restructuring charge associated with its future lease commitments, DoubleClick engaged a third party real estate firm to provide it with estimates of the future sublease income for its excess and idle space, which also includes an estimate of the time period required to identify new sublessees. This analysis was performed based on the current real estate market conditions in the local markets where DoubleClick's facilities are located. This real estate firm also provided estimates of lease termination/buyout fees landlords might charge to terminate existing leases rather than subleasing idle and excess space. DoubleClick's restructuring charge relating to future lease commitments is based on its review of this information. Should market conditions change, this information may be updated. DoubleClick will eliminate certain operating expenses totaling approximately $7.0 million on an annualized basis, primarily relating to personnel- and facility-related expenses, as a result of the restructuring initiatives undertaken during the three months ended September 30, 2002. A majority of these reductions are expected to primarily impact sales and marketing and general and administrative expenses. DoubleClick will begin to recognize the full effect of these cost savings in the fourth quarter of 2002. 23 DoubleClick is continuing to review its operational performance and may incur additional restructuring charges in the fourth quarter of 2002, principally related to additional facility consolidations. As part of its ongoing restructuring activities, DoubleClick recorded additional provisions totaling approximately $5.3 million in the third quarter of 2001. These measures included the involuntary terminations of approximately 170 employees, primarily from the TechSolutions division. This charge included estimated costs of approximately $3.1 million for severance costs associated with this additional work force reduction, approximately $1.6 million in future lease costs, and approximately $0.6 million in other exit costs. LOSS FROM OPERATIONS DoubleClick's operating loss was $69.6 million for the three months ended September 30, 2002 and $103.4 million for the three months ended September 30, 2001. The decrease in its operating loss of $33.8 million is primarily attributable to the decrease in our sales and marketing expenses of $17.6 million, a decrease in goodwill impairment of $18.1 million, and a decrease in goodwill amortization of approximately $14.4 million. This was offset by a increase in restructuring charges of $18.6 million and a decrease in gross profits of approximately $4.4 million. DoubleClick continues to manage its operations with a focus on productivity and manage its headcount accordingly, but due to the general economic and industry trends it may incur future losses from operations. EQUITY IN INCOME (LOSSES) OF AFFILIATES Equity in income (losses) of affiliates was approximately $(0.6) million for the three months ended September 30, 2001. Since the June 26, 2002 acquisition of the remaining 50% interest that DoubleClick did not previously own, the results of operations of Abacus UK have been consolidated into DoubleClick's operations. IMPAIRMENT OF INVESTMENTS IN AFFILIATES In response to the prolonged downturn of the economy in general, and the continued weakness in aggregate online advertising spending in particular, DoubleClick management undertook a review of the recoverability of certain of its investments in the third quarter of 2001. Noting the continued fall in the price of ValueClick stock, management determined that its investment in ValueClick was impaired. Consequently, DoubleClick wrote down its investment in ValueClick and recognized an impairment charge of approximately $11.7 million during the three months ended September 30, 2001, which represented the difference between DoubleClick's carrying value and the estimated fair value of its investment in ValueClick. In the third quarter of 2002, DoubleClick determined that the carrying value of certain of its investments, principally its cost-method investments in AdLINK and NetRatings and its equity-method investment in MaxWorldwide were impaired based on the continued decline in the fair market value of these investments. As a result, DoubleClick recorded an impairment charge of $11.7 million, which represented the difference between DoubleClick's carrying value and the estimated fair value of these investments. The estimated fair values of DoubleClick's investments in AdLINK, NetRatings and MaxWorldwide were determined based on the closing market price of their stock on September 30, 2002. Additionally, DoubleClick's cost method investment in the joint venture, DoubleClick Asia, will be liquidated and has no continuing value. As a consequence, DoubleClick wrote-off its entire investment in DoubleClick Asia and recognized an impairment charge of $2.4 million. GAIN ON THE EXTINGUISHMENT OF DEBT In the third quarter of 2002, DoubleClick repurchased $64.9 million of its outstanding 4.75% Convertible Subordinated Notes for approximately $53.6 million in cash. DoubleClick wrote off approximately $0.7 million in deferred issuance costs and recognized a gain of approximately $11.9 million as the result of the early retirement of this debt. 24 In the third quarter of 2001, DoubleClick repurchased $20.3 million of its outstanding 4.75% Convertible Subordinated Notes for approximately $13.6 million in cash. DoubleClick wrote off approximately $0.3 million in deferred issuance costs and recognized a gain of approximately $6.4 million as the result of the early retirement of this debt. INTEREST AND OTHER, NET Interest and other, net was $4.6 million for the three months ended September 30, 2002 and $7.0 million for the three months ended September 30, 2001. Interest and other, net primarily included $6.2 million in interest income and $0.6 million in contract termination fee income for the three months ended September 30, 2002, partially offset by $2.6 million of interest expense. Interest and other, net included $10.2 million of interest income for the three months ended September 30, 2001, partially offset by $3.2 million in interest expense. The decrease in interest income was primarily attributable to decreases in average investment yields due to declines in interest rates, offset by an increase in the average quarterly balances of our investments in marketable securities. The decrease in interest expense is directly associated with the repurchase of the Convertible Subordinated Notes during the quarter. 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. PROVISION FOR 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 September 30, 2002 primarily relates to corporate income taxes of $1.5 million on the earnings of some of our foreign subsidiaries. In addition, DoubleClick recorded federal alternative minimum tax of $0.6 million related to gains on the sale of DoubleClick's North American Media business and on the early extinguishment of debt. DoubleClick also recorded approximately $0.5 million of state and local taxes. For the three months ended September 30, 2001, the provision for income taxes primarily relates to corporate income taxes of $1.0 million on the earnings of some of our foreign subsidiaries and state and local taxes of $0.3 million. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
NINE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTMEBER 30, 2001 ----------------------------------------- ------------------------------------------ TECHNOLOGY DATA MEDIA TOTAL TECHNOLOGY DATA MEDIA TOTAL ---------- ---- ----- ----- ---------- ---- ----- ----- (IN THOUSANDS) (IN THOUSANDS) Revenue................. $143,534 $62,921 $30,250 $236,705 $155,249 $61,683 $102,142 $319,074 Intersegment elimination........... (2,472) (301) -- (2,773) (8,997) (579) -- (9,576) -------- ------- ------- -------- -------- ------- -------- -------- Revenue from external customers............. $141,062 $62,620 $30,250 $233,932 $146,252 $61,104 $102,142 $309,498 -------- ------- ------- -------- -------- ------- -------- -------- -------- ------- ------- -------- -------- ------- -------- -------- Segment gross profit.... $ 93,717 $45,057 $ 9,338 $148,112 $ 99,199 $40,880 $ 32,956 $173,035 -------- ------- ------- -------- -------- ------- -------- -------- -------- ------- ------- -------- -------- ------- -------- -------- Data commission fee..... (293) (157) -------- -------- Consolidated gross profit................ $147,819 $172,878 -------- -------- -------- --------
