##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File Number: 0-23137
 aQuantive, Inc.
 (Exact name of registrant as specified in its charter)
 Washington
(State of Incorporation)
    
    91-1819567
(I.R.S. Employer Identification Number)
 821 Second Avenue, 18th Floor
Seattle, Washington 98104
(Address of principal executive offices)
 (206) 816-8800
(Registrants telephone number, including area code)
 þ o
 þ o




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AQUANTIVE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 4. Submissions of matters to a vote of security holders
    
    
    32Item 6. Exhibits
    
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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##### Table of Contents



Item 1. Condensed Consolidated Financial Statements
 AQUANTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
(unaudited)
 June 30,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    32,623
    
    
    $
    24,555Short-term investments
    
    
    35,159
    
    
    
    34,692Accounts receivable, net of allowances of
$3,024 and $3,144
    
    
    134,539
    
    
    
    106,683Other receivables
    
    
    660
    
    
    
    1,486Prepaid expenses and other current assets
    
    
    2,863
    
    
    
    1,631Deferred tax asset
    
    
    7,204
    
    
    
    7,204Total current assets
    
    
    213,048
    
    
    
    176,251Property and equipment, net
    
    
    23,304
    
    
    
    17,569Goodwill
    
    
    138,519
    
    
    
    137,845Other intangible assets, net
    
    
    32,205
    
    
    
    36,226Other assets
    
    
    2,564
    
    
    
    2,690Deferred tax assets, net
    
    
    12,456
    
    
    
    15,642Total assets
    
    $
    422,096
    
    
    $
    386,223Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    77,022
    
    
    $
    68,542Accrued liabilities
    
    
    24,334
    
    
    
    21,066Pre-billed media
    
    
    15,812
    
    
    
    15,655Deferred rent, current portion
    
    
    600
    
    
    
    603Deferred revenue
    
    
    9,128
    
    
    
    10,394Total current liabilities
    
    
    126,896
    
    
    
    116,260Deferred rent, less current portion
    
    
    3,408
    
    
    
    3,010Long-term accrued liabilities
    
    
    418
    
    
    
    456Notes payable
    
    
    80,000
    
    
    
    80,000Total liabilities
    
    
    210,722
    
    
    
    199,726Shareholders equity:Common stock, $0.01 par value; 200,000
shares authorized 63,957 and 62,256 shares
issued and outstanding
    
    
    640
    
    
    
    623Paid-in capital
    
    
    244,717
    
    
    
    233,898Accumulated deficit
    
    
    (33,929
    )
    
    
    (48,099
    )Accumulated other comprehensive (loss) income
    
    
    (54
    )
    
    
    75Total shareholders equity
    
    
    211,374
    
    
    
    186,497Total liabilities and shareholders equity
    
    $
    422,096
    
    
    $
    386,223
  3




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AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(in thousands except per share amounts)
(unaudited)
 Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    77,189
    
    
    $
    27,849
    
    
    $
    142,186
    
    
    $
    50,491Costs and expenses:Cost of revenue
    
    
    9,475
    
    
    
    4,497
    
    
    
    17,636
    
    
    
    8,535Client support
    
    
    36,053
    
    
    
    7,393
    
    
    
    66,709
    
    
    
    14,239Product development
    
    
    2,166
    
    
    
    1,414
    
    
    
    4,133
    
    
    
    2,906Sales and marketing
    
    
    3,471
    
    
    
    2,140
    
    
    
    6,410
    
    
    
    3,984General and administrative
    
    
    9,988
    
    
    
    4,521
    
    
    
    17,702
    
    
    
    8,590Amortization of intangible assets
    
    
    1,803
    
    
    
    333
    
    
    
    3,606
    
    
    
    846Client reimbursed expenses
    
    
    959
    
    
    
    
    
    
    
    1,637
    
    
    
    Total costs and expenses
    
    
    63,915
    
    
    
    20,298
    
    
    
    117,833
    
    
    
    39,100Income from operations
    
    
    13,274
    
    
    
    7,551
    
    
    
    24,353
    
    
    
    11,391Interest and other income, net
    
    
    257
    
    
    
    477
    
    
    
    527
    
    
    
    1,057Interest expense
    
    
    583
    
    
    
    
    
    
    