DOUBLECLICK TECHSOLUTIONS DoubleClick TechSolutions revenue decreased 7.5% to $143.5 million for the nine months ended September 30, 2002 from $155.2 million for the nine months ended September 30, 2001. DoubleClick TechSolutions gross margin was 65.3% for the nine months ended September 30, 2002 and 63.9% for the nine months ended September 30, 2001. The decrease in DoubleClick TechSolutions revenue was primarily the result of increased levels of price competition and overall decreases in the volumes of impressions delivered to customers. This was slightly offset by a favorable shift in product mix and acquisition-related growth in our email business associated with our purchases of FloNetwork and 25 MessageMedia. The decrease in TechSolutions revenues reflected in large part the decline in overall online advertising spending. 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. In response to general economic conditions, many companies have significantly scaled back their advertising and marketing budgets, which has had a correspondingly negative impact on aggregate online advertising spending and increased the overall level of pricing pressure we face. As a result of these trends of decreases in online advertising spending among our customers, we anticipate slight decreases in both the absolute dollar amount of TechSolutions revenues and gross profit during the fourth quarter of 2002. DOUBLECLICK DATA DoubleClick Data revenue increased 2.0% to $62.9 million for the nine months ended September 30, 2002 from $61.7 million for the nine months ended September 30, 2001. Gross margin increased from 66.3% for the nine months ended September 30, 2001 to 71.6% for the nine months ended September 30, 2002. The increase in DoubleClick Data revenue reflects an increase in revenues from the Abacus U.S. business and revenues generated from Abacus Direct Europe, offset by the sale of the @plan research product line in May 2002. The growth in the Abacus U.S. business represented an increase in list circulation market share and better product penetration within the business to consumer market, as well as continued growth in the business-to-business alliance. The increase in gross margin was due primarily to lower costs associated with DoubleClick Data's data collection and the sale of the @plan research product line. DOUBLECLICK MEDIA Revenue for DoubleClick Media decreased 70.4% to $30.3 million for the nine months ended September 30, 2002 from $102.1 million for the nine months ended September 30, 2001. DoubleClick Media's gross margin was 30.9% for the nine months ended September 30, 2002 and 32.3% for the nine months ended September 30, 2001. The decrease in DoubleClick Media revenue reflected the sale of its European and North American Media businesses. On January 28, 2002, DoubleClick completed the sale of the European Media business to AdLINK. On July 10, 2002, DoubleClick completed the sale of the North American Media business to L90, which was renamed MaxWorldwide. Revenues also decreased due to the decline in overall online advertising spending mentioned above. For the nine months ended September 30, 2002 and 2001, revenues derived by the European Media business were $1.1 million and $21.9 million, respectively. Revenue recognized by the North American Media business was approximately $18.0 million and $62.8 million for the nine months ended September 30, 2002 and 2001, respectively. Excluding the European and North American Media businesses, DoubleClick Media revenues would have been $11.2 million and $17.4 million for the nine months ended September 30, 2002 and 2001, respectively. DoubleClick Media revenue also decreased due to the departure of the AltaVista Web site from the DoubleClick network. DoubleClick Media revenue for the nine months ended September 30, 2001 included approximately $8.0 million, or 7.8% of DoubleClick Media revenue, for advertising impressions delivered to users of the AltaVista Web site. No such revenue was recognized in DoubleClick Media's results during the nine months ended September 30, 2002. Gross margin decreased due to increased levels of price competition and increases in the amount of unsold inventory, which diluted the effective price of delivered advertising impressions. This decrease was partially offset by lower average site fees remitted to publishers and a reduction in the cost of technology support provided by DoubleClick TechSolutions. Gross profits recognized by the North American Media business was approximately $6.7 million and $22.7 million for the nine months ended September 30, 2002 and 2001, respectively. 26 As a result of the sale of the North American Media business, DoubleClick anticipates significant decreases in absolute dollar amounts of both revenues and gross profits in its Media segment in the fourth quarter of 2002 and for the foreseeable future. Future revenue and gross profits of DoubleClick Media will only consist of the media operations of our consolidated subsidiary, DoubleClick Japan. 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 $78.7 million or 33.6% of revenue for the nine months ended September 30, 2002, and $148.2 million or 47.9% of revenue for the nine months ended September 30, 2001. The $69.5 million decrease in sales and marketing expense was primarily attributable to reductions in personnel-related costs of $27.1 million, non-cash compensation paid to former shareholders of DoubleClick Scandinavia of $15.2 million and marketing expenditures of $7.6 million, as well as reductions of travel and entertainment expenses of $4.3 million and rent, utilities, and other overhead costs of $7.1 million. We expect the absolute dollar amount of sales and marketing expenses to remain relatively consistent, but to increase as a percentage of revenues in fourth quarter of 2002 due to anticipated lower revenues. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of compensation and related benefits, professional services, and other operating expenses associated with our executive, finance, human resources, legal, facilities, and administrative departments. General and administrative expenses were $36.3 million or 15.5% of revenue for the nine months ended September 30, 2002, and $52.8 million or 17.1% of revenue for the nine months ended September 30, 2001. The $16.5 million decrease in general and administrative expense was primarily the result of overall reductions in professional services fees of $8.7 million and personnel-related costs of $4.8 million. Decreased professional services fees resulted in part from a reduction in legal fees as well as a reduction in consulting fees associated with tighter cost controls in place. Personnel-related costs declined as the result of headcount reductions associated with our restructuring activities. We expect the absolute dollar amount of general and administrative expenses to decrease significantly as a result of corporate headcount reductions but to only decrease slightly as a percentage of revenues in the fourth quarter of 2002 due to anticipated lower 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. The product development departments perform research and development, enhance and maintain existing products, and provide quality assurance. To date, all product development costs have been expensed as incurred. Product development expenses were $30.7 million or 13.1% of revenue for the nine months ended September 30, 2002, and $42.5 million or 13.7% of revenues for the nine months ended September 30, 2001. The $11.8 million decrease in product development expenses were primarily the result of reductions in compensation and related benefits for product development personnel of $7.6 million, and professional fees of $2.2 million. Compensation and related benefits declined as the result of headcount reductions associated with our restructuring activities. The decrease in professional fees was associated with the implementation of tighter cost controls. Although we will continue to concentrate on the efficient allocation of our resources, we believe that on-going investment in product development is critical to the attainment of our strategic objectives. We expect the absolute dollar amount of product development expenses to remain relatively consistent but to increase as a percentage of revenues during the fourth quarter of 2002 due to anticipated lower revenues. 27 AMORTIZATION OF INTANGIBLE ASSETS Amortization of intangible assets consists primarily of customer lists and patents. Amortization expense was $9.3 million for the nine months ended September 30, 2002 and $6.1 million for the nine months ended September 30, 2001. The increase was primarily the result of the amortization of customer lists acquired in various business combinations. AMORTIZATION OF GOODWILL 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 $36.3 million for the nine months ended September 30, 2001 related to the acquisitions of @plan, Flashbase, FloNetwork, DoubleClick Scandinavia and DoubleClick Japan. GOODWILL IMPAIRMENT As noted above, the persistence of unfavorable economic conditions led DoubleClick management to undertake a review of the recoverability of certain of its investments in the third quarter of 2001. As a result of significantly lower-than-expected revenues generated to date and considerably reduced estimates of future performance, management concluded that its investments in @plan and Flashbase were impaired. Accordingly, DoubleClick recognized an approximately $63.3 million impairment charge equal to the difference between its investments in and the estimated fair value of these entities in the third quarter of 2001. Of this amount, approximately $53.3 million related to @plan and $10.0 million related to Flashbase. The amount of the goodwill impairment was calculated based on discounted analyses of these entities' expected future cash flows, which were no longer deemed adequate to support the value of the goodwill associated with these investments. In both cases, sharply-reduced estimates of anticipated revenue growth and operating results, triggered primarily by the continued softness in aggregate on-line advertising spending, generated correspondingly lowered expectations of future cash flows and formed the basis for the recording of the charge in the third quarter of 2001. These entities' expected future cash flows and terminal values are based on management's budgeted forecasts and estimates. In the third quarter of 2002, based upon the prolonged softness in the economy and lower than anticipated revenues generated to date and decline in estimates of future performance of DoubleClick's email reporting unit, DoubleClick initiated a third-party valuation of its email reporting unit to determine whether the recorded balance of goodwill related to this reporting unit was recoverable. The outcome of this valuation resulted in an impairment charge of approximately $45.2 million being recorded during the quarter. The fair market value of the email reporting unit was determined based on revenue projections, recent transactions involving similar businesses and price/revenue multiples at which they were bought and sold, and price/revenue multiples of our competitors in the email marketplace. DoubleClick continues to evaluate its acquired intangible assets for evidence of impairment. If economic conditions continue to deteriorate and/or our investments do not perform in line with expectations, additional impairment charges related to our acquired intangible assets could be recorded in future periods. IMPAIRMENT OF INTANGIBLE ASSETS In the third quarter of 2002, as a result of the third party valuation of its email reporting unit, the fair value of certain intangibles assets were considered impaired. As a result, DoubleClick recorded an impairment charge of $1.0 million based on the difference between the carrying value and estimated fair value of the intangible assets. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with our acquisition of FloNetwork in April 2001, $1.3 million of the purchase price was allocated to in-process research and development projects and charged to operations as the projects 28 had not reached technological feasibility as of the date of acquisition and were determined to have no alternative future uses. We recognized no such charges during the nine months ended September 30, 2002. RESTRUCTURING AND OTHER CHARGES In the nine months ended September 30, 2002, DoubleClick 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 the TechSolutions division, as well as the consolidation of some of its leased office space and the closure of several offices. As a consequence, we recorded a $32.6 million charge to operations during the nine months ended September 30, 2002. This charge included approximately $4.7 million for severance-related payments to terminated employees, and approximately $27.9 million for the write-off of fixed assets, the accrual of future lease costs (net of estimated sublease income and deferred rent liabilities previously recorded) and other exit charges. In determining the restructuring charge associated with its future lease commitments, DoubleClick engaged a third party real estate firm to provide it with estimates of the future sublease income for its excess and idle space, which also includes an estimate of the time period required to identify new sublessees. This analysis was performed based on the current real estate market conditions in the local markets where DoubleClick's facilities are located. This real estate firm also provided estimates of lease termination/buyout fees landlords may charge to terminate existing leases rather than subleasing idle and excess space. DoubleClick's restructuring charge relating to future lease commitments is based on its review of this information. Should market conditions or other conditions change, this information may be updated. DoubleClick expects to eliminate certain operating expenses totaling approximately $18.0 million on an annualized basis, primarily related to personnel- and facility-related expenses, as a result of the restructuring initiatives undertaken during the nine months ended September 30, 2002. A majority of these reductions are expected to primarily impact sales and marketing expenses and general and administrative expenses. DoubleClick will begin to recognize the full effect of these cost savings in the fourth quarter of 2002. DoubleClick is continuing to review its operational performance and may incur additional restructuring charges in the fourth quarter of 2002, principally related to facility consolidations. During the nine months ended September 30, 2001, as part of a separate restructuring initiative, DoubleClick management took certain actions to further increase operational efficiencies and bring costs in line with revenues. These measures included the involuntary terminations of approximately 415 employees, primarily from the Media and TechSolutions divisions, as well as the consolidation of some leased office space and the closure of several offices. As a consequence, DoubleClick recorded a $35.9 million charge to operations during the nine months ended September 30, 2001. This charge included approximately $6.9 million for severance-related payments to terminated employees, approximately $10.9 million for the accrual of future lease costs (net of estimated sublease income and deferred rent liabilities previously recorded), approximately $15.8 million for the write-off of fixed assets situated in office locations that were closed or consolidated, and approximately $2.3 million in other exit costs, which included consulting and professional fees related to the restructuring activities and expenses associated with the decision to move the TechSolutions customer support department from New York to Colorado. LOSS FROM OPERATIONS DoubleClick's operating loss was $85.9 million for the nine months ended September 30, 2002 and $213.4 million for the nine months ended September 30, 2001. The decrease in its operating loss of $127.5 million is primarily attributable to the decrease in our sales and marketing expenses of $69.5 million, a decrease in goodwill amortization of $36.3 million, a decrease in goodwill impairment of $18.1 million, a decrease in general and administrative expenses of $16.2 million, and a decrease in product development costs of $11.8 million as a result of our restructuring activities and other cost cutting 29 initiatives during 2001. This was partially offset by a decrease in gross profits of approximately $25.1 million, and an increase in amortization of intangibles of approximately $3.2 million. DoubleClick continues to manage its operations with a focus on productivity and manage its headcount accordingly, but due to the general economic or industry trends it may incur future losses from operations. EQUITY IN INCOME (LOSSES) OF AFFILIATES Equity in income (losses) of affiliates was $0.2 million for the nine months ended September 30, 2002 and $(2.6) million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, equity in income (losses) of affiliates was attributable entirely to DoubleClick's 50% interest in the Abacus Direct Europe joint venture. Since the June 26, 2002 acquisition of the remaining 50% interest that DoubleClick did not previously own, the results of operations of Abacus UK have been consolidated into DoubleClick's operations. The increase in equity in income (losses) of affiliates was primarily the result of our investment in ValueClick being accounted for as a marketable security during the nine months ended September 30, 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% as of December 31, 2001. Additional business combinations consummated by ValueClick during 2002 have further reduced DoubleClick's ownership interest to approximately 9%. 