    1,173
    
    
    
    Income before provision for income taxes
    
    
    12,948
    
    
    
    8,028
    
    
    
    23,707
    
    
    
    12,448Provision for income taxes
    
    
    5,188
    
    
    
    520
    
    
    
    9,537
    
    
    
    793Net income
    
    $
    7,760
    
    
    $
    7,508
    
    
    $
    14,170
    
    
    $
    11,655Basic net income per share
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    0.19Diluted net income per share
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.17Shares used in computing basic net income per share
    
    
    63,438
    
    
    
    60,965
    
    
    
    63,020
    
    
    
    60,741Shares used in computing diluted net income per share
    
    
    75,677
    
    
    
    69,753
    
    
    
    74,895
    
    
    
    69,752Comprehensive income:Net income
    
    $
    7,760
    
    
    $
    7,508
    
    
    $
    14,170
    
    
    $
    11,655Items of comprehensive loss
    
    
    (110
    )
    
    
    (298
    )
    
    
    (129
    )
    
    
    (354
    )Comprehensive income
    
    $
    7,650
    
    
    $
    7,210
    
    
    $
    14,041
    
    
    $
    11,301
  4




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AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months endedJune 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    14,170
    
    
    $
    11,655Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    8,878
    
    
    
    3,264Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (27,856
    )
    
    
    (15,228
    )Other receivables, prepaid expenses and other current assets
    
    
    (406
    )
    
    
    575Other assets
    
    
    (148
    )
    
    
    (250
    )Accounts payable
    
    
    8,480
    
    
    
    23,115Accrued liabilities
    
    
    4,150
    
    
    
    3,164Pre-billed media
    
    
    157
    
    
    
    5,453Deferred rent
    
    
    375
    
    
    
    104Deferred revenue
    
    
    (1,266
    )
    
    
    (747
    )Deferred taxes
    
    
    8,647
    
    
    
    144Net cash provided by operating activities
    
    
    15,181
    
    
    
    31,249CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (10,290
    )
    
    
    (4,539
    )(Purchases) proceeds of marketable securities, net
    
    
    (626
    )
    
    
    24,179Acquisitions, less cash received of $60 in 2004
    
    
    (1,573
    )
    
    
    (4,243
    )Net cash (used in) provided by investing activities
    
    
    (12,489
    )
    
    
    15,397CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock related to exercises of common stock options and the ESPP
    
    
    5,376
    
    
    
    2,498Net cash provided by financing activities
    
    
    5,376
    
    
    
    2,498Net increase in cash and cash equivalents
    
    
    8,068
    
    
    
    49,144Cash and cash equivalents, beginning of period
    
    
    24,555
    
    
    
    32,797Cash and cash equivalents, end of period
    
    $
    32,623
    
    
    $
    81,941
  5




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##### Table of Contents



AQUANTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands except per share amounts)
(unaudited)
 1. Organization and Operations of the Company
   2. Summary of Significant Accounting Policies
 Basis of Presentation
    Use of Estimates in the Preparation of Financial Statements
  6




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Revenue Recognition
  Digital Marketing Services
      Digital Marketing Technologies
  7




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##### Table of Contents



Digital Performance Media
   All Segments
    Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Customer A
    
    
    12%
    
    
    
    20%
    
    
    
    12%
    
    
    
    20%
  Recent Accounting Pronouncements
  8




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##### Table of Contents



Reclassifications
  3. Stock-Based Compensation
   Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    7,760
    
    
    $
    7,508
    
    
    $
    14,170
    
    
    $
    11,655Deduct: total stock-based compensation determined under fair
value based method for all awards, net of tax in 2005
    
    
    (2,610
    )
    
    
    (2,175
    )
    
    
    (4,233
    )
    
    
    (4,308
    )Pro forma net income, fair value method for all stock-based awards
    
    $
    5,150
    
    
    $
    5,333
    
    
    $
    9,937
    
    
    $
    7,347Basic net income per share:As reported
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    0.19Pro forma
    
    $
    0.08
    
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.12Diluted net income per share:As reported
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.17Pro forma
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.11
  Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Weighted average risk-free interest rate
    
    
    3.91%
    
    
    
    3.75%
    
    
    
    3.98%
    
    
    
    3.23%Expected lives (in years from vest date)
    
    
    4.5 - 8
    
    
    
    1-6.5
    
    
    
    4.5 - 8
    
    
    
    1-6.5Expected volatility
    
    
    99%
    
    
    
    104%
    
    
    
    102%
    
    
    
    105%
  9




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##### Table of Contents



Six Months endedJune 30,2005
    
    2004Weighted average risk-free interest rate
    
    
    2.36
    
    
    
    1.08Expected lives (in years from vest date)
    
    
    0.5 - 1
    
    
    
    0.5 - 1Expected volatility
    
    
    54.3
    %
    
    
    72.9
    %
 4. Net Income Per Share
  Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (numerator for basic)
    
    $
    7,760
    
    
    $
    7,508
    
    
    $
    14,170
    
    
    $
    11,655Add: Interest expense on convertible notes, net of tax in 2005
    
    
    355
    
    
    
    
    
    
    
    714
    
    
    
    Adjusted net income (numerator for diluted)
    
    $
    8,115
    
    
    $
    7,508
    
    
    $
    14,884
    
    
    $
    11,655Shares (denominator for basic and diluted):Gross weighted average common shares outstanding
    
    
    63,438
    
    
    
    60,965
    
    
    
    63,020
    
    
    
    60,741Shares used in computation of basic net income per share
    
    
    63,438
    
    
    
    60,965
    
    
    
    63,020
    
    
    
    60,741Add: Dilutive effect of employee stock options
    
    
    6,076
    
    
    
    8,788
    
    
    
    5,712
    
    
    
    9,011Add: Dilutive effect of convertible debt
    
    
    6,163
    
    
    
    
    
    
    
    6,163
    
    
    
    Shares used in computation of diluted net income per share
    
    
    75,677
    
    
    
    69,753
    
    
    
    74,895
    
    
    
    69,752Basic net income per share
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    0.19Diluted net income per share
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.17
  5. Segment Reporting
     Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalThree Months ended June 30, 2005Revenue
    
    $
    48,252
    
    
    $
    22,482
    
    
    $
    6,455
    
    
    $
    
    
    
    $
    77,189Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,607
    
    
    
    3,676
    
    
    
    192
    1
    
    
    9,475Client support
    
    
    34,836
    
    
    
    
    
    
    
    1,217
    
    
    
    
    
    
    
    36,053Product development
    
    
    
    
    
    
    2,166
    
    
    
    
    
    
    
    
    
    
    
    2,166Sales and marketing
    
    
    1,082
    
    
    
    2,389
    
    
    
    
    
    
    
    
    
    
    
    3,471General and administrative
    
    
    4,223
    
    
    
    2,295
    
    
    
    409
    
    
    
    3,061
    
    
    
    9,988Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    959
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959Total costs and expenses
    
    
    41,100
    
    
    
    12,457
    
    
    
    5,302
    
    
    
    5,056
    
    
    
    63,915Income (loss) from operations
    
    $
    7,152
    
    
    $
    10,025
    
    
    $
    1,153
    
    
    $
    (5,056
    )
    
    $
    13,274
 10




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Three Months ended June 30, 2004Revenue
    
    $
    12,785
    
    
    $
    14,399
    
    
    $
    665
    
    
    $
    
    
    
    $
    27,849Costs and expenses:Cost of revenue
    
    
    
    
    
    
    3,605
    
    
    
    700
    
    
    
    192
    1
    
    
    4,497Client support
    
    
    7,102
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    7,393Product development
    
    
    
    
    
    
    1,414
    
    
    
    
    
    
    
    
    
    
    
    1,414Sales and marketing
    
    
    179
    
    
    
    1,961
    
    
    
    
    
    
    
    
    
    
    
    2,140General and administrative
    
    
    812
    
    
    
    1,519
    
    
    
    48
    
    
    
    2,142
    
    
    
    4,521Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    333Total costs and expenses
    
    
    8,093
    
    
    
    8,499
    
    
    
    1,039
    
    
    
    2,667
    
    
    
    20,298Income (loss) from operations
    
    $
    4,692
    
    
    $
    5,900
    
    
    $
    (374
    )
    
    $
    (2,667
    )
    