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. GAIN ON EQUITY TRANSACTIONS OF AFFILIATES, NET For the nine months ended September 30, 2001, we recognized a gain of approximately $7.2 million from the initial public offering of our consolidated subsidiary DoubleClick Japan, which was partially offset by a loss of approximately $5.3 million related to the decrease in value of our proportionate share of the net assets of our equity-method investee ValueClick following the consummation of business combinations with ClickAgents.com, Inc., Bach Systems Inc. and Z Media, Inc. We recognized no such gains or losses during the nine months ended September 30, 2002. IMPAIRMENT OF INVESTMENTS IN AFFILIATES As a result of the significant decline in the market value of Internet-based companies and the declining access of these companies to public and private financing, management performed an assessment of the carrying values of its investments in affiliates. In the course of its analysis, DoubleClick determined that the carrying value of its cost-method investment in Return Path was no longer recoverable. As a consequence, DoubleClick wrote off its entire investment in Return Path and recognized an impairment charge of $4.5 million during the second quarter of 2001. In the third quarter of 2001, DoubleClick determined that the carrying value of its equity method investment in ValueClick was impaired. Consequently, DoubleClick wrote down its investment in ValueClick and recognized an impairment charge of approximately $11.7 million, which represented the difference between DoubleClick's carrying value and the estimated fair value of its investment in ValueClick. The estimated fair value of DoubleClick's investment in ValueClick was determined based on the closing market price of ValueClick stock on September 30, 2001. In the third quarter of 2002, DoubleClick determined that the carrying value of certain of its investments, principally its cost-method investments in AdLINK and NetRatings and its equity-method investment in MaxWorldwide were impaired based on the continued decline in the fair market value of these investments. As a result, DoubleClick recorded an impairment charge of $11.7 million, which represented the difference between DoubleClick's carrying value and the estimated fair value of these investments. The estimated fair values of DoubleClick's investments in AdLINK, NetRatings and MaxWorldwide were determined based on the closing market price of their stock on September 30, 2002. Additionally, DoubleClick's cost method investment in the joint venture, DoubleClick Asia, will 30 be liquidated and has no continuing value. As a consequence, DoubleClick wrote-off its entire investment in DoubleClick Asia and recognized an impairment charge of $2.4 million. GAIN ON THE EXTINGUISHMENT OF DEBT In the third quarter of 2002, DoubleClick repurchased $64.9 million of its outstanding 4.75% Convertible Subordinated Notes for approximately $53.6 million in cash. DoubleClick wrote off approximately $0.7 million in deferred issuance costs and recognized a gain of approximately $11.9 million as the result of the early retirement of this debt. In the third quarter of 2001, DoubleClick repurchased $20.3 million of its outstanding 4.75% Convertible Subordinated Notes for approximately $13.6 million in cash. DoubleClick wrote off approximately $0.3 million in deferred issuance costs and recognized a gain of approximately $6.4 million as the result of the early retirement of this debt. INTEREST AND OTHER, NET Interest and other, net was $10.8 million for the nine months ended September 30, 2002 and $18.9 million for the nine months ended September 30, 2001. Interest and other, net included $20.2 million of interest income for the nine months ended September 30, 2002, partially offset by $8.7 million in interest expense. For the nine months ended September 30, 2001, Interest and other, net included $34.7 million of interest income, partially offset by $9.7 million in interest expense. The decrease in interest income was primarily attributable to decreases in average investment yields due to declines in interest rates, offset by increases in the average quarterly balances of our investments in marketable securities. 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 rates of our investments. PROVISION FOR 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 nine months ended September 30, 2002 primarily relates to corporate income taxes of $4.4 million on the earnings of some of our foreign subsidiaries and gain on the sale of DoubleClick's European Media business. In addition, DoubleClick recorded federal alternative minimum tax of $0.6 million related to gains on the sales of DoubleClick's North American Media business and @plan research product line, and gain on early extinguishment of debt. DoubleClick also recorded approximately $1.0 million of state and local taxes. For the nine months ended September 30, 2001, the provision for income taxes primarily relates to corporate income taxes of $2.3 million on the earnings of certain of our foreign subsidiaries and state and local taxes of $0.7 million. 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 $29.9 million for the nine months ended September 30, 2002 and used $18.0 million for the nine months ended September 30, 2001. Cash provided by operating activities for the nine months ended September 30, 2002 resulted primarily from our net loss, adjusted for non- cash items, and decreases in accounts receivable, prepaid expenses and other assets, and increases in accrued expenses and other current liabilities, offset by decreases in accounts payable. Cash used in operating activities for the nine months ended September 30, 2001 resulted primarily from our net loss, adjusted for non-cash items and decreases in accounts receivable, offset by increases in prepaid expenses and other current assets and decreases in accounts payable, accrued expenses, other liabilities, and deferred revenue. Investing activities generated $35.6 million for the nine months ended September 30, 2002 and used $2.0 million for the nine months ending September 30, 2001. Cash provided by investing activities for the nine months ended September 30, 2002 resulted primarily from the net maturity of some of our 31 investments in marketable securities, cash paid for the purchase of equipment, proceeds placed in escrow in connection with our acquisition of Protagona, restricted cash and the acquisition of businesses and intangible assets, which were partially offset by proceeds received from the sale of the North American Media business and the @plan research product line. Cash used in investing activities for the nine months ended September 30, 2001 resulted primarily from the purchase of equipment and the acquisition of businesses and intangible assets, which was partially offset by the net maturity of some of our investments in marketable securities. Net cash used in financing activities was $68.6 million for the nine months ended September 30, 2002 and net cash provided by financing activities was $15.3 million for the nine months ended September 30, 2001. Net cash used in financing activities resulted primarily from repurchase of convertible bonds, purchase of treasury stock, and 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 for the nine months ended September 30, 2001 resulted primarily from the initial public offering of common stock of our consolidated subsidiary, DoubleClick Japan, and the proceeds from the exercise of stock options and the issuance of common stock, offset by payments of notes and under capital lease obligations, the repurchase of our 4.75% convertible debt and the purchase of treasury stock. We may in the future use available cash to repurchase additional outstanding convertible bonds, although there can be no assurance that we will do so. As of September 30, 2002, we had $100.6 million of cash and cash equivalents, $580.4 million in investments in marketable securities and $38.0 million in restricted cash. As of September 30, 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 September 30, 2002, our investments in marketable securities had a weighted average time to maturity of 350 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 September 30, 2002.