    $
    7,551
 Six Months ended June 30, 2005Revenue
    
    $
    87,339
    
    
    $
    43,123
    
    
    $
    11,724
    
    
    $
    
    
    
    $
    142,186Costs and expenses:Cost of revenue
    
    
    
    
    
    
    10,364
    
    
    
    6,888
    
    
    
    384
    1
    
    
    17,636Client support
    
    
    64,563
    
    
    
    
    
    
    
    2,146
    
    
    
    
    
    
    
    66,709Product development
    
    
    
    
    
    
    4,133
    
    
    
    
    
    
    
    
    
    
    
    4,133Sales and marketing
    
    
    2,175
    
    
    
    4,235
    
    
    
    
    
    
    
    
    
    
    
    6,410General and administrative
    
    
    7,361
    
    
    
    4,090
    
    
    
    649
    
    
    
    5,602
    
    
    
    17,702Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,606
    
    
    
    3,606Client reimbursed expenses
    
    
    1,637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,637Total costs and expenses
    
    
    75,736
    
    
    
    22,822
    
    
    
    9,683
    
    
    
    9,592
    
    
    
    117,833Income (loss) from operations
    
    $
    11,603
    
    
    $
    20,301
    
    
    $
    2,041
    
    
    $
    (9,592
    )
    
    $
    24,353
 Six Months ended June 30, 2004Revenue
    
    $
    22,647
    
    
    $
    26,394
    
    
    $
    1,450
    
    
    $
    
    
    
    $
    50,491Costs and expenses:Cost of revenue
    
    
    
    
    
    
    6,671
    
    
    
    1,672
    
    
    
    192
    1
    
    
    8,535Client support
    
    
    13,745
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    14,239Product development
    
    
    
    
    
    
    2,906
    
    
    
    
    
    
    
    
    
    
    
    2,906Sales and marketing
    
    
    356
    
    
    
    3,628
    
    
    
    
    
    
    
    
    
    
    
    3,984General and administrative
    
    
    1,774
    
    
    
    3,048
    
    
    
    98
    
    
    
    3,670
    
    
    
    8,590Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    846
    
    
    
    846Total costs and expenses
    
    
    15,875
    
    
    
    16,253
    
    
    
    2,264
    
    
    
    4,708
    
    
    
    39,100Income (loss) from operations
    
    $
    6,772
    
    
    $
    10,141
    
    
    $
    (814
    )
    
    $
    (4,708
    )
    
    $
    11,391
 
 1
    
    For the three and six months ended June 30, 2005 and 2004, cost of revenue classified
as unallocated corporate expenses relates to the amortization of developed technology
resulting from the acquisition of Atlas One Point and Atlas NetConversions.   6. Legal Proceedings
   11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and intentions. Words such
as anticipates, expects, intends, plans, believes, estimates, may, will and similar
expressions are intended to identify forward-looking statements. In addition, any statements that
refer to expectations, projections or other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking statements. Our actual results could
differ materially and adversely from those discussed in any forward-looking statements as a result
of various factors. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled Additional Factors That May Affect Our
Business, Future Operating Results and Financial Condition, included elsewhere in this Quarterly
Report. Readers are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. We undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may subsequently arise.
Readers are urged to carefully review and consider the various disclosures made in this report and
in our other reports filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect our business, prospects and results of
operations.
 12




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##### Table of Contents



Overview
  Acquisitions and Comparability of Operations
  Digital Marketing Services
  Digital Marketing Technologies
  
    
    Atlas Digital Marketing Suite,an end-to-end solution for managing Internet advertising
that consists of the Atlas Media Console, the Atlas Creative Management System, Atlas
Delivery and Tracking Services and the Atlas Analysis and Optimization Engine;
    
    Atlas Search,an integrated search marketing and online campaign management toolset;
    
    Atlas Rich Media, an integrated rich media and online campaign management toolset;
    
    Atlas NetConversions,a website usability tool that allows our clients to optimize their websites;
    
    Atlas OnePoint,a paid search management and optimization tool for small- to mid-sized marketers; and
    
    Atlas Publisher,a highly-scalable ad serving solution focused solely on helping
publishers maximize revenue and lower costs associated with performance-focused advertisers.
 Digital Performance Media
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
    
    DRIVEpms Selector and MediaBrokers CPM Program,targeting tools that allow our clients
to focus ad impressions on those users that fit a predetermined customer segment; and
    
    DRIVEpms Performance and MediaBrokers PFP Programs,service offerings that allow our
clients to control the cost of desired action by paying on a cost per action basis.
 Critical Accounting Policies and Judgments
   Estimates and Assumptions Related to Financial Statements
  Results of Operations
  Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(in thousands)
    
    Three months ended June 30, 2005Revenue
    
    $
    48,252
    
    
    $
    22,482
    
    
    $
    6,455
    
    
    $
    
    
    
    $
    77,189Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,607
    
    
    
    3,676
    
    
    
    192
    (1)
    
    
    9,475Client support
    
    
    34,836
    
    
    
    
    
    
    
    1,217
    
    
    
    
    
    
    
    36,053Product development
    
    
    
    
    
    
    2,166
    
    
    
    
    
    
    
    
    
    
    
    2,166Sales and marketing
    
    
    1,082
    
    
    
    2,389
    
    
    
    
    
    
    
    
    
    
    
    3,471General and administrative
    
    
    4,223
    
    
    
    2,295
    
    
    
    409
    
    
    
    3,061
    
    
    
    9,988Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    959
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959Total costs and expenses
    
    
    41,100
    
    
    
    12,457
    
    
    
    5,302
    
    
    
    5,056
    
    
    
    63,915Income (loss) from operations
    
    $
    7,152
    
    
    $
    10,025
    
    
    $
    1,153
    
    
    $
    (5,056
    )
    
    $
    13,274Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,188Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,760
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Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(in thousands)
    
    Three months ended June 30, 2004Revenue
    
    $
    12,785
    
    
    $
    14,399
    
    
    $
    665
    
    
    $
    
    
    
    $
    27,849Costs and expenses:Cost of revenue
    
    
    
    
    
    
    3,605
    
    
    
    700
    
    
    
    192
    (1)
    
    
    4,497Client support
    
    
    7,102
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    7,393Product development
    
    
    
    
    
    
    1,414
    
    
    
    
    
    
    
    
    
    
    
    1,414Sales and marketing
    
    
    179
    
    
    
    1,961
    
    
    
    
    
    
    
    
    
    
    
    2,140General and administrative
    
    
    812
    
    
    
    1,519
    
    
    
    48
    
    
    
    2,142
    
    
    
    4,521Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    333Total costs and expenses
    
    
    8,093
    
    
    
    8,499
    
    
    
    1,039
    
    
    
    2,667
    
    
    
    20,298Income (loss) from operations
    
    $
    4,692
    
    
    $
    5,900
    
    
    $
    (374
    )
    
    $
    (2,667
    )
    
    $
    7,551Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    520Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,508
 (in thousands)
    
    Six months ended June 30, 2005Revenue
    
    $
    87,339
    
    
    $
    43,123
    
    
    $
    11,724
    
    
    $
    
    
    
    $
    142,186Costs and expenses:Cost of revenue
    
    
    
    
    
    
    10,364
    
    
    
    6,888
    
    
    
    384
    (1)
    
    
    17,636Client support
    
    
    64,563
    
    
    
    
    
    
    
    2,146
    
    
    
    
    
    
    
    66,709Product development
    
    
    
    
    
    
    4,133
    
    
    
    
    
    
    
    
    
    
    
    4,133Sales and marketing
    
    
    2,175
    
    
    
    4,235
    
    
    
    
    
    
    
    
    
    
    
    6,410General and administrative
    
    
    7,361
    
    
    
    4,090
    
    
    
    649
    
    
    
    5,602
    
    
    
    17,702Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,606
    
    
    
    3,606Client reimbursed expenses
    
    
    1,637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,637Total costs and expenses
    
    
    75,736
    
    
    
    22,822
    
    
    
    9,683
    
    
    
    9,592
    
    
    
    117,833Income (loss) from operations
    
    $
    11,603
    
    
    $
    20,301
    
    
    $
    2,041
    
    
    $
    (9,592
    )
    
    $
    24,353Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    527Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,173Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,537Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,170
 (in thousands)
    
    Six months ended June 30, 2004Revenue
    
    $
    22,647
    
    
    $
    26,394
    
    
    $
    1,450
    
    
    $
    
    
    