TIME TO MATURITY ------------------------------------- ONE YEAR ONE TO TWO TO OR LESS TWO YEARS FOUR YEARS FAIR VALUE ------- --------- ---------- ---------- (IN THOUSANDS) ASSETS: Cash and cash equivalents.................... $100,633 -- -- $100,633 Average interest rate........................ 1.04% Fixed-rate investments in marketable securities................................. $268,731 $311,707 -- $580,438 Average interest rate........................ 3.99% 3.21% LIABILITIES: Convertible subordinated notes............... -- -- $154,800 $130,232 Average interest rate........................ 4.75%
32 As of September 30, 2002, restricted cash was $38.0 million and the average interest rate associated with this cash was 2.32%. Restricted cash consists of office lease security deposits, amounts held in escrow relating to our acquisition of Protagona plc, and funds to cover our automated clearing house payment function. We did not hold derivative financial instruments as of September 30, 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, as well as cash balances held in currencies other than the functional currency of DoubleClick and its subsidiaries. The effect of foreign exchange rate fluctuations on operations resulted in net realized and unrealized gains and (losses) of $0.1 million and $(0.9) million for the three and nine months ended September 30, 2002, respectively. This was principally as a result of the strengthening and weakening of the U.S. dollar and its impact upon our U.S. dollar denominated deposits held by our international subsidiaries for the three and nine months ended September 30, 2002, respectively. To date we have not used 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 September 30, 2002, we had $43.8 million in cash and cash equivalents denominated in foreign currencies. 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. EQUITY RISK DoubleClick holds investments in equity instruments of public companies received as a result of certain business transactions, including shares held in ValueClick, NetRatings, AdLINK and MaxWorldwide. Such investments, which are in the Internet industry, are subject to significant fluctuations in fair market value due to the volatility of the stock market and the market value of technology companies in particular. The following represents the cost basis and fair market value of these investments, which are included in as 'Investment in affiliates' on the accompanying Consolidated Balance Sheets.
AS OF SEPTEMBER 30, 2002 ---------------------------- FAIR MARKET COST BASIS VALUE ---------- ----- ValueClick, Inc..................................... 16,608 17,175 NetRatings Inc...................................... 2,954 2,954 AdLINK Internet Media AG............................ 1,855 1,855 MaxWorldwide, Inc................................... 2,544 2,544
Certain of DoubleClick's investments have suffered a decrease in value as a result of recent market volatility. As a consequence, DoubleClick wrote-down these investments to their estimated fair value in the third quarter of 2002. We will continue to evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a further decline in market value is other than temporary, a charge to earnings will be recorded for all or a portion of the unrealized loss, and a new cost basis in the investment will be established. 33 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 or anticipated 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, advertising 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 and industry 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 $63.9 million for the nine months ended September 30, 2002 and as of September 30, 2002, our accumulated deficit was $612.5 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. We also have lease obligations for facilities that currently constitute excess or idle facilities. Periodically, we evaluate the expenses likely to be incurred for these facilities, and where appropriate, have taken restructuring charges with respect to these expenses. We cannot assure you that there will not be additional restructuring charges recognized with respect to our excess or idle facilities. As a result of these factors, 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. 34 WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM ADVERTISEMENTS AND ADVERTISING SERVICES. 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 advertising agencies. 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 the last couple of years by increasing softness of demand, lower prices for advertisements, the reduction or cancellation of advertising contracts, an increased risk of uncollectible receivables from customers and the reduction of marketing and advertising budgets, especially for online advertising. 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 is 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 advertising agencies purchase less advertising inventory and tend not to invest as much in Internet advertising. Consequently, the number of ad impressions delivered by DoubleClick TechSolutions may decline or fail to grow or the price that we can charge for our services may decline, which in either case 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, thereby possibly reducing the demand for DoubleClick Data's services. If direct marketing activities fail to grow or decline our revenues could be adversely affected. We cannot assure you that further reductions in marketing spending will not occur. We also cannot assure you that if economic conditions improve, marketing budgets and advertising spending will increase, or not decrease, from current levels. A continued decline in the economic prospects of marketers or the economy in general could alter current or prospective marketers' spending priorities or increase the time it takes to close a sale with a customer. As a result, our revenues from advertisements and marketing services may decline significantly in any given period. WE DO NOT OFTEN 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. MANY OF OUR CUSTOMERS CONTINUE TO EXPERIENCE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS. Some of our customers 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 marketing in general and our offerings in particular. 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 does not improve, our business, results of operations and financial condition could be materially adversely affected. 35 INDUSTRY SHIFTS, CONTINUING EXPANSION OF OUR PRODUCTS AND SERVICES AND OTHER CHANGES MAY STRAIN 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, continuing 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 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 policies will be adequate to support our operations or that our management will be able to achieve the execution necessary to offer our products and services and implement our business plan successfully. Our inability to effectively respond to these challenges 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 involves generating revenue by providing digital marketing products and services to direct marketers, publishers and advertisers. 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 marketing and advertising sector, our revenue outlook is sensitive to downturns in the economy, including declines in advertisers' marketing budgets. The profit potential of our business model is also subject to the acceptance of our products and services by direct marketers, publishers and advertisers. 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. Our failure to achieve these results would adversely affect the profit potential of our business model. 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 36 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 marketers, Web publishers and advertisers as well as with inhouse solutions. Abacus competes with data aggregation companies and providers of information products and marketing research services to the direct marketing industry. We also compete indirectly with others, such as providers of customer relationship management services, companies engaged in providing analytic services 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 we have. 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, direct marketer 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 profits 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: direct marketer, publisher and advertiser demand for our products and services; Internet user traffic levels; number and size of ad units per page on our customers' Web sites; downward pricing pressures from current and potential customers for our products and services; the introduction of new products or services by us or our competitors; 37 variations in the levels of capital, operating expenditures and other costs relating to our operations; general seasonal and cyclical fluctuations; and general economic and industry conditions. We may not be able to adjust spending quickly enough to offset any unexpected revenue shortfall. Our 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 that 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 TechSolutions business. 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 deliver. As a result, we believe that period-to-period comparisons of our results of operations may not be 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, MessageMedia and Protagona. We may continue 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 are also minority investors in several technology companies, including in ValueClick, NetRatings, AdLINK and MaxWorldwide. Our investments have suffered decreases in value as a result of market volatility, and periodically, we have recorded charges to earnings for all or a portion of the unrealized loss due to declines in market value considered to be other than temporary. The market value of these investments may decline in future periods due to the continued volatility in the stock market in general or the market prices of securities of technology companies in particular and we may be required to record further charges to earnings as a result. Further, we cannot assure you that we will be able to sell these securities at or above our cost basis. We have recorded goodwill in connection with a number of our acquired businesses, including MessageMedia, @plan, FloNetwork, DoubleClick Japan and Flashbase. As a result of significantly lower-than-expected revenues generated to date and considerably reduced estimates of future performance, we have in the past recognized impairment charges with respect to the goodwill of some acquired businesses. If market conditions require, we may in the future record additional impairments in the value of our acquired businesses. 