    $
    50,491Costs and expenses:Cost of revenue
    
    
    
    
    
    
    6,671
    
    
    
    1,672
    
    
    
    192
    (1)
    
    
    8,535Client support
    
    
    13,745
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    14,239Product development
    
    
    
    
    
    
    2,906
    
    
    
    
    
    
    
    
    
    
    
    2,906Sales and marketing
    
    
    356
    
    
    
    3,628
    
    
    
    
    
    
    
    
    
    
    
    3,984General and administrative
    
    
    1,774
    
    
    
    3,048
    
    
    
    98
    
    
    
    3,670
    
    
    
    8,590Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    846
    
    
    
    846Total costs and expenses
    
    
    15,875
    
    
    
    16,253
    
    
    
    2,264
    
    
    
    4,708
    
    
    
    39,100Income (loss) from operations
    
    $
    6,772
    
    
    $
    10,141
    
    
    $
    (814
    )
    
    $
    (4,708
    )
    
    $
    11,391Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,057Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    793Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,655
 
 1
    
    For the three and six months ended June 30, 2005 and 2004, cost of revenue classified as unallocated
corporate expenses relates to the amortization of developed technology resulting from the
acquisition of Atlas OnePoint and Atlas NetConversions. Revenue
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Cost of revenue
   Client Support
  16




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Product Development
  Sales and Marketing
   General and Administrative
  17




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Amortization of Intangible Assets
  Client Reimbursed Expenses
  Interest and Other Income, Net
  Interest Expense
  Provision for Income Taxes
  Income From Operations
  18




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Liquidity and Capital Resources
   Net Cash from Operating Activities
  Net Cash from Investing Activities
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Net Cash from Financing Activities
    Commitments and Contingencies
  Six Months endedDecember 31,
    
    
    Year Ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterCommitments:Operating leases
    
    $
    2,588
    
    
    $
    5,733
    
    
    $
    4,710
    
    
    $
    3,886
    
    
    $
    2,784
    
    
    $
    5,038Sublease rental income
    
    
    (142
    )
    
    
    (205
    )
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    Ad content delivery services
    
    
    439
    
    
    
    87
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Convertible debt (including interest payments)
    
    
    900
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    107,000Total commitments
    
    $
    3,785
    
    
    $
    7,415
    
    
    $
    6,485
    
    
    $
    5,686
    
    
    $
    4,584
    
    
    $
    112,038
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Outlook for 2005
  Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition
 You should carefully consider the following factors that may affect our business, future
operating results and financial condition, as well as other information included in this Quarterly
Report. The risks and uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial also may impair
our business operations. If any of the following risks actually occur, our business, financial
condition and operating results could be materially adversely affected.
 We are subject to risks frequently encountered by companies in the Internet marketing and
advertising industry.
  
    
    attract new clients and maintain current client relationships;
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
    
    achieve effective advertising campaign results for our clients;
    
    continue to expand the number of services and technologies we offer;
    
    successfully implement our business model, which is evolving;
    
    maintain our reputation and build trust with our clients; and
    
    identify, attract, retain and motivate qualified personnel.
  We have a history of losses and may not maintain profitability.
  Our quarterly operating results are subject to fluctuations that may cause our stock price to
decline.
  Our operating results may fluctuate from quarter to quarter and we cannot assure you that we
will be profitable in subsequent quarters.
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We rely on a limited number of clients, and the loss of a major client or a reduction in a
major clients Internet advertising or marketing budget could significantly reduce our revenue.
  Our client contracts have short termination periods, and the loss of a significant one of
these contracts in a short period of time would harm our business.
  We buy inventory for our performance media business that has to be resold.
  The Internet advertising or marketing market may deteriorate, or develop more slowly than
expected, which could harm our business.
  Acquisitions or investments may be unsuccessful and may divert our managements attention and
consume significant resources.
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
    
    difficulties in integrating the operations, technologies, services and personnel of acquired businesses;
    
    ineffectiveness or incompatibility of acquired technologies or services;
    
    diversion of managements attention from other business concerns;
    
    unavailability of favorable financing for future acquisitions;
    
    potential loss of key employees of acquired businesses;
    
    inability to maintain the key business relationships and the reputations of acquired businesses;
    
    responsibility for liabilities of acquired businesses;
    
    inability to maintain our standards, controls, procedures and policies, which could
affect our ability to receive an unqualified attestation from our independent accountants
regarding managements required assessment of the effectiveness of our internal control
structure and procedures for financial reporting; and
    
    increased fixed costs.
 Our business may be seriously harmed by third-party litigation against us relating to the
collection and use of Internet user information, or relating to Internet business practices.
  Privacy concerns could lead to legislative and other limitations on our ability to collect
usage data from Internet users, including limitations on our use of cookie or action tag technology
and user profiling.
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Our business may be seriously harmed by litigation alleging violations of federal and state
securities laws.
  We may be subject to patent infringement claims in the future, including claims that our ad
serving technologies, processes or methods infringe the patents of other parties.
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We may be subject to trademark infringement claims and other legal challenges, which could
cause us to incur significant expenses, pay substantial damages and be prevented from using our
trademarks.
  In addition to patent and trademark claims, third parties may assert other intellectual
property claims, which may cause us to incur significant expenses, pay substantial damages and be
prevented from providing our services.
  Failure of our services to perform properly or improper use of our services by our clients
could give rise to legal claims against us or damage our reputation.
  The loss of key personnel or any inability to attract and retain additional personnel could
impair our ability to maintain or expand our business.
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We may not be able to compete successfully in the market for Internet advertising, marketing
and consulting.
    Consolidation of Internet advertising networks, web portals, Internet search engine sites and
web publishers may impair our ability to serve advertisements, to acquire advertising space at
favorable rates and to collect campaign data.
  Sustained or repeated system failures could significantly impair our operations and lead to
client dissatisfaction.
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Clients may attempt to prohibit us from providing services to their competitors, limiting our
business opportunities.
  Legislation, regulations or standards may be adopted or amended that could impair our ability
to provide our services to clients or otherwise harm our business.
    We may not be able to adapt to rapidly changing Internet technology trends and evolving
industry standards.
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Our stock price has been and may continue to be volatile.
 .
 
    
    releases to the public of financial and other information about companies we have acquired;
    
    quarterly variations in our operating results;
    
    announcements by us or our competitors of new products or services, significant
contracts, acquisitions or business relationships with other companies;
    
    publicity about our company, our services, our competitors or Internet advertising in general;
    
    additions or departures of key personnel;
    
    acquisitions or losses of significant clients;
    
    any future sales of our common stock or other securities; and
    
    stock market price and volume fluctuations of other publicly traded companies in general
and, in particular, those that are Internet or advertising related.
  We have significant debt as a result of the sale of convertible notes.
  We may need additional financing in the future, which we may be unable to obtain.
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We rely on strategic relationships that could be terminated easily.
  The infringement or misuse of intellectual property rights could harm our business.
  If we do not perform to our clients expectations, we face potential liability.
  Many of our engagements are complicated projects that involve the use of new technology, which
may make it difficult for us to perform to the satisfaction of our clients.
  Our business may suffer if we have disputes over our right to reuse intellectual property
developed for specific clients.
  Our business may be harmed if we fail to accurately estimate the cost, scope, expectations or
duration of a fixed fee engagement or fail to communicate changes to specifications to our clients.
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Our billable employees may be underutilized if clients do not retain our services, which could
reduce our revenues and margins.
  If we fail to maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 IPO Securities Litigation.
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Sotelo Purported Class Action Litigation.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Nominee
    
    For
    
    WithheldNicolas J. Hanauer
    
    
    39,091,346
    
    
    
    16,174,137Brian P. McAndrews
    
    
    52,928,975
    
    
    
    2,336,508Jack Sansolo
    
    
    52,926,337
    
    
    
    2,339,146
  
 ITEM 6. EXHIBITS
 31.1
    
    
    Certification of Brian P. McAndrews Pursuant to Rule
13a-14(a) of the Securities and Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200231.2
    
    
    Certification of Michael Vernon Pursuant to Rule
13a-14(a) of the Securities and Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200232.1
    
    
    Certification of Brian P. McAndrews Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Michael Vernon Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 32




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SIGNATURES
  AQUANTIVE, INC.By:
    
    /s/ MICHAEL VERNONMichael Vernon
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
 33