38 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 disposing of the excess or idle facilities of an acquired company or business; 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. DISRUPTION OF OUR SERVICES DUE TO UNANTICIPATED PROBLEMS OR FAILURES COULD HARM OUR BUSINESS. Our DART ad management and DARTmail technology resides in our data centers in multiple locations in the United States and abroad. 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, delays or destroys our operations. 39 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 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 not be able 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, patents, 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 intellectual property 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', DARTMAIL'TM' and ABACUS'TM'. 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 not be available on commercially reasonable terms, if at all. We also enter into confidentiality, assignments of proprietary rights and license agreements, as appropriate, with our employees, consultants and business partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, we cannot be certain that the steps we take to prevent unauthorized use of our intellectual 40 property 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 intellectual property 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, WE MAY BE LIABLE FOR DAMAGES AND BE REQUIRED TO MAKE CHANGES TO OUR TECHNOLOGY OR BUSINESS. Infringement claims may be asserted against us, which could adversely affect our reputation and the value of our intellectual property rights. From time to time we have been, and we expect to continue to be, subject to claims or notices in the ordinary course of our business, including assertions 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 during a large part of their prosecution, 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 as an alternative 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 have been a defendant in several 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 have been 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. These situations were resolved in 2002. However, we may in the future be subject to additional claims or regulatory inquiries. 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. 41 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. 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 price and volume fluctuations. Investors may be unable to resell their shares of our common stock at or above their purchase price. 42 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 September 30, 2002, we had 135,873,394 shares of common stock outstanding, excluding 17,921,858 shares subject to options outstanding as of such date under our stock option plans that are exercisable at prices ranging from $0.04 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 digital marketing products or services or Internet advertising spending 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 relatively 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. 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 43 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. 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 impose stricter standards and thus 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 offerings 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 ON THE WEB OR THROUGH EMAILS 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 becomes widely adopted by computer users, demand for our products and services would decline. 44 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 advertisers, Web publishers and direct marketers using our products and services. 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. If electronic commerce, including the purchase of merchandise and the exchange of information via the Internet or other media, increases significantly in the future, 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. 45 ITEM 4. CONTROLS AND PROCEDURES a) Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner and when required, and are effective to ensure that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. 46 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2001, in our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2002 and the quarter ended March 31, 2002 and in our Current Report on Form 8-K filed on April 3, 2002, DoubleClick was a defendant in class action lawsuits concerning Internet user privacy and data collection and other business practices in both state and federal court. On March 29, 2002, the parties issued a joint press release outlining the terms of a settlement of these lawsuits. The court gave final approval of the settlement at a hearing held on May 21, 2002 and the judge signed a Final Judgment and Order of Dismissal of the actions on May 23, 2002. One person objected to the settlement and filed a notice of appeal of the court's order on June 19, 2002, which was dismissed pursuant to a settlement agreement with plaintiffs. These lawsuits have all been dismissed with prejudice. On October 16, 2002, the action brought by the State's Attorney of Cook County, Illinois was dismissed with prejudice pursuant to a settlement agreement between the parties. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2001, in our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2002 and the quarter ended March 31, 2002 and in our Current Report on Form 8-K filed on August 30, 2002, DoubleClick's ad serving and data collection practices were the subject of inquiries by the attorneys general of several states. These inquiries were resolved by an agreement between DoubleClick and the attorneys general of ten states. On August 26, 2002, the Company issued a press release outlining the terms of this settlement. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2001, and in our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2002 and the quarter ended March 31, 2002, 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 alleged that the directors of NetGravity breached their fiduciary duties to NetGravity's stockholders in connection with the negotiation of the proposed merger. On August 16, 2002, the court gave final approval of the settlement between the parties. As previously disclosed in our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2002 and the quarter ended March 31, 2002, in April 2002, a consolidated amended class action complaint alleging violations of the federal securities laws was filed in the United States District Court for the Southern District of New York naming DoubleClick and certain of its officers and directors and certain underwriters of DoubleClick's follow-on offerings as defendants. 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 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. This action seeks, among other things, unspecified damages and costs, including attorneys' fees. In October 2002, the action was dismissed against our officers and directors without prejudice. However, claims against the Company remain. DoubleClick, along with other issuer defendants, have filed a motion to dismiss the complaint, which is currently pending before the court. We believe that the claims asserted by these lawsuits are without merit, and 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. 47 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) Exhibits
NUMBER DESCRIPTION ------ ----------- 10.17 -- Severance Agreement, dated as of November 1, 2002, between DoubleClick Inc. and Christopher Saridakis 99.1 -- Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 -- Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K We filed a Current Report on Form 8-K, Items 5 and 7, on August 30, 2002, attaching the press release we issued on August 26, 2002 announcing that DoubleClick and the Attorneys General from 10 states had reached an agreement to end the investigation into our ad serving practices. The Attorneys General of New York, which led the investigation, Arizona, California, Connecticut, Massachusetts, Michigan, New Jersey, New Mexico, Vermont and Washington signed onto the agreement. We filed a Current Report on Form 8-K, Items 5 and 7, on July 11, 2002, announcing that on July 10, 2002, DoubleClick Inc. and L90, Inc. completed a transaction whereby L90, Inc. acquired DoubleClick's North American Media business, pursuant to an Agreement and Plan of Merger, dated as of June 29, 2002, by and among MaxWorldwide, Inc., L90, Inc., DoubleClick, DoubleClick Media Inc., Picasso Media Acquisition, Inc. and Lion Merger Sub, Inc. 48 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: November 14, 2002 DOUBLECLICK INC. By: /s/ CORY A. DOUGLAS .................................. CORY A. DOUGLAS VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER (CHIEF ACCOUNTING OFFICER AND DULY AUTHORIZED OFFICER) 49 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Kevin P. Ryan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DoubleClick Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the 'Evaluation Date'); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ KEVIN P. RYAN ..................................... KEVIN P. RYAN CHIEF EXECUTIVE OFFICER Dated: November 14, 2002 50 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Bruce Dalziel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DoubleClick Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the 'Evaluation Date'); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ BRUCE DALZIEL ..................................... BRUCE DALZIEL CHIEF FINANCIAL OFFICER Dated: November 14, 2002 51 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT --- ---------------------- 10.17 Severance Agreement, dated as of November 1, 2002, between DoubleClick Inc. and Christopher Saridakis 99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
52 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as............................. 'TM' The registered trademark symbol shall be expressed as.................. 'r' The section symbol shall be expressed as............................... 'SS' EX-10 3 ex10-17.txt EXHIBIT 10.17 EXHIBIT 10.17 As of November 1, 2002 Christopher Saridakis DoubleClick Inc. 450 W. 33rd Street New York, NY 10001 Dear Chris: This letter agreement will confirm our understandings and obligations in connection with your separation from DoubleClick Inc. As used in this letter agreement, 'DoubleClick' is defined to include, as appropriate, DoubleClick Inc., any directly or indirectly held subsidiary, any affiliated entity, and any successor to any of the foregoing. Resignation. You hereby resign, effective immediately, from your position as Senior Vice President, Global TechSolutions and any other currently held positions with DoubleClick. This letter agreement confirms that your authority and responsibility for any DoubleClick 'policymaking function' (as that term is used in Rule 16a-1 to the Rules and Regulations to the Securities Exchange Act of 1934) immediately ceases upon your resignation from these positions. From today through and including the earlier of May 30, 2003, or the date upon which you obtain new employment, which date will be the effective date of your termination (the 'Termination Date'), you will continue to be employed by DoubleClick and will assist in those special projects as may be designated by DoubleClick's Chief Executive Officer or President and reasonably acceptable to you. DoubleClick acknowledges that you will be able to serve in your new capacity without being present in DoubleClick's offices on a daily basis. Separation Pay. In lieu of a notice period and in consideration for your agreeing to the terms of this agreement, you will receive: (a) your regular salary at your current base rate of pay for the period from today through and including May 30, 2003, with any then-unpaid balance to be paid in a lump sum in the event of any Termination Date that occurs before May 30, 2003; and (b) a lump-sum payment of $93,333.33, based on target commissions for the fourth quarter 2002 ($53,333.33) and first quarter 2003 ($40,000), payable on or about the earlier of the Termination Date, or the conclusion of each respective quarter in the ordinary course of business. All payments will be less customary deductions and withholdings. You agree to notify me in writing upon acceptance of employment with any other employer. Stock Sales. DoubleClick will, to the extent necessary, file to remove you as a Section 16 reporting officer. You acknowledge that you are familiar with the trading and reporting requirements applicable to a former Section 16 reporting officer. Until May 1, 2003, you agree to continue to abide by DoubleClick's insider trading policies, for which purposes you shall remain a 'Listed Employee' until November 1, 2002. During the period until May 1, 2003, you agree to notify DoubleClick in advance of any planned stock sales by you, a member of your household or those financially dependent on you, although it is acknowledged that you will no longer be subject to DoubleClick's insider trading policies following the Termination Date. Stock Options. This letter agreement confirms that all stock options granted to you by DoubleClick prior to the date of this letter will continue to vest according to their respective terms through and including the Termination Date. Release of Claims. You, on your own behalf and on behalf of any spouse, heirs, legal representatives, successors-in-interest, and assigns, waive, release, and discharge DoubleClick Inc., its present and former subsidiaries, divisions, departments, affiliated entities, predecessors, partners, joint venturers, directors, officers, shareholders, agents, employees, successors, and assigns from any and all claims, rights, demands, debts, obligations, damages or accountings of whatever nature which you may have, may have had, or, in the future, may believe you had, against DoubleClick occurring prior to the date of this agreement, whether known or unknown, asserted or unasserted, including but not limited to: (a) all claims and liability for any acts that violated or may have violated your rights under any contract, tort, or other common law, any federal, state, or local fair employment practices or civil rights law or regulation, any employee relations statute, executive order, law, regulation, or ordinance, any workers compensation law, or any other duty or obligation of any kind, including but not limited to rights created by 42 U.S.C. 'SS' 1981, Title VII of the Civil Rights Act of 1964 ('Title VII'), the Age Discrimination in Employment Act ('ADEA'), the Americans with Disabilities Act ('ADA'), the Family and Medical Leave Act ('FMLA'), and all other federal, state, and local laws prohibiting employment discrimination of whatever kind or nature; (b) all liability for any claims whatsoever which were or may have been alleged against or imputed to DoubleClick by you or anyone acting on your behalf; (c) all rights to or claims for wages, commissions, monetary or equitable relief, or compensatory, punitive, or liquidated damages, or reemployment or reinstatement in any position; and (d) all rights to or claims for attorneys' fees, costs, or disbursements. DoubleClick, on its own behalf and on behalf of any present and former subsidiaries, divisions, departments, affiliated entities, predecessors, partners, joint venturers, directors, officers, shareholders, agents, employees, successors, and assigns waives, releases, and discharges you, your spouse, heirs, legal representatives, and assigns, from any and all claims, rights, demands, debts, obligations, damages, or accountings of whatever nature which it may have, may have had, or, in the future, may believe it had, against you arising prior to the date of its signing this agreement, whether known or unknown, asserted or unasserted other than acts or conduct constituting fraud, gross negligence, or willful misconduct. On or promptly following the Termination Date, DoubleClick hereby agrees to execute a release in the form attached hereto as Exhibit A, and you hereby agree to execute a release in the form attached hereto as Exhibit B. You acknowledge and agree that DoubleClick's obligation to pay any Separation Pay to you hereunder (other than salary continuation) is expressly contingent upon your execution of the release attached as Exhibit B (provided that DoubleClick concurrently executes the release attached as Exhibit A). Confidentiality. You shall keep the terms and conditions of this agreement strictly confidential. You shall not disclose the terms of this agreement, except to your tax, finance, or legal advisors, or to your immediate family members, or to potential new employers, each of whom will also have an obligation of confidentiality. You further recognize and reaffirm that the Employee Covenant of Confidentiality and the Employee Proprietary Information and Inventions Agreement you signed pursuant to your employment with DoubleClick continue in full force and effect. You agree that you will never disclose DoubleClick trade secret or proprietary information, including but not limited to information in its databases, technical or scientific information relating to current or future products, services, or research, business or marketing plans or projections, earnings and other financial data, personnel information, including executive and organizational changes, software, computer systems, and programs, and policies and procedures of DoubleClick. Return of Company Property. By signing below, you agree that you will return to DoubleClick, on or before the Termination Date, any documents (including electronic documents, disks, and files) that you received and/or created as part of your employment with DoubleClick and that remain in your possession, custody, or control, and you further agree that you will not, to the best of your knowledge and belief, have retained (yourself or through an agent) any copies thereof. You further agree that you will, on or before the Termination Date, all tangible company property that remains in your possession, custody, or control, including but not limited to company-sponsored credit cards and/or calling cards, cellular telephones, computer equipment, keys, badges, and any other company property. You agree and understand that your material compliance with the requirements of this paragraph is an express condition to your entitlement to the Separation Pay set forth above. We acknowledge that you will vacate your office following the date of this letter agreement, and that you may remove your personal belongings from the company premises at your convenience. You agree that DoubleClick may, at its discretion, examine all documents and other materials that you have designated as personal, prior to their removal from the company premises. Through and including the Termination Date, you will be allowed continued use of your computer, email account, and DoubleClick telephone number. 2 Non-Solicitation. You agree that for the duration of your employment with DoubleClick and through and including April 30, 2004 (the 'Restricted Period'), you may not solicit any DoubleClick employee on behalf of another employer or encourage any DoubleClick employee to leave the company. Similarly, you agree that for the same period of continued employment and through and including the Restricted Period, you may not solicit any DoubleClick account, on your behalf or on behalf of any other individual or entity, for the purpose of engaging in 'DoubleClick Competitive Business' (as defined in the following paragraph). Non-Competition. You agree that for the duration of your employment with DoubleClick and through and including the Restricted Period, you may not, as an employee, agent, consultant, advisor, independent contractor, partner, officer, director, stockholder, owner, co-venturer, principal, investor, lender, or guarantor of any corporation, partnership, or other entity, or in any other capacity, directly or indirectly: (a) engage in any business in which DoubleClick, as of the Termination Date, is engaged or, to your knowledge, proposes to engage, in each case a material part of DoubleClick's business ('DoubleClick Competitive Business'); (b) authorize your name to be used in connection with a DoubleClick Competitive Business; or (c) acquire any debt, equity, or other ownership interest in any person or entity engaged, to your knowledge, in a DoubleClick Competitive Business, except that you may own, in the aggregate, not more than one percent (1%) of the outstanding equity of any publicly traded entity that is engaged in a DoubleClick Competitive Business as a material part of such entity's business. You hereby acknowledge that the scope of this non-competition obligation is fair and reasonable, and is given in consideration of the other benefits set forth in this letter agreement. Duty to Cooperate. You agree to cooperate with DoubleClick in providing truthful testimony or information with respect to all inquiries or investigations, claims and litigation pertaining to DoubleClick. Benefits. You are entitled to the following benefits: You will receive payment for any accrued but unused Paid Time Off days through November 1, 2002. You will receive any entitlement under DoubleClick's 401(k) plan in accordance with the terms of the plan as applied to all covered employees. You will be refunded the post-tax value of your cash balance from contributions, if any, to the Employee Stock Purchase Plan. You will be reimbursed for any usual and ordinary business expenses incurred in connection with your employment in accordance with DoubleClick's expense policy. You will be entitled to retain, and exercise, all stock options vested on or before the Termination Date in accordance with the terms expressed in the respective notices of grant of stock option. Your entitlement to stock option vesting shall cease completely as of that date. Your benefits and coverages under the medical insurance arrangements to which you are subject as of the date of this agreement will continue, under the current terms and conditions, through the last day of the month in which your Termination Date falls, on which date such benefits and coverages will cease and you will be eligible to continue such benefits and coverages at your expense pursuant to the federal law known as COBRA. You will be receiving more detailed information concerning your option to continue your health coverage under separate cover. Other than the foregoing benefits and the Separation Pay set forth above, you will not be entitled to any form of payment or benefit. Entire Agreement/Choice of Law/Severability. This agreement contains the entire agreement between the parties and shall be governed by the laws of the State of New York without giving effect to its principles of conflicts of law. You hereby agree that you are subject to the jurisdiction of the courts of the State of New York. This agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Should any provision of this agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms, or provisions shall not be affected thereby and said illegal or invalid part, term, or provision shall be deemed not to be part of this agreement. Acknowledgment. You acknowledge by signing this agreement that you have read it in its entirety, understand all of its terms and conditions, and knowingly and voluntarily assent to those terms and conditions. Any alterations to this agreement shall not affect its terms; your signature shall be deemed 3 an acceptance of its terms without modification. You further acknowledge that you have been advised of your right to consult with counsel in connection with this agreement. To signify your acceptance of these terms, please sign and date this agreement in the space provided and return the original to me within seven days. We wish you the best of success in your future endeavors. Very truly yours, DOUBLECLICK INC. BY: /s/ MELANIE HUGHES .................................. MELANIE HUGHES SVP, HUMAN RESOURCES AGREED TO AND ACCEPTED: BY: /s/ CHRISTOPHER SARIDAKIS ................................. CHRISTOPHER SARIDAKIS November 1, 2002 ..................................... DATE 4 EXHIBIT A RELEASE OF CLAIMS BY DOUBLECLICK INC. For good and valuable consideration, DoubleClick Inc., on its own behalf and on behalf of any present and former subsidiaries, divisions, departments, affiliated entities, predecessors, partners, joint venturers, directors, officers, shareholders, agents, employees, successors, and assigns (collectively referred to hereinafter as 'DoubleClick') waives, releases, and discharges Christopher Saridakis, any spouse, heirs, legal representatives, and assigns (collectively, 'Saridakis'), from any and all claims, rights, demands, debts, obligations, damages or accountings of whatever nature which it may have, may have had, or, in the future, may believe it had, against Saridakis arising prior to the date of its signing this release, whether known or unknown, asserted or unasserted other than acts or conduct constituting fraud or intentional misconduct, including but not limited to: (a) all claims and liability for any acts that violated or may have violated its rights under any contract, tort, or other common law, any federal, state or local law, or any other duty or obligation of any kind; (b) all liability for any claims whatsoever which were or may have been alleged against or imputed to Saridakis by DoubleClick or anyone acting on Saridakis' behalf; (c) all rights to or claims for wages, commissions, monetary or equitable relief, or compensatory, punitive, or liquidated damages, or reemployment or reinstatement in any position; and (d) all rights to or claims for attorneys' fees, costs, or disbursements. Notwithstanding the foregoing, this release shall not apply to claims based on, or preserved by, the November 1, 2002 letter agreement between Saridakis and DoubleClick. DOUBLECLICK INC. BY: .................................. MELANIE HUGHES SVP, HUMAN RESOURCES Dated: .............................. 5 EXHIBIT B RELEASE OF CLAIMS BY CHRISTOPHER SARIDAKIS For good and valuable consideration, I, on my own behalf and on behalf of any spouse, heirs, legal representatives, and assigns, waive, release, and discharge DoubleClick Inc., its present and former subsidiaries, divisions, departments, affiliated entities, predecessors, partners, joint venturers, directors, officers, shareholders, agents, employees, successors, and assigns (collectively referred to hereinafter as 'DoubleClick') from any and all claims, rights, demands, debts, obligations, damages, or accountings of whatever nature which I may have, may have had, or, in the future, may believe I had, against DoubleClick arising prior to the date of my signing this release, whether known or unknown, asserted or unasserted, other than acts or conduct constituting fraud or intentional misconduct, including but not limited to: (a) all claims and liability for any acts that violated or may have violated my rights under any contract, tort, or other common law, any federal, state, or local fair employment practices or civil rights law or regulation, any employee relations statute, executive order, law, regulation, or ordinance, any workers compensation law, or any other duty or obligation of any kind, including but not limited to rights created by 42 U.S.C. 'SS' 1981, Title VII of the Civil Rights Act of 1964 ('Title VII'), the Age Discrimination in Employment Act ('ADEA'), the Americans with Disabilities Act ('ADA'), the Family and Medical Leave Act ('FMLA'), and all other federal, state, and local laws prohibiting employment discrimination of whatever kind or nature; (b) all liability for any claims whatsoever which were or may have been alleged against or imputed to DoubleClick by me or anyone acting on my behalf; (c) all rights to or claims for wages, commissions, monetary, or equitable relief, or compensatory, punitive, or liquidated damages, or reemployment or reinstatement in any position; and (d) all rights to or claims for attorneys' fees, costs, or disbursements. Notwithstanding the foregoing, this release shall not apply to claims based on, or preserved by, the November 1, 2002 letter agreement between me and DoubleClick. ..................................... CHRISTOPHER SARIDAKIS Dated: .............................. 6 EX-99 4 ex99-1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report on Form 10-Q of DoubleClick Inc. (the 'Company') for the quarterly period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the 'Report'), Kevin P. Ryan, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ KEVIN P. RYAN ..................................... KEVIN P. RYAN CHIEF EXECUTIVE OFFICER November 14, 2002 EX-99 5 ex99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report on Form 10-Q of DoubleClick Inc. (the 'Company') for the quarterly period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the 'Report'), Bruce Dalziel, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ BRUCE DALZIEL ..................................... BRUCE DALZIEL CHIEF FINANCIAL OFFICER November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----